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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission file number 33-14051

Securities registered pursuant to Section 12(b) of the Act:  None.
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 Par Value.

Indicate by a 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 the filing requirements for at least the past 90 days.

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

 Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of March 21, 2003 was approximately $304,000.  All directors, officers and more than 10% stockholders of registrant are deemed affiliates of registrant for the purpose of calculating such aggregate market value.  The registrant, however, does not represent that such persons, or any of them, would be deemed “affiliates” of the registrant for any other purpose under the Securities Exchange Act of 1934 or the Securities Act of 1933.

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 March 21, 2003, the registrant had issued and outstanding 5,000,000 shares of common stock, $.01 par value per share.

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PRANDIUM, INC.

FORM 10-K

For the Fiscal Year Ended December 29, 2002

INDEX

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PRANDIUM, INC.

PART I

Background

          Prandium, Inc., (“Prandium”) formerly known as Koo Koo Roo Enterprises, Inc. and as Family Restaurants, Inc. (together with its subsidiaries, the “Company”), was incorporated in Delaware in 1986.  The Company is primarily engaged in the operation of restaurants in the full-service and fast-casual segments.  Information relating to periods ending prior to October 30, 1998 included in this report relates to the historical operations of Family Restaurants, Inc. and, except as otherwise indicated, does not reflect the operations of Koo Koo Roo, Inc., a Delaware corporation (“KKR”) and KKR’s previously wholly owned subsidiary The Hamlet Group, Inc., a California corporation (“Hamlet”), both of which the Company acquired on October 30, 1998.  At December 29, 2002, the Company operated 172 restaurants in 21 states, approximately 66% of which are located in California, Ohio, Pennsylvania, Michigan and Indiana, and franchised and licensed 8 restaurants outside the United States.

          This report covers the Company’s fiscal years ended December 31, 2000, December 30, 2001 and December 29, 2002.  The Company’s fiscal year consists of 52 or 53 weeks and ends on the last Sunday in December each year.  The fiscal years 2001 and 2002 contained 52 weeks, and fiscal year 2000 contained 53 weeks.  The Company’s fiscal quarters typically consist of 13 weeks.

Reorganization Plan, Subsequent Events and Going Concern

          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 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

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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 all 5,000,000 shares of the new common stock of Prandium, and stock options to purchase up to an additional 444,070 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 initially 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 a 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 March 21, 2003, 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.

          The Company has experienced comparable restaurant sales declines in each of its concepts since the Closing Date.  These sales declines have resulted in operating performance that is significantly lower than projections included as part of the Plan. As a result of this operating performance, the Company has supplemented its cash flow from operations with borrowings under the Credit Facility.  The sales declines and depressed operating performance have continued into the first quarter of 2003.  Should the Company’s operating results not improve and the Company be unable to meet its financial covenants or, if necessary, obtain waivers or amendments to the Credit Facility, the Company’s financial condition and results of operations could be materially adversely affected.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.

          On December 30, 2002, Mr. Kevin S. Relyea, the Company’s Chairman, Chief Executive Officer and President, resigned all his positions with the Company.

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          In response to the Company’s financial condition and results of operations, on February 26, 2003, the Company appointed two members of the turnaround firm, Alvarez & Marsal, Inc. (“A&M”), to key management positions.  The Company appointed Hugh G. Hilton to the position of Interim Chief Executive Officer and President and Timothy Matthew Klein to the position of Interim Chief Operating Officer.

          The Company entered into an agreement (the “Services Agreement”) on February 26, 2003 with A&M regarding the provision of interim management services by Messrs. Hilton and Klein (the “Officers”) to the Company and its board of directors.  Under the terms of the Services Agreement, A&M will make available to the Company the services of the Officers and one additional professional to assist in the performance of services by the Officers.  It is anticipated that the Officers’ activities in connection with the Services Agreement will include the following (i) identification and execution of cost reduction and operational improvement opportunities; (ii) identification and execution of revenue improvement opportunities; (iii) development and implementation of both short-term turnaround and long-term stabilization and growth strategies for the Company’s restaurant concepts; and (iv) leadership in other strategic alternatives.  The Services Agreement will continue until terminated and may be terminated by either party upon 30 days written notice to the other party. The Officers are employees of A&M, will remain employees of A&M during the time that they act as officers of the Company, and A&M will be responsible for the Officers’ compensation and employee benefits during the term of the Services Agreement.  A&M will be compensated for the services of the Officers partially in cash and partially in shares of a new series of preferred stock to be issued by the Company. During the term of the Services Agreement, the Company will pay A&M a fixed monthly fee of $165,000, subject to annual adjustment, and will reimburse A&M for reasonable out-of-pocket expenses.  Subject to certain conditions, the Company will also issue to A&M up to 213,000 shares of a new series of preferred stock (the “Shares”).  The Shares shall be payable as follows:  200,000 Shares on March 1, 2004 and 13,000 Shares on June 1, 2004.   All or a portion of the Shares may be issued to A&M earlier upon the occurrence of certain events set forth in the Services Agreement.  Each Share will be convertible into 10 shares of the Company’s common stock, will have piggyback registration rights and will not be entitled to receive dividends.  Each of the Shares will have one vote, voting together with the common stock as a single class.  The Shares will have a standard non-participating liquidation preference upon liquidation of the Company’s assets or a sale of the Company.

          On March 6, 2003, as one of the first initiatives under the A&M engagement, 30 divisional and corporate support positions were eliminated.  These eliminations included several executive positions.

          The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its financing agreements and ultimately to attain profitable operations.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Liquidity and Capital Resources – Liquidity.

Sale of the Hamburger Hamlet Chain

          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

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in accordance with its terms. The purchaser under the Hamlet Agreement provided the Company notice that it did not believe that the Company’s termination notice was effective. The Company and the purchaser have continued to discuss the matter, including the negotiation of a potential new transaction with a subsidiary of the purchaser, but the parties have not been able to reach acceptable terms and no other action has been taken by either side and no new written agreement to sell the Hamburger Hamlet Chain to any party exists. 

          As called for in the Note Agreement, the proceeds of any sale of the Hamburger Hamlet Chain would be used to prepay the Notes in accordance with the terms of the Note Agreement.

          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.

Change of Control

          On December 29, 2000, Mr. Relyea acquired approximately 53.1% of the Company’s outstanding capital stock.  Mr. Relyea purchased 95,831,997 outstanding shares of common stock held by AIF II, L.P. for an aggregate consideration of $15,000 in cash.  After giving effect to the acquisition, Mr. Relyea owned approximately 53.7% of the outstanding capital stock of the Company.  Prior to effecting the acquisition, Foothill granted a waiver under the change of control provisions of the Old Credit Facility.  Mr. Relyea’s purchase did not trigger the change of control provisions of the Prandium Notes or the Old FRI-MRD Notes.  On January 26, 2001, a stockholder of the Company initiated a stockholder derivative suit arising out of Mr. Relyea’s purchase of the common stock.  In accordance with a Court approved settlement of this matter, the block of stock purchased by Mr. Relyea, together with the remainder of Prandium’s old common stock was canceled without consideration on July 2, 2002 pursuant to the Plan.  The cost of settlement was covered by insurance. 

Sale of El Torito Division

          On June 28, 2000, the Company completed the sale of its El Torito restaurant division (the “El Torito Sale”) in a transaction with an adjusted enterprise value of approximately $129.5 million.  As a result of the El Torito Sale, the Company received, after a $0.7 million post-closing adjustment based on a closing balance sheet, $128.8 million, consisting of $114.0 million in cash, the assumption of $9.8 million of long-term debt, consisting primarily of capitalized lease obligations, and $5.0 million initially deposited in escrow and subsequently released.  The Company recorded a pretax gain of $60.7 million in fiscal 2000 as a result of this transaction.  A portion of the net cash proceeds was used to pay indebtedness outstanding under the Old Credit Facility of $25.9 million. See “–– Sale of El Torito Division on June 28, 2000.”

1998 Merger

          On October 30, 1998, the Company acquired KKR by merger (the “Merger”).  In connection with the Merger, FRI-MRD issued $24 million aggregate face amount of the 14% FRI-MRD Notes for net proceeds of $21.7 million. The proceeds from the sale of the 14% FRI-MRD Notes were used to acquire all of the outstanding capital stock of Hamlet from KKR immediately prior to the

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consummation of the Merger (the “Hamlet Acquisition”). The Merger and the Hamlet Acquisition were accounted for as a purchase. Accordingly, the results of operations and financial position of KKR (including Hamlet) were combined with the results of operations and financial position of the Company’s operations from October 30, 1998 forward. 

          After completion of the Merger, confusion between the Company’s prior name, Koo Koo Roo Enterprises, Inc., and the Koo Koo Roo restaurant concept led to numerous misunderstandings within the restaurant industry and among the Company’s stockholders, vendors and other audiences. As a result, the Company adopted its current name in April 1999.

Restaurant Operations

          The Company operated 172 restaurants primarily under the Chi-Chi’s, Koo Koo Roo and Hamburger Hamlet concepts at December 29, 2002.  The Chi-Chi’s restaurants serve moderately priced, high-quality Mexican food and a wide selection of alcoholic and non-alcoholic beverages. Koo Koo Roo restaurants are in the growing restaurant category of fast-casual restaurants that serve meals with the convenience and value associated with quick service, but the quality, freshness and variety associated with casual, full-service dining restaurants.  The Hamburger Hamlet restaurants are full-service casual dining restaurants offering an extensive variety of distinctive products.

          The average food check per person for Chi-Chi’s and Hamburger Hamlet (excluding alcoholic beverage sales) for 2002 was as follows:

The average transaction charge for Koo Koo Roo for 2002 was $  10.01.

          Chi-Chi’s restaurants generally contain from 5,000 to 10,600 square feet of floor space and accommodate approximately 200 to 400 guests in the restaurant and lounge. The Chi-Chi’s restaurants are typically located in freestanding buildings in densely populated suburban areas, and the Company believes their festive atmosphere and moderate prices are especially appealing to family clientele.  Koo Koo Roo restaurants generally contain from 2,700 to 3,100 square feet of floor space and accommodate approximately 75 to 85 guests.  Hamburger Hamlet restaurants generally contain from 5,500 to 10,000 square feet of floor space and accommodate approximately 165 to 290 guests in the restaurant and lounge.

Site Selection

          The selection of sites for any future new restaurants will be the responsibility of the senior management of Chi-Chi’s, Inc. (“Chi-Chi’s”) and KKR.  Typically, potential sites are brought to the attention of the Company by real estate brokers and developers familiar with the Company’s needs. Sites are evaluated on the basis of a variety of factors, including demographic data, land use and environmental restrictions, competition in the area, ease of access, visibility, availability of parking and proximity to a major traffic generator such as a shopping mall, office complex, stadium or university.

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Employees

          At December 29, 2002, the Company had a total of 8,167 employees, of whom 7,475 were restaurant employees, 535 were field management and 157 were corporate personnel. Employees are paid on an hourly basis, except restaurant managers, corporate and field management and certain administrative personnel.  Restaurant employees include a mix of full-time and part-time, mostly hourly personnel, enabling the Company to provide services necessary during hours of restaurant operations.  The Company has not experienced any significant work stoppages and believes its labor relations are good.

Competition

          The restaurant business is highly competitive and is affected by changes in the public’s eating habits and preferences, population trends and traffic patterns and local and national economic conditions affecting consumer spending habits.  Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, attractiveness of facilities, advertising, name identification and restaurant location.  Each of the Company’s restaurants competes directly or indirectly with locally-owned restaurants, as well as with restaurants with national or regional images, many of which have greater financial, marketing, personnel and other resources than the Company.  The Company is required to respond to various factors affecting the restaurant industry, including changes in consumer preferences, tastes and eating habits, demographic trends and traffic patterns, increases in food and labor costs, competitive pricing and national, regional and local economic conditions.  The failure to compete successfully could have a material adverse effect on the Company’s financial condition and results of operations.

          The Company’s Chi-Chi’s restaurants have encountered increased competition in recent years from new Mexican full-service restaurants, emerging Mexican fast-casual restaurants and from restaurants offering Mexican food products as part of an overall casual dining concept.

          Koo Koo Roo restaurants operate in the fast-casual segment and compete with restaurants in the quick-service segment, both of which are highly competitive with respect to price, service and location.  In addition, the quick-service segment is characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. In recent years, numerous competitors, including those in the casual dining, fast-casual and quick-service segments have introduced products, including products featuring chicken, that were developed to capitalize on growing consumer preference for food products that are, or are perceived to be, more healthful, nutritious, lower in calories and lower in fat content.  Management believes that Koo Koo Roo will be subject to increased competition from companies whose products or marketing strategies address these consumer preferences. 

Government Regulation

          Each of the Company’s restaurants is subject to federal, state and local laws and regulations governing health, sanitation, environmental matters, safety, the sale of alcoholic beverages and regulations regarding hiring and employment practices.  The Company believes it has all licenses and

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approvals material to the operation of its business, and that its operations are in material compliance with applicable laws and regulations.

          The Company is subject to federal and state laws governing matters such as minimum wages, overtime and other working conditions.  Approximately 44% of the Company’s employees are paid at rates related to the minimum wage.  Therefore, increases in the minimum wage or decreases in the allowable tip credit (tip credits reduce the minimum wage that must be paid to tipped employees in certain states) increase the Company’s labor costs.  This is especially true in California, where there is no tip credit.  The federal minimum wage is $5.15. In California, the state’s minimum wage was increased to $6.75 on January 1, 2002. No increases to the $5.15 federal minimum wage are currently scheduled for 2003.  In response to previous minimum wage increases, the Company has implemented various menu price increases.  An increase in the minimum wage that the Company could not completely recover from customers by raising prices could have a material adverse effect on the Company’s results of operations and financial position.

          The Company is also subject to both Federal and state regulations governing disabled persons’ access to its restaurant facilities, including the Americans with Disabilities Act (“ADA”), which became effective in January 1992.  If the ADA were interpreted to require a higher degree of accessibility for disabled persons than presently established, it could have a significant economic impact on the Company, inasmuch as such interpretation could require the Company, and the restaurant industry as a whole, to make substantial modifications to its restaurant facilities.

          Currently, the Company franchises and licenses 8 Chi-Chi’s restaurants internationally.  See “--Franchised and Licensed Restaurants.”  The Company believes the franchised restaurants are operating in material compliance with applicable laws and regulations governing such operations.

Trademarks and Service Marks

          The Company regards its trademarks and service marks as important to the identification of its restaurants and believes that they have significant value in the conduct of its business.  The Company has registered various trademarks and service marks with the United States Patent and Trademark Office.  In addition to its federal registrations, certain trademarks and service marks have been registered in various states and selected international markets in which the Company operates restaurants.  Also, many of the Company’s menus, training manuals, web sites and other printed manuals utilized in conjunction with its business are copyrighted.

Franchised and Licensed Restaurants

          On October 15, 1997, Chi-Chi’s entered into a binding term sheet agreement with its licensee, Chi-Chi’s International Operations, Inc. (“CCIO”), whereby the parties agreed to resolve various ongoing disputes.  Under the general provisions of the term sheet, (i) the rights to develop Chi-Chi’s restaurants throughout the world, except in areas of currently existing Chi-Chi’s franchises, were transferred back to Chi-Chi’s; (ii) CCIO must operate the existing international Chi-Chi’s restaurants for Chi-Chi’s in exchange for a fee equal to all royalties and fees payable from the international franchisees and licensees; (iii) CCIO has the right to convert existing international Chi-Chi’s restaurants to other concepts; and (iv) under certain conditions, Chi-Chi’s has the option to purchase

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CCIO’s rights under the management arrangement. As a result of the term sheet, Chi-Chi’s will not receive any royalties or license fees from CCIO or the currently existing international Chi-Chi’s restaurant operations until Chi-Chi’s exercises its option to purchase the management agreement with CCIO.

          As described above, under existing license and other franchise agreements, 8 Chi-Chi’s restaurants are operated in international markets.  There were no franchise and license fees paid to the Company for the years ended December 29, 2002 and December 30, 2001. This compares to $101,000 for the year ended December 31, 2000, which was entirely related to franchisees of the El Torito Division prior to its sale.

Sale of El Torito Division on June 28, 2000

          On June 28, 2000, the Company completed the El Torito Sale in a transaction with an adjusted enterprise value of approximately $129.5 million.  At June 28, 2000, the El Torito Division operated 97 full-service restaurants and four fast-casual restaurants in eleven states and franchised and licensed eleven restaurants outside the United States. All but two full-service restaurants and none of the four fast-casual restaurants were included in the El Torito Sale.  As a result of the El Torito Sale, the Company received, after a $0.7 million post-closing adjustment based on a closing balance sheet, $128.8 million, consisting of $114.0 million in cash, the assumption of $9.8 million of long-term debt, consisting primarily of capitalized lease obligations, and $5.0 million initially deposited in escrow and subsequently released.  The Company recorded a pretax gain of $60.7 million in fiscal 2000 as a result of this transaction.  A portion of the net cash proceeds was used to pay indebtedness outstanding under the Old Credit Facility of $25.9 million. In connection with the El Torito Sale, the Company and FRI-MRD have agreed, subject to certain limitations, to indemnify the buyer against certain losses if they occur, primarily related to events prior to the closing.  The buyer has agreed to indemnify the Company, with certain exceptions, for certain events occurring after the closing.

          The 95 full-service El Torito Division restaurants that were sold generated sales of $112,409,000 and operating income of $5,411,000 for the six months and two days ended June 27, 2000 (through the date of sale).  Such operating income included charges for allocated corporate general and administrative expenses of $2,889,000 for the six months and two days ended June 27, 2000.

          See Note 19 to the Company’s consolidated financial statements for financial disclosure relating to the Company’s operating segments.

Certain Risk Factors

The Company Has Substantial Leverage

          The Company currently has a significant amount of indebtedness, although reduced as a result of the Reorganization Case. The following chart shows certain important credit statistics as of the dates specified below:

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This substantial indebtedness has important consequences.  For example, it:

          Failure to comply with certain covenants in the Company’s debt instruments could result in an event of default which, if not cured or waived, could have a material adverse effect on the Company.

The Company May Not Be Able to Service Debt

          The Company’s ability to make payments on and to refinance its indebtedness and to fund planned capital expenditures will depend on its ability to generate cash in the future.  This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the Company’s control.

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          The Company can give no assurance that its business will generate sufficient cash flow from operations, that operating improvements will be realized or that future borrowings will be available in an amount sufficient to enable the Company to pay its indebtedness or to fund other liquidity needs.  If the Company is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required, among other things, to seek additional financing in the debt or equity markets, to refinance or restructure all or a portion of its indebtedness, to sell selected assets or to reduce or delay planned capital expenditures.  Such measures may not be sufficient for the Company to service its debt.  In addition, there can be no assurance that any such financing, refinancing or sale of assets will be available on commercially reasonable terms or at all.  See MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Liquidity and Capital Resources—Liquidity.”

The Company Has a History of Losses

          For the six months ended December 29, 2002 and June 30, 2002 and the years ended December 30, 2001 and December 31, 2000, the Company recorded net income (losses) of $(6.2) million, $184.9 million (including gain on extinguishment of debt of $191.4 million and reorganization items of $9.2 million), $(63.3) million and $(41.8) million, respectively.  For the same periods, the Company recorded operating losses of $3.3 million, $5.0 million, $ 34.7 million and $71.0 million, respectively. Although the Plan eliminated significant interest costs in the future and other strategic initiatives could result in improvements to operations, there can be no assurance that the Company will achieve profitable operations in the future.

The Company May Not Be Able to Sell the Hamburger Hamlet Chain

          The sale of the Hamburger Hamlet Chain still remains part of the Company’s capital restructuring strategy, and, therefore, the Company must find an acceptable purchaser.  There can be no guarantee that the Company will be able to sell the Hamburger Hamlet Chain on acceptable terms.

The Company May Not Be Able to Implement Future Growth and Financing Initiatives

          After development and implementation of short-term turnaround strategies and long-term stabilization strategies, the Company anticipates that its future business strategy will include improving existing Chi-Chi’s and Koo Koo Roo restaurants and potentially developing new restaurants, which may include future development, construction and renovation projects.  The extent and timing of any such projects will depend upon various factors, including available cash flow, restrictions under the Company’s debt instruments, the ability to obtain additional financing (including landlord contributions) and the availability of suitable locations, many of which are beyond the Company’s control.  In addition, the Company is subject to the risks inherent in any development activity, including, but not limited to, disruption of existing operations, delays in receipt of permits, licenses or other regulatory approvals, shortages of materials or skilled labor, work stoppages, and weather interferences, any of which could delay development or result in substantial cost increases.

The Company May Lose Key Personnel

          The Company’s success depends to a significant extent on retaining the services of its executive officers.  The Company does not maintain key man insurance.  The loss of the services of

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key employees (whether such loss is through resignation or other causes) or the inability to attract additional qualified personnel could have an adverse effect on the Company’s financial condition and results of operations.

The Company’s Independent Auditors Have Expressed Substantial Doubt About the Company’s Ability to Continue as a Going Concern

          The report of the Company’s independent auditors on the attached consolidated financial statements includes an explanatory paragraph stating that the Company’s comparable restaurant sales declines since the Closing Date, which have resulted in operating performance that is significantly lower than projected, among other circumstances, raise substantial doubt as to the Company’s ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. See Note 2 to the Company’s consolidated financial statements for a discussion of going concern matters.

Forward Looking Statements

          This document includes “forward looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act including, in particular, statements about the Company’s plans, strategies, and prospects.  When used in this document and the documents incorporated herein by reference, the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions are intended to identify in certain circumstances, forward looking statements.  Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward looking statements are reasonable, it can give no assurance that such plans, intentions or expectations will be achieved.  Important factors that could cause actual results to differ materially from the forward looking statements made in this document are set forth above and elsewhere in this document.  Given these uncertainties, the Company cautions against undue reliance on such statements or projections.  The Company does not undertake any obligation to update these forward looking statements or projections.  All forward looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the preceding cautionary statements.  See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.”

          Of the 172 restaurants operated by the Company as of December 29, 2002, the Company owned the land and buildings for 19, owned the buildings and leased the land for 41 and leased both land and buildings for the remaining 112 restaurants.  The full-service restaurants are primarily free-standing units ranging from approximately 5,000 to 10,600 square feet.  KKR restaurants generally approximate 2,700 to 3,100 square feet.  Most of the leases provide for the payment of a base rental or approximately 5% to 6% of gross sales, whichever is greater, plus real estate taxes, insurance and other expenses.

          The leases (assuming exercise of all options) have terms expiring as follows:

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          In addition, the Company owns a 43,120 square-foot building in Irvine, California which houses support personnel for the Company. Adjacent to this building, the Company completed construction in 2000 of a 4,000 square-foot research and development facility which houses the Company’s test kitchen and a quality assurance testing facility.  The Company also leases (i) 11,000 square feet of space in a building in Louisville, Kentucky which houses certain Chi-Chi’s support functions and (ii) various other smaller offices and warehouses.

          Substantially all of the Company’s assets are encumbered under the Credit Facility (other than Hamburger Hamlet’s capital stock).

          Approximately 23% of the Company’s restaurants are located in California.  Revenues are dependent on discretionary spending by consumers, particularly by consumers living in the communities in which the restaurants are located.  A significant weakening in any of the local economies in which the restaurants operate (particularly California) may cause the residents of such communities to curtail discretionary spending which, in turn, could have a material effect on the results of operations and financial position of the entire Company. The Company’s geographic concentration of restaurants could have a material adverse effect on its financial condition and results of operations.  The following table details the Company-operated restaurants by state of operation as of December 29, 2002:

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          Not including restaurants sold as part of an operating division, during the past five years the Company has divested more than 80 restaurants, and the Company currently has a substantial portfolio of closed, subleased and assigned properties.  Because the ability of any particular acquiror to satisfy its obligations under any subleased or assigned lease depends on its ability to generate sufficient revenues in the acquired restaurant, there can be no assurance that the Company will not incur significant and unplanned costs in connection with such leases.  It is expected that ongoing divestment activities will add to this portfolio of closed, subleased and assigned properties.  From time to time, the Company has been required to reassume leases associated with these properties, but it has generally been able to relet them within a reasonable period of time.  As of December 29, 2002, the Company was attempting to lease six closed properties with an annual carrying cost of $1.0 million.  The failure to relet such properties on favorable economic terms, or at all, or increases in the carrying costs associated with such leases, could have a material adverse effect on the Company’s financial condition and results of operations.

          See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Restructuring – 1.  Reorganization Plan” for a discussion of the Reorganization Case. 

          The Company is involved in various other litigation matters incidental to its business.  The Company does not believe that any of the claims or actions filed against it will have a material adverse effect upon the consolidated financial position or results of operations of the Company.

          None.

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PART II

          From September 15, 1986 (date of incorporation) through October 30, 1998, there was no established public trading market for the Company’s common stock.  Commencing November 2, 1998 with the consummation of the Merger, and continuing until February 1, 1999, the Company’s common stock traded in, and was listed for quotation through, the National Association of Securities Dealers Automated Quotation System (“Nasdaq”) National Market.  On February 2, 1999, the Company’s common stock began trading in the NASD Over-the-Counter Bulletin Board Market. On July 2, 2002, the Company’s common stock and trading symbols (PDIM and PDIMQ) were canceled and delisted as part of the Reorganization Case.  Beginning July 17, 2002, the Company’s new common stock has traded under the symbols PRDMV and PRDM on the NASD Over-the-Counter Bulletin Board Market.

          The following table sets forth for the periods identified the high and low closing price of the Company’s common stock, as reported by the Over-the-Counter Bulletin Board Market. 

          At March 21, 2003, there were 26 stockholders of record of the Company’s new common stock.

          The Company has not paid cash dividends to holders of the Company’s common stock since its incorporation.  The Company has retained, and expects to continue to retain, all available earnings, if any, generated by its operations for the maintenance, development and growth of its business, and does not anticipate paying dividends on the Company’s common stock in the foreseeable future.  In addition, each of (i) the note agreement governing the Notes and (ii) the Credit Facility, restricts or prohibits the Company’s ability to pay dividends.

Recent Sales of Unregistered Securities

          In connection with the Plan consummated on July 2, 2002, the 9 3/4% Prandium Notes were cancelled in exchange for all 5,000,000 shares of the new common stock of the Company.  The shares

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of the Company’s new common stock were issued pro rata to the holders of the 9 3/4% Prandium Notes without registration pursuant to Section 3(a)(9) of the Securities Act of 1933 and Section 1145(a) of the United States Bankruptcy Code.  The Company had no contract, arrangement or understanding relating to, and did not, directly or indirectly, pay any commission or other remuneration to any broker, dealer, salesperson, agent or any other persons for soliciting votes to exchange or reject the Plan or for soliciting any exchange of the 9 3/4% Prandium Notes.

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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.

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 consolidated financial statements.  (These accounting policies are also discussed in the notes to the consolidated financial statements.)

          Fresh Start Reporting.  As a result of the confirmation of the Plan and pursuant to the American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting by Entities in Reorganization,” the Company qualified for fresh start reporting as of July 2, 2002.  Under fresh start reporting, all assets and liabilities were 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 generated different results from those reflected in the 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.

          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

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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 consolidated financial statements.

          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 which claims 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 $7,532,000 at December 29, 2002.  Management continually 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.

          Divestment Reserves.  The Company makes decisions to close restaurants based on their cash flows and anticipated future profitability.  Prior to the adoption of FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), losses on disposition of properties were recognized when a commitment to divest a restaurant property is made by the Company and include estimated carrying costs through the expected disposal date.   As a result of the adoption of SFAS 146, future losses on disposition of properties will be recognized when incurred. 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.

Liquidity and Capital Resources

          Liquidity

          Cash needs are being funded by available cash balances and cash provided by operating activities, supplemented by borrowings under the Credit Facility (limited to $3.0 million of cash borrowings at March 21, 2003).  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 has experienced comparable restaurant sales declines in each of its concepts since the Closing Date.  These sales declines have resulted in operating performance that is significantly lower than projections included as part of the Plan. As a result of this operating performance, the Company has supplemented its cash flow from operations with borrowings under the Credit Facility.  The sales declines and depressed operating performance have continued into the first quarter of 2003.  Should the Company’s operating results not improve and the Company be

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unable to meet its financial covenants or, if necessary, obtain waivers or amendments to the Credit Facility, the Company’s financial condition and results of operations could be materially adversely affected.  These matters raise substantial doubt about the Company’s ability to continue as a going concern.

          Statement of Cash Flows.  For the year ended December 29, 2002, net cash provided by operating activities was $3.6 million compared to $8.7 million used in operating activities for the year ended December 30, 2001.  This $12.3 million change was due to the $11.5 million increase in cash received from customers, franchisees and licensees net of cash paid to suppliers and employees and a $1.2 million reduction in restructuring costs and reorganization items paid.  For 2002, net cash provided by investing activities was $6.3 million as compared to $14.7 million used in investing activities in 2001.  This $21.0 million change was due to a $3.3 million decrease in capital expenditures and a $20.8 million change in restricted cash activity (net cash collateral increase of $7.9 million in 2001 and net cash collateral and escrow release of $12.9 million in 2002), partially offset by a $3.2 million reduction in proceeds from disposal of property and equipment.  For 2002, net cash used in financing activities was $31.3 million compared to $2.1 million used in financing activities 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.

          For the year ended December 30, 2001, net cash used in operating activities was $8.7 million compared to $17.8 million for the year ended December 31, 2000.  Interest paid decreased by $30.3 million from 2000 to 2001 due to the failure to make the interest payments on the Prandium Notes and the Old FRI-MRD Notes.  This change was partially offset by a $18.1 million decrease in cash received from customers, franchisees and licensees as compared to cash paid to suppliers and employees from 2000 to 2001 and $3.7 million in restructuring costs.  For 2001, net cash used in investing activities was $14.7 million as compared to net cash provided by investing activities of $89.6 million in 2000. This change was primarily due to net proceeds received from the El Torito Sale of $111.7 million in 2000 along with an increase in restricted cash of $7.9 million, partially offset by a reduction in capital expenditures of $10.1 million.  For 2001, net cash used in financing activities was $2.1 million compared to $22.0 million used in financing activities in 2000, including $21.9 million in repaid working capital borrowings.

          EBITDA.  For the year ended December 29, 2002, the Company reported EBITDA (defined as earnings (loss) before opening costs, loss on disposition of properties, gain on sale of division, provision for divestitures and write-down of long-lived assets, restructuring costs, reorganization items, interest, taxes, depreciation and amortization and gain on extinguishment of debt) of $12.7 million, compared to $3.4 million for 2001. See calculations in Item 6, "Selected Financial Data." The increase in EBITDA of $9.3 million was primarily the result of:  (i) a $4.4 million increase in the EBITDA attributable to the Chi-Chi’s restaurants; (ii) a $1.7 million increase in the EBITDA attributable to the Koo Koo Roo restaurants; (iii) an $836,000 decrease in the EBITDA attributable to the Hamburger Hamlet Chain; and (iv) $4.0 million of previously unallocated general and administration 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 as an alternative to, or more meaningful than, operating income (loss) as an indicator of operating performance or to cash flows from operating

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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 substantial working capital deficiency because:

          The Company had a working capital deficiency of $18.9 million on December 29, 2002. This amount includes property held for sale of approximately $11.9 million.

          The following represents a comprehensive list of the Company’s contractual obligations and commitments ($ in thousands):

          The Company currently has a substantial portfolio of subleased and assigned properties.  Because the ability of any particular sub-lessee or assignee to satisfy its obligations under any subleased or assigned lease depends on its ability to generate sufficient revenues in the acquired restaurant, there can be no assurance that the Company will not incur significant and unplanned costs in connection with such leases.  The Company’s maximum theoretical future exposure at December 29, 2002, computed as the sum of all remaining lease payments through the expiration dates of the respective leases, was $51,514,000.  Approximately $24,639,000 of this amount, related to subleased properties, is included in the $114,686,000 of total operating lease payments in the preceding table of payments due by period.  The remaining $26,875,000 of this amount is for assigned properties.  The maximum theoretical future exposure does not take into consideration any mitigating measures the Company could take to reduce this exposure in the event of default, including re-leasing the locations, or terminating the lease by negotiating a lump sum payment to the landlord less than the sum of all remaining future rents.

          On July 2, 2002, Prandium, FRI-MRD, Chi-Chi’s, KKR, and certain of their subsidiaries

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became guarantors of the Credit Facility with Foothill. The term of the guarantee is four years.  However, the Credit Facility is subject to early termination on January 1, 2005 if, on or before January 1, 2005, the maturity date of the Notes has not been extended to October 2, 2006 or later.  The maximum potential amount of future payment the guarantors could be required to make under the guarantee is $15,000,000, assuming that the Company borrowed the full amounts available under the revolver and letter of credit components of the Credit Facility.  At March 21, 2003, approximately $9.8 million of letters of credit and $1 million of working capital borrowings were outstanding under the Credit Facility.

          In addition, Chi-Chi’s, is a guarantor on six operating leases for Chi-Chi’s restaurants operated by various subsidiaries of Chi-Chi’s.  FRI-MRD and KKR are guarantors on operating leases for seven restaurants and one restaurant, respectively, which have been subleased to other parties. The terms of these guarantees run through the lease term for each property.  The maximum potential aggregate amount of future payment that could be required to be made under these guarantees is $3,757,000. Of this amount, $1,757,000 is included in the $51,514,000 of maximum theoretical future exposure noted above and $1,979,000 is included in the $114,686,000 of total operating lease payments in the table of payments due by period above.

          Debt Restructuring. 

          1.     Reorganization Plan.     On May 6, 2002, following receipt of sufficient votes from their debtholders approving the Plan, Prandium and FRI-MRD filed the joint Reorganization Case seeking confirmation of the Plan with the Bankruptcy Court. The Bankruptcy Court subsequently confirmed the Plan on June 20, 2002.  The Plan’s Closing was on July 2, 2002 when all material conditions to the Plan, including entering into the Credit Facility with Foothill, were completed.

          Under the Plan, the 14% FRI-MRD Notes were exchanged at a discount for $18 million in cash, and the 15% FRI-MRD Notes were exchanged at a discount for a combination of $12 million in cash and Notes with an initial face value of $59 million having substantially similar terms as the 15% FRI-MRD Notes except that the replacement 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 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 will be 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, the 9 3/4% Prandium Notes were cancelled in exchange for all 5,000,000 shares of the new common stock of Prandium, and stock options to purchase up to an additional 444,070 shares at an exercise price of $1.90 per share were granted to certain members of management.  The 10 7/8% Prandium Notes were cancelled without receiving any consideration. The old common stock of Prandium was also cancelled without receiving any consideration.

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          In accordance with the Plan, at the Closing the Company, among other things, entered into the Note Agreement, revised Prandium’s charter and By-laws and the charter of FRI-MRD, entered into the Credit Facility with Foothill to replace the Old Credit Facility with Foothill, and initially designated four of Prandium’s five-member board of directors.  Under the Plan, the Representative has the right to initially designate one individual to a 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 March 21, 2003, 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.

          2.     Credit Facility.  On July 2, 2002, the Company entered into the four-year Credit Facility to provide for the ongoing working capital needs of the Company.  The Credit Facility includes anniversary fee provisions which call for payments of $150,000 at the first year anniversary, $300,000 at the second year anniversary and $450,000 at the third year anniversary, respectively.  In addition, the Credit Facility is subject to early termination on January 1, 2005 if, on or before January 1, 2005, the maturity date of the Notes (or any refinancing of the Notes) has not been extended to October 2, 2006 or later.  The Credit Facility replaces the Old Credit Facility and provides for up to $4 million in revolving cash borrowings and up to $15 million in letters of credit (less the outstanding amount of revolving cash balances). As of March 21, 2003, the Credit Facility includes a $1 million reserve against both the revolving cash borrowings and letter of credit limits that prohibits the Company from borrowing the full amounts available under the revolver and letter of credit components of the Credit Facility. The $1 million reserve is to be released at the 270-day anniversary of the Closing Date. In addition, any borrowings are subject to restrictions based on a borrowing base calculation in the Credit Facility.  The Credit Facility is secured by substantially all of the real and personal property of the Company and contains customary restrictive covenants, including the maintenance of certain financial ratios.  Among other things, the covenants restrict the Company’s ability to incur debt, pay dividends on or redeem capital stock, make certain types of investments, make dispositions of assets and engage in mergers and consolidations.  In addition, a change in ownership of 30% or more of the Company’s common stock, with certain permitted exceptions, is prohibited.  The Company was in compliance with all financial ratios at December 29, 2002.

          Approximately $9.9 million of letters of credit were outstanding under the Credit Facility as of December 29, 2002 with approximately $9.8 million outstanding as of March 21, 2003.  Such outstanding letters of credit, in large part, provide security for future amounts payable under the Company’s workers’ compensation insurance program and under Kevin S. Relyea’s severance agreement.   Working capital borrowings of $1 million were outstanding under the Credit Facility as of December 29, 2002 and March 21, 2003.

          3.     FRI-MRD and Prandium Notes.  As described above, under the Plan, the 14% FRI-MRD Notes were exchanged at a discount for cash, and the 15% FRI-MRD Notes were exchanged at a discount for a combination of cash and Notes.  Also under the Plan, the 9 3/4% Prandium Notes

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were cancelled in exchange for 5,000,000 shares of the new common stock of Prandium, and the 10 7/8% Prandium Notes were cancelled without receiving any consideration.

          The Notes, among other things, (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 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.

          Sale of the Hamburger Hamlet Chain.  On May 10, 2002, the Company entered into 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 provided the Company notice that it did not believe that the Company’s termination notice was effective.  The Company and the purchaser have continued to discuss the matter, including the negotiation of a potential new transaction with a subsidiary of the purchaser, but the parties have not been able to reach acceptable terms and no other action has been taken by either side and no new written agreement to sell the Hamburger Hamlet Chain to any party exists.

          As called for in the Note Agreement, the proceeds of any sale of the Hamburger Hamlet Chain would 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 and contractual extra reductions, $566,000 for the second quarter of 2002, $425,000 for the third quarter of 2002 and $422,000 for the fourth quarter of 2002, was used to prepay $747,000, $551,000 and $531,000, 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.

          Other.  The State of Delaware sent the Company a notice dated July 29, 2002 that requested compliance with Delaware’s escheat (unclaimed property) laws.  The Company and certain of its subsidiaries have entered into voluntary disclosure agreements with Delaware which allowed the Company to file unclaimed property reports for the years 1991 through 1996, plus the current report for 1997, on March 1, 2003.  Reports for years prior to 1991 and any penalties and interest will be waived.  The Company paid approximately $340,000  in connection with those reports.  Additional amounts potentially due to other states by the Company or on behalf of certain divested businesses are accrued in the Company’s consolidated balance sheet.

Capital Resources

          Net cash provided by investing activities was $6.3 million for the year ended December 29, 2002, including $2.2 million used for capital expenditures, as compared to net cash used in investing activities of $14.7 million for fiscal 2001 and net cash provided by investing activities of $89.6 million

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for fiscal 2000. The change in net cash provided by (used in) investing activities for 2002 as compared to 2001 and 2000 was  primarily due to (i) a decrease in restricted cash of $12.9 million in 2002, (ii) net proceeds from the completion of the El Torito Sale in 2000 and (iii) lower capital expenditures in 2002 and 2001.  The $2.2 million of capital expenditures for fiscal 2002 were used to repair and replace equipment in the normal course of business.

          Capital expenditures of up to approximately $4.3 million have been identified for fiscal 2003, primarily related to maintaining existing open and operating restaurants. Actual capital expenditures for fiscal 2003 will be dependent on restrictions under the Company’s debt instruments and the availability of the required funds.

Results of Operations

          As used herein, “comparable restaurants” are restaurants operated by the Company for at least eighteen months and that continued operating through the last day of the later year being compared.

Fiscal year 2002 as compared to fiscal year 2001 

          As a result of the consummation of the Plan and the Company’s emergence from bankruptcy, the results of operations since the Closing Date are not comparable to those prior to the Closing Date. For certain key operating elements of the statement of operations, however, the following analysis of a comparison of 2002’s operations (six months of Successor Company plus six months of Predecessor Company) to 2001’s operations of the Predecessor Company is provided.  Where there is a lack of comparability of results, such as for depreciation and amortization and interest expense, that fact is noted.

          Total sales of $257,181,000 for 2002 decreased by $32,689,000 or 11.3% as compared to 2001.  The decrease was the result of (i) declines in comparable restaurant sales for Koo Koo Roo, Chi-Chi’s and Hamburger Hamlet and (ii) sales decreases for restaurants sold or closed, slightly offset by sales from a new restaurant.  The breakdown of the sales decrease for 2002 is detailed below: