<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q


 X   Quarterly report pursuant to section 13 or 15(d) of the Securities
---  Exchange Act of 1934

For the quarterly period ended September 27, 1998 or

     Transition report pursuant to section 13 or 15(d) of the
---  Securities Exchange Act of 1934

For the transition period from _____________ to _______________

                        Commission file number 33-14051
                                               --------

                         Koo Koo Roo Enterprises, Inc.
                         -----------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                                    33-0197361
  -------------------------------          ------------------------------------
  (State or other jurisdiction of          (I.R.S. Employer Identification No.)
  incorporation or organization)
                                    

              18831 Von Karman Avenue, Irvine, California   92612
              -----------------------------------------------------
              (Address of principal executive offices)   (Zip Code)

      Registrant's telephone number, including area code:  (949) 757-7900
                                                           --------------

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.

                           Yes    X        No 
                               -------        -------       

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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.

                           Yes    X        No 
                               -------        -------

As of  November 9, 1998, the registrant had issued and outstanding 179,572,476
shares of common stock, $.01 par value per share.

                                      -1-
<PAGE>
                       PART  I.  FINANCIAL INFORMATION
                       -------------------------------

Item 1.  Financial Statements
-------

                         KOO KOO ROO ENTERPRISES, INC.
                         -----------------------------

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                     -------------------------------------
                    ($ in thousands, except share amounts)
<TABLE> 
<CAPTION> 

                                                                                      September 27,       December 28,       
                                                                                           1998               1997           
                                                                                      --------------     --------------      
                                                                                       (Unaudited)                           
<S>                                                                                   <C>                <C> 
ASSETS                                                                                                                       
------
Current assets:                                                                                                              
  Cash and cash equivalents                                                                $  18,787          $  32,518      
  Bridge note receivable - KKR merger                                                          3,064                  0      
  Receivables                                                                                  3,710              3,944      
  Inventories                                                                                  4,196              4,569      
  Other current assets                                                                         3,748              4,086      
                                                                                           ---------          ---------     
    Total current assets                                                                      33,505             45,117      
                                                                                                                             
Property and equipment, net                                                                  180,347            183,601      
Reorganization value in excess of amount allocable to identifiable assets, net                35,479             36,529      
Other assets                                                                                  24,758             24,521      
                                                                                           ---------          ---------     
                                                                                           $ 274,089          $ 289,768      
                                                                                           =========          =========     
                                                                                                                             
LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                        
-------------------------------------
                                                                                                                             
Current liabilities:                                                                                                         
  Current portion of long-term debt, including capitalized lease obligations               $   2,380          $   2,694      
  Accounts payable                                                                            13,454             13,959      
  Self-insurance reserves                                                                     28,701             32,515      
  Other accrued liabilities                                                                   53,582             58,573      
  Income taxes payable                                                                         3,730              3,788      
                                                                                           ---------          ---------     
    Total current liabilities                                                                101,847            111,529      
                                                                                                                             
Other long-term liabilities                                                                    4,555              4,478      
Long-term debt, including capitalized lease obligations, less current portion                215,775            199,955      
                                                                                                                             
Stockholders' deficit:                                                                                                       
  Common stock - authorized 1,500,000 shares, par value $.01 per share,                                                      
    997,277 shares issued                                                                         10                 10      
  Additional paid-in capital                                                                 157,317            157,317      
  Accumulated deficit                                                                       (204,032)          (182,138)     
  Less treasury stock, at cost (8,992 shares)                                                 (1,383)            (1,383)     
                                                                                           ---------          ---------     
    Total stockholders' deficit                                                              (48,088)           (26,194)     
                                                                                           ---------          ---------     
                                                                                           $ 274,089          $ 289,768      
                                                                                           =========          =========     
</TABLE> 

     See accompanying notes to condensed consolidated financial statements

                                      -2-
<PAGE>
                         KOO KOO ROO ENTERPRISES, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                -----------------------------------------------
                  ($ in thousands, except per share amounts)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                  For the Quarters Ended
                                             --------------------------------
                                             September 27,      September 28,
                                                 1998               1997
                                             -------------      -------------
<S>                                          <C>                <C>
Sales                                            $115,293           $116,585
                                              -----------        -----------

Product costs                                      30,492             30,774
Payroll and related costs                          40,941             41,081
Occupancy and other operating expenses             30,416             32,653
Depreciation and amortization                       5,586              5,533
General and administrative expenses                 7,683              7,395
Opening costs                                       1,103                 51
Loss on disposition of properties, net              1,835                313
                                              -----------        -----------

  Total costs and expenses                        118,056            117,800
                                              -----------        -----------

Operating loss                                     (2,763)            (1,215)

Interest expense, net                               6,111              5,002
                                              -----------        -----------

Loss before income tax provision                   (8,874)           (6,217)

Income tax provision                                   46                 30
                                              -----------        -----------

Net loss                                      $    (8,920)       $    (6,247)
                                              ===========        ===========

Net loss per share -
  basic and diluted                           $      (.07)       $      (.05)
                                              ===========        ===========
Weighted average shares
  outstanding - basic and diluted             121,515,391        121,515,391
                                              ===========        ===========
</TABLE>

     See accompanying notes to condensed consolidated financial statements


                                      -3-
<PAGE>
                         KOO KOO ROO ENTERPRISES, INC.
                         -----------------------------

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                -----------------------------------------------
                  ($ in thousands, except per share amounts)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                             For the Nine Months Ended
                                        ----------------------------------
                                        September 27,        September 28,
                                            1998                 1997
                                        -------------        -------------
<S>                                     <C>                  <C>
Sales                                     $   348,694          $   354,666
                                          -----------          -----------

Product costs                                  93,288               93,905
Payroll and related costs                     122,859              124,451
Occupancy and other operating expenses         92,595               99,077
Depreciation and amortization                  16,208               16,714
General and administrative expenses            21,799               21,837
Opening costs                                   2,361                   54
Loss on disposition of properties, net          3,241                2,190
Impairment of long-lived assets                     0                2,640
                                          -----------          -----------

  Total costs and expenses                    352,351              360,868
                                          -----------          -----------

Operating loss                                 (3,657)              (6,202)

Interest expense, net                          17,937               13,964
                                          -----------          -----------

Loss  before income tax provision             (21,594)             (20,166)

Income tax provision                              300                  382
                                          -----------          -----------

Net loss                                  $   (21,894)         $   (20,548)
                                          ===========          ===========

Net loss per share -
   basic and diluted                      $      (.18)         $      (.17)
                                          ===========          ===========

Weighted average shares
   outstanding - basic and
   diluted                                121,515,391          121,515,391
                                          ===========          ===========

</TABLE>


     See accompanying notes to condensed consolidated financial statements


                                      -4-
<PAGE>
 
                         KOO KOO ROO ENTERPRISES, INC.

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

<TABLE>
<CAPTION>
                                                                          For the Nine Months Ended
                                                                       ---------------------------------
                                                                       September 27,      September 28,
                                                                           1998               1997
                                                                       -------------      --------------
<S>                                                                    <C>                <C> 
Increase (Decrease) in Cash and Cash Equivalents

Cash flows from operating activities:
  Cash received from customers, franchisees and licensees                $ 350,267          $ 355,962
  Cash paid to suppliers and employees                                    (336,863)          (352,738)
  Interest paid, net                                                       (14,320)           (14,340)
  Opening costs                                                             (2,017)                 0
  Income taxes paid                                                           (358)              (197)
                                                                         ---------          --------- 
    Net cash used in operating activities                                   (3,291)           (11,313)
                                                                         ---------          --------- 
Cash flows from investing activities:                                                
  Proceeds from disposal of property and equipment                           4,585                225
  Bridge note receivable - KKR merger                                       (3,000)                 0
  KKR merger costs                                                          (1,271)                 0
  Capital expenditures                                                     (17,703)            (8,560)
  Mandatory lease buyback, net                                                   0             (2,690)
  Lease termination payments                                                (1,115)            (2,761)
  Opening costs                                                                  0               (145)
  Other                                                                       (570)            (1,999)
                                                                         ---------          --------- 
    Net cash used in investing activities                                  (19,074)           (15,930)
                                                                         ---------          --------- 
Cash flows from financing activities:                                                
  Reductions of long-term debt, including capitalized lease obligations     (2,889)            (2,315)
  Net proceeds from issuance of notes                                       11,620             33,947
  Payment of debt issuance costs                                               (97)            (2,696)
                                                                         ---------          --------- 
    Net cash provided by financing activities                                8,634             28,936
                                                                         ---------          --------- 
Net increase (decrease) in cash and cash equivalents                       (13,731)             1,693
Cash and cash equivalents at beginning of period                            32,518             33,820
                                                                         ---------          --------- 
Cash and cash equivalents at end of period                               $  18,787          $  35,513
                                                                         =========          =========
</TABLE> 

     See accompanying notes to condensed consolidated financial statements

                                      -5-
<PAGE>
                         KOO KOO ROO ENTERPRISES, INC.

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

<TABLE>
<CAPTION>
                                                                               For the Nine Months Ended
                                                                            ---------------------------------
                                                                            September 27,      September 28,
                                                                                 1998               1997
                                                                            --------------     --------------
<S>                                                                         <C>                <C> 
Reconciliation of net loss to net cash used in operating activities:

Net loss                                                                       $  (21,894)        $  (20,548)
Adjustments to reconcile net loss  to net cash used in operating
 activities:
    Depreciation and amortization                                                  16,208             16,768
    Amortization of debt issuance costs                                               896                792
    Expense of unamortized opening costs                                              344                  0
    Loss on disposition of properties                                               3,241              2,190
    Impairment of long-lived assets                                                     0              2,640
    Accretion of interest                                                           6,066              1,295
    Decrease in receivables, inventories and other current assets                     601              1,025
    Decrease in accounts payable, self-insurance reserves, other accrued
      liabilities and income taxes payable                                         (8,753)           (15,475)
                                                                               -----------        -----------

Net cash used in operating activities                                          $   (3,291)        $  (11,313)
                                                                               ===========        ===========
</TABLE> 

                                      -6-
<PAGE>
 
                         KOO KOO ROO ENTERPRISES, INC.
                         -----------------------------

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              ----------------------------------------------------
                                  (Unaudited)

     1.  Company.  Koo Koo Roo Enterprises, Inc. (formerly known as Family
         -------                                                          
Restaurants, Inc.) (together with its subsidiaries, the "Company") was
incorporated in Delaware in 1986 and is primarily engaged in the operation of
restaurants in the full-service and fast-casual segments, through its
subsidiaries.  Information relating to periods ending on or prior to September
27, 1998 included herein 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"), which the
Company acquired in the Merger (as defined below, see Note 5) on October 30,
1998.  At September 27, 1998, the Company operated 266 restaurants in 29 states,
with approximately 61% of its restaurants located in California, Ohio,
Pennsylvania, Indiana and Michigan.  Additionally, as of September 27, 1998, the
Company was the franchisor and licensor of 20 restaurants outside the United
States. As a result of the Merger, as of November 9, 1998, the Company operated
313 restaurants in 28 states.

     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 Year Ended December 28, 1997 included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1997
(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 only of
normal recurring adjustments) necessary for a fair presentation of the results
of the interim periods presented have been made.  The results of operations for
the quarter and nine months ended September 27, 1998 are not necessarily
indicative of those for the full year.

     3.   Long-Term Debt.  On August 12, 1997, FRI-MRD Corporation (a wholly-
          --------------                                                    
owned subsidiary of the Company) ("FRI-MRD") issued new senior discount notes
(the "Senior Discount Notes") in an aggregate face amount of $61 million at a
price of approximately 75% of par. The Senior Discount Notes are due on January
24, 2002.  Interest on the Senior Discount Notes accretes at a rate of 15% per
annum until July 31, 1999 and, thereafter, is payable in cash semi-annually at
the rate of 15% per annum.  The $61 million of Senior Discount Notes were issued
to certain existing holders of the Company's 9-3/4% Senior Notes due 2002 (the
"Senior Notes") in exchange for $15.6 million of Senior Notes plus approximately
$34 million of cash under an agreement pursuant to which FRI-MRD had the ability
to issue up to a maximum of $75 million aggregate face amount of Senior Discount
Notes.  The gain of $3,548,000 realized on the exchange of Senior Notes has been
deferred and classified as an element of long-term debt in accordance with the
guidelines of Emerging Issues Task Force Issue No. 96-19 because the present
value of the cash flows of the Senior Discount Notes was not at least 10%
different from the present value of the cash flows of the Senior Notes
exchanged.  The deferred gain is being amortized as a reduction of interest
expense over the life of the Senior Discount Notes.  On January 14 and 15, 1998,
FRI-MRD issued the remaining $14 million aggregate face amount of the Senior
Discount Notes available under such agreement to the same purchasers at a price
of 83% of par.  FRI-MRD received approximately $11.6 million in cash as a 

                                      -7-
<PAGE>
 
result of this subsequent sale. Proceeds from the sales of the Senior Discount
Notes have been and will continue to be used to fund the Company's capital
expenditure programs and for general corporate purposes.

     4.   Opening Costs.  Opening costs are incurred in connection with the
          -------------                                                    
opening or remodeling of a restaurant and are principally related to stocking
the restaurant and training its staff. Through the year ended December 28, 1997,
the Company's policy had been to capitalize such opening costs and amortize them
over one year.  In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the
Costs of Start-Up Activities," which specifies that all costs of start-up
activities, including restaurant opening costs, should be expensed as incurred.
Although SOP 98-5 is effective for fiscal years beginning after December 15,
1998, early adoption is allowed, and the Company elected to adopt the provisions
of SOP 98-5 in the quarter ended March 29, 1998.

     Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) was expensed in the condensed consolidated
statement of operations for the quarter ended March 29, 1998.  Opening costs
incurred during the quarter and nine months ended September 27, 1998 were
$1,103,000 and $2,017,000, respectively.  Amortization of opening costs of
$51,000 and $54,000 in the comparable periods of 1997 has been reclassified.

     5.   Subsequent Event - KKR Merger.  On October 30, 1998, the Company, FRI-
          -----------------------------                                        
Sub, Inc., a Delaware corporation and wholly owned subsidiary of FRI-MRD (the
"Merger Sub"), and KKR consummated their merger (the "Merger"), pursuant to an
Agreement and Plan of Merger, dated as of June 9, 1998 (the "Merger Agreement").
In the Merger, Merger Sub was merged with and into KKR, with KKR as the
surviving corporation.

     As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR was converted into the right to receive one share of common stock,
par value $0.01 per share, of the Company (the "Company Common Stock").
Immediately prior to the Merger, a stock dividend was declared whereby
approximately 121.96 shares of Company Common Stock were distributed for each
share of Company Common Stock outstanding immediately prior to the Merger. In
connection with the signing of the Merger Agreement, FRI-MRD provided a $3.0
million loan (the "Bridge Loan") to a subsidiary of KKR. Additionally, in
connection with the Merger, FRI-MRD issued $24 million aggregate face amount of
new senior secured discount notes (the "New MRD Notes") pursuant to the Senior
Secured Discount Note Agreement dated June 9, 1998 for net proceeds of $21.7
million and the Company expanded the Foothill Credit Facility (as defined below)
by an additional $20.0 million. The proceeds from the sale of the New MRD Notes
were used to acquire all of the outstanding capital stock of The Hamlet Group,
Inc. ("Hamlet") immediately prior to the consummation of the Merger (the "Hamlet
Acquisition"). The Merger and the Hamlet Acquisition will be accounted for as a
purchase.

     The following table presents certain summary unaudited pro forma combined
financial information for the Company, assuming the Merger occurred as of the
beginning of fiscal 1997 for the periods presented or on the date indicated. The
unaudited pro forma combined financial information does not reflect certain cost
savings that management believes may be realized following the Merger. The
unaudited pro forma combined financial information is not indicative of the
results of operations or financial position of the combined companies that would
have occurred had the Merger occurred at the beginning of the periods presented
or on the date indicated, nor is it indicative of future operating results or
financial position. The unaudited pro forma adjustments are based upon currently
available
                                      -8-
<PAGE>
 
information and certain assumptions that management believes are reasonable
under the circumstances.
<TABLE> 
<CAPTION> 
                                            Quarters Ended           Nine Months Ended    
                                        ----------------------   --------------------------
                                         Sept. 27,   Sept. 28,    Sept. 27,      Sept. 28,
                                           1998        1997         1998           1997   
                                        ----------  ----------   ----------     -----------
                                                          (Pro Forma)                      
Combined Statements of Operations
 Information (Amounts in thousands,
 except per share data)

<S>                                     <C>         <C>          <C>            <C>  
Sales                                     $137,536    $137,176     $416,003        $402,430
Operating loss                              (4,519)     (9,525)     (20,343)        (20,270)
Interest expense, net                        6,973       5,682       20,399          15,938
Net loss                                   (11,307)    (15,229)     (40,554)        (36,663)
Pro forma basic and diluted loss
 per common share                         $   (.06)   $   (.08)    $   (.23)       $   (.20)
Pro forma weighted average number
 of common shares outstanding              179,572     179,572      179,572         179,572
</TABLE> 

<TABLE> 
<CAPTION> 
                                                                  Sept. 27,
                                                                    1998
                                                                 ----------
                                                                 (Pro Forma)
Combined Balance Sheet
 Information (Amounts in thousands) 
<S>                                                              <C> 
Total assets                                                       $375,432
Total long-term debt and capitalized
 lease obligations                                                  240,694
Stockholder's equity                                                 14,912
</TABLE> 

Item 2.   Management's Discussion and Analysis of Financial Condition and
------    Results of Operations

     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" 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 result in actual
results of the Company or the restaurant industry differing 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
(i) the development of successful marketing strategies for the Company's
restaurants, (ii) the effect of national and regional economic conditions, (iii)
the availability of adequate working capital, (iv) competitive products and
pricing, (v) changes in legislation, (vi) demographic changes, (vii) the ability
to attract and retain qualified personnel, (viii) changes in business strategy
or development plans, (ix) business disruptions, (x) changes in consumer
preferences, tastes and eating habits, (xi) increases in food and labor costs
and (xii) potential difficulties in combining the operations of KKR with the
Company.  The Company 

                                      -9-
<PAGE>
 
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.

     On October 30, 1998, the Company, Merger Sub and KKR consummated the
Merger, pursuant to the Merger Agreement.  In the Merger, Merger Sub was merged
with and into KKR, with KKR as the surviving corporation.

     As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR was converted into the right to receive one share of Company
Common Stock. Immediately prior to the Merger, a stock dividend was declared
whereby approximately 121.96 shares of Company Common Stock were distributed for
each share of Company Common Stock outstanding immediately prior to the Merger.
In connection with the signing of the Merger Agreement, FRI-MRD provided the
Bridge Loan to a subsidiary of KKR. Additionally, in connection with the Merger,
FRI-MRD issued the New MRD Notes pursuant to the Senior Secured Discount Note
Agreement dated June 9, 1998 for net proceeds of $21.7 million and the Company
expanded the Foothill Credit Facility by an additional $20.0 million. The
proceeds from the sale of the New MRD Notes were used to complete the Hamlet
Acquisition immediately prior to the consummation of the Merger.

     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.  Information relating to periods ending on or prior to September 27,
1998 included herein relates to the historical operations of Family Restaurants,
Inc. and, except as otherwise indicated, does not reflect the operations of KKR,
which the Company acquired on October 30, 1998.  See Note 5 of the unaudited
condensed consolidated financial statements included elsewhere herein.

     As used herein, "comparable restaurants" means restaurants operated by the
Company on January 1, 1997 and that continued in operation through the end of
the third quarter of 1998.

Liquidity and Capital Resources
-------------------------------

     A.  Liquidity

     The Company reported net cash used in operating activities for the nine
months ended September 27, 1998 and September 28, 1997.  Cash needs are being
funded by available cash balances, supplemented, as necessary, by working
capital advances available under the Foothill Credit Facility (as defined
below).  In addition, through November 9, 1998, FRI-MRD has raised approximately
$67.3 million in cash from the issuance of the Senior Discount Notes and the New
MRD Notes to supplement its cash needs.  The Company's viability has been and
will continue to be dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, and to comply with the terms of its
financing agreements.

     Statement of Cash Flows.  For the first nine months of 1998, net cash used
in operating activities was $3.3 million compared to $11.3 million for the same
period in 1997.  The difference in cash received from customers, franchisees and
licensees as compared to cash paid to suppliers and employees improved by $10.2
million from 1997 to 1998 which more than offset cash paid for opening costs of
$2.0 million in 1998.  For the first nine months of 1998, net cash used in
investing activities was $19.1 million compared to $15.9 million for the same
period in 1997.  The increase in net cash used in investing activities of $3.1
million was due to the $3.0 million bridge loan related to 

                                      -10-
<PAGE>
 
the Merger, Merger costs of $1.3 million and an increase in capital expenditures
of $9.1 million which more than offset decreases in mandatory lease buyback of
$2.7 million, lease termination payments of $1.6 million and an increase in
proceeds from disposal of property and equipment of $4.4 million. For the first
nine months of 1998, net cash provided by financing activities was $8.6 million
compared to $28.9 million for the same period in 1997. During 1998, $11.6
million in net proceeds from the issuance of notes was received compared to
$33.9 million in 1997, while payment of debt issuance costs decreased $2.6
million from 1997.

     EBITDA.  For the first nine months of 1998, 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, interest, taxes, depreciation and amortization) of $18.2
million, compared to $15.4 million for the same period in 1997.  The $2.8
million improvement was primarily due to the continuing impact of El Torito and
Chi-Chi's cost reduction and reengineering strategies, which have improved
operating margins.  This improved EBITDA is the continuation of the trend that
began in 1996 when new management was installed at both El Torito and Chi-Chi's.
Since 1995, the divisional EBITDA of the Company's ongoing operations is set
forth in the following table.

<TABLE>
<CAPTION>
                                           Divisional EBITDA         
                                         ----------------------      
              Fiscal Year Ended          El Torito   Chi-Chi's       
              ------------------------   ---------   ----------      
                                           ($ in thousands)          
<S>                                      <C>         <C> 
              December 31, 1995 (a)        $13,508    $(10,455)      
              December 29, 1996             11,956      (4,278)      
              December 28, 1997             17,627          36        
</TABLE>

              (a)  Includes 53 weeks of operations and, in accordance with
                   Company policy at that time, excludes certain unallocated
                   corporate overhead.

      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 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 operates with a substantial
working capital deficiency because (i) restaurant operations are conducted
primarily on a cash (and cash equivalent) basis with a low level of accounts
receivable, (ii) rapid turnover allows a limited investment in inventories and
(iii) cash from sales is usually received before related accounts payable for
food, beverages and supplies become due.  The Company had a working capital
deficiency of $68.3 million on September 27, 1998.

     Credit Facility.  In connection with the Merger, the Company has increased
its credit facility with Foothill Capital Corporation (the "Foothill Credit
Facility") to $55 million to provide for the ongoing working capital needs of
the Company.  The Foothill Credit Facility now provides for up to 

                                      -11-
<PAGE>
 
$35 million in revolving cash borrowings and up to $55 million in letters of
credit (less the outstanding amount of revolving cash borrowings). The Foothill
Credit Facility is secured by substantially all of the real and personal
property of the Company, contains customary restrictive covenants, including the
maintenance of certain financial ratios, and expires on January 10, 2002. The
Company is in compliance with all financial ratios for the quarter ended
September 27, 1998. Letters of credit are issued under the Foothill Credit
Facility primarily to provide security for future amounts payable under the
Company's workers' compensation insurance program ($13.1 million of such letters
of credit were outstanding as of November 9, 1998). No revolving cash borrowings
were outstanding as of November 9, 1998.

     To increase its credit facility as discussed above, on June 9, 1998, the
Company entered into an amendment to the Foothill Credit Facility.  The
amendment permitted, among other things, (i) an increase in the amount of
borrowings available under the Foothill Credit Facility from $35.0 million to
$55.0 million, (ii) the issuance of the New MRD Notes and (iii) the consummation
of the Hamlet Acquisition and the Merger.  The additional borrowings under the
Foothill Credit Facility only became available after the consummation of the
Hamlet Acquisition and the Merger and then only on a pro rata basis as each
mortgage on the real property securing the Foothill Credit Facility is amended
to reflect the increase in the maximum amount.  In connection with the execution
of the amendment, Foothill earned a consent fee in the amount of $100,000 and a
line increase fee of $500,000.

     Senior Discount Notes.  On August 12, 1997, FRI-MRD issued an aggregate
principal amount of $61 million of its Senior Discount Notes to certain holders
of the Company's Senior Notes in exchange for $15.6 million of Senior Notes plus
approximately $34 million of cash.  On January 14 and 15, 1998, FRI-MRD issued
an additional $14 million aggregate principal amount of its Senior Discount
Notes to the same purchasers for approximately $11.6 million in cash.  Proceeds
from the sales of the Senior Discount Notes have been and will continue to be
used to fund the Company's capital expenditure programs and for general
corporate purposes.

     On June 9, 1998, FRI-MRD and the holders of the existing Senior Discount
Notes entered into an amendment to the Note Agreement governing the Senior
Discount Notes.  Pursuant to the amendment, upon the closing of the Merger, the
Senior Discount Notes were amended to, among other things, permit (i) the
issuance of the New MRD Notes, (ii) the consummation of the Hamlet Acquisition
and the Merger and (iii) an increase in the amount of borrowings available under
the Foothill Credit Facility by up to $20.0 million.

     Senior Secured Discount Notes.  On June 9, 1998, FRI-MRD entered into a
Note Agreement pursuant to which FRI-MRD issued $24.0 million aggregate face
amount of New MRD Notes at a price of approximately 90% of par resulting in net
proceeds of $21.7 million.  The New MRD Notes are due on January 24, 2002.  No
interest is payable on the New MRD Notes until July 31, 1999, at which time
interest will be payable in cash semi-annually at the rate of 14% per annum with
the first cash interest payment due on January 31, 2000.  The New MRD Notes are
redeemable by FRI-MRD, in whole or in part, on or before January 23, 2001, at a
price of 105% of the accreted value thereof, or after January 23, 2001, at a
price of 102.5% of the accreted value thereof.  The New MRD Notes contain
covenants that restrict FRI-MRD, including limitations on (i) the incurrence of
certain indebtedness and liens, (ii) the ability to make certain restricted
payments, (iii) certain mergers, consolidations and asset sales, (iv) certain
transactions with affiliates and (v) the issuance of any 

                                      -12-
<PAGE>
 
equity securities of Hamlet. Proceeds from the sale of the New MRD Notes were
used exclusively to purchase, and thereafter are secured by, all of the
outstanding shares of Hamlet.

     The Company continues to be highly leveraged and has significant debt
service requirements. Although management believes that its current sources of
cash should be sufficient to meet its operating and debt service requirements
for the foreseeable future, there can be no assurance that the Company will be
able to repay or refinance its Senior Notes and its 10-7/8% Senior Subordinated
Discount Notes due 2004, or that FRI-MRD will be able to repay or refinance the
Senior Discount Notes or the New MRD Notes, at their respective maturities.  The
Company continues to consider additional sources of cash, such as the sale of
non-core assets.

     B.  Capital Expenditures

     Net cash used in investing activities was $19.1 million for the first nine
months of 1998, including $17.7 million for capital expenditures, as compared to
net cash used in investing activities of $15.9 million for the same period in
1997.

     Capital expenditures of up to approximately $28 million are now anticipated
for fiscal 1998, including approximately $6 million devoted to normal
improvements of the Company's restaurants. The Company is continuing its
remodeling of both El Torito and Chi-Chi's restaurants and anticipates spending
approximately $13 million to $14 million for this purpose in fiscal 1998.  In
fiscal 1998, the Company also plans to open two new El Torito restaurants,
including an El Torito Grill in Mission Viejo, California and its newly
developed quick-service casual-style restaurant, "El Torito Express Grill,"
which opened on July 6, 1998 in Pasadena, California.  The Company also plans to
upgrade El Torito's in-store Point-of-Sale ("POS") technology beginning in late
fiscal 1998 and continuing into fiscal 1999.

     By November 9, 1998, the Company had completed the remodeling of 20
additional El Torito restaurants, primarily in the Los Angeles/Orange County and
Sacramento markets, and 34 additional Chi-Chi's restaurants in various markets
(including four restaurants that are testing an enhanced remodel package) in
1998.  The Company has announced plans for an aggressive remodel program for the
Chi-Chi's chain over the fiscal 1998 to fiscal 2000 period.  This program could
cost up to $50 million.

Year 2000
---------

     Background.  In the past, many computers, software programs, and other
information technology ("IT systems"), as well as other equipment relying on
microprocessors or similar circuitry ("non-IT systems"), were written or
designed using two digits, rather than four, to define the applicable year.  As
a result, date-sensitive systems (both IT systems and non-IT systems) may
recognize a date identified with "00" as the year 1900, rather than the year
2000.  This is generally described as the Year 2000 issue.  If this situation
occurs, the potential exists for system failures or miscalculations, which could
impact business operations.

     The Securities and Exchange Commission ("SEC") has asked public companies
to disclose four general types of information related to Year 2000 preparedness:
the company's state of 

                                      -13-
<PAGE>
 
readiness, costs (historical and prospective), risks and contingency plans. See
SEC Release No. 33-7558 (July 29, 1998). Accordingly, the Company has included
the following discussion in this report, in addition to the Year 2000
disclosures previously filed with the SEC.

     State of Readiness.  The Company began a concerted effort to address its
Year 2000 issues in fiscal 1997.  In fiscal 1998, the Company formalized the
effort with a team that includes the Chief Executive Officer, General Counsel,
Chief Financial Officer and Vice President of Information Services.  This team
decided in early 1998 that the Company's best course of action was to replace
the IT systems that were not Year 2000 compliant with new hardware and software.
In addition to improving processes and allowing wider access to data, the new
systems would be Year 2000 compliant.

     The Company believes that it has identified all significant IT Systems that
require replacement in connection with Year 2000 issues.  Internal resources
have been used, and are continuing to be used, to make the required changes and
test Year 2000 readiness.  The required modifications of all significant systems
are well underway.  The Company plans on completing the replacement and testing
of all significant systems by September 1999.  The Company is in the process of
identifying all non-IT systems that require replacement or update.  Non-IT
systems that may have a significant impact on the Company are expected to be
replaced or updated by September 1999.

     In addition, the Company has communicated with suppliers, banks, vendors
and others with whom it does significant business (collectively, its "business
partners") to determine their Year 2000 readiness and the extent to which the
Company is vulnerable to any other organization's Year 2000 issues.  Based on
these communications and related responses, the Company is monitoring the Year
2000 preparations and state of readiness of its business partners.  Although the
Company is not aware of any significant Year 2000 problems with its business
partners, there can be no guarantee that the systems of other organizations on
which the Company's systems rely will be converted in a timely manner, or that a
failure to convert by another organization, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.

     Costs.  The total cost to the Company of Year 2000 activities has not been
and is not anticipated to be material to its financial position or results of
operations in any given year.  The Company expects to spend approximately $1.6
million on the new software and related hardware and installation costs in 1998,
approximately $1.2 million of which has been spent through September 27, 1998.
In addition, the El Torito in-store POS upgrade discussed in Capital
Expenditures above and POS upgrades in the Company's other operating divisions,
including KKR, which are required for Year 2000 compliancy, are expected to be
completed by September 1999 at a cost of approximately $6.0 million to $6.5
million, the majority of which is anticipated to be lease financed.  These
costs, as well as the date on which the Company plans to complete the Year 2000
modifications and testing processes, are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors.  However, there can be no guarantee that these estimates will
be achieved, and actual results could differ from those estimates.

     Risks.  The Company utilizes IT systems and non-IT systems in many aspects
of its business. Year 2000 problems in some of the Company' systems could
possibly disrupt operations at some 

                                      -14-
<PAGE>
 
restaurants, but the Company does not expect that any such disruption would have
a material adverse impact on the Company's operating results.

     The Company is also exposed to the risk that one or more of its suppliers
or vendors could experience Year 2000 problems that could impact the ability of
such suppliers or vendors to provide goods and services.  Although this risk is
lessened by the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the extent of the disruption,
potentially have a material adverse impact on the Company's operations.

     Contingency Plans.  Based on the above-described plans, the Company does
not believe that significant contingency plans will be necessary but as 1999
unfolds, the Company will begin preparing plans to deal with the possibility
that some suppliers or vendors might fail to provide goods and services on a
timely basis as a result of Year 2000 problems.  The Company expects these
contingency plans will generally include the identification, acquisition and/or
preparation of backup systems, suppliers and vendors.

Results of Operations.
--------------------- 

     The Company's total sales of $115,293,000 for the third quarter of 1998
decreased by $1,292,000 or 1.1% as compared to the same period in 1997.  For the
first nine months of 1998, total Company sales of $348,694,000 decreased by
$5,972,000 or 1.7% as compared to the same period in 1997.  As shown below,
these decreases were due to restaurants divested or closed in 1997 and 1998,
partially offset by increases in sales of comparable restaurants.

<TABLE>
<CAPTION>
                                              Third Quarter   First Nine Months
                                             Sales Decrease     Sales Decrease 
                                             --------------   -----------------
                                                     ($ in thousands)          
<S>                                          <C>               <C>             
Decrease in Sales of Restaurants Divested or                                   
 Closed                                             $(3,218)           $(7,298)
Increase in Sales of Comparable Restaurants           1,926              1,326 
                                                    -------            ------- 
  Total                                             $(1,292)           $(5,972)
                                                    =======            =======  
</TABLE>

     Sales for comparable restaurants of $113,495,000 for the third quarter of
1998 increased by $1,926,000 or 1.7% as compared to the same period in 1997.
For the first nine months of 1998, sales of comparable restaurants of
$345,024,000 increased by $1,326,000 or 0.4% as compared to the same period in
1997.  As shown below, these increases were primarily due to increased sales for
comparable Chi-Chi's restaurants in both the quarter and nine month periods.
Overall comparable sales results continue to reflect a competitive operating
environment for restaurants.

                                      -15-
<PAGE>
 
<TABLE>
<CAPTION>
                               Third Quarter          First Nine Months
                               Sales Increase           Sales Increase
                             ------------------     ----------------------
                              Amount   Percent       Amount       Percent
                             --------  --------     --------   -----------
                                          ($ in thousands)

<S>                          <C>       <C>          <C>        <C> 
Comparable Chi-Chi's           $1,853       3.1%      $1,720          0.9%
Comparable El Torito               73       0.1         (394)        (0.2)
                               ------                 ------
 
           Total               $1,926       1.7%      $1,326          0.4%
                               ======      ====       ======         ====
</TABLE>

     El Torito comparable sales in the third quarter were basically flat (up
0.1%) as compared to the same period in 1997.  In the third quarter, El Torito
suspended the use of electronic media for advertising, opting to reach targeted
customers utilizing alternative media strategies.  In an effort to increase the
frequency of existing guests, El Torito introduced a series of two bounce back
programs in the third quarter, the Mystery Bounce Back Program and  the "Tic-
Tac-2-Mexico" program.  Both programs were designed to attract existing guests
to visit more frequently during a specified time period by offering the chance
to win cash prizes, discounts and free food.  Additionally, the "Tic-Tac-2-
Mexico" program was tailored to build guest traffic during specific day parts.
The promotional focus for the quarter was fajitas which included the
introduction of four new types of fajitas as Chef's Specials.

     Comparable sales for Chi-Chi's were up 3.1% in the third quarter of 1998 as
compared to the same period in 1997.  July began with the media-supported
introduction of Chi-Chi's "Sizzling Sensation" campaign featuring the new
Grilled Steak & Chicken Tower and other items such as the Sizzling Enchiladas
and the new Sizzling Burrito and Sizzling Chimichanga.  A free-standing insert
extended the campaign through mid-September and included special discount offers
for all times of the day to boost sales during the historic back-to-school sales
lull.  Also contributing to Chi-Chi's improving comparable sales trends are the
favorable results of the remodel program begun in 1997. Since the inception of
the program, Chi-Chi's has remodeled 45 restaurants, five of which incorporated
an enhanced, more extensive version of the original remodel concept.

     Product costs of $30,492,000 for the third quarter of 1998 decreased by
$282,000 or 0.9% as compared to the same period in 1997.  For the first nine
months of 1998, product costs of $93,288,000 decreased by $617,000 or 0.7% as
compared to the same period in 1997.  The decreases are due to the impact of the
16 restaurants sold or closed since the beginning of 1997.  As a percentage of
sales, product costs remained flat at 26.4% in the third quarter of 1998 as
compared to the same period of 1997 and increased to 26.8% for the first nine
months of 1998 as compared to 26.5% in the same period of 1997.

     Payroll and related costs of $40,941,000 for the third quarter of 1998
decreased by $140,000 or 0.3% as compared to the same period in 1997.  For the
first nine months of 1998, payroll and related costs of $122,859,000 decreased
by $1,592,000 or 1.3% as compared to the same period of 1997.  The decreases are
due to the impact of the 16 restaurants sold or closed since the beginning of
1997.  As a percentage of sales, payroll and related costs increased to 35.5% in
the third quarter of 1998 as compared to 35.2% in the same period of 1997 and
increased to 35.2% for the first nine 

                                      -16-
<PAGE>
 
months of 1998 as compared to 35.1% in the same period of 1997. Savings realized
from the El Torito and Chi-Chi's cost reduction strategies which have focused on
improving labor scheduling and efficiencies have been offset by the impact of
the minimum wage increases nationally on September 1, 1997, and on March 1, 1997
and March 1, 1998 in California.

     The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions.  Following the Merger,
approximately half 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.  Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively froze the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, in California, voters approved
a proposition on November 5, 1996 that increased the state's minimum wage to
$5.00 on March 1, 1997 and further increased the state's minimum wage to $5.75
on March 1, 1998.  In response to the minimum wage increases on October 1, 1996,
March 1, 1997 and March 1, 1998, the Company raised menu prices at its El Torito
restaurants in an effort to recover the higher payroll costs.  Chi-Chi's also
raised menu prices in October and December 1997 as a result of the cumulative
impact of  these minimum wage increases.  Similarly, in March 1998, KKR also
raised menu prices.  Although pressure continues for further increases in both
the Federal and California minimum wage levels, the status of proposed
legislation indicates that increases in 1999 are not likely at this time.

     Occupancy and other operating expenses of $30,416,000 for the third quarter
of 1998 decreased by $2,237,000 or 6.9% as compared to the same period in 1997.
For the first nine months of 1998, occupancy and other operating expenses of
$92,595,000 decreased by $6,482,000 or 6.5% as compared to the same period in
1997.  The decreases are due, in part, to the impact of the 16 restaurants sold
or closed since the beginning of 1997.  As a percentage of sales, occupancy and
other operating expenses decreased to 26.4% in the third quarter of 1998 as
compared to 28.0% in the same period in 1997 and decreased to 26.6% for the
first nine months of 1998 as compared to 27.9% in the same period of 1997.
These decreases primarily reflect (i) the impact of El Torito and Chi-Chi's cost
reduction strategies and (ii) a decrease in media advertising expense in El
Torito in the first nine months of 1998 as compared to the same period of 1997.

     Depreciation and amortization of $5,586,000 for the third quarter of 1998
increased by $53,000 or 1.0% as compared to the same period in 1997.  For the
first nine months of 1998, depreciation and amortization of $16,208,000
decreased by $506,000 or 3.0% as compared to the same period in 1997.  The
decrease for the nine month period reflects the impact of (i) the 16 restaurants
sold or closed since the beginning of 1997 and (ii) the write-down of certain
long-lived assets in the second quarter of 1997, partially offset by
depreciation related to the Company's ongoing capital expenditure program.

     General and administrative expenses of $7,683,000 for the third quarter of
1998 increased by $288,000 or 3.9% as compared to the same period of 1997.  For
the first nine months of 1998, general and administrative expenses of
$21,799,000 decreased by $38,000 or 0.2% as compared to 

                                      -17-
<PAGE>
 
the same period in 1997. As a percentage of sales, general and administrative
expenses increased to 6.7% in the third quarter of 1998 as compared to 6.3% in
the same period of 1997 and increased to 6.3% for the first nine months of 1998
as compared to 6.2% in the same period of 1997. Management continues to closely
evaluate the Company's general and administrative cost structure for savings
opportunities and expects that, as a result of the Merger, general and
administrative costs will decrease as a percentage of sales as the Company
eliminates redundant administrative functions and as these functions operate
more efficiently due to improvements in economies of scale.

     The Company reported a loss on disposition of properties of $1.8 million in
the third quarter of 1998 and $3.2 million for the first nine months of 1998 as
compared to a loss of $0.3 million for the third quarter of 1997 and $2.2
million for the first nine months of 1997.  These amounts primarily reflect
losses associated with restaurant divestments and closures in such periods.
Also included in the loss on disposition of properties in the third quarter of
1998 is a $0.5 million increase to the Company's reserve for the carrying costs
of closed properties.  During the third quarter of 1998, eight Chi-Chi's
restaurants were divested with an additional restaurant divested early in the
fourth quarter of 1998.   As part of the Company's strategic planning process
for 1999, management is reviewing the total Chi-Chi's restaurant portfolio to
identify potential restaurant divestment candidates as the Company looks to
focus on Chi-Chi's core operating markets.  Up to 50 restaurants are being
considered for inclusion in the divestment listing.  As a result, the Company
anticipates that certain divestment reserves could be recorded in the fourth
quarter of 1998.  As an initial step in this divestment strategy, five Chi-Chi's
restaurants were closed in late October 1998.

     The Company recorded a write-down of long-lived assets in the second
quarter of 1997 of $2.6 million.

     Interest expense, net for the third quarter of 1998 of $6,111,000 increased
by $1,109,000 or 22.2% as compared to the same period in 1997.  Interest
expense, net for the first nine months of 1998 of $17,937,000 increased by
$3,973,000 or 28.5% as compared to the same period in 1997. These increases were
primarily the result of the issuance of the Senior Discount Notes in August 1997
and January 1998 and the accretion of interest thereon, partially offset by the
elimination of cash interest expense associated with the $15.6 million of Senior
Notes received as part of the exchange on August 12, 1997.

The Merger
----------

     The Merger and the Hamlet Acquisition will be accounted for as a purchase.
Accordingly, the results of operations and financial position of KKR will be
combined with the results of operations and financial position of the Company's
operations from October 30, 1998 forward.  At September 29, 1998, KKR operated
40 Koo Koo Roo California Kitchen restaurants and 14 Hamburger Hamlet
restaurants and had total assets of $55.9 million.  For the quarter and nine
months ended September 29, 1998, KKR reported (i) sales of $22.2 million and
$67.3 million, respectively, compared to $20.6 million and $47.8 million,
respectively, for the corresponding periods of the prior year and (ii) operating
losses of $1.5 million and $15.8 million, respectively, compared to $8.0 million
and $13.2 million, respectively, for the corresponding periods of the prior
year.  These operating losses included restructuring and other charges (credits)
of $(0.6) million and $11.1 million, respectively, for the quarter and nine
months ended September 29, 1998, compared to $4.6 million 

                                      -18-
<PAGE>
 
and $4.4 million, respectively, for the corresponding periods of the prior year.
EBITDA for the quarter and nine months ended September 29, 1998 amounted to
$(0.7) million and $(0.3) million, respectively, compared to $(1.9) million and
$(4.8) million, respectively, for the corresponding periods of the prior year.

     Compensation expense of $6.4 to $8.4 million is expected to be recorded in 
the fourth quarter of 1998 in connection with the termination of the Company's 
Value Creation Units Plan. Such expense consists of a $3.0 to $5.0 million cash 
payment and approximately $3.4 million for the intrinsic value of stock options
to be granted in connection with such termination. The stock options will be 
fully vested options to purchase up to 3% of the fully diluted Company Common 
Stock immediately following the Merger (including shares to be reserved for 
issuance under the Company's 1998 Stock Incentive Plan). Such options will have 
a per share strike price not less than the greater of $.50 and 25% of the fair 
market value of a share of Company Common Stock on the date of issuance. Such 
options will not be exercisable for a period of 90 days after issuance.

Selected Division Operating Data.
-------------------------------- 

     Through the third quarter of 1998, the Company primarily operated full-
service Mexican restaurants in two divisions under the El Torito, Chi-Chi's,
Casa Gallardo and other names.  At September 27, 1998 the Company's El Torito
restaurant division operated 95 restaurants and the Company's Chi-Chi's
restaurant division operated 171 restaurants.

     The following table sets forth certain information regarding the Company,
its El Torito and Chi-Chi's restaurant divisions, and the various operations
divested in 1996.

                                      -19-
<PAGE>
<TABLE> 
<CAPTION> 
                                              For the Quarter Ended                     For the Nine Months Ended
                                   -----------------------------------------    -----------------------------------------
                                    Sept. 27,      Sept. 28,      Sept. 29,      Sept. 27,      Sept. 28,      Sept. 29,
                                      1998           1997           1996           1998           1997           1996
                                   -----------    -----------    -----------    -----------    -----------    -----------
                                                         ($ in thousands, except average check amount)
<S>                                <C>            <C>            <C>            <C>            <C>            <C> 
El Torito Restaurant Division
-----------------------------
Restaurants Open at End of Period:
  Owned/operated                            95             97             98             95             97             98
  Franchised and Licensed                    8              7              5              8              7              5
Sales                                 $ 53,778       $ 54,961       $ 55,258       $163,170       $167,341       $168,285
Restaurant Level Cashflow (a)            8,719          7,678          6,929         25,749         24,257         20,661
Divisional EBITDA (b)                    5,723          4,672          3,015         17,021         15,108         10,364
Percentage increase (decrease) in
    comparable restaurant sales            0.1%          (0.1)%         (4.4)%         (0.2)%         (0.4)%         (0.4)%
Average check                         $  10.15       $   9.75       $   9.36       $  10.02       $   9.70       $   9.37

Chi-Chi's Restaurant Division
-----------------------------
Restaurants Open at End of Period:
  Owned/operated                           171            180            186            171            180            186
  Franchised and Licensed                   12             16             21             12             16             21
Sales                                 $ 61,515       $ 61,624       $ 66,207       $185,524       $187,325       $215,588
Restaurant Level Cashflow (a)            4,474          4,118          4,005         13,411         12,135          5,666
Divisional EBITDA (b)                       96             65            789          1,300            423         (4,845)
Percentage decrease in comparable
    restaurant sales                       3.1%          (5.1)%        (13.9)%          0.9 %         (9.1)%        (12.5)%
Average check                         $   8.22       $   7.37       $   7.31       $   7.83       $   7.45       $   7.36

Ongoing Operations
------------------
Restaurants Open at End of Period:
  Owned/operated                           266            277            284            266            277            284
  Franchised and Licensed                   20             23             26             20             23             26
Sales                                 $115,293       $116,585       $121,465       $348,694       $354,666       $383,873
Divisional EBITDA (b)                    5,819          4,737          3,804         18,321         15,531          5,519

Divested Operations (c)
-----------------------
Restaurants Open at End of Period:
  Owned/operated                             0              0             12              0              0             12
  Franchised and Licensed                    0              0              0              0              0              0
Sales                                 $      0       $      0       $  7,078       $      0       $      0       $222,745
Divisional EBITDA (b)                        0              0           (322)             0              0         19,366

Total Company
-------------
Restaurants Open at End of Period:
  Owned/operated                           266            277            296            266            277            296
  Franchised and Licensed                   20             23             26             20             23             26
Sales                                 $115,293       $116,585       $128,543       $348,694       $354,666       $606,618
EBITDA (d)                               5,761          4,682          3,538         18,153         15,396         25,220
</TABLE> 

(a) Restaurant Level Cashflow with respect to any operating division represents
    Divisional EBITDA (as defined below) before general and administrative
    expenses and any net franchise profit or miscellaneous income (expense)
    reported by the respective division.
(b) Divisional EBITDA with respect to any operating division is defined as
    earnings (loss) before opening costs, gain (loss) on disposition of
    properties, interest, taxes, depreciation and amortization.
(c) Divested Operations in 1996 includes the results of the Family Restaurant
    Division until it was divested on May 23, 1996 and the traditional
    dinnerhouse restaurants that were divested by year-end 1996.
(d) EBITDA is 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, interest, taxes, depreciation and
    amortization. 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 activities as a measure of liquidity. Furthermore, other companies
    may compute EBITDA differently, and therefore, EBITDA amounts among
    companies may not be comparable.

                                     -20-

<PAGE>
 
                          PART II.  OTHER INFORMATION
                          ---------------------------

Item 1.   Legal Proceedings
------                     

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

Item 2.   Changes in Securities and Use of Proceeds
------                                             

     None.

Item 3.   Defaults Upon Senior Securities
------                                   

     None.

Item 4.   Submission of Matters to a Vote of Security Holders
------                                                       

     None.

Item 5.   Other Information
------                     

     None.

Item 6.   Exhibits and Reports on Form 8-K
------                                    

     (a)  Exhibits

          2  (a)  Stock Purchase Agreement dated as of March 1, 1996 by and
                  among Koo Koo Roo Enterprises, Inc., Flagstar Companies, Inc.,
                  Flagstar Corporation and FRD Acquisition Co. (Filed as Exhibit
                  2.1 to the Company's Form 10-Q filed with the SEC on May 15,
                  1996.)

          2  (b)  Agreement and Plan of Merger, dated as of June 9, 1998, by and
                  among the Company, FRI-Sub, Inc. and Koo Koo Roo, Inc.
                  ("KKR"). (Filed as Exhibit 2.1 to the Company's Form S-4 filed
                  with the SEC on July 1, 1998.)
 
          3  (a)  Fifth Restated Certificate of Incorporation of the Company.
                  (Filed as Exhibit 4.1 to the Company's Form S-8 filed with the
                  SEC on November 12, 1998.)
 
 
          3  (b)  Amendment to Fifth Restated Certificate of Incorporation of
                  the Company. (Filed as Exhibit 4.2 to the Company's Form S-8
                  filed with the SEC on November 12, 1998.)
 

                                      -21-
<PAGE>
 
          3  (c)  Amended and Restated Bylaws of the Company. (Filed as Exhibit
                  4.3 to the Company's Form S-8 filed with the SEC on November
                  12, 1998.) 
 
          4  (a)  Indenture dated as of January 27, 1994 Re: $300,000,000 9-3/4%
                  Senior Notes due 2002. (Filed as Exhibit 4(a) to the Company's
                  Form 10-K filed with the SEC on March 28, 1994.)

          4  (b)  Indenture dated as of January 27, 1994 Re: $150,000,000 10-
                  7/8% Senior Subordinated Discount Notes due 2004. (Filed as
                  Exhibit 4(b) to the Company's Form 10-K filed with the SEC on
                  March 28, 1994.)

          4  (c)  First Supplemental Indenture, dated as of July 3, 1996,
                  between the Registrant and IBJ Schroder Bank & Trust Company,
                  a New York Banking corporation, as Trustee. (Filed as Exhibit
                  10.1 to the Company's Form 8-K filed with the SEC on July 9,
                  1996.)

          4  (d)  First Supplemental Indenture, dated as of July 3, 1996,
                  between the Registrant and Fleet National Bank, as successor
                  by merger to Fleet National Bank of Massachusetts, formerly
                  known as Shawmut Bank, N.A., as Trustee. (Filed as Exhibit
                  10.2 to the Company's Form 8-K filed with the SEC on July 9,
                  1996.)

          4  (e)  Note Agreement dated as of August 12, 1997 Re: Up to
                  $75,000,000 FRI-MRD Corporation Senior Discount Notes due
                  January 24, 2002. (Filed as Exhibit 4(e) to the Company's Form
                  10-Q filed with the SEC on November 12, 1997.)

          4  (f)  Joinder Agreement dated as of January 14, 1998 Re: FRI-MRD
                  Corporation Senior Discount Notes due January 24, 2002. (Filed
                  as Exhibit 4(f) to the Company's Form 10-K filed with the SEC
                  on March 30, 1998.)

          4  (g)  First Amendment dated as of June 9, 1998 to the Note Agreement
                  dated August 12, 1997. (Filed as Exhibit 4.7 to the Company's
                  Form S-4 filed with the SEC on July 1, 1998.)

          4  (h)  Note Agreement dated as of June 9, 1998 Re: $24,000,000 FRI-
                  MRD Corporation Senior Secured Discount Notes due January 24,
                  2002. (Filed as Exhibit 4.8 to the Company's Form S-4 filed
                  with the SEC on July 1, 1998.)

         *4  (i)  First Amendment dated as of October 30, 1998 to the Note
                  Agreement dated as of June 9, 1998.

                                      -22-
<PAGE>
 
         10  (ee) Stock Purchase Agreement dated as of June 9, 1998 by and
                  between FRI-MRD Corporation and KKR. (Filed as Exhibit 10.1 to
                  the Company's Form S-4 filed with the SEC on July 1, 1998.)

         10  (ff) Amendment Number Three to Loan and Security Agreement, dated
                  as of April 9, 1998 by and among the parties thereto. (Filed
                  as Exhibit 10.29 to Amendment No. 1 to the Company's Form S-4
                  filed with the SEC on August 18, 1998.)

         10  (gg) Amendment Number Four to Loan and Security Agreement dated as
                  of June 9, 1998 by and among the parties thereto. (Filed as
                  Exhibit 10.30 to Amendment No. 1 to the Company's Form S-4
                  filed with the SEC on August 18, 1998.)

        *10  (hh) Amendment Number Five to Loan and Security Agreement dated as
                  of October 30, 1998 by and among the parties thereto.

        *10  (ii) Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive Plan.

        *27       Financial Data Schedule.

--------
* Filed herewith.


(b)  Reports on Form 8-K.

     None.

                                      -23-
<PAGE>
 
                                   SIGNATURE
                                   ---------


     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                              Koo Koo Roo Enterprises, Inc.
                              (Registrant)


                              By: /s/ Robert T. Trebing, Jr.
                                  --------------------------
                                     Robert T. Trebing, Jr.
                                  Executive Vice President and
                                    Chief Financial Officer
                                  (Principal Financial Officer)

Date:  November 12, 1998

                                      -24-