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Article by DailyStocks_admin    (09-17-08 07:34 AM)

Filed with the SEC from Sep 04 to Sep 10:

Grill Concepts (GRIL)
Investor Charles Mathewson boosted his stake to 2.76 million shares (25.78%) from 905,947 (10.25%). He recently bought 5,000 shares of Series C convertible preferred and a warrant to purchase 600,000 shares at $4 each.

BUSINESS OVERVIEW

General

Grill Concepts, Inc., and its subsidiaries, develops, owns, operates, manages and licenses full-service upscale casual dining restaurants under the name “Daily Grill” and fine dining restaurants under the name “The Grill on the Alley.”

The Company was incorporated under the laws of the State of Delaware in November of 1985.

At December 30, 2007, we owned and operated 19 restaurants (“Company Restaurants”), including 14 Daily Grill restaurants and five The Grill on the Alley restaurants, and managed or licensed nine additional Daily Grill restaurants. Of the Company Restaurants, 14 were solely owned and operated by us and five were operated by partnerships of which we are the majority partner and the general partner.

In 2001, we entered into a strategic alliance with Starwood Hotels and Resorts Worldwide, Inc. (“Starwood”) to jointly develop restaurant properties in Starwood hotels. Management believes that the opening of restaurants in hotel properties in strategic markets will help further establish brand name recognition for the opening of additional restaurants in those markets. In March 2007, Starwood transferred all of its shares of our common stock to a separate entity called Eaterna, LLC in which Starwood holds a non-controlling interest.

Recent Developments

During 2007, we continued to pursue a strategic growth plan whereby we plan to open, and/or convert, and operate, and/or manage, Daily Grill and Grill on the Alley restaurants in hotel properties, and non-hotel based restaurants, in strategic markets throughout the United States. During 2007, we continued efforts to expand the pace of our restaurant openings.

In order to provide financing to support the planned accelerated pace of restaurant openings, in March 2006, we entered into a financing agreement with Diamond Creek Investment Partners, LLC, at which time our previous line of credit was terminated. The credit agreement provided for a revolving term loan of the lesser of (a) $8.0 million, or (b) 2.25 times our trailing 12 month EBITDA. In December 2006, the credit agreement was amended to increase the available credit thereunder from $8.0 million to $12.0 million. In March 2008, the credit agreement was amended a second time to increase the allowable annual threshold for capital expenditures.

During 2007, we opened four restaurants, a 100% owned Daily Grill which opened in July 2007 in Austin, Texas; a 100% owned Daily Grill which opened in November 2007 in Fresno, California and two managed hotel based Daily Grills which opened in Memphis, Tennessee and Seattle, Washington during April 2007 and June 2007, respectively.

In January 2007, we signed a lease agreement to open a wholly owned Daily Grill restaurant in Dallas, Texas. The restaurant will be located in the Park Lane development in North Dallas. The restaurant is currently scheduled to open in the summer of 2009.

In April 2007, we signed a lease agreement to open a wholly owned Daily Grill restaurant located the in the City North development in Phoenix, Arizona. The restaurant is currently scheduled to open during the summer of 2009.

In April 2007, we signed a management agreement for a hotel-based Daily Grill restaurant in Tulsa, Oklahoma. The restaurant is currently scheduled to open in the summer of 2008. The initial term of the management agreement is 10 years and has a minimum guaranteed annual management fee of $200,000.

In April 2007, we terminated the license of the Skokie Daily Grill due to the failure of the licensee to operate the restaurant in accordance with the license agreement. The termination of the Skokie license is not expected to have a material impact on our consolidated balance sheets or statements of operations.

In May 2007, we signed a lease to open a wholly owned Daily Grill restaurant at The Shops at Prudential Center in Boston, Massachusetts. The restaurant is currently scheduled to open in the spring of 2008.

In August 2007, we signed a lease to open a wholly owned Grill on the Alley restaurant at The Promenade at Westlake in Thousand Oaks, California. The restaurant is currently scheduled to open in late 2008.

In December 2007, we signed a lease to open a new quick-service restaurant concept called “In Short Order - Daily Grill” in the Sheraton Hotel in Seattle, Washington, which opened for business on February 14, 2008.

In December 2007, we signed a lease to open a Daily Grill at The Towne Center in Annapolis, Maryland. The restaurant is currently scheduled to open in the summer of 2009.

In December 2007, we signed a lease to open a wholly owned Daily Grill in the Westin Hotel near the Los Angeles International Airport (“LAX”). The restaurant is currently scheduled to open in late 2008.

In March 2008, we signed a lease to open a wholly owned Grill on the Alley in Aventura, Florida. The restaurant is currently scheduled to open in late 2008.

Restaurant Data

We earn management and license fee revenue based on a percentage of net sales at restaurants under management and licensing arrangements. Our management and license fee revenue typically is earned at a rate of five to eight percent of reported net sales at these restaurants. In addition to the base fee we also earn incentive fees based on net income that is reported as management and license fees revenue. The net sales of managed and licensed restaurants are not included in our consolidated statements of operations. However, we consider the disclosure of these sales to be a key indicator of brand strength and important to understanding how changes in sales at the managed and licensed restaurants impact our revenue.

Restaurant Concepts

Daily Grill Restaurants

Background . At December 30, 2007, we, through our subsidiaries, owned and operated, managed or licensed 23 Daily Grill restaurants in California; the Washington, D.C. metropolitan region; Houston and Austin Texas; Seattle, Washington; Memphis, Tennessee; and Portland, Oregon. Daily Grill restaurants are patterned after “The Grill on the Alley” in Beverly Hills. See “The Grill on the Alley.” After successfully operating The Grill on the Alley for a number of years, in 1988, our founders 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. Those principles were emphasized in an effort to create a loyal patron who will be a “regular” at our restaurants.

Restaurant Sites . Current and planned Daily Grill restaurants can be characterized as either owned, in part or in whole, managed or licensed and as either hotel based or based in shopping malls and other commercial and retail properties.

Existing non-hotel based Daily Grill restaurants range in size from 3,500 to 7,600 square feet of which approximately 30% is devoted to kitchen and service areas and seat between 140 and 300 persons. Our costs for existing non-hotel based restaurants, including leasehold improvements; furniture, fixtures and equipment; and pre-opening costs, have averaged $375 per foot, less tenant improvement allowances.

Existing hotel based Daily Grill restaurants range in size from 3,600 to 8,000 square feet of which approximately 30% is devoted to kitchen and service areas and seat between 140 and 270 persons. Management anticipates that additional hotel based Daily Grill restaurants will require minimal capital investment on our part. However, each hotel restaurant arrangement will be negotiated separately and our capital investment may vary widely. Our portion of opening costs of existing hotel restaurants, including leasehold improvements; furniture, fixtures and equipment; and pre-opening costs, have ranged from $0 to $513,000 per restaurant.

Menu and Food Preparation . Each Daily Grill restaurant offers a similar extensive menu featuring over 100 items. The menu was designed to be reminiscent of the selection available at American-style grill restaurants of the 1930’s and 1940’s. During 2005 we redesigned the menu placing a greater emphasis on steaks, chops and seafood. Daily Grill offers genuine Angus steaks and chops, as well as, such “signature” items as Cobb salad, Caesar salad, meatloaf with mashed potatoes, chicken pot pie, hamburgers, fresh fruit cobbler and key lime pie. The emphasis at the Daily Grill is on freshly prepared American food served in generous portions.

Entrees range in price, subject to regional differences, from $9.95 for a hamburger to $30.50 for a char-broiled filet steak with all the trimmings. The average lunch check is about $18 per person and the average dinner check is about $30 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 30, 2007, food and non-alcoholic beverage sales constituted approximately 82% of the total restaurant revenues for the Daily Grill restaurants, with alcoholic beverages accounting for the remaining 18%.

Atmosphere and Service . Most Daily Grill restaurants are open for lunch and dinner seven days a week and for Sunday brunch. Several are open for breakfast as well, especially in hotel locations. 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 where singles can feel comfortable. A number of the Daily Grill restaurants have private dining rooms for banquets or additional seating. Each restaurant emphasizes the quality and freshness of Daily Grill food dishes in addition to the cleanliness of operations. The dining area is well-lit and is characterized by a “high energy level”. Reservations are accepted but not required.

The Grill on the Alley Restaurants

Background . At December 30, 2007, we, through our subsidiaries, owned and operated five The Grill on the Alley restaurants (“Grill”).

The original Grill is a fine dining Beverly Hills restaurant, which opened in 1984 and served as the model for the Daily Grill restaurants. The Grill is set in the traditional style of the old-time grills of New York and San Francisco, with black-and-white marbled floors and polished wooden booths. The Grill offers five-star American cuisine and uncompromising service in a comfortable, dignified atmosphere.

Restaurant Sites . At December 30, 2007, we owned and operated five Grill restaurants, including two hotel-based restaurants.

Existing non-hotel based Grill restaurants range in size from approximately 4,200 to 8,100 square feet of which approximately 35% is devoted to kitchen and service areas and seat 120 to 260 guests.

Existing hotel based Grill restaurants range in size from approximately 6,500 to 9,250 square feet of which approximately 35% to 40% is devoted to kitchen and service areas and seat 280 to 300 guests.

Because of the unique nature of Grill restaurants, the size, seating capacity and opening costs of future sites will be unique to each location. Each hotel restaurant arrangement will be negotiated separately and our capital investment may vary widely. Total project costs of the existing hotel based restaurants, including leasehold improvement; furniture, fixtures and equipment; and pre-opening costs, have ranged from $2.1 million to $3.3 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 prime steaks, fresh seafood from all over the world, freshly prepared salads and vegetables served in generous portions.

Entrees range in price from $12.95 for a cheeseburger to $34.50 for jumbo lump crab cakes. The average lunch check is about $26 per person and the average dinner check is about $56 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 30, 2007, food and non-alcoholic beverage sales constituted approximately 72% of the total restaurant revenues for Grill restaurants, with alcoholic beverages accounting for the remaining 28%.

Atmosphere and Service . Each Grill restaurant is open, at least, 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.

In Short Order - Daily Grill Quick Service Restaurants

Background. In February 2008, we opened a new quick service concept restaurant called In Short Order – Daily Grill (“In Short Order”). The concept was developed during 2007. The first location is a 100% company owned restaurant located in the lobby of the Sheraton Hotel in Seattle, Washington. This concept is in a test stage and future openings of “In Short Order” will be evaluated based on the results of the initial restaurant.

Restaurant Sites. Potential locations for this concept are expected to be in hotels, malls and office buildings.

Menu and Food Preparation. The prototype restaurant has a menu featuring about 70 items. The menu was designed for patrons “on the go”. The menu includes soups, salads, and sandwiches similar to those served in the Daily Grill restaurants, as well as, pastries, beverages, and custom coffee based drinks. This first location is in a hotel where we operate a managed Daily Grill restaurant which prepares and sells the soups, salads and sandwiches to the In Short Order.

Atmosphere and Service . The In Short Order restaurant is open from early morning to late afternoon and caters mainly to hotel patrons seeking a quick breakfast, lunch and snacks in a “grab and go” format. The restaurant doesn’t have a full kitchen (which others in the future may have), is located in 400 square feet and provides counter service with limited seating and tables available in the adjacent lobby of the hotel.

Operating Principles

All of our team members are trained to treat each person who visits our restaurants 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 team member is taught that at our restaurants “the guest is always right.” Our policy is to accommodate all reasonable guest requests, ranging from substitutions of menu items to take-out orders.

In order to assure that our philosophy of guest service is adhered to, all team members from the kitchen staff to the serving staff undergo extensive training, making each team member knowledgeable not only in our procedures and policies but in every aspect of operations. Our policy of promoting from within and providing access to senior management for all team members has produced a work force which works in a cooperative team approach and has resulted in a team member turnover rate of about 70% per year for all hourly team members, considerably below the industry average which management believes to be approximately 105%. The turnover rate for management team members is 15% per year which is also lower than the industry standard of 23%.

We believe that the familiarity and feeling of comfort, which accompanies dining in a familiar setting, with familiar food and quality service by familiar servers, produces satisfied customers who become “regulars.” Management believes that at the restaurants which have been open for over 18 months repeat business is significantly greater than the industry average, with many guests becoming “regulars” in the tradition of the neighborhood restaurant.

Proprietary recipes have been developed for substantially all of the items offered on our menus. 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 are cooked from scratch utilizing fresh food ingredients. Our management believes that our standards for ingredients and the preparation of menu items are among the most stringent in the industry.

Each Daily Grill restaurant has up to six cooks and each 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.

Restaurant Management

We strive to maintain quality and consistency in our 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. We believe that our concept and high sales volume enable us to attract quality, experienced restaurant management and hourly personnel. We have experienced a relatively low turnover at every level at our Daily Grill and Grill restaurants. See “Operating Principles” above.

Each Daily Grill and Grill restaurant, including free standing, non-hotel and hotel-based restaurants, is managed by one general manager and up to four managers or assistant managers. Each restaurant also has one head chef and one or two sous chefs, depending on volume. On average, general managers have approximately five years experience in the restaurant industry and three years with us. The general manager has primary responsibility for the operation of the restaurant and reports directly to an Area Director who in turn reports to our Senior Vice President of Operations. In addition to ensuring that food is prepared properly, the head chef is responsible for product quality, food costs and kitchen labor costs. Each restaurant has approximately 75 team members.

We maintain 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. 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 home office management, receives these daily reports to ensure that problems can be identified and resolved in a timely manner. All team members receive appropriate training relating to revenue, cost and cash control. Financial management and accounting policies and procedures are developed and maintained by our Director of Finance, Corporate Controller, Vice President of Information Systems, and Chief Financial Officer.

All managers participate in a comprehensive eight-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, guest service, food and beverage service, safety policies and team member relations. In addition, we have developed training courses for assistant managers and chefs. We typically have a number of team members involved in management training, so as to provide qualified management personnel for new restaurants. Our senior management meets regularly with each restaurant management team to discuss business issues, new ideas and revisit the manager’s manual. Overall performance at each location is also monitored with shoppers’ reports, guest comment cards and third party quality control reviews.

Servers at each restaurant participate in approximately eight days of training during which the team member 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 guest satisfaction. Certified trainers are given responsibility for training new team members and are rewarded with additional hourly pay plus other incentives. Management believes that such practice fosters a cooperative team approach that contributes to a lower turnover rate among team members. Representatives of home office management regularly visit the restaurants to ensure that our philosophy, strategy and standards of quality are being adhered to in all aspects of restaurant operations.

CEO BACKGROUND

Rudolph Borneo
Age: 67
Director since 2007
Mr. Borneo is Vice Chairman and Director of Stores of Macy’s West, a division of Macy’s Inc., and, prior to assuming his current position, served as President of Macy’s California and Macy’s West. Mr. Borneo serves as a director of Motor Car Parts of America, Inc., a publicly traded company that remanufactures starters and alternators.

Philip Gay
Age: 50
Director since 2006
Mr. Gay has served as our President and Chief Executive Officer, and as a director, since July 2006. Previously, Mr. Gay served as Executive Vice President and Chief Financial Officer from July 2004 until his promotion in 2006. From March 2000 until he joined Grill Concepts in July 2004, Mr. Gay served as Managing Director of Triple Enterprises, a business advisory firm that assisted mid-cap sized companies with financing, mergers and acquisitions, franchising and strategic planning. From March 2000 to November 2001, Mr. Gay served as an independent consultant with El Paso Energy. Previously he served as Chief Financial Officer for California Pizza Kitchen (1987 to 1994), Chief Financial Officer and Interim Chief Executive Officer for Wolfgang Puck Food Company (1994 to 1996), Chief Executive Officer for Color Me Mine and held various Chief Operating Officer and Chief Executive Officer positions with Diversified Food Group from 1996 to 2000. Mr. Gay is also on the Board of Motor Car Parts of America, Inc., a publicly traded company that remanufactures starters and alternators, and on the Board of The California Restaurant Association. He is a Certified Public Accountant, a former audit manager at Laventhol and Horwath and a graduate of the London School of Economics.

Glenn Golenberg
Age: 67
Director since 1995
Mr. Golenberg is a Managing Director of Golenberg & Company, formed in 1978, and The Bellwether Group, LLC, merchant banking firms that invest in and provide consulting and financial advisory services to a broad range of businesses. Prior to forming Golenberg & Company, Mr. Golenberg served in various research and management positions in the investment banking industry from 1966 to 1978. Previously, Mr. Golenberg was a CPA with Arthur Andersen & Co.

Stephen Ross
Age: 59
Director since 2001
Mr. Ross is Senior Vice President – Recreational Enterprises, Warner Bros. Entertainment, Inc. and has served in various management positions with Warner Bros since 1989. Previously, Mr. Ross served as Senior Vice President and General Counsel for Lorimar Telepictures Corporation, and its predecessors, from 1981 to 1989. Mr. Ross also serves as a director of j2 Global Communications, Inc.

Bruce Schwartz
Age: 68
Director since 2004
Mr. Schwartz served, from 1989 until his retirement in 2003, in various executive capacities with Sysco Food Services of Los Angeles, Inc., a major food services company and subsidiary of NYSE traded Sysco Corporation. From 1989 to 1996, Mr. Schwartz served as President and Chief Operating Officer of Sysco Food Services and, from 1996 to 2003, Mr. Schwartz served as Chairman of the Board and Chief Executive Officer of Sysco Food Services.


Robert Spivak
Age: 64
Director since 1995
Mr. Spivak served as President and Chief Executive Officer of the Company from 1995 until his retirement in 2006, as a director since 1995 and as Co-Chairman of the Board since 2007. Mr. Spivak was a co-founder of the company’s predecessor (“GCI”) and served as President, Chief Executive Officer and a director of GCI from inception in 1988 until 1995. Prior to forming GCI, Mr. Spivak co-founded, and operated, The Grill on the Alley restaurant in Beverly Hills in 1984. Mr. Spivak is a founder and past president of the Beverly Hills Restaurant Association. Mr. Spivak also chairs the executive advisory board of the Collins School of Hotel and Restaurant Management at California State Polytechnic University at Pomona, is Director Emeritus of the California Restaurant Association and is a member of the Board of Directors of DiRoNA – Distinguished Restaurants of North America.


Michael Weinstock
Age: 65
Director since 1995
Mr. Weinstock has served as Executive Vice President and a director of the Company since 1995 and as Chairman, and Co-Chairman, of the Board since 2000. From 1995 to 2000, Mr. Weinstock served as Vice-Chairman of the Board. Mr. Weinstock was a co-founder of GCI and served as Chairman of the Board, Vice President and a director of GCI from 1988 until 1995. Prior to forming GCI, Mr. Weinstock co-founded The Grill on the Alley restaurant in Beverly Hills in 1984. Mr. Weinstock previously served as President, Chief Executive Officer and a director of Morse Security Group, Inc., a security systems manufacturer.

MANAGEMENT DISCUSSION FROM LATEST 10K

General

Grill Concepts, Inc., and its subsidiaries, develops, owns, operates, manages and licenses full-service upscale casual dining restaurants under the name “Daily Grill” and fine dining restaurants under the name “The Grill on the Alley.”

Our revenues are derived from sales at company-owned restaurants, management and license fees from restaurants managed or licensed by us and reimbursements of operating expenses of managed outlets.

During the fiscal year ended December 30, 2007, we owned and operated, for the full fiscal year, 15 restaurants (10 Daily Grill and 5 Grill restaurants), including two Daily Grill and three Grill restaurants owned in partnership with third parties. During fiscal 2007, we also opened two owned Daily Grill restaurants, temporarily closed three Daily Grill restaurants for remodeling and purchased a minority interest in a Daily Grill converting the restaurant from a partnership owned restaurant to a company-owned restaurant.

Also during fiscal 2007, we managed or licensed, for the full fiscal year, six Daily Grill restaurants. During fiscal 2007, we opened two managed Daily Grill restaurants and closed a licensed Daily Grill restaurant.

During the fiscal year ended December 31, 2006, we owned and operated, for the full fiscal year, 16 restaurants (12 Daily Grill and four Grill restaurants), including three Daily Grill and three Grill restaurants owned in partnership with third parties. During fiscal 2006, we also operated one fully owned Grill restaurant that opened in July.

Also during fiscal 2006, we managed or licensed, for the full fiscal year, six Daily Grill restaurants.

Sales revenues are derived from sales of food, beer, wine, liquor and non-alcoholic beverages. Approximately 78% of combined 2007 sales were food and non-alcoholic beverages and 22% were alcoholic beverages. 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.

Management and license fees revenues are derived from individually negotiated arrangements by which we manage restaurants on behalf of third parties or license to third parties the right to operate Daily Grill restaurants. Management and license fees are primarily influenced by the number of management and license arrangements in place, the negotiated management or license fee and the revenues of the managed or licensed restaurants. Management and license fees typically range from five to eight percent of net sales of the subject restaurants. Management and license fees revenues also include incentive fees we receive which are based on a percentage of net operating income.

Revenues derived from reimbursement of operating expenses of managed outlets relate to contractual undertakings relating to managed restaurants wherein we assume responsibility for some or all operating expenses of managed restaurants and the restaurant owner undertakes to reimburse all of those expenses. Pursuant to the guidance of EITF 01-14 and EITF 99-19, we are considered to be the primary obligor with respect to the reimbursed expenses and, as such, report the reimbursed expenses as revenues, “Cost Reimbursements”, with the expenses being reported as “Reimbursed Costs” under operating expenses.

Expenses are comprised primarily of cost of food and beverages; restaurant operating expenses, including payroll, rent and occupancy costs, and reimbursed costs. Our largest expenses 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 our restaurants. Restaurant operating expenses consist primarily of wages paid to part-time and full-time team members, rent, utilities, insurance and taxes. Reimbursed costs are costs incurred on behalf of managed restaurants that are reimbursable by the managed restaurant. We typically analyze these costs as a percentage of restaurant sales, not total revenues.

In addition to restaurant operating expenses, we pay certain general and administrative expenses that relate primarily to operation of our home office. Home office general and administrative expenses consist primarily of salaries of officers, management personnel and clerical personnel, rent, legal and accounting costs, travel, insurance and office expenses. Also included in general and administrative expenses are the costs of SOX implementation, stock based compensation expense (in accordance with SFAS No. 123R) and other public company costs.

Recent Developments

Restaurant Openings, Leasing and Management . During 2007, we continued to pursue a strategic growth plan whereby we plan to open, and/or convert, and operate, and/or manage, Daily Grill and Grill on the Alley restaurants in hotel properties, and non-hotel based restaurants, in strategic markets throughout the United States. During 2007, we continued efforts to expand the pace of our restaurant openings.

During 2007, we opened four restaurants, a 100% owned Daily Grill which opened in July 2007 in Austin, Texas, a 100% owned Daily Grill which opened in November 2007 in Fresno, California, and two managed hotel based Daily Grills which opened in Memphis, Tennessee, and Seattle, Washington during April 2007 and June 2007, respectively.

In January 2007, we signed a lease agreement to open a wholly owned Daily Grill restaurant in Dallas, Texas. The restaurant will be located in the Park Lane development in North Dallas. The restaurant is currently scheduled to open in summer 2009.

In April 2007, we signed a lease agreement to open a wholly owned Daily Grill restaurant in the City North Development in Phoenix, Arizona. The restaurant is currently scheduled to open during summer 2009.

In April 2007, we signed a management agreement for a hotel-based Daily Grill restaurant in Tulsa, Oklahoma. The restaurant is currently scheduled to open in the summer of 2008. The initial term of the management agreement is 10 years and has a minimum guaranteed annual management fee of $200,000.

In April 2007, we terminated the license of the Skokie Daily Grill due to the failure of the licensee to operate the restaurant in accordance with the license agreement. The termination of the Skokie license is not expected to have a material impact on our consolidated balance sheets or statements of operations.

In May 2007, we signed a lease to open a wholly owned Daily Grill restaurant at The Shops at Prudential Center in Boston, Massachusetts. The restaurant is currently scheduled to open in spring 2008.

In August 2007, we signed a lease to open a wholly owned Grill on the Alley restaurant at The Promenade at Westlake in Thousand Oaks, California. The restaurant is currently scheduled to open in late 2008.

In December 2007, we signed a lease to open a new quick service restaurant concept called “In Short Order - Daily Grill” in the Sheraton Hotel in Seattle, Washington, which opened for business on February 14, 2008.

In December 2007, we signed a lease to open a Daily Grill at The Towne Center in Annapolis, Maryland. The restaurant is currently scheduled to open in summer 2009.

In December 2007, we signed a lease to open a wholly owned Daily Grill in the Westin Hotel near the Los Angeles International Airport. The restaurant is currently scheduled to open in late 2008.

In March 2008, we signed a lease to open a wholly owned Grill on the Alley restaurant in Aventura, Florida. The restaurant is currently scheduled to open in late 2008.

Purchase of Minority Interest in Downtown Daily Grill. During 2007, we entered into a purchase agreement with Downtown Grill Investors LLC (the “Investment Partner”) pursuant to which we acquired the 41.6% ownership interest held by the Investment Partner in 612 Flower Daily Grill, LLC, which owns and operates a Daily Grill restaurant in Downtown Los Angeles. The Investment Partner is owned by an investor group unaffiliated with the Company that provided initial capital to fund the opening of the restaurant. The primary purpose of the acquisition was to potentially increase our future consolidated earnings and cash flow and simplify our organizational structure.

The purchase price has been allocated to the assets and acquired liabilities based on estimated fair values at the date of acquisition, which are comprised of working capital accounts and furniture, fixtures and equipment. The excess purchase price of approximately $515,000 over the estimated fair value of the net assets acquired was recorded as goodwill. We believe that the estimated future cash flows of the restaurant support the fair value of the goodwill recorded.

We hold 100% of the ownership interest of 612 Flower Daily Grill, LLC upon consummation of the acquisition. The operations of 612 Flower Daily Grill, LLC are consolidated in these financial statements. As of October 1, 2007, earnings and losses are no longer allocated to minority interest in this entity.

The common shares issued in exchange for the 41.6% minority interest were offered and sold in a privately negotiated transaction without general advertising or solicitation pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. Under the terms of the purchase agreement, the Investment Partner and its members were granted piggyback registration rights with respect to the shares issued there under.

Common Stock Transactions, Conversion of Preferred Stock and Payment of Accumulated Dividends. During 2007, we issued 2,000,000 shares of common stock and warrants to purchase up to 735,000 shares of common stock as part of a private placement equity offering (“Equity Offering”) for aggregate gross proceeds of $14.1 million.

The warrants entitle the holders to purchase one share of common stock for each warrant held for a term of up to five years at an exercise price equal to $8.05 per share, subject to adjustment upon certain corporate events, including stock dividends, distributions and reclassifications. The warrant exercise price is also subject to adjustment upon certain issuances of shares at prices below the exercise price of the warrant, provided, however that the exercise price shall in no event be reduced to less than $7.00 (subject to adjustment in the event of stock splits, reverse stock splits, stock dividends and similar transactions).

In connection with the 2007 private placement, we paid commissions to the placement agents totaling $0.8 million, or 6.5 % of gross funds received (excluding funds received from affiliates of existing shareholders), and issued placement agent warrants to purchase up to 85,164 shares of common stock, representing an aggregate of five percent of the shares of common stock sold in the private placement (excluding shares sold to affiliates of existing shareholders), for a term of up to three years at an exercise price $8.75 per share, subject to adjustment only upon certain corporate events, subject to adjustment only upon certain corporate events, including stock dividends, distributions and reclassifications.

During 2007, we issued 245,455 shares of common stock as consideration for the purchase of the minority interest in the Downtown Daily Grill (see above).

During 2007, we issued 56,325 shares of common stock pursuant to the exercise of stock options for aggregate consideration of $131,000.

During 2007, we cancelled 9,496 shares of common stock that were previously exchanged as consideration for warrant exercises.

During 2007, we issued 95,184 shares of common stock on conversion of 500 outstanding shares of Series II, 10% Convertible Preferred Stock.

In conjunction with the conversion of the Series II, 10% Convertible Preferred Stock, in 2007, we paid accumulated dividends on the Series II, 10% Convertible Preferred Stock in the amount of $493,000 in cash. The payment of accumulated dividends is reflected in accumulated deficit on the consolidated balance sheet at December 30, 2007.

Credit Facility . In March 2006, we entered into a financing agreement with Diamond Creek Investment Partners, LLC, at which time our previous line of credit was terminated. The credit agreement provided for a revolving term loan to us of the lesser of (a) $8.0 million, or (b) 2.25 times trailing 12 month EBITDA. In December 2006, the credit agreement was amended to increase the credit available under the facility from $8.0 million to $12.0 million. In March 2008, the credit agreement was again amended to increase the allowable threshold for capital expenditures.

Income Taxes . During 2006, we determined, based on an analysis of our taxable income over the preceding three years and the projected taxable income for the next three years, that it is more likely than not that we will recover the majority of our existing net deferred tax asset. Accordingly, during 2006, most of the previously recorded valuation allowance with respect to our deferred tax asset was eliminated. As a result of the elimination of the valuation allowance, we realized a net tax benefit of $4.5 million during 2006. Our consolidated balance sheets reflected long-term deferred tax assets of $5.9 million and $5.4 million at December 30, 2007 and December 31, 2006, respectively.

We have a remaining valuation allowance of $1.3 million, consisting of $1.1 million for general business credits and $0.2 million for net operating losses (“NOL’s”) in a jurisdiction in which we are not currently conducting business. After further review of the deferred tax assets as of December 2007, management has concluded that with the exception of the general business tax credits and the state NOL’s it is more likely than not that the deferred tax assets will be realized. We will continue to review the valuation allowance each quarter to see if any further adjustments are necessary.

Stock Based Compensation. Effective December 26, 2005, the first day of the Company’s 2006 fiscal year, we adopted Financial Accounting Standards Board (“FASB”) Statement No. 123R, “Share-Based Payment” (“SFAS No. 123R”), using the modified prospective transition method, and as a result, did not retroactively adjust results from prior periods. Under this transition method, stock-based compensation was recognized for expenses related to the options vesting in 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. We apply the Black-Scholes valuation model in determining the fair value of share-based payments to , consultants and non-directors. The resulting compensation expense is recognized over the requisite service period, which is generally the option vesting term of five years. Options issued to non-directors are vested 100% at grant date. Prior to fiscal 2006, stock-based compensation was included as a pro forma disclosure in the notes to the consolidated financial statements as permitted by SFAS No. 123.

As a result of the adoption of SFAS No. 123R, we recorded compensation expense relating to stock option grants of $348,000 and $199,000 in fiscal years 2007 and 2006, respectively.

As of December 31, 2007, total unrecognized stock-based compensation expense related to non-vested stock options was $882,551, which is expected to be recognized over a weighted-average period of approximately 3.4 years.

In March 2006, our board of directors adopted the Grill Concepts, Inc. 2006 Equity Incentive Plan (the “2006 Plan”). The shareholders approved the 2006 Plan in June 2006. Under the 2006 Plan, 500,000 shares are reserved for issuance pursuant to the exercise of stock options and awards of restricted stock, stock appreciation rights and other similar equity based award grants. There were 203,209 and 183,250 options granted in 2007 and 2006, respectively. At December 30, 2007, there were 131,791 shares available for grant under the 2006 Plan and an additional 152,300 shares available for grant under predecessor plans.

Amendment of Starwood Agreements . On June 21, 2006, we entered into a First Amendment to the Development Agreement (the “First DA Amendment”) with Starwood. The First DA Amendment amended the Development Agreement to (1) eliminate our obligation to issue warrants to Starwood following the opening of ten, fifteen and twenty restaurants under the terms of the Development Agreement and (2) modify the exercise price of warrants issued following the opening of five restaurants under the terms of the Development Agreement.

Under the terms of the First DA Amendment, if a fifth restaurant is opened under the terms of the Development Agreement, we will issue to Starwood warrants to purchase a number of shares of common stock equal to 4% of the shares outstanding at December 25, 2005. As of April 1, 2008, four restaurants were operated under the terms of the Development Agreement.

The warrants will have an exercise price equal to (1) if the fair market value of the common stock as of the date of issuance of the warrants (the “Threshold Date Value”) is greater than the fair market value of the common stock as of the date of the original Development Agreement (the “Closing Date Value”), the greater of (a) 75% of the Threshold Date Value, or (b) the Closing Date Value, or (2) if the Threshold Date Value of the common stock is less than the Closing Date Value, the Threshold Date Value.

On June 21, 2006, we entered into a First Amendment to Stockholders’ Agreement (the “First SA Amendment”) with Starwood. The First SA Amendment amends the July 27, 2001 Stockholders’ Agreement between us, Starwood and certain of our stockholders to (1) eliminate our obligation to cause at least two nominees of Starwood to be elected to our board of directors if ten or more restaurants are operated under the Development Agreement, and (2) modify certain provisions limiting the size of our board of directors.

Under the terms of the First SA Amendment, so long as Starwood continues to hold at least 333,334 shares of our common stock, we shall take all actions reasonably necessary to assure that at least one nominee of Starwood is elected to the board of directors and to limit the size of the board of directors to no more than nine persons.

At December 30, 2007, we operated four restaurants under the terms of the Development Agreement. In March 2007, Starwood transferred all of its shares of our common stock to a separate entity called Eaturna, LLC, in which Starwood holds a non-controlling interest.

Hotel Property Agreement . In June 2007, we paid $2.8 million as full and final payment to Hotel Restaurant Properties Inc. and certain related parties (collectively “HRP” or the “Sellers”) pursuant to the terms of the agreement for purchase and sale of assets (the “HRP Purchase Agreement”), effective June 30, 2006, pursuant to which we purchased certain rights and interests relating to the current and future operation of our restaurants in hotel properties pursuant to the terms of an August 1998 agreement, as amended, with HRP.

HRP is affiliated with a former director and former preferred stockholder of our company.

At the final closing date, the Sellers entered into a non-competition agreement pursuant to which the Sellers, for a period of 5 years from the closing date, will not assist any owner, operator, franchisor or franchisee of a branded restaurant in entering into a lease, license or management agreement to operate a restaurant, provide room service or provide food or banquet room events at any hotel (the “Restricted Business”), provided, however, that the Sellers shall not be prohibited from (a) owning up to 10% of any publicly traded company engaged in the Restricted Business, (b) engaging in the Restricted Business with respect to hotel properties owned by the Sellers or affiliates of the Sellers and managed by the Sellers or the affiliates of the Sellers, or (c) engaging in the Restricted Business with up to 3 additional hotels. Branded restaurants, for purposes of the non-competition agreement, means a restaurant operated in ten or more locations under a single brand name.

We recorded the HRP Purchase Agreement transaction as a contract termination cost in our consolidated statements of operations in 2006.

Results of Operations

Fiscal Year 2007 Compared to Fiscal Year 2006

Revenues . Total revenues consisted of sales revenues of $68.0 million, up 8.6% from $62.7 million in 2006, reimbursed management outlet expenses of $22.3 million, up 38.7% from 16.1 million in 2006, and management and license fees of $2.4 million, up 19.0% from 2.1 million in 2006.

—Sales Revenues . Excluding the $0.7 million impact of the 53 rd week of operation in 2006, sales for Daily Grill restaurants increased by 5.5% from $39.8 million in 2006 to $42.0 million in 2007. The increase in sales revenues of $2.2 million for the Daily Grill restaurants from 2006 to 2007 was primarily attributable to opening of two Daily Grills during 2007 ($1.7 million) and an increase in same-store sales of 4.7% ($1.5 million) for restaurants open for 18 months in both 2007 and 2006 offset by a decrease in sales from three Daily Grills that were temporarily closed for remodeling ($1.0 million). Weighted average weekly sales at the Daily Grill restaurants increased 3.6% to $66,022 in 2007 from $63,731 in 2006. Comparable restaurant sales and weighted-average weekly sales at the Daily Grill restaurants in 2007 reflected menu price increases in November/December of 2006 and June/July of 2007. The increase in same-store sales was principally attributable to the menu price increases in addition to an increase in check averages.

Excluding the $0.5 million impact of the 53 rd week of operations in 2006, sales for Grill restaurants increased by 27.2% from $21.7 million in 2006 to $26.0 million in 2007. The increase in sales revenues of $4.3 million for the Grill restaurants was primarily attributable to the opening of the Dallas Grill in July 2006 ($2.0 million) and an increase in same-store sales of 11.7% ($2.3 million) for restaurants open for 18 months in both 2007 and 2006. Weighted-average weekly sales at the Grill restaurants increased 8.7% from $92,124 in 2006 to $100,113 in 2007. The improvement in same-store sales was primarily attributable to menu price increases as well as increased guest counts.

Selected price increases may be implemented from time to time in the future, consistent with the casual dining industry and depending on how the economy fares. Future revenue growth is expected to be driven principally by a combination of expansion into new and existing markets and the opening of additional restaurants and establishment of market share in those new markets as well as increases in guest count at existing restaurants and selected price increases. When entering new markets where we have not yet established a market presence, sales levels may be initially lower than in existing markets where we have a concentration of restaurants and high customer awareness. Although our 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 could result.

—Cost Reimbursements Revenue . Cost reimbursements represent amounts incurred by the Company on behalf of managed outlets for which the Company receives reimbursements from the owners of the managed restaurants. The increase in revenues attributable to cost reimbursements was attributable to the opening of the Memphis and Seattle Daily Grills as well as increased sales at other managed restaurants

—Management and License Fee Revenues . Management and license fee revenues increased 19.0% ($0.4 million) from $2.1 million in 2006 to $2.4 million in 2007. The increase in management and license fee revenue is primarily attributable to increased revenues and resulting increases in management fees from restaurants under management during both years ($0.1 million) and the opening of two new managed locations ($0.3 million), partially offset by a minimal decrease in license fees attributable to the termination of a license to operate a Daily Grill in Skokie, Illinois.

Operating Expenses and Operating Results . Total operating expenses, including cost of sales, restaurant operating expenses, reimbursed costs, general and administrative expense, depreciation and amortization, and pre-opening costs, increased 13% to $94.2 million in 2007 from $83.2 million in 2006. The impact of the 53 rd week of operations in 2006 on operating expenses was $1.0 million.

—Cost of Sales . Cost of sales consists of the cost of food and beverages sold, and where applicable, alcohol taxes. Cost of sales increased by 10.0% ($1.8 million) and as a percentage of sales revenues increased to 28.7% in 2007 compared to 28.4% in 2006. The increase in cost of sales was attributable to the opening of new restaurants and the increase in overall sales generally. The increase in cost of sales as a percentage of sales is primarily due to the normal inefficiencies of new restaurant openings as well as a full year of the Dallas Grill, which increases the blended cost of sales percentage. Cost of sales in 2006 included $0.3 million attributable to the 53 rd week of operations.

—Restaurant Operating . Restaurant operating expenses consists of wages and benefits of restaurant personnel and all other operating expenses. The operating expenses include, but are not limited to, supplies, advertising, occupancy, maintenance and utilities. Restaurant operating expenses increased 9.0% from $37.3 million in 2006 to $40.7 million in 2007. As a percentage of sales revenues, restaurant operating expenses represented 59.5% in 2006 and 59.8% in 2007. Excluding the $0.6 million impact of the 53 rd week of operations in 2006, the increase in restaurant operating expenses was primarily attributable to the opening of two restaurants in 2007 and one restaurant in 2006 ($1.7 million) and increases in payroll and related costs, occupancy costs and other fixed and variable costs at comparable restaurants ($1.1 million). For comparable restaurants, the operating expense as a percentage of sales revenues is 58.5% and 58.4% for 2007 and 2006, respectively.

— Reimbursed Costs . Reimbursed costs increased 38.7% from $16.1 million in 2006 to $22.3 million in 2007. These expenses represent the operating costs for which we are the primary obligor for the restaurants we do not consolidate. The increase is primarily due to the addition of two managed restaurants in 2007 ($4.9 million).

—General and Administrative . General and administrative expenses rose to $7.6 million in 2007 compared to $6.2 million in 2006. General and administrative expenses represented 8.2% of sales revenues in 2007 as compared to 7.6% of total revenues in 2006. The dollar increase was primarily the result of an increase in home office compensation costs ($0.3 million), increased professional services ($0.5 million), stock based compensation expense ($0.3 million), corporate advertising ($0.4 million), costs associated with the our initial year SOX implementation ($0.3 million), and office expenses ($0.1 million) offset by a decrease in bad debt provision of ($0.1 million) due to the subsequent collection of an amount previously included the bad debt reserve. The increase in home office compensation costs relates principally to the hiring of five additional staff to support new restaurant openings, restaurant operations, and financial and technology support services in addition to an overall cost of living increase.

—Depreciation and Amortization . Depreciation and amortization expense was $2.6 million during 2007 and $2.3 million in 2006. The increase was due primarily to the addition of two Daily Grills restaurants during 2007 and a Grill restaurant during 2006.

—Pre-opening Costs . Pre-opening costs totaled $1.4 million in 2007 as compared with $0.5 million in 2006. The 2007 pre-opening costs were primarily attributable the opening of the Austin Daily Grill ($0.5 million), the Fresno Daily Grill ($0.4 million) and pre-opening rent expense for the Austin Daily Grill ($0.1 million) and the Boston Daily Grill ($0.1 million). Pre-opening costs, including rents, also included the cost to remodel three restaurants ($0.3 million) during 2007. Pre-opening costs in 2006 were related to the construction of the Dallas Grill.

—Contract Termination Cost . We incurred a contract termination cost of $3.1 million for the year ended December 31, 2006, related to the purchase of certain contract rights from Hotel Restaurant Properties, Inc. and affiliates. No contract termination cost was incurred during the 2007.

Interest, Net . Interest expense, net, totaled $0.2 million during 2007 as compared to $0.3 million in 2006. The decrease in interest expense was primarily attributable to paying off all outstanding balances on our credit facility during the third quarter of 2007.

Debt Extinguishment Costs . We recorded debt extinguishment costs of $0.3 million in 2006. No similar costs were reported during 2007. The debt extinguishment costs relate to the retirement of the collateralized subordinated note payable and mandatorily redeemable capital obligations payable to the Michigan Avenue Group. A condition of the early debt retirement was payment of a $0.2 million penalty to be paid out in four annual installments of $50,000 each. Additionally, $69,000 of warrant costs and $10,000 of deferred loan costs associated with the debt were written off.

Benefit for Income Taxes . During 2007 and 2006, we reported a tax benefit of $0.5 million and $4.5 million, respectively. The 2006 tax benefit was primarily attributable to a reversal of a majority of our valuation allowance with respect to our deferred tax assets. The change in judgment during 2006 was based on our historical taxable income over the preceding three years, projected taxable income for the three subsequent years and the expected reversals of temporary differences. Based on the evidence considered, we believe that it is more likely than not that the amounts of deferred income tax assets recognized in the consolidated financial statements are realizable.

Minority Interest . We reported a minority interest in the profit of consolidated subsidiaries of $0.2 million during 2007 as compared to a minority interest of $0.3 million during 2006. The change in minority interest was primarily attributable to an increase in the net earnings of the Hollywood Grill offset by the affect of our purchase of the minority partner’s interest in the Downtown Daily Grill.

Net Income/Loss . We reported a net loss of $1.3 million in 2007 as compared to a net income of $1.3 million in 2006.

Liquidity and Capital Resources

Cash Position and Short-Term Liquidity. At December 30, 2007, we had a working deficit of $1.0 million and a cash balance of $4.9 million as compared to a working capital deficit of $4.1 million and a cash balance of $3.0 million at December 31, 2006.

Included in cash flows from operating activities were tenant improvement allowances of $0.7 million in 2007, and $1.8 million in 2006.

Included in cash flows from investing activities were capital expenditures of $9.7 million primarily related to the construction of the Austin Daily Grill ($3.0 million), construction of the Boston Daily Grill ($0.6 million), construction of the In Short Order – Daily Grill ($0.2 million), construction of the Fresno Daily Grill ($2.4 million); preliminary construction fees for the Aventura Grill ($0.1 million), North Dallas ($0.1 million), and Westlake Village ($0.1 million); capital replacements in existing restaurants ($1.2 million) and the remodels of the Brentwood ($0.6 million), Studio City ($0.9 million) and CityWalk ($0.5 million) Daily Grills. Capital expenditures were $4.1 million in 2006, primarily related to the opening of the Dallas Grill.

Cash flows from financing activities during 2007 include $13.1 million in net proceeds from our Equity Offering, $5.5 million of net proceeds from our credit facility with Diamond Creek, $0.4 million of proceeds from our line of credit with Union Bank, $6.8 million of payments on long-term debt, including payments on the Diamond Creek credit facility, and $0.5 million dividend payment on preferred stock.

Financing Facilities. At December 30, 2007, our principal financing facility was the Diamond Creek revolving credit facility with maximum borrowing capacity of $12.0 million.

The Diamond Creek credit agreement, entered into in March 2006 and amended in December 2006 and March 2008, provides for a revolving term loan to us of the lesser of (a) $12.0 million, or (b) 2.25 times trailing 12 month EBITDA. Funds may be borrowed under the credit agreement, subject to satisfaction of all conditions of funding, in monthly advances in minimum increments of $500,000. Proceeds of the facility may be used to pay expenses of the facility and for general corporate purposes. The interest rate on borrowings under the facility is, at our option and subject to certain limitations on the use of LIBOR based loans, equivalent to either (a) the prime rate, but not less than 7%, plus 2.5%, or (b) the London Interbank Offered Rate, but not less than 4%, plus 5.25%. The interest rate at December 31, 2007 was equal to 10.86%.

The credit agreement provides that we will pay all expenses incurred in connection with the facility, including expenses incurred by the lender. By separate agreement, we agreed to pay certain fees associated with the facility, including a loan initiation fee of $120,000, an unused line fee of 0.5% of the unused portion of the credit facility (0.4% if the balance is below $500,000) payable monthly and a loan servicing fee of $3,000 per month (not applicable if the balance is below $500,000). In connection with the March 2008 amendment to the credit agreement, we paid an amendment fee of $60,000.

Borrowings under the facility mature, and are payable in full, on March 9, 2011 subject to mandatory prepayment to the extent, if any, that the outstanding principal balance of the loan exceeds 2.25 times trailing 12 month EBITDA or upon the occurrence of certain defined extraordinary events.

Our obligations under the credit agreement are secured by a first lien on all of our assets, including all of the capital stock and other equity interests held in our subsidiaries, subject to existing liens on such assets. The facility requires us to comply with certain ordinary lending covenants. These include, among others, financial covenants relating to maximum debt to EBITDA ratio, minimum EBITDA and maximum capital expenditures. We must also comply with certain information requirements, including providing periodic financial statements and projections as well as notices of defaults, litigation and other matters, maintenance of insurance and compliance with laws as well as limitations on liens and encumbrances, indebtedness, dispositions, dividends and retirement of capital stock, consolidations and mergers, changes in nature of business and other operating, financial and structural limitations.

During 2007, we borrowed a total of $5.5 million under the Diamond Creek credit facility to fund (1) restaurant construction and pre-opening costs, (2) payment of accumulated dividends totaling $492,000 on the conversion of our Series II, 10% Convertible Preferred Stock, and (3) payment of the balance owing under the HRP Agreement, totaling $2.8 million. All amounts borrowed under the credit facility were paid at December 30, 2007.

In addition to our credit facility with Diamond Creek, we enter into periodic financing transactions in the nature of equipment leases and landlord loans and advances. At December 30, 2007, we owed $0.3 million under equipment lease financing transactions and $0.1 million under loans/advances from a landlord.

Amounts owing under a short term line of credit agreement entered into in July 2007 with Union Bank of California totaled $400,000 at December 30, 2007. The line of credit expired on January 22, 2008 and carried an interest rate of 5.19%. Payment was due in full upon expiration of the line of credit and was paid down by an expiring certificate of deposit on or about the same date. Proceeds of the facility were used for general operating purposes and to fund new restaurant construction.

In March 2008, we entered into a new equipment lease financing facility under which we have an available line of credit of $1.4 million for new kitchen construction financing.

Operating Leases. During 2007, we, and our subsidiaries, were obligated under 27 leases covering the premises in which our Daily Grill and Grill Restaurants are located as well as leases on our home offices. Such restaurant leases and the home office leases contain minimum rent provisions which provided for the payment of minimum aggregate annual rental payments of approximately $4.0 million in 2007 and percentage rent obligations, above and beyond minimum rent, of $0.9 million. Our minimum rent obligations for 2008 are $4.9 million.

Contractual Obligations. At December 30, 2007, we were obligated under twenty-seven leases covering the premises in which our Daily Grill and Grill restaurants are located as well as a lease on our home office. Such restaurant leases and the home office leases contain minimum rent provisions which provide for the payment of minimum aggregate rental payments of approximately $49.0 million over the life of those leases, with minimum rental payments of $5.0 million in 2008, $11.5 million between 2009 and 2010, $9.8 million between 2011 and 2012, and $22.8 million thereafter.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

We also earn revenues from management and license fees based on a percentage of sales and, in some cases, profit incentives from restaurants under management and licensing arrangements. Our management and license fees revenue typically is earned at a rate of five to eight percent of reported sales at these restaurants. The sales of managed and licensed restaurants are not included in our sales revenues in the condensed consolidated statements of operations. However, we consider the disclosure of these sales to be a key indicator of brand strength and important to understanding how changes in sales at the managed and licensed restaurants impact our revenue.

As noted, the Company received a notice of termination of the management agreement relating to the Memphis Daily Grill. The termination fee payable on termination of the management agreement, in the amount of $200,000, was recorded in management and license fees during the quarter ended June 29, 2008. Subsequent management and license fees, from and after the date of termination of management of the Memphis Daily Grill, will not include the termination fee or management fees relating to the Memphis Daily Grill.

Material Changes in Results of Operations for the Three and Six Months Ended June 29, 2008 as compared to the Three and Six Months Ended July 1, 2007

Revenues

Total revenues increased 7.6% to $24.5 million for the second quarter 2008 from $22.8 million in the second quarter 2007 and increased 11.4% to $49.6 million for the six months ended June 29, 2008 from $44.5 million for the six months ended July 1, 2007. For the quarter, total revenues consisted of sales revenues of $17.7 million, up 4.3% from $17.0 million in 2007, management and license fees of $0.8 million, up 14.9% from $0.6 million in 2007, and reimbursed managed outlet expenses of $6.1 million, up 14.8% from $5.3 million in 2007. For the six month year-to-date period, total revenues consisted of sales revenues of $35.6 million, up 4.8% from $34.0 million in 2007, management and license fees of $1.4 million, up 33.0% from $1.1 million in 2007, and reimbursed managed outlet expenses of $12.6 million, up 33.0% from $9.5 million in 2007. Total comparable sales decreased by 6.3% for the second quarter of 2008 from a strong 10.6% increase in the prior comparable period. Total comparable sales for the six month period decreased 5.0% compared to an increase of 9.5% in 2007. Excluding the Company’s three locations in Orange County and adjacent in California, which have been heavily impacted by the mortgage crisis, same-store sales for the second quarter of 2008 would have been down by only 5.1% and for the six months by only 3.4%.

Daily Grill Restaurants. Sales for Daily Grill restaurants increased by 9.1% from $10.5 million in the second quarter of 2007 to $11.4 million in the second quarter of 2008. The increase in sales revenues for the Daily Grill restaurants from the second quarter 2007 to the second quarter 2008 was primarily attributable to the opening of the Austin and Fresno Daily Grills in July and November of 2007, respectively ($1.2 million), the opening of the Boston Daily Grill in May 2008 ($0.5 million), partially offset by lower sales at the other Daily Grills due to inflationary economic pressures ($0.8 million). Weighted-average weekly sales at the Daily Grill restaurants decreased 4.0% from $67,583 in the second quarter 2007 to $59,788 in the second quarter of 2008. Comparable restaurant sales and weighted-average weekly sales at the Daily Grill restaurants in the three months ended June 29, 2008 reflect full period impact of price increases in June/July 2007 and November/December of 2007. We believe the decrease in same-store sales was principally attributable to the macro economic factors impacting the restaurant industry in general.

Sales for Daily Grill restaurants increased by 10.0% from $21.3 million during the six months ended July 1, 2007 to $23.2 million during the six months ended June 29, 2008. For the six month year-to-date period, the increase in sales revenues for the Daily Grill restaurants from 2007 to 2008 was primarily attributable to the opening of the Austin and Fresno Daily Grills in July and November of 2007, respectively ($2.6 million), the opening of the Boston Daily Grill in May 2008 ($0.5 million), partially offset by lower sales at the other Daily Grills due to inflationary economic pressures ($1.0 million). Weighted-average weekly sales at the Daily Grill restaurants decreased 9.6% from $68,870 during the six months ended July 1, 2007 to $62,292 for the six month period ended June 29, 2008. Comparable restaurant sales and weighted-average weekly sales at the Daily Grill restaurants in 2008 reflect full period impact of price increases in June/July 2007 and November/December of 2007. We believe the decrease in same-store sales was principally attributable to the macro economic factors impacting the restaurant industry in general.

Grill on the Alley Restaurants. Sales for Grill on the Alley (“Grill”) restaurants decreased by 3.6% from $6.4 million in the second quarter of 2007 to $6.2 million in second quarter of 2008. The decrease in sales revenues for the Grill restaurants from 2007 to 2008 was attributable to a decrease in same-store sales of 3.6% ($0.2 million). Weighted-average weekly sales at the Grill restaurants decreased 3.6% from $98,429 in the second quarter of 2007 to $94,856 in the second quarter of 2008.

Sales for Grill restaurants decreased by 4.0% from $12.7 million for the six month year-to-date period ended July 1, 2007 to $12.2 million during the six month year-to-date period ending June 29, 2008. The decrease in sales revenues for the Grill restaurants from 2007 to 2008 was attributable to a decrease in same-store sales of 2.7% ($0.3 million) and a decrease in sales at the Dallas Grill on the Alley, which had not been opened 18 months at June 29, 2008 and therefore not included in same store sales comparisons ($0.2 million). Weighted-average weekly sales at the Grill restaurants decreased 3.7% from $97,895 for the six months ended July 1, 2007 to $94,216 during the six months ended June 29, 2008.

Management and License Fees. Management and license fees was attributable to hotel restaurant management services which accounted for $742,000 of management fees during the second quarter of 2008 as compared to $467,000 during the second quarter of 2007 and licensing fees of $55,000 during the second quarter of 2008 compared to $105,000 during the second quarter of 2007. The increase in management fees during the second quarter of 2008 was primarily attributable to the termination fee recorded as a result of the Memphis Daily Grill hotel owner’s notice of termination ($200,000), the opening of the Seattle Daily Grill in June 2007 ($83,000), partially offset by lower fees at other managed locations due to reduced sales levels ($8,000). The decrease in license fees revenue was primarily attributable to the termination of a license to operate a Daily Grill in Skokie, Illinois.

For the six month year-to-date period, management and license fee revenues were attributable to hotel restaurant management services of $1,289,000 in 2008 compared to $901,000 in 2007 and licensing fees of $93,000 in 2008 compared to $159,000 in 2007. The increase in management and license fee revenue during the six months ended June 29, 2008 was primarily attributable to the termination fee recorded as a result of the Memphis Daily Grill hotel owner’s notice of termination ($200,000), the opening of the Seattle Daily Grill in June 2007 ($173,000) and slightly higher fees at other managed locations due to higher sales levels ($15,000).

Cost Reimbursements . Cost reimbursements represent amounts incurred by the Company on behalf of managed outlets for which the Company receives reimbursements from the owners of the managed restaurants. The increases in revenues attributable to cost reimbursements in the three and six months ended June 29, 2008 compared to three months ended July 1, 2007 were attributable to the opening of the Memphis Daily Grill and the Seattle Daily Grill during 2007.

Operating Expenses

Total operating expenses, including cost of sales, restaurant operating expenses, reimbursed costs, general and administrative expenses, depreciation and amortization and pre-opening costs and litigation claim settlement, increased 15.7% to $26.3 million in the second quarter of 2008 from $22.7 million in the second quarter of 2007. For the six months ended June 29, 2008, total operating expenses increased 17.2% to $51.5 million from $43.9 million for the six months ended July 1, 2007.

Cost of Sales. While sales revenues increased by 4.3% ($0.7 million) in the second quarter of 2008 as compared to the second quarter of 2007 and 4.8% ($1.6 million) for the six months ended June 29, 2008 as compared to the six months ended July 1, 2007, total cost of sales increased by 3.4% ($0.2 million) during the second quarter of 2008 compared to the second quarter of 2007 and 4.3%, ($0.4 million) for the six month period in 2008 compared to the six month period in 2007. The dollar increase in cost of sales for both the three month and six month periods is primarily due to the increase in sales with a minimal amount due to increased purchase prices for certain products. Cost of sales as a percentage of restaurant sales was 28.6% for the second quarter of 2008 and 28.8% for the same period in 2007. Cost of sales as a percentage of restaurant sales was 28.5% for the six months ended June 29, 2008 and 28.7% for the six months ended July 1, 2007.

Restaurant Operating. Restaurant operating expenses increased by $1.1 million, or 11.4%, for the second quarter of 2008 and $1.8 million, or 9.0%, for the six months ended June 29, 2008 compared to the same period in 2007. The dollar increase in restaurant operating expenses for the quarter was primarily attributable to the opening of the Austin, Texas; Fresno, California and Boston, Massachusetts Daily Grills and In Short Order-Daily Grill in Seattle, Washington ($1.4 million), partially offset by a decrease in payroll and related costs at comparable restaurants ($0.3 million). The dollar increase in restaurant operating expenses for the six months ended June 29, 2008 was primarily attributable to the opening of the Austin, Texas; Fresno, California and Boston, Massachusetts Daily Grills and In Short Order-Daily Grill in Seattle, Washington ($2.4 million), partially offset by a decrease in payroll and related costs at comparable restaurants ($0.6 million). Restaurant operating expenses, as a percentage of restaurant sales, were 63.2% in the second quarter of 2008 and 59.2% in the second quarter of 2007. Restaurant operating expenses, as a percentage of restaurant sales, were 61.2% for the six months ended June 29, 2008 and 58.8% during the same period in 2007.

Reimbursed Costs. Reimbursed costs increased 14.8% from $5.3 million to $6.1 million for the second quarter of 2008 compared to the second quarter of 2007. Reimbursed costs increased 33.0% from $9.5 million to $12.6 million for the six months ended June 29, 2008 compared to the same period in 2007. These expenses represent the operating costs for which we are the primary obligor of the restaurants the Company does not consolidate. The increase for both the three and six months ended June 29, 2008 is primarily due to the opening of the Seattle Daily Grill and the Memphis Daily Grill during 2007.

General and Administrative. General and administrative expenses decreased 4.8% for the second quarter of 2008 compared to the second quarter of 2007 and increased 9.8% for the six months ended June 29, 2008 compared to the six months ended July 1, 2007. As a percentage of total revenues, general and administrative expense totaled 7.1% for the second quarter and 7.5% for the six month period of 2008, compared to 8.1% for the second quarter and 7.6% for the six month period of 2007. The decrease in total general and administrative expenses of $0.1 million for the second quarter of 2008 compared to the second quarter of 2007 was primarily attributable to a reclassification of litigation settlement costs to a separate line on the condensed consolidated statements of operations.

Depreciation and Amortization. Depreciation and amortization expense increased 65.4% for the second quarter of 2008 and 56.5% for the six months ended June 29, 2008 compared to the same periods in 2007. As a percentage of restaurant sales, depreciation and amortization expense was 3.7% and 2.4% for the second quarter of 2008 and 2007, respectively. As a percentage of restaurant sales, depreciation and amortization expense was 4.8% and 3.2% for the six months ended June 29, 2008 and July 1, 2007, respectively. The increase in depreciation expense in the second quarter of $0.4 million is primarily attributable to the opening of the Boston Daily Grill and In Short Order-Daily Grill in 2008 ($0.1 million); Fresno Daily Grill and Austin Daily Grill, which opened in 2007 ($0.2 million) and remodeled Daily Grills in Brentwood and Studio City ($0.1 million). The increase in depreciation expense for the six months ended June 29, 2008 of $0.6 million is primarily attributable to the opening of the Boston Daily Grill and In Short Order-Daily Grill in 2008 ($0.1 million); Fresno Daily Grill and Austin Daily Grill, which opened in 2007 ($0.3 million) and remodeled Daily Grills in Brentwood, Studio City along with tenant improvements at the new Corporate offices ($0.2 million).

Pre-opening Costs. Pre-opening costs totaled $543,000 in the second quarter of 2008 and $717,000 in the sixth months ended June compared to $118,000 in the second quarter of 2007 and $244,000 in the sixth months ended July 1, 2007. Pre-opening costs in the second quarter of 2008 are primarily attributable to costs associated with the opening of the Boston Daily Grill ($0.3 million) and the future openings of Grill on the Alleys in Aventura, Florida and Westlake, California ($0.2 million). Pre-opening costs in the six months ended June 29, 2008 are primarily attributable to costs associated with the opening of the Boston Daily Grill ($0.4 million) and the future openings of Grill on the Alleys in Aventura, Florida and Westlake, California ($0.2 million) and the quick-casual concept, In Short Order—Daily Grill, in Seattle, Washington ($0.1 million).

Litigation Claim Settlement . Litigation claim settlement expense totaled $780,000 during the 2008 second quarter and six month period. The settlement expense was attributable to the pending settlement of the meal and rest breaks litigation.

Interest, net

Total net interest expense increased $17,000, or 14.5%, to $135,000, during the second quarter of 2008 compared to the second quarter of 2007. The increase in interest expense for the three month period was primarily attributable to borrowings on the Company’s credit facility with Diamond Creek. For the six months ended June 29, 2008, total net interest decreased $38,000, or 80.0% from $185,000 in the six months ended July 1, 2007. The decrease in interest expense for the six month period was primarily attributable to paying off all outstanding balances on our credit facility during the third quarter of 2007.

Income Taxes

During the three months ended June 29, 2008, we reported a tax benefit of $769,000. During the three months ended July 1, 2007, we reported a tax benefit of $12,000. The increase in the tax benefit was primarily attributable to a taxable loss and our ability to utilize certain tax credits. The tax benefit for the six months ended June 29, 2008 was $835,000 compared to a tax expense of $165,000 for the sixth months ended July 1, 2007. The 2008 tax benefit was primarily attributable to a taxable loss and our ability to utilize certain tax credits.

Minority Interest

We reported a minority interest in the loss of consolidated subsidiaries of $105,000 during the 2008 second quarter as compared to a minority interest in profits of consolidated subsidiaries of $24,000 during the same quarter of 2007. During the six months ended June 29, 2008, we reported a minority interest in the loss of consolidated subsidiaries of $47,000 as compared to a minority interest in profits of $102,000 for the six months ended July 1, 2007. The decrease in minority interest for the quarter and year to date was primarily attributable to the purchase of the Downtown Daily Grill partnership during the third quarter of 2007 and net losses recorded by the remaining partnerships. Included in cash flows from operating activities were tenant improvement allowances of $1.0 million and $0.4 million in 2008 and 2007, respectively.

Included in cash flows from investing activities were capital expenditures of $5.4 million primarily related to the construction of the Boston Daily Grill ($1.5 million); the Grill on the Alley in Westlake, California ($1.7 million); the Grill on the Alley restaurant in Aventura, Florida ($1.7 million) and capital asset replacements in existing restaurants ($0.5 million).

Cash flows from financing activities during the six months ended June 29, 2008 include $5.0 million in borrowings on our line of credit with Diamond Creek.

The $2.1 million decrease in working capital was primarily attributable to construction of the Westlake Grill on the Alley in Westlake, California and Aventura Grill on the Alley in Aventura, Florida.

Financing Facilities

At June 29, 2008, our principal financing facility was the Diamond Creek revolving credit facility with maximum borrowing capacity of $12.0 million. This revolving credit facility matures on March 9, 2011. At June 29, 2008, the applicable interest rate on the line of credit was 9.25%. We also enter into periodic financing transactions in the nature of equipment leases and landlord loans and advances.

In March 2008, we entered into a new equipment lease financing facility under which we have an available line of credit of $1.4 million for new kitchen construction financing.

At June 29, 2008, we had $5.0 million of outstanding borrowings under our revolving credit facility, $0.7 million owing under our new equipment lease financing facility, $0.2 million owing under previously existing equipment lease financing transactions, and a loan from a landlord of $0.1 million.

Subsequent to June 29, 2008, we borrowed an additional $1.0 million under our revolving credit facility.

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