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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

As of November 8, 2002 the registrant had issued and outstanding 5,000,000 shares of common stock, $.01 par value per share.

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

PRANDIUM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)

See accompanying notes to condensed consolidated financial statements

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PRANDIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements

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PRANDIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements

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PRANDIUM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)

See accompanying notes to condensed consolidated financial statements

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PRANDIUM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

              1.     Company.     Prandium, Inc. (“Prandium” and together with its subsidiaries, the “Company”), was incorporated in Delaware in 1986.  Prandium, through its subsidiaries, is primarily engaged in the operation of restaurants in the full-service and fast-casual segments.  At September 29, 2002, the Company operated 174 restaurants in 21 states, approximately 66% of which are located in California, Ohio, Pennsylvania, Indiana and Michigan, and franchised and licensed 8 restaurants outside the United States. 

              For the purpose of information presented in the condensed consolidated financial statements, “Predecessor Company” refers to the Company with respect to information relating to the periods ended prior to July 2, 2002 and “Successor Company” refers to the Company with respect to information relating to the periods beginning on or after July 2, 2002, giving effect to the Plan (as defined below) and the related transactions discussed below.

              2.     Financial Statements.     The Condensed Consolidated Financial Statements in this Form 10-Q have been prepared in accordance with Securities and Exchange Commission Regulation S-X. Reference is made to the Notes to the Consolidated Financial Statements for the Fiscal Year Ended December 30, 2001 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2001 (the “Form 10-K”) for information with respect to the Company’s significant accounting and financial reporting policies, as well as other pertinent information.  The Company believes that all adjustments, consisting of normal recurring adjustments as well as those adjustments required pursuant to the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization” (“SOP 90-7”), necessary for a fair presentation of the results of the interim periods presented have been made.  The results of operations for the interim periods ended September 29, 2002 and June 30, 2002 are not necessarily indicative of those for the full year.  As a result of the Company’s fresh start reporting described below, the nine months ended September 29, 2002 has been presented as the six months ended June 30, 2002 for the Predecessor Company and the quarter ended September 29, 2002 for the Successor Company.

              The condensed consolidated financial statements of the Company relating to periods ended before July 2, 2002 were prepared on a going concern basis that contemplated continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the consummation of the Plan (as defined below) on July 2, 2002 and pursuant to SOP 90-7, the Company qualified for fresh start reporting as of July 2, 2002.  Under fresh start reporting, all assets and liabilities are restated to the current value of the reorganized entity to approximate the Company’s fair value at the date of reorganization. 

              The Company has obtained an independent appraisal of the value of its long-term assets as of the Closing (as defined below) of $82.8 million, the estimated effect of which it has utilized, together with adjustments of $229,000 to current assets, $(3,000) to other assets and $(848,000) to current liabilities, to implement fresh start reporting. In addition, although the Notes (as defined below) have an initial face value of $59 million and have a stated interest rate of 12%, for financial reporting purposes

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the Notes were recorded at $52.8 million with an interest rate of 16.6% (which was considered the fair value interest rate for the Notes at the Closing).  The allocation of the reorganization value to the Company’s assets will be finalized in the near future.  The Company does not expect that the final allocation will require any adjustment that would have a material impact on its condensed consolidated financial statements included herein.  

              The reorganization value of $8.8 million was determined by considering many factors and various valuation methods, including a discounted cash flow analysis using projected five-year financial information, selected publicly traded company market multiples of certain companies whose operating businesses are viewed to be similar to those of the Company, and other applicable ratios and valuation techniques believed by the Company and its financial advisors to be representative of the Company’s business and industry.  The determination of the reorganization value was also based upon a number of estimates and assumptions that are inherently subject to significant uncertainties and contingencies beyond the control of the Company.  For example, the five-year cash flow projections used as a factor in determining the reorganization value were based on estimates and assumptions about circumstances and events that have not yet taken place.  Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties beyond the control of the Company including, but not limited to, those with respect to the future course of the Company’s business activity.  Any difference between the Company’s cash flow projections and actual results following the consummation of the Plan will not alter the determination of the fresh start reorganization equity value because the determination of the reorganization value is not contingent upon the Company achieving the projected results or meeting any of the other factors considered by the Company.  Accordingly, there can be no assurance that the values reflected in the reorganization value will be realized, and actual results could vary materially.  Moreover, the value of the Company’s common stock may, and currently does, differ materially from the reorganization value.

              The accumulated deficit of the Predecessor Company was eliminated as required by fresh start reporting.  For financial reporting purposes, the effective date of the Reorganization Case is deemed to be the close of business on June 30, 2002; therefore certain transactions occurring after June 30, 2002 but on or before July 2, 2002 are reflected in the condensed consolidated financial statements as if they had occurred on June 30, 2002.  As a result, the condensed consolidated statement of operations for the six months ended June 30, 2002 reflects the effects of the forgiveness of debt ($191.4 million) resulting from confirmation of the Plan and the effects of the adjustments to restate assets and liabilities ($9.9 million) to reflect the reorganization value of the Company.  As such, the condensed consolidated balance sheet of the Company as of September 29, 2002 and the accompanying condensed consolidated statement of operations for the quarter then ended represent, in effect, that of  a new entity with assets, liabilities and a capital structure having carrying values not comparable with prior periods.  The accompanying condensed consolidated balance sheet as of December 30, 2001 and the condensed consolidated statements of operations for the periods ended June 30, 2002 and September 30, 2001 represent that of the Predecessor Company.

              3.     Reorganization Plan.     On May 6, 2002, following receipt of sufficient votes from their debtholders approving a pre-packaged Chapter 11 plan of reorganization (the “Plan”), Prandium and its subsidiary, FRI-MRD Corporation (“FRI-MRD”), each filed cases (together, the “Reorganization Case”) seeking confirmation of the Plan in the United States Bankruptcy Court for the Central District of California, Santa Ana division (the “Bankruptcy Court”).  The Reorganization Case was entitled In

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re Prandium, Inc. and FRI-MRD Corporation, Case No. SA-02-13529 (RA) (Jointly Administered). The Bankruptcy Court subsequently confirmed the Plan on June 20, 2002.  The Plan was consummated (the “Closing”) on July 2, 2002 (the “Closing Date”) when all material conditions to the Plan, including entering into a new secured credit facility (the “Credit Facility”) with Foothill Capital Corporation (“Foothill”), were completed.

              Under the Plan, the FRI-MRD 14% Senior Secured Discount Notes (the “14% FRI-MRD Notes”) were exchanged at a discount for $18 million in cash, and the FRI-MRD 15% Senior Discount Notes (the “15% FRI-MRD Notes” and together with the 14% FRI-MRD Notes, the “Old FRI-MRD Notes”) were exchanged at a discount for a combination of $12 million in cash and new FRI-MRD 12% Senior Secured Notes with an initial face value of $59 million (the “Notes”).  The Notes have substantially similar terms as the 15% FRI-MRD Notes except that the Notes (i) mature on January 31, 2005, (ii) have an interest rate of 12% that is payable-in-kind at the Company’s option, (iii) include capital expenditure restrictions on the 14 location Hamburger Hamlet restaurant chain (the “Hamburger Hamlet Chain”), (iv) require that free cash flow generated by the Hamburger Hamlet Chain prior to a sale of the restaurants, and the proceeds of any  sale of the Hamburger Hamlet Chain, be applied to prepay the Notes and (v) contain additional limitations on indebtedness and capital expenditures.  In addition, while no cash interest payments are required on the Notes, prepayments are encouraged by an extra reduction in principal of up to 33.33% of the prepaid amount, depending on how quickly the prepayment is made.  The Notes are secured by the stock of the subsidiary operating the Hamburger Hamlet Chain.

              Also under the Plan, Prandium’s 9 3/4% Senior Notes (the “9 3/4% Prandium Notes”) were cancelled in exchange for 5,000,000 shares of the new common stock of Prandium, and stock options to purchase up to an additional 444,445 shares at an exercise price of $1.90 per share were granted to certain members of management.  Prandium’s 10 7/8% Senior Subordinated Discount Notes (the “10 7/8% Prandium Notes” and together with the 9 3/4% Prandium Notes, the “Prandium Notes”) were cancelled without receiving any consideration.  The old common stock of Prandium was also cancelled without receiving any consideration.

              In accordance with the Plan, at the Closing the Company, among other things, entered into a note agreement (the “Note Agreement”) governing the Notes, revised Prandium’s charter and bylaws and the charter of FRI-MRD, entered into the Credit Facility with Foothill to replace the old secured credit facility (the “Old Credit Facility”) with Foothill and designated four members of Prandium’s five-member board of directors.  Under the Plan, the investment representative of certain of the holders of the Notes (the “Representative”) has the right to initially designate one individual to the currently vacant position on the board of directors of Prandium. The Representative’s right to nominate one individual for election to the board of directors continues until the Notes are paid in full pursuant to the Plan and a nominating agreement entered into with Prandium and certain of Prandium’s common stockholders.  As of November 8, 2002, the Representative had not yet designated a director.

              The Plan did not involve any of Prandium’s or FRI-MRD’s operating subsidiaries.  The claims of employees, general unsecured creditors (other than noteholders) and secured creditors, other than holders of the 14% FRI-MRD Notes, were not impaired under the Plan.

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              4.     Sale of Hamburger Hamlet Restaurants.     On May 10, 2002, the Company entered into an agreement (the “Hamlet Agreement”) to sell the Hamburger Hamlet Chain.  On August 9, 2002, the Company terminated the Hamlet Agreement in accordance with its terms. The purchaser under the Hamlet Agreement has given the Company notice that it does not believe that the Company’s termination notice is effective.  The Company and the purchaser are continuing to discuss the matter and as of the filing date of this report, no other action has been taken by either side.  Since a sale of the Hamburger Hamlet Chain is contemplated by the Company’s capital restructuring strategy, the Company continues to explore and develop opportunities to sell the Hamburger Hamlet Chain. As called for in the Note Agreement, the proceeds of any sale of the Hamburger Hamlet Chain will be used to prepay the Notes in accordance with the terms of the Note Agreement. Prior to a sale of the Hamburger Hamlet Chain, the Note Agreement requires that the excess cash flow generated by the Hamburger Hamlet Chain be used to prepay the Notes.  In accordance with this provision, $566,000 for the second quarter of 2002 and $425,000 for the third quarter of 2002, was used to prepay $747,000 and $551,000, respectively, principal amount of the Notes.  There can be no assurance that a sale will be successfully completed.  A prior agreement to sell the Hamburger Hamlet Chain to a different party was entered into on October 23, 2001 and terminated on February 6, 2002 in accordance with its terms.

              The assets and liabilities of the Hamburger Hamlet Chain have been written down to their estimated net realizable value of $14,786,000 and classified as property held for sale in the accompanying condensed consolidated balance sheet.  This amount reflects an additional write-down of $1,058,000 recorded in the quarter ended March 31, 2002 to recognize the terms of the Hamlet Agreement.  During the second quarter of 2002, the Company recorded a provision for divestitures of $467,000 related to the sale of the Hamburger Hamlet Chain.  During the third quarter of 2002, the Company recorded an additional provision for divestitures of $60,000 related to the sale of the Hamburger Hamlet Chain.

              The Hamburger Hamlet Chain generated sales of $22,936,000 and $24,582,000 for the nine months ended September 29, 2002 and September 30, 2001, respectively, and related operating income of $2,228,000 and $2,763,000 for the same periods, respectively.  Such operating income includes charges for allocated general and administrative expenses of $447,000 and $559,000 for the nine months ended September 29, 2002 and September 30, 2001, respectively.

              5.     Strategic Divestment Programs.     During the fiscal years 1999, 2000 and 2001, the Company designated three, ten and four non-strategic Koo Koo Roo restaurants for divestment (the “KKR Strategic Divestment Program”), respectively.  In conjunction with the KKR Strategic Divestment Program, for such periods, the Company recorded provisions for divestitures of $904,000, $4,510,000 and $814,000, respectively.  On a cumulative basis, these provisions consisted of (i) $3,429,000 for the write-down to net realizable value of the property and equipment associated with such restaurants and (ii) $2,799,000 for costs associated with lease terminations, subsidized leases, brokerage fees and other divestment costs.  During 2001, the Company also recorded a provision for severance costs of $189,000 associated with certain restaurant managers in connection with the restaurants to be divested.  During 2000, two of the restaurants designated in 1999 were subleased and a third restaurant’s lease was terminated.  Of the ten restaurants designated in 2000, nine were divested or closed during 2001, and one was closed during the first quarter of 2002.  Of the four restaurants designated in 2001, one was divested in the fourth quarter of 2001, and three were divested or closed

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during the first quarter of 2002.  For the years ended December 30, 2001, December 31, 2000 and December 26, 1999, the Company paid (i) $138,000, $0 and $0, respectively, for severance costs associated with certain restaurant and regional managers who were terminated in connection with the restaurants divested and (ii) $947,000, $135,000 and $0, respectively, for net costs associated with lease terminations, subsidized subleases, brokerage fees and other divestment costs.  During the first nine months of 2002, the Company paid $47,000 for severance costs and $211,000 for lease terminations. During the first nine months of 2002, restaurants still in operation under the KKR Strategic Divestment Program had sales of $352,000 and restaurant- level operating losses of $232,000.  The Company has identified one additional Koo Koo Roo restaurant for divestment.  During the first nine months of 2002, this restaurant had sales of $573,000 and restaurant-level operating losses of $149,000.  An additional provision for divestitures could be required in the fourth quarter of 2002 after management reviews its options with respect to this restaurant.

              In the fourth quarter of 1998, 48 non-strategic Chi-Chi’s restaurants were designated for divestment (the “CC Strategic Divestment Program”).  In conjunction with the CC Strategic Divestment Program, the Company recorded a provision for divestitures of $22,884,000, including divestment reserves of $12,256,000.  During the fourth quarter of 1999, the Company determined that it would not be able to satisfactorily negotiate lease terminations or subleases for 20 operating restaurants of the 48 Chi-Chi’s restaurants designated for divestment.  As a result, these 20 restaurants were removed from the CC Strategic Divestment Program, and $1,048,000 previously recorded in conjunction with the provision for divestitures was reversed during the fourth quarter of 1999.  After this reversal, the eight restaurants remaining in the CC Strategic Divestment Program were divested during 2000.  In the fourth quarter of 2001, sixteen additional Chi-Chi’s restaurants were designated for divestment.  The Company recorded a provision for divestitures of $2,736,000. This provision consisted of (i) $2,386,000 for the write-down to net realizable value of the property and equipment associated with such restaurants and (ii) $350,000 for costs associated with lease terminations, subsidized leases, brokerage fees and other divestment costs.  In December 2001, the Company recorded an additional provision for divestitures of $2,029,000 for costs associated with lease terminations, subsidized leases, brokerage fees and other divestment costs.  For the years ended December 30, 2001, December 31, 2000 and December 26, 1999, the Company paid (i) $33,000, $225,000 and $287,000, respectively, for severance costs associated with certain restaurant and regional managers who were terminated in connection with the restaurants divested and (ii) $1,681,000, $2,124,000 and $1,913,000, respectively, for net costs associated with lease terminations, subsidized subleases, brokerage fees and other divestment costs.  During the first quarter of 2002, the Company recorded an additional provision of $695,000 consisting of (i) $250,000 for the write-off of a liquor license and (ii) $445,000 for lease terminations and other divestment costs. During the second quarter of 2002, the Company recorded a provision of $82,000 for lease terminations, other divestment costs and the write-down of property and equipment to net realizable value.  During the first nine months of 2002, the Company paid $110,000 for severance costs and $1,245,000 for lease terminations.  During the first nine months of 2002, restaurants still in operation under the CC Strategic Divestment Program had sales of $9,227,000 and restaurant-level operating losses of $1,352,000.  Of the properties remaining in the Chi-Chi’s Strategic Divestment Program from 2001, the Company has determined that three of the restaurants will be operated until their leases expire due to their short remaining lease lives.  In addition, the Company has identified two additional Chi-Chi’s restaurants for divestment.  During the first nine months of 2002, these restaurants had sales of $1,109,000 and restaurant-level operating losses of $139,000.  An additional provision for divestitures could be required in the fourth quarter of 2002 after management reviews its options with respect to

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these restaurants.

              In the second quarter of 2001, the Company announced an organizational restructuring that resulted in the elimination of approximately 40 positions in the Company’s support center.  The Company recorded a provision of $1,607,000 for severance and outplacement services and the amount was included in restructuring costs on the 2001 consolidated statement of operations.  For the year ended December 30, 2001, a total of $1,521,000 was paid for severance and outplacement services. During the first nine months of 2002, the Company paid $17,000 for outplacement services.

              6.     Segment Information.     The Company operates exclusively in the food-service industry. Substantially all revenues result from the sale of menu products at restaurants operated by the Company. The Company’s reportable segments are based on restaurant operating divisions.  The Koo Koo Roo Division includes the operations of Koo Koo Roo and Hamburger Hamlet restaurants. Operating income (loss) includes the operating results before interest.  The corporate component of sales, depreciation and amortization and operating income (loss) represents operating results of certain other restaurants, as well as corporate general and administrative expenses.  Corporate assets include corporate cash, restricted cash, investments, receivables, asset portions of financing instruments and certain other restaurants.  As a result of the impact of the Plan on the Company’s capital structure and the Company’s adoption of fresh start reporting, certain key elements of segment reporting since the Closing Date are not comparable to those prior to the Closing Date.  The information presented for the nine months ended September 29, 2002 is composed of one quarter of Successor Company operations plus six months of Predecessor Company operations. The value of the total assets is based on an independent appraisal recently performed in connection with the determination of the Company’s reorganization value in connection with fresh start reporting.  The allocation of the value among the Company’s divisions will be finalized in the near future.  The Company does not expect that the final allocation will require any adjustment that would have a material impact on the condensed consolidated financial statements included herein.

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              Certain information and statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, including, without limitation, statements containing the words “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates” and words of similar import, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks and uncertainties that could cause actual results of the Company or the restaurant industry to differ materially from expected results expressed or implied by such forward-looking statements.  Although it is not possible to itemize all of the factors and specific events that could affect the outlook of a restaurant company operating in a competitive environment, factors that could significantly impact expected results include:

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              The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

              The following should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in the Form 10-K.

Critical Accounting Policies

              The Company’s financial condition and results of operations are necessarily impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations of the Company, and require estimates or other judgments of matters inherently uncertain. Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the condensed consolidated financial statements. 

              1.     Fresh Start Reporting.   As a result of the confirmation of the Plan and pursuant to SOP 90-7, the Company qualified for fresh start reporting as of July 2, 2002. Under fresh start reporting, all assets and liabilities are restated to the current value of the reorganized entity to approximate the Company's fair value at the date of reorganization. The fresh start reporting reorganization value of $8.8 million was determined by considering many factors and various valuation methods, including a discounted cash flow analysis using projected five-year financial information, selected publicly traded company market multiples of certain companies whose operating businesses are viewed to be similar to the Company's operating business, and other applicable ratios and valuation techniques believed by the Company and its financial advisors to be representative of the Company's business and industry. The determination of reorganization value and the appraisal of the Company’s long-term assets in connection with the adoption of fresh start reporting both required estimates and judgments of matters inherently uncertain. Different assumptions and estimates could have resulted in different results from those reflected in the condensed consolidated financial statements. Any difference between the Company's cash flow projections and actual results following the consummation of the Plan will not alter the determination of the fresh start reorganization equity value because the determination of the reorganization value is not contingent upon the Company achieving the projected results or meeting any of the other factors considered by the Company. Accordingly, there can be no assurance that the values reflected in the reorganization value will be realized, and actual results could vary materially. Moreover, the value of the Company's common stock may, and currently does, differ materially from the reorganization value.

              2.     Impairment of Long-Lived Assets.   The Company reviews long-lived assets for impairment when events or circumstances indicate that the carrying amounts may not be recoverable. Assets subject to this review, and for which impairments have been recorded in 2002 or prior years, include property, plant and equipment and costs in excess of net assets of business acquired.

              In determining asset impairments, management must make significant judgments and estimates to calculate the fair value of an asset.  Fair value is developed through consideration of several valuation methods including comparison of similar recent sales transactions and discounted cash flow.  Discounted cash flow is calculated by estimating future cash flow streams, applying appropriate discount rates to determine the present values of the cash flow streams, and then assessing the probability of the various cash flow scenarios.  The impairment is then recorded based on the excess of the carrying value of the asset over fair value.

              Changes in assumptions and estimates included within the impairment reviews could result in significantly different results than those discussed below in Results of Operations and recorded in the condensed consolidated financial statements.

              3.     Insurance Reserves.   Insurance liabilities and reserves are accounted for based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses for claims that have not yet been reported.  These estimates rely on actuarial calculations of ultimate loss experience for similar historical events and an estimate of incurred but not reported claims.  The Company’s insurance reserves totaled $7,698,000 at September 29, 2002.  Management continually

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evaluates the potential for changes in loss estimates, both positive and negative, and uses the results of these evaluations to adjust recorded provisions and reserves.

              4.     Divestment Reserves.   The Company makes decisions to close restaurants based on their cash flows and anticipated future profitability.  Losses on disposition of properties are recognized when a  commitment to divest a restaurant property is made by the Company and include estimated carrying costs through the expected disposal date.   This policy may change upon the adoption of Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) (see Recent Accounting Pronouncements).  These divestment charges represent a liability for the net present value of any remaining lease obligations, including executory costs, after the expected closure dates, net of estimated sublease income, if any.  These estimates of future costs often require significant judgments and estimates by management and could be materially affected by factors such as the Company’s ability to secure subleases and the Company’s success at negotiating early termination agreements with lessors.  While management believes the current estimates of future liabilities are adequate, it is possible that future events could require the Company to make significant adjustments for revisions to these estimates.

              As used herein, “comparable restaurants” means restaurants operated by the Company for at least eighteen months and that continued in operation through the end of the third quarter of 2002.

Liquidity and Capital Resources

              A.   Liquidity

              Cash needs are being funded by available cash balances and cash provided by operating activities and can be supplemented by borrowings under the Credit Facility (currently limited to $2.0 million of cash borrowings). As described below, the Company filed a Reorganization Case to confirm the Plan with the Bankruptcy Court.  The Plan was confirmed by the Bankruptcy Court on June 20, 2002 and consummated on July 2, 2002.  The Company’s continuing viability will be dependent upon its ability to generate sufficient operating cash flow or cash flow from other sources to meet its obligations on a timely basis and to comply with the terms of its new financing agreements or to be able to renegotiate such obligations and terms.

              Sales for comparable restaurants have declined in 2002 as compared to 2001 for each of the Company’s restaurant concepts.  In spite of this issue, the Company has reported an improvement in operating income (loss) and EBITDA during the first nine months of 2002 as compared to the same period for 2001 due to various reductions in costs.  If sales for comparable restaurants do not improve in the future, cost reductions may not be available to continue to offset the impact of declining sales and a reduction in operating cash flow could result.  This could cause a risk to the Company’s ability to comply with the terms of its financing agreements, including financial ratios.

              Statement of Cash Flows.  For the nine months ended September 29, 2002, net cash provided by operating activities was $1.1 million compared to $7.2 million used in operating activities for the same period in 2001.  This $8.3 million change was primarily due to the $8.4 million increase in cash received from customers, franchisees and licensees net of cash paid to suppliers and employers.  For the first nine months of 2002, net cash provided by investing activities was $8.4 million compared to $18.0 million

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used in investing activities for the same period in 2001.  This $26.4 million change was primarily due to a $2.2 million decrease in capital expenditures and a $22.4 million change in restricted cash activity (net cash collateral increase of $9.4 million in 2001 and net cash collateral and escrow release of $12.9 million in 2002). For the first nine months of 2002, net cash used in financing activities was $31.6 million compared to $1.1 million used in financing activities for the same period in 2001.  This change was primarily due to the payment of $30.0 million to the holders of the Old FRI-MRD Notes in accordance with the Plan.

              EBITDA.  For the first nine months of 2002, the Company reported EBITDA (defined as earnings (loss) before opening costs, gain (loss) on disposition of properties, provision for divestitures and write-down of long-lived assets, restructuring costs, reorganization items, interest, taxes, depreciation and amortization) of $10.0 million, compared to $1.8 million in the same period of 2001. The $8.3 million increase was primarily composed of (i) a $4.0 million increase in the EBITDA attributable to the Chi-Chi’s restaurants; (ii) a $1.8 million increase in the EBITDA attributable to the Koo Koo Roo restaurants; (iii) a $535,000 decrease in the EBITDA attributable to the Hamburger Hamlet Chain; and (iv) $3.0 million of previously unallocated general and administrative expenses that have been eliminated.

              The Company has included information concerning EBITDA herein because it understands that such information is used by certain investors as one measure of an issuer’s historical ability to service debt.  EBITDA should not be considered an alternative to, or more meaningful than, operating income (loss) as an indicator of operating performance or cash flows from operating activities as a measure of liquidity.  Furthermore, other companies may compute EBITDA differently, and therefore, EBITDA amounts among companies may not be comparable.

              Working Capital Deficiency.  The Company normally operates with a working capital deficiency because:

              The Company had a working capital deficiency of $17.4 million on September 29, 2002.  This amount is net of property held for sale of approximately $14.8 million.

              The following represents a list of the Company’s contractual obligations and commitments, including interest on the Notes that is payable-in-kind at the Company’s option ($ in thousands):

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