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See Notes to Condensed Financial Statements (Unaudited)

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See Notes to Condensed Financial Statements (Unaudited)

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April 1, 2003

The accompanying unaudited Condensed Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals, except for the reclassifications required by the two accounting statements described in the next paragraph) considered necessary for a fair presentation for the interim periods have been included. The results for the interim periods are not necessarily indicative of the results to be expected for the full year.

These financial statements should be read in conjunction with the financial statements and footnotes included in the Piccadilly Cafeterias, Inc. Annual Report on Form 10-K for the year ended July 2, 2002. Except for the adoption of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144) as discussed in Note 5 below, SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145), as discussed in Note 4 below, and the adoption of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146), the accounting policies used in preparing these financial statements are the same as those described in the Piccadilly Cafeterias, Inc. Annual Report on Form 10-K for the year ended July 2, 2002.

Comparative results of operations by periods may be affected by the timing of the opening and closing of cafeterias. Interim results are additionally affected by seasonal fluctuations in guest traffic volume. Guest traffic volume is subject to seasonal retail activity since approximately 50% of our cafeterias are located in regional shopping malls.

We determine impairment write-downs as being necessary for cafeteria locations when events or changes in circumstances indicate that the total carrying value of that location's assets may not be recoverable. During the quarter ended April 1, 2003, we recorded an asset impairment charge of $0.9 million for the entire remaining carrying value related to one cafeteria whose recent sales trends indicate that future cash flows will not be sufficient to recover its net carrying value. This cafeteria generated, before allocation of corporate overhead, net losses of $(0.1) million on net sales of $0.8 million for the first three quarters of fiscal 2003 and was break-even on net sales of $1.0 million for the first three quarters of fiscal 2002.

During the quarter ended December 31, 2002, we evaluated recent sales trends at these 48 cafeterias and based on that evaluation, we concluded that continued efforts to build guest traffic in these 48 cafeterias were not likely to yield the future cash flows necessary to recover their net carrying values. As a result of that evaluation, we recorded asset impairment charges of $5.8 million relating to the 48 low sales-volume cafeterias that were operating at the end of the quarter. These cafeterias generated, before allocation of corporate overhead and excluding the asset impairment charges, net losses of $(2.4) million and $(1.0) million on net sales of $36.2 million and $39.7 million for the first three quarters of fiscal 2003 and 2002, respectively. Six of these cafeterias were closed during the quarter ended April 1, 2003. As a group, the remaining 42 cafeterias have an average of 2.3 years remaining on their leases as of the quarter ended April 1, 2003. We expect that future marketing and capital expenditures relating to these cafeterias will be limited.

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We engaged a consulting firm with significant experience in renegotiating leases with regional and nationwide landlords. The consultants have been and continue to be engaged in one-on-one discussions with the landlords of low sales-volume cafeterias in an effort to secure more favorable lease arrangements, including buyouts of or early termination of the leases. To the extent cafeterias are closed before the end of their existing lease terms, we would expect to record charges for payments made or for accruals of obligations remaining to landlords in the period that such cafeterias are closed. As of May 14, 2003, we have made significant progress in these negotiations and have reached verbal agreements, which in some cases have been reduced to writing, with the landlords of 25 operating cafeterias and 3 other surplus properties to either i) buyout the remaining lease obligation, terminate the lease and close the cafeteria, if applicable (15 properties), ii) reduce the remaining occupancy costs and operate the cafeteria for the remaining term of the lease (8 properties), or iii) close the cafeteria and pay the remaining lease obligation as scheduled by the lease (5 properties). Some of these agreements have not been finalized and could change materially before final documentation is agreed.

Of the 25 operating cafeterias that are the subject of lease negotiations, we expect to close 17 cafeterias during the fourth quarter ending July 1, 2003, of which 12 were closed as of May 14, 2003. On average, the remaining lease-lives of the 17 cafeterias that have closed during the fourth quarter or are expected to close during the fourth quarter was 2.3 years as of April 1, 2003. We expect to record a closing charge in the fourth quarter for closing costs of approximately $4.6 million, primarily for lease-related costs. We estimate that the remaining lease-related obligations of these 17 properties before negotiations and as of April 1, 2003 were approximately $14.9 million. Selected operating results for the 17 cafeterias expected to close are:

In addition, we terminated our lease covering one of our surplus properties in the third quarter, and intend to terminate leases on two other surplus properties during the fourth quarter. Based on our discussions with landlords of these properties to date, we expect that the lease-related termination cost for these properties will be $0.4 million as compared to our that the remaining lease-related obligations of these properties before negotiations and as of April 1, 2003 were approximately $1.4 million.

During the third quarter of fiscal 2002, we recorded $0.2 million of asset impairment charges because we closed a cafeteria when the landlord exercised his right to terminate the lease.

We are required each year to make offers to repurchase the Term A Senior Notes and amounts outstanding under the Term Loan Credit Facility utilizing excess cash flow from the immediately preceding fiscal year. Excess cash flow is defined as EBITDA less interest expense, income tax expense, and capital expenditures. Until the Term Loan Credit Facility was repaid during the second quarter of fiscal 2003, we were required under the Term A Senior Secured Notes and Term Loan Credit Facility, during any fiscal year that we had excess cash flow of more than $2.5 million, to make an offer (the "first excess cash flow offer") to repurchase our Term A Senior Secured Notes and to prepay indebtedness outstanding under our Term Loan Credit Facility, in each case at 101% of the principal amount thereof, plus accrued interest. The first excess cash flow offer was required to be in an amount equal to the lesser of $5 million or the excess cash flow, and was required to be made ratably between the holders of the Term A Senior Notes and the Term Loan Credit Facility. In addition, we were required by the Term Loan Credit Facility to make a second offer (the "second excess cash flow offer") if we had excess cash flow more than $5 million during the immediately preceding fiscal year. The second excess cash flow offer was required to be in an amount equal to 50% of the amount by which our excess cash flow exceeded $5 million, and was required to offer to prepay indebtedness outstanding under the Term Loan Credit Facility at 101% of the principal amount thereof, plus accrued interest. We have the ability to prepay this indebtedness by using cash balances on hand, cash generated by operations, and cash available under our Senior Credit Facility.

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The required excess cash flow offers for the year ending July 1, 2003, amounting to $9.9 million, were made on September 30, 2002 and October 2, 2002, respectively, and on October 28, 2002 and October 31, 2002, following the end of the offer acceptance periods, we paid $3.6 million and $5.1 million, respectively, to repay debt, with the result that the Term Loan Credit Facility was entirely repaid. The second quarter ended December 31, 2002, included a charge of $1.3 million for early retirement of debt. The charge was comprised of $0.7 million premium paid over the repaid debt's carrying value and $0.6 million for related unamortized financing costs. After these repayments, $39.2 million of our Term A Senior Secured Notes remained outstanding and our Term Loan Credit Facility was entirely repaid. Prospectively, because the Term Loan Credit Facility has been fully repaid, our excess cash flow offers will be limited to the first excess cash flow offer, or $5 million. For fiscal 2002, no excess cash offers were required because excess cash flow for fiscal 2001 was below $2.5 million.

We have a $20 million senior credit facility with Foothill Capital Corporation (the "Senior Credit Facility"). At April 1, 2003, approximately $11.8 million of the Senior Credit Facility was used for outstanding commercial letters of credit and the remaining $8.2 million, subject to certain covenant limitations, was available for working capital and for other corporate purposes. As of April 1, 2003, we had no outstanding borrowings under the Facility. The Senior Credit Facility matures in December 2004. The three quarters ended March 31, 2002 includes a $0.5 million loss from the early retirement of debt related to the unamortized financing costs of a previous credit facility that was replaced.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4. We adopted SFAS No. 145 in the quarter ended October 1, 2002, as required. Losses on extinguishments of debt previously classified as extraordinary charges are reclassified to conform to the provisions of SFAS No. 145.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and 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 for a Disposal of a Segment of a Business. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sales and broadens the presentation of discontinued operations to include more disposal transactions. We adopted SFAS No. 144 in the quarter ended October 1, 2002, as required. Sixteen cafeterias were closed during the three quarters ended April 1, 2003. Included in discontinued operations for the quarter and three quarters ended April 1, 2003, is a gain on the sale of a cafeteria we closed in Deerfield Beach, Florida, of $0.8 million. The operating results of these 16 closed cafeterias for all periods presented have been reclassified and reported as discontinued operations. SFAS No. 144 does not permit reclassifying the operating results of cafeterias closed before fiscal 2003 to discontinued operations. The cafeterias described in Note 3 as "expected to close" were not closed as of April 1, 2003 and accordingly are not included in the discontinued operations.

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During the quarter ended April 1, 2003, we applied to the Internal Revenue Service for certain tax accounting method changes. As a result of these changes, we also filed a refund claim to carry back the tax net operating loss generated in the July 2, 2002 tax year to prior years which were previously outside the permitted carry back period until the enactment of the Job Creation and Work Assistance Act of 2002. At December 31, 2002, we estimated that the amount of the refund would be approximately $2.0 million. As a result of finalizing the return in the quarter ended April 1, 2003, the actual refund claim was $2.5 million. We received $2.2 million of the refund during the third quarter and we received $0.2 million of the refund in April 2003. We expect to receive the remaining $0.1 million by the end of the fourth quarter of this fiscal year. Likewise, in fiscal 2002 we filed and received a $2.0 million refund claim with the Internal Revenue Service to carry back net operating losses recognized in the June 30, 2001 taxable year to the June 30, 1996 taxable year. Because a full valuation allowance had previously been established for the Company's net deferred tax assets, including net operating losses, these refunds resulted in adjustments to the valuation allowance and tax benefits of approximately $2.5 million for fiscal 2003, $2.0 million of which was recognized in the quarter ended December 31, 2002 and $0.5 million of which was recognized in the quarter ended April 1, 2003, and $2.0 for fiscal 2002. Under SFAS No. 109, Accounting for Income Taxes, a valuation allowance is still recorded for the remaining net deferred tax assets.

We account for our employee stock options under the intrinsic value method described by Accounting Principles Bulletin 25, Accounting for Stock Issued to Employees. Accordingly, we have not recorded compensation expense for options, because all options have been issued with an exercise price equal to the stock's market price on the grant date. If we had accounted for our employee stock options using the fair value method described in Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation, our net income (loss) and earnings (loss) per share would have been reduced to the pro-forma amounts below: