<PAGE>   1

                                                                   EXHIBIT 4(e)



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                               FRI-MRD CORPORATION





                                 NOTE AGREEMENT





                           Dated as of August 12, 1997


                                       Re:


                  Up to $75,000,000 15.0% Senior Discount Notes

                              due January 24, 2002














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<PAGE>   2
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
SECTION HEADING                                                                                     PAGE
<S>        <C>                                                                                      <C>
SECTION 1.  DESCRIPTION OF NOTES AND COMMITMENT . . . . . . . . . . . . . . . . . . . . . . . . .     1
                 Section 1.1.  Description of Notes . . . . . . . . . . . . . . . . . . . . . . .     1
                 Section 1.2.  Commitment, Closing Date.  . . . . . . . . . . . . . . . . . . . .     1
                 Section 1.3.  Right of First Offer.  . . . . . . . . . . . . . . . . . . . . . .     2

SECTION 2.  PREPAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3
                 Section 2.1.  Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . .     3
                 Section 2.2.  Notice of Prepayments  . . . . . . . . . . . . . . . . . . . . . .     3
                 Section 2.3.  Allocation of Prepayments  . . . . . . . . . . . . . . . . . . . .     3

SECTION 3.  REPRESENTATIONS.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3
                 Section 3.1.  Representations of the Company . . . . . . . . . . . . . . . . . .     3
                 Section 3.2.  Representations of the Purchasers  . . . . . . . . . . . . . . . .     3

SECTION 4.  CLOSING CONDITIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5
                 Section 4.1.  Closing Certificate  . . . . . . . . . . . . . . . . . . . . . . .     5
                 Section 4.2.  Company's Existence and Authority  . . . . . . . . . . . . . . . .     5
                 Section 4.3.  Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5
                 Section 4.4.  Opinion  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5

SECTION 5.  COMPANY COVENANTS.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5
                 Section 5.1.  Corporate Existence, Etc.  . . . . . . . . . . . . . . . . . . . .     5
                 Section 5.2.  Insurance  . . . . . . . . . . . . . . . . . . . . . . . . . . . .     6
                 Section 5.3.  Taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     6
                 Section 5.4.  Maintenance, Etc.  . . . . . . . . . . . . . . . . . . . . . . . .     6
                 Section 5.5.  Limitations on Indebtedness. . . . . . . . . . . . . . . . . . . .     7
                 Section 5.6.  Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . . .     8
                 Section 5.7.  Restricted Payments  . . . . . . . . . . . . . . . . . . . . . . .     8
                 Section 5.8.  Mergers, Consolidations and Sales of Assets  . . . . . . . . . . .     9
                 Section 5.9.  Transactions with Affiliates . . . . . . . . . . . . . . . . . . .     9
                 Section 5.10.  Financial Statements, etc . . . . . . . . . . . . . . . . . . . .    11

SECTION 6.  EVENTS OF DEFAULT AND REMEDIES THEREFOR . . . . . . . . . . . . . . . . . . . . . . .    11
                 Section 6.1.  Events of Default  . . . . . . . . . . . . . . . . . . . . . . . .    11
                 Section 6.2.  Notice to Holders  . . . . . . . . . . . . . . . . . . . . . . . .    13
                 Section 6.3.  Acceleration of Maturities . . . . . . . . . . . . . . . . . . . .    13
                 Section 6.4.  Rescission of Acceleration . . . . . . . . . . . . . . . . . . . .    13

SECTION 7.  AMENDMENTS, WAIVERS AND CONSENTS  . . . . . . . . . . . . . . . . . . . . . . . . . .    13
                 Section 7.1.  Consent Required . . . . . . . . . . . . . . . . . . . . . . . . .    13
</TABLE>



<PAGE>   3


<TABLE>
<CAPTION>
SECTION HEADING                                                                                    PAGE
<S>        <C>                                                                                      <C>
                 Section 7.2.  Solicitation of Noteholders  . . . . . . . . . . . . . . . . . . .    14
                 Section 7.3.  Effect of Amendment or Waiver  . . . . . . . . . . . . . . . . . .    14

SECTION 8.  INTERPRETATION OF AGREEMENT; DEFINITIONS  . . . . . . . . . . . . . . . . . . . . . .    14
                 Section 8.1.  Definitions  . . . . . . . . . . . . . . . . . . . . . . . . . . .    14
                 Section 8.2.  Accounting Principles  . . . . . . . . . . . . . . . . . . . . . .    22

SECTION 9.  MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    22
                 Section 9.1.  Note Register  . . . . . . . . . . . . . . . . . . . . . . . . . .    22
                 Section 9.2.  Exchange of Notes  . . . . . . . . . . . . . . . . . . . . . . . .    22
                 Section 9.3.  Loss, Theft, Etc. of Notes . . . . . . . . . . . . . . . . . . . .    23
                 Section 9.4.  Powers and Rights Not Waived; Remedies Cumulative  . . . . . . . .    23
                 Section 9.5.  Notices  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    23
                 Section 9.6.  Successors and Assigns . . . . . . . . . . . . . . . . . . . . . .    24
                 Section 9.7.  Integration and Severability.  . . . . . . . . . . . . . . . . . .    24
                 Section 9.8.  Governing Law  . . . . . . . . . . . . . . . . . . . . . . . . . .    24
                 Section 9.9.  Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    24
                 Section 9.10.  Brokerage Fees  . . . . . . . . . . . . . . . . . . . . . . . . .    24
</TABLE>






<PAGE>   4
                         ATTACHMENTS TO NOTE AGREEMENT:


Schedule I       Name and Address of Purchasers

Exhibit A        Form of 15.0% Senior Discount Note Due January 24, 2002

Exhibit B        Closing Certificate of the Company


















<PAGE>   5

                               FRI-MRD CORPORATION


                                 NOTE AGREEMENT

                RE: UP TO $75,000,000 15.0% SENIOR DISCOUNT NOTES

                              DUE JANUARY 24, 2002



                          Dated as of August 12, 1997

To the Purchasers named in Schedule I attached hereto that are signatories to
this Agreement

Ladies and Gentlemen:

         The undersigned, FRI-MRD Corporation, a Delaware corporation (the
"Company"), agrees with each Purchaser as follows:

SECTION 1.  DESCRIPTION OF NOTES AND COMMITMENT.

         Section 1.1.  Description of Notes.  The Company will authorize the
issue and sale of up to $75,000,000 aggregate principal amount of its 15.0%
Senior Discount Notes due January 24, 2002 (the "Notes") to be dated the date
of issue. Each Note will be issued at substantial discount from its principal
amount for a price equal to its Purchase Price on the date of purchase.  Cash
interest will not accrue on the Notes prior to July 31, 1999.  Thereafter,
interest on the Notes will accrue at the lower of (i) 15.0% per annum and (ii)
the highest rate permitted by law (the "Interest Rate") and will be payable
semi-annually on January 31 and July 31 of each year, commencing on January 31,
2000, and at maturity.  The Notes will bear interest on overdue principal
(including any overdue required or optional prepayment of principal) and
premium, if any, and (to the extent legally enforceable) on any overdue
installment of interest at the Interest Rate from the date such payment is due,
whether by acceleration or otherwise, until paid.  The Notes will mature on
January 24, 2002, and will be substantially in the form attached hereto as
Exhibit A.  Interest on the Notes shall be computed on the basis of a 360-day
year of twelve 30-day months.  The term "Notes" as used herein shall include
each Note delivered pursuant to this Agreement.  The terms that are capitalized
herein shall have the meanings set forth in Section 8.1 hereof unless the
context shall otherwise require.  The Notes will be senior unsecured
obligations of the Company, ranking pari passu with all existing and future
unsecured or unsubordinated Indebtedness of the Company.

         Section 1.2.  Commitment, Closing Date.  Subject to the terms and
conditions hereof and on the basis of the representations and warranties
hereinafter set forth, the Company agrees to







                                       1

<PAGE>   6

issue and sell to each Purchaser, and each Purchaser agrees to purchase from
the Company, the aggregate principal amount of Notes set forth opposite such
Purchaser's name on Schedule I attached hereto by delivery of the Purchase
Price for such Notes, which may be paid in cash (the "Cash Portion") or by
delivery of Senior Notes (the "Senior Note Portion") as set forth on Schedule
I.  Delivery of the Notes will be made at the principal offices of Skadden,
Arps, Slate, Meagher & Flom LLP, 919 Third Avenue, New York, New York, 10022
against (i) payment therefor in Federal or other funds current and immediately
available in an amount equal to the Cash Portion and (ii) delivery of the
Senior Note Portion, together with bond powers duly executed in blank, in each
case at 10 A.M., Eastern time, on August 12, 1997 (the "Initial Closing Date")
and also at such later date or dates, if any, as the Company shall specify by
not less than five Business Days' prior written notice to the applicable
Purchaser (the "Subsequent Closing Date[s]" and, together with the Initial
Closing Date, the "Closing Date").  The Notes delivered to each Purchaser on
the Closing Date will be delivered in the form of a single registered Note
registered in the name of such Purchaser or in the name of such nominee or in
such other denominations (not less than $100,000 in principal amount) as such
Purchaser may specify no later than two Business Days prior to the Closing Date
and in substantially the form attached hereto as Exhibit A; provided, however,
that the Company shall not be required to issue any Notes in a denomination of
less than $1,000,000 if immediately after such issuance there would be issued
and outstanding more than twenty Notes of less than $1,000,000.

         Section 1.3.  Right of First Offer.  The Company shall provide the
Persons who purchased Notes on the Initial Closing Date (the "Original
Purchasers") with written notice (the "Notice") of the Company's desire to
issue Notes (the "Additional Notes") on any Subsequent Closing Date, which
Notice shall set forth the proposed Purchase Price and aggregate principal
amount for the Additional Notes proposed to be sold.  If the Original
Purchasers deliver to the Company, within 15 days following the delivery of the
Notice, a written acceptance (an "Acceptance") setting forth the binding
commitment of such Original Purchasers to purchase all but not less than all of
the Additional Notes for the Purchase Price set forth in the Notice (allocated
among the Original Purchasers pro rata based on the principal amount of Notes
purchased on the Initial Closing Date), then the Company shall sell, and the
Original Purchasers shall purchase, all of the Additional Notes on a date no
later than 30 days after delivery of the Notice pursuant to the terms of
Section 1.2.  If the Original Purchasers fail to deliver an Acceptance within
15 days after delivery of the Notice, or fail to purchase all of the Additional
Notes within 30 days after delivery of the Notice (which failure shall not
relieve any Original Purchaser of its binding commitment to purchase its pro
rata share of Additional Notes), then the Company may issue Additional Notes to
any one or more other Purchasers at a Purchase Price equal to or greater than
the proposed Purchase Price.


SECTION 2.  PREPAYMENT OF NOTES.








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<PAGE>   7

         No prepayment of the Notes may be made except to the extent and in the
manner expressly provided in this Agreement.

         Section 2.1.  Optional Prepayments.  The Company may at any time
prepay the outstanding Notes, either in whole or in part, by payment of the
aggregate Accreted Value (or portion thereof) and (in addition) after July 31,
1999 accrued and unpaid interest thereon to the date of such prepayment,
together with a premium equal to the Call Premium, determined two Business Days
prior to the date of such prepayment.  Any partial prepayment shall be for an
amount not less than $1,000,000 of the aggregate principal amount of the Notes
then outstanding.

         Section 2.2.  Notice of Prepayments.  The Company will give notice of
any prepayment of the Notes pursuant to Section 2.1 to the holder thereof not
less than 30 days nor more than 45 days before the date fixed for such
prepayment specifying (a) such date, (b) the aggregate Accreted Value (or
portion thereof) of the Notes to be prepaid and (c) accrued and unpaid
interest, if any, applicable to the prepayment.  Notice of prepayment having
been so given, the aggregate Accreted Value (or portion thereof) specified in
such notice, together with the Call Premium and accrued and unpaid interest, if
any, shall become due and payable on the prepayment date.

         Section 2.3.  Allocation of Prepayments.  All partial prepayments made
pursuant to Section 2.1 hereof shall be applied on all outstanding Notes
ratably in accordance with the unpaid Accreted Value thereof; provided, that
the Company may make such adjustments so that each Note remaining outstanding
after any such prepayment shall be at least $1,000,000 aggregate principal
amount.

SECTION 3.  REPRESENTATIONS.

         Section 3.1.  Representations of the Company.  The Company represents
and warrants that all representations set forth in the form of certificate
attached hereto as Exhibit B are true and correct as of the date hereof and are
incorporated herein by reference with the same force and effect as though
herein set forth in full.

         Section 3.2.  Representations of the Purchasers.  Each Purchaser
represents, warrants and agrees that:

                          (a)  Such Purchaser is acquiring its Notes for the
         purpose of investment and not with a view to the distribution thereof,
         and that such Purchaser has no present intention of selling,
         negotiating or otherwise disposing of its Notes; provided that the
         disposition of its property shall at all times be and remain within
         its control.






                                       3

<PAGE>   8

                          (b)  No part of the funds to be used by such
         Purchaser to purchase the Notes constitutes assets allocated to any
         separate account maintained by it.  As used in this Section 3.2(b),
         the term "separate account" shall have the meaning assigned to it in
         ERISA.

                          (c)  The Notes are issued at a substantial discount
         from their principal amount.  Consequently, such Purchaser is aware
         that it may be required to include amounts in gross income for federal
         income tax purposes in advance of receipt of the cash payments to
         which the income is attributable.

                          (d)  Such Purchaser is the sole legal and beneficial
         owner of the Senior Note Portion, if any, to be delivered by it, free
         and clear of all Liens, except for Liens expressly imposed in favor of
         FRI by the terms of the Senior Note Indenture.

                          (e)  Such Purchaser is duly organized, validly
         existing and in good standing under the laws of the jurisdiction of
         its organization with all requisite power and authority to execute,
         deliver and perform its obligations under this Agreement and to
         consummate the transactions contemplated hereby.

                          (f)  No approval, consent or withholding of objection
         on the part of any regulatory body, state, federal or local, or any
         other third party is necessary in connection with the execution by
         such Purchaser of the Agreement or its acceptance of its Notes or
         compliance by such Purchaser with any of the provisions of the
         Agreement or the Notes, unless such consent or approval has already
         been obtained.

                          (g)  The execution, delivery and performance by such
         Purchaser of this Agreement and all other instruments and documents to
         be executed and delivered by such Purchaser in connection herewith are
         not (and will not be or result) in conflict with or in material
         contravention or material violation of any law (including common law),
         rule or regulation by which such Purchaser is bound or to which it is
         subject or any material agreement to which it is a party.

                          (h)  The Notes have not been registered under the
         Securities Act of 1933, as amended (the "Securities Act"), or any
         state securities laws, and may not be sold, transferred or otherwise
         disposed of by such Purchaser without such registration or an
         exemption therefrom.  Such Purchaser is either an accredited investor
         within the meaning of Rule 501 of the Securities Act or a qualified
         institutional buyer within the meaning of Rule 144A of the Securities
         Act.

                          (i)  Such Purchaser understands that the Company may
         have material, non-public information regarding FRI or the Company and
         their respective conditions (financial or otherwise), results of
         operations, businesses, properties, plans and prospects (collectively,
         "Information").  Such Purchaser further acknowledges that it has been





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<PAGE>   9

         offered and does not wish to receive any of this Information and that
         such information might be material to such Purchaser's decision to
         sell Senior Notes or purchase the Notes or might otherwise be
         materially adverse to such Purchaser's Senior Notes.  Accordingly,
         such Purchaser acknowledges and agrees that the Company shall have no
         obligation to disclose to such Purchaser any of such Information.

SECTION 4.  CLOSING CONDITIONS.

         Each Purchaser's obligation to purchase the Notes on the applicable
Closing Date shall be subject to the performance by the Company of its
agreements hereunder that are to be performed at or prior to the time of
delivery of the Notes, and to the following further conditions precedent:

         Section 4.1.  Closing Certificate.  Such Purchaser shall have received
a certificate dated such Closing Date, signed by an Officer of the Company
substantially in the form attached hereto as Exhibit B.

         Section 4.2.  Company's Existence and Authority.  Such Purchaser shall
have received, in form and substance reasonably satisfactory to it, such
documents and evidence with respect to the Company as such Purchaser may
reasonably request in order to establish the existence and good standing of the
Company and the authorization of the transactions contemplated by this
Agreement.

         Section 4.3.  Consents.  Any consents or approvals required to be
obtained by the Company, FRI or any of their Subsidiaries that are necessary to
permit the consummation of the transactions contemplated hereby on such Closing
Date shall have been obtained.

         Section 4.4.  Opinion.  Each Purchaser shall have received an opinion
dated the applicable Closing Date from Skadden, Arps, Slate, Meagher & Flom
LLP, counsel for the Company, substantially in the form of Exhibit C.

         The Company's obligation to sell the Notes to a Purchaser on the
applicable Closing Date shall be subject to the performance by such Purchaser
of its agreements hereunder that are to be performed at or prior to the time of
delivery of the Notes and to the conditions precedent contained in Section 4.3.

SECTION 5.  COMPANY COVENANTS.

         From and after the date of this Agreement and continuing so long as
any amount remains unpaid on any Note:

         Section 5.1.  Corporate Existence, Etc.  The Company will preserve and
keep in force and effect its corporate existence, and will cause each
Subsidiary to preserve and keep in force







                                       5


<PAGE>   10

and effect its corporate, partnership or other existence in accordance with the
respective organizational documents of each such Subsidiary, and the rights and
franchises of the Company and its Subsidiaries, provided that (a) the Company
shall not be required to preserve any such right or franchise, or the
existence, right or franchise of any of its Subsidiaries, if the Board of
Directors of the Company shall determine that the preservation thereof is no
longer desirable in the conduct of the businesses of the Company and its
Subsidiaries taken as a whole and (b) the provisions of this Section 5.1 shall
not limit the ability of the Company or any Subsidiary of the Company to engage
in any transaction permitted by Section 5.8 hereof.

         Section 5.2.  Insurance.  The Company will maintain, and will cause
each Subsidiary to maintain, insurance coverage by financially sound and
reputable insurers in such forms and amounts and against such risks as are
customary for corporations of established reputation engaged in the same or a
similar business and owning and operating similar properties.

         Section 5.3.  Taxes.  The Company will pay or discharge or cause to be
paid or discharged, before the same shall become delinquent, all material
taxes, assessments and governmental charges levied or imposed upon the Company
or any of its Subsidiaries or upon the income, profits or property of the
Company or of any such Subsidiary; provided, however, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment or charge (i) whose amount, applicability or validity is being
contested in good faith by appropriate proceedings and, if required by GAAP,
for which adequate provision has been made, or (ii) where the failure to effect
such payment or discharge is not adverse in any material respect to any
Purchaser.

         Section 5.4.  Maintenance, Etc.  The Company will cause all material
properties owned by or leased to it or any of its Subsidiaries and material to
the business of the Company and its Subsidiaries, taken as a whole, to be
maintained and kept in normal condition and working order (ordinary wear and
tear and losses due to casualty excepted) and will from time to time cause to
be made all necessary repairs, renewals, and replacements thereof, all as in
the judgment of the Company may be necessary, so that the business carried on
in connection therewith may be properly conducted; provided, however, that (a)
nothing in this Section shall prevent the Company from discontinuing the use,
operation or maintenance of any of such properties, or disposing of any of
them, if such discontinuance or disposal is, in the judgment of its Board of
Directors or of the Board of Directors, board of trustees or managing partners
of the Subsidiary concerned, or of an Officer (or other agent employed by the
Company or any of its Subsidiaries) of the Company or such Subsidiary having
managerial responsibility for any such property, desirable in the conduct of
the businesses of the Company or any of its Subsidiaries (provided that any
such disposal is for a fair value after taking into account all circumstances
involved in the decision to dispose of such property); and (b) the provisions
of this Section 5.4 shall not limit the ability of the Company or any
Subsidiary to engage in any transaction permitted by Section 5.8 hereof.





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<PAGE>   11

         Section 5.5.  Limitations on Indebtedness.  The Company will not, and
will not permit any Subsidiary to, create, assume or incur any Indebtedness
except:

                          (1)  Indebtedness evidenced by the Notes;

                          (2)  Indebtedness under the Credit Agreement not to
                 exceed $35,000,000 in principal amount outstanding at any one
                 time; provided, however, such Indebtedness may exceed
                 $35,000,000 if the consolidated EBITDA of the Company and its
                 Subsidiaries, on a pro forma basis for the twelve-month period
                 ending on the last day of the calendar quarter immediately
                 preceding the date of such incurrence equals or exceeds 1.75
                 times the amount of the projected consolidated net interest
                 expense (before amortization of debt issuance costs) of the
                 Company and its Subsidiaries for the twelve-month period
                 immediately following the incurrence of such additional
                 Indebtedness;

                          (3)  Indebtedness of the Company and its Subsidiaries
                               outstanding as of the date of this Agreement;

                          (4)  Indebtedness relating to insurance premium
                 financing or in respect of workers' compensation claims, in
                 each case incurred in the ordinary course of business;

                          (5)  Indebtedness relating to the Company's and its
                 Subsidiaries' controlled disbursement accounts or in respect
                 of overdrafts of zero balance bank accounts, in each case
                 incurred in the ordinary course of business;

                          (6)  Indebtedness in respect of Capitalized Lease
                 Obligations or purchase money financings (including the
                 purchase price of inventory); provided that such Indebtedness
                 is secured only by the applicable asset;

                          (7)  Indebtedness between a Subsidiary and the
                 Company or between Subsidiaries;

                          (8)  Indebtedness represented by surety and
                 performance bonds and similar obligations, in each case
                 incurred in the ordinary course of business;

                          (9)  Hedging Obligations of the Company or a
                 Subsidiary incurred in the ordinary course of business;

                          (10)  Notwithstanding any amounts incurred under
                 clauses (1) through (9) of this Section 5.5, additional
                 Indebtedness of the Company and  its Subsidiaries outstanding
                 at any time that does not exceed in the aggregate an amount
                 equal to





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<PAGE>   12

                 (i) $75,000,000 less (ii) the aggregate principal amount of
                 Notes then outstanding; and

                          (11)  Indebtedness issued or incurred in connection
                 with the renewal, expansion or refunding of Indebtedness
                 permitted by the preceding clauses (1) through (10) of this
                 Section 5.5; provided that any expansion of such Indebtedness
                 would otherwise satisfy the conditions of one of the other
                 clauses (1) through (10) of this Section 5.5.

         Section 5.6.  Limitation on Liens.  The Company will not, and will not
permit any Subsidiary to, create, incur, assume or suffer to exist any Liens
other than Permitted Liens unless the Notes are secured equally and ratably
with any other obligations thereby secured.

         Section 5.7.  Restricted Payments.  The Company will not, and will not
permit any Subsidiary, to make any distribution or declare or pay any dividends
(in cash or other property, other than capital Stock) on, or purchase, redeem
or otherwise retire any of the Company's or any of its Subsidiaries' capital
Stock, whether now or hereafter outstanding, except:

                          (a)  Any Subsidiary may declare and pay dividends or
         other distributions to, or purchase, redeem or otherwise retire any
         capital Stock from, the Company or any Subsidiary.

                          (b)  So long as no Event of Default exists and is
         continuing at the time of such payment or would result therefrom, the
         Company may declare and pay dividends or other distributions to FRI in
         amounts from time to time required to make regular interest payments
         with respect to the FRI Notes (excluding therefrom any interest in
         respect of any increase in the aggregate principal amount thereof
         occurring after the Initial Closing Date), if and so long as FRI uses
         the proceeds of such dividends or other distributions to satisfy such
         interest obligation.

                          (c)  The Company may declare and pay dividends or
         other distributions to FRI during each fiscal year equal to the sum of
         (i) an amount not in excess of the federal, state, local and foreign
         taxes and assessments payable by FRI and its subsidiaries (determined
         on a consolidated basis) for such year, plus (ii) the aggregate amount
         of all general corporate, operating and administrative expenses
         incurred by FRI (including, without limitation, any such expenses
         incurred on behalf of its Subsidiaries) in the ordinary course of
         business.

                          (d)  The Company and each Subsidiary may purchase,
         acquire, cancel or otherwise retire for value shares of capital Stock
         of FRI or any of its Subsidiaries, options on any such shares or
         related stock appreciation rights or similar securities held by
         directors, officers, employees or former directors, officers or
         employees (or their estates or beneficiaries under their estates or
         permitted transferees) that were issued





                                       8
<PAGE>   13

         pursuant to any Stock Based Plan, in each case upon death, disability,
         retirement, termination or pursuant to the terms of such Stock Based
         Plan; provided, however, that the aggregate consideration paid for
         such purchases, acquisitions, cancellations or retirements shall not
         exceed $2.5 million in any fiscal year.

         Notwithstanding the foregoing, this Agreement does not prevent
immaterial cash dividends in lieu of payment of fractional shares.


         Section 5.8.  Mergers, Consolidations and Sales of Assets.

                          (a)  The Company will not, and will not permit any
         Subsidiary to, (1) consolidate with or be a party to a merger with any
         other corporation, (2) sell, lease or otherwise dispose of all or
         substantially all of the assets of the Company and its Subsidiaries
         (on a consolidated basis), or (3) issue any securities or any rights
         or options to purchase securities for less than fair value as
         determined in good faith by the Board of Directors, provided, however,
         that:

                          (i)  any Subsidiary may merge or consolidate with or
                 into the Company or any Subsidiary;

                          (ii)  the Company may consolidate or merge with any
                 other corporation if (A) the Company shall be the surviving or
                 continuing corporation or else the surviving or continuing
                 corporation shall (x) have a consolidated EBITDA for the
                 twelve- month period ending on the last day of the calendar
                 quarter immediately preceding the date of such consolidation
                 or merger, determined on a pro forma basis, equal to or
                 exceeding that of the Company for such period and (y) assume
                 all of the obligations of the Company under the Notes and this
                 Agreement and (B) at the time of such consolidation or merger
                 and after giving effect thereto no Default or Event of Default
                 shall have occurred and be continuing; and

                          (iii)  any Subsidiary may sell, lease or otherwise
                 dispose of its assets, or issue securities, to the Company or
                 any Subsidiary.

         Section 5.9.  Transactions with Affiliates.  The Company will not, and
will not permit any Subsidiary to, enter into any transaction (or series of
related transactions) (a "Transaction") with any holder (or any Affiliate of
such holder) of 5% or more of any class of capital Stock of the Company or with
any Affiliate of the Company, involving payments by the Company or any
Subsidiary (including, without limitation, any sale, purchase, lease or loan or
any other direct or indirect payment, transfer or other disposition) in excess
of $2,000,000, other than the following Transactions:





                                       9
<PAGE>   14
                          (i)  Transactions between or among the Company and
                 its Subsidiaries or between or among such Subsidiaries,

                          (ii)  Transactions the terms of which are at least as
                 favorable as the terms that could be obtained by the Company
                 or such Subsidiary, as the case may be, in a comparable
                 transaction made on an arm's-length basis between unaffiliated
                 parties (in each case as determined in good faith by a
                 majority of the directors of the Company unaffiliated with
                 such holder or Affiliate, or if there are no such directors,
                 as determined in good faith by its Board of Directors),

                          (iii)  Transactions in which the Company or any
                 Subsidiary delivers to the holders of the Notes a written
                 opinion of an independent nationally recognized investment
                 banking firm stating that such Transaction is fair to the
                 Company or such Subsidiary from a financial point of view,

                          (iv)  the performance by the Company of its
                 obligations hereunder and under the Notes,

                          (v)  the payment of reasonable and customary
                 compensation or fees (including, without limitation, options
                 or related stock appreciation rights or similar securities
                 issued pursuant to any Stock Based Plan and payments pursuant
                 to the Value Creation Units Plan) to officers, directors, and
                 employees of FRI, the Company or any of its Subsidiaries, in
                 each case as determined by the Company's Board of Directors in
                 good faith,

                          (vi)  loans or advances to officers, directors and
                 employees of FRI, the Company or any of its Subsidiaries made
                 in the ordinary course of business not to exceed $2 million at
                 any time outstanding,

                          (vii)  purchases (for equal to or less than fair
                 value) or sales (for equal to or more than fair value) of
                 goods and services made in the ordinary course of business,

                          (viii)  Transactions permitted by, and complying
                 with, the provisions of Section 5.7 hereof,

                          (ix)  Transactions permitted by, and complying with,
                 the provisions of Section 5.8 hereof,

                          (x)  management and tax sharing agreements in effect
                 on the date hereof or any replacements thereof which do not
                 materially increase the obligations of the Company or its
                 Subsidiaries, or





                                       10
<PAGE>   15
                          (xi) Investments by the Company or any Subsidiary in
                 any Unrestricted Subsidiary not to exceed $10,000,000 in the
                 aggregate at any one time outstanding.

         Section 5.10.  Financial Statements, etc.  (a)  As long as FRI is a
reporting company under the Exchange Act, the Company shall deliver to the
holders of the Notes, FRI's form 10-Q Quarterly Reports, Form 10-K Annual
Reports, and Form 8-K Current Reports, and any other filings made by FRI with
the SEC, if any, as soon as reasonably practicable after the same are filed.

                 (b)  In the event FRI is no longer a reporting company under
the Exchange Act, the Company shall deliver to the holders of the Notes as soon
as available, but in any event within 60 days after the end of each of the
first three quarters during each of FRI's fiscal years, a company prepared
balance sheet, income statement, and statement of cash flow covering FRI's
operations during such period; and (b) as soon as available, but in any event
within 105 days after the end of each of FRI's fiscal years, financial
statements of FRI for each such fiscal year, audited by independent certified
public accountants.  Such audited financial statements shall include a balance
sheet, profit and loss statement, and statement of cash flow and, promptly
after receipt and if prepared, such accountants' letter to management.

                 (c)      Each Purchaser acknowledges that it is familiar with
its responsibilities under the federal securities laws relating to restrictions
on trading in securities of an issuer while in possession of material,
non-public information, and restrictions on sharing such information with other
persons who may engage in such trading; and agrees that such Purchaser will not
violate those restrictions, and will use reasonable efforts to prevent any of
its directors, officers, employees, agents and advisors (including, without
limitation, attorneys, accountants, bankers and financial advisors) who receive
any such information from such Purchaser concerning the Company (whether
prepared by the Company, its advisors or otherwise and irrespective of the form
of communication) from violating those restrictions.

SECTION 6.  EVENTS OF DEFAULT AND REMEDIES THEREFOR.

         Section 6.1.  Events of Default.  Any one or more of the following
shall constitute an "Event of Default" as the term is used herein:

                          (a)  Default shall occur in the payment of interest
         on any Note when the same shall have become due and such default shall
         continue for more than 10 Business Days; or

                          (b)  Default shall occur in the making of any other
         payment of the principal of any Note or the Call Premium, if any,
         thereon at the expressed or any maturity date or at any date fixed for
         prepayment; or





                                       11
<PAGE>   16


                          (c)  Default shall occur in the observance or
         performance of any other provision of this Agreement which is not
         remedied within 30 days after the date on which written notice thereof
         is given to the Company by the holders of a majority in aggregate
         Accreted Value of the outstanding Notes; or

                          (d)  Any judgment or order for the payment of money
         shall be rendered against the Company or a Material Subsidiary of the
         Company by a court of competent jurisdiction and shall not be
         discharged or stayed within 90 days, and the amount thereof that is
         not covered by insurance, letters of credit or a bond shall be in
         excess of $10,000,000 and either (i) an enforcement proceeding shall
         have been commenced by any creditor upon such judgment or order or
         (ii) there shall be any period of 90 consecutive days, after written
         notice has been given to the Company by the Holders of at least 25% in
         aggregate Accreted Value of the outstanding Notes, during which a stay
         of enforcement of such judgment or order, by reason of a pending
         appeal or otherwise, shall not be in effect; or

                          (e)  An event of default occurs which extends beyond
         any period of grace applicable thereto under any mortgage, indenture
         or other instrument under which there may be issued any Indebtedness
         of the Company or any Material Subsidiary of the Company for borrowed
         money having an outstanding principal amount of $10,000,000 or more in
         the aggregate, whether such Indebtedness now exists or shall hereafter
         be created, if either (i) such default results from the failure to pay
         principal upon the final maturity of such Indebtedness or (ii) as
         result of such event of default such Indebtedness has been declared to
         be due and payable prior to its stated maturity, provided, however,
         that if such default shall be remedied or cured or waived by the
         holders of such Indebtedness, then the Event of Default hereunder by
         reason thereof shall be deemed to have been thereupon remedied, cured
         or waived without further action on the part of the holders of the
         Notes; or

                          (f)  The Company or any Material Subsidiary becomes
         insolvent, is generally not paying its debts as they become due or
         makes an assignment for the benefit of creditors, or the Company or
         any Material Subsidiary applies for or consents to the appointment of
         a custodian, trustee, liquidator, or receiver for the Company or such
         Subsidiary or for the major part of the property of either; or

                          (g)  A custodian, trustee, liquidator, or receiver is
         appointed for the Company or any Material Subsidiary or for the major
         part of the property of either and is not discharged within 45 days
         after such appointment; or

                          (h)  Bankruptcy, reorganization, arrangement or
         insolvency proceedings, or other proceedings for relief under any
         bankruptcy or similar law or laws for the relief of debtors, are
         instituted by or against the Company or any Material Subsidiary and,
         if





                                       12
<PAGE>   17

         instituted against the Company or any Material Subsidiary, are
         consented to or are not dismissed within 45 days after such
         institution; or

                          (i)  A Change of Control occurs; or

                          (j)  FRI retires or prepays all or any portion of the
         FRI Notes with a source other than (i) assets of FRI, (ii) Notes
         issued in exchange for FRI Notes or (iii) proceeds of Indebtedness
         issued by FRI or the Company that is subordinate in right of payment
         to the Notes.

         Section 6.2.  Notice to Holders.  When the Company has knowledge that
any Event of Default described in the foregoing Section 6.1 has occurred, the
Company agrees to give notice to the holders of the outstanding Notes within
three Business Days of the date on which the Company becomes aware of such
Event of Default.

         Section 6.3.  Acceleration of Maturities.  When any Event of Default
described in paragraphs (a) through (j), inclusive, of said Section 6.1 has
happened and is continuing, the holder or holders of 25% or more of the
Accreted Value of outstanding Notes may, by notice to the Company, declare the
entire principal and all interest accrued and unpaid, if any, on all Notes to
be, and all Notes shall thereupon become, forthwith due and payable, without
any presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived.  When any Event of Default described in paragraph (h)
of Section 6.1 has occurred, then the Accreted Value of all outstanding Notes
(together with accrued and unpaid interest, if any) shall immediately become
due and payable without presentment, demand or notice of any kind.  Upon the
Notes becoming due and payable as a result of any Event of Default as
aforesaid, the Company will forthwith pay to the holders of the Notes the
entire Accreted Value and interest accrued and unpaid, if any, on the Notes.
No course of dealing on the part of any Noteholder nor any delay or failure on
the part of any Noteholder to exercise any right shall operate as a waiver of
such right or otherwise prejudice such holder's rights, powers and remedies.

         Section 6.4.  Rescission of Acceleration. The provisions of Section
6.3 are subject to the condition that if the principal of and accrued and
unpaid interest, if any, on all or any outstanding Notes have been declared
immediately due and payable by reason of the occurrence of any Event of Default
described in paragraphs (a) through (j), inclusive, of Section 6.1, the holders
of a majority in aggregate Accreted Value of the outstanding Notes may, by
written instrument filed with the Company, rescind and annul such declaration
and the consequences thereof.

SECTION 7.  AMENDMENTS, WAIVERS AND CONSENTS.

         Section 7.1.  Consent Required.  Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended or
compliance therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively), if





                                       13
<PAGE>   18

the Company shall have obtained the consent in writing of the holders of at
least 50% in aggregate Accreted Value of outstanding Notes; provided that
without the written consent of the holders of all of the Notes then
outstanding, no such waiver, modification, alteration or amendment shall be
effective (a) that will change the time of payment of the principal of or the
interest on any Note or reduce the Accreted Value thereof of change the rate or
interest thereon, or (b) that will change any of the provisions with respect to
optional prepayment or (c) that will change the percentage of holders of the
Notes required to consent to any such amendment, modification or waiver of any
of the provisions of this Section 7 or Section 6.

         Section 7.2.  Solicitation of Noteholders. Executed or true and
correct copies of any waiver effected pursuant to the provisions of Section 7.1
shall be delivered by the Company to each holder of outstanding Notes forthwith
following the date on which the same shall have been executed and delivered by
the holder or holders of the requisite percentage of outstanding Notes.

         Section 7.3.  Effect of Amendment or Waiver.  Any such amendment or
waiver shall apply equally to all of the holders of the Notes and shall be
binding upon them, upon each future holder of any Note and upon the Company,
whether or not such Note shall have been marked to indicate such amendment or
waiver.  No such amendment or waiver shall extend to or affect any obligation
not expressly amended or waived or impair any right consequent thereon.

SECTION 8.  INTERPRETATION OF AGREEMENT; DEFINITIONS.

         Section 8.1.  Definitions.  Unless the context otherwise requires, the
terms hereinafter set forth when used herein shall have the following meanings
and the following definitions shall be equally applicable to both the singular
and plural forms of any of the terms herein defined:

         "Acceptance" shall have the meaning provided in Section 1.3 of this
Agreement.

         "Accreted Value" shall mean, with respect to each Note, as of any date
of determination (a) prior to July 31, 1999, the sum of (i) the Purchase Price
of such Note and (ii) the portion of the excess of the principal amount of such
Note over such Purchase Price that has been accreted thereon through such date,
such amount to be so accreted on a daily basis at the rate, compounded
semi-annually, such that the Accreted Value of the Note on July 31, 1999 shall
equal its principal amount and (b) from and after July 31, 1999, the principal
amount of such Note.

         "Additional Notes" shall have the meaning provided in Section 1.3 of
this Agreement.

         "Affiliate" shall mean any Person (a) that directly or indirectly
through one or more intermediaries controls, or is controlled by, or is under
common control with, any other Person or (b) is an officer, director or
employee of any such Affiliate.  The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the





                                       14
<PAGE>   19

management and policies of a Person, whether through the ownership of Voting
Stock, by contract or otherwise.

         "Board of Directors" shall mean, with respect to any Person, the Board
of Directors of such Person or any committee of the Board of Directors
authorized to act for it hereunder.

         "Business Day" shall mean any day other than a Saturday, Sunday,
statutory holiday or other day on which banks in Los Angeles, California are
required by law to close or are customarily closed.

         "Call Premium" shall mean:

                          (a)     in connection with any prepayment prior to
                 January 24, 2000, the greater of (i) 7.5% of the amount of
                 Accreted Value being prepaid and (ii) an amount such that the
                 sum of the Accreted Value of the Notes to be prepaid plus such
                 Call Premium, if invested at the Reinvestment Rate for the
                 period beginning on the date of prepayment and ending on
                 January 24, 2002 would yield an annualized return of 9% on
                 such Accreted Value for such period.  "Reinvestment Rate"
                 shall mean a rate equal to the yield to maturity on the actual
                 or interpolated yield on U.S. Treasury Bonds with a maturity
                 equal to the then remaining life to maturity of the Notes plus
                 50 basis points, adjusted for quarterly compounding.

                          (b)     in connection with any prepayment or payment
                 from January 24, 2000 until January 24, 2001, an amount equal
                 to 7.5% of the amount of Accreted Value being prepaid.

                          (c)     in connection with any prepayment or payment
                 after January 24, 2001, an amount equal to 3.75% of the amount
                 of Accreted Value being prepaid.

         "Capitalized Lease Obligation" means, with respect to any Person, an
obligation of such Person to pay rent or other amounts under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP and the amount of such obligation shall be the capitalized amount thereof
determined in accordance with GAAP.

         "Cash Portion" shall have the meaning provided under Section 1.2
herein.

         "Change of Control" shall mean an event whereby a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) (other
than any Existing Stockholder) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power
of the then outstanding Voting Stock of FRI or the Company (calculated on a
fully diluted basis); provided, that a Change of Control shall be deemed not to
have occurred if a "group" (within the meaning of Sections 13(d) and 14(d)(2)
of





                                       15
<PAGE>   20

the Exchange Act) becomes the ultimate "beneficial owner" of more than 50% of
the total voting power of the then outstanding Voting Stock of FRI (calculated
on a fully diluted basis), so long as a majority of the voting power of the
Voting Stock of FRI ultimately "beneficially owned" by such "group" is
ultimately "beneficially owned" by any one or more of the Existing
Stockholders.

         "Closing Date" shall have the meaning provided in Section 1.2 herein.

         "Company" shall mean FRI-MRD Corporation, a Delaware corporation.

         "Credit Agreement" shall mean (i) the Loan and Security Agreement,
dated as of January 10, 1997, among the Company, certain of its Subsidiaries,
FRI, and Foothill Capital Corporation, as such agreement may be restated,
amended, supplemented or otherwise modified from time to time hereafter and
(ii) any refunding or replacement of any agreement provided for in clause (i)
or this clause (ii).

         "Default" shall mean any event or condition, the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute an
Event of Default as defined in Section 6.1.

         "Disqualified Stock" means any capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
earlier of the maturity date of the Notes or the date on which no Notes are
outstanding.

         "EBITDA" shall mean, for any Person, such Person's earnings (loss)
before (i) gain (loss) on disposition of properties, (ii) provision for
divestitures and writedown of long-lived assets, (iii) writedown of goodwill,
(iv) interest,  (v) taxes, (v) depreciation, (vi) amortization, (vii) gain
(loss) on extinguishment of debt, and (viii) extraordinary items, in each case
as determined in accordance with GAAP.

         "Environmental Legal Requirement" shall mean any international,
Federal, state or local statute, law, regulation, order, consent decree,
judgment, permit, license, code, covenant, deed restriction, common law,
treaty, convention, ordinance or other requirement relating to public health,
safety or the environment, including, without limitation, those relating to
releases, discharges or emissions to air, water, land or groundwater, to the
withdrawal or use of groundwater, to the use and handling of polychlorinated
biphenyls or asbestos, to the disposal, treatment, storage or management of
hazardous or solid waste, or Hazardous Substances or crude oil, or any fraction
thereof, or to exposure to toxic or hazardous materials, to the handling,
transportation, discharge or release of gaseous or liquid Hazardous Substances
and any regulation, order, notice or demand issued pursuant to such law,
statute or ordinance, in each case applicable to the property of the Company or
any of its Subsidiaries or the operation, construction or modification of any
such property, including without limitation the following:





                                       16
<PAGE>   21

the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended by the Superfund Amendments and Reauthorization Act of 1986,
the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, the
Hazardous Material Transportation Act, as amended, the Federal Water Pollution
Control Act, as amended by the Clean Water Act of 1976, the Safe Drinking Water
Act, the Clean Air Act, as amended, the Toxic Substances Control Act of 1976,
the Occupational Safety and Health Act of 1977, as amended, the Emergency
Planning and Community Right-to-Know Act of 1986, the National Environmental
Policy Act of 1975, the Oil Pollution Act of 1990 and any similar or
implementing state law, and any state statute and any further amendments to
these laws providing for financial responsibility for cleanup or other actions
with respect to the release or threatened release of Hazardous Substances or
crude oil, or any fraction thereof and all rules and regulations promulgated
thereunder.

         "Equity Interests" means capital Stock or warrants, options or other
rights to acquire capital Stock (but excluding any publicly-traded debt
security that is convertible into, or exchangeable for, capital Stock).

         "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and any successor statute of similar import, together with
the regulations thereunder, in each case as in effect from time to time.
References to sections of ERISA shall be construed to also refer to any
successor sections.

         "Event of Default" shall have the meaning set forth in Section 6.1
hereof.

         "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and any successor statute thereto.

         "Existing Stockholder" means (i) with respect to FRI, the stockholders
of FRI on the date hereof including (without limitation) Apollo FRI Partners,
L.P. and Green Equity Investors, L.P. and the Related Persons of such
stockholders and (ii) with respect to the Company, FRI and each Person
specified in clause (i) above.

         "FRI" means Family Restaurants, Inc., a Delaware corporation.

         "FRI Notes" shall mean the Senior Notes, the Subordinated Notes and
any other general unsecured Indebtedness of FRI, which may be in one or more
classes or series and may include zero coupon notes.

         "GAAP" shall mean generally accepted accounting principles in the
United States as in effect on the date of this Agreement and not including any
interpretations or regulations that have been proposed but that have not been
enacted.





                                       17
<PAGE>   22
         "Hazardous Substance" shall mean any hazardous or toxic material,
substance or waste, pollutant or contaminant which is regulated under any
statute, law, ordinance, rule or regulation of any local, state, regional or
federal authority having jurisdiction over the property of the Company and it
Subsidiaries or its use, including but not limited to any material, substance
or waste which is:  (a) defined as a hazardous substance under Section 31 1 of
the Federal Water Pollution Control Act (33 U.S.C. SS1317) as amended; (b)
regulated as a hazardous waste under Section 1004 or Section 3001 of the
Federal Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act (42 U.S.C.  Section 6901 et seq.) as amended;  (c) defined as a
hazardous substance under Section 101 of the Comprehensive Environmental
Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) or
(d) defined or regulated as a hazardous substance or hazardous waste under any
rules or regulations promulgated under any of the foregoing statutes.

         "Hedging Obligations" with respect to any Person, means the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates or currency exchange rates.

         "Indebtedness" of any Person as of any date means and includes,
without duplication, (i) all debt of such Person, (ii) all obligations of such
Person in respect of letters of credit or letter of credit reimbursement
obligations (whether or not such items would appear on the balance sheet of
such Person) and (iii) all guarantees by such Person of items that would
constitute Indebtedness under this definition (whether or not such items would
appear on such balance sheet).  The amount of Indebtedness of any Person at any
date shall be, without duplication, the principal amount that would be shown on
a balance sheet of such Person prepared as of such date in accordance with GAAP
and the maximum liability of any contingent obligations referred to in clauses
(i) through (iii) above at such date.

         "Initial Closing Date" shall have the meaning provided under Section
1.2 of this Agreement.

         "Information" shall have the meaning provided under Section 3.2 of
this Agreement.

         "Interest Rate" shall have the meaning provided under Section 1.1 of
this Agreement.

         "Investment" shall mean the sum of all investments, made in cash or by
delivery of property on or prior to the applicable date of determination, by
the Company or any of its Subsidiaries in any Unrestricted Subsidiary, whether
by acquisition of stock, Indebtedness, or other obligation or security of such
Unrestricted Subsidiary, or by loan, advance, capital contribution or
otherwise, less the aggregate amount by which such investments have been
reduced by repayment, sale of such Unrestricted Subsidiary, redesignation of
such Unrestricted Subsidiary as a Subsidiary or otherwise.





                                       18
<PAGE>   23
         "Lien" shall mean any lien, security interest, charge or encumbrance
of any kind (including any conditional sale or other title retention agreement,
any lease in the nature thereof, and any agreement to give any security
interest).

         "Material Subsidiary" shall mean a Subsidiary of the Company that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X
promulgated under the Securities Act.

         "Note" shall have the meaning provided in Section 1.1 of this
Agreement.

         "Note Register" shall have the meaning provided in Section 9.1 of this
Agreement.

         "Note Registrar" shall have the meaning provided in Section 9.1 of
this Agreement.

         "Notice" shall have the meaning provided in Section 1.3 of this
Agreement.

         "Noteholder" shall mean any of the holders of one or more Notes from
time to time.

         "Officer" shall mean the Chairman of the Board, the President, any
Vice President, the Treasurer, the Secretary or the Controller of any Person.

         "Original Purchaser" shall have the meaning provided in Section 1.3 of
this Agreement.

         "Permitted Lien" means (i) Liens existing on the date of this
Agreement; (ii) Liens for taxes, assessments or governmental charges or claims
that are not yet due or delinquent or that are being contested in good faith by
appropriate proceedings if a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made therefor; (iii)
statutory Liens or landlords', carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business with respect to amounts not yet overdue for a
period of 45 days or amounts being contested in good faith by appropriate
proceedings if a reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made therefor; (iv) Liens incurred by or
deposits made in connection with workers' compensation, unemployment insurance
and other types of social security benefits; (v) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory obligations,
surety and appeal bonds, government contracts, performance and return-of-money
bonds and other obligations of like nature incurred in the ordinary course of
business; (vi) attachment or judgment Liens not giving rise to a Default or an
Event of Default; (vii) easements, rights-of-way, restrictions and other
similar charges or encumbrances not interfering with the ordinary conduct of
the business of the Company or any of its Subsidiaries; (viii) leases or
subleases granted to others incurred in the ordinary course of business; (ix)
purchase money Liens incurred to secure the purchase price of property (and
Liens on property existing at the time of the acquisition thereof), which Lien
shall not cover any property other than that being acquired, purchased,
improved or constructed, and shall not cover property purchased, acquired,
constructed or improved more than 12 months before the creation of such





                                       19
<PAGE>   24

Lien; (x) title defects or irregularities that do not in the aggregate
materially impair the use of the property; (xi) obligations with respect to
Capitalized Lease Obligations; (xii) Liens pursuant to sale and leaseback
transactions incurred in the ordinary course of business; (xiii) Liens securing
obligations under the Credit Agreement and the documents entered into in
connection therewith; (xiv) Liens in favor of the Company or any wholly owned
Subsidiary of the Company; (xv) any other Liens imposed by operation of law
that do not materially affect the Company's ability to perform its obligations
under the Notes and this Agreement; (xvi) extensions (but not expansions that
are not otherwise Permitted Liens), renewals or refundings of any Liens
referred to in clauses (i) through (xv) above; and (xvii) Liens in addition to
the foregoing, provided that the amount of the obligations secured by such
Liens does not exceed in the aggregate $29,000,000.

         "Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political
subdivision thereof.


         "Purchase Price" with respect to any Note shall mean the Purchase
Price thereof, expressed as a percentage of the principal amount thereof and as
an amount in U.S. dollars, as set forth on Schedule I attached hereto.

         "Purchaser" shall mean the Persons listed under Schedule I attached
hereto.

         "Related Person" shall mean, with respect to any Person, (A) an
Affiliate of such Person, (B) any investment manager, investment advisor or
general partner of such Person, and (C) any investment fund, investment account
or investment entity whose investment manager, investment advisor or general
partner is such Person or a Related Person of such Person.

         "Securities Act" shall have the same meaning as in Section 3.2(h).

         "Senior Note Indenture" shall mean the indenture relating to the
Senior Notes between FRI, as issuer, and IBJ Schroder Bank & Trust Company, a
New York banking corporation, as trustee thereunder dated as of January 27,
1994, as may be restated, amended, supplemented or otherwise modified from time
to time.

         "Senior Notes" means (i) the 9 3/4% Senior Notes of FRI due February
1, 2002 as such Notes may be restated, amended, supplemented or otherwise
modified from time to time hereafter and (ii) any refunding or replacement of
any Indebtedness provided for in clause (i) or this clause (ii).

         "Senior Note Portion" shall have the meaning provided under Section
1.2 herein.

         "Stock" means all shares, options, warrants, interests,
participations, or other equivalents (regardless of how designated) of or in a
corporation or equivalent entity, whether





                                       20
<PAGE>   25
voting or nonvoting, including common stock, preferred stock, or any other
"equity security" (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Exchange Act).

         "Stock Based Plan" means any stock option plan, stock appreciation
rights plan or other similar plan or supplement relating to capital Stock of
FRI or any of its Subsidiaries, whether in effect on the date hereof or
established hereafter, established for the benefit of employees of FRI or of
any Subsidiary of FRI.

         "Subordinated Notes" mean (i) the 10 7/8% Senior Subordinated
Discounts Notes of FRI due February 1, 2004 as such Notes may be restated,
amended, supplemented or otherwise modified from time to time hereafter (ii)
and any refunding or replacement of any Indebtedness provided for in clause (i)
or this clause (ii).

         "Subsequent Closing Date" shall have the meaning provided under
Section 1.2 of this Agreement.

         The term "subsidiary" shall mean, as to any particular parent
corporation, any corporation, partnership, limited liability company, business
trust or other entity of which more than 50% (by number of votes) of the Voting
Stock shall be owned by such parent corporation and/or one or more corporations
which are themselves Subsidiaries of such parent corporation.  The term
"Subsidiary" shall mean a subsidiary of the Company other than an Unrestricted
Subsidiary.

         "Transaction" shall have the meaning provided under Section 5.9
herein.

         "Value Creation Units Plan" shall mean the Family Restaurants, Inc.
and FRI-MRD Value Creation Units Plan.

         "Unrestricted Subsidiary" shall mean any Subsidiary of the Company
(whether now existing or hereafter created) that is designated an Unrestricted
Subsidiary by the Board of Directors of the Company and not thereafter
redesignated as a Subsidiary.  Upon designation of a Subsidiary as an
Unrestricted Subsidiary the Company shall be deemed to have made an Investment
in such Unrestricted Subsidiary equal to the fair market value of the net
assets thereof as determined in good faith by the Board of Directors of the
Company.  There are no Unrestricted Subsidiaries as of the Initial Closing
Date.

         "Voting Stock" shall mean securities of any class or classes the
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).

         Section 8.2.  Accounting Principles.  Where the character or amount of
any asset or liability or item of income or expense is required to be
determined or any consolidation or other





                                       21
<PAGE>   26
accounting computation is required to be made for the purposes of this
Agreement, the same shall be done in accordance with GAAP, to the extent
applicable, except where such principles are inconsistent with the requirements
of this Agreement.

SECTION 9.  MISCELLANEOUS.

         Section 9.1.  Note Register.  The Company, in its capacity as note
registrar (the "Note Registrar") shall cause to be kept a register (the "Note
Register") for the registration and transfer of the Notes; provided, however,
the Company may at any time designate and cause any other Person to act as the
Note Registrar in order to maintain the Note Register pursuant to the terms of
this Note Agreement.  The Note Registrar will register or transfer or cause to
be registered or transferred, as hereinafter provided and under such reasonable
regulations as it may prescribe, any Note issued pursuant to this Agreement.

         At any time, and from time to time, the holder of any Note which has
been duly registered as hereinabove provided may transfer such Note upon
surrender thereof with the Note Registrar duly endorsed or accompanied by a
written instrument of transfer duly executed by the holder of such Note or its
attorney duly authorized in writing and, unless transferred pursuant to an
effective registration statement under the Securities Act, by an opinion of
counsel in form and substance satisfactory to the Company to the effect that
such transfer will be made in compliance with an exemption from the
registration requirements of the Securities Act.  Notes shall not be
transferred in denominations of less than $100,000.  Notwithstanding any other
provision of this Note Agreement, the Company shall not be required to issue,
transfer or exchange any Note for a denomination of less than $1,000,000 if
immediately after such issue, transfer or exchange there would be issued and
outstanding more than twenty Notes in a denomination of less than $1,000,000.

         Promptly upon request of a Noteholder, the Company shall provide such
holder, and any qualified institutional buyer designated by such holder, such
financial and other information as is necessary in order to permit compliance
with the information requirements of Rule 144A(d)(4) under the Securities Act
in connection with the resale of Notes, except at such times as the Company is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act.  For purposes of this paragraph, the term "qualified institutional buyer"
shall have the meaning specified in Rule 144A under the Securities Act.

         The Person in whose name any Note shall be registered shall be deemed
and treated as the owner and holder thereof for all purposes of this Agreement.
Payment of or on account of the principal, premium and interest, if any, on any
Note shall be made to or upon the written order of such holder.

         Section 9.2.  Exchange of Notes. At any time and from time to time,
upon not less than ten days' notice given by the holder of any Note initially
delivered or of any Note substituted therefor pursuant to Section 9.1, this
Section 9.2 or Section 9.3, and, upon surrender of such





                                       22
<PAGE>   27

Note at its office, the Company will deliver in exchange therefor, without
expense to the holder, except as set forth below, Notes for the same aggregate
Accreted Value as the then unpaid Accreted Value of the Note so surrendered, in
the denomination of $1,000,000 or any amount in excess thereof as such holder
shall specify, dated as of the date to which interest has been paid on the Note
so surrendered or, if such surrender is prior to the payment of any interest
thereon, then dated as of the date of issue, registered in the name of such
Person or Persons as may be designated by such holder, and otherwise of the
same form and tenor as the Notes so surrendered for exchange.  The Company may
require the payment of a sum sufficient to cover any stamp tax or governmental
charge imposed upon such exchange or transfer.

         Section 9.3.  Loss, Theft, Etc. of Notes.  Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of
any Note, and in the case of any such loss, theft, or destruction upon delivery
of a bond or indemnity in such form and amount as shall be reasonably
satisfactory to the Company, or in the event of such mutilation upon surrender
and cancellation of any Note, the Company will make and deliver without expense
to the holder thereof, a new Note, of like tenor, in lieu of such lost, stolen,
destroyed or mutilated Note.

         Section 9.4.  Powers and Rights Not Waived; Remedies Cumulative.  No
delay or failure on the part of the holder of any Note in the exercise of any
power or right shall operate as a waiver thereof; nor shall any single or
partial exercise of the same preclude any other or further exercise thereof, or
the exercise of any other power or right, and the rights and remedies of the
holder of any Note are cumulative to and are not exclusive of any rights or
remedies any such holder would otherwise have, and no waiver or consent, given
or extended pursuant to Section 7 hereof or otherwise, shall extend to or
affect any obligation or right not expressly waived or consented to.

         Section 9.5.  Notices.  All communications provided for hereunder
shall be in writing and, if to any Purchaser, delivered or mailed by prepaid
overnight air courier, or by facsimile communication, in each case addressed to
such Purchaser at its address appearing on Schedule I to this Agreement or such
other address as such Purchaser or subsequent holder may designate to the
Company in writing, and if to the Company, delivered and mailed by prepaid
overnight air courier, or by facsimile communication, in each case to the
Company at 18831 Von Karman Avenue, Irvine, California 92612, Attention:
General Counsel or to such other address as the Company may in writing
designate to such Purchaser or subsequent holder;  provided, however, that a
notice sent by overnight air courier shall only be effective if delivered at a
street address designated for such purpose in Schedule I, and a notice to such
Purchaser by facsimile communication shall only be effective if confirmed by a
copy thereof by prepaid overnight air courier, in either case, as such
Purchaser or a subsequent holder of any Note may designate to the Company in
writing.

         Section 9.6.  Successors and Assigns.  This Agreement shall be binding
upon the Company and its successors and assigns and shall inure to each
Purchaser's benefit and to the benefit of its successors and assigns, including
each successive holder or holders of any Notes.





                                       23
<PAGE>   28
         Section 9.7.  Integration and Severability.  This Agreement embodies
the entire agreement and understanding between the Purchasers and the Company,
and supersedes all prior agreements and understandings relating to the subject
matter hereof.  Should any part of this Agreement for any reason be declared
invalid or unenforceable, such decision shall not affect the validity of any
remaining portion, which remaining portion shall remain in force and effect as
if this Agreement had been executed with the invalid or unenforceable portion
thereof eliminated (or, if possible, rewritten to the extent necessary to
eliminate such invalidity or unenforceability) and it is hereby declared the
intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.

         Section 9.8.  Governing Law.  THIS AGREEMENT AND THE NOTES ISSUED AND
SOLD HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE
STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.  EACH
PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED
STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR PURPOSES OF ALL
LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT AND THE NOTES OR
THE TRANSACTIONS CONTEMPLATED HEREBY.  EACH PARTY HERETO IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.

         Section 9.9.  Captions.  The descriptive headings of the various
Sections or parts of this Agreement are for convenience only and shall not
affect the meaning or construction of any of the provisions hereof.

         Section 9.10.  Brokerage Fees.  Libra Investments, Inc. has acted as
agent for the Company in connection with the transactions contemplated hereby
and is being paid a commission by the Company pursuant to a separate letter
agreement.


















                                       24
<PAGE>   29
         The execution hereof by you shall constitute a contract between us for
the uses and purposes hereinabove set forth, and this Agreement may be executed
in any number of counterparts, each executed counterpart constituting an
original but all together only one agreement.


                                      FRI-MRD CORPORATION, as Company


                                      By   _____________________________
                                           Name:
                                           Title:

                    [signature pages continued on next page]





















                                      S-1
<PAGE>   30

                                      THE BROWN & WILLIAMSON MASTER RETIREMENT
                                      TRUST

                                      By:  MacKay-Shields Financial Corporation
                                      Its: Investment Advisor


                                      By:_____________________________________
                                         Name:
                                         Title:


                    [signature pages continued on next page]


























                                      S-2
<PAGE>   31


                                      THE MAINSTAY FUNDS, ON BEHALF OF ITS 
                                      STRATEGIC INCOME FUND SERIES

                                      By:  MacKay-Shields Financial Corporation
                                      Its: Investment Advisor



                                      By:______________________________________
                                         Name:
                                         Title:


                    [signature pages continued on next page]



















                                      S-3
<PAGE>   32


                                      HIGHBRIDGE CAPITAL CORPORATION

                                      By:  MacKay-Shields Financial Corporation
                                      Its: Investment Advisor



                                      By:______________________________________
                                         Name:
                                         Title:


                    [signature pages continued on next page]




















                                      S-4
<PAGE>   33


                                     THE MAINSTAY FUNDS, ON BEHALF OF ITS HIGH
                                     YIELD CORPORATE BOND FUND SERIES

                                     By:   MacKay-Shields Financial Corporation
                                     Its:  Investment Advisor



                                     By:______________________________________
                                        Name:
                                        Title:




                    [signature pages continued on next page]





















                                      S-5
<PAGE>   34


                                     MAINSTAY VP SERIES FUND, INC., ON BEHALF
                                     OF HIGH YIELD CORPORATE BOND PORTFOLIO


                                     By:   MacKay-Shields Financial Corporation
                                     Its:  Investment Advisor



                                     By:__________________________
                                     Name:
                                     Title:




                    [signature pages continued on next page]



























                                      S-6
<PAGE>   35


                                     POLICE OFFICERS PENSION SYSTEM OF THE CITY
                                     OF HOUSTON

                                     By:   MacKay-Shields Financial Corporation
                                     Its:  Investment Advisor



                                     By:_______________________________________
                                        Name:
                                        Title:




                    [signature pages continued on next page]

















                                      S-7
<PAGE>   36

                                     VULCAN MATERIALS COMPANY HIGH YIELD ACCOUNT

                                     By:   MacKay-Shields Financial Corporation
                                     Its:  Investment Advisor



                                     By:_______________________________________
                                        Name:
                                        Title:






















                                      S-8
<PAGE>   37

SCHEDULE I TO NOTE AGREEMENT

Purchaser:       THE BROWN & WILLIAMSON MASTER RETIREMENT TRUST

1.       Principal Amount.

         In U.S. Dollars:  $1,350,000

                 The Purchase Price of the Note will be $1,010,880 and will
                 consist of:
                 $265,000 of Senior Notes together with interest accrued
                 thereon through August 12, 1997 (valued at $199,539.48), and
                 $811,340.52 of cash

2.       In the case of payments on account of the Notes:
         By wire transfer of Federal or other immediately available funds
         (identifying each payment as to issuer, security and principal or
         interest) to:

                          ABA # 011000028
                          STATE STREET BANK AND TRUST COMPANY
                          BOSTON, MASS  02101
                          FOR CREDIT TO:
                          ACCT NAME:  BROWN & WILLIAMSON MASTER RETIREMENT
                          TRUST
                          DDA # 09237520
                          ACCT # ZH23

3.       All communications shall be delivered or mailed to:


                          MacKay-Shields Financial Corporation
                          9 West 57th Street
                          New York, New York  10019
                          Attn:  Steven Tananbaum
                          Fax:  (212) 758-4735

                          with a copy to:
                          Kleinberg, Kaplan, Wolff & Cohen, P.C.
                          551 Fifth Avenue
                          New York, New York  10176
                          Attn:  Fredric A. Kleinberg, Esq.
                          Fax:  (212) 986-8866
4.       Tax I.D. #:      043216086







<PAGE>   38


Purchaser:       THE MAINSTAY FUNDS, ON BEHALF OF ITS STRATEGIC INCOME
FUND SERIES

1.       Principal Amount.

         In U.S. Dollars:  $520,000

                 The Purchase Price of the Note will be $389,376 in cash

2.       In the case of payments on account of the Notes:
         By wire transfer of Federal or other immediately available funds
         (identifying each payment as to issuer, security and principal or
         interest) to:

                          ABA # 021000018
                          BANK OF NEW YORK/CUST.
                          GLA 111612
                          FOR CREDIT TO:
                          ACCT NAME:  MAINSTAY STRATEGIC INCOME FUND
                          ACCT # 267451


3.       All communications shall be delivered or mailed to:


                          MacKay-Shields Financial Corporation
                          9 West 57th Street
                          New York, New York  10019
                          Attn:  Steven Tananbaum
                          Fax:  (212) 758-4735

                          with a copy to:
                          Kleinberg, Kaplan, Wolff & Cohen, P.C.
                          551 Fifth Avenue
                          New York, New York  10176
                          Attn:  Fredric A. Kleinberg, Esq.
                          Fax:  (212) 986-8866

4.       Tax I.D. #:      133924140


<PAGE>   39

Purchaser:       HIGHBRIDGE CAPITAL CORPORATION

1.       Principal Amount.

         In U.S. Dollars:  $1,150,000

                 The Purchase Price of the Note will be $861,120 in cash

2.       In the case of payments on account of the Notes:
         By wire transfer of Federal or other immediately available funds
         (identifying each payment as to issuer, security and principal or
         interest) to:

                          ABA # 021-000-089
                          BEAR STERNS SECURITIES INC.
                          ACCT # 09253186
                          ACCT NAME:  HIGHBRIDGE CAPITAL CORPORATION
                          ACCT # 101-44079-2-6


3.       All communications shall be delivered or mailed to:


                          MacKay-Shields Financial Corporation
                          9 West 57th Street
                          New York, New York  10019
                          Attn:  Steven Tananbaum
                          Fax:  (212) 758-4735

                          with a copy to:
                          Kleinberg, Kaplan, Wolff & Cohen, P.C.
                          551 Fifth Avenue
                          New York, New York  10176
                          Attn:  Fredric A. Kleinberg, Esq.
                          Fax:  (212) 986-8866

4.       Tax I.D. #:      Bear Stearns Securities Corp.-Foreign (no tax i.d. #).



<PAGE>   40

Purchaser:       THE MAINSTAY FUNDS, ON BEHALF OF ITS HIGH YIELD
CORPORATE BOND FUND SERIES

1.       Principal Amount.

         In U.S. Dollars:  $52,200,000

                 The Purchase Price of the Note will be $39,087,360 and will
                 consist of: $13,895,000 of Senior Notes together with interest
                 accrued thereon through August 12, 1997 (valued at
                 $10,462,645.52), and $28,624,714.48 of cash

2.       In the case of payments on account of the Notes:
         By wire transfer of Federal or other immediately available funds
         (identifying each payment as to issuer, security and principal or
         interest) to:

                          ABA # 011000028
                          STATE STREET BANK AND TRUST COMPANY
                          BOSTON, MASS  02101
                          FOR CREDIT TO:
                          ACCT NAME:  MAINSTAY HIGH YIELD CORPORATE BOND FUND
                          DDA # 4266 0761
                          ACCT # SN04


3.       All communications shall be delivered or mailed to:


                          MacKay-Shields Financial Corporation
                          9 West 57th Street
                          New York, New York  10019
                          Attn:  Steven Tananbaum
                          Fax:  (212) 758-4735

                          with a copy to:
                          Kleinberg, Kaplan, Wolff & Cohen, P.C.
                          551 Fifth Avenue
                          New York, New York  10176
                          Attn:  Fredric A. Kleinberg, Esq.
                          Fax:  (212) 986-8866

4.       Tax I.D. #:      04-2910780


<PAGE>   41

Purchaser:       MAINSTAY VP SERIES FUND, INC., ON BEHALF OF HIGH YIELD
CORPORATE BOND PORTFOLIO

1.       Principal Amount.

         In U.S. Dollars:  $4,400,000

                 The Purchase Price of the Note will be $3,294,720 and will
                 consist of: $1,350,000 of Senior Notes together with interest
                 accrued thereon through August 12, 1997 (valued at
                 $1,016,521.87), and $2,278,198.13 of cash

2.       In the case of payments on account of the Notes:
         By wire transfer of Federal or other immediately available funds
         (identifying each payment as to issuer, security and principal or
         interest) to:

                          ABA # 021000018
                          BANK OF NEW YORK/CUST.
                          GLA 111612
                          FOR CREDIT TO:
                          ACCT NAME:  MAINSTAY V.P. SERIES HIGH YIELD CORPORATE
                          BOND FUND
                          ACCT # 274467


3.       All communications shall be delivered or mailed to:


                          MacKay-Shields Financial Corporation
                          9 West 57th Street
                          New York, New York  10019
                          Attn:  Steven Tananbaum
                          Fax:  (212) 758-4735

                          with a copy to:
                          Kleinberg, Kaplan, Wolff & Cohen, P.C.
                          551 Fifth Avenue
                          New York, New York  10176
                          Attn:  Fredric A. Kleinberg, Esq.
                          Fax:  (212) 986-8866

4.       Tax I.D. #:      13-3818793
<PAGE>   42
Purchaser:       POLICE OFFICERS PENSION SYSTEM OF THE CITY OF HOUSTON

1.       Principal Amount.

         In U.S. Dollars:  $1,200,000

                 The Purchase Price of the Note will be $898,560 in cash

2.       In the case of payments on account of the Notes:
         By wire transfer of Federal or other immediately available funds
         (identifying each payment as to issuer, security and principal or
         interest) to:

                          ABA # 071-000-152
                          NORTHERN TRUST/CHGO TRUST
                          FOR CREDIT TO:
                          ACCT # 5186061000
                          ACCT NAME:  POLICE OFFICERS PENSION SYSTEM OF THE
                          CITY OF HOUSTON ACCT # 26-41113


3.       All communications shall be delivered or mailed to:


                          MacKay-Shields Financial Corporation
                          9 West 57th Street
                          New York, New York  10019
                          Attn:  Steven Tananbaum
                          Fax:  (212) 758-4735

                          with a copy to:
                          Kleinberg, Kaplan, Wolff & Cohen, P.C.
                          551 Fifth Avenue
                          New York, New York  10176
                          Attn:  Fredric A. Kleinberg, Esq.
                          Fax:  (212) 986-8866

4.       Tax I.D. #:      74-6036541


<PAGE>   43

Purchaser:       VULCAN MATERIALS COMPANY HIGH YIELD ACCOUNT

1.       Principal Amount.

         In U.S. Dollars:  $180,000

                 The Purchase Price of the Note will be $134,784 and will
                 consist of: $50,000 of Senior Notes together with interest
                 accrued thereon through August 12, 1997 (valued at
                 $37,648.96), and $97,135.04 of cash

2.       In the case of payments on account of the Notes:
         By wire transfer of Federal or other immediately available funds
         (identifying each payment as to issuer, security and principal or
         interest) to:

                          ABA # 071-000-152
                          NORTHERN TRUST/CHGO TRUST
                          FOR CREDIT TO:
                          ACCT # 5186061000
                          ACCT NAME:  VULCAN MATERIALS
                          ACCT # 26-00065


3.       All communications shall be delivered or mailed to:


                          MacKay-Shields Financial Corporation
                          9 West 57th Street
                          New York, New York  10019
                          Attn:  Steven Tananbaum
                          Fax:  (212) 758-4735

                          with a copy to:
                          Kleinberg, Kaplan, Wolff & Cohen, P.C.
                          551 Fifth Avenue
                          New York, New York  10176
                          Attn:  Fredric A. Kleinberg, Esq.
                          Fax:  (212) 986-8866

4.       Tax I.D. #:      751867619
<PAGE>   44


                              FRI-MRD CORPORATION

                15.0% SENIOR DISCOUNT NOTE DUE JANUARY 24, 2002

No. R-                                                          August 12, 1997


FRI-MRD CORPORATION, a Delaware corporation (the "Company"), for value
received, hereby promises to pay to

                             or registered assigns

                   on the twenty-fourth day of January, 2002

                            the principal amount of

                         [_____] DOLLARS ($__________)

This Note is issued at a substantial discount from its principal amount for a
price equal to the Purchase Price.  Cash interest will not accrue on this Note
prior to July 31, 1999.  Thereafter, interest on this Note will accrue at the
rate of 15.0% per annum (or, if less, the highest rate permitted by law) and be
payable semi-annually on January 31 and July 31 of each year, commencing on
January 31, 2000, and at maturity.  The Company agrees to pay interest on
overdue principal (including any overdue required or optional prepayment of
principal) and premium, if any, and (to the extent legally enforceable) on any
overdue installment of interest at the Interest Rate per annum from the date
such payment is due, whether by acceleration or otherwise, until paid.  Both
the principal hereof and interest hereon are payable at the principal office of
the Company at 18831 Von Karman Avenue, Irvine, California 92612 in coin or
currency of the United States of America which at the time of payment shall be
legal tender for the payment of public and private debts.  If any amount of
principal, premium or interest, if any, on or in respect of this Note becomes
due and payable on any date which is not a Business Day, such amount shall be
payable on the next preceding Business Day.  "Business Day" means any day other
than a Saturday, Sunday, statutory holiday or other day on which banks in Los
Angeles, California are required by law to close or are customarily closed.

         This Note is one of the 15.0% Senior Discount Notes due January 24,
2002 of the Company in the aggregate principal amount of up to $75,000,000
issued or to be issued under and pursuant to the terms and provisions of the
Note Agreement, dated as of August 12, 1997 (the "Note Agreement"), entered
into by the Company with the original purchaser therein referred to and this
Note and the holder hereof are entitled equally and ratably with the holders of
all other Notes outstanding under the Note Agreement to all the benefits
provided for thereby or referred to therein, to which Note Agreement reference
is hereby made for the statement 


                                   EXHIBIT A
                              (TO NOTE AGREEMENT)



<PAGE>   45
thereof. Capitalized terms used herein and not otherwise defined shall have
the meanings provided in the Note Agreement.

         This Note and the other Notes outstanding under the Note Agreement may
be declared due prior to their expressed maturity dates and certain prepayments
are required to be made thereon, all in the events, on the terms and in the
manner and amounts as provided in the Note Agreement.

         The Notes are not subject to prepayment or redemption at the option of
the Company prior to their expressed maturity dates except on the terms and
conditions and in the amounts and with the premium, if any, set forth in the
Note Agreement.

         This Note is registered on the books of the Company and is
transferable only by surrender thereof at the principal office of the Company
duly endorsed or accompanied by a written instrument of transfer duly executed
by the registered holder of this Note or its attorney duly authorized in
writing and, unless transferred pursuant to an effective registration statement
under the Securities Act of 1933, as amended, by an opinion of counsel in form
and substance satisfactory to the Company to the effect that such transfer will
be made in compliance with an exemption from the registration requirements of
the Securities Act of 1933, as amended.  THIS NOTE IS SUBJECT TO SIGNIFICANT
ADDITIONAL RESTRICTIONS ON TRANSFER CONTAINED IN THE NOTE AGREEMENT.  Payment
of or on account of principal, premium and interest, if any, on this Note shall
be made only to or upon the order in writing of the registered holder.

         This Note and said Note Agreement are governed by and construed in
accordance with the laws of New York.

                                          FRI-MRD CORPORATION


                                          By  _____________________________
                                              Name:
                                              Title:





                                   EXHIBIT A
                              (TO NOTE AGREEMENT)
<PAGE>   46
                              FRI-MRD CORPORATION

                              CLOSING CERTIFICATE




Ladies and Gentlemen:

         This certificate is delivered to you in compliance with the
requirements of the Note Agreement, dated as of August 12, 1997 (the
"Agreement"), entered into by the undersigned, FRI-MRD CORPORATION, a Delaware
corporation (the "Company"), with you, and as an inducement to and as part of
the consideration for your purchase on this date of $___________ principal
amount of the 15.0% Senior Discount Notes due January 24, 2002 (the "Notes") of
the Company pursuant to the Agreement.  The terms which are capitalized herein
shall have the same meanings as in the Agreement.

         The Company represents and warrants to you as follows:

                 1.  Subsidiaries.  Annex I hereto states the name of each
         Subsidiary of FRI and/or the Company, the jurisdiction of
         incorporation and the percentage of its Voting Stock owned by FRI, the
         Company and each other Subsidiary.  Except as set forth on Annex I
         attached hereto, the Company and each Subsidiary has good and
         marketable title to all of the shares it purports to own of the stock
         of each Subsidiary, in each case free and clear of any Lien other than
         Permitted Liens.  All such shares have been duly issued and are fully
         paid and non-assessable.

                 2.  Corporate Organization and Authority.  Except as set forth
         on Annex I attached hereto, FRI, the Company and each Subsidiary,

                          (a)     is a corporation duly organized, validly
                 existing and in good standing under the laws of its
                 jurisdiction of incorporation;

                          (b)     has all requisite power and authority and all
                 necessary licenses and permits to own and operate its
                 properties and carry on its business as now conducted and as
                 presently proposed to be conducted; and


                                   EXHIBIT B
                              (TO NOTE AGREEMENT)
<PAGE>   47

                          (c)     is duly licensed or qualified and is in good
                 standing as a foreign corporation in each jurisdiction wherein
                 the nature of the business transacted by it or the nature of
                 the property owned or leased by it makes such licensing or
                 qualification necessary, except where any failure to be so
                 licensed or qualified would not have a material adverse effect
                 on the properties, business, profits or condition of the
                 Company and its Subsidiaries.

                 3.  Financial Statements.  (a)  The consolidated balance
         sheets of FRI and its Subsidiaries as of December 29, 1996, and the
         statements of income and stockholder equity (deficit) and changes in
         financial position or cash flows for the fiscal year ended on said
         date, accompanied by a report thereon containing an opinion
         unqualified as to scope limitations imposed by FRI and otherwise
         without qualification except as therein noted, by KPMG Peat Marwick
         LLP, have been prepared in accordance with GAAP consistently applied
         except as therein noted, are correct and complete and present fairly
         the financial position of FRI and its Subsidiaries as of such date and
         the results of their operations and cash flows for such period.  The
         unaudited consolidated balance sheet of FRI and its Subsidiaries as of
         March 30, 1997, and the unaudited statements of income and cash flows
         for the fiscal period ended on said date prepared by FRI have been
         prepared in accordance with GAAP consistently applied, are correct and
         complete and present fairly the financial position of FRI and its
         Subsidiaries as of said date and the results of their operations and
         cash flows for such period subject to year-end audit and adjustments.

                 (b)      Except as set forth on Annex I attached hereto, since
         March 30, 1997, there has been no material change in the condition,
         financial or otherwise, of FRI and its Subsidiaries (such change, a
         "Material Adverse Change") as shown on the consolidated balance sheet
         as of such date except changes in the ordinary course of business, and
         the Company has no knowledge of any events or circumstances (excluding
         general economic conditions) which the Company has concluded is
         reasonably likely to result in a Material Adverse Change..

                 4.  Full Disclosure.  FRI's Form 10-K dated March 31, 1997,
         FRI's Form 10-Q dated May 14, 1997 and the financial statements
         referred to in paragraph 3, in each case as of their respective dates,












                                      B-2
<PAGE>   48

         do not contain any untrue statement of a material fact or omit a
         material fact necessary to make the statements contained therein or
         herein not misleading.  To the Company's knowledge, FRI has filed all
         reports, schedules, forms, statements and other documents required to
         be filed by it with the Securities and Exchange Commission.

                 5.  Pending Litigation.  Except as set forth on Annex I
         attached hereto, there are no proceedings pending or, to the knowledge
         of the Company, threatened against or affecting the Company or any
         Subsidiary in any court or before any governmental authority or
         arbitration board or tribunal which are reasonably likely to
         materially and adversely affect the properties, business, profits or
         condition (financial or otherwise) of the Company and its
         Subsidiaries.

                 6.  Title to Properties.  Except as set forth on Annex I
         attached hereto, the Company and each Subsidiary, has good and
         marketable title in fee simple (or its equivalent under applicable
         law) to all the real property it purports to own and has good title to
         all the other property it purports to own, including that reflected in
         the most recent balance sheet referred to in paragraph 3, except as
         sold or otherwise disposed of in the ordinary course of business, and
         except for Permitted Liens.

                 7.  Sale is Legal and Authorized.  The sale of the Notes and
         compliance by the Company with all of the provisions of the Agreement
         and the Notes:

                          (a)     are within the corporate powers and authority
         of the Company;

                          (b)     will not materially violate any material
                 provisions of any material law (including common law), rule or
                 regulation or any order of any court or governmental authority
                 or agency and will not conflict with or result in any material
                 breach of any of the terms, conditions or provisions of, or
                 constitute a default under the Restated Certificate of
                 Incorporation or By-laws of the Company or any indenture or
                 other agreement or instrument to which the Company is a party
                 or by which it may be bound or result in the




                                      B-3
<PAGE>   49

                 imposition of any material Liens on any property of the
                 Company; and

                          (c)     have been duly authorized by proper corporate
                 action on the part of the Company (no action by the
                 stockholders of the Company being required by law, by the
                 Restated Certificate of Incorporation or By-laws of the
                 Company or otherwise), has been duly executed and delivered by
                 the Company.  The Agreement and the Notes constitute the
                 legal, valid and binding obligations, contracts and agreements
                 of the Company enforceable in accordance with their respective
                 terms, except as such enforceability may be limited by
                 bankruptcy, reorganization, receivership, insolvency or
                 similar laws affecting the enforcement of creditors' rights
                 generally and limitations on the enforcement of equitable
                 remedies.

                 8.  No Defaults.  No Default or Event of Default as defined in
         the Agreement has occurred and is continuing.  Neither the Company nor
         any of its Subsidiaries is in default in the payment of any material
         Indebtedness and is not in default under any instrument or instruments
         or agreements under and subject to which any material Indebtedness has
         been issued and no event has occurred and is continuing under the
         provisions of any such instrument or agreement which with the lapse of
         time or the giving of notice, or both, would constitute an event of
         default thereunder.

                 9.  Consent.  No approval, consent or withholding of objection
         on the part of any regulatory body, state, federal or local, or any
         other third party is necessary in connection with the execution and
         delivery by the Company of the Agreement or the Notes or compliance by
         the Company with any of the provisions of the Agreement or the Notes,
         unless such consent or approval has already been obtained.

                 10.  Taxes.  All material tax returns required to be filed by
         the Company or any Subsidiary in any jurisdiction have, in fact, been
         filed, and all material taxes, assessments, fees, and other
         governmental charges upon the Company or any Subsidiary or upon any of
         their respective properties, income or franchises, which are due and
         payable have been paid.  For all taxable years ending on or








                                       B-4


<PAGE>   50

         before 1996, the federal income tax liability of the Company and its
         Subsidiaries has been satisfied.  The Company does not know of any
         proposed additional tax assessment against it for which adequate
         provision has not been made in its accounts, and no material
         controversy in respect of additional Federal or state income taxes is
         pending or to the knowledge to the Company threatened.

                 11.  Use of Proceeds.  The net proceeds from the sale of the
         Notes will be used for general corporate purposes.  None of the
         transactions contemplated in the Agreement (including, without
         limitation thereof, the use of proceeds from the issuance of the
         Notes) will violate or result in a violation of Section 7 of the
         Exchange Act, or any regulation issued pursuant thereto, including,
         without limitation, Regulations G, T and X of the Board of Governors
         of the Federal Reserve System, 12 C.F.R., Chapter 11.  Neither the
         Company nor any Subsidiary owns or intends to carry or purchase any
         "margin stock" within the meaning of said Regulation G.

                 12.  Private Offering.  Neither the Company, directly or
         indirectly, nor any agent on its behalf has offered or will offer the
         Notes or any similar security, or has solicited or will solicit, an
         offer to acquire the Notes or any similar security from any Person so
         as to bring the issuance and sale of the Notes within the provisions
         of Section 5 of the Securities Act.

                 13.  Compliance with Law.  Except as set forth in Annex I,
         neither the Company nor any Subsidiary (a) is in violation of any
         material law, ordinance, franchise, governmental rule or regulation,
         including without limitation, the Occupational Safety and Health Act
         of 1970, ERISA and any Environmental Legal Requirement to which it is
         subject; or (b) has failed to obtain any license, permit, franchise or
         other governmental authorization necessary to the ownership of its
         property or to the conduct of its business, which violation or failure
         to obtain would materially adversely affect the prospects, profits,
         properties or condition (financial or otherwise) of the Company and
         its Subsidiaries, taken as a whole, or impair the ability of the
         Company to perform its obligations contained in the Agreement or the
         Notes.  Neither the Company nor any Subsidiary is in default with
         respect to any order of any court or governmental authority or
         arbitration board or tribunal.

                 14.  Intercompany Debt.  Since June 29, 1997, no payments have
         been made by the Company or any of its Subsidiaries to FRI






                                      B-5

<PAGE>   51

         except as would have been permitted under Section 5 of the Agreement.
         The Company's and its Subsidiaries' Indebtedness to FRI did not exceed
         $500,000 as of the date hereof.

         Dated: August 12, 1997


                                              FRI-MRD CORPORATION



                                              By_____________________________
                                                Name:
                                                Title:
























                                      B-5

<PAGE>   52
                                    Annex I

   A. Subsidiaries (FRI-MRD Corporation is a wholly-owned subsidiary of Family
Restaurants, Inc., and all other subsidiaries listed are wholly-owned
(directly or indirectly) subsidiaries of FRI-MRD Corporation)

<TABLE>
<CAPTION>
Company                                    State of                Shares
Shares                                  Incorporation            Authorized          Issued
------                                  -------------            ----------          ------
<S>                                       <C>                      <C>                <C>  
FRI-Admin Corporation                      Delaware                 1,000              100

FRI-MRD Corporation                        Delaware                 1,000              100

EL Torito Restaurants, Inc.                Delaware                 1,000              100

Chi-Chi's, Inc.                            Delaware                 2,000            1,000

El Torito Franchising Company              Delaware                 1,000              100

CCMR of Timonium, Inc.                     Delaware                   600              200

CCMR of Maryland, Inc.                     Delaware                   600              200

Chi-Chi's of Greenbelt, Inc.               Kentucky                 2,000              100

Chi-Chi's of South Carolina, Inc.          Kentucky                 2,000              100

Chi-Chi's of West Virginia, Inc.           Kentucky                 2,000              100

Chi-Chi's Franchise Operations Co.         Kentucky                 2,000              100

Chi-Chi's Management Corporation           Kentucky                 2,000              100

Maintenance Support Group                  Kentucky                 2,000              100

CCMR Advertising Agency, Inc.              Kentucky                 2,000              100

CCMR of Catonsville, Inc.                  Kentucky                 2,000              100

CCMR of Cumberland, Inc.                   Kentucky                 2,000              100

CCMR of Frederick, Inc.                    Kentucky                 2,000              100
</TABLE>



<PAGE>   53


<TABLE>
<CAPTION>

<S>                                       <C>                      <C>                <C>
CCMR of Golden Ring, Inc.                  Kentucky                 2,000              100

CCMR of Greenbelt, Inc.                    Kentucky                 2,000              100

CCMR of Harford County, Inc.               Kentucky                 2,000              100

CCMR of Inner Harbor, Inc.                 Kentucky                 2,000              100

CCMR of Ritchie Highway, Inc.              Kentucky                 2,000              100

Chi-Chi's of Kansas, Inc.                  Kansas                   2,000              100
</TABLE>



                      B.  Indebtedness as of June 29, 1997

                             See attached Exhibit B

                        C.  Liens as of January 10, 1997

                             See attached Exhibit C

               D.  Material Adverse Changes since March 30, 1997

                                      none

                             E.  Pending Litigation

                                      none

                       F.  Title to Properties Exceptions

                                      none

                       G.  Compliance with Law Exceptions

                                      none