KOO KOO ROO INC/DE, 10-K/A, 1997-04-30

KOO KOO ROO INC/DE
10-K/A, 1997-04-30
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

AMENDMENT NO. 1 TO FORM 10-K

FORM 10-K/A

(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- - ---
SECURITIES EXCHANGE ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 1996

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- - ---
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM __________ TO __________

Commission file number: 0-19548

[LOGO OF KOO KOO ROO]

KOO KOO ROO, INC.
(Exact name of Registrant as specified in its charter)

Delaware 22-3132583
- - ------------------- -----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification #)

11075 Santa Monica Boulevard, Suite 225, Los Angeles, CA 90025
--------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (310) 479-2080

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
----------------------------
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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
--- ---

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

As of March 7, 1997, 16,352,596 shares of Registrant's Common Stock were
outstanding. The aggregate market value of the Registrant's Common Stock held
by non-affiliates of the Registrant as of March 7, 1997, was approximately $93.1
million based on the closing price of $6.9375 per share on that date on the
Nasdaq National Market. All directors and officers and more than 5%
stockholders of Registrant are deemed "affiliates" of Registrant for the purpose
of calculating such aggregate market value. Registrant, however, does not
represent that such persons, or any of them, would be deemed "affiliates" of
Registrant for any other purpose under the Securities Exchange Act of 1934 or
the Securities Act of 1933.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Current Report on Form 8-K dated March 18, 1996 are
hereby incorporated herein by reference into Item 5 of Part II of this Report.
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PART I

EXPLANATORY NOTE: This Amendment No. 1 to Form 10-K on Form 10-K/A amends and
restates the Form 10-K filed March 31, 1997

ITEM 1. BUSINESS

GENERAL INFORMATION

The principal business of Koo Koo Roo, Inc. (the "Company" or "Koo Koo
Roo") is the operation of restaurants in the emerging food category of fresh,
convenient meals--meals with the convenience and value associated with quick
service, but the quality, freshness and variety associated with upscale, casual
full-service restaurants. The Company's signature concept, Koo Koo Roo
California Kitchen(TM), features the Company's proprietary Original Skinless
Flame-Broiled Chicken(TM), fresh oven-roasted hand-carved turkey, country herb
rotisserie chicken, made to order tossed salads, specialty sandwiches on fresh
baked rolls, a signature vegetable soup and more than 23 side dishes including
hand-mashed potatoes, stuffing, steamed green beans and other vegetables, rices
and grains. With few exceptions, all are prepared fresh in small batches on-site
throughout the day. As of March 7, 1997, the Company operated 28 Koo Koo Roo
restaurants: 26 company owned and operated restaurants located in California
(24); New York (1); and Colorado (1), as well as two joint venture restaurants
in Florida, which are operated by the Company. See "--Restaurants in Operation
and Expansion Plans."

The Company's restaurants are designed to appeal to consumers who look for
good tasting, freshly prepared food, and who also appreciate menu items that are
wholesome and healthy. The products are easy to understand, high in quality and
generally low in fat, calories and cholesterol, without the negative connotation
or taste of "health food." The sights and smells of fresh food preparation, such
as turkey carving and salad tossing, are displayed in glass enclosed stations
featuring "chefs" in restaurant whites and toques. The average check ranges
between $8 and $9 and the restaurants generally range in size from approximately
2,000 to 4,000 square feet.

The Company opened its first restaurant in Los Angeles, California in
August 1988 in a fast food format with a menu limited to the proprietary
Original Skinless Flame-Broiled Chicken(TM) and a half-dozen hot and cold side
dishes. In 1990 Kenneth Berg (the Company's current Chairman and Chief Executive
Officer) purchased a financial interest of 50% in Koo Koo Roo, which had only
two stores at the time, from the Company's founders for $2.0 million. The
Company then completed an initial public offering in October 1991 and the
founders attempted to roll out the fast food format concept in several states.
In July 1992, Mr. Berg led the buyout of the remaining shares held by the
Company's founders and became the Company's Chairman and Chief Executive
Officer. Also in 1992, Mr. Berg hired Michael D. Mooslin, an experienced chain
restaurant executive, to be President and to help reposition the Company's
concept from a standard fast food format to a broad menu restaurant with full
service cooking standards while continuing to offer counter service. Over the
next several years, executive management, together with the Company's corporate
chef and professional designers, developed the layout, menu and appearance of
the Koo Koo Roo California Kitchen(TM).

In 1994 the Company initiated an area development and franchising program,
but the performance and nature of the concept led management to focus on a
quality-oriented brand strategy and to begin an expansion program starting in
1995. The expansion program focused on Company ownership or joint venture
relationships rather than franchising. During 1995, and 1996, additional real
estate, marketing, human resources, operations, construction and purchasing
executives, as well as store managers, were recruited to join the Company from
restaurant industry leaders such as The Cheesecake Factory, California Pizza
Kitchen, Houston's and Acapulco Restaurants. In February 1995, Mr. Berg
recruited Robert Kautz to join the Company as Chief Financial Officer. Over the
next two years, Mr. Kautz was principally responsible for raising over $75
million in new equity for the Company. Mr. Kautz was recently named President of
Koo Koo Roo, Inc. while retaining his title of Chief Financial Officer. In June
of 1995, Iacocca Capital Partners, L.P. served as placement agent in raising
$14.3 million in common stock and warrants. Subsequent to the June private
placement, Lee A. Iacocca, retired Chairman of Chrysler Corporation, was elected
to the Company's Board of Directors. In September 1996, John Kaufman joined the
Company as President of Koo Koo Roo USA responsible for all domestic operations.
Mr. Kaufman was previously Chief Executive Officer of Rosti and also opened 64
restaurants over nine years during his tenure at California Pizza Kitchen where
he was Vice President of Operations. In September 1996, Mr. Mooslin was
appointed the President and Chief Operating Officer of Koo Koo Roo
International. See "--Recent Developments" and "Executive Officers, Directors
and Key Employees."

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In 1996, the Company also acquired 90% of Color Me Mine, Inc. ("Color Me
Mine"), a chain of paint-your-own ceramics studios. Color Me Mine is a retail
chain of studios where customers paint ceramics primarily for entertainment
which are fired overnight in kilns located on site. The Company acquired Color
Me Mine with a view to open units next to Koo Koo Roo restaurants to utilize
larger real estate locations. Color Me Mine has been built in two Koo Koo Roo
locations and two additional dual-brand locations are presently under
construction. Color Me Mine has its own management team and plans to grow
independently through company-owned and franchise operations. As of March 1,
1997, Color Me Mine operated nine company-owned ceramics studios and is a joint
venture partner in six other studios through its franchising subsidiary. The
stores have unpainted ceramic items which are purchased by the customer and all
supplies are provided for the customer to design and paint their selection.
Color Me Mine also operates a ceramics manufacturing facility in Van Nuys,
California where over 400 different items are produced for distribution to its
owned stores and franchises.

As of March 7, 1997, eleven of the Company's Koo Koo Roo restaurants also
featured the specialty products of the Arrosto Coffee Company ("Arrosto"), a
wholly-owned subsidiary of the Company. Arrosto offers fresh roasted coffee and
espresso drinks along with regular and reduced-fat pastries and desserts.
Inclusion of Arrosto in the Koo Koo Roo California Kitchen(TM) locations allows
for increased facility utilization across day-parts, including early morning,
mid-afternoon, and evening. Arrosto operates a coffee bean micro-roastery in Van
Nuys, California and ships beans to its locations three to four times per week
to ensure the freshness of its end products. In addition, Arrosto has begun
construction of a test location for a family coffee house concept and, depending
on the results of the test location, may make additional investments in
locations strategically located near or adjacent to Koo Koo Roo California
Kitchen restaurants or Color Me Mine ceramics studios.

RECENT DEVELOPMENTS

PRIVATE PLACEMENTS

In February 1997, the Company completed a private placement of 6% Series B
Convertible Preferred Stock, liquidation preference $100 per share (the "Series
B Convertible Preferred Stock"), and received net proceeds of approximately
$26.9 million (after deducting cash fees to the placement agent and estimated
transaction expenses). The Series B Convertible Preferred Stock is convertible
into shares of the Company's Common Stock at a conversion price generally equal
to the market price of the Common Stock at the time of conversion, less a
discount initially equal to 3% and increasing over time to 25% at the end of 13
months from the date of original issuance. Dividends may be paid in cash or by
issuing additional shares of Series B Convertible Preferred Stock (valued at
$100 per share). The Company also agreed to issue to the placement agent three
year warrants to purchase 29,000 shares of Series B Convertible Preferred Stock
at $100 per share.

In March 1996, the Company completed two related private placement
offerings and received net proceeds aggregating approximately $30.4 million
(after deducting cash fees to the placement agents and transaction expenses). In
these offerings, the Company issued (i) 1,200,000 shares of 5% Convertible
Preferred Stock, liquidation preference $25 per share (the "Series A Convertible
Preferred Stock"), and (ii) 450,000 shares of Common Stock, subject to
adjustment. The Series A Convertible Preferred Stock is convertible into shares
of the Company's Common Stock at a conversion price generally equal to the
market price of the of the Common Stock at the time of conversion, less a
discount initially equal to 13% and increasing over time to 29% thirteen months
from the date of original issuance. Dividends may be paid in cash or by issuing
shares of Common Stock (valued at market value). To date, the Company has
issued a total of 285,417 additional shares of Common Stock in respect of the
Common Stock placement in accordance with the adjustment mechanism. The Company
also issued to the placement agent five year warrants to acquire 108,000 shares
of Series A Convertible Preferred Stock for $25 per share and 40,500 shares of
Common Stock for $7.75 per share.

The number of shares of Common Stock issuable upon conversion or the Series
A and Series B Convertible Preferred Stock is dependent on future events,
consisting of, among other things, future trading prices of the Common Stock in
the marketplace and the conversion decisions of the holders. See Item 7.,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Page 3
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PURCHASE AGREEMENT FOR 14 HAMBURGER HAMLET RESTAURANTS

On March 21, 1997, the Company entered into a purchase agreement to acquire
14 Hamburger Hamlet restaurants for a total consideration consisting of $9.7
million in cash, 150,000 shares of restricted common stock and assumption of
$250,000 in debt as well as assumption of the related real property leases. The
purchase agreement is subject to the approval of the bankruptcy court. Ten
restaurants are located in California and four in the Washington, DC Beltway
area. If consummated, certain of the acquired locations would be converted to or
co-located with Koo Koo Roo California Kitchen(TM) restaurants. In certain of
the acquired locations, the Company also intends to test market a menu insert
profiling Koo Koo Roo California Kitchen(TM) and offering selected Koo Koo Roo
California Kitchen(TM) menu items in the full service Hamburger Hamlet
restaurant environment. The Company presently intends to finance the acquisition
with cash on hand or with borrowings under a debt package which is presently
being negotiated. There can be no assurance that this acquisition will be
completed.

ACQUISITION OF COLOR ME MINE, INC.

On March 25, 1996, the Company acquired 90% of the outstanding capital
stock of Color Me Mine, the operator of a small chain of paint-your-own-ceramics
studios located in Southern California. As consideration for its 90% interest,
the Company issued to the shareholders of Color Me Mine a total of 377,000
restricted shares of unregistered Common Stock, of which shares with a value of
$900,000 are subject to registration under the Securities Act of 1933 as amended
(the "Securities Act") and another 100,000 shares will be held in escrow to be
released at the end of three years. The transaction has been designed to be a
tax-free reorganization under the federal income tax laws and has been accounted
for utilizing the pooling of interests accounting method. See "--Business
Development Agreement."

CANADIAN JOINT VENTURE

The Company entered into an agreement in 1995 with a group of Canadian
business leaders to form a joint venture to develop the Koo Koo Roo California
Kitchen(TM) restaurant concept in Canada ("Koo Koo Koo Canada"). The Company has
a 40% ownership interest in Koo Koo Roo Canada and a pro rata participation in
the earnings and responsibility to provide it's proportionate share of capital.
Koo Koo Roo Canada has entered into three lease agreements and is negotiating
for a fourth site, all in the greater Toronto area. The first Canadian Koo Koo
Roo is under construction and presently is scheduled to open in late spring of
1997. The second restaurant, also under construction, is presently expected to
open in late spring or early summer of 1997 and the third is scheduled for the
fall of 1997. The management was hired from successful, high volume, full-
service restaurants in the Toronto area and have been training at the Company's
corporate headquarters in California.

INTERNATIONAL

In September 1996, Michael Mooslin, who led the development of the Koo Koo
Roo California Kitchen(TM) concept, became President of the Company's
International division, Koo Koo Roo International. In this role, Mr. Mooslin is
responsible for seeking joint venture partners and licensees in international
markets. Mr. Mooslin will also be charged with establishing the necessary
systems and culture by international operators to facilitate the replication of
Koo Koo Roo products and quality.

In addition to the Canadian joint venture described above, the Company is
actively pursuing other international opportunities. Among these is a licensing
agreement which the Company is negotiating with restaurant operators based in
the Middle East to cover Lebanon, Kuwait, United Arab Emirates and Egypt. In
addition, the Company has signed an initial memorandum of understanding with a
prominent multi-national company to develop Koo Koo Roo restaurants in Asia in a
joint venture partnership. The terms of any such joint venture in Asia are
subject to, among other things, the development of a mutually acceptable
business plan, which has not been completed as of the date of this Report. At
this time, the Company cannot predict whether these activities will lead to the
establishment of further international operations, or the terms thereof.

Page 4
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BUSINESS DEVELOPMENT AGREEMENT

On May 8, 1996, the Company retained Restaurant Marketing Corp. ("RMC") to
provide business development services. RMC's principal responsibility will be to
pursue additional joint venture partners for Koo Koo Roo and Color Me Mine. RMC
identified the Company's Canadian partners and facilitated the structuring and
establishment of Koo Koo Roo Canada. In consideration for the agreement, the
Company issued options to purchase one million shares of the Company's Common
Stock at an exercise price of $8.00 per share which will become exercisable 33-
1/3% per year so long as the business development agreement with RMC remains in
place. The business development agreement may be canceled with six months notice
by the Company's Chief Executive Officer in his sole discretion. These options
will also vest upon change in control (as defined in the business development
agreement). RMC is an affiliate of Mel Harris, a director of the Company.

FLORIDA/SOUTHERN GEORGIA AREA DEVELOPMENT AGREEMENT

The Company's sole remaining franchisee was granted rights pursuant to a
1994 Area Development Agreement covering Florida and certain counties in
Southern Georgia (the "Florida/Southern Georgia Area Development Agreement"). In
August 1995, the Company entered into a First Amendment to the Florida/Southern
Georgia Area Development Agreement pursuant to which the local area developer in
that market (the "Developer") granted the Company a right of first refusal to
participate as a joint venture partner with the Developer in future Koo Koo Roo
store locations in the Florida/Southern Georgia territory. Under this
arrangement, it is anticipated that the Company and the Developer will jointly
develop stores in Florida through equal ownership in newly-formed partnerships.
For financial reporting purposes, the results of these stores will be
consolidated with the Company's operations subject to the minority interest of
the Developer. The first such joint venture restaurant opened in South Miami in
November 1995 and an additional location in North Miami opened in July 1996. In
May 1996, the Company further amended the Florida/Southern Georgia Area
Development Agreement to remove the right of the Developer to franchise stores
and, thereby, require that all stores built will be developed as joint ventures.
As consideration for the May 1996 amendment, the Developer was issued options to
purchase 350,000 shares of Common Stock at $8.00 per share. The developer is an
affiliate of Mel Harris, a director of the Company.

BUSINESS STRATEGY

The Company believes that its Koo Koo Roo California Kitchen(TM)
restaurants are positioned in a new dining niche being created by a number of
emerging trends: the aging of the population and market segment's growing
interest in eating healthier; the rapidly developing interest among young adults
and parents of young children in food that's "better for you"; the increasing
demand for fresh, understandable food that tastes good and offers the comfort of
home cooking; the replacement of beef with poultry as an everyday protein; the
growing propensity for restaurants to provide a source of visual entertainment;
the increasing demand for quality carry-out food; and the preference for branded
high quality coffees and espresso drinks. Management believes the Koo Koo Roo
California Kitchen(TM) concept, when combined with an Arrosto Coffee Bar,
addresses each of these trends in a unique direct way.

The Company's goal is to become a leader in the convenient, fresh food
market niche. Therefore, its strategic objective is to grow and attain brand
awareness and economies of scale. To achieve this objective, the Company has
assembled a management team and invested in research and development and
corporate infrastructure to: acquire real estate locations; design and build its
restaurants; manage the systems and services required to maintain quality and
safety in a high growth environment; and finance the investment necessary to
achieve economies of scale. The Company believes that in its core market of West
Los Angeles it has established a brand name which represents convenient, high
quality, fresh food, at affordable prices. The Company's business plan is to
replicate the Koo Koo Roo California Kitchen(TM) concept, with an initial focus
on building clusters of stores in a limited number of major metropolitan areas
which are demographically similar to the core Los Angeles market. The Company
intends to grow in the long-term through the replication of Company-owned
stores, license or joint venture arrangements in national and international
markets, acquisitions for conversion, dual-branding and co-locating and other
strategic alliances or acquisitions which will increase the distribution and
awareness of its fresh food brand and attain economies of scale in its
convenient, fresh food market niche. As of the date of this report, the Company
has no agreement regarding any such venture, alliance or acquisition beyond that
discussed herein under the caption "--Recent Developments" and there can be no
assurance that any such opportunity will be identified or realized.

In 1996, the Company also acquired 90% of Color Me Mine, Inc. The Company
acquired Color Me Mine with a view to open it next to Koo Koo Roo restaurants to
utilize larger real estate locations. Color Me Mine has been built in three Koo
Koo Roo locations and two additional dual-brand locations are presently under
construction. However, Color Me Mine has its own management team and plans to
grow independently through company-owned and franchised operations.

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GROWTH PHILOSOPHY

GROWTH THROUGH REPLICATING COMPANY STORES. The Company's present emphasis
in the United States will be the development of additional Koo Koo Roo
California Kitchen(TM) stores which will either be owned and operated by the
Company or owned in partnership and operated by the Company. Management
currently intends to focus its 1997 expansion in California, Florida, the New
York City area, the Washington DC Beltway area, and, opportunistically, in other
areas as appropriate. See "Restaurants in Operation and Expansion Plans."

GROWTH IN SALES OF EXISTING RESTAURANTS. The Company intends to continue to
focus on growth in sales of existing restaurants. New initiatives will include a
Grab and Go case with ready made sandwiches and salads, expanded catering,
delivery and take-out services, new products and enhanced marketing programs.

FUTURE POTENTIAL GROWTH. In the future, the Company expects to act
opportunistically to establish joint ventures and/or pursue acquisitions as
appropriate with experienced, major operators. The Company recently sign an
agreement to acquire 14 Hamburger Hamlet restaurants. See "--Recent
Developments."

FOCUSED RESTAURANT REAL ESTATE STRATEGY. Based on the success of the
restaurants, the Company tries to locate most of the Company's restaurants in
highly accessible, free-standing locations and strip shopping centers in mixed
use, high-traffic locations which facilitate take-out business. The Company also
has stores in alternative real estate venues in a shopping mall and a street
level site in an urban, high rise building, and will take advantage of these
alternative sites as appropriate. The Company has hired experienced real estate
professionals to secure locations in California, Southern Florida, the Northeast
(tri-state area) and Washington DC Beltway area. The Company has been and will
be pursuing discussions from time to time with other entities regarding possible
acquisitions of existing restaurants with the intent to secure locations. In
addition, the Company has hired a former developer to focus on strategic
alliances with banks and retailers who have need to restructure their real
estate. As of the date of this Report, the Company has no agreement regarding
any such alliance, joint venture or acquisition beyond that discussed herein
under the caption "--Recent Developments" and there can be no assurance that any
such opportunity will be identified or realized.

MULTIPLE COMPLEMENTARY BRANDS FOR REAL ESTATE LEVERAGE. In 1993, the
Company purchased the Arrosto Coffee Company, which created the foundation for
sales opportunities during hours other than the Koo Koo Roo peak lunch and
dinner periods. These include retail goods and specialty coffee and espresso
beverages, a breakfast program and afternoon and evening dessert/snack business.
After testing several approaches, the Company has designed a retail concept with
a credible coffee house identity, fresh baked goods, additional breakfast items
and reduced fat and regular desserts. The Company began implementation of the
refined coffee concept with the opening of the South Miami store and to date,
has included an Arrosto location in 11 Koo Koo Roo California Kitchen(TM)
locations. In March of 1996, the Company also acquired 90% of Color Me Mine, a
chain of paint-your-own ceramics studios. In certain locations, the Company has
located Koo Koo Roo and Color Me Mine stores in adjacent facilities in order to
take advantage of real estate locations which have attractive demographics, but
which are too large to be economically efficient for a Koo Koo Roo California
Kitchen(TM) store alone. See "--Recent Developments."

EXPERIENCED CORPORATE AND STORE MANAGEMENT. During 1996, the Company
continued building its management team with multi-unit retail and high growth
chain restaurant personnel. Real estate, marketing, human resources, operations,
construction and purchasing executives, as well as store managers, have been
recruited to join the Company from restaurant industry leaders, such as The
Cheesecake Factory, California Pizza Kitchen, Perkins Family Restaurants, Taco
Bell, Houston's and Acapulco Restaurants. See "--Executive Officers, Directors
and Key Employees."

INFORMATION TECHNOLOGY. The Company has invested in sophisticated touch
screen point-of-sale systems. These systems enable management to monitor sales
and costs according to day-part (morning, lunch, mid-day, dinner, evening), menu
item (skinless chicken, turkey, rotisserie chicken, etc.), customer type (eat-
in, take-out or catering), and by hour throughout the day. In addition, these
systems are connected via modem to a network which enables store polling and
updating of prices and menus from a central corporate coordination point.
Moreover, open databases, which the Company is currently implementing and
connecting via communication systems, will facilitate electronic invoicing,
accounting and purchasing designed to allow the Company to grow with a more
efficient use of clerical and supervisory staff. During 1997, the Company
currently plans to complete a wide area network application and add an executive
information system for analytical information reporting.

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HIGHLY MOTIVATED FIELD MANAGEMENT. The philosophy of the Company's
entrepreneurial chairman has led to an innovative, individual store management
team approach with a general manager and production chef, who receive
incentives, including store performance-driven bonuses and stock options in the
Company. The Company recognizes that the distinguishing features of the
restaurants are highly dependent on quality and hand preparation and the Company
monitors and rewards its managers with the objective to ensure that its high
standards are maintained. The Company believes that its sophisticated training
systems and motivated store management teams will provide a competitive
advantage in the Company's convenient fresh food market niche.

KOO KOO ROO CALIFORNIA KITCHEN(TM) CONCEPT

KOO KOO ROO'S MISSION. The mission of the Koo Koo Roo California
Kitchen(TM) is "to provide a dining experience that contributes to healthier,
happier and longer lives" as stated by the Company's Chairman, Ken Berg.
Utilizing ingredients and products that provide the best possible taste while
also achieving a healthy compromise on nutrition, convenience and fresh food,
the executive chef has created a variety of menu items which range from zero to
average levels of fat and sodium at affordable prices. In addition, the Company
aims to maintain a sense of fun and excitement in its restaurants, embodied in
the Koo Koo Roo name and its signature "winking" chickenhead logo. The Company's
management focus on cleanliness in the brightly lit restaurants, consistently
fast and friendly service and enjoyable fresh roasted coffees and pastries
through the Arrosto Coffee Company brand all contribute to achieving the
Company's mission.

"FRESH, HEALTHY AND DELICIOUS" FOOD CONCEPT. The Company's premium poultry,
rices/grains, vegetables and fruits are freshly prepared in small quantities on-
site throughout the day. Research with customers shows that the primary reasons
for customers choosing to frequent the Company's stores involve the good taste,
variety and freshness of the food. Management believes that its "from scratch"
approach to food preparation provides a distinguishable difference in taste from
most similarly priced competition.

CLEAN DINING AREAS AND SUPERIOR SERVICE. The Company also tries to
distinguish its concept by maintaining a management focus on clean surfaces,
sanitized containers and tools, and food that is touched as little as possible
by human hands. This noticeably clean environment is further enhanced by a
training and management focus on giving courteous, friendly service with a
heightened sense of urgency. Quality monitoring and training for food
preparation and other key service standards is supported by a self-managed,
multi-lingual, card and audio tape training system to assist management in
maintaining consistency as the Company grows.

PROPRIETARY, SIGNATURE PRODUCTS AND DISPLAYS. The Company's signature
product, Original Skinless Flame-Broiled Chicken(TM), has never been duplicated
to the Company's knowledge and requires marinating and basting in a proprietary
sauce. The Company has developed other proprietary dishes and received a patent
for its Turkey Bar, which features hand-carved, fresh steam-roasted turkey. A
wide array of side dishes are shown in brightly-lit glass cases. The Vegetable
Stand, surrounded by up to 14 fresh produce items in wooden, refrigerated
displays, is reminiscent of a farm fresh produce stand and provides an
exhibition work station for the salad maker.

VERSATILE PROTOTYPES. The Koo Koo Roo California Kitchen(TM) concept has
been designed for three prototypical sizes: a 3,500 square foot restaurant with
Arrosto coffee bar in free-standing or in-line locations; a 2,000 square foot
restaurant for smaller, lower density, in-line locations; and a 600 to 700
square foot kitchen outlet for high traffic, shared seating, and take-away
locations such as airports or the foot traffic of office buildings. The
Company's present locations range from 1,400 to 5,600 feet. Present development
plans for 1997 include building 30% of the stores with the larger, 3,500 foot
prototype and 70% of the stores with the 2,000 square foot prototype. As of the
date of this Report, none of the 600 to 700 square foot sites or the 2,000
square foot sites have been built, although the Company plans to open a small
number of 600 to 700 foot test sites. See "Restaurants in Operation and
Expansion Plans--Restaurants in Operation as of December 31, 1996."

RESTAURANTS IN OPERATION AND EXPANSION PLANS

To date, all restaurants, with the exception of the Beverly Boulevard store
in Los Angeles, have been partially or entirely renovated to provide the
Company's Koo Koo Roo California Kitchen(TM) menu. Management currently intends
that all restaurants to be opened in the future will be selected in accordance
with the Company's site selection criteria and constructed in compliance with
one of the three prototypes discussed above. As of March 7, 1997, the Company
had 28 Koo Koo Roo restaurants open and 39 locations either identified or in
various stages of development. This includes nine sites with executed leases (3
of which are currently under construction), 7 sites in final lease negotiation
and 23 sites identified, some of which have letters of intent executed. While
management believes certain of the letters of intent to be binding, leases will
not be signed until permit and zoning approvals are in place. Consequently,
these sites, although presently planned for opening in 1997, are not listed
below. See "--Site Selection, Design and Construction." The status of the Color
Me Mine ceramics studios is separately described under the caption "--Color Me
Mine, Inc."

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RESTAURANTS IN OPERATION AS OF DECEMBER 31, 1996:

<TABLE>
<CAPTION>
Square
Location Footage Date Opened
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<S> <C> <C> <C>

LOS ANGELES COUNTY, CA: Los Angeles
(Beverly Blvd.) 1,425 March 1989
Marina Del Rey 2,500 June 1990
Encino 2,075 April 1991
West Los Angeles 2,675 May 1991
Brentwood 2,600 May 1994
Beverly Hills
(South Beverly) 2,975 August 1994
Santa Monica 3,525 January 1995
Downtown Los Angeles 2,325 April 1995
Manhattan Beach 2,675 April 1995
Pasadena 3,200 August 1995
Woodland Hills 3,800 December 1995
Studio City 5,600 January 1996
Larchmont Village 2,500 March 1996
Venice 4,100 April 1996
North Beverly Hills 4,650 May 1996
Redondo Beach 3,000 October 1996
ORANGE COUNTY, CA: Costa Mesa 2,850 July 1995
Yorba Linda 3,600 July 1996
Irvine 3,475 August 1996
Tustin Market 3,500 November 1996
SAN FRANCISCO BAY AREA: Menlo Park 5,067 October 1996
SAN DIEGO COUNTY, CA: Del Mar 2,425 November 1995
COLORADO: Denver 3,500 September 1996
FLORIDA: South Miami/1/ 3,200 November 1995
North Miami/1/ 3,550 July 1996
NEW YORK: Bayside 3,700 October 1996
NEW JERSEY: Taj Mahal Hotel & Casino 4,875 December 1991/2/

</TABLE>

RESTAURANT LOCATIONS WITH EXECUTED LEASES AT DECEMBER 31, 1996:

<TABLE>
<CAPTION>
Square Estimated Date
Location Footage of Opening/3/
- - ----------------------- ------- --------------
<S> <C> <C> <C>

LOS ANGELES COUNTY, CA: West Hollywood 3,600 January 1997
(Opened)
Burbank /4/ 4,125 March 1997
(Opened)
Torrance (Del Amo) 3,800 July 1997
Torrance (Rolling Hills) 2,000 September 1997
Claremont 2,500 September 1997
ORANGE COUNTY, CA Laguna Hills 3,500 July 1997
Aliso Viejo /4/ 4,260 May 1997
WESTFIELD, NJ Westfield 3,600 May 1997
LEESBURG PIKE, VA Baileys 3,600 May 1997
LAS VEGAS, NV Las Vegas 2,500 4th Quarter 1997
LONG ISLAND, NY New Hyde Park 2,800 3rd Quarter 1998
</TABLE>
- - --------------------
/1/ Joint venture with area developer. See "--Recent Developments--
Florida/Southern Georgia Area Development Agreement."

/2/ This store was sold for $1.4 million in January 1997 to the Taj Mahal Hotel
& Casino for casino expansion purposes.

/3/ Estimated date subject to potential delays beyond the control of
management, including government permits and construction complications.

/4/ These locations were purchased by the Company in 1996. Subsequent to
December 31, 1996, the Company entered into sale/leaseback agreements on
these properties.

Page 8
<PAGE>

SITE SELECTION, DESIGN AND CONSTRUCTION

The Company considers the location of a restaurant to be critical to its
long-term success. The site selection process involves an evaluation of a
variety of factors, including demographics (such as target population density
and household income levels); specific site characteristics (such as visibility,
accessibility, parking availability and traffic volume); proximity to activity
centers (such as prime urban office or retail shopping districts, suburban
shopping areas, health clubs, medical centers and hotel and office complexes);
and potential competition in the area. Based on the Company's impression of the
similarity between the customers of the Color Me Mine studios and Koo Koo Roo
California Kitchen(TM) restaurants, the Company plans in certain instances to
locate the two complementary concepts in adjacent facilities to take advantage
of real estate locations which have attractive demographics but which are too
large to be economically efficient for a Koo Koo Roo California Kitchen(TM)
alone. The Company leases all of its restaurant sites (except for two sites
which are to be financed with sale/leaseback transactions). Senior executives
inspect and approve the site for each Company-owned restaurant prior to the
execution of a lease. The opening of new restaurants is subject to certain
business risks including, among other things, locating satisfactory sites,
negotiating favorable leases, completing construction and securing appropriate
government permits and approvals. Once space has been leased and made available
to the Company, 120 days or more are required to complete construction, obtain
necessary licenses and approvals and open the new restaurant. Uncontrollable
factors such as obtaining licenses can result in additional months of delay from
lease signing to opening. See "--Business Risks."

While the Company's restaurant design is flexible and may be adapted to
local architectural styles and existing buildings with varying floor plans and
configurations, the Company has developed its own proprietary cooking system
which includes specialized equipment and a distinctive and proprietary equipment
layout in standardized modules which speed the design process. Currently, most
open restaurants range in size from approximately 2,000 to 3,800 square feet.
Currently, the standard restaurant consists of a kitchen/preparation area and
order/display counter, comprising approximately 50% of the total space of the
restaurant, with seating capacity for approximately 75 to 125 persons in the
remaining half of the restaurant.

RESTAURANT OPERATIONS AND MANAGEMENT

The Company generally employs full service restaurant managers. The
training program is up to 16 weeks for general managers, depending on experience
level, and includes training materials, including a certified "Train the
Trainer" program and task training materials for managers to use in training
their employees as well as Hazard Analysis of Critical Control Points (HACCP)
for professional implementation of food and facility safety and sanitation. The
average restaurant employs 30 to 40 staff members including an experienced full-
service general manager, a skilled production chef, and a personnel manager
along with shift leaders, cooks, turkey carvers, salad makers, and other service
personnel.

PURCHASING

The Company currently negotiates directly with manufacturers, producers and
suppliers for food ingredients and beverage products in order to ensure uniform
quality and adequate supply and to gain access to the most competitive prices.
The restaurants obtain food and beverage items from local suppliers, shipped
directly to the restaurants, but at the prices and on the terms established
relative to the Company's national contracts, which management believes results
in significant benefits to the Company.

FRANCHISE OPERATIONS

Due to its success with its new restaurant concept, the Company's franchise
activities have been eliminated with respect to Koo Koo Roo. However, the
Company may pursue franchise opportunities at some future time when and if the
Company determines that it is in the Company's best interest to do so. The
Company is currently developing joint ventures with its area developer in the
State of Florida and certain counties located in Southern Georgia and exploring
other joint venture opportunities. It is, however, presently expected that Color
Me Mine will pursue franchising and area development agreements as well as
company-owned stores. See "--Color Me Mine, Inc."

TEST KITCHEN

The Company currently operates a test kitchen adjacent to its store in West
Los Angeles, California. The test kitchen is used for developing and testing
new menu items and testing of new equipment for its restaurant locations. The
test kitchen was opened in June 1996. Prior to June 1996, the Company conducted
such testing in existing restaurant locations. The Company expended
approximately $100,000, $150,000 and $240,000 during the years ended December
31, 1994, 1995 and 1996 to conduct these activities. These costs include the
compensation paid to the executive chief and the costs of operating the test
kitchen itself.

Page 9
<PAGE>

ADVERTISING AND PROMOTION

Historically, the Company has primarily pursued opportunistic, lower cost
advertising and promotion activities within the trading area of each restaurant.
Because its business is primarily driven by "word of mouth" messages and visit
frequency, these activities have been heavily weighted to community activities
that include sampling Koo Koo Roo food. A limited amount of local print and
selective radio advertising have also been tested in addition to a pilot
campaign combining billboards, transit posters and radio, and two two-week cable
television tests. Although the Company plans to continue marketing in its local
trading areas to its strength as reflected in consumer research studies
conducted by the Company--the taste, quality and healthiness of its food--
market-wide campaigns for a variety of media are also being developed. Longer
term, the Company plans to develop a sufficient number of restaurants in each
market to permit the cost-effective use of mass media.

COMPETITION

The Company believes that its ability to compete effectively will depend on
maintaining the quality of its food, service and ambiance at a reasonable price.
The Company believes that there exists an emerging market niche encompassing
quality, convenience, healthfulness, taste and affordability. The Company plans
to continue to introduce innovative product lines such as those associated with
the Turkey Bar and The Vegetable Stand, in addition to maintaining its own
individuality and standards of taste, freshness, visual vitality and cleanliness
at affordable pricing.

The restaurant industry is highly competitive and there are a number of
purveyors that compete directly and indirectly for the consumers' food dollars
many of which are larger and more widely known than the Company. Based on
research and customer comments, the Company believes that the quality and value
of its products, service, ambiance and prices distinguish it from its
competitors. There are several factors which could potentially affect the
competitive position of the Company or individual restaurants of the Company to
which management might have to respond. These factors include, but may not be
limited to: consumer taste and discretionary spending priorities; national,
regional or local economic conditions; demographic trends; traffic patterns;
employee availability; and the type, number and location of competing
restaurants. See "--Business Risks."

TRADEMARKS AND SERVICEMARKS

The trademark and servicemark "Koo Koo Roo(TM)" is registered in the United
States Patent and Trademark Office, and all right, title and interest in and to
the mark is held by the Company. Seventeen domestic and thirteen foreign
trademarks/patents are currently owned by the Company and more are being
developed for proprietary recipes, systems, software, customized equipment and
design/equipment layouts including the Company's patented Turkey Bar Carving
Station, its Original Skinless Flame Broiled Chicken(TM), The Vegetable Stand
and Arrosto Coffee. The Company believes that its trademarks and servicemarks
have significant value to the marketing of its restaurants and products.

GOVERNMENT REGULATION

The Company is subject to various federal, state and local laws affecting
its business. The Company's restaurants are subject to regulation by various
governmental agencies, including those responsible for compliance with state and
local licensing, zoning, land use, construction and environmental regulations
and various health, sanitation, safety and fire standards. The Company is also
subject to the Fair Labor Standards Act and various state laws governing such
matters as minimum wages, overtime and working conditions. Since many of the
Company's personnel are paid at rates based on the federal minimum wage,
increases in such minimum wage may result in an increase in the Company's labor
costs. The Company cannot predict the impact on its results of operations should
the federal minimum wage be changed.

If, in the future, the Company wishes to resume selling franchises or allow
additional joint venture partners to operate joint ventures in the U.S. (as is
presently planned to occur with Color Me Mine), it will be subject to federal
and state laws, rules and regulations that govern the offer and sale of
franchises. Although Color Me Mine has a current filing under the franchise laws
of California and all other states, there can be no assurance that the Company
or Color Me Mine will be able to update or maintain their respective disclosure
documents or become registered in certain states. Such state laws may require
the franchisor to deal with its franchisees in good faith, prohibit interference
with the right of free association among franchisees, and may regulate
discrimination among franchisees in charges, royalties or fees.

Page 10
<PAGE>

COLOR ME MINE, INC.

Based on the Company's impression of the similarity between the customers
of the Color Me Mine studios and Koo Koo Roo California Kitchen(TM) restaurants,
the Company initially bought its 90% interest primarily to locate the two
complementary concepts in adjacent facilities to take advantage of real estate
locations which have attractive demographics but which are too large to be
economically efficient for a Koo Koo Roo California Kitchen(TM) alone. The
Company believes that Color Me Mine and Koo Koo Roo California Kitchen(TM) are
complementary concepts primarily because of similarities in the demographic and
psychographic characteristics of their respective customer segments. Co-location
of the concepts results in the target customers direct exposure to both concepts
while patronizing either one. In addition, both concepts marketing is primarily
through word-of-mouth and visual appeal.

Based on activity in the industry, management's assessments of franchise
growth potential has led Color Me Mine to focus on its growth potential as a
stand alone business. A separate management team manages the concept and
develops it through franchises, area development agreements, joint ventures and
company-owned stores. Color Me Mine has a current Uniform Franchise Offering
Circular filed in the state of California and other states. Management presently
plans to pursue franchising simultaneously in multiple regions of the U.S., and
internationally. During 1996, Color Me Mine opened seven company-owned and two
franchised and four joint venture studios and signed three area developer
agreements for San Diego and Orange County, California, Nevada, Florida and New
Jersey. The founders of Color Me Mine have five-year employment contracts which
expire in March 2001. See "General Information" and "Recent Developments."
Detailed information regarding Color Me Mine is available in its Uniform
Franchise Offering Circular, available by writing to: Mr. Kevin Reilley, c/o
Color Me Mine, Inc., 14724 Ventura Blvd., Suite 1001, Sherman Oaks, CA 91403.

COLOR ME MINE CERAMICS STUDIOS IN OPERATION AS OF DECEMBER 31, 1996:

<TABLE>
<CAPTION>
Square
Location Footage Date of Opening
- - -------- ------- ---------------
<S> <C> <C>

Company-Owned
- - -------------

LOS ANGELES COUNTY, CA
Santa Monica 2,200 April 1994
Encino 1,650 March 1995
Beverly Hills 1,500 May 1996
Malibu 1,500 June 1996
Venice 1,392 July 1996
Studio City 1,670 September 1996
West Hollywood 1,700 December 1996

SAN FRANCISCO BAY AREA
Menlo Park 1,350 October 1996
San Francisco 1,000 December 1996

Franchised
- - ----------

ORANGE COUNTY, CA
Belmont Shores 1,400 November 1995

LIVINGSTON, NJ
Livingston 1,940 December 1996
Summit 2,370 November 1996

Joint Ventures
- - --------------

ORANGE COUNTY, CA
Costa Mesa 1,750 September 1996
Laguna Niguel 1,019 October 1996

SOUTHERN FLORIDA
Aventura 1,800 December 1996
Coconut Grove 1,550 December 1996
</TABLE>

Page 11
<PAGE>

EMPLOYEES

As of March 7, 1997, the Company employed approximately 1,672 full and
part-time individuals which includes 24 executives, 91 corporate and support
staff and five field managers. None of these employees is covered by a
collective bargaining agreement. The Company believes that it has good labor
relations.

BUSINESS RISKS

There can be no assurance that the Company will continue to enjoy the
existing store level success that it has enjoyed in the past, nor can there be
any assurance that new stores will open or enjoy success equal to the prototype
stores. Each potential investor should consider the following risks inherent in
the Company's business which include, but are not necessarily limited to: the
limited number of stores and the Company's history of losses; uncertainty of
proposed expansion due to availability of sites and the necessary capital;
uncertainty of consumer acceptance in new markets; competition which will
require continued innovation by management; potential reversal of consumer
trends in health and lifestyle which currently benefit Koo Koo Roo; dependence
upon key corporate and store management personnel; sanitation risks; and
government regulations including zoning/permitting delays, cost impact of labor
laws and franchise regulation of Color Me Mine franchises. While management is
aware of these factors and has strategies and plans which it believes will
manage these risks, some of these factors are beyond management's control and
could result in lower than expected performance.

ITEM 2. PROPERTIES

The Company's Burbank location (Opened in March 1997) and its Aliso Viejo
location (under construction), are properties that have been recently purchased
by the Company. All other Company-owned restaurant sites and ceramics studios
are leased from third parties. These leases expire on dates ranging up to May
2006, with the majority providing for renewal options. All leases provide for
specified periodic rental payments and certain leases call for additional
payments based on sales volume. Most leases require the Company to maintain the
property and pay the cost of insurance and taxes. Color Me Mine leases a 5,500
square foot warehouse and a 20,000 square foot ceramic bisque factory located in
Van Nuys, California, to support its operations. The ceramic bisque factory has
production capacity to provide ceramic products for approximately 75 to 80
stores. At December 31, 1996, the factory was operating at approximately 20% of
capacity. For information relative to the Company's future minimum lease
payment obligations under its long-term operating leases, see Note 12 to the
Consolidated Financial Statements. For listing of the Company's locations and
related square foot information, see "--Restaurants Opened as of December 31,
1996" and "--Ceramics Studios Opened as of December 31, 1996."

Certain corporate offices of the Company are located in space leased by
Berg Enterprises, Inc., a company owned by the Company's Chairman, located in
Iselin, New Jersey. During the year ended December 31, 1996, the Company
compensated Berg Enterprises, Inc. in the amount of $16,600 for the use of such
space. See "Item 13."

In addition, the Company's principal executive office is located in
approximately 11,400 square feet of leased space in Los Angeles, California,
under a five year lease which expires May 31, 1999, with a base rent of
approximately, $16,000 per month. In March 1997, Color Me Mine operations were
relocated to an office facility located in Sherman Oaks, California where they
leased 7,600 square feet of space at a base rent of approximately $9,000 per
month expiring in May 2000.

ITEM 3. LEGAL PROCEEDINGS

The Company has become subject to various lawsuits, claims and other legal
matters in the ordinary course of conducting its business. As of the date of
this Report, management believes that there are no legal proceedings pending,
the resolution of which is expected to have a material financial impact on the
Company's consolidated financial position.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable

Page 12
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since the Company's initial public offering in October 1991, the Company's
Common Stock has traded in the over-the-counter market and has been listed for
quotation through the National Association of Securities Dealers Automated
Quotation System ("Nasdaq"). Prior to such date, there was no public market for
the Common Stock. On August 14, 1995, the Company was accepted for quotation
through the Nasdaq National Market.

The following table sets forth for the periods identified the high and low
sales price of the Common Stock for the periods indicated, as reported by
Nasdaq.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1995
<S> <C> <C>

First Quarter $ 7.000 $4.000

Second Quarter 7.000 4.750

Third Quarter 9.781 6.250

Fourth Quarter 9.563 6.250

YEAR ENDED DECEMBER 31, 1996

First Quarter $ 9.125 $6.125

Second Quarter 10.000 7.750

Third Quarter 9.250 6.250

Fourth Quarter 8.812 6.000
</TABLE>

On March 7, 1997, there were 588 holders of record of the Company's Common
Stock. The Company estimates that there are approximately 9,473 beneficial
owners of such stock.

The Company has not paid cash dividends on its Common Stock since its
incorporation and does not intend to declare any such dividends in the
foreseeable future. The Company is obligated to pay dividends at the rate of 5%
per annum (which generally may be in cash or Common Stock) on its Series A
Convertible Preferred Stock issued in March 1996. The Company is also obligated
to pay dividends at the rate of 6% per annum (which generally may be in cash or
Series B Preferred Convertible Stock) on its Series B Convertible Preferred
Stock issued in February 1997.

During the year ended December 31, 1996, the Company issued 450,000 of
Common Stock to accredited investors at a cash purchase price of $7.245 per
share. The Company also issued 1,200,000 shares of its Series A Convertible
Preferred Stock to accredited investors at a cash purchase price of $25.00 per
share. Such shares of Series A Convertible Preferred Stock are convertible into
shares of Common Stock at a conversion, less a discount initially equal to 13%
and increasing over time to 29% thirteen months from the date of original
issuance. The Company also issued 861,721 shares of Common Stock upon conversion
of, or in lieu of cash dividends on, such shares of Series A Convertible
Preferred Stock. In connection with the foregoing original issuances, the
Company also issued to accredited investors, warrants exercisable into 40,500
shares of Common Stock, and 108,000 shares of Series A Convertible Preferred
Stock. All of such shares and warrants were issued upon reliance of the
exemption from registration provided by Regulation D under the Securities Act.
Additional information with respect to the issuance of the Common Stock,
the Series A Convertible Preferred Stock and the terms of its conversion into
shares of Common Stock, and the warrants is contained under Item 5 in the
Company's Current Report on Form 8-K dated March 18, 1996 which is hereby
incorporated herein by reference.

During the year ended December 31, 1996, the Company also issued an
aggregate of 46,168 shares of Common Stock to accredited investors for aggregate
consideration of $247,000, and 377,000 shares of Common Stock to accredited
investors in connection with the acquisition of Color Me Mine. During the year
ended December 31, 1996, the Company also issued to accredited investors options
to purchase an aggregate of 1,824,000 shares of Common Stock. Such shares and
options were issued upon reliance of the exemption from registration provided in
Section 4(2) of the Securities Act.

Page 13
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

(In thousands, except per share amounts and number of restaurants)
YEARS ENDED DECEMBER 31, 1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue $ 4,167 $ 5,082 $ 8,983 $20,896 $39,802
Net Loss (3,617) (2,219) (4,782) (6,911) (9,285)
Net loss per common share (1.08) (0.48) (0.63) (0.57) (0.83)
Total assets 2,754 5,732 8,356 26,555 49,772
Stockholders' equity 1,756 4,512 3,748 21,543 42,549
Stockholders' equity per common share 0.42 0.63 0.44 1.51 1.06
Average annual sales per unit/1/ 645 796 1,163 1,533 1,907
Number of restaurants open at period end 9 7 8 16 27
Average annual same store sales growth/2/ - 23.6% 56.7% 21.5% 10.6%
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

INTRODUCTION

The discussion below and elsewhere in this Report includes forward looking
statements about the future business results and activities of the Company
which, by their very nature, involve a number of risks and uncertainties. For an
explanation of certain of these risks and uncertainties, see the matters
discussed in the last paragraph of this Introduction section and the materials
referred to therein.

Calendar years 1995 and 1996 marked periods of continued expansion for the
Company as the Company opened nine and twelve new restaurants during 1995 and
1996 and added Arrosto Coffee Company locations in five of these restaurants.
At December 31, 1996, the Company operated 27 restaurants, ten of which included
Arrosto locations. Subsequent to year end the Company opened one location in
January 1997, which included an Arrosto location and another location in March
1997. On January 31, 1997, the Company sold the lease for its Atlantic City, New
Jersey location at the Taj Mahal Hotel and Casino to the hotel owner for
expansion purposes. This location included a Koo Koo Roo restaurant and a
Swenson's ice cream parlor which ceased operations on January 31, 1997.

In March 1996, the Company acquired 90% of the stock of Color Me Mine, a
small chain of paint-your-own ceramics studios then located in Southern
California. The total consideration consisted solely of 377,000 restricted
shares of unregistered Koo Koo Roo Common Stock and of this total, shares
aggregating $900,000 in value are subject to registration rights and 100,000
shares are subject to a lock-up to be released at the end of three years. The
founders of the acquired company have five year management contracts expiring in
March 2001 with annual compensation of $50,000 each plus profit sharing and
certain change in control provisions. The acquisition was accounted for using
the pooling of interest method of accounting. Accordingly, the financial
statements have been restated to include the effects of the acquisition of Color
Me Mine.

- - --------------------
/1/ Average annual sales per unit is computed by averaging sales for stores
open 24 months or more.

/2/ Average annual same store sales growth is computed by subtracting the
current year average annual sales from the prior year and dividing the
difference by the prior year average annual sales.

Page 14
<PAGE>

Many of the statements made in this Management Discussion and Analysis of
Financial Condition and Results of Operations are forward looking and, among
other things, comment on the prospects for the Company to grow rapidly and
attain profitable operations. The Company has incurred net losses which have
been increasing. Management presently anticipates that net losses will continue
to be incurred for some time, but that the net loss should decrease during the
next calendar year both in the aggregate and as a percentage of sales.
Management presently cannot predict precisely when the Company may achieve
profitable operations. The Company's current level of overhead contemplates more
restaurants and ceramics studios than are currently opened, and control over the
timing of the opening of the additional stores necessary to achieve a volume
level which would permit overall Company profitability is subject to factors
outside the control of management, including, among other things, site landlords
which are in negotiations with the Company, government permitting agencies, and
other outside parties and agencies including, but not necessarily limited to,
contractors, vendors, and government inspectors. See "Item 1.--Business Risks."

RESULTS OF OPERATIONS

The Company incurred operating losses during the years ended December 31,
1994, 1995 and 1996 in large part due to the costs of the management team and
other infrastructure which the Company believes necessary to pursue the
Company's corporate strategy of growing through the construction, acquisition
and operation of Company-owned stores. In addition to corporate overhead costs,
the Company's losses also reflect costs related to the development of new
products, store development expenses and the abandonment of certain sites and
assets, all of which continued to more than offset improvements in restaurant
operations. The net loss was also impacted by the cost of expansion of Color Me
Mine's operations as described below.

The net loss for the year ended December 31, 1996 was $9,285,000 compared
to a net loss of $6,911,000 for the year ended December 31, 1995. The Company's
operations consist of the Koo Koo Roo chain of restaurants (which includes the
Arrosto operations) and the Color Me Mine "paint-your-own" ceramics studios. The
discussion of the results of operations discusses the results of each line
separately to provide the reader a better understanding of the Company's
operations. Following are the results of operations for each line:

<TABLE>
<CAPTION>
RESTAURANTS CERAMICS STUDIOS
------------------------------ -----------------
1994 1995 1996 1995 1996
-------- -------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 8,772 $19,221 $36,608 $1,078 $1,655
Franchise fees and royalties - - - 13 363
Interest income and other 211 584 1,176 - -
------- ------- ------- ------ ------
Total 8,983 19,805 37,784 1,091 2,018
------- ------- ------- ------ ------

Costs and Expenses:
Cost of sales 6,457 13,981 26,160 541 1,328
Occupancy expense 1,237 1,737 3,240 122 281
Other operating expenses 5,728 10,611 17,301 368 1,199
Other 343 442 (368) 5 (54)
------- ------- ------- ------ ------
Total 13,765 26,771 46,333 1,036 2,754
------- ------- ------- ------ ------

Net income (loss) $(4,782) $(6,966) $(8,549) $ 55 $ (736)
======= ======= ======= ====== ======
</TABLE>

Page 15
<PAGE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995

CERAMICS STUDIO OPERATIONS

The ceramics studio operations incurred a loss for the year ended December
31, 1996 amounting to $736,000 compared to net income of $55,000 for the year
ended December 31, 1995. The loss for the current year results primarily from
the costs associated with opening new locations and the cost of relocation and
expansion of the ceramics production facility. Sales increased by 54% from
$1,078,000 to $1,655,000 during the current year as compared to the prior year,
primarily as the result of 13 new studio openings during the year, nine of which
opened in the forth quarter. Additional revenues were received during the year
ended December 31, 1996 amounting to $363,000 from the sales of franchise areas
and royalties.

RESTAURANT OPERATIONS

Revenues for the year ended December 31, 1996 amounted to $37,784,000
compared to $19,805,000 for the year ended December 31, 1995, an increase of
91%. Revenues for the current year included $1,145,000 of interest income earned
primarily from the Company's investment in marketable securities.

Sales of $35,342,000, excluding Arrosto, for the current year were produced
by sixteen restaurants which operated during both the current and prior calendar
years and twelve new restaurants open for part of the current year. Comparable
sales for the restaurants open throughout both 1996 and 1995 increased by 10.6%.
Ten Arrosto locations generated $1,266,000 in revenues during the current
year compared to $770,000 generated in the prior year by six Arrosto locations.
All of the Arrosto Coffee Company outlets are located in Koo Koo Roo California
Kitchen(TM) stores.

Gross profit on sales for calendar year 1996 increased by 99% to
$10,448,000 from $5,240,000 for the prior year. As a percentage of sales, gross
profit increased to 28.5% in the current year compared to 27.3% in the prior
year. Gross profit generally increases in mature stores (those open more than
three months) and are lower in newly opened stores. All but four Company stores
were open for more than three months during the 1996 calendar year. Cost of
sales improvements included efficiency improvements, waste reduction and
increased volumes, which resulted in improvements in overall food and paper
costs. Labor costs as a percentage of sales decreased by approximately 1.8%
during the current year as compared to the prior year.

Occupancy costs increased to $3,240,000 for the year ended December 31,
1996 compared to $1,737,000 during the prior period. Occupancy costs as a
percentage of sales were approximately the same in both years. Other operating
expenses which include other store and corporate expenses amounted to
$17,301,000 for the current year compared to $10,611,000 for 1995. This increase
was primarily due to the Company's expansion. As a percentage of sales, other
operating expenses decreased to 47% from 55% during the prior year, primarily as
a result of increased sales and higher per store volumes which resulted in
decreases in other fixed expenses. Included in other operating expenses during
1996 were marketing and advertising costs of approximately $400,000 and employee
severance costs approximating $125,000. Personnel and other corporate expenses
increased as the Company continued to implement the infrastructure necessary for
its planned growth. Management expects overall operating expenses to continue to
decline as a percentage of revenues in the future.

Minority interest represents the limited partners' interest in two
partnerships and the minority stockholders' interest in one subsidiary, which
are controlled by the Company. Pursuant to the partnership agreements, profits
and losses and cash distributions are allocated based on ownership percentage.
The financial results of the partnerships and subsidiary have been consolidated
with those of the Company. The ceramics studio subsidiary is 90% owned by the
Company.

The Company's present expansion plans contemplate a number of new store
openings during the balance of 1997 and into 1998. In connection with new store
openings, pre-opening costs (such as training of new employees and various site
costs) are capitalized until the store is opened at which time they are
amortized on a straight-line basis over the first twelve months' operations.
Pre-opening amortization and equipment and leasehold depreciation is expected to
increase as a result of an increase in store openings. See Item 1. "Business --
Restaurants in Operation and Expansion Plans."

Page 16
<PAGE>

YEAR ENDED DECEMBER 31, 1995 COMPARED TO 1994.

CERAMICS STUDIO OPERATIONS

Prior to 1995, the ceramics studio operations were nominal with only one
store opened at the beginning of the year and another added during the year.
Sales for 1994 amounted to $382,000 compared to $1,091,000 during 1995.

RESTAURANT OPERATIONS

The Company incurred operating losses during the year ended December 31,
1995 in large part due to the required costs of building the management team and
other infrastructure necessary to pursue the Company's corporate strategy of
growing through the construction and operation of Company-owned stores. In
addition to corporate overhead costs, the Company's losses also reflect costs
related to the development of new products, store development expenses and the
abandonment of certain sites and assets, all of which continued to more than
offset improvements in store operations.

The net loss for the year ended December 31, 1995 was $6,966,000 compared
to a net loss of $4,782,000 for the year ended December 31, 1994. Included in
the net loss for the year ended December 31, 1995 were costs related to the
closing of restaurants amounting to $587,000 and other costs including asset
abandonment costs, costs related to canceling Area Development Agreements and
certain other non-operating costs totaling $1,145,000. Included in the net loss
for the year ended December 31, 1994 were store closing costs of $425,000 and
certain other non-operating costs, chiefly expenses associated with a terminated
financing discussions totaling $331,000.

Revenues for the year ended December 31, 1995 amounted to $19,805,000
compared to $8,983,000 for the year ended December 31, 1994, an increase of
120%. Revenues for the current year included $427,000 of interest income earned
chiefly from the Company's investment in marketable securities. Franchise
revenues were minor in both years and have been largely eliminated with the
reacquisition of all but one of the Area Development Agreements as the Company
changed its strategy to emphasize company-owned or operated restaurants.

Sales of $18,450,000, excluding Arrosto, for 1995 were produced by eight
restaurants which operated during both the current and prior calendar years and
nine additional restaurants open for part of 1995. Comparable sales for the
restaurants open throughout both 1995 and 1994 increased by 21.5%. Six Arrosto
locations generated $770,000 in sales during 1995 compared to four Arrosto
locations and $291,000 in the prior year. All of the Arrosto Coffee Company
outlets are located in Koo Koo Roo California Kitchen(TM) stores.

Gross profit, net of other income, for calendar year 1995 increased by 126%
to $5,239,000 from $2,315,000 for the prior year. As a percentage of sales,
gross profit increased to 27.3% in the current year compared to 26.4% in the
prior year. Gross profit generally increases in mature stores (those open more
than three months) and are lower in newly opened stores. All but three Company
stores were open for more then three months during the current calendar year.
Cost of sales improvements included efficiency improvements, waste reduction and
increased volumes, which resulted in improvements in overall food and paper
costs. Labor costs as a percentage of sales remained approximately level.

Occupancy expenses increased to $1,737,000 during the year ended
December 31, 1995 as compared to $1,237,000 during 1994. The increase was
primarily due to additional locations opened during 1995. As a percentage of
sales, occupancy expenses deceased to 8.9% from 14.1% during the prior year as a
result of additional locations maturing during 1995 resulting in same store
sales growth of 21.6%. Other operating expenses amounted to $10,611,000 for 1995
compared to $5,728,000 for 1994. The increase was also due to the Company's
expansion. As a percentage of sales, other operating expenses decreased to 55%
of sales compared to 65% of sales in the prior year. Occupancy, as well as other
operating expenses are expected to continue to decline as a percentage of sales
in the future. Personnel and other corporate expenses increased as the Company
implemented the infrastructure necessary for its planned growth and continued to
incur product development expenses for such products as The Vegetable Stand.

During calendar year 1995, the Company closed one location in Miami Beach,
Florida and also closed one Arrosto location incurring an aggregate cost of
$437,000. In addition, $150,000 was reserved for a store closing which occurred
in 1994. Management currently anticipates that store closing costs will remain
low. These expenses include the abandonment of signed leases and sites deemed
inappropriate given the Company's concept criteria developed during 1995, as
well as the unamortized costs of certain assets abandoned and written off during
the remodeling of the New Jersey store. Other operating expenses for the current
year also include $284,000 of costs related to reacquiring Area Development
Agreements. Other operating expenses for 1994 include a charge of $331,000 for
expenses associated with terminated financing discussions.

Page 17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

Total cash, cash equivalents and marketable securities at December 31, 1996
amounted to $9,811,000. The Company's cash position increased to $4,591,000 from
$3,502,000 at December 31, 1995. As of March 1, 1997, the Company's cash, cash
equivalents and marketable securities amounted to approximately $32 million
which includes the net proceeds of the February 1997 private placement of the
Series B Convertible Preferred Stock.

The Company has been expending cash resources to build new and remodeled
Koo Koo Roo California Kitchen(TM) stores. The Company completed the
construction of twelve Koo Koo Roo restaurants, including five with Arrosto
Coffee Company locations, as well as eight Company-owned Color Me Mine "paint
your own" ceramics studios during the year ended December 31, 1996. In addition,
as of December 31, 1996, five Koo Koo Roo restaurants and five Color Me Mine
ceramics studios were in various stages of construction.

Net cash used in operating activities amounted to $2,599,000, $2,175,000
and $4,368,000 during the years ended December 31, 1994, 1995 and 1996. The
increases were primarily caused by net losses each year and were partially
offset by increases in payables and accrued liabilities of $565,000, $2,345,000
and $1,252,000 during the years ended December 31, 1994, 1995 and 1996.

Net cash used in investing activities, including purchases of property and
equipment together with costs for acquiring certain locations, amounted to
$4,086,000, $10,373,000 and $20,732,000 during the years ended December 31,
1994, 1995 and 1996 as well as $1,287,000 and $1,588,000 for pre-opening costs
during the years ended December 31, 1995 and 1996.

Net cash provided by financing activities amounted to $5,790,000,
$20,456,000 and $29,862,000 during the years ended December 31, 1994, 1995 and
1996. The Company received $3,441,000, $19,876,000 and $31,561,000 from sales of
Common Stock and Preferred Stock during the years ended December 31, 1994, 1995
and 1996. During calendar years 1994 and 1995, the Company received capital
contributions of $2,234,000 and $616,000 from minority partners of three
partnerships which owned restaurants in Los Angeles and which were consolidated
with the Company. On September 26, 1995, the Company agreed to purchase the
limited partner's minority interest in three Los Angeles restaurants. As
consideration for this purchase, the Company issued 275,848 shares of its common
stock. In November 1996, the Company utilized $1,645,000 to repurchase a portion
of the outstanding stock purchase warrants issued in connection with private
placements originating during 1995.

At December 31 1996, management has provided a 100% valuation allowance
amounting to approximately $9.8 million against the net deferred asset
represented by its net operating loss carry forwards due to the indeterminate
nature of the Company's ability to realize this deferred asset.

CAPITAL RESOURCES

During the year ended December 31, 1996, the Company completed two private
placement offerings and, in addition, received the proceeds from the exercise of
certain Common Stock options and warrants. The Company received a total of $30.4
million, net of related expenses from the private placement offerings and
$1,146,000 from the exercise of options and warrants.

In February 1997, the Company completed a private placement of the Series B
Convertible Preferred Stock and received a total of $26.9 million (net of
related costs and estimated expenses of $2.1 million). The Series B Convertible
Preferred Stock can be converted at the rate of 15% of each holders' shares per
month starting in the fourth month, into the Company's Common Stock at the
market price, less a discount of 3% on the 91st day after issuance, increasing
to 25% at the end of 13 months. The conversion ratio will be based on the market
price of the Company's Common Stock at the time of the conversion. The Company
also agreed to issue to the placement agent a warrant to purchase 29,000 shares
of Series B Convertible Preferred Stock at $100 per share. The Company has
noticed a special meeting of its stockholders to be held on April 17, 1997 to
approve and reserve for issuance shares of Common Stock issuable upon the
conversion of shares of the Company's Series B Convertible Preferred Stock, as
dividends thereon and in respect of related placement agent warrants. If
Stockholder approval is not obtained, the Company would be prohibited from
issuing more than approximately 3,150,000 shares of Common Stock in connection
with the private placement of the Series B Convertible Preferred Stock. In such
event, the Company would have to satisfy further obligations with cash. One such
obligation would be to return within 15 days of such event an estimated $10.1
million to the holders of the Series B Convertible Preferred Stock (including a
premium of 3%, or approximately $303,000), and completion of the redemption by
June 30, 1997. Although the Company has established a reserve of cash and
marketable securities to satisfy future obligations, there can be no assurance
that the Company will have the cash resources to satisfy future obligations
which might arise depending on the future market price of the Common Stock, or
that such payments would not have a material adverse effect on the Company's
financial position or ability to execute its growth plan.

Page 18
<PAGE>

In March 1996, the Company completed two related private placement
offerings and received net proceeds aggregating approximately $30.4 million
(after deducting cash fees to the placement agents and transaction expenses). In
these offerings, the Company issued (i) 1,200,000 shares of 5% Convertible
Preferred Stock, liquidation preference $25 per share (the "Series A Convertible
Preferred Stock") and (ii) 450,000 shares of Common Stock, subject to
adjustment. The Series A Convertible Preferred Stock is convertible into shares
of the Company's Common Stock at a conversion price generally equal to the
market price of the of the Common Stock at the time of conversion, less a
discount initially equal to 13% and increasing over time to 29% thirteen months
from the date of original issuance. Dividends may be paid in cash or by issuing
shares of Common Stock (valued at market value). As of March 11, 1997, the
Company issued during 1997 a total of 285,417 shares in respect of the Common
Stock placement in accordance with a market price adjustment mechanism. The
Company also issued to the placement agent five year warrants to acquire 108,000
shares of Series A Convertible Preferred Stock for $25 per share and 40,500
shares of Common Stock for $7.75 per share.

With the exception of $1,695,000, the Company has no long-term debt or
store level debt financing as of December 31, 1996. Management estimates that an
investment of approximately $22 million will be required for capital
expenditures relating to new locations during 1997, (excluding the Hamburger
Hamlet transaction) which management plans to fund through the use of cash and
marketable securities. In addition, the Company intends to investigate store-
level, asset-based financing of fixtures, equipment and leasehold improvements
as its expansion continues. The Company has also entered into sale-leaseback
agreements for the Burbank and Aliso Viejo properties which are expected to
generate approximately $2.8 million in cash for the Company in 1997.

To date, the development and expansion of Color Me Mine has been financed
by advances from Koo Koo Roo, Inc., which advances totaled approximately $3.7
million at December 31, 1996. The Company is considering various alternative
strategies to finance the further growth of Color Me Mine, which may include
future debt or equity financing by Color Me Mine as well as financing that may
be provided by future joint venture partners and franchisees.

The timing of future capital requirements will be affected by, among other
things, the number of stores opened, operational results, real estate
development, and potential other corporate opportunities, which may include
joint ventures in the United States and internationally and the acquisition of
complimentary businesses. In the ordinary course of its business, the Company
regularly investigates and enters into negotiations related to joint venture and
acquisition opportunities. During March of 1996, the Company raised net proceeds
of approximately $30.4 million from private placement offerings. During February
1997 the Company raised approximately $26.9 million from a private placement
offering to be used principally for the construction of new stores, joint
venture investments and possible acquisitions. See "Item 1. Business-Recent
Developments" and Consolidated Financial Statements, Note 14 -"Subsequent
Events."

Management believes that the Company's existing capital resources will be
sufficient to fund its planned growth into I998. In addition, the Company is
seeking acquisitions suitable for conversion or co-locating with Koo Koo Roo
California Kitchen(TM) restaurants which would accelerate the Company's growth
and might require additional capital. The Company may seek additional funds from
public or private offerings of debt or equity, or may seek bank financing
facilities.

SEASONALITY

Company revenues in certain areas appear to be subject to seasonal
fluctuations. These seasonal fluctuations have not to date been apparent in
overall results due to more significant trends including, but not limited to,
same store sales growth and unit growth.

Page 19
<PAGE>

INFLATION

The Company does not believe that inflation has to date had a material
impact on its operations. Significant increases in labor, food, or other
operating costs could have a material adverse affect on the Company's results if
the Company were for some reason unable to pass along cost increases due to
general inflation by increasing its prices.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

All directors hold office until the next annual meeting of the stockholders
and the election and qualification of their successors. Officers are elected
annually by the Board of Directors and serve at the discretion of the Board.

Directors who are officers of the Company receive no additional
compensation for serving on the Board of Directors, other than reimbursement of
reasonable expenses incurred in attending meetings. Non-employee directors
receive a maximum annual compensation of $3,000, a fee of $300 for each meeting
attended, $250 for each committee meeting attended and reimbursement of
reasonable expenses incurred in attending meetings. The currently authorized
number of directors is fifteen. The Board of Directors has a Compensation
Committee, Stock Awards Committee which administers the Company's Stock Awards
Plan, a Finance Committee and an Audit Committee.

The following sets forth certain information regarding the directors,
executive officers and other key employees of the Company. Additional
information available in the Company's annual proxy statement is incorporated by
reference. Set forth below is certain information with respect to each person
who is a director or executive officer of the Company as of March 7, 1997:

NAME POSITION WITH COMPANY
- - ---- ---------------------
<S> <C>
Kenneth Berg/4/ Chairman of the Board and Chief Executive
Officer. Born 1926.

Robert F. Kautz President, Chief Financial Officer and Director.
Born 1958.

Michael D. Mooslin President of Koo Koo Roo International and
Director. Born 1947.

John Kaufman President of Koo Koo Roo USA and Director.
Born 1962

Morton J. Wall/1/ Treasurer and Director. Born 1938.

Ronald D. Garber General Counsel and Corporate Secretary.
Born 1953

Kory L. Berg President of the Arrosto Division and Director.
Born 1960.

Lee A. Iacocca/2//3//4/ Director. Born 1924.

Mel Harris Director. Born 1940.

Jess M. Ravich/1/ Director. Born 1957.

Don Wohl/1//2//3//4/ Director. Born 1932.
</TABLE>
- - --------------------
/1/ Member of the Audit Committee.
/2/ Member of the Compensation Committee.
/3/ Member of the Stock Awards Committee.
/4/ Member Finance Committee

KENNETH BERG, CHAIRMAN AND CHIEF EXECUTIVE OFFICER. Mr. Berg has been a
director since August 1990 and has been Chairman of the Board and Chief
Executive Officer since July 1992. He was Co-Chairman of the Board and Co-Chief
Executive Officer from March 1992 until July 1992. From August 1990 until March
1992, he served as Chairman of the Board of the Company. Since January 1990,
Mr. Berg has served as Chairman of the Board and President of Berg Enterprises,
Inc. ("Berg Enterprises"), a holding company of which Mr. Berg is the sole
stockholder. From 1969 to December 1989, Mr. Berg served as Chairman of the
Board and President of the original Berg Enterprises, Inc., a company chiefly
involved in the mortgage banking business (renamed Margco Holdings, Inc. in
1990), which was listed on the New York Stock Exchange until May 1985 and which
subsequently became a subsidiary of Primerica Corporation. Mr. Berg presently
works full-time for the Company. Kenneth Berg is the father of Kory L. Berg.

Page 20
<PAGE>

ROBERT F. KAUTZ, PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr.
Kautz has been Chief Financial Officer of the Company since February 1995,
became Assistant Secretary and a Director in November 1995, President of
Corporate Development in September 1996, and President, Koo Koo Roo, Inc. in
March, 1997. Prior to joining the Company, Mr. Kautz managed due diligence and
business plan development projects at Archon Capital Partners, L.P. and
InterActive Partners, L.P. as a consultant and associate for one year. Prior to
Archon, for two years he was Vice President of Marketing and Business
Development for Integrated Voice Solutions, Inc., a software developer of
automated scheduling systems. For five years prior to that, and on an interim
basis in early 1994, he led U.S. and international consulting engagements as a
Senior Manager, Manager and Senior Consultant for the Price Waterhouse Strategic
Consulting Group specializing in business strategy and cost and quality
improvement. He has an MBA degree from Harvard Business School.

JOHN KAUFMAN, PRESIDENT AND CHIEF OPERATING OFFICER, KOO KOO ROO USA, AND
DIRECTOR. Mr. Kaufman joined the Company in September, 1996, and is directly
responsible for domestic restaurant operations, marketing, human resources,
training, real estate and profitability. Prior to joining the Company, Mr.
Kaufman was Chief Executive Officer of Rosti, a small Italian restaurant chain
based in California. He joined Rosti in December 1994, responsible for
overseeing all operations. Mr. Kaufman was also with California Pizza Kitchen,
starting in June 1986 with its first restaurant and promoted to Vice President
Operations, overseeing the opening of an additional 64 restaurants over a nine-
year period. He had store profit responsibility including daily operations,
restaurant design, menu design, and management hiring and training.

MICHAEL D. MOOSLIN, PRESIDENT AND CHIEF OPERATING OFFICER, KOO KOO ROO
INTERNATIONAL, AND DIRECTOR. Mr. Mooslin was President and Chief Operating
Officer of the Company from March 1992 until September 1996 when he became
President and Chief Operating Officer of Koo Koo Roo International. He has also
been a director of the Company since September 1992. Mr. Mooslin has been
involved in various capacities in the food business since 1962. From 1986 until
March 1992, Mr. Mooslin owned and operated MDM Restaurant Group, a management
company which facilitated the growth of small, development stage fast-food
chains. From 1972 to 1986, he served as President of Naugles, inc., a fast-food
chain featuring freshly prepared Mexican food.

RONALD D. GARBER, GENERAL COUNSEL AND CORPORATE SECRETARY. Mr. Garber has
been General Counsel and Corporate Secretary since May of 1996. From 1993 until
April 1996, Mr. Garber was a partner at the law firm of Richman, Lawrence, Mann,
Greene & Chizever in Beverly Hills, where he represented the Company. Prior
thereto, he was Of Counsel for the law firm of Cooper, Epstein & Horowitz.

MORTON J. WALL, TREASURER AND DIRECTOR. Mr. Wall has been Treasurer of the
Company since August 1990 and a Director since June 30, 1994. He also served as
Secretary from August 1990 to May 1996. Since March 1990, Mr. Wall has served
as Vice President and Treasurer of Berg Enterprises.

KORY L. BERG, PRESIDENT, ARROSTO AND DIRECTOR. Mr. Berg has been a
director and employee of the Company since August 1990. He established the
first Koo Koo Roo in Florida and served as its general manager from November
1990 to November 1994.

LEE A. IACOCCA, DIRECTOR. Mr. Iacocca, the retired Chairman of Chrysler
Corporation, was named to the Board of Directors in August 1995. He is also a
director of MGM Grand, Inc. and New World Communications Group Inc. In
addition, Mr. Iacocca is Chairman of the Committee for Corporate Support of the
Joslin Diabetes Foundation and a member of the advisory board of Reading is
Fundamental.

MEL HARRIS, DIRECTOR. Since 1988 Mr. Harris has been Chairman and since
1993 Chief Executive Officer of Preferred Employers Holdings, Inc. (NASDAQ:
PEGI) and President of International Insurance Group, Inc. since 1984. Mr.
Harris is Chief Executive Officer of Restaurant Marketing Corporation (RMC) and
Restaurant Acquisition Corporation (RAC), entities with which the company has
service agreements. RAC is also the Company's joint venture partner in two
stores in Florida. Mr. Harris is Chief Executive Officer of Ceramics Acquisiton
Corporation which is the joint venture partner of Color Me Mine, Inc. in three
stores in Florida. He also serves on the board of directors of the National
Parkinson Foundation, Hebrew Home for the Aged in Riverdale, New York, and the
Yeshiva University Sy Syms School of Business. He is a founder of the United
States Holocaust Memorial Museum, Washington, D.C., and a 1994 recipient of the
Ellis Island Medal of Honor Award.

JESS M. RAVICH, DIRECTOR. Mr. Ravich has been the Chief Executive Officer
and the majority owner of Libra Investments, Inc., a registered broker dealer,
since its was founded in 1991. From March 1990 to March 1991, Mr. Ravich was
Executive Vice President of high yield trading with Jefferies & Co, a registered
broker dealer. Mr. Ravich is a director of Cherokee, Inc., a clothing
manufacturer and ACTV, Inc. a developer of individualized television programming
technology.

DON WOHL, DIRECTOR. Mr. Wohl has been a director of the Company since
December 1993. He has been a private investor as well as a business and
individual consultant for more than the past five years. Mr. Wohl is also a
director of Vitafort International Corporation, a specialty food manufacturer.

Page 21
<PAGE>

The following sets forth, as of April 21, 1997, certain biographical
information with respect to additional members of the Company's management:

BETH ARNOLD, VICE PRESIDENT FINANCE. Ms. Arnold joined the Company in 1994
and brings over 15 years of management experience in accounting, finance, data
processing and administrative functions. Prior to joining the Company, she
served as Director of Accounting and Administration for a wholesale food
distributor owned by Flagstar Companies, Inc. Prior to that, she was a
controller and assistant controller to two start-up restaurant chains. Ms.
Arnold is a CPA.

THOMAS BECK, VICE PRESIDENT OF CONSTRUCTION & DESIGN. Mr. Beck is a
seasoned manager who has built restaurants across the United States and been
involved in construction since 1970. Prior to joining the Company, he was
Director of Construction for California Pizza Kitchen.

JOHN BIRDSALL, SENIOR VICE PRESIDENT AND EXECUTIVE CHEF. Mr. Birdsall
brings 16 years of restaurant experience. Before joining the Company, Mr.
Birdsall was executive chef for Monroe's Restaurant and Catering, Metro
Restaurant, California Institute of Foods, Ruby's Diner Corporation and Hilton
Hotel. He is responsible for menu development and kitchen training.

MARVIN COHEN, VICE PRESIDENT OF PURCHASING. Mr. Cohen has over 25 years
experience in food purchasing and distribution, most recently with The
Cheesecake Factory where he was Director of Purchasing. He has also held
numerous management positions with firms such as S.E. Rykoff and Sizzler
International, Inc.

ROBERT FORT, VICE PRESIDENT, INFORMATION SYSTEMS TECHNOLOGY. Mr. Fort has
spent more than 18 years developing information systems for various industries
including food service. Prior to joining the Company Mr. Fort worked for Nestle
USA where he developed and successfully implemented various financial systems.

JEANNE GILES, CONTROLLER. Ms. Giles joined the company in March 1997. She
brings over ten years of accounting and finance experience primarily in a
restaurant/retail environment. Prior to joining the Company, Ms. Giles, was the
Controller for La Salsa, a ninety unit restaurant chain, where she managed all
the accounting, finance and information system functions for the past five
years.

BRADLEY GOLD, DIRECTOR OF OPERATIONS, ARROSTO COFFEE COMPANY. Mr. Gold
brings over 20 years of multi-unit restaurant and real estate experience. Most
recently, Mr. Gold was Regional Operations Manager for California for Pasqua,
Inc. where he managed 31 coffee bar locations and a distribution facility.
Previously, he was with The Tiger Company, Thrifty Corporation and Associated
Hosts, a fifteen restaurant chain.

JAMES KONSTANTINIDES, VICE PRESIDENT, REAL ESTATE. Mr. Konstantinides has
been involved in the restaurant, real estate development and franchising fields
for over twenty years. He has identified and secured over 350 sites in his
career for major chains including Friday's, Swensen's, Red Robin and Denny's.
Previously, he was President and Chief Operating Officer for California
Restaurant Concepts, the franchisee of T.J. Applebee's in California.

JACK MCSHANE, EXECUTIVE VICE PRESIDENT, STORE OPENINGS. Mr. McShane has
been Executive Vice President of the Company since August 1993. Mr. McShane
brings over 15 years of restaurant experience to the Company. Prior to joining
the Company, Mr. McShane spent 10 years with Pioneer Boulangerie where he served
as General Manager and Chief Buyer for the multi-million dollar food complex
which encompassed catering, a national wholesale bakery facility, and fine
dining as well as quick service dining.

JOEL PETERSEN, REGIONAL VICE PRESIDENT OF OPERATIONS. Mr. Petersen brings
over 20 years of restaurant operations experience to the Company. Mr. Petersen
has worked for Mr. Steak Restaurants, Brown Derby, Pizza Time Theatres and
Denny's and has directly supervised up to 200 stores.

Page 22
<PAGE>

MARTIN G. PARAVATO, SENIOR VICE PRESIDENT FINANCE. Mr. Paravato joined the
Company in August 1996. Prior to joining the Company, Mr. Paravato was a
partner with the international accounting firm of BDO Seidman LLP, specializing
in SEC reporting companies. He is a CPA and a graduate of California State
University at Northridge.

MAX SCHNEEBERGER, REGIONAL VICE PRESIDENT OF OPERATIONS. Mr. Schneeberger
possesses both corporate and franchise operations experience as a result of his
20 year career with Sizzler Restaurants International. Mr. Schneeberger
supervised operations for up to 85 stores with annual sales of $100 million.

JEANNE SCOTT, VICE PRESIDENT OF HUMAN RESOURCES. Ms. Scott has been Vice
President of Human Resources of the Company since December 1995 and is also
responsible for the Training Department. From August 1993 to November 1995, she
served as Vice President of Human Resources for Perkins Family Restaurants, a
450-unit, full service restaurant chain with approximately 9,000 employees.
From April 1980 to July 1992, Ms. Scott held various human resource and training
positions with the Taco Bell Corporation, a unit of PepsiCo.

ROBERT ZANOLLI, REGIONAL VICE PRESIDENT OF OPERATIONS. Mr. Zanolli brings
to the Company over 15 years of restaurant experience having worked for Acapulco
Restaurants, Red Onion, El Torito and Sheraton. Most recently, he supervised
operations with annual revenues exceeding $42 million.

Page 23
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table. The following table provides certain summary
information concerning compensation paid to or accrued by the Company's Chief
Executive Officer and the three other executive officers of the Company who
earned more than $100,000 (salary and bonus) (the "Named Executive Officers")
for all services rendered in all capacities to the Company during the twelve
months ended December 31, 1996:

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------- -----------------------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK OPTIONS/
POSITION YEAR SALARY BONUS COMPENSATION/1/ AWARDS SARS (#)
------------------ ---- ------ ------ ------------ ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Berg/2/.............. 1996 $207,700 $ -- $ -- $ -- 500,000
(Chief Executive Officer and 1995 172,500 -- -- 1,050,000(2) 900,000
Chairman of the Board) 1994 150,000 -- -- -- --

Robert F. Kautz /3/ 1996 176,300 -- 27,400 -- --
(President and Chief 1995 116,109 -- -- -- 250,000
Financial Officer)

Michael D. Mooslin .......... 1996 161,500 -- 41,900 -- --
(President and Chief 1995 143,700 -- 30,121 -- --
Operating Officer of Koo 1994 125,000 -- 44,900 -- --
Koo Roo International)
</TABLE>

- - --------------------------

/1/ With respect to each of the executive officers named in the table, if not
separately reported the aggregate amount of perquisites and other personal
benefits, securities or property received was less than either $50,000 or
10% of the total annual salary and bonus reported for such executive
officer.

/2/ Mr. Berg commenced his employment with the Company on August 16, 1990. Mr.
Berg received 200,000 restricted shares of Common Stock in March 1995 as
consideration for the extension of the term of his employment agreement.
Such Common Stock vests pro rata over the term of Mr. Berg's Amended and
Restated Employment Agreement which terminates on January 9, 2001. As of
December 31, 1996, Mr. Berg owned 200,000 restricted shares of Common Stock
which had an aggregate market value of $1,450,000 based on the last
reported sales price of the Common Stock on the Nasdaq National Market on
December 31, 1996. Mr. Berg also received options to purchase 500,000
restricted shares of Common Stock at $8.50 per share. All of such shares
upon estimated issuance thereof are eligible to receive dividends if and
when declared thereon. See "--Employment Arrangements."
/3/ Mr. Kautz commenced his employment with the Company on February 24, 1995.
See "--Employment Arrangements."

OPTION/SAR GRANTS IN LAST FISCAL YEAR
- - -------------------------------------

The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the twelve months ended December
31, 1996:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------- VALUE AT ASSUMED
NAME NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
---- SECURITIES OPTIONS/SARS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM 5%
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION ----------------------
GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE ($) 10% ($)
------------------ ------------- ------------ ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Berg 500,000 32.4% $8.50 Apr. 16, 2006 $2,672,800 $6,773,400
</TABLE>

Page 24
<PAGE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

The following table sets forth certain information regarding exercises of
stock options by the Named Executive Officers during the twelve months ended
December 31, 1996 and the value of unexercised options at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END FY-END
----------------------- -----------------------
SHARES
ACQUIRED ON VALUE ($) ($)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Berg -- -- 846,666 853,334 $3,132,499 $667,502
Robert F. Kautz -- -- 90,000 160,000 83,700 284,800
Michael D. Mooslin -- -- 262,800 53,200 1,511,100 305,900
</TABLE>

REPRICING OF OPTIONS

During the twelve months ended December 31, 1996, there were no adjustments
or amendments of the exercise prices of stock options previously awarded to the
Named Executive Officers.

DIRECTORS' COMPENSATION

DIRECTORS' STOCK OPTION PLAN

The Company's Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors and approved by the stockholders to enable the
Company to attract and retain the services of non-employee members of the Board
and to provide them with increased motivation and incentive to exert their best
efforts on behalf of the Company by enlarging their personal stake in the
Company. The Directors' Plan covers an aggregate of 60,000 shares of Common
Stock and will expire in 2001. The Directors' Plan, as amended, provides that
each non-employee person who becomes a director will receive an option to
purchase a minimum of 10,000 shares and up to a maximum of 20,000 shares of
Common Stock at an exercise price equal to the fair market value of the
Company's Common Stock on the date the option is granted.

During the twelve months ended December 31, 1996, Mr. Ravich and Mr. Harris
were each granted 10,000 options under the Director's Plan at an exercise price
of 9.50 and $7.13, respectively, upon election to the Board of Directors.

EMPLOYMENT ARRANGEMENTS

KENNETH BERG

On January 9, 1995, Kenneth Berg entered into an Amended and Restated
Employment Agreement with the Company (the "Agreement"). The Agreement provides
for an annual base salary of $150,000 (or at such higher rate as may be
determined by the Board of Directors or the Compensation Committee (as defined
below) of the Company) and for an incentive bonus equal to 3% of the Company's
earnings before interest, taxes, depreciation and amortization ("EBITDA") to the
extent such EBITDA exceeds $1,000,000. As of January 1, 1996, Mr. Berg's base
compensation was $200,000 per year. Under the Agreement, the termination date of
the original employment agreement was extended from October 14, 1996 to January
9, 2001. In consideration for the extension of the term of the Agreement, the
Company issued Mr. Berg 200,000 shares of Common Stock on March 21, 1995;
provided, however, that (i) such shares of Common Stock vest pro rata over the
term of Mr. Berg's Agreement, (ii) Mr. Berg may not dispose of any such Common
Stock prior to January 9, 1998 and (iii) beginning on January 9, 1998, Mr. Berg
may only dispose of such Common Stock at a rate of 50,000 shares per year.

Page 25
<PAGE>

Mr. Berg is entitled to participate in the Company's fringe benefits,
bonus, profit-sharing and incentive plans. He is also entitled to reimbursement
for medical expenses not covered by the Company's or other health plans and for
certain Company-related travel expenses, including use of an automobile and
related expenses. The Company has agreed to provide Mr. Berg with such
financial and accounting services as he may reasonably request.

The Agreement provides that Mr. Berg is obligated to devote his full-time
services to the Company, although he is permitted to continue to engage in other
business activities so long as such activities do not conflict with, or
otherwise unreasonably interfere with, the performance of his services to the
Company. Under the Agreement, in the event of disability preventing his
performance of full-time duty for nine consecutive months, the Company may
discontinue payment of his base salary after such nine-month period; provided
that the base salary will be reinstated if he returns to full-time duty within
18 months (and during the term of the Agreement following the nine-month
disability period). The Agreement also provides that in the event of Mr. Berg's
death, the Company shall pay to Mr. Berg's estate or designated beneficiaries a
death benefit equal to one year's base salary and the pro rata portion of any
incentive bonus to which he would be entitled.

Under the Agreement, the Board of Directors of the Company may only
terminate Mr. Berg for "cause," which is defined in the Agreement as the
conviction of Mr. Berg for a felony. Upon such termination of Mr. Berg for
cause, the Company will pay Mr. Berg his base salary through the date of
termination at the rate in effect on such date of termination; provided,
however, that all of Mr. Berg's entitlements, other compensation or fringe
benefits will immediately terminate (to the maximum extent permitted by law).

The Agreement also provides that if the Company terminates Mr. Berg's
employment without cause, the Company shall pay to Mr. Berg in one lump sum
(less applicable tax withholding but adjusted for any surtax under Section 280G
of the Internal Revenue Code of 1986, as amended) an amount in cash equal to two
times the sum of Mr. Berg's base salary and incentive bonus that would otherwise
be payable to Mr. Berg during the full remaining contract term of his employment
under the Agreement (the "Severance Payments"). In addition, if Mr. Berg's
employment is terminated without cause, all stock options granted by the Company
to Mr. Berg which are not vested will vest concurrently with the effective date
of termination and the exercise period of such options will be extended by five
years. The Agreement also provides that Mr. Berg may terminate his employment
agreement with "good reason" (as defined in the Agreement) and in such event
would be entitled to the Severance Payments described above. Good reason is
defined in the Agreement to include, but is not limited to, a (i) "change in
control" of the Company (as defined in the Agreement to occur when, among other
things, any person or entity beneficially owns, directly or indirectly, 20% or
more of the combined voting power of the Company's then outstanding securities
(ii) a relocation of Mr. Berg's principal office or (iii) a material reduction
in the nature and scope of Mr. Berg's duties to the Company.

Page 26
<PAGE>

ROBERT F. KAUTZ

Robert F. Kautz was appointed President of Koo Koo Roo, Inc. in March 1997
and has served as Chief Financial Officer of the Company since February 1995.
Pursuant to a February 29, 1996 amendment to his February 24, 1995 Agreement
with the Company, he receives a base salary at an annual rate of $175,000, to be
increased annually in accordance with the recommendation of the Compensation
Committee. Mr. Kautz is entitled to participate in such fringe benefits, bonus,
profit sharing and incentive plans as determined by the Board of Directors. He
also receives automobile and other allowances of $2,100 per month in the
aggregate. Pursuant to Mr. Kautz's agreement with the Company, the Company has
loaned to Mr. Kautz $25,000 in 1995 and $35,000 in 1996. Mr. Kautz's employment
agreement terminates February 28, 1999, subject to two annual renewal options
which may be exercised by the Company. The Company has the right to terminate
Mr. Kautz's agreement without cause and in such event the $60,000 in loans
referred to above would be forgiven.

In February 1995 the Company granted Mr. Kautz an option to purchase
200,000 shares of the Company's Common Stock. The option has a term of ten
years and 20% of such options vest each year over the first five years of Mr.
Kautz's employment. In November 1995, the Company granted Mr. Kautz an option
to purchase 50,000 shares of the Company's Common Stock. The option became
exercisable on February 24, 1996 and has a term of ten years. In the event of a
change in control of the Company, all of Mr. Kautz's options which are not
vested as of the effective date of such sale or change in control will
immediately and automatically become vested and exercisable.

MICHAEL D. MOOSLIN

Michael D. Mooslin joined the Company as President and Chief Operating
Officer on March 16, 1992 and in September 1996 was named President and Chief
Operating Officer of Koo Koo Roo International. Pursuant to Mr. Mooslin's
Amended and Restated Employment Agreement ("Agreement") with the Company, he
receives a base salary at an annual rate of $150,000 (or such higher rate as may
be determined by the Board of Directors of the Company). In 1993 and 1994, Mr.
Mooslin accepted a temporary reduction in current salary to $125,000 per annum
in return for certain loans. As such loans were forgiven, the amount thereof
was reported as "Other Annual Compensation." Mr. Mooslin is entitled to
participate in fringe benefits and bonus, profit sharing and incentive plans as
determined by the Board of Directors. Mr. Mooslin is reimbursed for certain
Company-related travel expenses. The Company makes annual payments for an
automobile and reimbursement of up to $1,500 per month for rent and related
housing expenses. The Company may terminate the Agreement in the event that Mr.
Mooslin is disabled and unable to perform his full-time duties for a consecutive
period of 90 days or for a total of 120 days in any consecutive twelve-month
period. The Agreement expired on March 17, 1997, but provides that it shall
continue from year-to-year thereafter unless terminated by either the Company or
by Mr. Mooslin upon notice to the other provided not less than 90 nor more than
120 days prior to the end of the term. The Company may terminate the Agreement
for cause if Mr. Mooslin willfully breaches or habitually neglects his duties.
The Company may also terminate the Agreement without cause. In the latter event,
the Company would be required to pay to Mr. Mooslin the amount of his base
salary for the remainder of the term plus an additional amount equal to his base
salary. The Agreement also provides that Mr. Mooslin may terminate his
employment with the Company if, among other things, (i) Mr. Mooslin is not
reelected or reappointed to (other than by his own choice) the office and
position of President or such additional office or position to which Mr. Mooslin
may subsequently be elected or (ii) there is a material reduction in the nature
and scope of Mr. Mooslin's duties to the Company. In such event, the Company
will pay Mr. Mooslin his base salary through the period ending on the date of
his termination and an amount equal to no less than six months of his base
salary.

JOHN KAUFMAN

Mr. Kaufman has been President of Koo Koo Roo USA since August 1996.
Pursuant to an employment agreement dated July 31, 1996 he receives a base
salary at an annual rate of $200,000 as well as a $25,000 guaranteed bonus
payable on the one year anniversary date of his employment with the Company. He
also receives an auto allowance of $600 per month and family health insurance
coverage. In addition, at the Company's discretion he may be granted options to
purchase an additional $250,000 worth of the Company's Common Stock; such grant
is based on performance. A severance clause provides that if termination occurs
for any reason other than cause, Mr. Kaufman will receive a $100,000 payment and
a one year acceleration in vesting on any unvested stock options.

Page 27
<PAGE>

RONALD D. GARBER

Mr. Garber has been Corporate Secretary and General Counsel since May 1996.
Pursuant to an Employment Agreement dated May 3, 1996 he receives a base salary
at an annual rate of $150,000 and an auto allowance of $500 per month and family
health insurance coverage. In the event of a change in control in the Company,
all of Mr. Garber's options which are not vested as of the effective date of
such sale or change in control will immediately become vested and exercisable.
Mr. Garber received a $25,000 loan from the Company in 1996.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to November 1995, the Company did not have a Compensation Committee.
Prior to the creation of the Compensation Committee, Kenneth Berg, Chairman of
the Board and Chief Executive Officer, and Don Wohl, the Company's only outside
director from January to July 1995, participated in deliberations concerning
executive compensation. In November 1995, the Board of Directors formed a
Compensation Committee. The Compensation Committee is composed of Lee Iacocca
and Don Wohl were elected to the Committee. The Compensation Committee did not
meet during 1996.

Mr. Don Wohl served as director of Vitafort International Corporation
during 1996.

Mr. Lee Iacocca served as a director of MGM Grand, Inc. and New World
Communications Group, Inc. during 1996.

On March 7, 1994, the Company and Don Wohl, a director of the Company,
entered into a Consulting Agreement. Such agreement, which has since
terminated, provided for Mr. Wohl to provide part-time financial consulting
services to the Company in connection with the Company's plans for business
expansion, at the Company's request, to the degree reasonably required to
provide the services required under such agreement. For such services, the
Company granted Mr. Wohl a warrant to purchase 200,000 shares of the Common
Stock at a price of $6.00 per share which expires March 7, 1999.

On November 28, 1994, in furtherance and expansion of Don Wohl's existing
financial consulting arrangement, the Company entered into a Non-Qualified Stock
Option Agreement with Mr. Wohl, whereby the Company granted him an option to
purchase 100,000 shares of the Company's Common Stock at a price of $5.00 per
share. These options become exercisable at the rate of 33.3% per year and
expire 10 years from the date of grant.

On June 5, 1995, in recognition of Don Wohl's continuing role in financing
the Company, the Company entered into a Warrant Agreement with Mr. Wohl, whereby
the Company granted him the right to purchase 100,000 shares of the Company's
Common Stock at a price of $5.875 per share. The warrant became exercisable on
August 15, 1996 and expires on August 15, 2000.

Mr. Wohl is also the Managing General Partner of KKRO Partners, L.P., which
partnership previously owned a minority interest in the Santa Monica, Brentwood
and Beverly Hills Koo Koo Roo restaurants (the "Partnership"). On September 26,
1995, the Company agreed to purchase the limited partners' interest in the
Partnership. As consideration for the purchase, which closed in November 1995,
the Company issued 275,848 shares of Common Stock in payment of a purchase price
of approximately $2.0 million (approximately equal to such partners' investment
in the Partnership).

Page 28
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 31, 1997
with respect to the beneficial ownership of the Company's Common Stock, which
constitutes the Company's only outstanding class of voting securities, by (i)
each person who, to the knowledge of the Company, beneficially owned more than
5% of the Common Stock, (ii) each director and nominee for director of the
Company, (iii) the Named Executive Officers (as defined below) and (iv) all
executive officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER/1/ AMOUNT OF PERCENT
BENEFICIAL OWNERSHIP OF CLASS/2/
--------------------- -----------
<S> <C> <C>
Kenneth Berg 3,744,116 /3/ 21.4%
Robert F. Kautz 280,000 /4/ 1.7%
Michael D. Mooslin 317,250 /5/ 1.9%
John S. Kaufman 50,000 /6/ *
Morton J. Wall 19,700 /7/ *
Kory L. Berg 176,000 /8/ *
Lee A. Iacocca 386,500 /9/ 2.3%
Don Wohl 394,166 /10/ 2.3%
Jess M. Ravich 28,611 /11/ *
Mel Harris 1,331,000 /12/ 7.4%
Ronald D. Garber 10,000 /13/ *
All Directors, Nominees 6,737,343 /14/ 33.2%
and Executive Officers
as a Group (11 persons)
</TABLE>

- - ----------------------
* Represents less than 1% of the outstanding shares of Common Stock.

/1/ The address of Kenneth Berg, Robert F. Kautz, Michael D. Mooslin, John S.
Kaufman, Kory L. Berg and Ronald D. Garber is in care of the Company, 11075
Santa Monica Boulevard, Suite 225, Los Angeles, California 90025. The
address of Lee A. Iacocca is 1440 South Sepulveda Blvd., Third Floor, Los
Angeles, California 90025. The address of Morton J. Wall is in care of the
Company, 75 Route #27, Iselin, New Jersey 08830-0411. The address of Jess
M. Ravich is 11766 Wilshire Boulevard, Suite 870, Los Angeles, California
90025. The address of Don Wohl is 1800 Avenue of the Stars, Suite 1114,
Los Angeles, California 90067. The address of Mel Harris is 10800 Biscayne
Blvd., Penthouse Floor, North Miami, Florida 33161.

/2/ Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days of a specified date as provided for in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended. Each beneficial owner's
percentage is determined by assuming that options or warrants that are held
by such person (but not those held by any other person) and which are
exercisable within 60 days of the date of the above table have been
exercised. Further, the amounts do not give effect to any conversion of
shares of the Series A Convertible Preferred Stock or Series B Convertible
Preferred Stock because the number of shares of Common Stock deemed to be
beneficially owned by such persons cannot be determined. The number of
shares of Common Stock issuable is dependent on factors which cannot be
predicted by the Company at this time, including, among others, the future
trading prices of the Common Stock. As of the date of the table, there
were outstanding 939,939 shares of Series A Convertible Preferred Stock and
290,000 shares of Series B Convertible Preferred Stock.

/3/ Kenneth Berg's holdings include: (a) 830,000 shares of Common Stock held
by his spouse which Mr. Berg has the right to vote pursuant to a proxy
(Mr. Berg disclaims beneficial ownership of such shares) and (b) 986,666
shares of Common Stock issuable upon exercise of options exercisable within
60 days of the date of the table.

Page 29
<PAGE>

/4/ Includes 10,000 shares of Common Stock issuable upon exercise of options
within 60 days of the date of the table.

/5/ Includes 316,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of the date of the table.

/6/ Includes 50,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of the date of the table.

/7/ Includes 50 shares of Common Stock held by his spouse (Mr. Wall disclaims
beneficial ownership of such shares). Includes 19,600 shares of Common
Stock issuable upon exercise of options within 60 days of the date of the
table.

/8/ Includes 32,000 shares of Common Stock issuable upon exercise of options
within 60 days of the date of the table.

/9/ Includes 325,000 shares of Common Stock issuable upon exercise of options
within 60 days of the date of the table.

/10/ Includes 374,166 shares of Common Stock issuable upon exercise of warrants
and options within 60 days of the date of the table.

/11/ Includes 27,400 shares of Common Stock issuable upon exercise of Warrants
exercisable within 60 days of the date of the table. Excludes (i) 10,000
shares of Series A Convertible Preferred Stock and Warrants to purchase
18,000 shares of Series A Convertible Preferred Stock owned by Mr. Ravich
and (ii) Warrants to purchase 18,000 shares of Series A Convertible
Preferred Stock owned by Libra Investments, Inc. that Mr. Ravich may be
deemed to beneficially own in his capacity as Chief Executive Officer and
majority shareholder of such firm. None of such shares excluded may be
exercised for, or converted into, shares of Common Stock within 60 days of
this table.

/12/ Includes 1,331,000 shares of Common Stock issuable upon exercise of options
within 60 days of the date of the table.

/13/ Includes 10,000 shares of Common Stock issuable upon exercise of options
within 60 days of the date of the table.

/14/ Includes 1,490,266 shares of Common Stock reserved for issuance pursuant to
the Company's Stock Awards Plan and non-plan options and warrants to
purchase 2,264,066 shares of Common Stock, all of which are exercisable
within 60 days of the date of the table.

Page 30
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On May 8, 1996 the Company entered into a business development
agreement with an entity associated with its Restaurant Marketing Corp., which
is owned by Mr. Harris, to provide business development services. In
consideration for the agreement, the Company issued options to purchase 1.0
million shares of common stock at an exercise price of $8.00 per share. The
options will become exercisable ratably over a three-year period beginning on
the first anniversary of the date of issuance, so long as the business
development agreement remains in place. The business development agreement may
be canceled with six months notice by the Company's Chief Executive Officer in
his sole discretion. The options also will vest upon a change in control (as
defined).

On May 8, 1996 the Company amended its area development agreement with
Restaurant Acquisition Corp., which is owned by Mr. Harris, covering Florida and
certain counties in Southern Georgia. Under this amendment, the area
developer's rights to open franchise restaurants were terminated, and all stores
will be developed as joint ventures through newly-formed partnerships of which
the Company will own a 50% interest. In consideration for this amendment, the
Company granted the area developer options to purchase 350,000 shares of the
Company's common stock at an exercise price of $8.00 per share. The options
vested and became exercisable immediately upon grant.

On August 21, 1996, the Company entered into a Non-Qualified Stock Option
Agreement with Mr. Kaufman, whereby the Company granted him an option to
purchase 250,000 shares of the Company's Common Stock at an exercise price of
$7.69 per share. Fifty thousand of these options became exercisable immediately
and the remaining are exercisable at the rate of 20% per year over the five year
period beginning on the first anniversary of the date of issuance and expire ten
years from the date of grant.

During the twelve months ended December 31, 1996, the Company obtained
certain accounting, bookkeeping, occupancy and other office services from a
corporation controlled by Kenneth Berg in return for aggregate payments of
$82,000. Additional payments are anticipated for the upcoming fiscal year which
are expected to be a lesser amount due to a reduction in office space and
personnel.

Mr. Ravich is the Chief Executive Officer of Libra Investments, Inc., which
acted as a Placement Agent in connection with private placement of 1,200,000
shares of the Company's Series A Convertible Preferred Stock and 450,000 shares
of the Company's Common Stock and which received compensation of $1.25 million
related to this placement. In addition, in connection with the private
placement, Libra Investments, Inc. and certain of its officers received, options
to purchase 20,250 shares of the Company's Common Stock at an exercise price of
$7.25 per share, of which 18,250 are owned directly by Mr. Ravich, and options
to purchase 54,000 shares of the Company's Series A Convertible Preferred Stock
at an exercise price of $25.00 per share, 18,000 of which are owned directly by
Mr. Ravich.

COMPLIANCE WITH SECTION 16(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities ("Insiders"), to file with the
Commission initial reports of ownership and reports of changes in ownership of
Common Stock. Insiders are required by the Commission's regulations to furnish
the Company with copies of all Section 16(a) reports filed by such persons.

To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company, during the year ended December 31, 1996
all Section 16(a) filing requirements applicable to Insiders were complied with,
except for two late filings relating to transactions by Ronald D. Garber.

PART IV
<TABLE>
<CAPTION>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

<S> <C>
(a)(1) FINANCIAL STATEMENTS

Index to Consolidated Financial Statements F-1

Report of Independent Certified Public Accountants F-2

Consolidated Balance Sheets as of
December 31, 1995 and 1996 F-3

Consolidated Statements of Operations for the
years ended December 31, 1994, 1995 and 1996 F-4

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996 F-5

Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1995 and 1996 F-6

Notes to Consolidated Financial Statements F-7
</TABLE>

(a)(2) FINANCIAL STATEMENT SCHEDULES

All schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule,
or because the information required is included in the financial
statements or notes thereto.

Page 31
<PAGE>

(a)(3) EXHIBITS

<TABLE>

<C> <S>
3.1 Restated Certificate of Incorporation of Registrant/1/

3.2 Amended and Restated Bylaws of Registrant, as amended March 1992/2/

3.3 Bylaw Amendment Changing year-end/3/

3.4 Certificate of Amendment to the Restated Certificate of Incorporation of
Koo Koo Roo, Inc./10/

3.5 Certificate of Designations of 5% Convertible Preferred Stock/9/

4.1 Form of Certificate for Common Stock of Registrant/1/

4.2 Form of Certificate for 5% Convertible Preferred Stock of Registrant/9/

4.3 Form of Amendment to the Restated Certificate of Incorporation of Registrant/9/

4.4 Certificate of Designations of 5% Convertible Preferred Stock of Registrant/9/

4.5 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants/8/

4.6 Form of Warrant Agreement used in connection with the Company's June 1995 private
placement of Company Common Stock and Warrants/8/

4.7 Form of Stock Purchase Agreement dated March 12, 1996 by and among the Registrant
and the purchasers named therein/9/

4.8 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and among the
Registrant and the purchasers named therein/9/

4.9 Certificate of Designations of Series B 6% Convertible Preferred Stock/13/

4.10 Form of Certificate for Series B 6% Convertible Preferred Stock/13/

4.11 Form of Series B Preferred Stock Investment Agreement dated February 27, 1997 by and
among the Registrant and the purchasers named therein/13/

4.12 Form of 5% Convertible Preferred Stock Warrant Agreement dated March 20, 1996/14/

4.13 Form of Common Stock Warrant Agreement dated March 12, 1996/14/

10.49 Agreement of Limited Partnership of KKRO Partners L.P. dated March 23, 1994/4/

10.50 Area Development Agreement dated August 19, 1993 between the Registrant and Mel Harris/5/
</TABLE>

Page 32
<PAGE>

<C> <S>
10.55 Amended and Restated Employment Agreement of Kenneth Berg dated as of
January 9, 1995 and related letter agreement/8/

10.56 Amended and Restated Employment Agreement of Michael Mooslin dated
as of March 17, 1995/8/

10.58 Employment Agreement of Robert Kautz dated as of February 8, 1995/8/

10.59 Stock Awards Plan/6/

10.60 Form of Non-Qualified Stock Option Agreement Under the Stock Awards Plan/8/

10.61 Directors' Stock Option Plan, as amended/7/

10.62 First Amendment to the Harris Development Agreement dated as of August 25, 1995/8/

10.63 KKRO Partners, L.P. Purchase Agreement dated as of September 26, 1995 by and
between the Company and KKRO Partners, L.P./8/

10.64 KKRO Partners, L.P. Liquidation Agreement dated as of September 28, 1995 by and
between the Company and KKRO Partners, L.P./8/

10.65 Form of Warrant Agreement used in connection with the Company's February 1995
private placement of Company Common Stock and Warrants/8/

10.66 Form of Warrant Agreement used in connection with the Company's June 1995
private placement of Company Common Stock and Warrants/8/

10.67 Form of Stock Purchase Agreement dated March 12, 1996 by and among the
Registrant and the purchasers named therein/9/

10.68 Form of Preferred Stock Investment Agreement dated March 20, 1996 by and
among the Registrant and the purchasers named therein/9/

10.69 Agreement for Acquisition of Color Me Mine, Inc./10/

10.70 Canadian Letter of Intent/10/

10.71 Business Development Services Agreement, dated as of May 8, 1996, by and
between the Registrant and Restaurant Marketing Corporation./11/
</TABLE>

Page 33
<PAGE>

10.72 Non-Qualified Stock Option Agreement for Restaurant Marketing
Corporation, dated as of May 8, 1996, by and between the Registrant
and Restaurant Marketing Corporation./11/

10.73 Non-Qualified Stock Option Agreement for Restaurant Marketing
Corporation, dated as of May 8, 1996, by and between the Registrant
and Restaurant Marketing Corporation./11/

10.74 Second Amendment to Area Development Agreement, dated as of May 8,
1996, by and between the Registrant, Koo Koo Roo Licensing Systems,
Inc. and Restaurant Acquisition Corporation./11/

10.75 Employment Agreement and Non-Qualified Stock Option Agreement, dated as
of May 8, 1996, by and between the Registrant and Mel Harris./11/

10.76 Color Me Mine, Inc. Area Development Agreement/12/

10.77 Asset Purchase Agreement By and Between Hamburger Hamlet, Inc.and the
Registrant dated as of March 21, 1997./15/

21.1 Subsidiaries of Registrant/8/

23.1 Consent of Independent Certified Public Accountants

27 Financial Data Schedule/15/

99.1 "Item 5. Other Events" included the Company's Current Report dated March 18, 1996./10/
</TABLE>

footnotes
- - ---------
1 Incorporated by reference to identical exhibit number in the Company's
Registration Statement on Form S-18 (No. 33-42487-NY) declared effective on
October 15, 1991.

2 Incorporated by reference to identical exhibit number in the Company's
Transition Report on Form 10-K for the six months ended June 30, 1992.

3 Incorporated by reference to identical exhibit number in the Company's
Current Report on Form 8-K dated December 14, 1995 (filed with the
Commission on December 15, 1995).

4 Incorporated by reference to identical exhibit number in the Company's
Annual Report on Form 10-K/A for the fiscal year ended June 30, 1993 (filed
with the Commission on April 25, 1994).

5 Incorporated by reference to identical exhibit number in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1994.

6 Incorporated by reference to identical exhibit number in the Company's
Proxy Statement dated December 15, 1994.

7 Incorporated by reference to identical exhibit number in the Company's
Proxy Statement dated November 15, 1993.

8 Incorporated by reference to identical exhibit number in the Company's
Amendment No. 2 to its Annual Report on Form 10-K/A for the fiscal year
ended June 30, 1995.

9 Incorporated by reference to identical exhibit number in the Company's
Current Report on Form 8-K dated March 18, 1996.

10 Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996.

11 Incorporated by reference to identical exhibit number in the Company's
Registration Statement on Form S-1 (No. 333-3360) declared effective on

Page 34
<PAGE>

June 11, 1996.

12 Incorporated by reference to the exhibits filed with the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996

13 Incorporated by reference from the Company's Current Report on Form 8-K
dated February 27, 1997.

14 Incorporated by reference from the Company's Registration Statement on Form
S-3 (No. 333-23263) as filed on March 13, 1997.

15 Incorporated by reference from the Company's Annual Report on Form 10-K
filed for the year ended December 31, 1996 (filed with the Commission on
March 31, 1997).

* PREVIOUSLY FILED

b) REPORTS ON 8-K

Not Applicable

Page 35
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized the 29th day of April
1997.

KOO KOO ROO, INC.

By: /S/ KENNETH BERG
--------------------------
Kenneth Berg, Chairman of
the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
- - --------- ----- ----

/s/ KENNETH BERG Chairman of the Board April 29, 1997
- - ------------------------ Chief Executive Officer
Kenneth Berg and Director
(Principal Executive Officer)

/s/ ROBERT F. KAUTZ President, Chief Financial April 29, 1997
- - ------------------------ Officer and Director
Robert F. Kautz (Principal Financial Officer)

/s/ MICHAEL D. MOOSLIN President of Koo Koo Roo Arpil 29, 1997
- - ------------------------ International and Director
Michael D. Mooslin

/s/ JOHN KAUFMAN President of Koo Koo Roo April 29, 1997
- - ------------------------ USA and Director
John Kaufman

/s/ MARY E. ARNOLD Vice President-Finance April 29, 1997
- - ------------------------ (Principal Accounting Officer)
Mary E. Arnold

/s/ MORTON J. WALL Treasurer and Director April 25, 1997
- - ------------------------
Morton J. Wall

/s/ KORY BERG Director April 29, 1997
- - ------------------------
Kory L. Berg

/s/ MEL HARRIS Director April 29, 1997
- - ------------------------
Mel Harris

/s/ LEE A. IACOCCA Director April 29, 1997
- - ------------------------
Lee A. Iacocca

/s/ DONALD WOHL Director April 29, 1997
- - ------------------------
Donald Wohl

/s/ JESS M. RAVICH Director April 29, 1997
- - ------------------------
Jess M. Ravich

<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2

Consolidated Balance Sheets as of
December 31, 1995 and 1996 F-3

Consolidated Statements of Operations for the
years ended December 31, 1994, 1995 and 1996 F-4

Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996 F-5

Consolidated Statements of Cash Flows for the
years ended December 31, 1994, 1995 and 1996 F-6

Notes to Consolidated Financial Statements F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Koo Koo Roo, Inc.
Los Angeles, California

We have audited the accompanying consolidated balance sheets of Koo Koo Roo,
Inc. and subsidiaries as of December 31, 1995 and 1996 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Koo Koo
Roo, Inc. and subsidiaries as of December 31, 1995 and 1996 and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

/s/ BDO SEIDMAN, LLP
----------------------
BDO SEIDMAN, LLP

Los Angeles, California
March 5, 1997

F-2
<PAGE>

KOO KOO ROO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

<TABLE>
<CAPTION>
December 31,
--------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 3,502 $ 4,591
Marketable securities (Note 3) 3,663 5,220
Receivables 489 1,803
Inventories 187 815
Prepaid expense and other 191 196
-------- --------
Total current assets 8,032 12,625

Investments in and advances to joint ventures - 462
Property and equipment, net (Note 4) 14,271 31,307
Intangibles and other assets (Note 5) 4,252 5,378
-------- --------

$ 26,555 $ 49,772
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 1,661 $ 3,265
Accrued payroll 491 634
Accrued store closing costs (Note 11) 547 -
Other accrued liabilities 1,402 1,399
Current portion of long-term debt 14 220
-------- --------
Total current liabilities 4,115 5,518
-------- --------

Long-term debt (Note 7) 179 1,475
-------- --------
Minority interest (Note 6) 718 230
-------- --------
Commitments and contingencies (Notes 11, 12 and 14)

Stockholders' Equity (Notes 8, 11, 12 and 14)
Preferred stock, $.01 par value, 5,000,000 shares
authorized; 1,200,000 shares of Series A 5%
convertible preferred stock issued; 0 and 1,027,193
shares issued and outstanding (liquidation
preference $25,680,000) - 10
Common stock, $.01 par value, 50,000,000
shares authorized; 14,329,851 and
15,933,822 shares issued and outstanding 143 159
Additional paid-in capital 40,468 73,623
Accumulated deficit (18,275) (30,608)
Treasury stock, 84,352 and 72,512 shares, at cost (2) (2)
Common stock issued for unearned compensation (791) (633)
-------- --------
Total stockholders' equity 21,543 42,549
-------- --------
$ 26,555 $ 49,772
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

KOO KOO ROO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)

Year ended December 31,
----------------------------------------
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>

Revenues:
Restaurant sales $ 8,772 $ 19,221 $ 36,608
Ceramics studio sales - 1,078 1,655
Franchise fees and royalties - 13 363
Interest income and other 211 584 1,176
--------- ---------- ----------
Total 8,983 20,896 39,802
--------- ---------- ----------

Cost of sales:
Food and paper 3,367 7,155 13,811
Ceramics products - 541 1,328
Labor costs 3,090 6,826 12,349
--------- ---------- ----------
Total 6,457 14,522 27,488
--------- ---------- ----------

Gross profit 2,526 6,374 12,314
--------- ---------- ----------

Operating expenses:
Loss on store closings (Note 11) 425 587 -
Occupancy expense (Note 12) 1,237 1,859 3,521
Other operating expenses 5,727 10,979 18,500
--------- ---------- ----------
Total 7,389 13,425 22,021
--------- ---------- ----------

Loss before minority interest (4,863) (7,051) (9,707)

Minority interest in loss (Note 6) 81 140 422
--------- ---------- ----------

Net loss (Note 1) $ (4,782) $ (6,911) $ (9,285)
========= ========== ==========

Net loss per common share (Note 1) $ (0.63) $ (0.57) $ (0.83)
========= ========== ==========

Weighted average number of common
and common equivalent shares 7,626,800 12,093,500 14,878,400
========= ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

KOO KOO ROO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)

Additional
Common Stock Preferred Stock Paid-in Treasury Unearned
Shares Amount Shares Amount Capital Deficit Stock Compensation
------- ------- ---------- ------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 7,167 $ 71 - $ - $11,012 $ (6,571) $ - $ -
Stock Issuances:
Exercise of stock options 489 5 - - 765 - - -
Exercise of warrants 1,111 11 - - 2,659 - - -
Payment of expenses 12 - - - 60 - - -
Proposed financing
transaction (Note 11) 60 1 - - - - (1) -
Acquisition of assets 85 1 - - 499 - - -
Cancellation of escrowed
shares (Note 8) (400) (4) - - 4 - - -
Net loss for the year - - - - - (4,782) - -
------ ---- --------- ------ ------- -------- -------- ------------

Balance, December 31, 1994 8,524 85 - - 14,999 (11,353) (1) -

Acquisition (Note 2) 377 4 - - - 14 - -
------ ---- --------- ------ ------- -------- -------- ------------
Balance, December 31, 1994
as restated 8,901 89 - - 14,999 (11,339) (1) -
Stock Issuances:
Private Placements 3,986 40 - - 17,622 - - -
Exercise of stock options 62 1 - - 221 - - -
Exercise of warrants 480 4 - - 1,987 - - -
Acquisition of minority
interest 300 3 - - 1,909 - -
Payment of expenses 160 2 - - 862 - - -
Acquisition of assets 241 2 - - 1,925 - - -
Employment contract (Note
12) 200 2 - - 943 - - (945)
Distributions to
stockholders - - - - - (25) - -
Acquisition of treasury
stock - - - - - - (1) -
Amortization of unearned
compensation - - - - - - - 154
Net loss for the year - - - - - (6,911) - -
------ ---- --------- ------ ------- -------- -------- ------------

Balance, December 31, 1995 14,330 143 - - 40,468 (18,275) (2) (791)
Stock Issuances:
Private Placements 453 5 1,200 12 30,398 - - -
Exercise of stock options 246 3 - - 1,143 - - -
Payment of expenses 17 - - - 92 - - -
Acquisition of assets 26 - - - 175 - - -
Repurchase of stock warrants - - - - (1,645) - - -
Preferred Stock dividends 136 1 - - 2,997 (3,048) - -
Conversion of Preferred Stock
to Common Stock 726 7 (173) (2) (5) - - -
Amortization of unearned
compensation - - - - - - - 158
Net loss for the year - - - - - (9,285) - -
------ ---- --------- ------ ------- -------- -------- ------------

Balance, December 31, 1996 15,934 $159 1,027 $10 $73,623 $(30,608) $(2) $(633)
====== ==== ========= ====== ======= ======== ======== ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

KOO KOO ROO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

"Increase (Decrease) in Cash and Cash Equivalents"

<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1994 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(4,782) $ (6,911) $ (9,285)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 640 2,153 4,434
Deferred franchise revenue 490 (80) -
Other 35 191 91
Minority interest in net loss (82) (140) (422)
Assets written off or abandoned 165 695 -
Changes in operating assets and liabilities:
Inventories (32) (80) (628)
Prepaid expenses and other 402 (348) 190
Accounts payable 203 1,125 1,659
Accrued expenses and other liabilities 362 1,220 (407)
------- -------- --------

Net cash used in operating activities (2,599) (2,175) (4,368)
------- -------- --------

Cash Flows From Investing Activities:
Acquisition of marketable securities - (3,663) (1,557)
Acquisition of property and equipment (3,757) (10,155) (19,459)
Investments in joint ventures - - (528)
Lease acquisition and other costs (280) (127) (775)
Pre-opening costs - (1,287) (1,588)
Lease security deposits (49) (91) (498)
------- -------- --------

Net cash used in investing activities (4,086) (15,323) (24,405)
------- -------- --------

Cash Flows From Financing Activities:
Proceeds from loans payable 115 104 1,600
Payments on loans payable - (115) (97)
Minority capital contributions 2,234 616 -
Proceeds of private placements - 17,662 30,415
Repurchase of stock warrants - - (1,645)
Exercise of stock options and warrants 3,441 2,214 1,146
Other - (25) (1,557)
------- -------- --------

Net cash provided by financing activities 5,790 20,456 29,862
------- -------- --------

Net Increase (Decrease) in Cash and Cash Equivalents (895) 2,958 1,089

Cash and Cash Equivalents, beginning of period 1,439 544 3,502
------- -------- --------

Cash and Cash Equivalents, end of year $ 544 $ 3,502 $ 4,591
======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

KOO KOO ROO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Koo Koo Roo, Inc. (the "Company") operates under the name Koo Koo Roo
California Kitchen casual dining restaurants featuring flame-broiled skinless
chicken, rotisserie chicken, hand-carved turkey, salads, sandwiches and fresh-
baked goods. To complement its principal business, the Company has expanded to
provide, under the name Arrosto Coffee Company, a variety of fresh-roasted
coffees, pastries and other coffee-related products and merchandise. The
Company, through its 90% owned subsidiary Color Me Mine, Inc.("Color Me Mine"),
owns and operates and also franchises "paint-your-own" ceramics studios.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company,
its subsidiaries and limited partnerships in which the Company holds a
controlling interest. All significant intercompany transactions and balances are
eliminated. The Company's principal subsidiaries include Arrosto Coffee Company
and Color Me Mine (Note 2).

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with initial
maturities of three months or less to be cash equivalents.

MARKETABLE SECURITIES

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," the
Company classifies its investments in debt and equity securities into three
categories: held-to-maturity, available-for-sale, or trading. Held-to-maturity
investments are valued at amortized cost. Available-for-sale investments are
valued at fair value with the net unrealized gains or losses shown as a separate
component of stockholders' equity until realized. Trading investments are also
valued at fair value but net unrealized gains or losses are included in
earnings.

CONCENTRATION OF CREDIT RISKS

The Company maintains cash balances at various financial institutions.
Deposits not to exceed $100,000 for each institution are insured by the Federal
Deposit Insurance Corporation. At December 31, 1996, the Company has uninsured
cash and cash equivalents in the amount of $4,463,000.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method. Inventories are comprised of food and supplies
for its restaurants and ceramics products.

PROPERTY AND EQUIPMENT AND DEPRECIATION

Property and equipment is recorded at cost and is depreciated over estimated
useful lives of 5 to 7 years using the straight-line method. Leasehold
improvements are recorded at cost and are amortized over the lesser of the
estimated useful lives of the property or the lease term using the straight line
method.

F-7
<PAGE>

NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STORE LOCATIONS
The following is an analysis of restaurants and ceramics studios in
operation during the periods

<TABLE>
<CAPTION>
Restaurant Locations (a) Ceramics Studio Locations
----------------------------------- ----------------------------
1994 1995 1996 1994 1995 1996
---------- --------- ---------- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Numbers of locations:
At beginning of period: 7(b) 8 16 1 2 4
Opened during period: 2 9(c) 12 1 2(d) 13(e)
Closed during period: (1)(b) (1) (1)(c) - - (1)
---- ---- ---- ---- ---- ----
At end of period: 8 16 27 2 4 16
---- ---- ---- ---- ---- ----
</TABLE>
(a) Excluding Arrosto Coffee Company locations (six and ten locations open
as of December 31, 1995 and 1996, each of which is located in a
Koo Koo Roo restaurant identified in the table).
(b) Includes one franchised restaurant which was closed during 1994.
(c) Includes one franchised restaurant acquired as a Company-owned
restaurant in August 1995, which was subsequently closed in
March 1996.
(d) Includes one franchised studio.
(e) Includes two franchised and 4 joint venture studios.

PRE-OPENING COSTS
Pre-Opening costs consisting primarily of occupancy costs, salaries and
related expenses are incurred by the Company prior to the opening of new
restaurants and ceramics studios. These expenses are capitalized and are
amortized over a 12 month period beginning the month the restaurant or ceramics
studio opens.

LEASE ACQUISITION COSTS
Lease acquisition costs are being amortized over the term of each respective
lease beginning the month the restaurant or ceramics studio opens.

REVENUE RECOGNITION
In connection with its business activity of selling individual and area
franchises, principally with respect to Color Me Mine, the Company has no
significant commitments or obligations resulting from the franchise agreements.
The Company recognizes income from area franchise sales in accordance with
Statement of Financial Accounting Standards No. 45. Franchise agreements with
franchisees provide for initial franchise fees and continuing royalty payments
to the Company based upon a percent of sales. The Company generally charges an
initial franchise fee for each new franchised store that is added and in some
cases, an area development fee, which grants exclusive rights to develop a
specific number of Color Me Mine studios in a designated geographic area.
These fees are recognized ratably when substantially all the services required
of the Company are complete and the stores covered by such agreements commence
operations or upon cancellation or expiration of an area development agreement.

INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 requires a Company to use the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred income taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.

F-8
<PAGE>

NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK -BASED COMPENSATION

In 1996, the Company adopted for footnote disclosure purposes, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123) which requires that companies measure the cost of
stock-based employee compensation at the grant date based on the value of the
award and recognize this cost over the service period. The value of the stock
based award is determined using a pricing model whereby compensation cost is the
excess of the fair value of the stock as determined by the model at grant date
or other measurement date over the amount an employee must pay to acquire the
stock.

NET LOSS PER COMMON SHARE

Net loss per common share has been computed based on the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares representing the common shares that would be issued on conversion of
convertible securities and exercise of outstanding stock options and warrants
reduced by the number of shares which could be purchased from the related
exercise proceeds are not included since their effect would be anti-dilutive.

The net loss attributable to common stockholders has been adjusted for
dividends paid on preferred stock and deemed dividends. The deemed dividend
relates to the discount feature associated with the Company's 5% Convertible
Preferred Stock, computed in accordance with the SEC's recent position on
accounting for preferred stock which is convertible at a discount to the
market. Accordingly, during the fourth quarter of 1996, the Company recorded
the cumulative effect of the deemed dividend for 1996. The amount of deemed
dividends for the prior quarters of 1996 amounted to $1,155,000 for the second
quarter and $650,000 for the third quarter.

<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------
1994 1995 1996
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Net loss $(4,782) $(6,911) $ (9,285)
Deemed dividends on preferred stock - - (1,945)
Dividends paid on preferred stock - - (1,103)
------- ------- --------
Net loss attributable to common stockholders $(4,782) $(6,911) $(12,333)
======= ======== ========

Per common share:
Net loss $ (0.63) $ (0.57) $ (0.62)
Dividends paid or deemed paid on preferred stock - - (0.21)
------- ------- --------
Net loss attributable to common stockholders $ (0.63) $ (0.57) $ (0.83)
======= ======= ========
</TABLE>

NOTE 2 - ACQUISITION OF COLOR ME MINE

In March 1996, the Company acquired 90% of the stock of Color Me Mine, a
small chain of paint-your-own ceramics studios located in Southern California.
The consideration consisted solely of 377,000 shares of restricted, unregistered
shares of the Company's Common Stock. Of this total, shares aggregating
$900,000 in value are subject to registration at the end of one year. Two
founders of the acquired company have five year management contracts with annual
compensation of $50,000 each plus profit sharing and certain change in control
provisions. The acquisition was accounted for using the pooling of interest
method of accounting. Accordingly, the financial statements have been restated
to include the effects of the acquisition. For the period prior to the
acquisition during 1996, Color Me Mine recorded net sales of $271,000 and net
income, after minority interest, of $27,600.

F-9
<PAGE>

NOTE 3 - MARKETABLE SECURITIES

At December 31, 1996, marketable securities consist of $5,220,000 face value
(which approximates market value) of U.S. Treasury Notes maturing at various
dates from January 31, 1997 to January 31, 2000. Interest rates on these notes
range from 6.125% to 7.75%. These securities are classified as "Available-for-
sale" and are included in current assets since management may convert these
investments to cash during the fiscal year ending December 31, 1997.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Leasehold improvements $ 7,997 $17,969
Land and building - 1,560
Machinery and equipment 5,144 9,947
Furniture and fixtures 2,022 4,223
Construction-in-progress 1,248 2,116
------- -------
16,411 35,815
Accumulated depreciation and amortization (2,140) (4,508)
------- -------
Net Property and equipment $14,271 $31,307
======= =======

As of December 31, 1996, the estimated cost to complete construction-in-
progress is approximately $9.2 million.

NOTE 5 - INTANGIBLES AND OTHER ASSETS

Intangibles and other assets consists of the following:

December 31,
------------------------
1995 1996
------- -------
(In thousands)
Lease security deposits $ 275 $ 774
Lease acquisition costs, net of accumulated
amortization of $81,500 and $203,000 1,512 2,070
Pre-opening costs, net of accumulated
amortization of $454,500 and $1,827,000 841 1,056
Other intangibles, net of accumulated
amortization of $394,200 and $809,300 1,624 1,478
------ ------
Net Intangible and other assets $4,252 $5,378
====== ======
</TABLE>

NOTE 6 - MINORITY INTEREST IN SUBSIDIARIES

On September 26, 1995, the Company agreed to purchase the limited partner's
minority interest in three Los Angeles restaurants. As consideration for this
purchase, the Company issued 275,848 shares of its unregistered common stock.
Such shares were subsequently registered for resale under the Securities Act of
1933.

F-10
<PAGE>

NOTE 7 - LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
December 31,
---------------
1995 1996
----- ------
(In thousands)
<S> <C> <C>
Notes payable to the Small Business Administration
with interest at the rate of 11% payable in monthly
installments of $1,713 and maturing in 2002. $ 98 $ 101

Prime + 1% (9.25% at December 31, 1996) notes payable
to a bank with equal monthly installments over a seven
year period and collateralized by the assets and leasehold
interest of two of the Company's restaurants. - 1,544

Other 95 50
----- ------
Total notes payable 193 1,695

Current portion (14) (220)
----- ------

Long-term debt, net of current portion $ 179 $1,475
===== ======
</TABLE>

Long-term debt maturities during the next five years is as follows; $220,000
in 1997, $207,000 in 1998, $225,000 in 1999, $245,000 in 2000 and $267,000 in
2001 and $531,000 thereafter.

NOTE 8 - STOCKHOLDERS' EQUITY

PRIVATE PLACEMENT OFFERINGS

In February 1995, the Company completed a private placement offering and
received a total of $4,243,500. In connection with this offering the Company
issued 942,999 shares of its common stock. The offering also included warrants
to purchase 471,499 shares of common stock at an exercise price of $5.00 per
share and expiring on January 31, 1998. The Company has the right, under
certain conditions, to request the mandatory exercise of these warrants after
January 1, 1996.

In June 1995, the Company completed a private placement offering and
received a total of $13,418,100, net of related costs and expenses of $854,300.
In connection with this offering, the Company issued 3,042,812 shares of common
stock. The offering also included warrants to purchase 1,197,863 shares of
common stock at exercise prices of $5.70 or $5.75 per share, exercisable after
August 15, 1996 and expiring May 31, 1998. The Company has the right, under
certain conditions, to request the mandatory exercise of these warrants after
August 15, 1996. A portion of these warrants were repurchased by the Company
during 1996.

In March 1996, the Company completed a private placement offering of 450,000
shares of the Company's common stock and received a total of $2,981,000 (net of
related costs and expenses of $280,000). The Company is required to issue
additional shares if during the first twelve months after issuance, the Company
sells newly issued common stock at a price below that of the private placement.
Subsequent to December 31, 1996, the Company issued 285,417 additional shares in
accordance with the private placement agreement. The placement agent in the
transaction received a warrant to purchase 40,500 shares of the Company's common
stock at $7.75 per share.

In March 1996, the Company completed a private placement of 5% Series A
Convertible Preferred Stock (the "Series A Convertible Preferred Stock") and
received a total of $27,530,000 (net of related costs and expenses of
$2,589,000). The Series A Convertible Preferred Stock can be converted at the
rate of 10% per month starting in the fourth month, into the Company's common
stock at the market price, less a discount of 13% on the 91st day after issuance
increasing to 29% at the end of 13 months. The placement agents in the
transaction received a warrant to purchase 108,000 shares of the Company's
Series A Convertible Preferred Stock at $25.00 per share. See Note 14 -
Subsequent Events.

F-11
<PAGE>

NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)

STOCK WARRANTS

The Company issued a total of 1,669,362 stock purchase warrants in
connection with two private placements during 1995. In November 1996, the
Company repurchased and canceled 813,589 stock warrants at a price of $2.00 per
warrant ($1,645,000 in the aggregate, including costs). At December 31, 1996,
the remaining stock warrants were exercisable to purchase 855,773 shares of the
Company's common stock. In connection with a private placement in September
1993, the Company issued warrants to purchase 600,005 shares of the Company's
common stock. These warrants were exercised during 1994 and the Company received
net proceeds in the amount of $2.4 million.

STOCK AWARDS PLAN

The Company has established a Stock Awards Plan (the "Awards Plan") that has
been adopted by the Board of Directors and approved by the stockholders on
behalf of selected eligible employees and consultants. The Awards Plan covers an
aggregate of 4,250,000 shares of common stock as amended on January 18, 1995,
and is administered by a committee appointed by the Board of Directors (the
"Stock Awards Committee"). The Awards Plan provides for the issuance of stock
options, stock appreciation rights ("SARs"), restricted stock and other awards
(collectively, "Awards").

Two types of stock options may be granted under the Awards Plan: incentive
stock options ("ISOs") which are intended to qualify under Section 422 of the
Internal Revenue Code ("IRC"), and non-qualified stock options ("NQSOs"). The
option price of each NQSO granted under the Awards Plan may not be less than the
par value of a share of common stock. The option price of each ISO granted under
the Awards Plan must be at least equal to the stock's fair market value on the
date the ISO is granted. The Stock Awards Committee determines the option
exercise period of each option. The period may not exceed ten years from the
date of grant. The aggregate fair market value of the shares covered by ISOs
granted under all stock option plans of the Company that become exercisable by a
grantee for the first time in any calendar year is subject to a $100,000 limit.
The NQSOs granted under the Awards Plan have been granted at an exercise price
which is no less than the fair market value at the date of grant.

The following table summarizes the activity in the Awards Plan:

<TABLE>
<CAPTION>
Number Weighted Average
of shares Exercise Price
--------- ----------------
(In thousands)
<S> <C> <C>
Shares under option - January 1, 1994 1,515 $3.19
Granted 1,854 5.53
Exercised (45) 2.02
Canceled (861) 5.64
-----
Shares under option - December 31, 1994 2,463 4.12
Granted 1,108 6.08
Exercised (4) 1.75
Canceled (473) 4.95
-----
Shares under option - December 31, 1995 3,094 4.70
Granted 1,545 7.98
Exercised (29) 5.45
Canceled (516) 6.54
-----
Shares under option - December 31, 1996 4,094 5.69
=====
</TABLE>

The number of shares of common stock available for granting future options
was 233,800 1,098,300 and 70,365 at December 31, 1994, 1995 and 1996. At
December 31, 1996, options were exercisable to purchase 1,681,000 shares at a
weighted average price per share of $4.00.

F-12
<PAGE>

NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)

NON-PLAN OPTIONS

The Company has from time to time awarded stock options to certain non-
employees. These options have terms varying from one to 10 years, are
exercisable over periods up to 5 years, and have prices that approximated the
fair value on the date granted.

The following table summarizes the activity of non-plan options:

<TABLE>
<CAPTION>
Number Weighted Average
of shares Exercise Price
--------- ----------------
(In thousands)
<S> <C> <C>
Shares under option - January 1, 1994 1,055 $3.21
Granted 1,485 3.41
Exercised (964) 1.09
Canceled (185) 4.78
-----
Shares under option - December 31, 1994 1,391 4.69
Granted 1,700 5.39
Exercised (537) 4.10
-----
Shares under option - December 31, 1995 2,554 5.67
Granted 1,674 7.67
Exercised (217) 4.43
Canceled (31) 6.70
-----
Shares under option - December 31, 1996 3,980 6.53
=====

Shares exercisable - December 31, 1996 2,650 6.00
=====
</TABLE>

DIRECTORS' STOCK OPTION PLAN

The Company has established a Directors' Stock Option Plan (the "Directors'
Plan") that has been adopted by the Board of Directors and approved by the
stockholders on behalf of each non-employee director. The Directors' Plan covers
an aggregate of 60,000 shares of common stock and will expire in 2001. The
Directors' Plan provides that each non-employee director would receive an option
to purchase 10,000 shares (amended to 20,000 shares) at the fair market value,
subject to the overall limit of the number of shares issuable under the
Directors' Plan.

The maximum term of each option is ten years from the date the option is
granted and automatically terminates upon leaving office. The term of each
option commences on the date of grant and terminates no later than ten years
from such date. Twenty-five percent of each optionee's shares will become
exercisable each year commencing on the first anniversary of the date of grant.
As of December 31, 1996, 50,000 options were outstanding of which 20,000 were
exercisable; 10,000 shares at $5.00 per share, 5,000 shares at $6.56 per share
and 5,000 shares at $6.625 per share.

ESCROW SHARES

Upon the consummation of its initial public offering in 1991, the Company's
stockholders prior to the offering placed on a pro-rata basis an aggregate of
800,000 shares of common stock in escrow (the "Escrow Shares"), pursuant to an
agreement by and among such stockholders, the Company, the escrow agent and the
underwriter. The Escrow Agreement permitted the release of the Escrow Shares
only upon attaining certain net income requirements. The Company did not meet
the net income requirements and, consequently, the 800,000 shares were canceled
and returned to authorized but unissued status (400,000 shares in 1993 and
400,000 shares in 1994).

F-13
<PAGE>

NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)

STOCK BASED COMPENSATION

All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based compensation been determined
based on the fair value at the grant dates consistent with the method of SFAS
123, the Company's net income and earnings per share for the years ended
December 31, would have been reduced to the pro forma amounts presented below
(in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
-------- --------
(in thousands)
<S> <C> <C>
Net loss
As reported $(6,911) $( 9,285)
Pro forma $(7,480) $(10,619)

Primary loss per common share
As reported $ (0.57) $ (0.83)
Pro forma $ (0.62) $ (0.92)
</TABLE>

Additional information relating to stock options and warrants outstanding
and exercisable at December 31, 1996 summarized by exercise price are as
follows:

<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------------- ---------------------------
Exercise Weighted Average Weighted
Price ----------------------------- Average
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
--------- --------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$0.62 to $4.50 1,443,065 5.72 $ 3.05 1,056,300 $3.60
4.63 to 5.00 1,494,499 7.50 5.00 752,665 5.00
5.12 to 5.87 1,229,774 7.57 5.74 834,575 5.79
5.91 to 6.56 969,300 4.91 6.23 489,733 6.34
6.62 to 7.62 1,008,945 6.27 7.14 582,600 7.18
7.63 to 7.94 449,190 7.59 7.74 94,700 7.71
8.00 to 8.00 1,492,500 8.28 8.00 1,380,500 8.00
8.12 to 9.25 780,500 6.95 8.52 15,700 8.73
9.50 to 9.50 12,000 8.37 9.50 - -
10.00 to 10.00 100,000 1.59 10.00 - -
--------- ---------
0.62 to 10.00 8,979,773 6.83 6.16 5,206,773 5.61
========= =========
</TABLE>

The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996; expected life option of 5 years, expected
volatility of 36%, risk free interest rate of 6.0% and a 0% dividend yield. The
weighted average fair value at date of grants range from $6.38 to $9.50 per
option.

Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above proforma numbers are
not indicative of the financial impact had the disclosure provisions of SFAS 123
been applicable to all years of previous option grants. The above numbers do not
include the effect of options granted prior to 1995 that vest in 1995 and 1996.

NOTE 9 - RELATED PARTY TRANSACTIONS

During the years ended December 31, 1994, 1995 and 1996, a corporation in
which the Company's principal stockholder has a controlling interest provided
various services to the Company. These services included accounting,
bookkeeping, occupancy and various other office services. The Company paid
$84,100, $77,600 and $82,000 for such services during the years ended December
31, 1994, 1995 and 1996.

During the years ended December 31, 1994, 1995 and 1996, a corporation in
which a former officer and director of the Company has controlling interest,
provided the Company with training manuals, recruiting and marketing services.
The Company made payments of $60,000, $327,600 and $329,200 during the years
ended December 31, 1994, 1995 and 1996.

F-14
<PAGE>

NOTE 9 - RELATED PARTY TRANSACTIONS (CONTINUED)

On March 21, 1995, the Company issued 200,000 shares of its common stock,
subject to certain restrictions, to its principal stockholder in connection with
the amendment and extension of his employment agreement (see Note 12). The
value assigned to these shares is being amortized over the term of the
employment agreement, the unamortized portion is shown as a reduction to
stockholders' equity.

During May 1996, the Company entered into a business development agreement
with an entity associated with its Florida joint venture partner to provide
business development services. In consideration for the agreement, the Company
issued options to purchase 1.0 million shares of its common stock with an
exercise price of $8.00 per share. The options will become exercisable ratably
over a three-year period beginning on the first anniversary of the date of
issuance, so long as the business agreement remains in place. The president of
this entity subsequently became a member of the Company's Board of Directors in
November 1996. See Note 12.

NOTE 10 - INCOME TAXES

Deferred tax assets consist of the following and the Company has provided
valuation allowances to offset the benefit of any net operating loss
carryforwards or deductible temporary differences as a result of adopting SFAS
109:

<TABLE>
<CAPTION>
December 31,
------------------
1995 1996
------- -------
(In thousands)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards $ 7,060 $10,204
Other - -
------- -------
Total Deferred Tax Assets 7,060 10,204
------- -------
Deferred Tax Liabilities:
Capitalized preopening costs (336) (422)
Excess depreciation (48) (73)
------- -------
Total Deferred Tax Liabilities (384) (495)
------- -------
6,676 9,709
Valuation Allowance (6,676) (9,709)
------- -------
Net Deferred Tax Assets $ - $ -
======= =======
</TABLE>

Since inception the Company has reported losses for income tax and financial
reporting purposes. Accordingly, no provisions for Federal or state income taxes
were provided. A 100% valuation allowance was provided at December 31, 1995 and
1996 since management could not determine that it was more likely than not that
the net deferred tax asset would be realized.

At December 31, 1996, the Company has available net operating loss
carryforwards of approximately $28.3 million for income tax purposes, subject to
certain limitations, which expire in varying amounts through 2011. Section 382
of the Internal Revenue Code, as amended, impose limitations on the use of net
operating losses following certain changes in ownership. Such a change occurred
during 1995. The limitation imposed by Section 382 reduced the amount that such
benefits would be available to offset future taxable income each year commencing
in 1995 in the amount of approximately $3.4 million per year.

F-15
<PAGE>

NOTE 11 - OTHER ITEMS

STORE CLOSINGS

On December 15, 1993, the Company sold a location in Long Beach, California
to be operated as a Koo Koo Roo franchise. As part of the sale the Company
received a promissory note for $275,000 secured by all furniture, fixtures and
equipment. As a result of the sale, the Company recognized a loss of $97,000
for the year ended December 31, 1993. Beginning March 1994, the franchisee
defaulted on current obligations that led to the closing of the location. As a
result of the store closing, the Company recognized a loss during the year ended
December 31, 1994 of $380,000 which includes the unpaid amount of the promissory
note, the net amount of fixed assets abandoned, estimated damages due to the
landlord and other associated costs. During June 1995 the estimated damages due
to the landlord were increased and, accordingly, the Company recognized an
additional loss of $150,000 in the year ending December 31, 1995. In December
1996, the Company reached a settlement with the landlord and paid him $75,000.

On December 26, 1995, the Company allowed an option to renew its lease to
expire and closed its location in Miami Beach, Florida which had been opened in
June 1991. The loss on store closing amounted to $367,000 and included the net
book value of fixed assets abandoned, estimated closing costs and additional
payments due in accordance with the store lease.

ABORTED FINANCING

In September 1994, the Company issued 60,000 shares of its unregistered
common stock in connection with a private placement for the par value of $.01
per share. The Company immediately repurchased these shares and pledged them as
security for up to $300,000 of potential financing. The Company ultimately
determined that it was not in its stockholders' best interest to further pursue
the financing. The Company incurred approximately $331,000 of costs relating to
the financing, which were expensed and included in the caption "other operating
expenses" in the accompanying statement of operations for the year ended
December 31, 1994.

AREA FRANCHISE / DEVELOPMENT RIGHTS

On August 18, 1995, the Company purchased the franchise rights for San Diego
and Northern California (including certain counties in and around San
Francisco), the assets of one existing franchise location including the
assignment of the lease for this location and the assumption of certain related
liabilities and certain other assets (including the assignment of the lease for
an additional location and the assumption of liabilities for a third location).
In connection with this purchase, the Company issued 200,000 shares of its
unregistered common stock. The aggregate purchase price of $1,215,000 has been
allocated as follows: $150,000 to property and equipment, $240,000 in
satisfaction of deferred franchise revenue and $825,000 to the acquisition of
franchise rights. The franchise rights are being amortized over a period of ten
years.

In August 1995, the Company acquired certain development and joint venture
rights for possible future locations in the State of Florida and certain
portions of Georgia. As consideration for this agreement, the Company granted a
non-plan stock option to purchase 300,000 shares of common stock at $4.50 per
share, a price lower than the quoted market price at the time the option was
granted. The rights were recorded at the excess of the market value over the
exercise price which amounted to $414,000 and is being amortized over a period
of ten years. In May 1996, the agreement was modified whereby all future
locations will be developed as joint ventures through newly-formed partnerships
of which the Company will own a 50% interest. In consideration for this
amendment, the Company granted the area developer options to purchase 350,000
shares of the Company's common stock at $8.00 per share. See Note 9.

F-16
<PAGE>

NOTE 12 - COMMITMENTS AND CONTINGENCIES

The Company leases restaurants, an office facility, a ceramics production
facility and ceramics studios under long-term operating leases. Future minimum
lease payments under these noncancellable operating leases are as follows:

Year Amount
- - ---------- --------------
(In thousands)
<S> <C>
1997 $ 4,165
1998 4,587
1999 4,524
2000 4,328
2001 4,020
Thereafter 15,509
</TABLE>

In addition to the above amounts, the leases generally contain inflation
escalation clauses and requirements for the payment of property taxes, insurance
and maintenance expenses, and security deposits. Certain leases call for
additional payments based on unit sales volume.

The Company has become subject to various lawsuits, claims and other legal
matters in the course of conducting its business. The Company believes that the
outcome of such lawsuits, claims and other legal matters will not have a
material impact on the Company's consolidated financial position.

The Company entered into a five year employment agreement with its Chairman
effective October 15, 1991. On January 9, 1995 this agreement was amended and
restated, whereby the term was extended for an additional six years and 200,000
shares of common stock were issued to the Chairman. The agreement provides
aggregate minimum annual compensation of $150,000.

On March 16, 1992, the Company entered into a three year employment
agreement with an individual to be President and Chief Operating Officer. On
March 17, 1995, the agreement was amended and restated and the term was extended
for an additional 2 years. The agreement provides for minimum annual
compensation of $150,000.

NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures of cash flow information: Interest expense
amounted to $64,700, $9,400 and $91,900 during the years ended December 31,
1994, 1995 and 1996. Supplemental noncash investing and financing activities:
The Company issued common stock in payment for various expenses and the
acquisition of certain assets. These issuances were recorded at their fair value
of the shares at the dates of issuance as follows:

<TABLE>
<CAPTION>
Shares Amount
------ ------
(In thousands)
<S> <C> <C>
During 1994
- - -----------
Acquisition of assets 85 $ 500
Payment of expenses 11 60
During 1995
- - -----------
Extension of employment agreement 200 945
Acquisition of assets 241 1,927
Acquisition of minority interest 276 1,912
Payment of expenses 160 864
During 1996
- - -----------
Acquisition of assets 26 175
Payment of expenses 17 92
Private placement fee 3 23
</TABLE>

F-17
<PAGE>

NOTE 14 - SUBSEQUENT EVENTS

In January 1997, the Company completed the sale of a Koo Koo Roo restaurant
and a yogurt and ice cream parlor located in the Taj Mahal Hotel and Casino in
Atlantic City, New Jersey. The restaurant and ice cream parlor were closed in
anticipation of expansion plans by the hotel and casino. The Company received
total consideration of $1,400,000 payable $100,000 cash and the balance to be
paid in three equal installments plus interest on September 1, 1997, January 1,
1998 and the final payment on January 1, 1999. The Company will recognize a
gain on the sale in the amount of approximately $216,000 during the first
quarter of 1997.

In February 1997, the Company completed a private placement of 6% Series B
Convertible Preferred Stock (the "Series B Convertible Preferred") and received
a total of $26.9 million (net of related costs and estimated expenses of $2.1
million). The Series B Convertible Preferred Stock can be converted at the rate
of 15% of each holders' shares per month, starting in the fourth month, into the
Company's common stock at the market price, less a discount of 3% on the 91st
day after issuance increasing to 25% at the end of 13 months. The conversion
ratio will be based on the market price of the Company's stock at the time of
the conversion. The placement agent in the transaction received a warrant to
purchase 29,000 shares of Series B Convertible Preferred at $100 per share.

On March 5, 1997, the Company signed a letter of intent to acquire 14
Hamburger Hamlet restaurants for a total consideration consisting of $9.7
million in cash, 150,000 shares of restricted common stock and assumption of
$250,000 in debt as well as assumption of the real property leases. The
acquisition is subject to court approval and due diligence procedures to be
carried out by the Company.

F-18
<PAGE>

INDEX OF EXHIBITS

The following exhibits are filed in the order hereinafter listed:

SEQUENTIAL
EXHIBIT PAGE NO.
- - ------- ----------
<C> <S> <C>

3.1 Restated Certificate of Incorporation of Registrant/1/