<PAGE>   1

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934

         For the quarterly period ended       June 28, 1998

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) EXCHANGE ACT 
         For the transition period from____________to_________________

                         Commission file number 0-17975

                                 REDHEADS, INC.
           (Exact name of business issuer as specified in its charter)

                               Delaware 95-4169432
(State or other jurisdiction of incorporation or organization(IRS Employer
Identification No.)

             Fifty South Buckhout Street, Irvington, New York 10533
                    (Address of principal executive offices)

                                 (914) 591-4444
                           (Issuer's telephone number)


(Former name, former address and formal fiscal year, if changed since last
report)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X   No

               APPLICATION ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes   No

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,453,439 as of August 17, 1998.



                                  Page 1 of 22
<PAGE>   2
                         Redheads, Inc, AND SUBSIDIARIES

                                      INDEX

PART I                         FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                                                 Page No.
                                                                                                 --------
<S>           <C>                                                                                <C>
Item 1.       Financial Statements

              Consolidated Balance Sheet as of June 28, 1998 (unaudited)
               and December 28, 1997  (audited)......................................................3

              Consolidated Statement of Operations for the thirteen weeks ending
               June 28, 1998 (unaudited) and eight weeks ending May 30, 1997 and
               five weeks ending  June 29, 1997 (unaudited)..........................................4

              Consolidated Statement of Operations for the twenty-six weeks ending
               June 28, 1998 (unaudited) and twenty-one weeks ending May 30, 1997 and
               five weeks ending  June 29, 1997 (unaudited)..........................................5

              Consolidated Statement of Cash Flows as of June 28, 1998 (unaudited)...................6

              Notes to Consolidated Financial Statements
                (unaudited).......................................................................7-12

Item 2.       Management's Discussion and Analysis
              of Financial Condition and Results
              of Operations..................................................................... 12-18

PART II       OTHER INFORMATION

Item 1.       Legal Proceedings..................................................................19-20

Item 2.       Changes in Securities.................................................................20

Item 3.       Defaults Upon Senior Securities.......................................................20

Item 4.       Submission of Matters To A Vote Of Security Holders...................................20

Item 5.       Other Information.....................................................................20

Item 6.       Subsequent Events.....................................................................21

Item 7        Exhibits and Reports on Form 8-K......................................................21

Signature Page    ..................................................................................22
</TABLE>



                                  Page 2 of 22
<PAGE>   3
                          PART I FINANCIAL INFORMATION

Item 1.  Financial Statements

                         REDHEADS, INC, AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
                                                                     June 28, 1998    December 28, 1997
                                                                       (Unaudited)         (Audited)
<S>                                                                   <C>               <C>
ASSETS
CURRENT ASSETS
Cash                                                                     (67,070)          180,082
Inventories                                                               75,878            83,376
Subscription Receivable                                                        0           400,000
Other Current Assets                                                     549,057           336,202
                                                                      ----------        ----------
TOTAL CURRENT ASSETS                                                     557,865           999,660

Fixed Assets                                                           2,483,427         2,321,494
Other Assets                                                             628,351           469,771
Long Term Note Receivable                                                673,017           673,017
                                                                      ----------        ----------
TOTAL LONG TERM ASSETS                                                 3,784,795         3,464,282

TOTAL ASSETS                                                           4,342,660         4,463,942
                                                                      ==========        ==========

LIABILITIES AND STOCKHOLDERS EQUITY

CURRENT LIABILITIES
Trade accounts                                                           859,700           736,113
Notes Payable                                                            438,433
Sales and payroll taxes payable                                           64,055            71,224
Current portion of long-term debt                                        117,650           117,650
Reserves For Liabilities                                                 185,072           185,072
Accrued Expenses                                                          46,759            46,759
                                                                      ----------        ----------
TOTAL CURRENT LIABILITIES                                              1,711,669         1,156,818

LONG-TERM DEBT                                                           284,916           278,098

STOCKHOLDERS' DEFICIT
8% Preferred stock - $.001 par value;  5,333 issued                       40,000            40,000
and outstanding as of Dec. 28, 1997 and June 28, 1998
8% Preferred stock  LEV- $.001 par value; 11,333 shares                   85,000            85,000
outstanding as of Dec. 28, 1997 and June 28, 1998
12% Preferred stock $.001 par value; 44,775 issued  and                  315,815           315,815
outstanding as of Dec. 28, 1997 and June 28,1998
Common stock - $.001 par value; authorized - 23,024,000                    2,458             2,386
2,390,756 issued and outstanding at Dec. 28, 1997
issued and outstanding at June 29, 1998
Additional paid-in capital                                             3,172,341         2,901,661
Accumulated deficit                                                   (1,489,539)         (715,836)
                                                                      ----------        ----------
                                                                       2,146,075         2,629,026
                                                                      ----------        ----------

Plus:  subscriptions receivable                                          200,000           400,000
TOTAL STOCKHOLDERS' EQUITY                                             2,346,075         3,029,026
                                                                      ----------        ----------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                             4,342,660         4,463,942
                                                                      ==========        ==========
</TABLE>




                                  Page 3 of 22
<PAGE>   4
                         REDHEADS, INC, AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
                                        13 Weeks              8 Weeks                  5 Weeks
                                      June 28, 1998         May 25, June            June 29, 1998
                                       (Unaudited)          (Unaudited)              (Unaudited)
                                     ---------------      ----------------          -------------
<S>                                   <C>          <C>      <C>             <C>       <C>           <C>
SALES                                  2,415,365              1,415,733                  939,309

COST OF SALES                            692,125    28.6%       403,433      28.5%       262,457     27.9%
                                      ----------            -----------               ----------

GROSS PROFIT                           1,723,240    71.3%     1,012,300      71.5%       676,852     72.0%

OPERATING EXPENSES
Labor costs                              792,020    32.7%       437,023      30.8%       293,477     31.2%
Occupancy costs                          336,277    13.9%       206,276      14.5%       101,269     10.7%
Other Operating Expense                  543,365    22.5%       314,245      22.2%       211,319     22.5%
Depreciation                             153,940     6.3%        57,363      4.05%        27,933     2.97%
                                      ----------            -----------               ----------
TOTAL OPERATING EXPENSES               1,825,601    75.5%     1,014,907      71.6%       633,998     67.5%
                                      ----------            -----------               ----------
INCOME (LOSS) FROM RESTAURANT           (102,361)   -4.2%        (2,607)    -0.18%        42,854      4.5%
OPERATIONS
                                      ----------            -----------               ----------

General and administrative expenses      299,819    12.4%       442,025     31.22%        57,672      6.1%
                                      ----------            -----------               ----------
INCOME (LOSS) FROM OPERATIONS           (402,180)  -16.6%      (444,631)    -31.4%       (14,818)    -1.5%
                                      ----------            -----------               ----------

OTHER INCOME (EXPENSE)
Interest income (expense)                (12,250)   -0.5%      (126,024)    -8.90%        11,789      1.2%
Other income (expense) net                 2,137    0.09%        96,297      6.80%        (6,514)    -0.6%
TOTAL OTHER INCOME (EXPENSE)             (10,113)   -0.4%       (29,727)    -2.10%         5,275      0.5%

REORGANIZATION EXPENSE
Professional fees                       (100,500)   -4.1%      (375,852)    -26.5%       (11,697)    -1.2%
Forgiveness of Debt                      176,586     7.3%    16,072,400    1135.2%       (13,200)    -1.4%

TOTAL REORGANIZATION EXPENSE              76,086     3.1%    15,696,548    1108.7%       (24,897)    -2.6%
                                      ----------            -----------               ----------


NET INCOME (LOSS)                       (336,207)  -13.9%    15,222,189    1075.2%       (34,440)    -3.6%
                                      ==========            ===========               ==========

WEIGHTED AVERAGE NUMBER OF

COMMON SHARES
OUTSTANDING                            2,453,439              7,154,549                2,234,744


INCOME (LOSS) PER COMMON SHARE             (0.14)                  2.13                    (0.02)
</TABLE>


                                  Page 4 of 22
<PAGE>   5
                         REDHEADS, INC, AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>
                                                26 Weeks Ending             21 Weeks                 5 Weeks
                                                                             Ending                  Ending
                                                 June 28, 1998            May 30, 1997            June 29, 1997
                                                  (unaudited)              (unaudited)              (unaudited)
                                                 --------------           ------------            -------------
<S>                                              <C>             <C>      <C>             <C>       <C>          <C>
SALES                                                 4,805,017              3,735,855                  939,309

COST OF SALES                                         1,421,194   29.5%      1,077,107     28.8%        262,457   27.9%
                                                 --------------           ------------              -----------

GROSS PROFIT                                          3,383,823   70.4%      2,658,747     71.1%        676,852   72.0%
                                                 --------------           ------------              -----------


OPERATING EXPENSES
Labor costs                                           1,521,171   31.6%      1,174,177     31.4%        293,477   31.2%
Occupancy costs                                         644,028   13.4%        506,279     13.5%        101,269   10.7%
Other Operating Expense                               1,098,322   22.8%        840,281     22.4%        211,319   22.5%
Depreciation                                            288,630    6.0%        139,027      3.7%         27,933    2.9%
                                                 --------------           ------------              -----------
TOTAL OPERATING EXPENSES                              3,552,150   73.9%      2,659,763     71.2%        633,998   67.5%
                                                 --------------           ------------              -----------
INCOME (LOSS) FROM                                     (168,328)  -3.5%         (1,015)   -0.03%         42,854    4.5%
                                                 --------------           ------------              -----------

General and administrative                              576,525   12.0%        610,489     16.3%         57,672    6.1%
                                                 --------------           ------------              -----------
INCOME (LOSS) FROM                                     (744,853) -15.5%       (611,505)   -16.3%        (14,818)  -1.5%
                                                 --------------           ------------              -----------


OTHER INCOME (EXPENSE)
Interest income (expense)                               (19,070)  -0.4%       (323,864)    -8.6%         11,789    1.2%
Other income (expense) net                                2,250   0.05%        (22,158)    -0.6%         (6,514)  -0.7%
                                                 --------------           ------------              -----------
TOTAL OTHER INCOME                                      (16,819)  -0.3%       (346,022)    -9.2%          5,275    0.5%


REORGANIZATION EXPENSE
Professional fees                                      (188,616)  -3.9%       (478,116)   -12.8%        (11,697)  -1.2%
Loss on abandonment or disposal                               0                  8,014      0.2%              0   0.00%

FORGIVENESS OF DEBT                                     176,586    3.6%     16,072,400    430.2%        (13,200)  -1.4%

TOTAL OTHER INCOME                                      (12,030)  -0.3%     15,602,298    417.6%        (24,897)  -2.6%
(EXPENSE)
                                                 --------------           ------------              -----------

                                                 --------------           ------------              -----------
NET INCOME (LOSS)                                      (773,702) -16.1%     14,644,771    392.0%        (34,440) -3.7%
                                                 ==============           ============              ===========
                                                      2,453,439              7,154,549                2,234,744

INCOME (LOSS) SHARE                                       (.315)                 2.047                     (.02)

</TABLE>


                                  Page 5 of 22
<PAGE>   6
                         REDHEADS, INC, AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF CASH FLOWS


<TABLE>
<S>                                                               <C>
CASH FLOW PROVIDED FROM OPERATING ACTIVITIES
Net Income (Loss)                                                 (336,207)
Depreciation & Amortization                                        153,940
Decrease (Increase) In Inventory                                     5,434
Decrease (Increase) In Other Current Assets And Accts. Rec          46,426
Decrease (Increase) In Other Assets                                 63,899
Restructuring Expense                                              100,500
Forgiveness Of Debt                                               (176,586)
Increase (Decrease) In Trade Accounts And Notes Payable
     And Accrued Expenses                                         (192,722)
Increase (Decrease) In Sales And Payroll Taxes Payable             (24,820)
Increase (Decrease) In Deferred Income & Accrued Expenses            4,886
                                                                  --------
Net Cash Provided by (Used In) Operating Activities               (360,136)


CASH FLOW FROM INVESTING ACTIVITY
Decrease (Increase) In C.I.P. And Fixed Assets                      17,147
Decrease (Increase) In Cash Due To/From Affiliated Co's                  0
                                                                  --------
Net Cash Provided by (Used In) Investing Activities                 17,147


CASH FLOW FROM FINANCING ACTIVITY
Change to Common Stock                                                  72
Change to Paid in Capital                                          105,679
Change to Cumulative Preferred
Change to Preferred Stock Subscribed                                     0

Net Cash Provided by (Used In) Financing Activities                105,751


Increase (Decrease) Cash                                          (237,238)


Cash at Beginning of Period                                        170,168

Cash at End of Period                                              (67,070)
                                                                  ========
</TABLE>


                                  Page 6 of 22
<PAGE>   7
                         REDHEADS, INC, AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.       Statement of Information Furnished

         The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-QSB instructions and in the opinion of
management contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of June 28, 1998
and December 28, 1997, the results of operations for the thirteen and twenty-six
weeks ended June 28, 1998, eight and twenty-one week periods ending May 30,
1997, and five week period ending June 28, 1998, and the cash flows for the
thirteen weeks ended June 28, 1998. These results have been determined on the
basis of generally accepted accounting principles and practices applied
consistently with those used in the preparation of the Company's Annual
Consolidated Financial Statements included in the Company's Form 10-KSB for the
year ended December 28, 1997.

         Certain information and footnote disclosures normally included in the
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that the accompanying
consolidated financial statements be read in conjunction with financial
statements and notes thereto incorporated by reference in the Company's Form
10-KSB for the year ended December 28, 1997.

         Interim results of operations are not necessarily indicative of the
results to be expected for a full year.

2.       Commitments and Contingencies

         (a) The Company operates its restaurants under various operating leases
expiring through August 2013. The executive offices are located in Irvington,
New York. Rent expense for the existing operations for the twenty-six week
period ending June 28, 1998 and twenty-one week period ending May 30, 1997 and
five week ending June 29, 1997 was 644,028, 506,279 and 101,269 respectively.

Future minimum rent payments

<TABLE>
<CAPTION>
                Fifty-Two/ Fifty-Three Weeks
                       Ending December
                       ---------------
<S>                                                          <C>
                             1998                            $  999,273
                             1999                             1,023,488
                             2000                             1,049,663
                             2001                             1,056,699
                             2002                             1,046,695
                         Thereafter                           8,819,518
                                                             ----------
</TABLE>


                                  Page 7 of 22
<PAGE>   8
3.       Capitalization

Preferred Stock, Convertible 5%

         All equity interests outstanding prior to the Plan Effective Date of
May 30, 1997, were canceled and extinguished without compensation.


Preferred Stock

         All equity interests outstanding prior to the Plan Effective Date of
May 30, 1997, were canceled and extinguished without compensation.

         Series A 12% Cumulative Convertible Preferred Stock ("Series A
Preferred Stock"). In accordance with the Plan of Reorganization, Teleferscot
International Ltd. ("Teleferscott"), the holders of $1,700,000 in postpetition
series B notes (see accompanying discussion of the Reorganization Plan) and
$1,600,000 subsequently funded and issued Series A Preferred Stock subscription,
currently holds 44,775 series A Preferred Stock. The Company is obligated to pay
dividends to the holders of the Series A 12% Cumulative Convertible Preferred
Stock ("Series A Preferred Stock") that was issued under the Plan at a rate
equal to twelve percent (12%) per annum on the $75 stated value. The dividends
are payable annually through the issuance of shares of Common Stock of the
Company at a price equal to 80% of the average bid price for the Common Stock
during the preceding 12 months. To the extent these funds are legally available,
beginning May 30, 2000, the Company has the option to purchase, at a cash price
equal to $75. per share, plus accrued and unpaid dividends, portions of Series A
Preferred Stock, so that the stock would be retired within seven years. For the
first three years after the issuance, at the election of the holders and with
the consent of the Company, the Series A Preferred Stock is exchangeable for
shares of common stock. After this time the stock is not exchangeable at the
holders option. As of June 28, 1998, a total of 44,775 shares of the Series A
Preferred Stock was outstanding, and all of such shares were held by
Teleferscot. Any newly issued Series A Preferred Stock will be entitled to
dividends on the same terms as the currently outstanding shares of Series A
Preferred Stock.

         R.B.B. of Secaucus and R.B.B. of Yonkers Preferred Stock. Pursuant to
the Plan, R.B.B. of Secaucus, Inc., R.B.B. of Yonkers, Inc. and R.B.B. of
Levittown issued 8% Cumulative Exchangeable Preferred Stock (the "Subsidiary
Preferred Stock") in exchange for a release of prepetition liability of
approximately $400,000. Each issuing subsidiary owns and operates the restaurant
unit located in the city designated in the corporate name of the particular
issuing subsidiary.

         Dividends are payable on the Subsidiary Preferred Stock at a rate of 8%
per annum based on the liquidation preference of $75 per share. The dividends
are payable semi-annually, to the extent funds are legally available therefor.
At the election of the issuing subsidiary such dividends may be paid by issuance
of shares of Common Stock of the Company, valued for this purpose at the closing
price as of the 10th business day preceding declaration of the dividend.
Further, to the extent funds are legally available therefor, on May 30, 2000,
May 30, 2001, and May 30, 2002, each issuing subsidiary will offer to purchase,
at a cash price equal to $75 per share, plus accrued


                                  Page 8 of 22
<PAGE>   9
and unpaid dividends, one-sixth, one-third, and one-half, respectively of the
Subsidiary Preferred Stock issued under the Plan; provided, however, that if at
any time the closing bid price of the Common Stock exceeds $5 per share for 40
consecutive trading days, any such mandatory repurchase obligation shall expire.

         Levittown Preferred Stock. R.B.B. of Levittown, Inc. has also issued
its own 8% Cumulative Exchangeable Preferred Stock (the "Levittown Preferred
Stock"). On May 25,1997 the company issued 13,111 shares of 8% Levittown
Preferred Stock. Dividends are payable on the Levittown Preferred Stock in cash
at a rate of 8% per annum based on the liquidation preference of $75 per share.
The dividends are payable semi-annually, to the extent funds are legally
available therefor. Further, to the extent funds are legally available therefor,
beginning on May 30, 1998, and monthly thereafter, the Levittown subsidiary will
offer to purchase one forty- eighth (1/48) of the shares of the Levittown
Preferred Stock issued under the Plan to the holder. The purchase price for such
repurchase is equal to the liquidation preference of $75 per share, plus accrued
and unpaid dividends. For the first three years after issuance, at the election
of the holders and with the consent of the Company, Levittown Preferred Stock
and the Subsidiary Preferred Stock is exchangeable for shares of common stock.
After this time, the stock is not exchangeable at the holders option.

         As of December 28, 1997 the Company has $58,000 of dividends in arrears
for Series A 8% Cumulative Exchangeable Preferred Stock.

The Company's charter provisions forbid mergers or consolidations in which the
Company is not the survivor, and certain asset sales, without the consent of
holders of a majority of the shares of the Series A Preferred Stock, voting as a
single class.

         The Subsidiary Preferred Stock and the Levittown Preferred Stock each
provide that if the issuing subsidiary of the preferred stock fails to pay three
consecutive semiannual dividends or fails to make one mandatory repurchase, then
the holders of such stock in such subsidiary, voting as a single class, shall be
entitled to elect one director to the Board of Directors of the issuing
subsidiary. Such director will serve until all accrued dividend and mandatory
repurchase payments are brought current.

         The certificates of incorporation of the subsidiaries issuing the
Subsidiary Preferred Stock each provide that the subsidiary may not create,
incur, assume, or otherwise become or be liable for any indebtedness for
borrowed money or for the deferred purchase price of property (except to the
Company or another subsidiary of the Company).

         The certificate of incorporation of R.B.B. of Levittown provides that
it may not create, incur, assume, or otherwise become or be liable for any
indebtedness for borrowed money or for the deferred purchase price of property.
Further, the charter provides that the issuing subsidiary will not sell,
transfer, or dispose of the assets of the subsidiary, except for cash in the
ordinary course of business at then fair market value.



                                  Page 9 of 22
<PAGE>   10
         The certificate of incorporation of R.B.B. of Levittown also provides
it may not enter into mergers or consolidations in which R.B.B. of Levittown is
not the survivor, or into certain asset sales, without the consent of holders of
a majority of the shares of the Levittown Preferred Stock, voting as a single
class.

         Holders of the Levittown Preferred Stock also have the right, if a
default in payment of dividends or mandatory repurchase is uncured for 60 days
or if the covenant on occurrence of indebtedness or ownership of the subsidiary
assets is breached, to require the Company to deliver to the holder all
outstanding shares of common stock of R.B.B. of Levittown, Inc. in exchange for
the Levittown Preferred Stock.


Common Stock

         All equity interests outstanding prior to the Plan Effective Date of
May 30, 1997, were canceled and extinguished without compensation. A further
discussion of capitalization is in the section titled "The Reorganization Plan",
to follow.

         The Common Stock issued pursuant to the Plan has not been publicly
traded since the Plan Effective Date. Prior to the Plan Effective Date, the
Company's then issued Common Stock was quoted for trading on the NASDAQ (symbol
"MGIK"), until it was de-listed on April 10, 1995. Pursuant to its obligations
under the Plan, the Company will use reasonable efforts to have the Common Stock
quoted for trading on the automated quotation system maintained by the National
Quotation Bureau, Inc (symbol "RDHD").

         The following table sets forth the quarterly high and low sales prices
for the then issued Common Stock of the Company for the two years preceding year
end December 28, 1997. The source of these quotations is the National Quotations
Bureau. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
                       Low          High
                       ---          ----
<S>                  <C>          <C>
1996
First quarter ...... $ 0.01       $ 0.12
Second quarter ..... $ 0.01       $ 0.12
Third quarter ...... $ 0.01       $ 0.12
Fourth quarter ..... $ 0.01       $ 0.12

1997
First quarter ...... $ 0.01       $ 0.12
Second quarter ..... $ 0.01       $ 0.12
Third quarter ...... $ 0.01       $ 0.12
Fourth quarter ..... $ 0.01       $ 0.12

1998
First quarter ...... $ 0.01       $ 0.02
Second quarter ..... $ 1.50       $ 2.00
</TABLE>


                                  Page 10 of 22
<PAGE>   11
Holders

         As of December 28, 1997, there were approximately 62 holders of record
         of the Company's Common Stock.

4.       Acquisition and Divestitures of Restaurants

1) While operating under chapter 11 The Company ceased operations at all of its
restaurants in the Washington D.C. area. The long term assets of 8 restaurants
in the Washington D.C. area.
Were written off as of year end 1996.

2) In August 1996 The Company caused the conversion of its Levittown Long Island
Red Robin to a Redheads Bistro/Bar.

3) On December 15, 1996, the Company ceased operations in its Smithhaven, New
York location. As of December 29, 1996, the Company ceased operations in its
Staten Island, New York location. As of December 15, 1996, the Company ceased
operations in its Tysons Corner, Virginia location. The long term assets of all
operations were written off as of year end 1996.

4) On December 31, 1996 the Company sold the assets of its Tysons Corner
restaurant for $200,0000 to Kaboudan International, L.L.C.(the Purchaser). The
Purchaser assumed all obligations under the lease on that date.

5) On June 11, 1997 the Bankruptcy Court overseeing the Chapter 11 cases of Red
One, Inc., Mr. Gallagher entered an order authorizing the sale of the Redheads
Bistro/Bar concept and the Middletown Redheads Bistro/Bar facility to the
Company. The Company purchased the trade name, trade dress elements, and all
related intellectual property rights in the Redheads Bistro/Bar concept for
$100,000, and purchased the Middletown Redheads Bistro/Bar for $175,000 cash,
plus assumption of the underlying lease. The closing of this sale occurred on
June 23, 1997, and ownership of the Redheads concept and the Middletown Redheads
Bistro/Bar transferred to the Company. No appeals of the order authorizing the
sale were filed, and the property was transferred, by the Bankruptcy Court
order, free and clear of all liens, claims, and encumbrances.


5.       Income Taxes

         The company files a consolidated federal income tax return and certain
combined state and city returns. There are no significant temporary differences
for the thirteen weeks ended June 28, 1998. The Company's federal state and city
tax returns have not yet been filed for the fifty two week period ending
December 28, 1997, the twenty six weeks ended December 29, 1996, the fifty two
weeks ended June, 30 1996 and July 2, 1995.

         As of December 28, 1997 the Company had approximately $15,300,000 of
net operating loss carry forwards expiring through 2011, available to face
future federal income taxes.

         As a result of the change in control of the company is subject to
limitations on the future utilization of its federal net operating loss carry
forwards. These limitations, described in Section 382 of the Internal Revenue
Code, limit the amount of future taxable income which may be offset by pre-

                                  Page 11 of 22
<PAGE>   12
change net operating loss and capital loss carry forwards. This limitation is
calculated by reference to the value the Company immediately before the change
date, multiplied by a discount factor, known as the "long term tax-exempt rate"


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

(A)      General

         On April 6, 1995, the Company (then Magic Restaurants, Inc.) and its 17
wholly-owned subsidiaries filed petitions for relief under Chapter 11 of Title
11 of the United States Code in the Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"), thereby commencing their Chapter 11 cases
(the "Reorganization Cases"). While under the protection of Chapter 11, actions
to collect on all claims against the Company that were in existence prior to the
filing of the petitions for relief, whether secured or unsecured, were stayed
while the Company and its subsidiaries reorganized their businesses as debtors
and debtors-in-possession. These claims are reflected in the Company's December
29, 1996 audited balance sheet as "liabilities subject to compromise."
Additional claims may arise subsequent to the petition date from rejection of
executory contracts and unexpired leases and from determination by the
Bankruptcy Court (or otherwise agreed by the claimant) of allowed claims for
contingencies and other disputed amounts. The Company received Bankruptcy Court
approval to pay or otherwise honor certain of its prepetition obligations,
including employee wages, which the Company did primarily in the last quarter of
the fiscal year ended July 2, 1995.

         The lack of liquidity that precipitated the Company's Chapter 11 filing
stemmed from under- capitalization, the collapse of its stock price, the
concomitant inability to obtain equity or debt financing through the public
capital markets, rising interest costs of nearly $1 million annually, mounting
amortization and accelerations of nearly $4 million in notes payable, high level
of general and administrative expenses, and delays in closing several
unprofitable restaurant locations.

<TABLE>
<CAPTION>
         RESTAURANT LOCATIONS

         LOCATION       PRESENT CONCEPT  EST. SEATING    SQ. FOOTAGE          TERM(1)
         --------------------------------------------------------------------------------
<S>                        <C>            <C>               <C>               <C>
         Brooklyn, NY      Red Robin      250                6,500            May 1986-Jan. 2005
         Levittown NY      Redheads       340               10,000            Sept 1993-Aug 2013
         Yonkers, NY       Redheads       260                7,500            July 1987-June 2012
         Middletow NY      Redheads       210                6,000            Apr 1991-Mar 2006
         Secaucus, NJ      Redheads       250                8,250            Oct 1989-Sept 2009

         (1)      Assumes that company exercises all extension options.
</TABLE>


         Selection and Purchase of the Redheads Concept. In September of 1996
the Company began redirecting its strategic focus towards development,
ownership, and operation of a multi-unit, mid-scale, casual dining concept
operating under the name Redheads Bistro/Bar. In furtherance of this strategic
redirection, during the twenty-six week transition period ended December 29,
1996, the Company ceased all restaurant operations under The American Cafe
concept, closed down two

                                  Page 12 of 22
<PAGE>   13
marginal Red Robin restaurants in Smithhaven and Staten Island New York, and
caused the restaurant in Levittown, New York, formerly operating as a Red Robin
restaurant, to be converted to a Redheads Bistro/Bar. Pursuant to an agreement
with Red Robin International, entered into in connection with consummation of
the Plan, the Company is required to cease operating its three restaurants in
Yonkers, New York, Secaucus, New Jersey, and Kings Plaza Brooklyn, New York as
Red Robin restaurants by no later than December 31, 1997. The Company intends to
cause each of these three restaurants to be converted to a Redheads Bistro/Bar
in accordance with that agreement.

         On June 11, 1997 the Bankruptcy Court overseeing the Chapter 11 cases
of Red One, Inc., Mr. Gallagher entered an order authorizing the sale of the
Redheads Bistro/Bar concept and the Middletown Redheads Bistro/Bar facility to
the Company. The Company purchased the trade name, trade dress elements, and all
related intellectual property rights in the Redheads Bistro/Bar concept for
$100,000, and purchased the Middletown Redheads Bistro/Bar for $175,000 cash,
plus assumption of the underlying lease. The closing of this sale occurred on
June 23, 1997, and ownership of the Redheads concept and the Middletown Redheads
Bistro/Bar transferred to the Company. No appeals of the order authorizing the
sale were filed, and the property was transferred, by the Bankruptcy Court
order, free and clear of all liens, claims, and encumbrances.

         The Reorganization Plan. By order of the Bankruptcy Court entered on
December 30, 1997, the Bankruptcy Court confirmed the Company's Second Amended
Plan of Reorganization. The Plan became effective by its terms on May 30, 1997.
Prior to such date the Company's name was changed to Redheads, Inc. The Plan
addressed the treatment of all claims against and equity interests in the
Company through the Plan Effective Date in the following manner:

         Postpetition Series A Notes. The holders of $2,520,000 of the
Postpetition Series A Notes received 1,896,983 shares of the Company's Common
Stock in exchange for their notes and interest due of approximately $325,000.
$35,000 of Series A Notes remained intact.

         Postpetition Series B Notes. Teleferscot, the holder of $1,700,000 in
Postpetition Series B Notes received 23,442 shares of the Company's newly issued
Series A Preferred Stock in exchange for the notes and interest due of
approximately $58,150. The holder of the Series A Preferred Stock is authorized
under the terms thereof to exchange one share of Series A Preferred Stock for
(a) 5 shares of Common Stock through May 30, 1998, (b) 3.75 shares of Common
Stock from May 31, 1998 through May 30, 1999, and (c) 3 shares of Common Stock
from May 31, 1999 through May 30, 2000. The Series A Preferred Stock carries a
$75 liquidation preference per share (plus accrued and unpaid dividends) and is
callable by the Company at any time at the liquidation preference price. The
Series A Preferred Stock also grants the Company an option to repurchase a
percentage of the Series A Preferred Stock, each year, at $75 per share
commencing on May 30, 2000. If the Company exercised all such options it would
retire the Series A Preferred Stock by May 30, 2004.

         Postpetition Liabilities. Approximately $1,882,000 of postpetition
liabilities were exchanged for 5,333 shares of newly issued Subsidiary Preferred
Stock and 213,760 shares of newly issued Common Stock. The holders of the
Subsidiary Preferred Stock are authorized under the terms thereof (with the
Company's consent), to exchange one share of Preferred Stock for (a) 5 shares of
Common Stock through May 30, 1998, (b) 3.75 shares of Common Stock through May
30, 1999, and (c) 3 shares of Common Stock through May 30, 2000. The Subsidiary
Preferred Stock carries a $75 liquidation preference per share (plus accrued and
unpaid dividends) and is callable by the Company at any time at the liquidation
preference price. The present holder of all Subsidiary


                                  Page 13 of 22
<PAGE>   14
Preferred Stock is Red Robin International, which holds 1,778 shares of
Subsidiary Preferred Stock of R.B.B. of Secaucus, Inc., 1,777 shares of R.B.B.
of Yonkers, Inc. and 1,777 shares of R.B.B. of Levittown, Inc. Approximately
$1,227,025 of postpetition liabilities remain intact, $500,000 of which is to
professionals retained in the bankruptcy case in addition to approximately
382,000 in tax claims. No interest will accrue on the outstanding unpaid
balances. Some of the professionals retained in the bankruptcy case subsequently
exchanged their postpetition liability for common stock in the company as
provided for in the plan of reorganization.

         Secured Claims. Secured claims of approximately $1,207,000 (including
interest of approximately $197,000) were exchanged for $209,000 in cash, and
11,335 shares of Levittown Preferred Stock. The present holder of this Levittown
Preferred Stock is Keybro Enterprises, Inc., with 11,335 shares.

         Trade and Other Miscellaneous Claims. The holders of approximately
$13,456,000 of trade and miscellaneous claims received 125,000 shares of Common
Stock of the Company, to be shared pro rata among certain of the claimants.

         Pre-Plan Effective Date Equity Interests. All equity interests
outstanding prior to the Plan Effective Date were canceled and extinguished
without compensation.


(B)      Results of Operations

Results of Operations -The thirteen weeks ended June 28, 1998 as compared with
the eight weeks ended May 30, 1997 and five weeks ended June 29, 1997.

       Total revenues increased $60,323 or 2.56% to $2,415,365 for the thirteen
weeks ended June 28, 1998, from $2,355,042 for the thirteen weeks ended June
29,1997. The increase was attributable to the net effect the acquisition of the
Middletown, New Jersey, Redheads Bistro/Bar location and declining sales at the
Levittown, Long Island location.

       Same stores sales decreased approximately $359,381 or 12.72% for the
thirteen weeks ended June 28, 1998 from the same period a year ago. The decrease
in same store sales can be largely attributed to the Company's Levittown, Long
Island Redheads Bistro/Bar location. The decrease in same store sales at the
Levittown unit totaled approximately $172,369 or 30.60%.

       Food and beverage expense increased $26,235 or 3.93% to $692,125 for the
thirteen weeks ended June 28, 1998 from $665,890 for the thirteen weeks ended
June 29, 1997, principally due to the difference in food cost inherent in the
Redheads Bistro/Bar concept as compared to the food cost inherent in the Red
Robin concept and partially attributable to the acquisition of the Middletown
location.

       Restaurant labor and related expenses increased $61,520 or 8.38% to
$792,020 for the thirteen weeks ended June 28, 1998, from $737,153 for the
thirteen weeks ended June 29, 1997. This was attributable to increased sales at
the Kings Plaza location and the acquisition of the Middletown location.
Restaurant labor expenses as a percentage of food and beverage revenues
increased 1.77% to 32.79% from 31.02%, in the respective periods.

                                  Page 14 of 22
<PAGE>   15
       Restaurant occupancy expenses increased $28,732 or 9.3% to $336,277 for
the thirteen weeks ended June 28, 1998, from $307,545 for the thirteen weeks
ended June 29, 1997. This was attributable to the combined effect of (1) the
acquisition of the Middletown Redheads Bistro/Bar location and the increase in
base rent at the Yonkers location. Restaurant occupancy expenses as a percentage
of food and beverage revenues increased .86% to 13.92% from 13.06%, in the
respective periods.

       Other operating expenses increased $17,801 or 3.38% to $543,365 for the
thirteen weeks ended June 28, 1998, from $525,564 for the thirteen weeks ended
June 29, 1997. This was attributable to the acquisition of the Middletown
Redheads Bistro/Bar location. Other operating expenses consist mainly of
utilities, supplies, royalties, insurance, maintenance and other overhead items.
Other operating expenses as a percentage of food and beverage revenues increased
1.8% to 22.5% from 22.32%, in the respective periods.

       Depreciation increased $68,643 or 80.47% to $153,940 for the thirteen
weeks ended June 28, 1998, from $85,296 for the year ended June 29, 1997. The
increase is attributable to the depreciation of fixed asset additions in
connection with the conversion of Redheads Yonkers, New York, Redheads Secaucus
and acquisition of the Middletown, New Jersey restaurant.

       General and administrative expenses decreased $199,878 or 39.9% to
$299,819 for the thirteen weeks ended June 28, 1998, from $499,697 for the
thirteen weeks ended June 29, 1997. The decrease is attributable to a number or
cost cutting programs implemented by management. General and administrative
expenses consist of, among other things, executive salaries, other
administrative compensation, corporate office rent and corporate overhead
expenses. General and administrative expenses as a percentage of revenues
decreased to 12.41% from 21.22%, in the respective periods.

       Interest expense decreased $101,985 or 89.27% to $12,250 for the thirteen
weeks ended June 28, 1998 from $114,235 for the thirteen weeks ended June 29,
1997, principally as a result of interest incurred in connection with DIP
financing converted to equity in May 1997. Interest income as a percentage of
revenues improved to .51% from 4.85%, in the respective periods.

       Professional Fees decreased $287,049 or 74.06% to $100,500 for the
thirteen weeks ended June 28, 1998 from $387,549 for ended June 29, 1997
principally as a result of a decrease in attorneys fees related to the
bankruptcy. Reorganization expense as a percentage of revenues decreased 12.3%
to 4.16% from 16.46%, in the respective periods.

       The Company's net loss from operations decreased $57,269 or 12.46% to
($402,180) for the thirteen weeks ended June 28, 1998, from ($459,449) for the
thirteen weeks ended June 29, 1997. Net operating loss as a percentage of
revenues decreased 2.86% to 16.65% from 19.51%, in the respective periods.

Results of Operations -The twenty-six weeks ended June 28, 1998 as compared with
the twenty-one weeks ended May 30, 1997 and five weeks ended June 29, 1997.

       Total revenues increased $129,853 or 2.77% to $4,805,017 for the
twenty-six weeks ended June 28, 1998, from $4,675,164 for the twenty-six weeks
ended June 29,1997. The increase was attributable to the net effect the
acquisition of the Middletown, New Jersey, Redheads Bistro/Bar location and
declining sales at the Levittown, Long Island location.

                                  Page 15 of 22
<PAGE>   16
       Same stores sales decreased approximately $614,452 or 11.72% for the
twenty-six weeks ended June 28, 1998 from the same period a year ago. The
decrease in same store sales can be largely attributed to the Company's
Levittown, Long Island Redheads Bistro/Bar location. The decrease in same store
sales at the Levittown unit totaled approximately $367,568 or 32.02%.

       Food and beverage expense increased $81,630 or 6.07% to $1,421,194 for
the twenty-six weeks ended June 28, 1998 from $1,339,564 for the twenty-six
weeks ended June 29, 1997, principally due to the difference in food cost
inherent in the Redheads Bistro/Bar concept as compared to the food cost
inherent in the Red Robin concept and partially attributable to the acquisition
of the Middletown location.

       Restaurant labor and related expenses increased $53,518 or 3.64% to
$1,521,171 for the twenty-six weeks ended June 28, 1998, from $1,467,653 for the
twenty-six weeks ended June 29, 1997. This was attributable to increased sales
at the Kings Plaza location and the acquisition of the Middletown location.
Restaurant labor expenses as a percentage of food and beverage revenues
increased .27% to 31.66% from 31.39%, in the respective periods.

       Restaurant occupancy expenses increased $36,480 or 6.0% to $644,028 for
the twenty-six weeks ended June 28, 1998, from $607,547 for the twenty-six weeks
ended June 29, 1997. This was attributable to the combined effect of (1) the
acquisition of the Middletown Redheads Bistro/Bar location and the increase in
base rent at the Yonkers location. Restaurant occupancy expenses as a percentage
of food and beverage revenues increased .40% to 13.4% from 13.0%, in the
respective periods.

       Other operating expenses increased $46,723 or 4.44% to $1,098,322 for the
twenty-six weeks ended June 28, 1998, from $1,051,600 for the twenty-six weeks
ended June 29, 1997. This was attributable to the acquisition of the Middletown
Redheads Bistro/Bar location. Other operating expenses consist mainly of
utilities, supplies, royalties, insurance, maintenance and other overhead items.
Other operating expenses as a percentage of food and beverage revenues increased
 .37% to 22.86% from 22.49%, in the respective periods.

       Depreciation increased $121,669 or 72.87% to $288,630 for the twenty-six
weeks ended June 28, 1998, from $166,960 for the year ended June 29, 1997. The
increase is attributable to the depreciation of fixed asset additions in
connection with the conversion of Redheads Yonkers, New York, Redheads Secaucus
and acquisition of the Middletown, New Jersey restaurant.

        General and administrative expenses decreased $91,637 or 13.71% to
$576,525 for the twenty-six weeks ended June 28, 1998, from $668,162 for the
twenty-six weeks ended June 29, 1997. The decrease is attributable to a number
or cost cutting programs implemented by management. General and administrative
expenses consist of, among other things, executive salaries, other
administrative compensation, corporate office rent and corporate overhead
expenses. General and administrative expenses as a percentage of revenues
decreased to 12.00% from 14.29%, in the respective periods.

       Interest expense decreased $323,929 or 95.06% to $16,819 for the
twenty-six weeks ended June 28, 1998 from $340,748 for the twenty-six weeks
ended June 29, 1997, principally as a result of interest incurred in connection
with DIP financing converted to equity in May 1997.

                                  Page 16 of 22
<PAGE>   17
       Professional Fees decreased $301,197 or 61.49% to $188,616 for the
twenty-six weeks ended June 28, 1998 from $489,813 for ended June 29, 1997
principally as a result of a decrease in attorneys fees related to the
bankruptcy. Reorganization expense as a percentage of revenues decreased 6.5% to
3.93% from 11.48%, in the respective periods

       The Company's net loss from operations increased $118,530 or 18.9% to
($744,853) for the twenty-six weeks ended June 28, 1998, from ($626,323) for the
twenty-six weeks ended June 29, 1997. Net operating loss as a percentage of
revenues increased 2.1% to 15.5% from 13.4%, in the respective periods. The
increase in loss is attributed to the shut down of Secaucus during conversion to
a Redheads and the loss of sales at Levittown.

(C)    Liquidity And Capital Resources

       Operating Activities. Since inception, the Company has incurred losses
from operations. As of May 25, 1997, the Company had an accumulated deficit of
$36,864,531. This was all eliminated through the use of "fresh-start"
accounting. During the period December 29, 1997 through June 28, 1998 operations
resulted in a loss of $773,702 and the net decrease in cash totaled $247,152.
This was primarily the result the net cash provided from operations of $48,785;
net cash used in investing activities of $386,688, mostly from construction in
the Secaucus unit conversion and net cash used in financing activities of
$15,000 from the receipt of $200,000 of Preferred Stock Subscribed and payment
of private placement financing fees. As of June 28, 1998, the Company had a
negative cash balance of ($67,070).

       As of June 28, 1998, the Company had negative working capital of
$1,153,804, as compared to negative working capital of $976,736 as of December
28, 1997.

       The Company has, upon the effectiveness of its confirmed Plan, accounted
for the reorganization using "fresh-start" reporting. Accordingly, all assets
and liabilities are restated to reflect their reorganization value, which
approximates fair value at the date of reorganization. Application of the
principles of "fresh-start" reporting resulted in elimination of the
stockholders' deficit and caused $22,435,338 of total liabilities to be
extinguished, as provided specifically in the Plan itself. See"-- The
Reorganization Proceedings; Confirmation and Effectiveness of the Company's
Reorganization Plan" for further discussion of the consequences of the Plan's
confirmation and effectiveness.

       The Company does not have trade accounts receivable, since sales are for
cash or by credit card receipts, which are usually paid within one week. The
Company does not maintain substantial inventories due to the relatively brief
shelf life and frequent turnover of food products and liquor. The restaurants
receive deliveries of food not less frequently than every other day and
deliveries of liquor several times each week.



                                  Page 17 of 22
<PAGE>   18
       The Company's current leases require, and future leases may require, the
Company to pay taxes, maintenance, insurance, repairs and utility costs which
are also subject to inflation, and in addition, some leases contain, and future
leases may contain, escalations of annual rentals based upon limited increases
in specific cost-of-living indices, none of which are controllable by the
Company.

       The Company anticipates that it may continue to incur losses in the near
term as it continues to integrate operating margin improvement programs into its
existing restaurants. Additionally, the Company believes an anticipated private
placement will provide the necessary capital to acquire additional locations to
achieve profitability. However, the Company believes, although there can be no
assurance, that these programs will achieve profitability and/or anticipated
financing occur thereby and enhancing the Company's profitability and working
capital position.

       Investing Activities. The Company is required by an order of the
Bankruptcy Court, entered into in connection with the Plan, to remove all Red
Robin trade dress from its restaurant location in Secaucus, New Jersey, Yonkers,
New York, and Kings Plaza, Brooklyn, on or before December 31, 1997. Failure to
remove the trade dress as required by the Bankruptcy Court order could result in
litigation and the grant of injunctive relief against the Company, and the
imposition of unspecified monetary damages against the Company. The Company has
proceeded with the conversions as directed by the court. As of November 1997 and
March 1998 the Yonkers and Secaucus locations (respectively) had been
successfully converted and only the Kings Plaza location was in violation of
this order. The Company has notified Red Robin of its violation and intent to
convert the unit during the third quarter of 1998.

       Financing Activities. To fund these units' conversion to the Redheads
Bistro/Bar concept and costs associated with the emergence from bankruptcy, as
well as other costs, the Company obtained a funding commitment from Teleferscot
to provide up to $3.5 million. Through June 28, 1998 the Company received
approximately $3,300,000 of the committed funding. In exchange for each $75
drawn down under the funding commitment, Teleferscot will receive 1 additional
share of the Company's Series A Preferred Stock.

       It is management's belief that profitability will be achieved by opening
or acquiring additional restaurants to provide an expanding revenue base to
absorb fixed corporate overhead charges. The Company anticipates that revenues
will exceed the increased expenditures associated with the construction and
acquisition of additional restaurants.

       The poor performance of any one restaurant could have a materially
adverse effect upon the financial condition of the Company. However, the Company
believes, although there can be no assurance, that the adverse effect of the
results of any one restaurant will diminish as the number of restaurants
operated by the Company increases. While the Company believes that management
efficiencies and marketing strategies will limit declines in existing store
revenues, there can be no assurance that future declines in existing restaurant
revenues will not occur and adversely affect the Company.

       The Company anticipates that it will require substantial additional debt
or equity capital to fund the Company's expansion plans, which contemplate the
opening of at least one new Redheads Bistro/Bar restaurant each quarter. The
inability of the Company to obtain such additional financing will result in the
curtailment by the Company of its expansion activities and further restructuring
or downsizing of the Company's operations.


                                  Page 18 of 22
<PAGE>   19
                            Part II OTHER INFORMATION


Item 1. Legal Proceedings.

General

       On December 30, 1996 the second amended plan of reorganization was
approved by the Bankruptcy Court. Pursuant to the Plan, the Bankruptcy Court
retained jurisdiction to hear and determine any objections to claims. Certain
prepetition unsecured claims against the Company, subject to resolution and
discharge in the Chapter 11 cases, have not been resolved. However pursuant to
the Plan, 125,000 shares of the Company's Common Stock are allocated for
distribution to all such claimants, and no other stock or assets of the Company
may be claimed by such claimants. As a result, the resolution of such disputed
claims will not affect the Company.

        The Company is also presently appealing an order of the Bankruptcy Court
requiring the Company to pay approximately $100,000 to Bowie Produce, Inc., a
prepetition produce vendor, pursuant to the Perishable Agricultural Commodities
Act ("PACA"). The resolution of these matters is not expected to become final
until the latter part of fiscal year 1998. The Company believes that an adverse
decision to the Company in each of these matters will not materially affect the
Company's operations, and further that it will have sufficient cash available to
pay any judgments that may be entered with finality against the Company.

       In February, 1997 it was noted that Dining Ala Card (DAC) made
unauthorized withdrawals totaling approximately $66,224 from the Company's bank
accounts during the period April 18, 1996 until February 11,1997. Upon inquiry
of the deductions, the company was informed they were for funds received on
February 11, 1996 (post petition). Further inquiry by the company revealed the
bank account DAC alleged to wire the money to had been closed November, 1994
(this was confirmed with the bank). During later communication, a DAC
representative confirmed the Company did not receive any post petition funding.
The representative went on to say any reimbursement decision might best be
resolved in the bankruptcy court. The company has since sought relief from the
courts. The Company believes that an adverse decision to the Company in this
matter will not materially affect the Company's operations.

       In January 1998 The Company came to agreement with Mr. Michael Ezzo of
Carmella Cafes with regard to a note held by The Company for the March 6, 1995
sale of the Carmella Cafes. The agreement forgives all unpaid interest through
Dec. 31, 1997 ($173,821) and reduces the interest rate from 11% to 7 %
contingent on receipt of all payments due on a timely basis. The note was
restructured to 7% with a 20 year term and quarterly payments of $12,990.89
commencing April 30, 1998.

       Other than as discussed in this Item 3, there are no other legal
proceedings to which the Company is a party that are material to the Company's
business.


Potential Dram Shop Liability

       All restaurants in New Jersey and New York are subject to dram shop
legislation which imposes liability on licensed alcoholic beverage servers for
injuries or damages caused by their negligent service of alcoholic beverages to
a visibly intoxicated person or to a minor, if such service is the proximate
cause of

                                  Page 19 of 22
<PAGE>   20
the injury or damage and such injury or damage is reasonably foreseeable.
Additional restaurants established or acquired by the Company in the future are
likely to be subject to similar potential liability in New Jersey and New York
or elsewhere. While the Company maintains insurance which it believes is
adequate to protect against such liability, there can be no assurance that it
will not be subject to a judgment in excess of its insurance coverage or that it
will be able to continue to obtain insurance coverage at reasonable costs or at
all. The imposition of a judgment substantially in excess of the Company's
insurance coverage would have a material adverse effect on the Company. The
failure or inability of the Company to maintain insurance coverage could
materially and adversely affect the Company.

Submission of Matters to a Vote of Security Holders

       The Company was operating pursuant to the orders of the Bankruptcy Court
during the first quarter of 1997 and did not submit any matters to a vote of the
security holders during that period.


Item 2. Changes in Securities.

       All equity interests outstanding prior to the Plan Effective Date of May
30, 1997, were canceled and extinguished without compensation. See section
"Management Discussion and Analysis" for further discussion on securities.

       During the quarter postpetition liabilities in the amount of $176,586
were converted to 67,000 shares of common stock of the company.

Item 3. Defaults Upon Senior Securities.

       On December 30, 1996 the second amended plan of reorganization was
approved by the Bankruptcy Court. All securities, except as expressly provided
in the plan, and other documents representing or giving rise to claims or equity
interests in Magic Restaurants, Inc. and the subsidiaries shall be deemed to be
canceled and holders of such documents/instruments shall have no rights arising
from the documents/instruments, except the rights as expressly provided in the
plan.

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

       None

Item 5. Other Information

       On December 15, 1996, the Company ceased operations in its Smithhaven,
New York location. As of December 29, 1996, the Company ceased operations in its
Staten Island, New York location. As of December 15, 1996, the Company ceased
operations in its Tysons Corner, Virginia location. The long term assets of both
operation were written off as of year end 1996.

       On February 18, 1998 the Company entered into an exclusive agreement
for the private placement of securities with Fordham Financial Management, Inc.
("Fordham" or "Agent") for the private placement of up $2,000,000 of the
Company's securities. The offering will be on a "best efforts all or none basis"
as to $1,750,000 of Securities and on a "best efforts basis" as to an additional
$250,000 of Securities. The anticipated terms of the Offering are subject to
further review and negotiation and the completion of due

                                  Page 20 of 22
<PAGE>   21
diligence by Fordham. There can be no assurance that the Company will receive
the contemplated financing.

Item 6. Subsequent Events

       The Bankruptcy Court confirmed the Company's plan of reorganization
effective, May 30, 1997. On this date the name of the reorganized company was
changed to Redheads Bistro Bar, Inc.

       During November 1997 the Yonkers, New York Red Robin was successfully
converted to a Redheads Bistro/Bar and opened November, 28, 1997. During
February 1998 the Secaucus, New Jersey Red Robin was successfully converted to a
Redheads Bistro/Bar and opened March 2, 1998.

       In December 1997 The Company relocated its corporate offices from One
Executive Blvd., Yonkers, New York 10701 to 50 South Buckhout Street, Irvington,
New York 10533. The move took place without incident and the office was up and
running within a week.

       The Company is required by an order of the Bankruptcy Court, entered into
in connection with the Plan, to remove all Red Robin trade dress from its
restaurant locations in Secaucus, New Jersey, Yonkers, New York, and Kings
Plaza, Brooklyn, on or before December 31, 1997. Failure to remove the trade
dress as required by the Bankruptcy Court order could result in litigation and
the grant of injunctive relief against the Company, and the imposition of
unspecified monetary damages against the Company. The Company is proceeding with
the conversions as directed by the court. As of May 1998 the Yonkers and
Secaucus location had been successfully converted, and only the Kings Plaza
location was in violation of this order.

       In January 1998 The Company came to agreement with Mr. Michael Ezzo of
Carmella Cafes with regard to a note held by The Company for the March 6, 1995
sale of the Carmella Cafes. The agreement forgives all unpaid interest through
Dec. 31, 1997 ($173,821) and reduces the interest rate from 11% to 7 %
contingent on receipt of all payments due on a timely basis. The note was
restructured to 7% with a 20 year term and quarterly payments of $12,990.89
commencing April 30, 1998.

Item 7. Exhibits and Reports on Form 8-K

       (A)      Exhibits Filed

                27   Financial Data Schedule


       (B) The Company filed the following currents reports of Form 8-K and
8-K/A during the quarter ended June 28, 1998:

       None.



                                  Page 21 of 22
<PAGE>   22
SIGNATURES


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

                                    Redheads, Inc,




Date:  August 19, 1998              By:  s/ Charles O. Olson, Jr.
      ----------------                   ------------------------
                                         Charles O. Olson, Jr.
                                         Chief Executive Officer



                                  Page 22 of 22