Back to GetFilings.com



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 28, 2003

or

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to ___________

Commission File Number: 0-19542


AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)


Georgia 59-2778983
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)

Hancock at Washington, Madison, GA 30650
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)


706-342-4552
---------------------------------------
(Registrant's telephone number, including area code)

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.

X Yes No
--- ---

Indicate by check mark whether or not the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No
--- ---

As of January 5, 2004, there were 33,123,090 shares of common stock of the
Registrant outstanding.




NOTE:

As a result of recent developments and changes in the management of the
Company (See Part II. Other Information, Item 5 of this Form 10-Q), the
Company's independent certified public accountants have not completed their
limited review of the financial information included in this quarterly report in
accordance with Statement on Auditing Standards No. 100 as required by Rule
10-01 of SEC Regulation S-X.

2



AVADO BRANDS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 28, 2003


INDEX


Part I - Financial Information

Item 1 - Consolidated Financial Statements:

Consolidated Statements of Earnings (Loss)......................4

Consolidated Balance Sheets.....................................5

Consolidated Statements of Shareholders' Equity (Deficit)
and Comprehensive Loss..........................................6

Consolidated Statements of Cash Flows...........................7

Notes to Consolidated Financial Statements......................8

Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..................22

Item 3 - Quantitative and Qualitative Disclosures About Market Risk.....29

Item 4 - Controls and Procedures........................................29

Part II - Other Information

Item 3 - Defaults Upon Senior Securities................................30

Item 5 - Other Information..............................................30

Item 6 - Exhibits and Reports on Form 8-K...............................30

Signature....................................................................33


3


Avado Brands, Inc.
Consolidated Statements of Earnings (Loss)
(Unaudited)

(In thousands, except per share data) Quarter Ended Nine Months Ended
- --------------------------------------------------------------------------------------- ----------------------
Sep. 28, Sep. 29, Sep. 28, Sep. 29,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------- ----------------------

Restaurant sales:
Canyon Cafe $ 77 6,069 2,267 21,160
Don Pablo's 58,665 57,542 176,216 180,660
Hops 36,148 37,210 112,585 124,657
- --------------------------------------------------------------------------------------- ----------------------
Total restaurant sales 94,890 100,821 291,068 326,477
- --------------------------------------------------------------------------------------- ----------------------
Operating expenses:
Food and beverage 29,672 28,193 87,775 92,206
Payroll and benefits 33,413 34,452 101,471 108,876
Depreciation and amortization 3,737 3,288 10,838 10,208
Other operating expenses 23,649 26,491 72,628 85,486
General and administrative expenses 5,553 6,676 17,073 19,408
Loss on disposal of assets 33 112 1,711 3
Asset revaluation and other charges 11,889 1,902 14,329 3,726
- --------------------------------------------------------------------------------------- ----------------------
Operating income (loss) (13,056) (293) (14,757) 6,564
- --------------------------------------------------------------------------------------- ----------------------
Other income (expense):
Interest expense, net (6,043) (7,276) (25,487) (23,593)
Forgiveness of credit facility amendment and waiver fee - - 6,500 -
Distribution expense on preferred securities (56) (55) (168) (1,977)
Gain on debt extinguishment - 14,629 5,585 41,412
Other, net 25 907 1,106 696
- --------------------------------------------------------------------------------------- ----------------------
Total other income (expense) (6,074) 8,205 (12,464) 16,538
- --------------------------------------------------------------------------------------- ----------------------
Earnings (loss) from continuing operations before income taxes (19,130) 7,912 (27,221) 23,102
Income tax expense - - - 375
- --------------------------------------------------------------------------------------- ----------------------
Earnings (loss) from continuing operations (19,130) 7,912 (27,221) 22,727
- --------------------------------------------------------------------------------------- ----------------------
Discontinued operations:
Loss from discontinued operations (148) (9,845) (11,692) (15,782)
- --------------------------------------------------------------------------------------- ----------------------
Net earnings (loss) $ (19,278) (1,933) (38,913) 6,945
======================================================================================= ======================

Basic earnings (loss) per common share:
Basic earnings (loss) from continuing operations $ (0.58) 0.24 (0.82) 0.74
Basic loss from discontinued operations - (0.30) (0.36) (0.51)
- --------------------------------------------------------------------------------------- ----------------------
Basic earnings (loss) per common share $ (0.58) (0.06) (1.18) 0.23
======================================================================================= ======================

Diluted earnings (loss) per common share:
Diluted earnings (loss) from continuing operations $ (0.58) 0.24 (0.82) 0.72
Diluted loss from discontinued operations - (0.30) (0.36) (0.50)
- --------------------------------------------------------------------------------------- ----------------------
Diluted earnings (loss) per common share $ (0.58) (0.06) (1.18) 0.22
======================================================================================= ======================

See accompanying notes to consolidated financial statements.

4



Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)

(In thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------
Sep. 28, Dec. 29,
2003 2002
- ---------------------------------------------------------------------------------------------------------------

Assets
Current assets:
Cash and cash equivalents $ 2,400 4,803
Accounts receivable 4,354 5,087
Inventories 4,720 5,283
Prepaid expenses and other 4,620 2,129
Assets held for sale 150 10,920
- ---------------------------------------------------------------------------------------------------------------
Total current assets 16,244 28,222

Premises and equipment, net 172,030 236,950
Deferred income tax benefit 11,620 11,620
Related party note receivable, net of allowance of $13.7 million
in 2003 and $11.1 million in 2002 - 2,650
Other assets 28,138 26,020
- ---------------------------------------------------------------------------------------------------------------
$ 228,032 305,462
===============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdrafts $ 6,000 4,167
Accounts payable 7,008 11,509
Accrued liabilities 38,784 54,292
Current installments of long-term debt and capital lease obligations 116,237 30,838
Income taxes 41,098 35,038
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 209,127 135,844

Long-term debt 47,561 164,031
Capital lease obligations 4,613 -
Other long-term liabilities 2,196 2,143
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 263,497 302,018
- ---------------------------------------------------------------------------------------------------------------

Company-obligated mandatorily redeemable convertible preferred securities
of Avado Financing I, a subsidiary holding solely Avado
Brands, Inc. 7% convertible subordinated debentures
due March 1, 2027 3,179 3,179

Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized - 75,000,000 shares;
issued - 40,478,760 shares in 2003 and 2002;
outstanding - 33,123,090 shares in 2003 and 33,101,929 in 2002 405 405
Additional paid-in capital 154,363 154,637
Accumulated deficit (97,031) (58,118)
Treasury stock at cost; 7,355,670 shares in 2003 and 7,376,831 in 2002 (96,381) (96,659)
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (38,644) 265
- ---------------------------------------------------------------------------------------------------------------
$ 228,032 305,462
===============================================================================================================

See accompanying notes to consolidated financial statements.

5



Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Loss
(Unaudited)

Additional Total
Common Stock Paid-in Accumulated Treasury Shareholders'
(In thousands) Shares Amount Capital Deficit Stock Equity (Deficit)
- ----------------------------------------------------------------------------------------------------------------

Balance at December 29, 2002 40,479 $405 $154,637 ($58,118) ($96,659) $265
- ----------------------------------------------------------------------------------------------------------------
Net and comprehensive loss,
as previously reported - - - (17,801) - (17,801)
Adjustment to correct error in
reporting disposal of properties - - - (1,561) - (1,561)
- ----------------------------------------------------------------------------------------------------------------
Net and comprehensive loss,
as restated (See Note 2) - - - (19,362) - (19,362)
- ----------------------------------------------------------------------------------------------------------------
Balance at March 30, 2003,
as restated (See Note 2) 40,479 405 154,637 (77,480) (96,659) (19,097)
- ----------------------------------------------------------------------------------------------------------------
Net and comprehensive loss - - - (273) - (273)
Exercise of stock options - - (274) - 278 4
- ----------------------------------------------------------------------------------------------------------------
Balance at June 29, 2003,
as restated (See Note 2) 40,479 405 154,363 (77,753) (96,381) (19,366)
- ----------------------------------------------------------------------------------------------------------------
Net and comprehensive loss - - - (19,278) - (19,278)
- ----------------------------------------------------------------------------------------------------------------
Balance at September 28, 2003 40,479 $405 $154,363 ($97,031) ($96,381) ($38,644)
================================================================================================================

See accompanying notes to consolidated financial statements.

6



Avado Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

(In thousands) Nine Months Ended
- --------------------------------------------------------------------------------------------------------
Sep. 28, Sep. 29,
2003 2002
- --------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
Net earnings (loss) $ (38,913) 6,945
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation of premises and equipment 11,392 10,925
Amortization, write off of deferred costs and prepaid interest 11,161 3,713
Forgiveness of credit facility amendment and waiver fee (6,500) -
Asset revaluation and other charges 14,329 3,726
Gain on debt extinguishment (5,585) (41,412)
Loss on disposal of assets 1,711 3
Loss from discontinued operations 11,692 15,782
Mark-to-market adjustment on interest rate swap - 861
(Increase) decrease in assets:
Accounts receivable 819 558
Inventories 275 172
Prepaid expenses and other 100 1,419
Increase (decrease) in liabilities:
Accounts payable (4,286) (10,514)
Accrued liabilities (16,657) (21,640)
Income taxes 6,060 113
Other long-term liabilities (131) (273)
- --------------------------------------------------------------------------------------------------------
Net cash used in operating activities (14,533) (29,622)
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (5,643) (4,332)
Proceeds from disposal of assets and notes receivable, net 2,628 6,519
Proceeds from sale-leaseback 22,366 -
Other, net (1,944) (434)
- --------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 17,407 1,753
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (repayment of) revolving credit agreements (1,056) 19,646
Proceeds from (repayment of) term credit agreement (12,736) 16,165
Increase in bank overdrafts 1,833 1,978
Payment of financing costs (4,568) (8,502)
Principal payments on long-term debt (84) (18)
Purchase of long term debt (5,195) (8,489)
Settlement of interest rate swap agreement - (1,704)
Reduction in letter of credit collateral - 9,978
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (21,806) 29,054
- --------------------------------------------------------------------------------------------------------
Cash provided by (used in) discontinued operations 16,529 (1,648)
- --------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,403) (463)
Cash and cash equivalents at the beginning of the period 4,803 4,117
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 2,400 3,654
========================================================================================================

See accompanying notes to consolidated financial statements.

Page 7



AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2003
(Unaudited)


NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 29, 2002,
except as disclosed herein. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the quarter and nine
months ended September 28, 2003 are not necessarily indicative of the results
that may be expected for the year ending December 28, 2003.

Certain accounts have been reclassified in the 2002 financial statements to
conform with the 2003 classifications. Previously, bank accounts with negative
cash balances were netted against those with positive balances. Negative cash
balances of $4.2 million at December 29, 2002 have been reclassified to "Bank
overdrafts" with a resulting increase to "Cash and cash equivalents" on the
accompanying Consolidated Balance Sheet.

As a result of the adoption of Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company has classified the revenues, expenses and related assets
and liabilities of 11 Don Pablo's restaurants and one Hops restaurant, which
were closed during the first half of 2003, plus 11 additional Don Pablo's
restaurants and eight additional Hops restaurants which were closed in 2002, as
discontinued operations for all periods presented in the accompanying
consolidated financial statements. The revenues, expenses and related assets and
liabilities of Canyon Cafe, which has been divested, have not been classified as
discontinued operations in the accompanying consolidated financial statements.
As the decision to divest the operations of Canyon Cafe was made prior to the
implementation of SFAS No. 144 and it did not meet the criteria for
classification as discontinued operations under the provisions of APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", it is required to be classified within
continuing operations under the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".


NOTE 2 - RESTATEMENT OF FIRST QUARTER RESULTS

In November 2003, the Company determined that it had incorrectly calculated
the loss on the first quarter 2003 disposal of two Don Pablo's properties
included in discontinued operations and did not remove from premises and
equipment $1.6 million of assets that were disposed of in these transactions. As
a result, the Company will file an amended Form 10-Q for the first quarter,
restating its financial statements for this error. An amended Form 10-Q will
also be filed for the second quarter to restate the Consolidated Balance Sheet
as of June 29, 2003 and the Consolidated Statement of Loss for the six month
period ended June 29, 2003 for the same correction as required for the first
quarter. This correction has been recorded in the Consolidated Statement of Loss
for the nine months ended September 28, 2003 and the Consolidated Balance Sheet
as of September 28, 2003 that are included in this third quarter Form 10-Q.
Additionally, the accompanying Consolidated Statements of Shareholders' Equity
(Deficit) and Comprehensive Loss have been restated to reflect the correction of
this error.

The following table presents the originally reported amounts that are
affected by the restatement compared to the amounts that will be included in the
amended Form 10-Q's for the first and second quarters of 2003.

8


As of or for the quarter ended March 30, 2003 and six months ended June 29,
2003:



Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------------------------------------------
Mar. 30, 2003 Jun. 29, 2003
Mar. 30, 2003 As Originally Jun. 29, 2003 As Originally
(In thousands, except for per share amounts) As Restated Reported As Restated Reported
- -------------------------------------------------------------------------------------------------------------------

Loss from discontinued operations $ (9,163) (7,602) (11,544) (9,983)
Net loss $ (19,362) (17,801) (19,635) (18,074)

Per share:
Loss from discontinued operations (basic and diluted) $ (0.28) (0.23) (0.35) (0.30)
Net loss (basic and diluted) $ (0.58) (0.54) (0.59) (0.55)

Premises and equipment, net $ 186,412 187,973 184,547 186,108
Accumulated deficit $ (77,480) (75,919) (77,753) (76,192)
- -------------------------------------------------------------------------------------------------------------------


The Company expects to file amended Form 10-Q's for the first and second
quarters by January 30, 2004.


NOTE 3 - STOCK BASED COMPENSATION

The Company accounts for its stock based compensation by using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations ("APB
25"), and has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Under APB 25, no stock-based
compensation cost is reflected in earnings (loss) for grants of stock options to
employees as the Company grants stock options with an exercise price equal to
the market value of the stock on the date of grant.

The following table illustrates the effect on net earnings (loss) and
earnings (loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:



Quarter Ended Nine Months Ended
- --------------------------------------------------------- ---------------------------- ---------------------------
Sep. 28, Sep. 29, Sep. 28, Sep. 29,
2003 2002 2003 2002
- ---------------------------------------------------------- ------------- ------------- ------------- -------------

Net earnings (loss), as reported $ (19,278) (1,933) (38,913) 6,945
Total stock-based employee compensation
income (expense) determined under fair value based
method for all awards, net of related tax effects (131) 238 (497) (93)
- ---------------------------------------------------------- ------------- ------------- ------------- -------------
Pro forma net earnings (loss) $ (19,409) (1,695) (39,410) 6,852
- ---------------------------------------------------------- ------------- ------------- ------------- -------------

Earnings (loss) per share:
Basic - as reported $ (0.58) (0.06) (1.18) 0.23
- ---------------------------------------------------------- ------------- ------------- ------------- -------------
Basic - pro forma $ (0.59) (0.05) (1.19) 0.22
- ---------------------------------------------------------- ------------- ------------- ------------- -------------
Diluted - as reported $ (0.58) (0.06) (1.18) 0.22
- ---------------------------------------------------------- ------------- ------------- ------------- -------------
Diluted - pro forma $ (0.59) (0.05) (1.19) 0.22
- ---------------------------------------------------------- ------------- ------------- ------------- -------------

9


NOTE 4 - LONG-TERM DEBT

Long-term debt and capital lease obligations at September 28, 2003 and
December 29, 2002 consisted of the following (amounts in thousands):



Sep. 28, 2003 Dec. 29, 2002
- ------------------------------------------------------ ----------------- -----------------

Senior secured credit facility
(15.5% at September 28, 2003) $ 10,515 30,809
9.75% Senior Notes, unsecured 105,318 116,500
11.75% Senior Subordinated Notes, unsecured
(net of discount of $0.4 million) 47,231 47,179
Capital lease obligations 4,627 -
Other 720 381
- ------------------------------------------------------ ------------------ -----------------
Total long-term debt and capital lease obligations 168,411 194,869
Less current installments 116,237 30,838
- ------------------------------------------------------ ------------------ -----------------
Total long-term debt and capital lease obligations
excluding current installments $ 52,174 164,031
- ------------------------------------------------------ ------------------ -----------------


On March 24, 2003, the Company obtained a new $39.0 million revolving
credit facility (the "Credit Facility") and entered into a $20.0 million
sale-leaseback transaction covering 15 Don Pablo's locations (the "Don Pablo's
sale-leaseback"). Proceeds from this financing were used to pay amounts
outstanding under the Company's previously existing credit agreement totaling
$19.5 million and fees associated with the new financing agreements totaling
$4.6 million.

The Credit Facility limited total borrowing capacity at any given time to
an amount equal to the lesser of $39.0 million or 1.95 times the Company's
trailing 12 months earnings before interest, income taxes and depreciation and
amortization as determined for the most recently completed four quarters as
defined in the agreement. A portion of the facility, totaling $17.0 million, was
restricted for the purchase of the Company's 9.75% Senior Notes due June 2006
("Senior Notes") and 11.75% Senior Subordinated Notes due June 2009
("Subordinated Notes"). The agreement limited the amount the Company could pay
to acquire Senior Notes and Subordinated Notes to $0.50 and $0.30 per one dollar
outstanding, respectively. In accordance with the agreement, the unused
availability under the restricted portion of the facility terminated on May 31,
2003. The Credit Facility matures on March 24, 2004 but may be extended for one
year at the lender's option and subject to an extension fee equal to five
percent of the total commitment amount. In certain circumstances, borrowings
under the Credit Facility are required to be repaid to the lender and any such
repayments are not available to be re-borrowed by the Company. Events generating
a required repayment include, among other things, proceeds from asset
dispositions (other than Assets Held for Sale as defined in the agreement),
casualty events and tax refunds, each as defined in the Credit Facility. In
addition, the lender has the right to impose certain reserves against the
Company's total borrowing availability under the facility, which may limit the
Company's liquidity. The Credit Facility is secured by substantially all of the
Company's assets.

During the second quarter of 2003, the Company executed three separate
amendments to the Credit Facility which, among other things, made certain
technical changes to the agreement and allowed the Company to borrow $2.4
million under the $17.0 million restricted portion of the facility to buy out
the Company's master equipment lease. The remaining unused portion of the
facility was terminated, reducing the maximum commitment under the Credit
Facility from $39.0 million to $30.0 million. Additionally, in accordance with
the terms of the Credit Facility, tax refunds received in September 2003 further
reduced the maximum commitment under the Credit Facility to $26.0 million.

At September 28, 2003, $2.5 million in cash borrowings were outstanding
under the unrestricted portion of the Credit Facility and an additional $13.1
million of the facility was utilized to secure letters of credit which primarily
secure the Company's insurance programs. Also outstanding at September 28, 2003
was $8.0 million which was borrowed under the restricted portion of the facility
to acquire $11.2 million in face value of the Company's Senior Notes and buy out
the Company's master equipment lease. The total Credit Facility availability was
also reduced by lender reserves of $2.3 million. At September 28, 2003, $0.1
million of the facility remained unused and available.

10


The terms of the Credit Facility, the Company's Senior Notes and
Subordinated Notes, the Don Pablo's sale-leaseback, and the 2000 Hops
sale-leaseback (See Note 12) collectively include various provisions which,
among other things, require the Company to (i) achieve certain EBITDA targets,
(ii) maintain defined net worth and coverage ratios, (iii) maintain defined
leverage ratios, (iv) limit the incurrence of certain liens or encumbrances in
excess of defined amounts and (v) limit certain payments. During the second
quarter of 2003, the Company terminated its previously existing master equipment
lease thereby eliminating any financial covenants or restrictions related to
that lease. At September 28, 2003, the Company was not in compliance with
certain financial requirements contained in the Credit Facility. The Company's
failure to comply with these covenants is a result of a decline in sales and an
increase in operating expenses. Under the terms of the Credit Facility, the
failure to meet the prescribed financial targets represented an event of default
whereby the lender had the right to declare all obligations under the agreement
immediately due and payable. On January 2, 2004, the Company entered into a
forbearance agreement with its Credit Facility lender whereby the lender has
agreed not to exercise any remedies under the Credit Facility during the
forbearance period, which will expire on January 31, 2004. The forbearance
agreement also provides the Company with $3.0 million of additional liquidity
for general corporate purposes. While the lender has not notified the Company of
its intent to do so, acceleration of the obligations after the expiration of the
forbearance period would have a material adverse effect on the Company.

If the obligations under the Credit Facility were to be accelerated after
the expiration of the forbearance period, cross-default provisions contained in
the indentures for the Senior Notes and Subordinated Notes would be triggered,
creating an event of default under those agreements as well. At September 28,
2003, the outstanding balances of the Senior Notes and Subordinated Notes were
$105.3 million and $47.6 million, respectively. An event of default under the
Credit Facility does not result in a cross-default under the Company's
sale-leaseback agreements. If some or all of the obligations under the Company's
credit agreements were to become immediately due and payable, the Company would
not have sufficient liquidity to satisfy these obligations. As a result, the
Company will be seeking to restructure its existing capital structure, which is
likely to involve a filing under Chapter 11 of the Bankruptcy Code.
Additionally, the Company was not in compliance with a net worth requirement
contained in its 2000 Hops sale-leaseback agreement at December 29, 2002. The
lessor, however, has waived this requirement until March 31, 2004 at which time
the minimum net worth requirement will be $150.0 million. It is unlikely that
the Company will be in compliance with the $150.0 million net worth requirement
on March 31, 2004. Although the outcome is uncertain, the Company intends to
enter into discussions to obtain a waiver of this default or an amendment to the
sale-leaseback agreement.

Interest payments on the Company's Senior Notes and Subordinated Notes are
due semi-annually in each June and December. The Company's semi-annual interest
payments total approximately $7.9 million. Under the terms of the related note
indentures, the Company has an additional 30-day grace period from the scheduled
interest payment dates before an event of default occurs, due to late payment of
interest. The Company did not have sufficient liquidity to make the December 1,
2003 interest payments on its Senior Notes within the 30-day grace period and
has incurred an event of default, due to non payment of interest, under which
the Senior Notes could become currently due and payable. Additionally, the
Company will not make the December 15, 2003 interest payment on its Senior
Subordinated Notes within the 30-day grace period. The Company's failure to make
the interest payment on the Senior Subordinated Notes will also represent an
event of default under which the Senior Subordinated Notes could become
currently due and payable. Thus, it is expected that the Senior Subordinated
Notes will be classified as a current liability in future financial reports. The
Company is currently in discussions with its Senior Note Holders to obtain
forbearance of amounts due. However, there can be no assurance that such efforts
will be successful. As a result, the Company will be seeking to restructure its
existing capital structure, which is likely to involve a filing under Chapter 11
of the Bankruptcy Code.

Also, on July 2, 2003, the Trustee for the Company's Senior Notes received
a Notice of Default and Acceleration Notice (the "Notice"), filed by holders
representing a majority of the Company's outstanding Senior Notes (see Note 13).
Although the Company intends to vigorously contest the claims that the events of
default as described in the Notice have occurred, there can be no assurances
that the Company's defenses will be successful. Additionally, the August 2003
sale-leaseback of a Hops location (see Note 12) may not have complied with
certain financial tests contained in the indenture governing the Senior Notes.
Because certain financial tests specified in the indenture are ambiguous, it is
not certain that a covenant violation has in fact occurred. As a result, the
Company has classified the outstanding debt related to the Senior Notes as a
current liability in the accompanying Consolidated Balance Sheet as of September
28, 2003.

11


NOTE 5 - LIQUIDITY

The Company has suffered from recurring losses from operations, has an
accumulated deficit, has incurred an event of default under its Senior Notes due
to the failure to make required interest payments, has entered into a
forbearance agreement with its senior secured Credit Facility lenders which
expires on January 31, 2004 and anticipates not making the scheduled interest
payment on its Senior Subordinated notes within the 30-day grace period, all of
which raise substantial doubt about the Company's ability to continue as a going
concern. While the Company's forbearance agreement (see Note 4) provides
additional liquidity in the near term as well as temporary relief from the
potential acceleration of obligations due under the Credit Facility, sufficient
liquidity to make required debt service and lease payments is dependent
primarily on the Company's negotiations with its Credit Facility lenders, the
realization of cash flow from operations and other creditor negotiations to
generate liquidity. There can be no assurance that such efforts will be
successful.

Principal financing sources in the first nine months of 2003 consisted of
(i) proceeds of $22.4 million from sale-leaseback transactions, (ii) cash
provided by discontinued operations, primarily related to the sale of assets, of
$16.5 million, (iii) income tax refunds of $6.1 million and (iv) proceeds from
the sale of assets of $2.6 million. The primary uses of funds consisted of (i)
net cash used in operations of $14.5 million which included interest payments of
$20.0 million primarily related to the Senior and Subordinated Notes and Credit
Facility along with lease payments of $15.4 million, (ii) net repayments of
credit agreements of $13.8 million, (iii) repurchase of long-term debt of $5.2
million, (iv) capital expenditures of $5.6 million, $4.4 million of which
related to the second quarter buyout of the Company's master equipment lease,
and (v) payment of financing costs related to the Credit Facility and Don
Pablo's sale-leaseback totaling $4.6 million.

The Company incurs various capital expenditures related to existing
restaurants and restaurant equipment in addition to capital requirements for
developing new restaurants. The Company does not have any contractual
obligations to open any new restaurants during 2003. Capital expenditures for
existing restaurants are expected to be approximately $1.0 million during the
fourth quarter of 2003.

The Company is also exposed to certain contingent payments. In connection
with the Applebee's, Canyon Cafe and McCormick & Schmick's divestiture
transactions, the Company remains contingently liable for lease obligations
relating to 63 Applebee's restaurants, 10 Canyon Cafe restaurants and four
McCormick & Schmick's restaurants. Assuming that each respective purchaser
became insolvent, an event management believes to be remote, the Company could
be liable for lease payments extending through 2017 with minimum lease payments
totaling $45.2 million. The Company also remains contingently liable for lease
obligations relating to seven Harrigan's restaurants which were divested in
1999. Minimum lease payment obligations for those seven restaurants total $5.1
million and extend through 2012. On March 14, 2003, Harrigan's filed a
bankruptcy petition under Chapter 11 of the United States Bankruptcy Code and
subsequently on October 27, 2003, obtained an order converting that Chapter 11
filing to a Chapter 7 bankruptcy filing. Consequently, Harrigan's has ceased
operations and closed its restaurants. While the Company has not yet been
notified of any intent by the respective landlords to hold the Company liable
for any remaining lease obligations, there can be no assurance that the Company
will not ultimately be held liable for some or all of the Harrigan's leases.

Under the Company's insurance programs, coverage is obtained for
significant exposures as well as those risks required to be insured by law or
contract. It is the Company's preference to retain a significant portion of
certain expected losses related primarily to workers' compensation, physical
loss to property, and comprehensive general liability. The Company's deductibles
for workers' compensation and general liability are $500,000 per claim. Losses
in excess of these risk retention levels are covered by insurance which
management considers to be adequate. Provision for losses expected under these
programs are recorded based upon estimates of the liability for claims incurred.
Such estimates are based on management's evaluation of the nature and severity
of claims and expected losses based on the Company's historical experience,
information provided by the Company's third party administrators and certain
actuarial assumptions used by the insurance industry. In the first nine months
of 2003, claims paid under the Company's self-insurance programs totaled $3.2
million. In addition, at September 28, 2003, the Company was contingently liable
for letters of credit aggregating approximately $13.1 million, relating
primarily to its insurance programs. Management believes that the ultimate
disposition of these contingent liabilities will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.

12


The Company's 1998 Federal income tax returns are currently being audited
by the Internal Revenue Service ("IRS"). The Company believes its recorded
liability for income taxes of $41.1 million as of September 28, 2003 is adequate
to cover its exposure that may result from the ultimate resolution of the audit.
During the first quarter of 2003, the Company submitted an Offer in Compromise
to the IRS whereby the Company offered to settle its potential obligations at a
discounted amount. The Offer in Compromise process is a mechanism available to
taxpayers to potentially reduce amounts otherwise payable to the IRS based on
analysis of a taxpayer's ability to pay, the value of its assets versus its
liabilities and other economic factors. Although the ultimate outcome of the
audit or the Offer in Compromise cannot be determined at this time, the Company
does not have sufficient liquidity to pay any significant portion of its
recorded liability if resolution of the audit results in such amount being
currently due and payable. Management does not currently expect that this will
be the result, or that any resolution with respect to audit issues will be
reached in the near future. During the third quarter of 2003, the Company
received a $5.5 million federal income tax refund related to its 2002 Federal
income tax return. Due to the uncertainty surrounding the ultimate resolution of
the ongoing IRS audit of the Company's 1998 tax return, the Company increased
its recorded liability for income taxes by $5.5 million during the third
quarter.

Management has taken steps to improve cash flow from operations, including
changing the Company's marketing strategy to be less reliant on expensive
broadcast media, reducing overhead through consolidation of functions and
personnel reductions primarily from the first quarter relocation of its Hops
corporate headquarters and adjusting supervisory management level personnel in
its restaurant operations. However, there can be no assurance these efforts will
be successful in improving cash flow from operations sufficiently to enable the
Company to continue to meet its obligations, including required payments under
its debt and lease agreements and capital expenditures necessary to maintain its
existing restaurants. The Company's forbearance agreement (see Note 4) does
provide additional liquidity as well as temporary relief from the potential
acceleration of obligations due under the Credit Facility, however, there is no
assurance the Company will be able to obtain additional forbearances of defaults
incurred under its Credit Facility or that negotiations to obtain forbearance
from its Senior Note Holders will be successful. As a result, the Company will
be seeking to restructure its existing capital structure, which is likely to
involve a filing under Chapter 11 of the Bankruptcy Code.


NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION

For the nine months ended September 28, 2003 and September 29, 2002, the
following supplements the consolidated statements of cash flows (amounts in
thousands): 2003 2002

Sep. 28, Sep. 29,
2003 2002
-------------- ------------
Interest paid $ 20,043 22,621
Distributions paid on preferred securities $ - 5,372
Income taxes paid (refunded) $ (6,060) 262


NOTE 7 - ASSET REVALUATION AND OTHER CHARGES

For the quarter ended September 28, 2003, asset revaluation and other
charges of $11.9 million include (i) predominately non-cash asset impairment
charges of $9.0 million recorded to reduce the carrying value of three Don
Pablo's and eight Hops restaurants to estimated fair value, (ii) a $2.6 million
valuation allowance to reduce the carrying value of a note receivable (see Note
14), and (iii) $0.3 million in other charges primarily related to the final
disposition of the Company's remaining Canyon Cafe locations.

For the nine months ended September 28, 2003, asset revaluation and other
charges of $14.3 million include (i) predominately non-cash asset impairment
charges of $9.9 million recorded to reduce the carrying value of the assets of
the Company's remaining Canyon Cafe locations, prior to divestiture, along with
four Don Pablo's restaurants and eight Hops restaurants to estimated fair value,
(ii) a $2.6 million valuation allowance to reduce the carrying value of a note
receivable (see Note 14), and (iii) $1.8 million in other charges primarily
related to costs associated with the relocation of the Hops corporate office to
Madison, Georgia.

Asset revaluation and other charges of $3.7 million for the nine months
ended September 29, 2002 reflect predominately non-cash asset impairment charges
of $2.1 million to reduce the carrying value of the assets of the Company's
Canyon Cafe restaurants to estimated fair value and $1.6 million in other
charges primarily related to the write-off of various capitalized costs
associated with sites that are no longer expected to be developed and related
development costs which are not anticipated to be fully recoverable.


NOTE 8 - DISPOSAL OF ASSETS

Loss on disposal of assets of $1.7 million for the nine months ended
September 28, 2003, primarily reflects losses related to the sale of 15 Don
Pablo's restaurants included in the Company's Don Pablo's sale-leaseback
transaction which occurred during the first quarter (see Note 12).

13


Loss on disposal of assets for the nine months ended September 29, 2002
reflects fees incurred in connection with the first quarter termination of the
Company's interest rate swap agreement and losses incurred on the sale of two
closed Canyon Cafe locations. These losses were offset nearly in their entirety
by an adjustment to amounts receivable from the divestiture of McCormick &
Schmick's and a gain on the sale of a closed Hops location.


NOTE 9 - GAIN ON DEBT EXTINGUISHMENT

Gain on debt extinguishment for the nine months ended September 28, 2003
reflects the retirement of $11.2 million in face value of the Company's 9.75%
Senior Notes for $5.2 million plus $0.4 million in accrued interest. After a
$0.4 million write-off primarily of deferred loan costs, the Company recorded a
gain on the extinguishment of $5.6 million.

Gain on debt extinguishment for the nine months ended September 29, 2002
reflects the retirement of $52.4 million in face value of the Company's 11.75%
Senior Subordinated Notes for $8.5 million plus $2.2 million in accrued
interest. After a $2.5 million write-off primarily of deferred loan costs and
unamortized initial issue discount, the Company recorded a gain on the
extinguishment of $41.4 million.


NOTE 10 - INCOME TAXES

No income tax benefit was recorded related to the loss before income taxes
for the three or nine months ended September 28, 2003. The income tax expense
recorded for the nine months ended September 29, 2002 represents the effective
rate of expense on earnings before income taxes for the first nine months of
2002. The tax rate was based on the Company's expected rate for the full fiscal
2002 year.


NOTE 11 - DISCONTINUED OPERATIONS

As discussed in Note 1 - Basis of Presentation, discontinued operations
includes the revenues and expenses of 11 Don Pablo's and one Hops restaurant
which were closed in the first half of 2003, plus 11 additional Don Pablo's
restaurants and eight additional Hops restaurants which were closed during 2002.
The decision to dispose of these 31 locations reflects the Company's ongoing
process of evaluating the performance and cash flows of its various restaurant
locations and using the proceeds from the sale of closed restaurants to reduce
outstanding debt. Subsequent to the end of the third quarter, one additional Don
Pablo's and two additional Hops restaurants have been closed and will be
presented as discontinued operations for the year ending December 28, 2003.

Loss from discontinued operations for the quarter and nine months ended
September 28, 2003, was $0.1 million and $11.7 million, respectively. These
amounts primarily reflect asset revaluation and other charges along with losses
on the disposal of closed restaurants. Total restaurant sales from discontinued
operations were $0.0 million and $3.5 million, respectively, for the quarter and
nine months ended September 28, 2003. The loss from discontinued operations for
the nine months ended September 28, 2003 has been increased to reflect the
correction of a $1.6 million error in the gain (loss) on disposal of restaurants
reported during the first quarter, related to the sale of two Don Pablo's
properties (see Note 2).

Loss from discontinued operations for the quarter and nine months ended
September 29, 2002 was $9.8 million and $15.8 million, respectively. These
amounts primarily reflect asset revaluation and other charges related to the
closure of restaurants. Total restaurant sales from discontinued operations were
$8.6 million and $30.6 million, respectively, for the quarter and nine months
ended September 29, 2002.


NOTE 12 - SALE-LEASEBACK TRANSACTIONS

On March 24, 2003, the Company completed a sale-leaseback transaction
covering 15 Don Pablo's locations (the "Don Pablo's sale-leaseback"). The
transaction included the sale of the land and buildings for total consideration
of $20.0 million. The term of the lease is 20 years with two 10-year renewal
options. Total annual payments due under the lease are $2.4 million at inception
and will escalate by 10% every five years. The portion of the lease attributable
to the buildings has been accounted for as a capital lease while the portion
attributable to the land has been accounted for as an operating lease. As a
result, at March 30, 2003 the Company recorded a capital lease obligation of
$3.9 million. Depreciation on the related assets will be recorded on a
straight-line basis over the 20 year base-term of the lease. In addition, the
Company recorded $10.3 million of prepaid interest, included in other assets in
the accompanying consolidated balance sheet, which will be amortized to interest
expense over the 20 year term of the lease. This prepaid interest represents the
excess of estimated fair value of the 15 locations over the proceeds received
from the transaction. A loss of $1.6 million, representing the excess of
recorded net book value over estimated fair value for the 15 locations was
recorded as a loss on disposal of assets during the first quarter.

14


On May 30, 2003 and August 29, 2003, the Company completed two additional
sale-leaseback transactions involving one Don Pablo's location and one Hops
location, respectively. Net proceeds from the two transactions totaled $2.4
million and were used to reduce amounts outstanding under the Company's Credit
Facility.

In October 2000, the Company completed a sale-leaseback transaction
involving 20 Hops restaurant properties. The transaction included the sale of
the land and buildings for total consideration of $28.4 million. The lease
covers an initial term of 20 years with options to extend the lease for four
periods of five years each. Rent expense related to the sale-leaseback escalates
by 1.2% each year. The transaction, which has been accounted for as an operating
lease, resulted in prepaid rent, which is being amortized over the lease term as
additional rent expense.


NOTE 13 - CONTINGENCIES

Under the Company's insurance programs, coverage is obtained for
significant exposures as well as those risks required to be insured by law or
contract. It is the Company's preference to retain a significant portion of
certain expected losses related primarily to workers' compensation, physical
loss to property, and comprehensive general liability. The Company's deductibles
for workers' compensation and general liability are $500,000 per claim. Losses
in excess of these risk retention levels are covered by insurance which
management considers as adequate. Provisions for losses expected under these
programs are recorded based on estimates of the liability for claims incurred.
Such estimates are based on management's evaluation of the nature and severity
of claims and expected losses based on the Company's historical experience,
information provided by the Company's third party administrators and certain
actuarial assumptions used by the insurance industry. At September 28, 2003, the
Company was contingently liable for letters of credit aggregating approximately
$13.1 million related primarily to its insurance programs.

The Company is also exposed to certain contingent payments. In connection
with the Applebee's, Canyon Cafe and McCormick & Schmick's divestiture
transactions, the Company remains contingently liable for lease obligations
relating to 63 Applebee's restaurants, 10 Canyon Cafe restaurants and four
McCormick & Schmick's restaurants. Assuming that each respective purchaser
became insolvent, an event management believes to be remote, the Company could
be liable for lease payments extending through 2017 with minimum lease payments
totaling $45.2 million. The Company also remains contingently liable for lease
obligations relating to seven Harrigan's restaurants which were divested in
1999. Minimum lease payment obligations for those seven restaurants total $5.1
million and extend through 2012. On March 14, 2003, Harrigan's filed a
bankruptcy petition under Chapter 11 of the United States Bankruptcy Code and
subsequently on October 27, 2003, obtained an order converting that Chapter 11
filing to a Chapter 7 bankruptcy filing. Consequently, Harrigan's has ceased
operations and closed its restaurants. While the Company has not yet been
notified of any intent by the respective landlords to hold the Company liable
for any remaining lease obligations, there can be no assurances that the Company
will not ultimately be held liable for some or all of the Harrigan's leases.

In September 2002, the Company was named as the Defendant in an action
filed in the U.S. District Court for the Middle District of Georgia. The
Plaintiff, Bank of America Securities, LLC, alleges that it is owed a fee of
approximately $1.0 million, relating to the Company's sale of the McCormick &
Schmick's brand. The Company believes that the allegations in the complaint are
without merit and is vigorously contesting the complaint. Accordingly, the
Company has filed a Motion for Summary Judgment. This Motion is still pending.
Thus, it is not possible for the Company to evaluate the likelihood of the
plaintiff prevailing on its claims. Because this claim is a suit on a contract,
the Company's existing insurance policies do not provide coverage. There can be
no assurance that an adverse determination in this litigation would not have a
material adverse effect on the Company's financial condition or results of
operations.

On April 3, 2003, the Company received a communication from counsel
representing an ad hoc committee ("the Committee") of holders of a majority of
the Company's 9.75% Senior Notes ("the Senior Notes"). The communication set
forth concerns of the Committee with respect to certain actions of the Company
and threatened to cause a notice of default under the indenture covering the
Senior Notes to be issued and other legal action to be taken if the Committee's
concerns were not addressed. On May 5, 2003, counsel for the Committee issued a
press release announcing the Committee's intention to cause a notice of default
to be issued, asserting that certain transactions with the Company's then
Chairman and CEO constituted violations of covenants in the Indenture governing
the Senior Notes. On July 2, 2003, the Trustee for the Company's Senior Notes
received a Notice of Default and Acceleration Notice, filed by the Committee.
The Company intends to vigorously contest the claims that the events of default
as described in the acceleration notice have occurred. Should it ultimately be
determined that an event of default exists, the Senior Notes could become
currently due and payable. While the final outcome of this matter, including any
potential litigation that it might involve, is inherently uncertain, the Company
does not believe that the Committee will prevail in this attempt to accelerate
the Senior Notes. In the event the Senior Notes are accelerated, however,
cross-default provisions would be triggered in the Company's Credit Facility and
Subordinated Notes, which could result in the Company having to seek protection
from its creditors through a bankruptcy filing.

15


The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.


NOTE 14 - RELATED PARTY TRANSACTIONS

During 1998 and 1999, the Board of Directors approved loans to certain
executive officers of the Company. At December 31, 2000, the Company held
several notes receivable, one of which was secured by real estate, from Tom E.
DuPree, Jr., beneficial owner of more than 5% of the Company's outstanding
voting securities and then Chairman of the Board and Chief Executive Officer of
the Company (the "DuPree Notes). At December 30, 2001, the due date of the
DuPree Notes was June 30, 2002 with an interest rate of 11.5% payable at
maturity.

At December 30, 2001, total amounts owed to the Company under the DuPree
Notes were $10.9 million in principal and $3.0 million in accrued interest. At
that time, the Company recorded an allowance against the ultimate realization of
amounts due totaling $11.1 million, resulting in a net book value of $2.8
million, the fair value of the real estate collateral held by the Company.

In March 2002, the Board of Directors approved a series of transactions
whereby Mr. DuPree sold the real estate collateral securing one of the DuPree
Notes and, with the $2.8 million in proceeds, purchased $14.0 million in face
value of the Company's 11.75% Senior Subordinated Notes, due June 2009 (the
"Subordinated Notes"). The Subordinated Notes were pledged as collateral by Mr.
DuPree to secure amounts owed by him to the Company under the DuPree Notes.

On March 6, 2002 the principal and interest due on the several DuPree Notes
were consolidated into one note with a principal balance of $14.1 million (the
"New DuPree Note"), and the interest payment terms, interest rate and due date
of the note were changed to match the terms and due date of the Subordinated
Notes. All amounts of interest and principal paid by the Company on the
Subordinated Notes owned by Mr. DuPree and pledged as collateral to the Company,
have been used to make simultaneous payments to the Company on amounts due to
the Company under the New DuPree Note.

In conjunction with the Company's July 10, 2002 payment of semi-annual
interest due to holders of its Subordinated Notes, Mr. DuPree made a
simultaneous payment of principal and interest under the New DuPree Note in the
amount of $0.8 million. As a result, the principal balance of the New DuPree
Note was reduced to $13.7 million at December 29, 2002. In conjunction with the
Company's January 9, 2003 and June 24, 2003 payments of semi-annual interest to
holders of its Subordinated Notes, Mr. DuPree made simultaneous payments of
interest totaling $1.6 million.

In the third quarter of 2003, an additional allowance of $2.6 million was
established against the ultimate realization of amounts due on the New DuPree
Note. This additional allowance, which reduced the net carrying value of the New
DuPree Note to zero, was established as a result of the Company's evaluation of
both the current value of the collateral and Mr. DuPree's ability to pay amounts
due. Subsequent to the end of the third quarter of 2003, Mr. DuPree resigned
both his position as Chairman of the Board and Chief Executive Officer of the
Company. The terms and contractual obligations of Mr. DuPree related to the New
DuPree Note are unaffected by his resignation or by the allowances established
by the Company.


NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires entities to recognize the fair value of
a liability for an asset retirement obligation in the period in which it is
incurred. The statement is effective for fiscal years beginning after June 15,
2002. The Company adopted SFAS No. 143 in the first quarter of fiscal 2003. The
adoption of this standard did not have a material impact on its results of
operations or financial position.

16


In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 supersedes Emerging
Issues Task Force ("EITF") Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 eliminates the
provisions of EITF Issue 94-3 that required a liability to be recognized for
certain exit or disposal activities at the date an entity committed to an exit
plan. SFAS No. 146 requires a liability for costs associated with an exit or
disposal activity to be recognized when the liability is incurred. SFAS No. 146
is effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of this statement did not have a material adverse impact
on the Company's results of operations or financial position during the nine
months ended September 28, 2003.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 changes the classification in the statement of financial position of
certain common financial instruments, with characteristics of both liabilities
and equity, from either equity or mezzanine presentation to liabilities (or
assets in some circumstances) and requires an issuer of those financial
statements to recognize changes in fair value or redemption amount, as
applicable, in earnings. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The effect
of adopting SFAS No. 150 is to be recognized as a cumulative effect of an
accounting change as of the beginning of the period of adoption. Restatement of
prior periods is not permitted. The Company completed its evaluation, during the
third quarter of 2003, of its convertible preferred securities and determined
that those securities do not fall under the provisions of SFAS No. 150. The
Company's adoption of SFAS No. 150 in the third quarter of 2003 therefore had no
material impact on its consolidated financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 expands the
disclosure requirements to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it has
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. Certain guarantees,
including (i) an original lessee's guarantee of the lease payments when that
lessee remains secondarily liable in conjunction with being relieved from being
the primary obligor and (ii) a parent's guarantee of a subsidiary's debt to a
third party, and a subsidiary's guarantee of debt owed to a third party by
either its parent or another subsidiary of that parent, are excluded from the
provisions related to liability recognition. These guarantees, however, are
subject to the disclosure requirements of the Interpretation. The liability
recognition provisions of FIN No. 45 are applicable to guarantees issued after
December 31, 2002. The disclosure requirements of the Interpretation are
effective for financial statements of interim and annual periods ending after
December 15, 2002. Historically, the only guarantees issued by the Company
relate to lease guarantees where the Company is no longer the primary obligor
and guarantees between Avado Brands, Inc. and its wholly-owned subsidiaries
related to debt owed to third parties. Currently under such guarantees, the
Company could be liable for lease payments extending through 2017 with minimum
lease payments totaling $50.3 million (see Note 13). The Company does not
anticipate issuing any guarantees which would be required to be recognized as a
liability under the provisions of FIN No. 45 and thus does not expect this
Interpretation to have a material impact on its results of operations or
financial position. The Company adopted the disclosure requirements of FIN No.
45 effective for fiscal year ended December 29, 2002.

In December 2003, the FASB issued revised Interpretation No. 46,
"Consolidation of Variable Interest Entities." The interpretation provides
guidance on consolidating variable interest entities. The provisions of revised
Interpretation No. 46 are required to be applied by public companies who do not
have interests in special-purpose entities in financial statements for periods
ending after March 15, 2004. The interpretation requires variable interest
entities to be consolidated if the equity investment at risk is not sufficient
to permit an entity to finance its activities without support from other
parties, or if the equity investors lack certain specified characteristics.
Adoption of Interpretation No. 46 is not expected to have a material impact on
the Company's consolidated financial statements.


NOTE 16 - GUARANTOR SUBSIDIARIES

The Company's Senior Notes and Credit Facility are fully and
unconditionally guaranteed on a joint and several basis by substantially all of
its wholly owned subsidiaries. Such indebtedness is not guaranteed by the
Company's non-wholly owned subsidiaries. These non-guarantor subsidiaries
primarily include certain partnerships of which the Company is typically a 90%
owner. At September 28, 2003 and September 29, 2002, these partnerships in the
non-guarantor subsidiaries operated 19 and 20 of the Company's restaurants,
respectively. Accordingly, condensed consolidated balance sheets as of September
28, 2003 and December 29, 2002, and condensed consolidated statements of
earnings (loss) and cash flows for the nine months ended September 28, 2003 and
September 29, 2002 are provided for such guarantor and non-guarantor
subsidiaries. Corporate costs associated with the maintenance of a centralized
administrative function for the benefit of all Avado restaurants have not been
allocated to the non-guarantor subsidiaries. In addition, interest expense has
not been allocated to the non-guarantor subsidiaries. Separate financial
statements and other disclosures concerning the guarantor and non-guarantor
subsidiaries are not presented because management has determined that they are
not material to investors. There are no contractual restrictions on the ability
of the guarantor subsidiaries to make distributions to the Company.

17



Condensed Consolidated Statement of Earnings (Loss)
Nine Months Ended September 28, 2003
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------

Restaurant sales $ 254,399 36,669 - 291,068
Operating expenses 237,454 35,258 - 272,712
General and administrative expenses 15,423 1,650 - 17,073
Loss on disposal of assets 1,709 2 - 1,711
Asset revaluation and other charges 14,329 - - 14,329
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Operating loss (14,516) (241) - (14,757)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Other income (expense) (12,462) (2) - (12,464)
Loss before income taxes from
continuing operations (26,978) (243) - (27,221)
Income taxes - - - -
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Loss from continuing operations (26,978) (243) - (27,221)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Loss from discontinued operations (11,692) - - (11,692)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net loss $ (38,670) (243) - (38,913)
================================================ ================ ================= =============== ================




Condensed Consolidated Statement of Earnings (Loss)
Nine Months Ended September 28, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------

Restaurant sales $ 288,178 38,299 - 326,477
Operating expenses 262,436 34,340 - 296,776
General and administrative expenses 17,679 1,729 - 19,408
Loss on disposal of assets 3 - - 3
Asset revaluation and other charges 3,726 - - 3,726
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Operating income 4,334 2,230 - 6,564
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Other income (expense) 16,538 - - 16,538
Earnings before income taxes from
continuing operations 20,872 2,230 - 23,102
Income taxes 292 83 - 375
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Earnings from continuing operations 20,580 2,147 - 22,727
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Loss from discontinued operations (15,623) (159) - (15,782)
- ------------------------------------------------ ---------------- ----------------- --------------- ----------------
Net earnings $ 4,957 1,988 - 6,945
================================================ ================ ================= =============== ================

Page 18



Condensed Consolidated Balance Sheet
September 28, 2003
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------

ASSETS
Current assets $ 15,449 795 - 16,244
Premises and equipment, net 149,362 22,668 - 172,030
Deferred income tax benefit 11,620 - - 11,620
Other assets 28,120 18 - 28,138
Intercompany advances 12,370 - (12,370) -
Intercompany investments 10,778 - (10,778) -
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------
$ 227,699 23,481 (23,148) 228,032
================================================ ================ ================= =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 208,794 333 - 209,127
Long-term liabilities 54,370 - - 54,370
Intercompany payables - 12,370 (12,370) -
Convertible preferred securities 3,179 - - 3,179
Shareholders' equity (deficit) (38,644) 10,778 (10,778) (38,644)
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------
$ 227,699 23,481 (23,148) 228,032
================================================ ================ ================= =============== ===============





Condensed Consolidated Balance Sheet
December 29, 2002
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------

ASSETS
Current assets $ 27,422 800 - 28,222
Premises and equipment, net 213,130 23,820 - 236,950
Deferred income tax benefit 11,620 - - 11,620
Other assets 28,652 18 - 28,670
Intercompany advances 12,370 - (12,370) -
Intercompany investments 12,131 - (12,131) -
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------
$ 305,325 24,638 (24,501) 305,462
================================================ ================ ================= =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 135,707 137 - 135,844
Long-term liabilities 166,174 - - 166,174
Intercompany payables - 12,370 (12,370) -
Convertible preferred securities 3,179 - - 3,179
Shareholders' equity (deficit) 265 12,131 (12,131) 265
- ------------------------------------------------ ---------------- ----------------- --------------- ---------------
$ 305,325 24,638 (24,501) 305,462
================================================ ================ ================= =============== ===============

Page 19




Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 28, 2003
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------

Net cash provided by (used in) operating activities $ (15,601) 1,068 - (14,533)
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash flows from investing activities:

Capital expenditures (4,548) (1,095) - (5,643)
Proceeds from disposal of assets and notes
receivable, net 2,628 - - 2,628
Proceeds from sale-leaseback transactions 22,366 - - 22,366
Other net (1,944) - - (1,944)
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Net cash provided by (used in) investing activities 18,502 (1,095) - 17,407
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash flows from financing activities:
Proceeds from revolving credit agreements (1,056) - - (1,056)
Repayment of term credit agreement (12,736) - - (12,736)
Increase in bank overdrafts 1,833 - - 1,833
Payment of financing costs (4,568) - - (4,568)
Purchase of long-term debt (5,195) - - (5,195)
Principal payments on long-term debt (84) - - (84)
Proceeds from (payment of) intercompany
advances (27) 27 - -
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Net cash provided by (used in) financing activities (21,833) 27 - (21,806)
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash provided by discontinued operations 16,529 - - 16,529
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Net decrease in cash and cash equivalents (2,403) - - (2,403)
Cash and equivalents at the beginning of the period 4,774 29 - 4,803
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash and equivalents at the end of the period $ 2,371 29 - 2,400
==================================================== ================ ================= =============== ==============





Condensed Consolidated Statement of Cash Flows
Nine Months Ended September 29, 2002
- ---------------------------------------------------- ---------------- ----------------- --------------- ----------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------

Net cash provided by (used in) operating activities $ (32,892) 3,270 - (29,622)
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash flows from investing activities:
Capital expenditures (3,788) (544) - (4,332)
Proceeds from disposal of assets and notes
receivable, net 6,519 - - 6,519
Other net (434) - - (434)
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Net cash provided by (used in) investing activities 2,297 (544) - 1,753
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash flows from financing activities:
Proceeds from revolving credit agreements 19,646 - - 19,646
Proceeds from term credit agreements 16,165 - - 16,165
Increase in bank overdrafts 1,978 - - 1,978
Payment of financing costs (8,502) - - (8,502)
Purchase of long-term debt (8,489) - - (8,489)
Principal payments on long-term debt (18) - - (18)
Settlement of interest rate swap agreement (1,704) - - (1,704)
Reduction in letter of credit collateral 9,978 - - 9,978
Proceeds from (payment of) intercompany
advances 2,565 (2,565) - -
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Net cash provided by (used in) financing activities 31,619 (2,565) - 29,054
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash used in discontinued operations (1,489) (159) - (1,648)
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Net increase (decrease) in cash and cash equivalents (465) 2 - (463)
Cash and equivalents at the beginning of the period 4,090 27 - 4,117
- ---------------------------------------------------- ---------------- ----------------- --------------- --------------
Cash and equivalents at the end of the period $ 3,625 29 - 3,654
==================================================== ================ ================= =============== ==============

Page 20


NOTE 17 - EARNINGS PER SHARE INFORMATION

The following table presents a reconciliation of weighted average shares
and earnings per share amounts (amounts in thousands, except per share data):



(In thousands, except per share data) Quarter Ended Nine Months Ended
- -------------------------------------------------------------------------------------------------------------------
Sep. 28, Sep. 29, Sep. 28, Sep. 29,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------

Average number of common shares used in basic calculation 33,123 33,102 33,110 30,740
Effect of dilutive stock options - * 475 - * 787
Shares issuable on assumed conversion of convertible
preferred securities - * - * - * - *
------------------------------------------------------------------------------------------------------------------
Average number of common shares used in diluted calculation 33,123 33,577 33,110 31,527
==================================================================================================================

Earnings (loss) from continuing operations $(19,130) 7,912 (27,221) 22,727
Loss from discontinued operations (148) (9,845) (11,692) (15,782)
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) (19,278) (1,933) (38,913) 6,945
Distribution savings on assumed conversion of convertible
preferred securities, net of income taxes - * - * - * - *
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) for computation of diluted earnings per
common share $(19,278) (1,933) (38,913) 6,945
===================================================================================================================

- -------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share from continuing operations $ (0.58) 0.24 (0.82) 0.74
Basic loss per common share from discontinued operations 0.00 (0.30) (0.36) (0.51)
- -------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share $ (0.58) (0.06) (1.18) 0.23
===================================================================================================================

- -------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share from continuing opperations $ (0.58) 0.24 (0.82) 0.72
Diluted loss per common share from discontinued operations 0.00 (0.30) (0.36) (0.50)
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share $ (0.58) (0.06) (1.18) 0.22
===================================================================================================================


* Inclusion of 551,811 and 439,070 shares issuable pursuant to employee
stock option plans would have resulted in a decrease to loss per share for the
quarter and nine months ended September 28, 2003, respectively. As those shares
are antidilutive, they are excluded from the computation of diluted loss per
share. Inclusion of 214,944 shares for the quarter and nine months ended
September 28, 2003 and 214,944 shares and 2,576,464 shares for the quarter and
nine months ended September 29, 2002, respectively, related to the Convertible
Preferred Securities would have resulted in a decrease to loss per share and an
increase to earnings per share in each respective period. As those shares are
antidilutive, they are excluded from the computation of diluted earnings (loss)
per share.


NOTE 18 - SUBSEQUENT EVENTS

On November 10, 2003, The Company issued a press release and filed a Form
8-K announcing the resignation of the Company's Chairman and CEO Tom E. DuPree,
Jr. and its Chief Administrative officer, Margaret (Beth) Waldrep. The Company
also announced that it will be appointing Kevin Leary of AlixPartners, LLC as
interim CEO, and Robert Sroka, a director since 2000, as Acting Chairman of the
Board. The Company will record charges of approximately $0.7 million and $0.4
million during the fourth quarter of 2003 related to severance payments for Mr.
DuPree and Ms. Waldrep, respectively. Approximately 75% of the severance
payments have been paid during the fourth quarter of 2003 and the remaining 25%
will be paid during February of 2004.

21


Item 2.

AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Third Quarter and Nine Months Ended September 28, 2003

Summary

The following Management Discussion and Analysis of Financial Condition and
Results of Operations should be read in its entirety. However, highlights
included in the next several pages are as follows:

o The Company has suffered from recurring losses from operations, has an
accumulated deficit, has incurred an event of default under its Senior Notes due
to the failure to make required interest payments, has entered into a
forbearance agreement with its senior secured Credit Facility lenders which
expires on January 31, 2004 and anticipates not making the scheduled interest
payment on its Senior Subordinated Notes within the 30-day grace period, all of
which raise substantial doubt about the Company's ability to continue as a going
concern.

o The Company did not make its December interest payment, due December 1,
2003, on its 9.75% Senior Notes, due 2006 within the 30-day no default grace
period, which expired on December 31, 2003. The Company is in discussions with
the Senior Note Holders and will attempt to negotiate a forbearance agreement.

o The Company will not make its December interest payment, due December 15,
2003, on its 11.75% Senior Subordinated Notes, due 2009 within the 30-day no
default grace period provided for under the indenture. Failure to make this
required debt service payment will result in an event of default under the
Senior Subordinated Notes.

o The Company is not in compliance with certain financial covenants of its
secured Credit Facility. On January 2, 2004 the Company and its secured lenders
executed a forbearance agreement whereby the secured lenders agreed not to
exercise their remedies under the agreement for these covenant violations and
other existing defaults. The forbearance period ends January 31, 2004. The
secured lenders also agreed to provide the Company with $3.0 million of
additional liquidity for general corporate purposes.

o As a result of the foregoing, the Company will be seeking to restructure
its existing capital structure, which is likely to involve a filing under
Chapter 11 of the Bankruptcy Code.


Presentation

In October 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS 144, which was adopted by the Company in the first
quarter of 2002, supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a "Segment" of a business as defined in that
Opinion. As a result of the adoption of SFAS 144, the Company has classified the
revenues, expenses and related assets and liabilities of 11 Don Pablo's
restaurants and one Hops restaurant, which were closed during the first half of
2003, plus 11 additional Don Pablo's restaurants and eight additional Hops
restaurants which were closed in 2002, as discontinued operations for all
periods presented in the accompanying consolidated financial statements. The
revenues, expenses and related assets and liabilities of Canyon Cafe, which has
been divested, have not been classified as discontinued operations in the
accompanying consolidated financial statements. As the decision to divest the
operations of Canyon Cafe was made prior to the implementation of SFAS 144 and
it did not meet the criteria for classification as discontinued operations under
the provisions of APB Opinion No. 30, it is required to be classified within
continuing operations under the provisions of SFAS 121.

22


Restaurant Sales

Restaurant sales for the third quarter and nine months ended September 28,
2003 were $94.9 million and $291.1 million, respectively, compared to $100.8
million and $326.5 million for the corresponding periods of 2002. Declining
revenues were primarily due to the divestiture of Canyon Cafe which was
substantially completed in the fourth quarter of 2002 and a decrease in
same-store sales at Don Pablo's and Hops. Sales were adversely impacted during
the first nine months of 2003 by the Company's limited liquidity and related
inability to advertise during the first quarter, as well as the war in Iraq and
a generally sluggish economy. The revenues and expenses related to 11 Don
Pablo's restaurants and one Hops restaurant which were closed during the first
half of 2003, plus 11 additional Don Pablo's restaurants and eight Hops
restaurants which were closed in 2002, have been included in discontinued
operations for all periods presented in the accompanying consolidated statements
of earnings (loss) and consolidated statements of cash flows. Same-store sales
for the third quarter of 2003 increased by 2.0% at Don Pablo's and decreased by
2.9% at Hops as compared to the corresponding period of the prior year
(same-store sales comparisons include all restaurants classified as continuing
operations and open for 18 months as of the beginning of 2003). On a
year-to-date basis, same-store sales decreased by 2.4% at Don Pablo's and 9.8%
at Hops.

EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer", addresses the recognition, measurement and income statement
classification for sales incentives offered to customers. Sales incentives
include discounts, coupons, free products and generally any other offers that
entitle a customer to receive a reduction in the price of a product. Under EITF
Issue 01-9, the reduction in the selling price of the product resulting from any
sales incentives should be classified as a reduction of revenue. The Company
adopted EITF Issue 01-9 in fiscal 2002. Prior to adopting this pronouncement,
the Company recognized sales incentives as restaurant operating expenses. As a
result of adopting EITF Issue 01-9, sales incentives have been classified as a
reduction of sales for all periods presented. Sales incentives were $6.1 million
and $13.8 million, respectively, for the quarter and nine months ended September
28, 2003 and $0.9 million and $3.4 million, respectively, for the quarter and
nine months ended September 29, 2002.


Operating Expenses

The following table sets forth the percentages which certain items of
income and expense bear to total restaurant sales for the operations of the
Company's restaurants for the quarter and nine-month periods ended September 28,
2003 and September 29, 2002.



- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------
Quarter Quarter Nine Months Nine Months
Ended Ended Ended Ended
Sep. 28, 2003 Sep. 29, 2002 Sep. 28, 2003 Sep. 29, 2002
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------

Restaurant sales:
Canyon Cafe 0.1 % 6.0 % 0.8 % 6.5 %
Don Pablo's 61.8 % 57.1 % 60.5 % 55.3 %
Hops 38.1 % 36.9 % 38.7 % 38.2 %
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------
Total restaurant sales 100.0 % 100.0 % 100.0 % 100.0 %
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------

Operating expenses:
Food and beverage 31.3 % 28.0 % 30.2 % 28.2 %
Payroll and benefits 35.2 % 34.2 % 34.9 % 33.3 %
Depreciation and amortization 3.9 % 3.3 % 3.7 % 3.1 %
Other operating expenses 24.9 % 26.3 % 25.0 % 26.2 %
General and administrative expenses 5.9 % 6.6 % 5.9 % 5.9 %
Loss on disposal of assets 0.0 % 0.1 % 0.6 % 0.0 %
Asset revaluation and other charges 12.5 % 1.9 % 4.9 % 1.1 %
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------
Total operating expenses 113.7 % 100.3 % 105.1 % 98.0 %
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------

Operating income (loss) (13.7)% (0.3) % (5.1)% 2.0 %
- ----------------------------------------------- ----------------- ---------------- ----------------- ----------------


Food and beverage costs and payroll and benefits increased, as a percentage
of sales, over the comparable periods of the prior year primarily as a result of
expenses associated with an increase in discounted sales. As a result of
adopting EITF Issue 01-9, sales incentives have been classified as a reduction
of sales for all periods presented. Such sales incentives were $6.1 million and
$13.8 million, respectively, for the quarter and nine months ended September 28,
2003 compared to $0.9 million and $3.4 million, respectively, for the quarter
and nine months ended September 29, 2002. Additionally, food and beverage costs
were negatively impacted primarily during the second quarter of 2003 by
increases in produce and beef prices.

23


Other operating expenses for both the quarter and nine months ended
September 28, 2003 decreased, as a percentage of sales, by 1.4% and 1.2%,
respectively, over the comparable periods of the prior year. The decrease was
primarily due to a decrease in marketing expenses generated by a shift in the
Company's marketing strategy from more expensive broadcast media to focused
discount offers which, in accordance with EITF Issue 01-9 are recorded as a
reduction of revenue. Decreased other operating expenses in the third quarter of
2003 were somewhat offset by increased rent expense associated with the
sale-leaseback of certain Don Pablo's locations.


General and Administrative Expenses

General and administrative expenses decreased by $1.1 million and $2.3
million for the quarter and nine months ended September 28, 2003, respectively,
compared to the corresponding periods of the prior year. General and
administrative expenses also decreased as a percent of sales despite declining
sales volumes at Hops and sales reclassifications required by EITF Issue 01-9.
The reduction in general and administrative expenses is primarily due to savings
realized from the relocation and consolidation of the Hops office to Madison,
Georgia.


Loss on Disposal of Assets

Loss on disposal of assets of $1.7 million for the nine months ended
September 28, 2003, primarily reflects losses related to the sale of 15 Don
Pablo's restaurants included in the Company's Don Pablo's sale-leaseback
transaction which occurred during the first quarter.

Loss on disposal of assets for the nine months ended September 29, 2002
reflects fees incurred in connection with the first quarter termination of the
Company's interest rate swap agreement and losses incurred on the sale of two
closed Canyon Cafe locations. These losses were offset nearly in their entirety
by an adjustment to amounts receivable from the divestiture of McCormick &
Schmick's and a gain on the sale of a closed Hops location.


Asset Revaluation and Other Charges

For the quarter ended September 28, 2003, asset revaluation and other
charges of $11.9 million include (i) predominately non-cash asset impairment
charges of $9.0 million recorded to reduce the carrying value of three Don
Pablo's and eight Hops restaurants to estimated fair value, (ii) a $2.6 million
valuation allowance to reduce the carrying value of a note receivable (see Note
14), and (iii) $0.3 million in other charges primarily related to the final
disposition of the Company's remaining Canyon Cafe locations.

For the nine months ended September 28, 2003, asset revaluation and other
charges of $14.3 million include (i) predominately non-cash asset impairment
charges of $9.9 million recorded to reduce the carrying value of the assets of
the Company's remaining Canyon Cafe locations, prior to divestiture, along with
four Don Pablo's restaurants and eight Hops restaurants to estimated fair value,
(ii) a $2.6 million valuation allowance to reduce the carrying value of a note
receivable (see Note 14), and (iii) $1.8 million in other charges primarily
related to costs associated with the relocation of the Hops corporate office to
Madison, Georgia.

Asset revaluation and other charges of $3.7 million for the nine months
ended September 29, 2002 reflect predominately non-cash asset impairment charges
of $2.1 million to reduce the carrying value of the assets of the Company's
Canyon Cafe restaurants to estimated fair value and $1.6 million in other
charges primarily related to the write-off of various capitalized costs
associated with sites that are no longer expected to be developed and related
development costs which are not anticipated to be fully recoverable.


Interest and Other Expenses

Net interest expense for the third quarter and nine months ended September
28, 2003 was $6.0 million and $25.5 million, respectively, compared to $7.3
million and $23.6 million for the corresponding periods of the prior year. The
reduction in interest expense for the third quarter ended September 28, 2003
reflected the elimination of interest expense related to outstanding Senior and
Subordinated Notes repurchased by the Company during the second quarter and a
reduction in outstanding borrowings on the Company's credit facility compared to
the prior year. These decreases were somewhat offset by the first quarter write
off of $0.9 million of deferred loan costs related to the $9.0 million
commitment reduction of the Company's Credit Facility. The increase in interest
expense for the nine months ended September 28, 2003 included $6.5 million in
deferred loan costs which were charged to interest expense as a result of the
Company's March 25, 2003 termination of its previously existing credit
agreement. Interest expense for the nine months ended September 29, 2002
included unfavorable mark-to-market adjustments under a fixed-to-floating
interest rate swap agreement, which was terminated on March 25, 2002, and
increased interest charges incurred related to past due sales and use, property
and other taxes.

24


Distribution expense on preferred securities relates to the Company's $3.50
term convertible securities with a liquidation preference of $50 per security
and convertible into 3.3801 shares of Avado Brands common stock for each
security (the "TECONS"). Expenses related to these securities decreased as a
result of the conversion of 1,307,591 of the securities into 4,419,478 shares of
common stock during 2002, all of which were issued from treasury stock. The
Company has the right to defer quarterly distribution payments on the
Convertible Preferred Securities for up to 20 consecutive quarters and has
deferred all such payments beginning with the December 1, 2000 payment until
December 1, 2005. The Company may pay all or any part of the interest accrued
during the extension period at any time. In June 2002, the Company made a
one-time distribution payment of accrued interest, totaling $5.4 million or
$4.25 per share, to holders of its TECONS. Of the 1,307,591 shares converted
during 2002, 1,200,391 shares were converted in conjunction with this
distribution payment.

During the nine months ended September 28, 2003, other income was
recognized primarily as a result of the abatement of previously incurred tax
penalties and the reversal of a liability previously established for unclaimed
gift cards. For the nine months ended September 29, 2002, other income related
primarily to the abatement of previously incurred tax penalties.

Due to the uncertainty of its realization, no income tax benefit was
recorded related to the loss before income taxes for the quarter and
year-to-date periods in 2003.


Discontinued Operations

As discussed in Note 1 - Basis of Presentation, discontinued operations
includes the revenues and expenses of 11 Don Pablo's and one Hops restaurant
which were closed in the first half of 2003, plus 11 additional Don Pablo's
restaurants and eight additional Hops restaurants which were closed during 2002.
The decision to dispose of these 31 locations reflects the Company's ongoing
process of evaluating the performance and cash flows of its various restaurant
locations and using the proceeds from the sale of closed restaurants to reduce
outstanding debt. Subsequent to the end of the third quarter, one additional Don
Pablo's and two additional Hops restaurants have been closed and will be
presented as discontinued operations for the year ending December 28, 2003.

Loss from discontinued operations for the quarter and nine months ended
September 28, 2003, was $0.1 million and $11.7 million, respectively. These
amounts primarily reflect asset revaluation and other charges along with losses
on the disposal of closed restaurants. Total restaurant sales from discontinued
operations were $0.0 million and $3.5 million, respectively, for the quarter and
nine months ended September 28, 2003. The loss from discontinued operations for
the nine months ended September 28, 2003 has been increased to reflect the
correction of a $1.6 million error in the Company's gain (loss) on disposal of
restaurants reported during the first quarter, related to the sale of two Don
Pablo's properties (see Note 2).

Loss from discontinued operations for the quarter and nine months ended
September 29, 2002 was $9.8 million and $15.8 million, respectively. These
amounts primarily reflect asset revaluation and other charges related to the
closure of restaurants. Total restaurant sales from discontinued operations were
$8.6 million and $30.6 million, respectively, for the quarter and nine months
ended September 29, 2002.


Liquidity and Capital Resources

The Company has suffered from recurring losses from operations, has an
accumulated deficit, has incurred an event of default under its Senior Notes due
to the failure to make required interest payments, has entered into a
forbearance agreement with its senior secured Credit Facility lenders which
expires on January 31, 2004 and anticipates not making the scheduled interest
payment on its Senior Subordinated Notes within the 30-day grace period, all of
which raise substantial doubt about the Company's ability to continue as a going
concern. While the Company's forbearance agreement (see Note 4) provides
additional liquidity in the near term as well as temporary relief from the
potential acceleration of obligations due under the Credit Facility, sufficient
liquidity to make required debt service and lease payments is dependent
primarily on the Company's negotiations with its Credit Facility lenders, the
realization of cash flow from operations and other creditor negotiations to
generate liquidity. There can be no assurance that such efforts will be
successful.

25


Generally, the Company operates with negative working capital since
substantially all restaurant sales are for cash while payment terms on accounts
payable typically range from 0 to 45 days. Fluctuations in accounts receivable,
inventories, prepaid expenses and other current assets, accounts payable and
accrued liabilities typically occur as a result of restaurant openings and
closings and the timing of settlement of liabilities. Decreases in accrued
liabilities occurred during the first nine months of 2003 primarily as a result
of interest payments made on the Company's Senior and Subordinated Notes.

On March 24, 2003, the Company obtained a new $39.0 million revolving
credit facility (the "Credit Facility") and entered into a $20.0 million
sale-leaseback transaction covering 15 Don Pablo's locations (the "Don Pablo's
sale-leaseback"). Proceeds from this financing were used to pay amounts
outstanding under the Company's previously existing credit agreement totaling
$19.5 million and fees associated with the new financing agreements totaling
$4.6 million.

The Credit Facility limited total borrowing capacity at any given time to
an amount equal to the lesser of $39.0 million or 1.95 times the Company's
trailing 12 months earnings before interest, income taxes and depreciation and
amortization as determined for the most recently completed four quarters as
defined in the agreement. A portion of the facility, totaling $17.0 million, was
restricted for the purchase of the Company's 9.75% Senior Notes due 2006
("Senior Notes") and 11.75% Senior Subordinated Notes due June 2009
("Subordinated Notes"). The agreement limited the amount the Company could pay
to acquire Senior Notes and Subordinated Notes to $0.50 and $0.30 per one dollar
outstanding, respectively. In accordance with the agreement, the unused
availability under the restricted portion of the facility terminated on May 31,
2003. The Credit Facility matures on March 24, 2004 but may be extended for one
year at the lender's option and subject to an extension fee equal to five
percent of the total commitment amount. In certain circumstances, borrowings
under the Credit Facility are required to be repaid to the lender and any such
repayments are not available to be re-borrowed by the Company. Events generating
a required repayment include, among other things, proceeds from asset
dispositions (other than Assets Held for Sale as defined in the agreement),
casualty events and tax refunds, each as defined in the Credit Facility. In
addition, the lender has the right to impose certain reserves against the
Company's total borrowing availability under the facility, which may limit the
Company's liquidity. The Credit Facility is secured by substantially all of the
Company's assets.

During the second quarter of 2003, the Company executed three separate
amendments to the Credit Facility which, among other things, made certain
technical changes to the agreement and allowed the Company to borrow $2.4
million under the $17.0 million restricted portion of the facility to buy out
the Company's master equipment lease. The remaining unused portion of the
facility was terminated, reducing the maximum commitment under the Credit
Facility from $39.0 million to $30.0 million. Additionally, in accordance with
the terms of the Credit Facility, tax refunds received in September 2003 further
reduced the maximum commitment under the Credit Facility to $26.0 million.

At September 28, 2003, $2.5 million in cash borrowings were outstanding
under the unrestricted portion of the Credit Facility and an additional $13.1
million of the facility was utilized to secure letters of credit which primarily
secure the Company's insurance programs. Also outstanding at September 28, 2003
was $8.0 million which was borrowed under the restricted portion of the facility
to acquire $11.2 million in face value of the Company's Senior Notes and buy out
the Company's master equipment lease. The total Credit Facility availability was
also reduced by lender reserves of $2.3 million. At September 28, 2003, $0.1
million of the facility remained unused and available.

The terms of the Credit Facility, the Company's Senior Notes and
Subordinated Notes, the Don Pablo's sale-leaseback, and the 2000 Hops
sale-leaseback (See Note 12) collectively include various provisions which,
among other things, require the Company to (i) achieve certain EBITDA targets,
(ii) maintain defined net worth and coverage ratios, (iii) maintain defined
leverage ratios, (iv) limit the incurrence of certain liens or encumbrances in
excess of defined amounts and (v) limit certain payments. During the second
quarter of 2003, the Company terminated its previously existing master equipment
lease thereby eliminating any financial covenants or restrictions related to
that lease. At September 28, 2003, the Company was not in compliance with
certain financial requirements contained in the Credit Facility. The Company's
failure to comply with these covenants is a result of a decline in sales and an
increase in operating expenses. Under the terms of the Credit Facility, the
failure to meet the prescribed financial targets represented an event of default
whereby the lender had the right to declare all obligations under the agreement
immediately due and payable. On January 2, 2004, the Company entered into a
forbearance agreement with its Credit Facility lender whereby the lender has
agreed not to exercise any remedies under the Credit Facility during the
forbearance period, which will expire on January 31, 2004. The forbearance
agreement also provides the Company with $3.0 million of additional liquidity
for general corporate purposes. While the lender has not notified the Company of
its intent to do so, acceleration of the obligations under the Credit Facility
after the expiration of the forbearance period would have a material adverse
effect on the Company.

26


If the obligations under the Credit Facility were to be accelerated after
the expiration of the forbearance period, cross-default provisions contained in
the indentures for the Senior Notes and Subordinated Notes would be triggered,
creating an event of default under those agreements as well. At September 28,
2003, the outstanding balances of the Senior Notes and Subordinated Notes were
$105.3 million and $47.6 million, respectively. An event of default under the
Credit Facility does not result in a cross-default under the Company's
sale-leaseback agreements. If some or all of the obligations under the Company's
credit agreements were to become immediately due and payable, the Company would
not have sufficient liquidity to satisfy these obligations. As a result, the
Company will be seeking to restructure its existing capital structure, which is
likely to involve a filing under Chapter 11 of the Bankruptcy Code.
Additionally, the Company was not in compliance with a net worth requirement
contained in its 2000 Hops sale-leaseback agreement at December 29, 2002. The
lessor, however, has waived this requirement until March 31, 2004 at which time
the minimum net worth requirement will be $150.0 million. It is unlikely that
the Company will be in compliance with the $150.0 million net worth requirement
on March 31, 2004. Although the outcome is uncertain, the Company intends to
enter into discussions to obtain a waiver of this default or an amendment to the
sale-leaseback agreement.

Interest payments on the Company's Senior Notes and Subordinated Notes are
due semi-annually in each June and December. The Company's semi-annual interest
payments total approximately $7.9 million. Under the terms of the related note
indentures, the Company has an additional 30-day grace period from the scheduled
interest payment dates before an event of default occurs, due to late payment of
interest. The Company did not have sufficient liquidity to make the December 1,
2003 interest payments on its Senior Notes within the 30-day grace period and
has incurred an event of default, due to non payment of interest, under which
the Senior Notes could become currently due and payable. Additionally, the
Company will not make the December 15, 2003 interest payment on its Senior
Subordinated Notes within the 30-day grace period. The Company's failure to make
the interest payment on the Senior Subordinated Notes will also represent an
event of default under which the Senior Subordinated Notes could become
currently due and payable. Thus, it is expected that the Senior Subordinated
Notes will be classified as a current liability in future financial reports. The
Company is currently in discussions with its Senior Note Holders to obtain
forbearance of amounts due. However, there can be no assurance that such efforts
will be successful. As a result, the Company will be seeking to restructure its
existing capital structure, which is likely to involve a filing under Chapter 11
of the Bankruptcy Code.

Also, on July 2, 2003, the Trustee for the Company's Senior Notes received
a Notice of Default and Acceleration Notice (the "Notice"), filed by holders
representing a majority of the Company's outstanding Senior Notes (see Note 13).
Although the Company intends to vigorously contest the claims that the events of
default as described in the Notice have occurred, there can be no assurances
that the Company's defenses will be successful. Additionally, the August 2003
sale-leaseback of a Hops location (see Note 12) may not have complied with
certain financial tests contained in the indenture governing the Senior Notes.
Because certain financial tests specified in the indenture are ambiguous, it is
not certain that a covenant violation has in fact occurred. As a result, the
Company has classified the outstanding debt related to the Senior Notes as a
current liability in the accompanying Consolidated Balance Sheet as of September
28, 2003.

Principal financing sources in the first nine months of 2003 consisted of
(i) proceeds of $22.4 million from sale-leaseback transactions, (ii) cash
provided by discontinued operations, primarily related to the sale of assets, of
$16.5 million, (iii) income tax refunds of $6.1 million and (iv) proceeds from
the sale of assets of $2.6 million. The primary uses of funds consisted of (i)
net cash used in operations of $14.5 million which included interest payments of
$20.0 million primarily related to the Senior and Subordinated Notes and Credit
Facility along with lease payments of $15.4 million, (ii) net repayments of
credit agreements of $13.8 million, (iii) repurchase of long-term debt of $5.2
million, (iv) capital expenditures of $5.6 million, $4.4 million of which
related to the second quarter buyout of the Company's master equipment lease,
and (v) payment of financing costs related to the Credit Facility and Don
Pablo's sale-leaseback totaling $4.6 million.

The Company incurs various capital expenditures related to existing
restaurants and restaurant equipment in addition to capital requirements for
developing new restaurants. The Company does not have any contractual
obligations to open any new restaurants during 2003. Capital expenditures for
existing restaurants are expected to be approximately $1.0 million during the
fourth quarter of 2003.

Subsequent to the end of the third quarter, the Company issued a press
release and filed a Form 8-K announcing the resignation of the Company's
Chairman and CEO Tom E. DuPree, Jr. and its Chief Administrative officer,
Margaret (Beth) Waldrep. The Company will record charges of approximately $0.7
million and $0.4 million during the fourth quarter of 2003 related to severance
payments for Mr. DuPree and Ms. Waldrep, respectively. Approximately 75% of the
severance payments have been paid during the fourth quarter of 2003 and the
remaining 25% will be paid during February of 2004.

27


The Company is also exposed to certain contingent payments. In connection
with the Applebee's, Canyon Cafe and McCormick & Schmick's divestiture
transactions, the Company remains contingently liable for lease obligations
relating to 63 Applebee's restaurants, 10 Canyon Cafe restaurants and four
McCormick & Schmick's restaurants. Assuming that each respective purchaser
became insolvent, an event management believes to be remote, the Company could
be liable for lease payments extending through 2017 with minimum lease payments
totaling $45.2 million. The Company also remains contingently liable for lease
obligations relating to seven Harrigan's restaurants which were divested in
1999. Minimum lease payment obligations for those seven restaurants total $5.1
million and extend through 2012. On March 14, 2003, Harrigan's filed a
bankruptcy petition under Chapter 11 of the United States Bankruptcy Code and
subsequently on October 27, 2003, obtained an order converting that Chapter 11
filing to a Chapter 7 bankruptcy filing. Consequently, Harrigan's has ceased
operations and closed its restaurants. While the Company has not yet been
notified of any intent by the respective landlords to hold the Company liable
for any remaining lease obligations, there can be no assurance that the Company
will not ultimately be held liable for some or all of the Harrigan's leases.

Under the Company's insurance programs, coverage is obtained for
significant exposures as well as those risks required to be insured by law or
contract. It is the Company's preference to retain a significant portion of
certain expected losses related primarily to workers' compensation, physical
loss to property, and comprehensive general liability. The Company's deductibles
for workers' compensation and general liability are $500,000 per claim. Losses
in excess of these risk retention levels are covered by insurance which
management considers to be adequate. Provision for losses expected under these
programs are recorded based upon estimates of the liability for claims incurred.
Such estimates are based on management's evaluation of the nature and severity
of claims and expected losses based on the Company's historical experience,
information provided by the Company's third party administrators and certain
actuarial assumptions used by the insurance industry. In the first nine months
of 2003, claims paid under the Company's self-insurance programs totaled $3.2
million. In addition, at September 28, 2003, the Company was contingently liable
for letters of credit aggregating approximately $13.1 million, relating
primarily to its insurance programs. Management believes that the ultimate
disposition of these contingent liabilities will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.

The Company's 1998 Federal income tax returns are currently being audited
by the Internal Revenue Service ("IRS"). The Company believes its recorded
liability for income taxes of $41.1 million as of September 28, 2003 is adequate
to cover its exposure that may result from the ultimate resolution of the audit.
During the first quarter of 2003, the Company submitted an Offer in Compromise
to the IRS whereby the Company offered to settle its potential obligations at a
discounted amount. The Offer in Compromise process is a mechanism available to
taxpayers to potentially reduce amounts otherwise payable to the IRS based on
analysis of a taxpayer's ability to pay, the value of its assets versus its
liabilities and other economic factors. Although the ultimate outcome of the
audit or the Offer in Compromise cannot be determined at this time, the Company
does not have sufficient liquidity to pay any significant portion of its
recorded liability if resolution of the audit results in such amount being
currently due and payable. Management does not currently expect that this will
be the result, or that any resolution with respect to audit issues will be
reached in the near future. During the third quarter of 2003, the Company
received a $5.5 million federal income tax refund related to its 2002 Federal
income tax return. Due to the uncertainty surrounding the ultimate resolution of
the ongoing IRS audit of the Company's 1998 tax return, the Company increased
its recorded liability for income taxes by $5.5 million during the third
quarter.

Management has taken steps to improve cash flow from operations, including
changing the Company's marketing strategy to be less reliant on expensive
broadcast media, reducing overhead through consolidation of functions and
personnel reductions primarily from the first quarter relocation of its Hops
corporate headquarters and adjusting supervisory management level personnel in
its restaurant operations. However, there can be no assurance these efforts will
be successful in improving cash flow from operations sufficiently to enable the
Company to continue to meet its obligations, including required payments under
its debt and lease agreements and capital expenditures necessary to maintain its
existing restaurants. The Company's forbearance agreement (see Note 4) does
provide additional liquidity as well as temporary relief from the potential
acceleration of obligations due under the Credit Facility, however, there is no
assurance the Company will be able to obtain additional forbearances of defaults
incurred under its Credit Facility or that negotiations to obtain forbearance
from its Senior Note Holders will be successful. As a result, the Company will
be seeking to restructure its existing capital structure, which is likely to
involve a filing under Chapter 11 of the Bankruptcy Code.


Effect of Inflation

Management believes that inflation has not had a material effect on
earnings during the past several years. Future inflationary increases in the
cost of labor, food and other operating costs could adversely affect the
Company's restaurant operating margins. In the past, however, the Company
generally has been able to modify its operations to offset increases in its
operating costs.

28


Various federal and state laws increasing minimum wage rates have been
enacted over the past several years. Such legislation, however, has typically
frozen the wages of tipped employees at $2.13 per hour if the difference is
earned in tip income. Although the Company has experienced slight increases in
hourly labor costs in recent years, the effect of increases in minimum wage have
been significantly diluted due to the fact that the majority of the Company's
hourly employees are tipped and the Company's non-tipped employees have
historically earned wages greater than federal and state minimums. As such, the
Company's increases in hourly labor costs have not been proportionate to
increases in minimum wage rates.


Forward-Looking Information

Certain information contained in this quarterly report, particularly
information regarding the future economic performance and finances, restaurant
development plans, capital requirements and objectives of management, is forward
looking. In some cases, information regarding certain important factors that
could cause actual results to differ materially from any such forward-looking
statement appear together with such statement. In addition, the following
factors, in addition to other possible factors not listed, could affect the
Company's actual results and cause such results to differ materially from those
expressed in forward-looking statements. These factors include future compliance
with debt covenants; the outcome of the audit of the Company's 1998 Federal
income tax returns; intense competition within the casual dining restaurant
industry; changes in economic conditions such as inflation or a recession;
consumer perceptions of food safety; weather conditions; changes in consumer
tastes; labor and benefit costs; legal claims; government monetary and fiscal
policies; laws and regulations; and governmental initiatives such as minimum
wage rates and taxes. Other factors that may cause actual results to differ from
the forward-looking statements contained in this release and that may affect the
Company's prospects in general are described in Exhibit 99.1 to the Company's
Form 10-Q for the fiscal quarter ended April 2, 2000, and the Company's other
filings with the Securities and Exchange Commission.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates and
changes in commodity prices. The Company's exposure to interest rate risk
relates primarily to Libor-based rate obligations on the Company's revolving
credit agreement. Interest swap agreements have historically been utilized to
manage overall borrowing costs and balance fixed and floating interest rate
obligations. As of March 25, 2002 the Company terminated the one such swap
agreement it had in place and no further obligation remains after that date.

The Company purchases certain commodities such as beef, chicken, flour and
cooking oil. Purchases of these commodities are generally based on vendor
agreements, which often contain contractual features that limit the price paid
by establishing price floors or caps. As commodity price aberrations are
generally short-term in nature and have not historically had a significant
impact on operating performance, financial instruments are not used to hedge
commodity price risk.


Item 4. Controls and Procedures

As of September 28, 2003 and prior to the filing of this report, an
evaluation was carried out by the Company's management, with the participation
of the Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures as defined in the federal
securities laws. Based on that evaluation, the Company's Chief Financial Officer
has concluded that the Company's disclosure controls and procedures were
effective as of the date of that evaluation, with the exception of the procedure
for identifying and recording gains and losses on the disposal of restaurant
properties. Subsequent to that evaluation, changes have been implemented within
the fixed asset and general ledger accounting systems to ensure that all assets
are properly accounted for within both systems to ensure the proper recording of
gains and losses on the disposal of assets going forward.

The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and although the Company's
disclosure controls and procedures have been designed to provide reasonable
assurance that the goals of such control system will be met, there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.

29


Except as disclosed herein, there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of this evaluation.


Part II. Other Information

Item 3. Defaults Upon Senior Securities

At September 28, 2003, the Company was not in compliance with certain
financial requirements contained in the Company's Credit Facility. Under the
terms of the Credit Facility, the failure to meet the prescribed financial
targets represents an event of default whereby the lender has the right to
declare all obligations under the agreement immediately due and payable. On
December 31, 2003 the Company and its secured lenders executed a forbearance
agreement whereby the secured lenders agreed not to exercise their remedies
under the agreement for these covenant violations and other existing defaults
during the forbearance period which expires on January 31, 2004. At September
28, 2003, outstanding cash borrowings under the Credit Facility totaled $10.5
million and these obligations are classified as current liabilities in the
accompanying consolidated balance sheet. In addition, outstanding letters of
credit, which are secured by the Credit Facility, totaled $13.1 million at
quarter end. If the obligations under the Credit Facility were to be accelerated
after the expiration of the forbearance period, cross-default provisions
contained in the indentures to the Company's 9.75% Senior Notes due 2006
("Senior Notes") and 11.75% Senior Subordinated Notes due 2009 ("Subordinated
Notes") would be triggered, creating an event of default under those agreements
as well. At September 28, 2003, the outstanding balances of the Senior Notes and
Subordinated Notes were $105.3 million and $47.6 million, respectively.

Interest payments on the Company's Senior Notes and Subordinated Notes are
due semi-annually in each June and December. Under the terms of the related note
indentures, the Company has an additional 30-day grace period from the scheduled
interest payment dates before an event of default occurs, due to late payment of
interest. The Company did not have sufficient liquidity to make the December
2003 interest payments on its Senior Notes within the 30-day grace period and
has incurred an event of default due to non payment of interest under which the
Senior Notes could become currently due and payable.


Item 5. Other Information

On November 10, 2003, the Company issued a press release and filed a Form
8-K announcing the resignation of the Company's Chairman and CEO Tom E. DuPree,
Jr. and its Chief Administrative officer, Margaret (Beth) Waldrep. The Company
also announced that it will be appointing Kevin Leary of AlixPartners, LLC as
interim CEO, and Robert Sroka, a director since 2000, as Acting Chairman of the
Board. The Company will record charges of approximately $0.7 million and $0.4
million during the fourth quarter of 2003 related to severance payments for Mr.
DuPree and Ms. Waldrep, respectively. Approximately 75% of the severance
payments have been paid during the fourth quarter of 2003 and the remaining 25%
will be paid during February of 2004.

The Company's independent certified public accountants have not completed
their limited review of the financial information included in this quarterly
report in accordance with Statement on Auditing Standards No. 100 as required by
Rule 10-01 of SEC Regulation S-X. The delay in the completion of the limited
review has resulted from recent developments and changes in management of the
Company. As a result of these developments and changes, the Company has not been
able to provide the certifications of the CEO specified in sections 302 and 906
of the Sarbanes-Oxley Act of 2002. Further, the Company has not been able to
provide satisfactory management representations to its independent certified
public accountants, including representations that would normally be supplied by
its CEO. The Company believes that the aforementioned issues will be resolved
and a review by the Company's independent certified public accountants will be
completed in the near future. An amended Form 10-Q will be filed at that time to
include the aforementioned certifications and eliminate this paragraph and the
Note on the page following the cover page of this Form 10-Q. The Company expects
no other changes to this Form 10-Q as a result of the completion of the
independent certified public accountants' limited review of the financial
information included herein.


Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

10.1 Real estate purchase and sale agreement, dated as of May 30, 2003,
between Don Pablo's Operating Corp., an Ohio corporation, as seller and Miko
Investments, LLC, a Tennessee limited liability company as buyer.

10.2 Ground lease agreement, dated as of May 30, 2003, between Miko
Investments, LLC, a Tennessee limited liability company as landlord and Don
Pablo's Operating Corp., an Ohio corporation, as tenant.

30


10.3 First amendment to ground lease, dated as of May 30, 2003, between
Miko Investments, LLC, a Tennessee limited liability company as landlord and Don
Pablo's Operating Corp., an Ohio corporation, as tenant.

10.4 Purchase and sale agreement, dated as of August 29, 2003, between
Avado Brands, Inc., a Georgia corporation, as seller, and Skyline-Fri 12,
Matthews, L.P. a Texas limited partnership, as buyer.

10.5 Land and building lease agreement, dated as of August 29, 2003,
between Skyline-Fri 12, Matthews, L.P. a Texas limited partnership, as landlord
and Hops of Matthews, LTD., a Florida limited partnership, as tenant.

31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

99.1 Safe Harbor Under the Private Securities Litigation Reform Act of
1995. (1)

99.2 Separation and general release agreement, dated as of November 8,
2003, between Avado Brands, Inc. and Thomas E. DuPree, Jr., former Chairman of
the Board and Chief Executive Officer of Avado Brands, Inc.

99.3 ADEA release agreement, dated as of November 8, 2003, between Avado
Brands, Inc. and Thomas E. DuPree, Jr., former Chairman of the Board and Chief
Executive Officer of Avado Brands, Inc.

99.4 Separation and general release agreement, dated as of November 8,
2003, between Avado Brands, Inc. and Margaret E. Waldrep, former Chief
Administrative Officer of Avado Brands, Inc.

99.5 ADEA release agreement, dated as of November 8, 2003, between Avado
Brands, Inc. and Margaret E. Waldrep, former Chief Administrative Officer of
Avado Brands, Inc.


(1) Incorporated by reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 2, 2000.


(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K, dated July 1, 2003, which
disclosed, pursuant to Item 5, the Company's receipt of a copy of a Notice of
Default and Acceleration Notice, purportedly also delivered to the Trustee of
the Company's 9.75% Senior Notes due June 2006, by certain holders of the Senior
Notes.

The Company filed a Current Report on Form 8-K, dated July 1, 2003, which
furnished, pursuant to Item 9, a press release, dated July 1, 2003, issued by
the Company commenting on claims, seeking payment acceleration, made by certain
noteholders of the Company.

The Company filed a Current Report on Form 8-K, dated August 5, 2003, which
furnished, pursuant to Item 12, a press release, dated August 5, 2003, issued by
the Company concerning the Company's financial condition and results of
operations for the quarter and six months ended June 29, 2003.

The Company filed a Current Report on Form 8-K, dated September 24, 2003,
which furnished, pursuant to Item 12, a press release, dated September 24, 2003,
issued by the Company updating its progress on key initiatives including
increasing same-store sales, reducing debt and improving profitability.

The Company filed a Current Report on Form 8-K, dated November 10, 2003,
which furnished, pursuant to Item 9, a press release, dated November 10, 2003,
issued by the Company announcing management changes including the naming of an
interim Chief Executive Officer and Acting Chairman of the Board.

31


The Company filed a Current Report on Form 8-K, dated December 1, 2003,
which disclosed, pursuant to Item 5, a press release, dated December 1, 2003,
issued by the Company announcing its intent to utilize the 30-day grace periods,
provided for under the terms of the indentures, for the payment of semi-annual
interest due December 1 and December 15 on the Company's 9.75% Senior Notes and
11.75% Senior Subordinated Notes. The Company also reported that it was
currently in covenant default on certain provisions of its secured credit
facility and was negotiating with its secured lenders to address those defaults.

The Company filed a Current Report on Form 8-K, dated December 15, 2003,
which furnished, pursuant to Item 9, a statement confirming the Company's intent
to utilize the 30-day grace period, provided for under the terms of the
indenture, for the payment of semi-annual interest due December 15 on the
Company's 11.75% Senior Subordinated Notes.

The Company filed a Current Report on Form 8-K, dated January 5, 2004,
which disclosed, pursuant to Item 5, press releases, dated December 31, 2003 and
January 2, 2004, issued by the Company announcing failure to make interest
payments due on the Company 9.75% Senior Notes, thereby incurring an event of
default. The Company also announced that it had executed a forbearance agreement
with its senior secured lenders which was attached as an exhibit to the Form
8-K.

32


Signature

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



Avado Brands, Inc.
(Registrant)



Date: January 9, 2004 /s/Louis J. Profumo
-------------------
Louis J. Profumo
Chief Financial Officer


33