GRILL CONCEPTS INC, 10KSB, 1999-03-29

GRILL CONCEPTS INC
10KSB, 1999-03-29
EATING PLACES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

(Mark One)

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

For the Fiscal Year Ended December 27, 1998

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

For the transition period from ______________ to _______________.

Commission File No. 0-23226

GRILL CONCEPTS, INC.
--------------------------------------------
(Name of small business issuer in its charter)

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

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

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

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

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

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

Common Stock, $.00001 par value
-------------------------------
(Title of Class)

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

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

The issuer's revenues for its most recent fiscal year were $34,908,105.

16,015,553 shares of common stock of the Registrant were outstanding as of
March 1, 1999. As of such date, the aggregate market value of the voting and
non-voting common equity held by non-affiliates, based on the closing price on
the NASDAQ Small-Cap Market, was approximately $7,582,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive annual proxy statement to be filed
within 120 days of the Registrant's fiscal year ended December 27, 1998 are
incorporated by reference into Part III.

Transitional Small Business Disclosure Format: Yes No X
-----

<PAGE>
TABLE OF CONTENTS

Page

PART I

ITEM 1. DESCRIPTION OF BUSINESS.............................. 1
ITEM 2. DESCRIPTION OF PROPERTIES............................ 14
ITEM 3. LEGAL PROCEEDINGS ................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................................. 15

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................... 15
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.................. 16
ITEM 7. FINANCIAL STATEMENTS.................................. 23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 23

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT..................... 24
ITEM 10. EXECUTIVE
COMPENSATION.......................................... 24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................. 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.......................................... 24
ITEM 13. EXHIBITS AND REPORTS OF FORM
8-K................................................... 24

SIGNATURES

<PAGE>
PART I

ITEM 1. DESCRIPTION OF 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. In
March of 1995, the Company consummated an exchange (the "Exchange") pursuant to
which the Company acquired the outstanding stock of Grill Concepts, Inc., a
California corporation ("GCI"). Following the Exchange, the Company changed its
name to "Grill Concepts, Inc.," management of GCI assumed effective management
and control of the Company and the Company effectively altered its future
operating plans to emphasize the expansion of the "Daily Grill" restaurant
format of GCI.

At December 27, 1998, the Company owned and operated fourteen restaurants,
consisting of nine Daily Grill restaurants, three Pizzeria Uno Restaurants, and
two The Grill on the Alley restaurants. With the exception of The Grill on the
Alley restaurant located in the San Jose Fairmont Hotel, which is operated by a
partnership in which the Company has a 50.05% interest, all of the Daily Grill
and The Grill on the Alley restaurants operated at December 27, 1998 were solely
owned and operated on a non-franchise basis by the Company. The three Pizzeria
Uno Restaurants are operated pursuant to franchise agreements.

At December 27, 1998, the Company also had granted a license to CA One
Services, Inc. ("CA One") to operate a Daily Grill at Los Angeles International
Airport ("LAX") and provided management services for (1) the City Grill in the
San Jose Hilton and (2) a restaurant in the Burbank Hilton Hotel which was
subsequently converted to the Daily Grill format.

During 1998, the Company (1) opened a new Daily Grill restaurant in Tysons
Corner, Virginia, (2) opened a new The Grill on the Alley in the San Jose
Fairmont Hotel, (3) began management of a restaurant in the Burbank Hilton
Hotel, (4) began management of a restaurant in the San Jose Hilton Hotel, (5)
began efforts to sell its three Pizzeria Uno restaurants, and (6) sold its
interest in the LAX Daily Grill venture to CA One and granted to CA One a
license to continue to operate the LAX Daily Grill.

Also during 1998, the Company initiated a strategic growth plan whereby the
Company plans to open, and/or convert, and operate, and/or manage, Daily Grill
and The Grill on the Alley restaurants in hotel properties in strategic markets
throughout the United States. Management believes that the opening of
restaurants in hotel properties in strategic markets will help further establish
brand name recognition for the opening of free standing restaurants in those
markets. To facilitate the planned entry into the hotel restaurant market, the
Company entered into an agreement (the "Hotel Property Agreement") with Hotel
Restaurant Properties, Inc. ("HRP") pursuant to which HRP has agreed to assist
the Company in locating suitable hotel locations for the opening of restaurants
and negotiating and entering into leases or management agreements for those
properties.

Implementation of the Company's hotel restaurant growth strategy began with
the opening of The Grill on the Alley at the San Jose Fairmont in May 1998. The
first property to be managed under the Hotel Property Agreement was a restaurant
in the Burbank Hilton Hotel where the Company assumed management in May 1998.
The format of that restaurant was converted to a Daily Grill in January of 1999.
Additional Daily Grill restaurants are scheduled to open during the spring of
1999 at the Georgetown Inn and the Salt Lake City Hilton and during the fall of
1999 at the Kahler Hotel in Rochester, Minnesota. The Grill on the Alley at the
Chicago Westin Hotel is scheduled to open in October of 1999.

1
<PAGE>

The following table sets forth unaudited restaurant count information, per
restaurant sales information, comparable restaurant sales information for
restaurants open twelve months in both periods, and total sales information
during 1998 and 1997 by restaurant concept for both Company owned restaurants
("Company Restaurants") and Company managed and/or licensed restaurants
("Managed Restaurants"):

<TABLE>

1997 1998
------ ------
<S> <C> <C>

Number of restaurants:
Daily Grill restaurants:
Company Restaurants:
Beginning of year................. 7 8
Restaurant openings............... 1 1
----- -----
End of year....................... 8 9
Managed Restaurants:
Beginning of year................. 0 0
----- -----
End of year....................... 0 0
Total Daily Grill restaurants:
Beginning of year................. 7 8
Restaurant openings............... 1 1
----- -----
End of year....................... 8 9
===== =====
Grill restaurants:
Company Restaurants:
Beginning of year................. 1 1
Restaurant openings............... 0 1
----- -----
End of year....................... 1 2
Managed Restaurants:
Beginning of year................. 0 0
----- -----
End of year....................... 0 0
Total Grill restaurants:
Beginning of year................. 1 1
Restaurant openings............... 0 1
----- -----
End of year....................... 1 2
===== =====
Other restaurants1:
Company Restaurants:
Beginning of year................. 3 3
----- -----
End of year....................... 3 3
Managed Restaurants:
Beginning of year................. 2 2
Restaurant openings............... 0 3
Restaurants closed or sold........ 0 2
----- -----
End of year....................... 2 3
Total Other restaurants:
Beginning of year................. 5 5
Restaurant openings............... 0 3
Restaurants closed or sold........ 0 2
----- -----
End of year....................... 5 6
===== =====
Total restaurants:
Beginning of year................. 13 14
Restaurant openings............... 1 5
Restaurants closed or sold........ 0 2
----- -----
End of year....................... 14 17
===== =====
</TABLE>

- --------------------
1 Includes three Pizza Restaurants operated by the Company pursuant to
franchise agreements; the LAX Daily Grill and Rhino Chasers which were sold
during 1998; and restaurants in two hotel properties for which the Company
assumed management during 1998. Operation of the LAX Daily Grill was licensed to
CA One during 1998 and is reflected as both a Managed Restaurant opening and
sale during 1998. One of the managed hotel restaurants was converted to a Daily
Grill format in January of 1999.

2
<PAGE>

1997 1998
------ ------
Weighted average weekly sales per restaurant:
Daily Grill restaurants:
Company Restaurants.............. $ 50,700 $ 54,927
Managed Restaurants.............. n.a. n.a.
Grill restaurants:
Company Restaurants.............. $ 64,185 $ 68,913
Managed Restaurants.............. n.a. n.a.
Other restaurants:
Company Restaurants.............. $ 32,249 $ 32,860

Change in comparable restaurant sales:
Daily Grill restaurants
Company Restaurants.............. 3.6 % 5.8 %
Managed Restaurants.............. n.a. n.a.
Grill restaurants
Company Restaurants.............. 3.2 % 4.5 %
Managed Restaurants.............. n.a. n.a.
Other restaurants:
Company Restaurants.............. 1.9 % 1.9 %

Total system sales:
Daily Grill.................. $ 20,532,240 $ 23,411,536
Grill........................ $ 3,337,611 $ 5,926,544
Pizza Restaurants............ $ 5,030,806 $ 5,126,209
Management and license fees.. $ 0 $ 443,816
----------- -----------
Total........................ $ 28,900,657 $ 34,908,105
=========== ===========

Restaurant Concepts

- -- Daily Grill Restaurants

Background. At December 27, 1998, the Company, through its subsidiary, GCI,
owned and operated seven Daily Grill restaurants in Southern California and two
Daily Grill restaurants in the Washington, D.C./Virginia market. Daily Grill
restaurants are patterned after "The Grill on the Alley" in Beverly Hills, a
fine dining American-style grill restaurant which was acquired by the Company
during 1996. See "-- The Grill on the Alley." The Grill on the Alley was founded
by Robert Spivak, Michael Weinstock and Richard Shapiro (the founders of GCI) in
the early 1980's to offer classic American foods in the tradition of the classic
American dinner house. After successfully operating The Grill on the Alley for a
number of years, in 1988, Messrs. Spivak, Weinstock and Shapiro decided to
expand on that theme by opening the first Daily Grill restaurant. Daily Grill,
in an effort to offer the same qualities that made The Grill on the Alley
successful, but at more value oriented prices, adopted six operating principles
that characterize each Daily Grill restaurant: high quality food, excellent
service, good value, consistency, appealing atmosphere and cleanliness. GCI
emphasized those principles in an effort to create a loyal patron who will be a
"regular" at its restaurants.

Restaurant Sites. Current and planned Daily Grill restaurants can be
characterized as either owned, in part or in whole, or managed and as either
hotel based or based in shopping malls and other commercial properties. At
December 27, 1998, the Company operated nine Daily Grill restaurants, all of
which were 100% owned by the Company and located in shopping malls and other
commercial properties.

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

3
<PAGE>

<TABLE>
Ownership
Interest or
Location Opened Managed Hotel
---------- -------- ------------- -------
<S> <C> <C> <C>

Brentwood, California September 1988 100%
Los Angeles, California April 1990 100%
Newport Beach, California April 1991 100%
Encino, California April 1992 100%
Studio City, California August 1993 100%
Palm Desert, California January 1994 100%
Irvine, California September 1996 100%
Washington, D.C. March 1997 100%
Tysons Corner, Virginia October 1998 100%
Burbank, California January 1999 Managed Hilton Hotel
Salt Lake City, Utah Scheduled March 1999 Managed Hilton Hotel
Washington, D.C. Scheduled April 1999 Managed Georgetown Inn
Universal Studios, California Scheduled May 1999 50%
Rochester, Minnesota Scheduled September 1999 Managed Kahler Hotel

</TABLE>

Each Daily Grill restaurant is located in leased facilities. Site selection
is viewed as critical to the success of the Company and, accordingly,
significant effort is exerted to assure that each site selected is appropriate.
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 restaurants, are high-end, mid-size retail shopping malls in large
residential areas with significant daytime office populations and some
entertainment facilities. Historically, Daily Grill restaurants have been anchor
tenants at high profile malls and, therefore, have received significant tenant
improvement allowances.

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

Existing non-hotel based Daily Grill restaurants range in size from 3,750
to 7,000 square feet, of which approximately 30% is devoted to kitchen and
service areas, and seat between 100 and 250 persons. Opening costs of existing
restaurants, including leasehold improvements, furniture, fixtures and equipment
and pre-opening expenses, have averaged $1.2 million per restaurant.

Existing and proposed 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 hotel based Daily Grill restaurants will require minimal
capital investment on the Company's part. However, each hotel restaurant
arrangement will be negotiated separately and the capital investment by the
Company may vary widely. Opening costs of existing hotel restaurants, including
leasehold improvements, furniture, fixtures and equipment and pre-opening
expenses, have ranged from $150,000 to $500,000 per restaurant.

4
<PAGE>

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

Entrees range in price from $8.95 for an "original" beef dip sandwich to
$20.95 for a char-broiled 16 oz. T-bone steak with all the trimmings. The
average lunch check is $11.50 per person and the average dinner check is $18 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 27, 1998, food and
non-alcoholic beverage sales constituted approximately 87% of the total
restaurant revenues for the Daily Grill restaurants, with alcoholic beverages
accounting for the remaining 13%.

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

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

Atmosphere and Service. All Daily Grill restaurants are presently open for
lunch and dinner seven days a week. Each Daily Grill location is designed to
provide the sense and feel of comfort. In the tradition of an old-time
American-style grill, the setting is very open with a mix of booths and tables.
Several of the restaurants have counters for singles to feel comfortable. The
restaurant emphasizes the quality and freshness of Daily Grill food dishes in
addition to the cleanliness of operations. The dining area is well-lit and is
characterized by a "high energy level".

The feeling of comfort and tradition is enhanced by the restaurant policy
of not requiring, nor accepting, reservations except for groups of six or more.
As a result, patrons are served on a first-come-first-served basis and never
have to wait for a table while a vacant table is being held for patrons with
reservations.

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

In order to assure that the Company's philosophy of guest service is
adhered to, all Daily Grill employees from the kitchen staff to the serving
staff undergo extensive training making each employee knowledgeable not only in
the Company's procedures and policies but in every aspect of Daily Grill
operations. The Company's policy of promoting from within and providing access
to senior management for all employees has produced a work force which works in
a cooperative team approach and has resulted in an employee turnover rate of
just under 70% per year for hourly employees, considerably below the industry
average which management believes to be approximately 125%.

The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that as many as 70% of the guests at the Daily Grills which
have been open for over a year represent repeat business, and many guests have
become "regulars" in the tradition of the neighborhood restaurant.

5
<PAGE>

- -- The Grill on the Alley

Background. At December 27, 1998, the Company, through its subsidiary, GCI,
owned and operated two The Grill on the Alley restaurants ("Grill"), one in
Beverly Hills, California and one in San Jose, California.

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

In April of 1996, the Company acquired, for 850,000 shares of common stock,
the original Grill from a partnership the managing partner of which was
controlled by the Company's principal shareholders and directors (Robert Spivak,
Michael Weinstock and Richard Shapiro). From 1995 until the acquisition of the
Grill, the Company provided management services for the Grill for a management
fee equal to 5% of the revenues of the Grill.

Restaurant Sites. At December 27, 1998, the Company operated two Grill
restaurants, one of which is a non-hotel based facility and one of which is a
hotel based facility.

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

Ownership
Interest or
Location Opened Managed Hotel
---------- -------- ------------- -------

Beverly Hills, California January 1984 2 100%
San Jose, California May 1998 50.05% Fairmont Hotel
Chicago, Illinois Scheduled October 1999 60.00% Westin Hotel

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

Each hotel based Grill restaurant is, or will be, located on the premises
of a hotel. Hotel based Grill restaurants may be newly constructed facilities or
remodeled facilities. Such facilities may be leased by the Company, operated
pursuant to a partnership or joint venture arrangement or operated pursuant to a
management agreement. As with free standing restaurants, site selection is
viewed as critical to the success of the Company and, accordingly, significant
effort is exerted to assure that each site selected is appropriate. The site
selection process is the responsibility of HRP which identifies suitable
locations and negotiations leases or management agreements for those properties.
See "-- Hotel Property Agreement."

The existing non-hotel based Grill restaurant is approximately 4,300 square
feet, of which approximately 1,500 square feet is devoted to kitchen and service
areas, and seats 120 persons. Because of the unique nature of Grill restaurants,
the size, seating capacity and opening costs of future sites cannot be
reasonably estimated.

- --------------------

2 The original The Grill on the Alley was acquired by the Company in April
1996.

6
<PAGE>

The existing hotel based Grill restaurant is approximately 8,000 square
feet, of which approximately 30% is devoted to kitchen and service areas, and
seats 280 persons. Management anticipates that hotel based Grill restaurants
will require minimal capital investment on the Company's part. However, each
hotel restaurant arrangement will be negotiated separately and the capital
investment by the Company may vary widely. Opening costs of the existing hotel
based restaurant, including leasehold improvements, furniture, fixtures and
equipment and pre-opening expenses, was approximately $2.1 million.

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

Entrees range in price from $12.50 for a hamburger to $32.25 for a Prime
Porterhouse Steak. The average lunch check is $23 per person and the average
dinner check is $45 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 27, 1998, food and non-alcoholic
beverage sales constituted approximately 75% of the total restaurant revenues
for Grill restaurants, with alcoholic beverages accounting for the remaining
25%.

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

Each Grill restaurant has up to 6 cooks on duty during regular lunch and
dinner hours to provide prompt, specialized service. Restaurant staff members
utilize a "point-of-sale" computer system to monitor the movement of food items
to assure prompt and proper service of guests and for fiscal control purposes.

Atmosphere and Service. Each Grill restaurant is presently open for lunch
six days a week and dinner seven days a week. Each Grill location is designed to
provide the sense and feel of comfort and elegance. In the tradition of an
old-time American-style grill, the setting is an open kitchen adjacent to tables
and booths. The open kitchen setting emphasizes the quality and freshness of
food dishes in addition to the cleanliness of operations. The dining area is
well-lit and is characterized by a "high energy level".

Reservations are accepted but are not required.

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

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

The Company believes that the familiarity and feeling of comfort which
accompanies dining in a familiar setting, with familiar food and quality service
by familiar servers, produces satisfied customers who become "regulars."
Management believes that as many as 75% of the guests at the original Grill
represent repeat business, and many guests have become "regulars" in the
tradition of the neighborhood restaurant.

7
<PAGE>

- -- Pizzeria Uno Restaurants

Restaurant Sites. At December 27, 1998, the Company, through its
wholly-owned subsidiaries, operated three "Pizzeria Uno Restaurant & Bar"
locations (the "Pizza Restaurants"). The Company's Pizza Restaurants are
operated in accordance with certain guidelines established by, and with
managerial assistance from and training provided by, the Franchisor. See "-- The
Franchise Agreements" below. The Company's Pizza Restaurants are located in the
following cities and were opened in the months and years indicated:

Location Opened
---------- ---------
South Plainfield, New Jersey January 1987
Media, Pennsylvania February 1987
Cherry Hill, New Jersey March 1990

The Pizza Restaurants are located in suburban areas in leased premises. The
Pizza Restaurants range in size from approximately 5,300 square feet to
approximately 7,900 square feet, including a bar and lounge area, and have
seating capacities ranging from 180 to 200 customers.

Menu and Food Preparation. The Pizza Restaurants offer a diverse menu in
accordance with guidelines established by the Franchisor, featuring gourmet,
Chicago-style deep-dish pizzas, filled with ingredients such as fresh meats,
spices, vegetables and cheese and baked to order based on proprietary recipes of
the Franchisor. The Pizza Restaurants also offer a variety of sandwiches,
hamburgers, appetizers, salads, desserts and beverages, including a full liquor
selection. All of the menu items offered by the Pizza Restaurants are also
available for delivery or carry-out. Delivery service is provided by third
parties pursuant to contractual arrangements. Entree selections currently range
in price from approximately $4.95 to $8.95, with an average cost per person per
meal, including beverage, of approximately $6.25 for lunch and $9.25 for dinner.

Atmosphere and Service. The Pizza Restaurants are characterized by a
casual, friendly and entertaining atmosphere, full and efficient service, and
high-quality menu items at moderate prices. Each of the Pizza Restaurants
employs between three and four full time managers and assistant managers and
between 45 and 85 part-time and full-time employees. The Pizza Restaurants are
generally open from 11:00 a.m. to midnight, seven days per week, except on
Friday and Saturday when the Pizza Restaurants remain open until 1:00 a.m.

The Franchise Agreements. The Company acquired the rights to operate under
the "Pizzeria Uno" name and use certain proprietary recipes and procedures
pursuant to three separate franchise agreements (the "Franchise Agreements")
between the Company or its subsidiaries and the Franchisor, a national operator
and franchisor of "Pizzeria Uno" restaurants.

Pursuant to the Franchise Agreements, the Company has the exclusive rights
to utilize the proprietary marks, recipes, procedures and system developed by
the Franchisor within a three mile radius of the Pizza Restaurants' designated
locations. The Franchise Agreements each have a term of 20 years with three
successive ten-year renewal periods at the option of the Company, provided that
the agreements have not previously been terminated.

In addition to use of the "Pizzeria Uno" name and mark and proprietary
recipes, the Franchise Agreements entitle the Company to certain initial and
ongoing services to be provided by the Franchisor. The Franchisor is also
obligated to conduct ongoing national, regional and local advertising and
promotions utilizing advertising fees paid by its various franchisees.

The Company, in turn, is obligated to comply with the guidelines set forth
in the Franchisor's Operating Manual and to maintain its confidentiality. Among
the various guidelines and prohibitions imposed on the Company pursuant to the
Franchise Agreements and the Manual are minimum insurance requirements,
noncompetition provisions, confidentiality requirements, product offering
requirements, physical appearance requirements, trade name and trademark
protection requirements, local advertising requirements, and operating
requirements, among others. The Company is also obligated to pay certain ongoing
fees in order to retain its franchises. Such ongoing fees consist of a
continuing license fee (5% of gross revenues), subject to certain prescribed
periodic minimum amounts, an advertising fee (1% of gross revenues) and the
expenditure of certain minimum amounts on local advertising and promotion (2% of
gross revenues).

8
<PAGE>

Potential Sale of Pizza Restaurants. During 1998, the Company determined
that the continued ownership and operation of the Pizza Restaurants did not fit
with the Company's strategic growth plan. As a result, the Company began efforts
to sell the Pizza Restaurants. As of March 1, 1999, the Company had not found a
suitable buyer for the Pizza Restaurants and continued to operate the Pizza
Restaurants.

Other Restaurant Activities

In addition to owning and operating Daily Grill, The Grill and the Pizza
Restaurants, the Company, at December 27, 1998, also provided management
services for the City Grill in the San Jose Hilton, the restaurant in the
Burbank Hilton which has since been converted to the Daily Grill format and had
granted a license to CA One to operate a Daily Grill at LAX.

- -- Restaurant Management Services

In conjunction with the Company's entry into the hotel restaurant market,
in May 1998, the Company began providing management services at the City Bar &
Grill at the San Jose Hilton. The Company is entitled to a management fee equal
to 4% of the gross receipts of the City Bar & Grill. Additionally, the Company
is entitled to a percentage of the annual profits of the City Bar & Grill in
excess of certain historical profits.

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

The Company may provide restaurant management services on a selected basis
in the future.

- -- LAX Restaurant Operations

Background. In March of 1995, the Company entered into an operating
agreement (the "Operating Agreement") with CA One Services, Inc., a major
national airport concessionaire and division of Delaware North Companies, Inc.
Pursuant to the Operating Agreement, the Company and CA One Services formed The
Airport Grill LLC (the "Airport LLC") to own and operate restaurants within Los
Angeles International Airport ("LAX"). Under the Operating Agreement, CA One
Services advanced all required capital to open and operate one or more
restaurants, other than certain minimum capital ($10,200) which the Company
contributed, and the Company provided certain managerial oversight and
assistance. Profits of the Airport LLC were shared 51% by the Company and 49% by
CA One Services after the payment of a management fee equal to 4% of gross
revenues to each of the Company and CA One Services and after the repayment of
CA One Services' advances to the Airport LLC, with interest.

LAX Daily Grill. In January of 1997, the Airport LLC opened a Daily Grill
restaurant in the International Terminal of LAX ("LAX Daily Grill"). The LAX
Daily Grill is an 8,300 square foot full-service restaurant seating
approximately 300 persons.

Sale of Interest in Airport LLC and Licensing Agreement. Effective April 1,
1998, the Company sold and assigned its interest in Airport Grill, L.L.C. to Air
Terminal Services, Inc., an affiliate of CA One Services, Inc., which owns the
remaining interest in Airport Grill, L.L.C. Pursuant to the terms of the sale of
such interest, Air Terminal Services, Inc. agreed to pay to the Company
$309,955.71, payable in three equal installments of $103,318.57 with the first
installment being due at closing and subsequent installments being due on April
1, 1999 and April 1, 2000. As a result the Company's ownership interest in
Airport Grill, L.L.C. has terminated.

9
<PAGE>

Simultaneous with the sale of its interest in Airport Grill, L.L.C., the
Company and Airport Grill, L.L.C. entered into a License Agreement pursuant to
which Airport Grill, L.L.C. will continue to have the right to utilize the Daily
Grill" name, logos, recipes and other rights associated with the operation of
the Daily Grill restaurant at Thomas Bradley International Airport. Pursuant to
the terms of the License Agreement, the Company is entitled to receive royalties
in an amount equal to 2.5% of the first $5 million of annual revenues from the
restaurant and 4% of annual revenues in excess of $5 million.

Hotel Property Agreement

In order to facilitate the Company's efforts to open restaurants on a large
scale basis in Hotel properties, the Company, in August of 1998 entered into the
Hotel Property Agreement with HRP pursuant to which HRP has agreed to assist the
Company in locating suitable hotel locations for the opening of the Company's
restaurants. HRP is responsible for identifying suitable hotel locations in
which a Grill or Daily Grill can be operated ("Managed Outlets") and negotiating
and entering into leases or management agreements for those properties. The
Company will, in turn, enter into management agreements with HRP or the hotel
owners, as appropriate. The Company will advance certain pre-opening costs and
certain required advances ("Manager Loans") and will manage and supervise the
day to day operations of each Managed Outlet. The Company will be entitled to
receive from HRP a base overhead fee equal to $4,167 per month per Managed
Outlet. Net income after repayments required on Manager Loans from each Managed
Outlet will be allocated 75% to the Company and 25% to HRP. The Agreement also
provides that both HRP and the Company will have certain rights to cause the
Company to acquire HRP commencing in May of 2004.

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 27, 1998, the Company operated non-hotel based Daily Grill and
Grill restaurants in Southern California, principally the greater-Los Angeles
market, and Washington, D.C. Within those markets, management anticipates that,
for the foreseeable future, the Company will concentrate its expansion efforts
in the Washington, D.C. market. The Company opened its first Washington, D.C.
Daily Grill, and first East Coast Daily Grill, in March of 1997. A second Daily
Grill in the Washington, D.C. market was opened in Tysons Corner, Virginia in
October of 1998. In order to establish market presence and economies of scale,
the Company plans to evaluate the opening of additional restaurants in the
Washington, D.C. market. As of March 1, 1999, no definitive sites had been
identified for future construction of free standing restaurants within the
Washington, D.C. market. Management anticipates that the cost to open additional
free standing Daily Grill and Grill restaurants will range from $1.0 to $2.0
million per restaurant, with each restaurant expected to be approximately 6,000
to 7,000 square feet in size. Actual costs may vary significantly depending upon
the tenant improvements, market conditions, rental rates, labor costs and other
economic factors prevailing in each market in which the Company pursues
expansion.

10
<PAGE>

At December 27, 1998, a hotel based Grill restaurant was operated in the
Northern California market, San Jose. A second hotel based Grill restaurant is
scheduled to open in Chicago in October 1999. A restaurant located in the
Burbank Hilton and previously operated by the Company under a management
agreement was converted to a Daily Grill during the January 1999 and additional
hotel based Daily Grill restaurants to be operated under management agreements
are scheduled to open during the Spring of 1999 in Salt Lake City and
Washington, D.C. and during the Fall of 1999 in Rochester, Minnesota. The
Company and HRP are presently evaluating the opening of additional hotel based
Daily Grill restaurants in the Chicago market. 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.

In addition to the planned restaurant expansion discussed above, in the
first quarter of 1999, the Company entered into an agreement with Universal
Studios CityWalk to a open a Daily Grill restaurant at the Universal Studios
entertainment complex in Southern California. The restaurant is scheduled to
open during the second quarter of 1999 and will feature a modified menu
including a wide variety of appetizers, signature Daily Grill sandwiches and
salads and selected entrees.

Restaurant Management

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

Daily Grill and Grill. Each Daily Grill and Grill restaurant, including
both free standing and hotel based restaurants, is managed by one general
manager and one or two managers or assistant managers. Each restaurant also has
one head chef and one or two sous chefs, depending on volume. On average,
general managers have approximately seven years experience in the restaurant
industry and three years with the Company. The general manager has primary
responsibility for the operation of the restaurant and reports directly to the
Company's Vice President - 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.
Inventory, expenses, labor costs, and cash are carefully monitored with
appropriate control systems. With the current systems, revenue and cost reports,
including food and labor costs, are produced every night reflecting that day's
business. The restaurant general manager, as well as corporate management,
receive these daily reports to ensure that problems can be identified and
resolved in a timely manner. All employees receive appropriate training relating
to cost, revenue and cash control.

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

11
<PAGE>

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.

Pizza Restaurants. The staff of the Company's Pizza Restaurants consists of
between three and four managers and between 40 and 85 hourly employees, most of
whom are part-time employees, per location.

All managers of the Pizza Restaurants participate in an onsite training
program and are provided with the Franchisor's Operating Manual. Additionally,
selected management personnel participate in periodic meetings conducted by the
Franchisor focusing on marketing, new products and other aspects of business
management.

The Company has a director of operations who oversees and supervises the
operations of each of the Company's Pizza Restaurants, providing ongoing
guidance and assistance to managers as necessary. Additionally, field-service
supervisors of the Franchisor periodically visit and inspect the operations of
the Pizza Restaurants to assure compliance with the quality, service and other
standards imposed by the Franchisor.

Purchasing

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

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

Pizza Restaurants. The Company has no contracts governing purchases of food
and beverage supplies but negotiates purchases for its Pizza Restaurants
directly with suppliers, often with the assistance of the Franchisor. Such
purchases cover all primary food ingredients and beverage products to ensure
adequate supplies and to obtain competitive prices.

Advertising and Marketing

Daily Grill and Grill. The Company has historically relied primarily on
reputation, local reviews and word of mouth to promote its Daily Grill and Grill
restaurants. Daily Grill and Grill restaurants have been featured in articles
and reviews in numerous local as well as national publications. The Company
supplements its reputation with a program of marketing and public relations
activities designed to keep the Daily Grill and Grill name before the public.
Such activities include media advertising, participating in local charity events
and providing a location and refreshments for meetings of charity organizations.
During 1998, expenditures for advertising and promotion were approximately 1.8%
of gross revenues.

12
<PAGE>

In 1996, the Company expanded and formalized its marketing efforts with the
hiring of an in-house marketing director and the retention of a national
consumer research firm to coordinate the Company's future advertising and
marketing efforts and to facilitate expansion into new markets. The Company's
marketing director is responsible for advertising, public relations and a wide
range of marketing-related activities. The Company also retained Pulse
Marketing, a nationally known consumer research firm, during 1996 to undertake
research designed to facilitate successful expansion into new markets.

Pizza Restaurants. The Company participates in local and regional/national
advertising programs, including paying certain advertising fees (1% of gross
revenues) to the Franchisor and spending certain minimum amounts for local
advertising (2% of gross revenues) as required by the Franchise Agreements. See
"The Pizza Restaurants - Franchise Agreements."

The Company budgets an average of 3% of Pizza Restaurant sales annually for
advertising and promotion. The Company's primary marketing philosophy is to
create an enjoyable, fun dining atmosphere and rely on word-of-mouth to attract
customers.

Competition

The Daily Grill restaurants compete within the rapidly growing mid-price,
full-service casual dining segment. Daily Grill competitors include national and
regional chains, as well as local owner-operated restaurants. Grill restaurants
compete within the fine dining segment. Grill competitors include a limited
number of national fine dining chains as well as selected local owner-operated
fine dining establishments. The primary competitors to the Company's Pizza
Restaurants are casual theme restaurant chains including Friday's and the Olive
Garden. Competition for the Company's hotel based restaurants is primarily
limited to restaurants within the immediate proximity of the hotel.

The restaurant business is highly competitive with respect to price,
service, restaurant location and food quality and is affected by changes in
consumer tastes, economic conditions and population and traffic patterns. The
Company believes it competes favorably with respect to these factors. However,
many of its competitors have been in existence longer than the Company, have a
more established market presence and have substantially greater financial,
marketing and other resources, which may give them certain competitive
advantages. The Company believes that its ability to compete effectively will
continue to depend in large measure on its ability to offer a diverse selection
of high quality, fresh food products with an attractive price/value relationship
served in a friendly atmosphere.

Management believes that its affiliation with, and operation under the name
of, "Pizzeria Uno" provides certain competitive advantages to the Company's
Pizza Restaurants. Management believes that the quality products, friendly
full-service atmosphere, diverse menu and moderate prices associated with
Pizzeria Uno restaurants, and the Company's Pizza Restaurants in particular,
enables the Company to compete effectively with other local and national-chain
restaurants.

Employees

The Company and its subsidiaries employ approximately 1,000 people, 21 of
whom are corporate personnel and 68 of whom are restaurant managers, assistant
managers and chefs. The remaining employees are restaurant personnel. Of the
Company's employees, approximately 500 are full-time employees, with the
remainder being part-time employees.

None of the Company's employees are represented by labor unions or are
subject to collective bargaining or other similar agreements. Management
believes that its employee relations are good at the present time.

13
<PAGE>

Trademarks and Service Marks

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

Pursuant to the Franchise Agreements, the Company's Pizza Restaurants
operate under the "Pizzeria Uno" trademark and service marks. The Franchisor has
undertaken to keep in place and renew, as necessary, its trademark registrations
and to vigorously oppose any infringements of its marks.

Government Regulation

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

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

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

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

ITEM 2. DESCRIPTION OF PROPERTIES

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

The Company's Cherry Hill Pizza Restaurant is located in space leased from
Denbob Corporation, a corporation controlled by the Company's chairman, Robert
L. Wechsler. The Grill restaurant in San Jose is located in space leased from
hotel management company which may be deemed to be controlled by Lew Wolff who
may also be deemed to be an affiliate of the Company as a result of his holdings
of common stock and securities convertible into or exercisable to acquire common
stock of the Company.

14
<PAGE>

The Company's executive offices are located in 3,300 square feet of office
space located in Los Angeles, California. Such space is leased from an
unaffiliated party on a month-to-month basis.

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

ITEM 3. LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of the Company's stockholders through
the solicitation of proxies, or otherwise, during the fourth quarter of the
Company's fiscal year ended December 27, 1998.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

High Low
------ ------

1997 - First Quarter 1-9/16 1-1/8
Second Quarter 1-21/32 59/64
Third Quarter 1-15/32 1-7/32
Fourth Quarter 1-3/8 1

1998 - First Quarter 1-1/4 1-1/16
Second Quarter 1-15/32 1-3/32
Third Quarter 1-9/16 31/32
Fourth Quarter 1-7/16 23/32

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

At March 1, 1999, the bid price of the Common Stock was $15/16.

As of March 1, 1999, there were approximately 426 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.

15
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

General

During the fiscal year ended December 27, 1998, the Company operated a
total of fourteen restaurants, consisting of nine Daily Grill restaurants, three
Pizzeria Uno restaurants and two Grills, including a Daily Grill opened in
Tysons Corner, Virginia in October 1998 and a Grill opened at the San Jose
Fairmont in May 1998. During fiscal 1997, the Company operated a total of
fourteen restaurants, consisting of nine Daily Grill restaurants, three Pizzeria
Uno restaurants, one Grill and Rhino Chasers, including a Daily Grill restaurant
opened in Washington, D.C. in March 1997 and the LAX Daily Grill opened in
January 1997 and operated pursuant to a joint operating arrangement. The Company
sold its interest in the LAX Daily Grill and Rhino Chasers in April of 1998.
Fiscal 1998 operating results include eleven weeks of operations at the
Company's Tysons Corner Daily Grill and thirty-four weeks of operations at the
San Jose Fairmont Grill. Fiscal 1997 operating results include 42 weeks of
operations at the Company's Washington, D.C. Daily Grill. In addition to
restaurants which were owned and operated by the Company during fiscal 1998, the
Company began offering restaurant management services at two restaurants and
licensing the right to operate the LAX Daily Grill. See "Description of
Business."

Sales revenues of the Company are derived from sales of food, beer, wine,
liquor and non-alcoholic beverages. Approximately 77.4% of combined 1998 sales
were food and 22.6% were beverage. Sales revenues from restaurant operations are
primarily influenced by the number of restaurants in operation at any time, the
timing of the opening of such restaurants and the sales volumes of each
restaurant.

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

In addition to its cost of food and beverages and normal restaurant
operating expenses, the Company has paid, and is obligated to pay, certain fees
to its Franchisor as well as certain minimum advertising expenses. Pursuant to
the Company's Franchise Agreements, the Company pays a continuing license fee
with respect to each of its Pizza Restaurants, an advertising fee and is
required to expend certain minimum amounts on local advertising and promotion.
See "Description of Business - The Pizza Restaurants -- The Franchise
Agreements."

The Company's balance sheet and results of operations at and for the year
ended December 27, 1998 reflect the capitalization of costs of acquiring liquor
licenses. The Company at December 27, 1998 had capitalized costs of obtaining
its various liquor licenses totaling approximately $641,603. Such costs consist
primarily of amounts paid to purchase such licenses. In connection with
acquisition of the Grill during 1996, the Company capitalized $246,000 of
goodwill which is being amortized over a thirty year period. As each of the
foregoing items involves the payment of certain amounts in advance and the
expensing of such amounts in subsequent years, the Company's operating results
reflect significant amortization expense which does not affect the Company's
operating cash flows.

Consistent with practices in the restaurant industry, the Company
historically deferred its restaurant preopening costs and amortized those costs
over a twelve month period following the opening of the respective restaurant.
In April 1998, The American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up
Activities." The SOP requires entities to expense as incurred all start-up and
preopening costs that are not otherwise capitalizable as long-lived assets. The
SOP is effective for the fiscal years beginning after December 15, 1998, with
earlier adoption encouraged. The Company adopted the SOP during 1998 resulting
in a one-time charge against earnings during fiscal 1998 of $70,000. Excluding
the one-time cumulative effect, the adoption of the new accounting standard
impacted the Company's reported results for fiscal 1998 by $513,000, or $0.03
per basic share.

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<PAGE>

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

Results of Operations -- Fiscal Year 1998 Compared to Fiscal Year 1997

The following table sets forth certain items as a percentage of total
revenues from the Company's Statements of Operations during 1998 and 1997:

<TABLE>

1997 1998
----------------------------- ------------------------------
Amount % Amount %
(in thousands) (in thousands)
----------------------------- ------------------------------
<S> <C> <C> <C> <C>

Sales revenues $ 28,901 100.0 % $ 34,464 98.7 %
Management and licensing fees - 0 444 1.3
Total revenues 28,901 100.0 34,908 100.0
Cost of sales 7,920 27.4 9,674 27.7
Gross profit 20,981 72.6 25,234 72.3
Restaurant operating expense 17,446 60.4 21,321 61.1
General and administrative expense 2,648 9.2 2,755 7.9
Depreciation and amortization 1,285 4.4 1,312 3.8
Unusual charges - 0 964 2.7
Total operating expenses 21,380 74.0 26,352 75.5
Operating income (loss) (399) (1.4) (1,118) (3.2)
Non-recurring acquisition costs 93 0.3 - 0
Interest expense, net (166) (0.6) (231) (0.6)
Loss before income tax (472) (1.7) (1,349) (3.8)
Provision for taxes (5) (0.0) (9) (0.0)
Minority interest - 0.0 121 0.3
Cumulative effect of change in
accounting principle - 0.0 (70) (0.2)
Net loss $ (477) (1.7)% $ (1,307) (3.7)%

</TABLE>

Revenues. The Company's revenues for 1998 increased 20.8% to $34.9 million
from $28.9 million in 1997. Sales revenues increased 19.3% to $34.5 million in
1998 from $28.9 million in 1997. Management and license fee revenues increased
to $444,000 in 1998 from $0 in 1997.

Sales for Daily Grill restaurants increased by 14% from $20.5 million in
1997 to $23.4 million in 1998. The increase in sales revenues for the Daily
Grill restaurants from 1997 to 1998 was primarily attributable to (1) the
opening and operation of the Tysons Corner Daily for eleven weeks during 1998
($0.6 million), (2) the operation of the Washington, D.C. Daily Grill for the
full 52 week period in fiscal 1998 as compared to 42 weeks during 1997 ($1.3
million), and (3) an increase in same store sales of 5.8% for restaurants open
for 12 months in both 1997 and 1998. Weighted average weekly sales at the Daily
Grill restaurants increased 8% from $50,700 in 1997 to $54,900 in 1998.
Comparable restaurant sales and weighted average weekly sales at the Daily Grill
restaurants in 1998 were positively affected by increased head count, higher
average checks and by menu price increases which averaged 1%.

17
<PAGE>

Sales for Grill restaurants increased by 78% from $3.3 million in 1997 to
$5.9 million in 1998. The increase in sales revenues for the Grill restaurants
from 1997 to 1998 was primarily attributable to (1) the opening and operation of
the San Jose Fairmont Grill for thirty-four weeks during 1998 ($2.4 million),
and (2) an increase in same store sales of 4.5% at the one Grill restaurant
which was open for 12 months in both 1997 and 1998. Weighted average weekly
sales at the Grill restaurants increased 7.4% from $64,200 in 1997 to $68,900 in
1998. Comparable restaurant sales and weighted average weekly sales at the Grill
restaurants in 1998 were positively affected by increased head count and by menu
price increases which averaged 1%.

Sales for the Pizza Restaurants increased by 1.9% from $5 million in 1997
to $5.1 million in 1998. The increase in sales revenues for the Pizza
Restaurants from 1997 to 1998 was attributable to an increase in same store
sales. Weighted average weekly sales at the Pizza Restaurants increased 1.9%
from $32,200 in 1997 to $32,800 in 1998. Comparable restaurant sales and
weighted average weekly sales at the Pizza Restaurants in 1998 were positively
affected by increased head count.

Price increases were implemented during the second quarter of 1998 for
certain menu items. While selected price increases may be implemented from time
to time in the future, the Company does not plan to implement additional price
increases in the foreseeable future. Future revenue growth is expected to be
driven principally by a combination of expansion into new markets and the
opening of additional restaurants and establishment of market share in those new
markets as well as increases in head count at existing restaurants and selected
price increases. When entering new markets where the Company has not yet
established a market presence, sales levels are expected to be lower than in
existing markets where the Company has a concentration of restaurants and high
customer awareness. Although the Company's experience in developing markets
indicates that the opening of multiple restaurants within a particular market
results in increased market share, decreases in comparable restaurant sales may
result.

Management and license fee revenues during 1998 were attributable to (1)
the commencement of hotel restaurant management services during the second
quarter of 1998 which accounted for $186,000 of management fees, and (2) gain
from the sale of the Company's interest in the LAX Daily Grill and licensing
fees from the LAX Daily Grill which totaled $258,000.

Cost of Sales and Gross Profit. While sales revenues increased by 19.3%
($5.5 million) in 1998 as compared to 1997, cost of sales increased by 22.1%
($1.7 million) and increased as a percentage of sales from 27.4% in 1997 to
27.7% in 1998. The increase in cost of sales as a percentage of sales revenues
was attributable to the higher cost of sales typically associated with The Grill
restaurants which was partially offset by purchasing efficiencies associated
with a new buying program implemented in late 1997 which reduced net food costs
in 1998 at the Daily Grill restaurants from 27.5% in 1997 to 27.1% in 1998

Gross profit increased 20.3% from $21.0 million (72.6% of sales) in 1997 to
$25.2 million (72.3% of sales) in 1998.

Operating Expenses and Operating Results. Total operating expenses,
including restaurant operating expenses, general and administrative expense and
depreciation and amortization, rose 23.3% to $26.4 million in 1998 (representing
75.5% of revenues) from $21.4 million in 1997 (representing 74.0% of sales).

Restaurant operating expenses increased 22.1% to $21.3 million in 1998 from
$17.4 million in 1997. As a percentage of sales, restaurant operating expenses
represented 61.1% in 1998 as compared to 60.4% in 1997. The increase in
restaurant operating expenses was primarily attributable to an increase in labor
cost and occupancy cost associated with the opening of new restaurants during
1998. The increase in restaurant operating expenses as a percentage of sales was
primarily attributable to increased labor costs. Restaurant labor wage rates
increased during 1998, with total restaurant labor costs representing 34.3% of
sales revenues during 1998 as compared to 32.9% of sales revenues during 1997.
The increase in restaurant labor costs as a percentage of sales revenues was
primarily attributable to increased minimum wage requirements. Occupancy costs,
consisting principally of rent expense, increased by 11.2% from $2.5 million in
1997 to $2.8 million in 1998, or 8% of sales revenues in 1998 as compared to
8.6% of sales revenues in 1997. The decrease in occupancy costs as a percentage
of sales revenues was primarily attributable to the increase in same store sales
and favorable rental terms at the San Jose Grill.

18
<PAGE>

General and administrative expenses increased 4% to $2.8 million in 1998
from $2.6 million in 1997. General and administrative expenses represented 7.9%
of sales in 1998 as compared to 9.2% of sales in 1997. The increase in total
general and administrative expenses was primarily attributable to the addition
of corporate office personnel and related costs to support expansion. The
percentage decrease in this category reflects the spreading of certain fixed
costs over greater sales for more restaurants and can be expected to continue
decreasing as a percentage as sales increase with the opening of additional
restaurants.

Depreciation and amortization expense, including amortization of
pre-opening expense, was $1.3 million during both 1998 and 1997. Depreciation
and amortization expense reflects the operation of three additional restaurants
during 1998, including the amortization of pre-opening costs in the amount of
$176,000 associated with the opening of the San Jose Grill during May of 1998
and the Tysons Corner Daily Grill during October of 1998. Amortization of
pre-opening costs during 1997 totaled $337,000.

Unusual Charges, Other Income and Expenses, Minority Interest, Effect of
Change in Accounting Principle and Net Income. The Company reported unusual
charges totaling $964,000 during 1998 relating to the Company's early adoption
of SOP 98-5 ($513,000) and the write-off of fixed assets ($451,000) of two
restaurants due to negative projected cash flows from those restaurants.

As noted, in addition to the unusual charge of $513,000 during 1998
relating to the incremental impact of early adoption of SOP 98-5, the Company
reported a $70,000 charge reported as the cumulative effect of a change in
accounting principle as a result of the early adoption of SOP 98-5.

Net interest expense increased by approximately $65,000 reflecting higher
average borrowing during the year.

The Company also reported a one-time non-recurring credit during 1997 of
$93,000 reflecting an overaccrual of a charge in 1996.

The Company reported a minority interest gain of $121,000 during 1998
attributable to the minority interest in the loss of San Jose Grill which
commenced operations in May of 1998.

The Company reported a net loss of $1,307,000 during 1998 as compared to a
net loss of $477,000 for 1997. In accordance with the recent position of the
Securities and Exchange Commission relating to accounting for Preferred Stock
which is convertible into common stock at a discount from the market price of
the common stock, the Company reported a "deemed dividend" of approximately
$83,000 during 1998 and $211,000 during 1997. The "deemed dividend", which
relates to the Company's issuance of convertible preferred stock during 1997, is
a non-cash, non-recurring accounting entry for determining income (loss)
applicable to common stock. After giving effect to preferred stock dividends
($85,000 during 1998 and $69,000 during 1997) and the "deemed dividend", the net
loss attributable to common stock was $1,475,000 for fiscal 1998 and $757,000
for fiscal 1997.

Liquidity and Capital Resources

At December 27, 1998, the Company had a working capital deficit of $2.3
million and a cash balance of $0.4 million as compared to a working capital
deficit of $1.2 million and a cash balance of $0.3 million at December 28, 1997.
The variance in the Company's working capital and cash was primarily
attributable to the payment of costs, and additional borrowings to pay costs,
associated with the opening of the San Jose Fairmont Grill and the Tysons Corner
Daily Grill during 1998.

The Company's need for capital resources historically has resulted from,
and for the foreseeable future is expected to relate primarily to, the
construction and opening of new restaurants. Historically, the Company has
funded its day-to-day operations through its operating cash flow, while funding
growth through a combination of bank borrowing, loans from
stockholders/officers, the sale of debentures and preferred stock, loans and
tenant allowances from certain of its landlords, and, beginning in 1998, through
joint venture arrangements. At December 27, 1998, the Company had existing bank
borrowing of $2.0 million, a loan from a member of the San Jose Grill L.L.C. of
$0.7 million, an SBA loan of $0.1 million, loans from stockholders/officers of
$0.9 million, equipment loans of $0.8 million, loans/advances from landlords and
others of $0.1 million.

19
<PAGE>

During 1998, the Company increased its bank credit availability from $1.6
million to $2.1 million consisting of a $600,000 line of credit and a $1.5
million term loan payable in 60 equal monthly installments of $25,000 plus
interest. At December 27, 1998, the Company had utilized $590,000 of its
available line of credit.

During 1998, the Company and its subsidiaries were obligated under fifteen
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 $2.6 million in 1998, with varying escalation and percentage rent
clauses in each of the restaurant leases. With the disposition of its interest
in the LAX Daily Grill and Rhino Chasers, the Company, and its subsidiaries, no
longer have any obligation with respect to the airport restaurants. Minimum
rental payments during 1999 on existing leases as of December 27, 1998, total
$2.05 million.

The Company currently expects to open five Daily Grill restaurants and one
Grill restaurant in 1999, of which one Daily Grill restaurant is expected to be
a non-hotel based owned facility, four Daily Grill restaurants are expected to
be hotel based managed facilities and the Grill restaurant is expected to be
hotel based majority owned restaurant. At March 1, 1999, the Company had entered
into leases and/or management agreements with respect to all six of the
referenced restaurants scheduled for opening in 1999, two of which had opened at
that date. Management anticipates that new non-hotel based restaurants will cost
between $1 million and $2 million per restaurant to build and open depending
upon the location and available tenant allowances. Hotel based restaurants may
involve remodeling existing facilities, substantial capital contributions from
the hotel operators and other factors which will cause the cost to the Company
of opening such restaurants to be less than the Company's cost to build and open
non-hotel based restaurants.

Capital expenditures were $1.75 million in 1997 and $3.8 million in 1998.
Capital expenditures in fiscal 1999 are expected to be between $0.5 million and
$1 million, primarily for the development of new restaurants, capital
replacements and refurbishing for existing restaurants, and enhancements to
information systems for the Company's restaurants and corporate office. The
amount of actual capital expenditures will be dependent upon, among other
things, the proportion of free standing versus hotel based properties as hotel
based restaurants are expected to generally require lower capital investment on
the Company's part. In addition, if the Company opens more, or less, restaurants
than it currently anticipates, its capital requirements will increase, or
decrease, accordingly.

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

The 1997 offering provided net proceeds to the Company of approximately
$1.5 million. The 1997 offering consisted of a private placement of 200,000
shares of common stock, 1,000 shares of Series I Convertible Preferred Stock,
500 shares of Series II 10% Convertible Preferred Stock, 750,000 five year $2.00
Warrants and 750,000 five year $3.00 Warrants. The aggregate sales price of
those securities was $1,500,000.

The Series I Convertible Preferred Stock is convertible into common stock
at $1.25 per share.

The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of (i) $1.00
per share, or (ii) 75% of the average closing price of the Company's common
stock for the five trading days immediately prior to the date of conversion;
provided, however, that the conversion price shall in no event exceed $2.50 per
share. The Series II 10% Convertible Preferred Stock is entitled to receive an
annual dividend equal to $100 per share payable on conversion or redemption in
cash or, at the Company's option, in common stock at the then applicable
conversion price. The Series II 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.

The $2.00 Warrants are exercisable to purchase common stock at a price of
$2.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance. The $2.00 Warrants are subject to cancellation
in the event the holders of Series I Preferred Stock, or common stock issued
upon conversion of such preferred stock, sell, assign or transfer such preferred
stock or underlying common stock, other than transfers to permitted persons,
within three years of the initial sale of the warrants.

20
<PAGE>

The $3.00 Warrants are exercisable to purchase common stock at a price of
$3.00 per share commencing three years from the date of issuance and ending five
years from the date of issuance. The $3.00 Warrants are subject to cancellation
in the event the holders of Series I Preferred Stock, or common stock issued
upon conversion of such preferred stock, sell, assign or transfer such preferred
stock or underlying common stock, other than transfers to permitted persons,
within three years of the initial sale of the warrants.

As of December 27, 1998, none of the shares of Series I or Series II
Preferred Stock had been converted.

The Grill at the San Jose Fairmont Hotel was built and is owned and
operated by a limited liability company of which the Company owns 50.05%.
Construction of the restaurant was funded primarily by a capital contribution
from the Company of $350,350 and by a capital contribution of $349,650 and a
$800,000 loan from the other member of the limited liability company.
Substantially all operating cash flows from the limited liability company will
be used to pay down the $800,000 loan prior to the distribution of funds to the
members. The Company will, however, receive a management fee of 5% of sales and
10% of cash flows declared for distribution.

Subsequent to fiscal 1998, in February of 1999, the Company entered into a
similar limited liability company/member loan arrangement to provide financing
for the planned opening of a Grill restaurant at the Chicago Westin Hotel which
is scheduled to open during October of 1999. Pursuant to the financing
arrangement for the Chicago Westin Hotel Grill, investor members of the limited
liability company (the "Chicago LLC") invested $1,000 in the Chicago LLC and
loaned an additional $1.699 million to the Chicago LLC. The Company will manage
the Chicago LLC for which it will receive a management fee of 5% of sales and
owns a 60% interest in the Chicago LLC. The Company guaranteed repayment of the
loan to the Chicago LLC and issued warrants to acquire 814,583 shares of common
stock at $1.75 per share.

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

In March of 1999, the Company received notice that its stock would be
subject to de-listing from the Nasdaq SmallCap Market if the bid price of its
common stock did not attain a minimum price of at least $1.00 per share for a
period of ten consecutive trading days on or before June 11, 1999, subject to
the Company's right to request a hearing regarding de-listing. If the Company's
stock is ultimately de-listed from Nasdaq, the Company's ability to raise
capital through the sale of equity securities may be adversely impacted.

Management believes that the Company has adequate resources on hand,
operating cash flow and available line of credit to sustain operations for at
least the following 12 months. In order to fund the opening of additional
restaurants, the Company will require, and intends to raise, additional capital
through additional bank borrowings, the issuance of debt or equity securities,
or the formation of additional investment/loan arrangements, or a combination
thereof. The Company presently has no commitments in that regard. See
"Description of Business -- Business Expansion" and "Management's Discussion and
Analysis -- Certain Factors Affecting Future Operating Results."

Certain Factors Affecting Future Operating Results

This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: adverse weather conditions and
other conditions affecting agricultural output which may cause shortages of key
food ingredients and volatility of food prices and which, in turn, may reduce
operating margins; changes in consumer tastes, demographics and adverse economic
conditions which may result in reduced frequency of dining at the Company's
restaurants; the dependence on key personnel and ability to attract and retain
qualified management and restaurant personnel to support existing operations and
future growth; regulatory developments, particularly relating to labor matters
(i.e., minimum wage, health insurance and other benefit requirements), health
and safety conditions, service of alcoholic beverages and taxation, which could
increase the cost of restaurant operations; establishment of market position and
consumer acceptance in new markets in light of intense competition in the
restaurant industry and the geographic separation of senior management from such
markets; potential delays in securing sites for new restaurants and delays in
opening restaurants which may entail additional costs and lower revenues than
would otherwise exist in the absence of such delays; and the availability of
capital to fund future restaurant openings. In addition to the foregoing, the
following specific factors may affect the Company's future operating results.

21
<PAGE>

The anticipated opening of additional Daily Grill and Grill locations is
expected to result in the incurrence of various pre-opening expenses and high
initial operating costs which may adversely impact earnings during the first
year of operations of such restaurants. However, management anticipates that
each of such operations can be operated profitably within the first year of
operations and that the opening of each of the restaurants presently
contemplated will improve revenues and profitability.

During the first quarter of 1998, the Company began formal efforts to sell
its Pizza Restaurants. If a buyer can be identified and an agreement reached to
sell the Pizza Restaurants on terms deemed acceptable to the Company, the
Company's Pizza Restaurants will be sold. In the event of such a sale, the
Company's revenues and operating profits will be reduced in future periods. The
Company intends to utilize the proceeds from the sale of the Pizza Restaurants
to fund the opening of additional Daily Grill and Grill restaurants.

Future Accounting Requirements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives will be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. The
new rules will be effective the first quarter of 2000. The Company does not
believe that the new standard will have a material impact on the Company's
financial statements.

Year 2000 Issue

The Company recognizes the need to ensure that its operations, as well as
those of third parties with whom the Company conducts business, will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the year 2000 date
are a known risk. The Company is addressing this risk to the availability and
integrity of financial systems and the reliability of operational systems
through a combination of actions including the implementation of new financial,
payroll, human resources software packages that are Year 2000 compliant and new
hardware in both its corporate headquarters and restaurants.

The corporate network of the Company's headquarters has been replaced with
new hardware with a Windows NT software package. The Company has taken delivery
on a new accounting, payroll and accounts payable software package which is Year
2000 compliant. Installation is anticipated for the first half of 1999.

Each new restaurant has had new year 2000 compliant software installed with
the new in-restaurant point of sale and back office computer systems.

The Company is evaluating the software currently being utilized in its 6
older restaurants. While we have received assurance from the software's supplier
that such software is year 2000 compliant, we are investigating new more
efficient software to replace the older software and expect a decision before
the end of June 1999.

The Company has incurred approximately $40,000 for the new corporate
hardware and $60,000 for new corporate software. Another $60,000 has been spent
for in restaurant back office computers.

New P.O.S., front of house restaurant computer systems and software cost
approximately $60,000 per restaurant. This is, however, a part of the initial
capital contribution for new restaurants.

22
<PAGE>

Regarding the Year 2000 issue, the greatest risk to the Company is that the
systems placed in service by the Company itself and/or its vendors will not be
fully operational by the end of calendar year 1999. This could adversely impact
the day to day operations of the Company. However, it is the Company's belief
that all of its systems will be in full operation in adequate time to ensure the
Company is fully operational by mid 1999. Beginning in calendar year 1999, if
any current vendors are not Year 2000 compliant, the Company will identify
alternative vendors who are Year 2000 compliant. Should any part of the
implementation by the Company or its vendors not function as anticipated, the
Company believes that it has ample time to develop contingency plans to ensure
Company operations will not be materially affected.

Impact of Inflation

Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses, could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past two years.

A majority of the Company's employees are paid hourly rates related to
federal and state minimum wage laws and various laws that allow for credits to
that wage. An increase in the Federal minimum wage went into effect on October
1, 1996, and a second increase became effective on September 1, 1997. In
addition, increases in the minimum wage are also being discussed by various
state governments. Although the Company has been able to and will continue to
attempt to pass along increases in costs through food and beverage price
increases, there can be no assurance that all such increases can be reflected in
its prices or that increased prices will be absorbed by customers without
diminishing, to some degree, customer spending at its restaurants.

ITEM 7. FINANCIAL STATEMENTS

The consolidated financial statements of the Company, together with the
independent accountants report thereon of PricewaterhouseCoopers LLP, appears on
pages F-2 through F-27 of this report. See Index to Financial Statements on F-1
of this report.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

23
<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

The information required by this Item will be included in a definitive
proxy statement, pursuant to Regulation 14A, to be filed not later than 120 days
after the close of the Company's fiscal year. Such information is incorporated
herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits
<TABLE>

Exhibit
Number Description of Exhibit
- --------- ------------------------
<S> <C>

3.1 Certificate of Incorporation, as amended, of Grill Concepts, Inc.(7)
3.2 Certificate of Amendment to Restated Certificate of Incorporation of
Grill Concepts, Inc. (8)
3.3 Bylaws, as amended, of Grill Concepts, Inc. (1)
3.4 Amendment to Bylaws of Magellan Restaurant Systems, Inc. dated December
29, 1994 (2)
4.1 Certificate of Designation fixing terms of Series B Preferred Stock (4)
4.2 Certificate of Designation fixing terms of Series I Preferred Stock (8)
4.3 Certificate of Designation fixing terms of Series II Preferred Stock (8)
4.4 Specimen Common Stock Certificate (1)
4.5 Form of Privately Issued Warrant (1)
4.6 Form of Offshore Warrant (3)
4.7 Warrant Agreement dated December 13, 1996 (4)
4.8 Form of $2.00 Warrant (8)
4.9 Form of $3.00 Warrant (8)
10.1 Form of Franchise Agreement (1)
10.2 Lease Agreement between Uno Concepts of Cherry Hill, Inc. and Denbob
Corp.
dated June 29, 1989 for premises in Cherry Hill, New Jersey (1)
**10.3 Employment Agreement with Robert Wechsler (2)

10.4 Operating Agreement for The Airport Grill LLC between Grill Concepts
and CA One Services, Inc. dated March 15, 1995 (5)
**10.5 Grill Concepts, Inc. 1995 Stock Option Plan (6)
**10.6* Employment Agreement, dated January 1, 1999, with Robert Spivak
10.7 Operating Agreement for San Jose Grill LLC, dated June 1997 (9)
10.8 Amendment, dated December 1997, to Operating Agreement for San Jose
Grill LLC (9)
10.9 Subordinate Note, dated December 1997, relating to San Jose Grill LLC (9)
10.10 Management Agreement re: San Jose City Bar & Grill (10)
10.11 Blanket Conveyance, Bill of Sale and Assignment between Grill
Concepts, Inc. and Air Terminal Services, Inc. (11)
10.12 License Agreement between Grill Concepts, Inc. and Airport Grill,
L.L.C. (11)
10.13 Agreement, dated August 27, 1998, between Grill Concepts, Inc. and
Hotel Restaurant Properties, Inc. (11)
10.14 Restaurant Management Agreement between Grill Concepts, Inc., Hotel
Restaurant Properties, Inc. and CapStar Georgetown Company, L.L.C.
for the Georgetown Inn (11)
10.15* Loan Agreement between Grill Concepts, Inc. and The Wolff Revocable
Trust of 1993
10.16* Addendum to Management Agreement re: San Jose City Bar & Grill
21.1* Subsidiaries of Registrant
23.1* Consent of PricewaterhouseCoopers LLP
27.1* Financial Data Schedules

</TABLE>

** Compensatory plan or management agreement.
* Filed herewith

(1) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993.

(2) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form S-4 (Commission File No.
33-85730) declared effective by the Securities and Exchange Commission on
February 3, 1995.

(3) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 30,
1996.

(4) Incorporated by reference to the respective exhibits filed with
Registrant's Current Report on Form 8-K dated December 13, 1996.

(5) Incorporated by reference to the respective exhibits filed with
Registrant's Annual Report on Form 10-KSB for the year ended December 25,
1994.

(6) Incorporated by reference to the respective exhibits filed with
Registrant's Quarterly Report on Form 10-QSB for the quarter ended June 25,
1995.

(7) Incorporated by reference to the respective exhibits filed with
Registrant's Registration Statement on Form SB-2 (Commission File No.
33-55378-NY) declared effective by the Securities and Exchange Commission
on May 11, 1993 and the exhibits filed with the Registrant's Current Report
on Form 8-K dated March 3, 1995.

(8) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended June 29, 1997.

(9) Incorporated by reference to the respective exhibits filed with the
Registrant's Annual Report on Form 10-KSB for the year ended December 28,
1997.

(10) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended March 29, 1998.

(11) Incorporated by reference to the respective exhibits filed with the
Registrant's Form 10-QSB for the quarter ended September 27, 1998.

(b) Reports on Form 8-K

The Company filed no reports on Form 8-K during the quarter ended December
27, 1998.

24
<PAGE>
SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

GRILL CONCEPTS, INC.

By: /s/ Robert Spivak
-----------------------
Robert Spivak
President

Dated: March 29, 1999

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

Signature Title Date

/s/ Robert Spivak
- ------------------------ President, Chief Executive Officer March 29, 1999
Robert Spivak and Director (Principal Executive
Officer, Principal Accounting and
Financial Officer)

- ------------------------ Chairman of the Board of Directors March __, 1999
Robert Wechsler

/s/ Michael Weinstock
- ------------------------ Executive Vice President, Vice March 29, 1999
Michael Weinstock Chairman and Director

/s/ Richard Shapiro
- ------------------------ Vice President and Director March 29, 1999
Richard Shapiro

- ------------------------ Director March __, 1999
Charles Frank

/s/ Glenn Golenberg
- ------------------------ Director March 29, 1999
Glenn Golenberg

- ------------------------ Director March __, 1999
Peter Balas

25
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
----------------

Page

Report of Independent Accountants...........................................F-2

Consolidated Balance Sheet as of December 27, 1998 and December 28, 1997....F-3

Consolidated Statements of Operation for the years ended December 27, 1998
and December 28, 1997.....................................................F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 27, 1998 and December 28, 1997...................................F-5

Consolidated Statements of Cash Flows for the years ended December 27, 1998
and December 28, 1997.....................................................F-6

Notes to Consolidated Financial Statements..................................F-7

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
-------------------

To the Board of Directors
Grill Concepts, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity, and cash flows
present fairly, in all material respects, the financial position of Grill
Concepts, Inc. and Subsidiaries at December 27, 1998 and December 28, 1997, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for the cost of start-up activities in 1998.

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California
March 12, 1999

F-2
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
------------

<TABLE>
December 27, December 28,

1998 1997
-------------- -------------
<S> <C> <C>

A S S E T S:
Current assets:
Cash and cash equivalents $438,184 $272,567
Inventories 385,131 302,631
Receivables 356,358 375,117
Prepaid expenses and other current assets 884,602 955,329
---------- -----------
Total current assets 2,064,275 1,905,644

Furniture, equipment and improvements, net 8,342,337 6,063,132

Goodwill, net 229,441 237,636
Liquor licenses 641,603 613,686
Other assets 109,305 190,757
---------- -----------
Total assets $11,386,961 $9,010,855
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Bank line of credit $590,026 $480,000
Accounts payable 1,648,465 1,359,529
Accrued expenses 1,045,832 858,050
Current portion of long-term debt 455,470 346,208
Note payable - related parties 624,500 84,500
---------- -----------
Total current liabilities 4,364,293 3,128,287

Long-term debt 2,001,760 699,364

Notes payable - related parties 926,038 -
---------- -----------
Total liabilities 7,292,091 3,827,651
---------- -----------
Minority interest 227,957 -

Commitments and contingencies (Note 9)

Stockholders' equity:
Series A, 10% Convertible Preferred Stock,
$.001 par value; 1,000,000 shares
authorized, none issued and outstanding in
1998 and 1997 - -
Series B, 8% Convertible Preferred Stock,
$.001 par value; 1,000,000 shares authorized,
0 and 32 issued and outstanding in 1998 and
1997, respectively - 1
Series I, Convertible Preferred Stock, $.001
par value; 1,000,000 shares authorized,
1,000 shares issued and outstanding in 1998 and
1997 1 1
Series II, 10% Convertible Preferred Stock, $.001
par value; 1,000,000 Shares authorized, 500
shares issued and outstanding in 1998 and 1997 1 1
Common Stock, $.00001 par value; 30,000,000 shares
authorized, 16,015,553 and 15,672,481 issued and
outstanding in 1998 and 1997, respectively 160 157
Additional paid-in capital 11,071,062 11,053,913
Accumulated deficit (7,204,311) (5,870,869)
---------- -----------
Total stockholders' equity 3,866,913 5,183,204
---------- -----------
Total liabilities and stockholders' equity $11,386,961 $9,010,855
========== ===========

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-3
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------
<TABLE>
December 27, December 28,
1998 1997
------------ ------------
<S> <C> <C>

Revenues:
Sales $34,464,289 $28,900,657
Management and license fees 443,816 -
----------- ----------

Total revenues 34,908,105 28,900,657

Cost of sales 9,673,787 7,919,959
----------- ----------
Gross profit 25,234,318 20,980,698
----------- ----------
Operating expenses:
Restaurant operating expenses 21,320,734 17,446,072
General and administration 2,754,711 2,648,014
Depreciation and amortization 1,137,439 948,361
Preopening costs 175,305 337,124
Unusual charges 963,831 -
----------- ----------
Total operating expenses 26,352,020 21,379,571
----------- ----------
Loss from operations (1,117,702) (398,873)

Interest expense, net (115,331) (123,125)
Interest expense - related parties (115,481) (43,281)
Nonrecurring gain - 93,000
----------- ----------
Loss before provision for income taxes, minority interest
and cumulative effect of change in accounting principle (1,348,514) (472,279)

Provision for income taxes (9,500) (5,000)
----------- ----------
Loss before minority interest and cumulative
effect of change in accounting principle (1,358,014) (477,279)

Minority interest 121,693 -
----------- ----------
Loss before cumulative effect of change in accounting
principle (1,236,321) (477,279)

Cumulative effect of change in accounting principle (70,281) -
----------- ----------
Net loss ($1,306,602) ($477,279)
=========== ==========
Preferred stock:
Preferred dividends accrued or paid ($85,384) ($69,168)
Accounting deemed dividends (82,877) (210,655)
----------- ----------

($168,261) ($279,823)
----------- -----------
Net loss applicable to common stock ($1,474,863) ($757,102)
=========== ===========
Net loss per share:
Basic net loss ($0.08) ($0.03)

Preferred stock:
Dividends (0.01) (0.00)
Accounting deemed dividends (0.00) (0.02)
----------- ----------
(0.01) (0.02)
----------- ----------
Basic net loss applicable to common stock ($0.09) ($0.05)
=========== ==========
Average-weighted shares outstanding 15,889,022 15,094,240
=========== ==========

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.

F-4
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------

<TABLE>
Series A Series B Series I Series II Additional
Preferred Preferred Preferred Preferred Common Paid-In Accumulated
Stock Stock Stock Stock Stock Capital Deficit Total
--------- ---------- ---------- ------------ -------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

Balance, December 29, 1996 $1 $1 - - $143 $9,552,453 ($5,350,117) $4,202,481

Issuance of common and
convertible Series I and II
Preferred stocks pursuant to
private placement - - $1 $1 2 1,457,998 - 1,458,002

Dividends of Series A, 10%
Convertible Preferred Stock,
paid by issuance of common stock - - - - 1 34,999 (35,000) -

Conversion of Series A, 10%
Convertible Preferred Stock,
to common stock (1) - - - 7 (6) - -

Dividends of Series B, 8%
Convertible Preferred Stock,
paid in cash - - - - - 8,473 (8,473) -

Conversion of Series B, 8%
Convertible Preferred Stock,
to common stock - - - - 4 (4) - -

Net loss - - - - - - (477,279) (477,279)
------- ------- ------- ------- ------- ------- --------- --------

Balance, December 28, 1997 - 1 1 1 157 11,053,913 (5,870,869) 5,183,204

Dividends of Series B, 8%
Convertible Preferred Stock,
paid in cash - - - - - (9,689) - (9,689)

Dividends of Series B, 8%
Convertible Preferred Stock,
paid by issuance of common stock - - - - 1 26,839 (26,840) -

Conversion of Series B, 8%
Convertible Preferred Stock,
to common stock - (1) - - 2 (1) - -

Net loss - - - - - - (1,306,602) (1,306,602)
------- ------- ------- ------- ------- ------- ---------- ----------

Balance, December 27, 1998 $ - $ - $1 $1 $160 $11,071,062 ($7,204,311) $3,866,913
======= ======= ======= ======= ======= =========== ============ ==========
</TABLE>

F-5

The accompanying notes are an integral part of these consolidated
financial statements.

<PAGE>
GRILL CONCEPTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------
<TABLE>

December 27, December 28,
1998 1997
------------- ------------
<S> <C> <C>

Cash flows from operating activities:
Net loss
($1,306,602) ($477,279)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,137,439 948,361
Cumulative effect of change in
accounting principal 70,281 -
Unusual charges - write-off of fixed assets 450,513 -
Minority interest in net loss (121,693) -
Amortization of preopening costs - 337,124
Changes in operating assets and liabilities:
Inventories (82,500) (63,394)
Receivables 18,759 (310,923)
Prepaid expenses and other current assets 446 (3,148)
Liquor licenses and other assets 53,535 (171,890)
Accounts payable 288,936 216,045
Accrued expenses 187,782 (425,755)
--------- --------
Net cash provided by operating activities 696,896 49,141
--------- --------

Cash flows from investing activities:
Additions to furniture, equipment and improvements (3,858,962) (1,764,721)
--------- ----------
Net cash used in investing activities (3,858,962) (1,764,721)
--------- ----------
Cash flows from financing activities:
Net increase in bank line of credit 110,026 480,000
Proceeds from term debt 3,850,313 -
Proceeds from investment in San Jose Grill LLC 349,650 -
Proceeds from issuance of preferred stock - 1,500,000
Payments on stock issuance costs - (41,998)
Payments on term debt (972,617) (322,172)
Dividends paid (9,689) -
--------- ---------
Net cash provided by financing activities 3,327,683 1,615,830
---------- ----------
Net increase (decrease) in cash and cash equivalents 165,617 (99,750)

Cash and cash equivalents, beginning of year 272,567 372,317
--------- ---------
Cash and cash equivalents, end of year $ 438,184 $272,567
========= =========
Supplemental cash flows information:
Cash paid during the year for:

Interest $ 156,989 $180,455
Income taxes $ 9,500 $5,400

</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

1. Business, Organization And Basis Of Presentation:

General
-------

Grill Concepts, Inc. (the "Company") is incorporated under the laws of the
State of Delaware. The Company operates exclusively in the restaurant
industry in the United States. As of December 27, 1998, the Company
operates fourteen restaurants, consisting of seven Daily Grill restaurants
in California; The Grill on the Alley ("The Grill"); The Grill in San Jose
("The San Jose Grill LLC"); one Daily Grill in Washington, D.C.; one Daily
Grill in Virginia; and three Pizzeria Uno Restaurants located in the
eastern part of the United States. With the exception of the three Pizzeria
Uno Restaurants which are operated pursuant to franchise agreements, each
of the Company's restaurants is owned and operated on a nonfranchise basis
solely by the Company.

Management's Plans
------------------

The Company has incurred net losses of $1,306,602 and $477,279 for the
years ended December 27, 1998 and December 28, 1997, respectively, and has
a negative working capital of $2,300,018 as of December 27, 1998. Although
the Company has recurring losses, the Company generated positive cash flows
from operations of $696,896 and $49,141 for the years ended December 27,
1998 and December 28, 1997, respectively.

Management's plans for profitable operations include increasing sales at
its existing restaurants and increased cost controls and efficiency gains
through the implementation of new information systems, procedures, and
management practices. In addition, the Company has shifted some of its
business focus to include hotel-based restaurants. Accordingly, the Company
has initiated a strategic growth plan whereby the Company plans to operate
its restaurants in hotel properties in strategic markets throughout the
United States. The Company believes that the opening of restaurants in
hotel properties will help further establish brand name recognition. As a
result, the Company has shown that it is able to expand its restaurant base
with little to no equity investment in new locations. Specifically, the new
locations to be opened in 1999 are already fully funded through landlord
contributions, joint ventures, partnerships, or a combination thereof. The
Company will earn management fee income in addition to profit sharing,
thereby increasing the predictability of its income stream and
significantly enhancing its return on assets. The Company believes that
these activities will allow the Company to meet its existing and ongoing
obligations, and achieve profitability and better margins from successfully
shifting some of its focus to hotel-based restaurants.

F-7

<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

2. Summary Of Significant Accounting Policies:

Principles Of Consolidation and Minority Interest
-------------------------------------------------

The consolidated financial statements include the accounts of Grill
Concepts, Inc., its wholly-owned subsidiaries, which include the three
Pizzeria Uno Restaurants and The Grill; and The San Jose Grill LLC (a
California Limited Liability Company), its majority-owned subsidiary. All
significant intercompany accounts and transactions for the periods
presented have been eliminated in consolidation. As of December 28, 1997,
the equity method of accounting is used for the investment in the joint
venture with CA One Services, Inc. ("CA One") relating to Rhino Chasers and
the one Daily Grill operated at Los Angeles International Airport ("LAX").
During 1998, the Company sold and assigned its interest related to Rhino
Chasers and the one Daily Grill operated at LAX to CA One. As a result, the
Company's ownership interest related to these two restaurants was
terminated.

In connection with the building of a new restaurant, in January 1998, a
limited liability company was formed for the operation of "The Grill"
restaurant in San Jose, California, of which the Company owns 50.05%.
Construction of the restaurant has been funded primarily by a capital
contribution from the Company of $350,350 and by a capital contribution of
$349,650 and a $800,000 loan from the other minority interest member of the
limited liability company. The consolidated financial statements include
the accounts of the limited liability company with minority interest
properly reflected.

Fiscal Year
-----------

The Company's fiscal year is the 52 or 53 weeks ending the Sunday closest
to December 31. The fiscal years 1998 and 1997 both consisted of 52 weeks
ended December 27, 1998 and December 28, 1997, respectively.

Cash And Cash Equivalents
-------------------------

The Company considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash
equivalents.

Concentration Of Credit Risk
----------------------------

Financial instruments which potentially subject the Company to a
concentration of credit risk are cash and cash equivalents. The Company
currently maintains substantially all of its day-to-day operating cash
balances with major financial institutions. At times, cash balances may be
in excess of Federal Depository Insurance Corporation ("FDIC") insurance
limits. Cash equivalents principally consist of an investment account with
a major brokerage house.

Inventories
-----------

Inventories consist of food, wine and liquor and are stated at the lower of
cost or market, cost generally being determined on a first-in, first-out
basis.

F-8
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

2. Summary Of Significant Accounting Policies, Continued:

Furniture, Equipment And Improvements
-------------------------------------

Furniture, equipment and improvements are stated at cost.

Depreciation of furniture and equipment is computed by use of the
straight-line method based on the estimated useful lives of 5 to 10 years
of the respective assets. Leasehold improvements are amortized using the
straight-line method over the life of the improvement or the remaining life
of the lease, whichever is shorter. Interest costs incurred during
construction were capitalized and are being amortized over the related
assets' estimated useful lives. When properties are retired or otherwise
disposed of, the costs and related accumulated depreciation are removed
from the accounts, and the resulting gain or loss is credited or charged to
current-year operations. The policy of the Company is to charge amounts
expended for maintenance and repairs to current-year expense and to
capitalize expenditures for major replacements and betterments.

Goodwill
--------

Goodwill relates to the excess of cost over the fair value of the net
assets of The Grill acquired in April 1996. Goodwill is being amortized on
a straight-line basis over 30 years. Accumulated amortization at
December 27, 1998 was $16,388.

Expendables
-----------

Initial amounts spent for china, glassware and flatware in connection with
the opening of a new restaurant are capitalized. Subsequent purchases are
expensed as incurred.

Liquor Licenses
---------------

The cost of acquiring liquor licenses are capitalized at cost and are
stated at the lower of cost or market.

Preopening Costs
----------------

Effective with fiscal year 1998, preopening costs are expensed as incurred.
For fiscal year 1997 and prior years, preopening costs were deferred and
amortized over the twelve-month period following restaurant openings.

F-9

<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

2. Summary Of Significant Accounting Policies, Continued:

Income Taxes
------------

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which prescribes an asset and liability approach. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory rates
applicable to future years to the difference between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Company establishes a valuation allowance to reduce net deferred tax assets
to the amount expected to be realized.

Advertising And Promotion Costs
-------------------------------

All costs associated with advertising and promoting products are expensed
in the year incurred. Advertising and promotion expense for the years ended
December 27, 1998 and December 28, 1997 was $928,911 and $486,615,
respectively.

Reclassifications
-----------------

Certain prior-year amounts have been reclassified to conform to the
current-year presentation.

Long-Lived Assets
-----------------

In accordance with SFAS No. 121, long-lived assets held and used by the
Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived
assets, the recoverability test is performed using undiscounted net cash
flows of the individual restaurants and consolidated undiscounted net cash
flows for long-lived assets not identifiable to individual restaurants
compared to the related carrying value.

F-10
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

2. Summary Of Significant Accounting Policies, Continued:

Stock-Based Compensation
------------------------

The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees." As such, no compensation expense is
recognized since the Company's stock option grants are generally priced at
fair market value on the date of grant. SFAS No. 123, "Accounting for
Stock-Based Compensation," established a fair value based methodology for
the financial accounting and reporting for stock-based employee
compensation plans. The Company has adopted the disclosure-only provisions
of SFAS No. 123.

Net Income Per Share
--------------------

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
SFAS No. 128 supersedes and simplifies the previous computational
guidelines under APB Opinion No. 15, "Earnings Per Share." Among other
changes, SFAS No. 128 eliminates the presentation of primary EPS and
replaces it with basic EPS for which common stock equivalents are not
considered in the computation. It also revises the computation of diluted
EPS.

Basic net income per share is computed by dividing the net income
attributable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net income per share
is computed by dividing the net income attributable to common shareholders
by the weighted-average number of common and common equivalent shares
outstanding during the period. Common share equivalents included in the
diluted computation represent shares issuable upon assumed exercise of
stock options, warrants and convertible preferred stocks using the Treasury
Stock method. Dilutive net income (loss) per share is not presented since
all of the dilutive shares are antidilutive for the periods presented. Net
income (loss) per share has also been adjusted to give effect to the deemed
dividends.

Use Of Estimates
----------------

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions for the reporting period and as of the financial
statement date. These estimates and assumptions affect the reported amounts
of assets and liabilities, the disclosure of contingent liabilities, and
the reported amounts of revenue and expenses. Actual results could differ
from those estimates.

F-11
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

2. Summary Of Significant Accounting Policies, Continued:

Fair Value Of Financial Instruments
-----------------------------------

SFAS No. 107, "Disclosure About Fair Value of Financial Instrument,"
requires disclosure of fair value information about most financial
instruments both on and off the balance sheet, if it is practicable to
estimate. SFAS No. 107 excludes certain financial instruments, such as
certain insurance contracts, and all nonfinancial instruments from its
disclosure requirements. A financial instrument is defined as a contractual
obligation that ultimately ends with the delivery of cash or an ownership
interest in an entity. Disclosures regarding the fair value of financial
instruments have been derived using external market sources, estimates
using present value or other valuation techniques.

Cash, accounts payable and accrued liabilities are reflected in the
financial statements at fair value because of the short-term maturity of
these instruments. The fair value of long-term debt closely approximates
its carrying value.

Recent Accounting Pronouncements
--------------------------------

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Standard establishes guidelines for the reporting and display
of comprehensive income and its components in financial statements.
Disclosure of comprehensive income and its components was required
beginning with the Company's fiscal year ending 1998. For the years ended
December 27, 1998 and December 28, 1997, the Company had no comprehensive
income components, as defined in SFAS No. 130.

Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." This Standard requires
that companies disclose "operating segments" based on the way management
disaggregates the Company for making internal operating decisions. The new
rules were effective for the Company's 1998 fiscal year-end. The adoption
of this Standard did not have any impact on the Company's reporting of its
segments.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives will be recorded each
period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if
it is, the type of hedge transaction. The new rules will be effective the
first quarter of 2000. The Company does not believe that the new standard
will have a material impact on the Company's financial statements.

F-12
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

2. Summary Of Significant Accounting Policies, Continued:

Recent Accounting Pronouncements, Continued

During fiscal 1998, the Company elected early adoption of American
Institute of Certified Public Accountants ("AICPA") Statement of Position
("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This new
accounting standard requires entities to expense all start-up and
preopening costs as they are incurred. Consistent with the practice of most
casual dining restaurant companies, the Company previously deferred such
costs and then wrote them off over the twelve-month period following the
opening of each restaurant. Restatement of previously issued financial
statements is not permitted by SOP 98-5, and entities are not required to
report the pro forma effects of the retroactive application of the new
accounting standard.

F-13
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

3. Furniture, Equipment And Improvements, Net:

Furniture, equipment and improvements at December 27, 1998 and December 28,
1997 consisted of:

1998 1997
------ ------

Furniture, fixtures and equipment $5,784,730 $4,239,213
Leasehold improvements 6,810,264 5,744,800
Motor vehicle 22,577 22,577
Expendables 237,841 115,186
Construction-in-progress - 218,902
---------- -----------

Furniture, equipment and improvements 12,855,412 10,340,678

Less, Accumulated depreciation (4,513,075) (4,277,546)
----------- -----------

Furniture, equipment and improvements, net $8,342,337 $6,063,132
=========== ===========

4. Debt:

Debt at December 27, 1998 and December 28, 1997 is summarized as follows:

<TABLE>

1998 1997
------ ------
<S> <C> <C>

Note payable to bank under revolving credit agreement, expiring August 1,
2003, payable in sixty equal monthly installments starting September 1,
1998, plus interest. Also available is $600,000 under a revolving line of
credit expiring June 30, 1999 ($590,026 outstanding at December 27,
1998). Interest is payable monthly at the Bank's Reference Rate (8% at
December 27, 1998) plus 0.25%. The Company has the option of fixing the
interest rate. The note is collateralized by an interest in the assets of
the Company. In addition, two of the Company's principal stockholders
have guaranteed the credit facility and it is their intention to continue
guaranteeing the credit facility upon renewal. In connection with this credit
facility, the Company is required to comply with a number of restrictive
covenants, including meeting certain debt service cover requirements. The
credit agreement also contains a subjective acceleration clause and a
cross-default provision. $1,990,026 $1,226,688

</TABLE>

F-14
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

4. Debt, Continued:

<TABLE>

1998 1997
------ ------
<S> <C> <C>

Note payable to Small Business Administration collateralized by property,
payable monthly, $1,648, including interest at 4.0%, due September 23,
2006. $130,905 145,047

Note payable to lessor, uncollateralized, payable monthly, $1,435,
including interest at 10.0%, due April 30, 2013. 136,836 139,119

Note payable for equipment, payable monthly, $2,039, due December 8, 2001. 58,275 -

Note payable for equipment, payable monthly, $14,597, including interest
at 9.25%, due April 30, 2004. 726,000 -

Note payable for automobile, payable monthly, $755, including interest at
2.9% due June 18, 1999. 5,214 14,718
---------- ---------

3,047,256 1,525,572

Less, Current portion of long-term debt 455,470 346,208

Less, Bank line of credit 590,026 480,000
---------- ---------
Long-term portion
$2,001,760 $699,364
========== =========
</TABLE>

Principal maturities of long-term debt are as follows:

Year Ending
December 31,

1999 $455,470
2000 464,148
2001 475,293
2002 469,683
2003 384,568
Thereafter 208,068
---------
Total $2,457,230
=========

Throughout fiscal year 1998, the Company was not in compliance with certain
bank covenants and has received a waiver from the lender with respect to
those instances of noncompliance. As of December 27, 1998, the Company was
in compliance with all of its bank covenants.

F-15
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

5. Related Parties:

Debt with related parties at December 27, 1998 and December 28, 1997
consisted of:

Uncollateralized note payable to shareholder, with interest payable at a
rate of 10% per annum. The note payable and interest is due on July 1999. $300,000 -

Uncollateralized subordinated note payable to shareholders, with interest
payable at a rate of 7.0% per annum. The note payable and interest is due
on December 26, 1999. 84,500 $84,500

Uncollateralized note payable to one of the shareholder's revocable trust
($500,000 original principal amount), with interest payable at a rate of 10.0%
per annum. Management fees received by the Company from the management of the
Burbank Daily Grill are remitted as principal and interest payments. As a
result, the current portion at 1998 fiscal year-end is calculated based on
projected 1999 results of operations of the restaurant. The note payable
and interest is due on December 31, 2003. 466,038 -

Uncollateralized subordinated note payable to a member of the San Jose Grill LLC
($800,000 original principal amount), with interest payable annually at a rate
of 10.0% per annum. The note payable has no defined payment terms and is due in
January 2018. Substantially all operating cash flows from the limited liability
company will be used to pay down the note prior to the distribution of funds to
the members. 700,000 -

Less, Current portion of notes payable - related parties 624,500 84,500
--------- ---------
Long-term portion $926,038 -
========= =========
</TABLE>

In 1997, the Company agreed to pay to each of two stockholders interest at
a rate of 2% per annum of the average annual balance of the note payable to
the bank for collateralizing the note with their personal assets. Interest
expense totalled $66,834 and $37,366 for fiscal years 1998 and 1997,
respectively.

F-16
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

5. Related Parties, Continued:

A stockholder of the Company is the lessor for property leased by one of
the Pizzeria Uno Restaurants. Rent expense related to this operating lease
was $244,000 for each of the fiscal years 1998 and 1997.

The holder of all of the Company's preferred stocks is a part owner of the
San Jose Fairmont Hotel, the site of the San Jose Grill LLC. He is also a
part owner of the San Jose Hilton Hotel, the site of The City Bar & Grill,
which is one of the management agreements entered into by the Company
during 1998. Revenue related to this management agreement was $73,000 for
fiscal year 1998.

In August 1998, the Company entered into an agreement with Hotel Restaurant
Properties, Inc. ("HRP") in which HRP will assist the Company in locating
hotel locations for the opening of the Company's restaurants. One of the
two owners of HRP is a family member of the above-referenced preferred
stockholder of the Company. A portion of the management fees received by
the Company as a result of the management agreements entered into with the
assistance of HRP is payable to HRP. There were no fees paid related to
this agreement for fiscal year 1998. The agreement also provides that both
HRP and the Company will have certain rights to cause the Company to
acquire HRP commencing in May of 2004.

6. Stockholders' Equity:

In June 1996, the Board of Directors authorized and the Company completed
an offering of $1.5 million of 1,500 shares of Series A, 10% Convertible
Preferred Stock to an offshore investor. The preferred shares are
convertible at the option of the holder in 25% increments commencing 60,
90, 120 and 150 days after June 17, 1996. The conversion price of the
preferred shares is equal to the lesser of $2.25 per share or 85% of the
average closing bid price of the common stock for the five trading days
preceding notice of conversion. The Company may, at its option, redeem the
preferred shares at their initial offering price or force conversion of the
preferred shares at the then applicable conversion price commencing
June 17, 1998. The holder of the preferred shares may, at its option, cause
any preferred shares remaining outstanding at June 17, 2000 to be redeemed
at their initial offering price. During fiscal year 1996, 800 shares of
Series A Convertible Preferred Stock were converted, resulting in the
issuance of an aggregate of 433,288 shares of common stock at an average
price of $1.84 per share. During fiscal year 1997, all of the remaining 700
shares of Series A Convertible Preferred Stock were converted, resulting in
the issuance of an aggregate of 801,896 shares of common stock at an
average price of $0.87 per share. In 1997, the Company paid $35,000 in
dividends by issuing common stock, calculated based on the market rate at
the issuance date, to the preferred shareholder. There were no accumulated
dividends in arrears at December 27, 1998 and December 28, 1997.

F-17
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

6. Stockholders' Equity, Continued:

In December 1996, the Board of Directors authorized and the Company
completed an offering of $650,000 of 65 shares of Series B, 8% Convertible
Preferred Stock. The preferred shares are convertible at the option of the
holder in one-third increments commencing 60, 75 and 90 days after December
13, 1996. The conversion price of the preferred shares is equal to the
lesser of $2.50 per share or the average closing bid price of the common
stock for the five trading days preceding notice of conversion multiplied
by the following percentages when converted during the period after the
issuance of the preferred shares indicated: 61 to 90 days - 85%; 91 to 130
days - 83.5%; 131 to 180 days - 82%; and 181 or more days - 80%. The
preferred shares are entitled to receive an 8% cumulative dividend payable
on conversion or redemption; provided, however, that with respect to any
preferred shares converted prior to 180 days after issuance, the dividend
shall be reduced to 4%. During fiscal year 1997, 33 shares of Series B
Convertible Preferred Stock were converted, resulting in the issuance of an
aggregate of 388,067 shares of common stock at an average price of $0.85
per share. During fiscal year 1998, all of the remaining 32 shares of
Series B, 8% Convertible Preferred Stock were converted, resulting in the
issuance of an aggregate of 318,560 shares of common stock at an average
price of $1.00 per share. In 1998, the Company paid $26,840 in dividends by
issuing common stock, calculated based on the market rate at the issuance
date, to the preferred shareholder. The Company paid $9,689 and $8,473 in
cash dividends during fiscal years 1998 and 1997, respectively. There were
no accumulated dividends in arrears at December 27, 1998 and December 28,
1997.

In June 1997, the Company completed a private placement of 200,000 shares
of common stock, 1,000 shares of Series I Convertible Preferred Stock, 500
shares of Series II, 10% Convertible Preferred Stock, 750,000 five-year
$2.00 warrants and 750,000 five-year $3.00 warrants. The aggregate sales
price of those securities was $1,500,000.

The Series I Convertible Preferred Stock is convertible into common stock
at $1.25 per share. There were no conversions at December 27, 1998 and
December 28, 1997.

F-18
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

6. Stockholders' Equity, Continued:

The Series II 10% Convertible Preferred Stock is convertible into common
stock commencing one year from the date of issuance at the greater of
(i) $1.00 per share, or (ii) 75% of the average closing price of the
Company's common stock for the five trading days immediately prior to the
date of conversion; provided, however, that the conversion price shall in
no event exceed $2.50 per share. The Series II, 10% Convertible Preferred
Stock is entitled to receive an annual dividend equal to $100 per share
payable on conversion or redemption in cash or, at the Company's option, in
common stock at the then-applicable conversion price. The Series II, 10%
Convertible Preferred Stock is subject to redemption, in whole or in part,
at the option of the Company on or after the second anniversary of issuance
at $1,000 per share. There were no conversions as of December 27, 1998.
Accumulated dividends in arrears totalled $75,695 and $25,695 as of
December 27, 1998 and December 28, 1997, respectively.

Warrants
--------

At December 31, 1995, the Company had outstanding 190,793 warrants
previously issued by Magellan and exercisable at a price of $2.00 per
share. Additionally, in connection with the Exchange and a private
placement during 1995, the Company issued an additional 100,000 warrants,
which are exercisable at $3.00 per share.

In connection with the offshore placement of the Series A, 10% Convertible
Preferred Stock, the Company issued warrants to acquire an aggregate of
250,000 shares of the Company's common stock at a price of $3.00 per share
for a period expiring June 17, 2001. The warrants are redeemable at the
Company's option commencing June 17, 1999 at a price of $.01 per warrant
providing that the closing bid price of the Company's common stock has
equalled or exceeded $4.50 per share for 20 trading days.

In December 1996, 46,222 warrants exercisable at $3.00 per share were
issued in connection with the sale of the Company's Series B, 8%
Convertible Preferred Stock. The warrants are scheduled to expire December
13, 1999.

In June 1997, 750,000 warrants exercisable at $2.00 per share and 750,000
warrants exercisable at $3.00 per share were issued in connection with the
offering of the Series I Convertible Preferred Stock which is scheduled to
expire June 26, 2002. These warrants are subject to cancellation in the
event the holders of the Series I Convertible Preferred Stock, or common
stock issued upon conversion of such preferred stock, sell, assign or
transfer such preferred stock or underlying common stock, other than
transfers to permitted persons, within three years of the initial sale of
the warrants.

F-19
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

6. Stockholders' Equity, Continued:

Deemed Dividend
---------------

In accordance with the recent position of the Securities and Exchange
Commission regarding accounting for preferred stock which is convertible at
a discount from market price for common stock, the Company has reflected,
for purposes of presenting net income (loss) per share, an accounting
"deemed dividend." This deemed dividend, which relates to the issuance of
the preferred stock, is a noncash, nonrecurring amount for the purpose of
presenting income (loss) applicable to common stock and income (loss) per
share. This deemed dividend was calculated at the date of issue as the
difference between the conversion price and the fair value of the common
stock into which the preferred stock is convertible, multiplied by the
number of shares into which the preferred stock convertible.

Options
-------

On June 1, 1995, the Company's Board of Directors adopted the Grill
Concepts, Inc. 1995 Stock Option Plan (the "1995 Plan"). The 1995 Plan
provides for options to be issued to the Company's employees. The exercise
price of the shares under option shall be equal to or exceed 100% of the
fair market value of the shares at the date of grant. The options generally
vest over a five- to ten-year period.

F-20
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

6. Stockholders' Equity, Continued:

Options, Continued
-------

A total of 1,500,000 common shares are reserved for issuance pursuant to
the 1995 Plan. During the year, upon recommendation of the Compensation
Committee, 20,000 options were granted under the 1995 Plan at $1.06. The
1995 Plan was approved at the 1996 annual stockholders' meeting.
Transactions during the fiscal years 1998 and 1997 under the 1995 Plan were
as follows (included in the following options are 40,000 shares from a
discontinued plan):

<TABLE>

1998 1997
Weighted- Weighted-
Average Option Average Option
Number Exercise Number Exercise
Of Shares Price Of Shares Price
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>

Options outstanding at beginning of
year 1,426,100 $1.30 1,110,100 $1.37

Options granted - price less than fair
value - - 15,000 1.00

Options granted - price equals fair
value 20,000 1.06 383,500 1.06

Options granted - price greater than
fair value - - 33,500 1.17

Options exercised - - - -
Options cancelled (165,000) 1.31 (116,000) 1.10
---------- -------- ---------- -------

Options outstanding at end of year 1,281,100 $1.31 1,426,100 $1.30
========== ======== ========== =======

Options exercisable at end of year 739,940 665,520
Options available for grant at end of
year 93,900 113,900

</TABLE>

The following table summarizes information about stock options outstanding
at December 27, 1998 (shares in thousands):

<TABLE>
Options Outstanding Options Exercisable
--------------------------------------------- ------------------------------
Number Weighted- Number
Outstanding At Average Weighted- Outstanding At Weighted-
Range Of December 27, Remaining Average December 27, Average
Exercise Price 1998 Contractual Life Exercise Price 1998 Exercise Price
---------------- -------------- ---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>

$1.00 to $1.17 434,000 7.4 $1.08 186,000 $1.09

$1.34 to $1.53 847,100 4.9 $1.43 553,940 $1.42
--------- ---------

1,281,100 739,940
========== =========

</TABLE>

F-21
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

6. Stockholders' Equity, Continued:

Options, Continued
-------

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," and will continue to use the
intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recognized for the stock option plans. Had
compensation expense for the Company's stock option plans been determined
based on the fair value at the grant date for awards in fiscal year 1998
and 1997 consistent with the provisions of SFAS No. 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma
amounts indicated below:

1998 1997
------ ------

Net loss, as reported ($1,306,602) ($757,102)
Net loss, pro forma ($1,388,600) ($803,869)
Net loss per share, as reported ($0.08) ($0.05)
Net loss per share, pro forma ($0.09) ($0.05)

The fair value of each option grant issued in fiscal year 1998 and 1997 is
estimated at the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions: (a) no dividend yield on
the Company's stock, (b) expected volatility ranging from 54.11% to 66.72%,
(c) risk-free interest rates ranging from 4.69% to 6.45%, and (d) expected
option lives of five years.

In June 1998, the Company's shareholders adopted the Grill Concepts, Inc.
1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan is similar in
nature to the 1995 Plan. A total of 750,000 shares are reserved for
issuance pursuant to the 1998 Plan. On December 31, 1998, the Company
granted 345,000 options.

F-22
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

7. Unusual Charges And Adoption Of Statement Of Position 98-5, "Reporting On
The Costs Of Start-Up Activities"

The Company recorded a charge to earnings of $450,513 for the write-off of
the long-lived assets related to a Daily Grill restaurant and one of the
Pizzeria Uno restaurants in 1998 in accordance with SFAS 121. The carrying
values of the fixed assets were completely written off due to negative
projected future cash flows pertaining to the two restaurants. The charge
was recorded in the Consolidated Statements of Operations under Unusual
Charges for fiscal year 1998. The write-off of the fixed assets of the two
restaurants impacted the Company's reported results for fiscal 1998 by
approximately $0.03 per basic share.

The Company elected early adoption of SOP 98-5, "Reporting on the Costs of
Start-Up Activities," during fiscal 1998. This new accounting standard,
issued in 1998 by the AICPA, requires entities to expense all start-up and
preopening costs as they are incurred. Consistent with the practice of most
casual dining restaurant companies, the Company previously deferred such
costs and then wrote them off over the twelve-month period following the
opening of each restaurant. The early adoption of SOP 98-5 was made
retroactive to the first quarter of fiscal 1998. The cumulative effect of
this change in accounting principle was $70,281. This new accounting
standard will accelerate the Company's recognition of preopening costs but
will benefit the post-opening results of new restaurants. Excluding the
one-time cumulative effect, the adoption of the new accounting standard
impacted the Company's reported results for fiscal 1998 by $513,318, or
$0.03 per basic share. This incremental impact has been included in the
Consolidated Statements of Operations under Unusual Charges for fiscal year
1998.

8. Pension Plan:

Effective January 1, 1996, the Company established the Grill Concepts, Inc.
401(k) Plan (the "Plan"), a defined contribution savings plan, which is
open to all employees of the Company who have completed one year (1,000
hours in that year) of service and have attained the age of 21. The Plan
allows employees of the Company to contribute up to the lesser of the
Internal Revenue Code-prescribed maximum amount or 20% of their income on a
pre-tax basis, through contribution to the Plan. The Company's
contributions are discretionary. For the years ended December 27, 1998 and
December 28, 1997, the Company made no contributions to the Plan.

F-23
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

9. Commitments And Contingencies:

The Company leases most of its restaurant facilities and corporate offices
under noncancellable operating leases. The restaurant leases generally
include land and building, require various expenses incidental to the use
of the property, and certain leases require contingent rent above the
minimum lease payments based on a percentage of sales. Certain leases also
contain renewal options and escalation clauses.

The aggregate minimum lease payments under noncancellable operating leases
are as follows:

Fiscal Year Ending
------------------

1999 $2,052,871
2000 1,935,823
2001 1,955,189
2002 1,886,002
2003 1,802,537
Thereafter 8,846,414
-----------

Total $18,478,836
===========

Rent expense was $2,590,021 and $2,325,263 for fiscal years 1998 and 1997,
respectively, including $171,955 and $139,087 for 1998 and 1997,
respectively, for contingent rentals which are payable on the basis of a
percentage of sales in excess of stipulated amounts.

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

The Company plans on five new restaurant openings during 1999. The
restaurants will be structured as either joint ventures, LLCs or management
agreements. In connection with the building of the restaurants, the Company
may be obligated for a portion of the start-up and/or construction costs.

F-24
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

10. Income Taxes:

The provisions for income taxes for the fiscal years ended December 27,
1998 and December 28, 1997 are as follows:

1998 1997
------ ------

Current - federal - -
Current - state $ 9,500 $5,000
------- -------
$ 9,500 $5,000
======= =======

The following is a reconciliation between the U.S. federal statutory rate
and the effective tax rate:

1998 1997
------ ------

Federal tax rate (34.0%) (34.0%)
Net operating loss for which no tax benefit was
realized 25.0% 23.0 %
Other 10.0% 12.0 %
-------- -------

Effective tax rate 1.0% 1.0 %
======== =======

F-25
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

10. Income Taxes, Continued:

Deferred tax assets and liabilities consist of the following as of December
27, 1998 and December 28, 1997:

1998 1997
------ ------

Deferred tax assets:

Net operating loss $1,435,707 $1,201,724
Fixed assets 883,183 219,105
Preopening costs 148,841 -
State taxes - 198,376
General business credit 384,716 251,347
Other 17,402 13,035
----------- ----------

Total gross deferred tax assets 2,869,849 1,883,587

Less, Valuation allowance (2,701,262) (1,859,692)
----------- ----------

Net deferred tax assets 168,587 23,895

Deferred tax liabilities:

Intangible assets (168,587) (23,895)
----------- ----------

Net deferred tax assets
and liabilities $ - $ -
=========== ==========

At December 27, 1998, the Company has available federal and state net
operating loss carryforwards of $3,430,222 and $2,694,320, respectively,
that may be utilized to offset future federal and state taxable earnings.
These net operating losses begin to expire in 2006 and 1998, respectively.
A full valuation allowance has been established to reduce net deferred tax
assets to the amount expected to be realized.

F-26
<PAGE>

GRILL CONCEPTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------

11. New Openings:

On December 31, 1998, the Company signed and executed a joint venture
agreement with Universal Studios, Inc. to open a Daily Grill restaurant at
Universal Studios CityWalk Hollywood, California.

In connection with the building of a new restaurant in February 1999, the
Grill on the Alley LLC ("Chicago LLC") was formed for the operation of a
"The Grill" restaurant at the Chicago Westin Hotel in Chicago, Illinois.
The Chicago LLC obtained a $1,699,000 senior convertible promissory note at
a rate of 8% per annum, with quarterly payments to begin on April 1, 2000.
The note will mature on October 1, 2009. The Company has guaranteed
repayment of the loan to the Chicago LLC and issued 814,583 warrants to
acquire common stock at $1.75 per share.

In March 1999, the Company opened a Daily Grill restaurant in Salt Lake
City, Utah. The Company plans to open another Daily Grill restaurant in
April 1999 in Washington, D.C., which the Company will operate under a
management agreement.

12. Quarterly Financial Data (Unaudited):

Summarized unaudited quarterly financial data for fiscal years 1998 and
1997 is as follows:

<TABLE>
March 29, June 28, September 27, December 27,
Quarter Ended 1998 1998 1998 1998
--------------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>

Total revenues $8,361,241 $8,450,280 $8,641,440 $9,455,144

Income (loss) from operations 101,180 (354,890) (196,806) (667,186)

Net income (loss) 60,861 (369,729) (201,880) (795,854)

Basic net loss per share $0.00 ($0.02) ($0.01) ($0.05)

March 30, June 29, September 28, December 28,
Quarter Ended 1997 1997 1997 1997
--------------- ---------- ---------- -------------- -------------

Total revenues $7,140,720 $7,306,781 $7,066,991 $7,386,165

Income (loss) from operations 70,174 (66,008) (149,346) (253,693)

Net income (loss) 74,613 (51,861) (171,416) (328,615)

Basic net income (loss) per share $0.00 ($0.01) ($0.01) ($0.02)

</TABLE>

F-27

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of January
1, 1999, by and between GRILL CONCEPTS, INC., a Delaware corporation (the
"Company") and ROBERT L. SPIVAK ("Employee").

RECITALS

WHEREAS, the Company and Employee have heretofore entered into Employment
Agreements dated July 1, 1999, January 1, 1993 and January 1, 1996 (collectively
the "Previous Agreements"), setting forth the terms and conditions of the
Company's employment of Employees as its Chief Executive Officer; and

WHEREAS, the Company and Employee desire that Employee continue his
employment with the Company as its Chief Executive Officer upon the expiration
of the three (3) year term of the January 1, 1996 Employment Agreement between
the Company and Employee, pursuant to and in accordance with the terms and
conditions hereinafter set forth in this Agreement;

NOW THEREFORE, in consideration of the mutual covenants and agreements contained
in this Agreement, the parties hereby agree as follows:

1. EMPLOYMENT
----------

1.1 The Company hereby employs Employee as its Chief Executive Officer for
a term of three (3) years, commencing as of January 1, 1999 and ending as of
December 31, 2001 (the "Term"); provided, however, that the Term may be extended
by the mutual written agreement of the parties. Employee hereby accepts such
position, upon the terms and conditions set forth in this Agreement.

1.2 During the Term, Employee shall devote his full time, energies and
skills to the performance of his duties hereunder, which shall include, but not
be limited to, the active development, management and operation of the Company's
business.

1.3 During the Term, Employee shall not, directly or indirectly, alone or
as a member of a partnership or other association, or as an officer, director or
stockholder, be engaged in or concerned with any other duties or pursuits in a
business activity which complete, directly or indirectly, with the business of
the Company without the written consent of the Company, other than owing
securities in a publicly traded company, provided that such ownership by
Employee does not exceed ten percent (10%) of any class of securities of such
company.

1.4 In the course of Employee's employment hereunder, it is anticipated
that Employee may from time to time be allowed access to confidential
information and trade secrets (collectively the "confidential Information")
owned by the Company and used in the course of its business. The parties
acknowledge and agree that there is a competitive value and confidential nature
with respect to the Confidential Information, and that material damage will
result to the Company if any of the Confidential Information is disclosed to a
third party. Employee therefore agrees that during the Term, and for a period of
one (1) year thereafter, Employee will not, directly or indirectly, disclose or
use any of the Confidential Information except as required in the ordinary
course of the company's business and Employee's employment hereunder. All
records, files, documents and materials relating to the Company's business which
Employee shall prepare, use or be provided with during the Term shall be and
remain the sole property of the Company, and shall not be removed from the
Company's premises or otherwise utilized by Employee for other than the benefit
of the Company without the Company's written consent.

<PAGE>

1.5 Employee acknowledges and agrees that in the event of a breach by
Employee of any of the provisions of paragraph 1.3 and 1.4 above, that in
addition to any other remedies it may have at law or in equity, the Company
shall be entitled to injunctive relief, without the necessity of proving the
inadequacy of such other remedies.

2. SALARY. Employee shall receive an annual base salary during each year of
the Term of this Agreement as follows:

Year One: $200,000
Year Two: $210,000
Year Three: $225,000

3.1 Vacation. Five (5) weeks vacation during each year of the Term, at such
times or times as shall be mutually agreed upon between Employee and the
Company; provided, however, that Employee may not accumulate any unused vacation
time from one employment year to the next during the Term.

3.2 Automobile. Unlimited use of an automobile of a make and model
commensurate with Employee's position as Chief Executive Officer of the Company
hereunder and consistent with that provided to Employee by the Company in the
past. The Company shall pay all expenses for repair, maintenance and insurance
for such automobile.

3.3. Travel and Entertainment. Unlimited reimbursement by the Company of
Employee for entertainment, dining and travel expenses incurred by Employee in
the course of his performing his duties hereunder.

3.4 Expense Allowance. In addition to the reimbursement under paragraph 3.3
above, Employee shall be entitled to a monthly expense allowance to be used by
Employee in his sole discretion, in an amount not to exceed One Thousand Five
Hundred Dollars ($1,500) per month.

3.5 Health Benefits. During the Term and any extension thereof, unless the
Executive is terminated for cause, each of the Executive and his spouse (or
widow) shall be entitled to receive, at the sole expense of the company, such
benefits, including without limitation, participation in group life, health,
accident, disability, liability or hospitalization insurance plans, pension
plans, severance plans or retirement plans, as the Company currently makes
available to its highest level of executive employees as a group or as such
programs and benefits are amended. In addition, the Company will, at its own
expense, continue to provide the benefits referred to in Paragraph 3.5 to the
Executive and his spouse (or widow) for five (5) years after the expiration of
the Term, such benefits to be provided regardless of the reason for any
separation of employment including, but not limited to, the Executive's death or
disability, but excluding termination for cause. The Company represents and
warrants that the benefits to the Executive and his spouse (or widow) described
in paragraph 3.5 shall at all times be substantially as favorable or more
favorable to the Executive and his spouse (or widow) as those currently
provided. In the event that the Company is unable to continue to provide the
benefits required by this paragraph 3.5 through continued participation in the
Company's plans, the Company is required to provide comparable benefits for the
Executive and his spouse (or widow) from another source. After benefits are no
longer required to be provided at the Company's expense to the Executive and his
spouse (or widow) pursuant to this Section 3.5, each of the Executive and his
spouse (or widow) shall be entitled to participate in the company's health and
hospitalization insurance plans as described in Section 3.5 at his and/or her
own expense, for as long as the Company's plans permit.

<PAGE>

3.6 Life Insurance. Term life insurance coverage in the face amount of One
Million Dollars ($1,000,000), the premiums and all other costs for which shall
be paid in full by the Company.

3.7 Other Benefits. Such other benefits as Employee may be eligible to
receive in accordance with the Company's announced employee benefit programs in
effect from time to time, including, but not limited to, paid sick leave,
participation in qualified pension and/or profit sharing plans, split-dollar
life insurance policies, reimbursement for uninsured medical expenses,
non-qualified and/or incentive stock options, and/or unfunded deferred
compensation. Nothing contained in this paragraph shall be deemed to restrict,
limit or affect any stock options which may have previously been granted to
Employee.

4. TERMINATION. This Agreement shall terminate upon the occurrence of any
of the following:

4.1 The expiration of the Term hereof.

4.2 The mutual written consent of the parties hereto.

4.3 The death of Employee

4.4 The permanent disability of Employee, as such term is defined in
paragraph 6 below.

4.5 For cause, at the option of the Company, as provided in paragraph
in 5 below.

Nothing contained in this paragraph 4 shall be construed, however, to
abrogate the payment by the Company to Employee or Employee's personal
representative or heirs, as the case may be, of any benefits or compensation
which had accrued and was due to Employee prior to termination of this
Agreement.

<PAGE>

5. TERMINATION FOR CAUSE. The Company shall have the right, at its sole
election, to terminate Employee's employment hereunder at any time during the
Term for cause, which, for purposes of this Agreement, shall be constitute by
any of the following events:

5.1 Employee is convicted by any federal, state or local authority with (i)
and act of dishonesty; or (ii) an act involving moral turpitude; or (iii) an act
constituting a felony; or (iv) narcotics addiction; or (v) habitual
intemperance.

5.2 The continued failure by Employee, following written notice from the
Company, to fulfill Employee's obligations under or comply with any of the
provisions of this Agreement.

Any election by the Company to terminate this Agreement for cause under
paragraphs 5.1 or 5.2 above shall be made by giving Employee written notice to
such effect by certified or registered mail at Employee's last known address, or
by personal delivery of such notice to Employee; provided, however, that in the
event Employee is either convicted or pleads guilty or nolo contendere to any of
the charges set forth in paragraph 5.1 above, the Company may immediately
terminate this Agreement thereupon. The waiver by the Company of any such acts
of Employee as described in this paragraph 5 shall not be construed as a waiver
of any subsequent acts by Employee.

6. PERMANENT DISABILITY.
--------------------

6.1 The terms "permanent disability" as used in this Agreement shall mean
six (6) months of substantially continuos disability. Disability shall be deemed
"substantially continuous" if, as a practical matter, Employee, by reason of
mental or physical health, is unable to sustain reasonably long periods of
substantial performance of his duties. Frequent long illness, though different
from a preceding illness and though separated by relatively short periods of
Employee's performance of his duties hereunder, shall be deemed to be
"substantially continuous".

6.2 In the event of any dispute concerning the permanent disability of
Employee, the Company and Employee shall each select a physician licensed to
practice medicine in the State of California, who shall then select a third
physician so licensed. Such selection shall be made within thirty (30) days
after Employee gives notice to the Company that he disputes the Company's
determination that Employee is permanently disabled. The determination disabled
shall be conclusive and binding upon the parties. Such determination shall be
made by the three (3) physicians within sixty (60) days of their selection. In
the event that either the Company or Employee fails to select a physician within
the prescribed time period, then either it or he shall be deemed to have waived
its or his right to do so, and the determination regarding Employee's permanent
disability hereunder shall be made by the sole physician selected.

7. ASSIGNMENT. Employee may not assign or otherwise transfer this Agreement
or any of Employee's rights, duties, interests or obligations hereunder without
the written consent of the Company.

<PAGE>

8. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties with respect to the subject matter hereof, and
supercedes all prior and contemporaneous agreements and understandings relating
to such subject matter, whether oral or written, including, without limitation,
the Previous Agreements. The parties acknowledge and agree that neither has made
any representations with respect to the subject matter of this Agreement except
as specifically set forth in this Agreement.

9. AMENDMENT. This Agreement may not be amended except by a written
document executed by the parties.

10. SEVERABILITY. If any provision of this Agreement shall be held
unenforceable as applied to any circumstance, the remainder of this Agreement
and the application of such provision to other circumstances shall be
interpreted so as best to affect the intent of the parties. The parties further
agree to replace any such unenforceable provision with an enforceable provision
(and to take such other action) which will achieve, to the extent possible, the
purpose of the unenforceable provision.

11. GOVERNING LAW. This Agreement shall be governed by and construed under
the laws of the State of California.

12. ARBITRATION. Any dispute arising under the terms of this Agreement
shall be submitted to binding arbitration under the Commercial Arbitration Rules
of the American Arbitration Association (the "Rules"). Any hearing under the
Rules shall take place at Los Angeles, California, in accordance with Rule 11 of
the Rules. The hearing shall be before one (1) arbitrator in accordance with
Rule 17 of the Rules; provided, however, that in the event of a claim made in
excess of One Hundred Thousand Dollars ($100,000), the hearing shall be before
three (3) arbitrators, in accordance with the Rules. The provisions of Section
1283.05 of the California Code of Criminal Procedure are incorporated into and
made a part of this Agreement, except that subparagraph (e) of Section 1283.05
shall not apply. Depositions in any arbitration hereunder may be noticed in
accordance with the California Code of Criminal Procedure, and leave to do so
need not be requested by the arbitrator or arbitrators. Any award rendered by
the arbitrator pursuant to this Agreement and the Rules shall be enforced in the
Superior Court of the County of Los Angeles in and for the State of California
as the court having sole jurisdiction over the arbitration.

13. ATTORNEYS' FEES. In any arbitration or action to enforce this
Agreement, the prevailing shall be entitled to recover from the non-prevailing
party all reasonable costs, including, without limitation, attorneys' fees.

14. ADDITIONAL DOCUMENTS. The parties agree to execute such additional
documents and perform such other acts as may be necessary or appropriate to
achieve the purposes of this Agreement.

15. NON-WAIVER. No waiver by a party of any failure by the other party to
keep any provision of this Agreement shall be deemed a waiver of any proceeding
of succeeding breach of the same or any other provision.

16. BINDING EFFECT. Subject to paragraph 7 above, this Agreement is binding
upon and shall inure to the benefit of the parties and their respective
successors, assigns, heirs, and legal representatives.

<PAGE>

17. NOTICE. Any notice or other communication given hereunder shall be
deemed sufficient if in writing and sent by registered or certified mail, return
receipt requested, addressed to the parties as indicated below:

If to the Company:

Grill Concepts, Inc.
11661 San Vicente Boulevard, #404
Los Angeles, CA 90049

If to Employee:

Robert L. Spivak
11661 San Vicente Boulevard, #404
Los Angeles, CA 90049

or to such other address as the parties may designate in writing pursuant to
this paragraph. Notice shall be deemed to have been given on the date of
mailing, except notices of change of address, which shall be deemed to have been
given when received.

18. COUNTERPARTS. This Agreement may be executed in one or more
counterparts and/or by facsimile, each of which shall be deemed an original but
all of which together shall constitute one and the same instrument. Facsimile
signatures shall be accepted by the parties as valid and binding in lieu of
original signatures, within two (2) business days after execution of the
Agreement such party shall also deliver to counsel for the other party(ies) an
original signature signed by that party.

19. WAIVER OF CONFLICT OF INTEREST. The parties acknowledge that this
Agreement was originally prepared by the law firm of Herzog, Fisher, Flame &
Grayson (the "Firm") at the request of the Company. The Firm has not however
represented either party in connection with the terms hereof. In view of the
fact that the Firm (and/or one or more of its individual members) has in the
past rendered legal services to and represented and will continue to render
legal services to, represent and/or be involved with the Company and/or Employee
in connection with the Company and other matters, there is potential for
conflicts of interest. The parties acknowledge that they are aware of such
conflicts of interest and the potential adverse effects to them which may result
therefrom, and, notwithstanding same, hereby consent to the Firm's preparation
of this Agreement and waive any potential conflicts of interest with respect to
or against the Firm in connection therewith. Further, both the Company and
Employee acknowledge that all of the terms of this Agreement were negotiated by
the parties without the Firm's participation in same, both parties being advised
by the Firm that independent legal advisors should be consulted relative to
same. In connection with the foregoing, the parties acknowledge that each of
them has had an opportunity to have this Agreement reviewed by independent
counsel, and that each if the parties is aware of and understands the form,
content and legal effect of this Agreement and their rights and obligations
hereunder.

<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

The Company: GRILL CONCEPTS, INC.,
a Delaware corporation

By: /s/
-------------------------
Executive Vice President
-------------------------

Employee: /s/Robert L. Spivak
------------------------

LOAN AGREEMENT

THIS AGREEMENT is made as of this ____ day of 1998, by and between THE
WOLFF REVOCABLE TRUST OF 1993, having its principal office at 11828 La Grange
Avenue, Suite #200, Los Angeles, California ("Lender") and GRILL CONCEPTS, INC.,
a Delaware corporation having its principal office at 11661 San Vicente Blvd.,
Suite 404, Los Angeles, California 90049 ("Borrower").

W I T N E S S E T H:

WHEREAS, Borrower may, from time to time, request loans from Lender to be
used for the payment of expenses incurred by Borrower in conversion of the
restaurant at the Burbank Hilton Hotel and the parties wish to provide for the
terms and conditions upon which such loans shall be made.

NOW, THEREFORE, in consideration of any loan hereafter made to Borrower by
Lender, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:

I. DEFINITIONS AND OTHER TERMS.

Definitions. As used herein, the following terms shall have the following
meanings (such meanings shall be equally applicable to the singular and plural
forms of the terms used, as the context requires):

"Agreement" means this Loan Agreement, as amended or otherwise
modified from time to time.

"Conversion Expenses" shall mean those conversion expenses incurred by
Borrower in its conversion of restaurant facility at the Burbank Hilton
Hotel to a Daily Grill Restaurant. .

"Lender's Agent" shall mean Tricia Knott or such other person(s) as
Lender may from time to time designate to Borrower in writing.

"Management Agreement" shall mean that Management Agreement dated May
13, 1998, between SHC Burbank, LLC and, Hotel Restaurant Properties, Inc.,
a California corporation ("Manager"), a copy of which is attached hereto as
Exhibit B and incorporated herein by reference, as amended or otherwise
modified from time to time. The Agreement will be assigned to GCI effective
as of May 13, 1998.

"Maximum Loan Availability" shall mean the principal sum of $500,000
or such other sum as the parties may agree in writing.

"Maturity Date" shall mean December 31, 2003.

<PAGE>

II. LOANS.

A. Lender Commitment. Subject to the terms and conditions of this
Agreement, Lender agrees to make such loans (individually each a "Loan" and
collectively the "Loans") to Borrower for all Conversion Expenses, as Borrower
may from time to time request in an aggregate amount, up to but not in excess of
the Maximum Loan Availability.

B. Prepayment. All Loans shall be repaid by Borrower on the Maturity Date,
unless payable sooner pursuant to the provisions of this Agreement, but may, at
Borrower's election, be repaid in whole or in part at any time prior to such
date without premium or penalty.

C. Maximum Loan Availability. Notwithstanding any other provision of this
Agreement, the aggregate outstanding principal balance of the Loans shall not
exceed the Maximum Loan Availability.

D. Loan Account; Demand Deposit Account. Lender shall establish or cause to
be established on its books in Borrower's name one or more accounts (each a
"Loan Account") to evidence Loans made to Borrower. Lender will cause to be
deposited in or otherwise credited to a commercial account ("Borrower's
Account") designated by Borrower the amount of any sums advanced as Loans
hereunder. Any amounts advanced as Loans hereunder will be debited to the
applicable Loan Account and result in an increase in the principal balance
outstanding in such Loan Account in the amount thereof.

E. Interest.

1. The unpaid principal amount of each Loan shall bear interest until
paid at the rate of ten percent (10%) per annum (the "Rate").

2. Interest on the unpaid principal amount of each Loan shall accrue
from and including the date funds are deposited or credits are otherwise
available to Borrower in Borrower's Account, but not including the date
such Loan is paid. Interest and any fee shall be calculated on the basis of
a year consisting of 365 days and paid for actual days elapsed.

F. Requests for Loans.

1. Loans shall be requested in writing.

2. Borrower shall provide Lender with written instructions indicating
the names of those individuals authorized by Borrower to authorize
disbursement of the proceeds of Loans by wire transfer or otherwise (a Loan
Request"), and Lender shall be entitled to rely upon such documentation
until notified in writing by Borrower of any change in the names of the
employees so authorized. Concurrently with any Loan Request, Borrower shall
submit invoices (or other evidence) reflecting the Conversion Expenses to
Lender's Agent who shall concurrently disburse funds (or otherwise make
credits available) in an amount equal to such Conversion Expenses to
Borrower's Account.

2
<PAGE>

G. All Loans One Obligation. All the Loans under this agreement shall
constitute one Loan. Borrower agrees that all of the rights of Lender set forth
in this Agreement shall apply to any modification of or supplement to this
Agreement unless otherwise agreed in writing.

H. Making of Payments. All payments by Borrower hereunder shall be made
without set-off or counterclaim and shall be made to Lender at its
above-indicated address, or at such other place as may be designated by Lender
to Borrower in writing at such times and in such amounts as set forth on
Schedule A, attached hereto and incorporated herein by reference.

III. GENERAL.

A. No Waiver by Lender; Amendments. No failure or delay on the part of
Lender in the exercise of any power or right, and no course of dealing between
Borrower and Lender, shall operate as a waiver of such power or right, nor shall
any single or partial exercise of any power or right preclude other or further
exercise thereof or the exercise of any other power or right. No notice to or
demand on Borrower not required hereunder shall in any event entitle Borrower to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of the right of Lender to any other or further action in any
circumstances without notice or demand. No amendment, modification or waiver of,
or consent with respect to, any provision of this Agreement shall in any event
be effective unless the same shall be in writing and signed and delivered by
Lender. Any waiver of any provision of this Agreement, and any consent to any
departure by Borrower from the terms of any provision of this Agreement, shall
be effective only in the specific instance and for the specific purpose for
which given.

B. Miscellaneous.

1. This Agreement shall inure to the benefit of, and be binding upon,
the parties hereto, their respective permitted heirs, legal
representatives, successors and assigns.

2. This document contains the entire agreement between Lender and
Borrower with respect to loans for the Conversion Expenses and supersedes
any and all prior or contemporaneous agreements or understandings, whether
written or oral.

3. This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California.

4. This Agreement may be amended or modified only by written
instrument duly executed by Lender and Borrower.

5. Any notice, demand or request provided for or permitted to be given
pursuant to this Agreement shall be in writing and shall be deemed to have
been properly given: (a) upon receipt, if hand delivered; (b) five (5) days
after deposit thereof at any main or branch United States Post Office, if
sent by United States registered or certified mail, return receipt
requested; (c) on the first business day following deposit thereof at the
office of a nationally recognized overnight delivery service, if sent by
such service; or (d) upon confirmation of receipt, if sent by facsimile,
addressed as follows:

3
<PAGE>

Lender: Wolff Revocable Trust of 1993 11828 LaGrange
Avenue, Suite #200 Los Angeles, California 90212

Borrower: Grill Concepts, Inc.
11661 San Vicente Boulevard, Suite 404
Los Angeles, California 90049
Attention: B. Spivak, President

With copy to: Michael A. Grayson, Esq.
Herzog, Fisher, Grayson & Wolfe
A Law Corporation
9460 Wilshire Boulevard, Fifth Floor
Beverly Hills, California 90212

6. In the event that any one or more of the provisions, paragraphs, words,
clauses, phrases or sentences contained in this Agreement, or the application
thereof in any circumstance, is held invalid, illegal or unenforceable in any
respect for any reason, the validity, legality and enforceability of any such
provision, paragraph, word, clause, phrase or sentence in every other respect,
and of the remaining provisions, paragraphs, words, clauses, phrases or
sentences of this Agreement, shall not be in any way impaired, it being the
intention of the parties that this Agreement shall be enforceable to the fullest
extent permitted by law.

7. Time is of the essence of this Agreement and each and every provision
hereof. If the performance of any obligation required hereunder or the last day
of any time period as determined in accordance with the terms and provisions
hereof is to occur on a Saturday, Sunday or legal holiday under the laws of the
United States or of the State of California, then the day on which the
performance of any such obligation is to occur or the last day of any such time
period, as the case may be, shall be extended to the next succeeding business
day.

8. This Agreement may be executed in any number of counterparts, any or all
of which may contain the signature of any one of the parties and all of which
shall be construed together as a single instrument. A facsimile copy or
photocopy of this Agreement containing a facsimile copy or photocopy of the
signatures or initials of any party shall be deemed to be sufficient evidence of
that party's action or intent.

9. In connection with any litigation or dispute arising out of this
Agreement, the prevailing party shall be entitled to recover all costs incurred,
including reasonable attorneys' fees and costs.

10. The Section headings contained herein are for convenience of reference
only and are not intended to define, limit or describe the scope or intent of
any provision of this Agreement.

4
<PAGE>

IN WITNESS whereof, the parties have duly executed this Loan Agreement the
day and year first are written.

GRILL CONCEPTS, INC.
("Borrower")

By:
Its:

5
<PAGE>
SCHEDULE A

Payments due under the loan shall be made as follows:

All management fees received by GCI from the management of the Burbank Daily
Grill (including, but not limited to, all fees received pursuant to Section 7 of
the Management Agreement) shall be remitted to Lender as payment under this loan
agreement. Payments shall first be credited to accrued interest. Any remainder
shall be credited to principal. Any amounts from the management fee to be
retained by GCI shall be approved in advance by Lender in its sole discretion.

ADDENDUM TO FEBRUARY 28, 1998 MANAGEMENT AGREEMENT
FOR THE CITY BAR & GRILL
IN THE SAN JOSE HILTON HOTEL

As of September 1, 1998, this addendum shall apply to the Management Agreement
dated February 20, 1998 ("the Agreement") by and between the Hilton Hotel
("Hotel") in San Jose, CA and Grill Concepts, Inc. (GCI) in Los Angeles, CA, as
follows:

Section 2.1 in the Agreement shall be replaced with the following:

In return for management of the food and beverage operations as defined in
Section 1 of the Agreement, Manager shall receive a Management Fee calculated in
the manner described in this section below.

Revenue Targets based upon the last four quarters' actual category revenue per
occupied hotel room plus a ten percent growth factor shall be established for
Restaurant and Room Service Food Revenue ("Food Revenue Per Occupied Room
Quarterly Target"), Beverage Revenue ("Beverage Revenue Per Occupied Room
Quarterly Target"), and Room Service Delivery Charge Revenue ("Room Service
Delivery Charge Revenue Per Occupied Room Quarterly Target"). These Revenue
Targets are based on actual revenue and occupied from figures from 2nd Quarter
1997 through 1st Quarter 1998 and are defined in Exhibit A attached and are
calculated for each fiscal quarter.

Expense Targets shall also be established for food cost of sales ("Target Food
Cost of Sales"), beverage cost of sales ("Target Beverage Cost of Sales"), wages
and benefits ("Target Wages and Benefits"), and other expenses ("Target Other
Expenses"). These Expense Targets are defined in Exhibit A attached and are
calculated for each fiscal quarter.

The Management Fee payable to Manager shall be calculated as follows:

1. Compute the Target Total Quarterly Revenue Figure:
----------------------------------------------------

Take the appropriate Food Revenue Per Occupied Room Quarterly Target
multiplied by actual occupied rooms for that quarter. The result is Target
Quarterly Food Revenue.

Take the appropriate Beverage Revenue Per Occupied Room Quarterly Target
multiplied by actual occupied rooms for that quarter. The result is Target
Quarterly Beverage Revenue.

Take the appropriate Room Service Delivery Charge Revenue Per Occupied Room
Quarterly Target multiplied by actual occupied rooms for that quarter. The
result is Target Quarterly Room Service Delivery Charge Revenue.

Add together all of the Target Quarterly Category Revenue Figures to get a
Target Quarterly Total Revenue Figure.

<PAGE>

2. Apply Target Cost Figures:
--------------------------

From the Target Quarterly Total Revenue Figure, subtract the target costs
outlined in the "Targets" section of Exhibit A. The result is the Target
Quarterly Profit for the City Grill and Room Service combined.

3. Computation of Management Fee:
-----------------------------

GCI will earn a fee that will vary depending upon how the Target Quarterly
Profit compares with the Actual Profit after Management Fees as determined
by the profit and loss statement issued by the hotel. The three levels of
fees are described as follow:

Level One:
If the actual profit, as reflected on the Profit and Loss report (including
a base fee equal to 4% of Gross Receipts), is less than the Target
Quarterly Profit for that quarter, then Manager shall be paid a base fee
equal to 4% of Gross Receipts and will not be entitled to any additional
fees.

Level Two:
If the actual profit, as reflected on the Profit and Loss report (including
a base fee equal to 4% of Gross Receipts), is greater than the Target
Quarterly Profit, then Manager will be paid a base fee of 4% of Gross
Receipts plus any actual profit above the Target Quarterly Profit ("Surplus
Profits") until total fees paid to Manager total 8% of Gross Receipts.

Level Three:
If actual profit, as reflected on the Profit and Loss report (including a
base fee equal to 4% of Gross Receipts) and after paying Manager any
Surplus Profits (resulting in total Management Fees equaling 8% of Gross
Receipts) is greater than the Target Quarterly Profit, then the Hotel and
Manager shall split fifty-fifty (50%/50%) the amount above the Target
Profit ("Surplus Profit After Fee").

The Profit and Loss report shall be calculated by the hotel using identical
accounting practices used to generate the 1997 reports. An additional expense
line item shall be added to the Profit and Loss report to reflect the Management
Fee paid to Manager.

Examples of the Management Fee calculation are included in Exhibit B and are for
illustrative purposes only.

Section 2.4 of the Agreement shall be replaced by the following:

Determination of and Payment of Management Fees:
- -----------------------------------------------

Manager shall be paid a base fee equal to 4% of Gross Receipts on a monthly
basis. Determination of and payment of any fees above that amount will
occur at the end of each quarter within 30 days of the end of that quarter.

<PAGE>

Section 3.1 of the Agreement shall be replaced with the following:

Manager shall oversee the operation of the restaurant and shall employ the
restaurant General Manager. All other employees of the restaurant including
Assistant Managers, Chef and hourly employees shall report to the General
Manager of the restaurant but shall remain employees of Hotel. It is the
intention of Hotel to have salaried managers, including Assistant Managers and
Chef, become employees of GCI as current positions are vacated and refilled as
time progresses, and these positions shall be evaluated on a case by case basis.

Section 3.3 of the Agreement shall be deleted due to the calculation in Section
2.1 of this Addendum.

Section 6.2 of the Agreement shall be deleted.

Section 6.3 of the Agreement shall be replaced with the following:

Either party shall have the right to terminate this agreement with 30 days
written notice, with or without cause. In the event that Hotel shall exercise
this option, Hotel shall reimburse Manager for any and all costs which have not
been recovered through payment of the Management Fee. Additionally, Hotel's use
of any and all Operating Systems shall cease upon termination.

All other sections of the Agreement not addressed by this Addendum remain in
full force and effect.

IN WITNESS WHEREOF, this Management Agreement has been executed as of September
1, 1998.

HILTON HOTEL

By: /s/
------------------------
Its: General Manager

GRILL CONCEPTS, INC.

By: /s/
------------------------
Its: President

List of Subsidiaries
--------------------

GRILL CONCEPTS, INC.

Name State of Organization
------ ------------------------

Grill Concepts, Inc. California
Uno Concepts of Cherry Hill, Inc. New Jersey
Uno Concepts of New Jersey, Inc. New Jersey
C.T.S. Investments, Inc. Pennsylvania
Grill Concepts D.C., Inc. District of Columbia
The Grill on the Alley, Inc. California
Emndee, Inc. California
San Jose Grill LLC California
Grill Concepts, Universal, Inc. California

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement of
the 1995 Stock Option Plan of Grill Concepts, Inc. on Form S-8 (File No.
333-04181) and the Registration Statement of the 1998 Comprehensive Stock Option
and Award Plan of Grill Concepts, Inc. on Form S-8 (File No. 333-57369) of our
report dated March 12, 1999, on our audits of the consolidated financial
statements of Grill Concepts, Inc. and subsidiaries as of December 27, 1998 and
December 28, 1997, and for the years then ended, which report is included in the
Annual Report on Form 10-KSB.

PRICEWATERHOUSECOOPERS LLP

/s/ PricewaterhouseCoopers LLP

Los Angeles, California
March 26, 1999

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> DEC-27-1998
<CASH> 438,184
<SECURITIES> 0
<RECEIVABLES> 356,358
<ALLOWANCES> 0
<INVENTORY> 385,131
<CURRENT-ASSETS> 2,064,275
<PP&E> 12,855,412
<DEPRECIATION> 4,513,075
<TOTAL-ASSETS> 11,386,961
<CURRENT-LIABILITIES> 4,364,293
<BONDS> 2,927,788
0
2
<COMMON> 160
<OTHER-SE> 3,866,750
<TOTAL-LIABILITY-AND-EQUITY> 11,386,961
<SALES> 34,464,289
<TOTAL-REVENUES> 34,908,105
<CGS> 9,673,787
<TOTAL-COSTS> 9,673,787
<OTHER-EXPENSES> 26,352,020
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 230,812
<INCOME-PRETAX> (1,348,514)
<INCOME-TAX> 9,500
<INCOME-CONTINUING> (1,236,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 70,281
<NET-INCOME> (1,306,602)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.09)

</TABLE>