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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Piccadilly Cafeterias, Inc.

Registrant’s telephone number, including area code (225) 293-9440

Securities registered pursuant to Section 12(b) of the Act

Securities registered pursuant to Section 12(g) of the Act

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.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

The aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price of such stock on December 31, 2002 was $12,437,352.

The number of shares outstanding of Common Stock, without par value, as of September 22, 2003 was 10,910,221.

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PART I

Item 1. Business

Overview

Piccadilly Cafeterias, Inc., founded in 1944, is the largest cafeteria chain in the Southeastern and Mid-Atlantic regions of the United States with 170 cafeterias in 15 states as of September 29, 2003. We serve a diverse and loyal customer base consisting of families, groups of friends and co-workers, senior citizens, couples, and students. Our patrons enjoy a wide selection of convenient, healthy, freshly prepared “home cooked” meals at value-oriented prices for lunch and dinner. Additional information is available on our website at www.piccadilly.com.

As previously announced in May 2003, our Board of Directors accepted the resignation of Ronald A. LaBorde as the Company’s chief executive officer, and engaged PMCM, LLC (“PMCM”), an operationally focused turnaround and crisis management firm, to provide an interim chief executive officer, Mr. John G. “Jack” McGregor, as well as financial advisory, management and restructuring services to the Company. In June 2003, we announced that our Board of Directors had authorized management to pursue a range of strategic options, including a possible sale of the Company, in an effort to maximize the Company’s value for the benefit of its constituencies. Management, working together with PMCM, began to explore the feasibility of a variety of strategic options, including remaining independent but downsizing the Company by shedding its unprofitable cafeterias and/or renegotiating the terms of unfavorable leases, seeking a capital partner to invest equity into the Company, seeking relief from the Pension Benefit Guaranty Corporation with respect to future funding obligations of the Company to restore the Company’s defined benefit plans to fully funded status, and renegotiating the terms of the Company’s secured indebtedness. However, given the magnitude of the Company’s funding liability for its pension plans, the projected cash cost of buying out the leases of the Company’s remaining unprofitable locations, and the Company’s liquidity constraints, management and PMCM concluded, and recommended to the Board, that while efforts would continue to pursue options to allow the Company to remain independent, the most prudent course of action would be to begin a process to determine whether credible bids to acquire the Company’s operations could be elicited.

With the Board’s approval, in late July, the Company and PMCM commenced this process, assembled a data room for due diligence materials, and began circulating confidentiality agreements and the descriptive memorandum to invite expressions of interest from potential strategic and financial buyers. Approximately 40 of the parties who were contacted executed confidentiality agreements and reviewed the descriptive memorandum. Of that group, six parties subsequently indicated an interest in conducting due diligence at the Company's data room and receiving a presentation from management. The Company is now engaged in ongoing discussions with several of these parties which have expressed a potential interest in acquiring the Company's profitable operations and locations.

All of the interested parties have indicated they would structure their offers as a sale in accordance with Section 363 of the United States Bankruptcy Code following the Company's Chapter 11 bankruptcy filing. Since in bankruptcy, the Company has the ability to reject undesirable contracts and leases and terminate benefit plans, this structure reflects and addresses the magnitude of the Company's pension plan liabilities, the costs of closing the Company's remaining unprofitable leased operations, and the Company's liquidity constraints. The Company has focused on transactions requiring an all cash price for the Company's most profitable assets and operations. In the bankruptcy proceeding, this cash price, together with any net cash realized in liquidating the Company's remaining assets, would be available to pay the Company's debts after paying for the Company's ongoing operations and the administrative costs of the bankruptcy. The bankruptcy case would also include procedures to seek bidders interested in paying a higher and better price for the Company's assets. Based on the indicative prices being discussed, the Company will not generate adequate funds to pay its liabilities in full.

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If negotiations are successful, the Company would execute a definitive agreement with the purchaser immediately prior to filing under Chapter 11. The Company would then request the bankruptcy court to approve the sale (including a higher and better sale transaction that could emerge during the Section 363 sale process). If all of these efforts succeed and we do not encounter delays, the Company could sign and announce a definitive sale agreement and file for Chapter 11 by the end of October 2003 and close the transaction in early 2004.

If we cannot reach a definitive agreement with a prospective purchaser, we expect to file to reorganize under Chapter 11 of the Bankruptcy Code in October 2003. In that case, without a purchaser to pay cash to the Company for its business, the Company would seek to renegotiate the terms of its existing debt and have a plan of reorganization confirmed by its creditors and approved by the bankruptcy court. The outcome for all of the Company’s creditors under a plan of reorganization is unclear, but the Company's shareholders would receive little or no value for their shares under any plan of reorganization for the Company.

The terms of a potential sale of the Company’s assets with bankruptcy court approval, or the terms of a reorganization plan ultimately confirmed by a bankruptcy court, will compromise significantly our ability to discharge our various pre-petition unsecured debts and will greatly diminish or eliminate any value of our equity securities. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies. A bankruptcy filing could result in holders of Piccadilly common stock receiving little or no value for their interests. Because of such possibilities, the value of the common stock is highly speculative. We urge that appropriate caution be exercised with respect to existing and future investments in any of the Company’s debt obligations and common stock.

We closed 32 “Non-Core Cafeterias”. During fiscal 2003, we engaged a consulting firm with significant experience in renegotiating leases with regional and nationwide landlords. The consultants engaged in one-on-one discussions with the landlords of 49 “Non-Core Cafeterias” and 19 “Surplus Properties” in an effort to secure more favorable lease arrangements, including buyouts of or early termination of the leases. As a result of these efforts, and the efforts of management, we closed 32 “Non-Core Cafeterias” during fiscal 2003. Of the 32 “Non-Core Cafeterias that were closed, we owned two of the properties. One of those properties was subsequently sold during fiscal 2003 and the second property was sold shortly after the end of fiscal 2003. The remaining 30 closed “Non-Core Cafeterias” were leased properties. Of these 30 leases, 18 leases have terminated either by expiration of the lease term or by negotiations with landlords. We have continuing lease obligations relating to the remaining 12 leases.

The 32 “Non-Core Cafeterias” closed in fiscal 2003 had net sales in fiscal 2003 of $21.0 million and net losses in fiscal 2003, excluding the allocation of corporate overhead and excluding gain on sale of properties, of $3.5 million. We realized a $0.8 million gain on the sale of one of the properties. The operating results of these cafeterias are classified as discontinued operations in our Statements of Operations for all periods presented (see Note 3 to the Financial Statements for further discussion).

We continue to operate poor-performing cafeterias and we continue to undertake efforts to negotiate the termination of the leases relating to those cafeterias. If we are unsuccessful in our negotiation efforts, we would expect to close those poor-performing cafeterias. In addition, we would also expect to close any poor-performing cafeterias not purchased out of the Company’s assets by a prospective purchaser.

The minimum pension liability increased. We recorded an additional minimum pension liability of $19.1 million at the end of fiscal 2003. The funded status of our pension plans deteriorated during fiscal 2003 because the return on invested pension assets was only 0.9% and the present value of the plans’ liabilities had increased, reflecting a decline in the discount rate assumption from 7.25% to 6.00%. The additional minimum pension liability did not affect our earnings, but did completely eliminate total shareholders’ equity.

Senior debt partially repurchased; No repurchase offer to be made in 2003. The required offers to repurchase portions of our senior secured debt in fiscal 2003 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 portions of our senior secured debt, with the result that the Term Loan Credit Facility was entirely repaid and $39.2 million of our Term A Senior Secured Notes remains outstanding. The terms of our Term A Senior Secured Notes obligate the Company to make an excess cash flow offer of $5 million (inclusive of accrued interest) on September 30, 2003. However, given the likelihood that the Company will seek protection under the federal bankruptcy laws in the near future, the Company decided to not provide the required notice. Under the terms of the Term A Senior Secured Notes, the Trustee for the Noteholders will have the right to notify the Company of its contractual breach which, if not cured timely, would accelerate the Company’s $39.2 million indebtedness. If such a notice is received, the Company does not intend to cure the breach.

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Cafeteria Operations

Significant Cafeteria Market Share in Core Markets. We are the largest cafeteria chain in the Southeastern and Mid-Atlantic regions of the United States with 172 cafeterias. The next largest cafeteria chain in these regions operates approximately 35 cafeterias. The family dining industry is competitive and has grown significantly through the introduction of new restaurant concepts and new restaurant openings, but the cafeteria segment has had few new entrants. In addition, the existing major cafeteria chains have generally focused on their existing regional markets.

Diverse and Loyal Customer Base. In our 59-year history we have developed substantial brand equity and guest loyalty and we have developed a diverse guest base. We believe cafeteria dining meets diverse guest needs by providing convenient, healthy, freshly prepared, and reasonably priced meals. We attribute our broad market appeal and high level of repeat business to the consistent quality of our meals, our varying menu selection, convenient cafeteria format, value pricing, and well-recognized brand name.

High Quality Food Offering. We were awarded the 2002 Choice in Chains Gold Award by Restaurants & Institutions (“R&I”) magazine. The R&I Choice in Chains award is based on a national consumer survey. Consumers gave us the second highest overall ranking in the cafeteria/buffet segment based on rating attributes such as food quality, service, cleanliness, value, and atmosphere and menu variety. All of our cafeterias offer a wide variety of quality, reasonably priced meals. Each of our cafeteria general managers has the ability to vary their menu to include local and seasonal favorites from our extensive proprietary recipe files.

Experienced Management Team. Our senior management team averages almost 17 years of experience at Piccadilly (excluding interim officers provided by PMCM). In addition, our regional and cafeteria general managers have an average of 24 and 18 years of experience at Piccadilly, respectively. As a result, our management team, at both the executive officer and local manager levels, is extremely familiar with our existing markets and customer base.

Store Design and Layout. Our traditional cafeterias average approximately 10,000 square feet in size and seat, on average, approximately 350 guests. During 1997, we completed the design of a more compact cafeteria model, which has approximately 7,500 square feet and seats approximately 200 guests. This smaller cafeteria allows us to access a broader range of markets at a lower investment cost. At the end of fiscal 2003, we had nine cafeterias utilizing this new design and format. We have not opened a new cafeteria since fiscal 2000 except for several cafeterias that were relocated within the same market areas in fiscal 2001 and we have no current plan to open new cafeterias for the foreseeable future.

Menu. All of our cafeterias offer a wide variety of quality, reasonably priced meals. Each of our cafeteria general managers has the ability to vary their menu to include local and seasonal favorites from our extensive proprietary recipe files. Our typical cafeteria line offers a wide food selection including up to 18 entrées, 2 soups, 20 salads, 18 vegetables, 7 breads, and 22 desserts. Guests make their meal selections by combining these items according to their individual preferences.

Pricing. We sell most meals as “bundled” meals that include an entrée, side items, and bread. Guests are also able to purchase meals on an a la carte basis. Approximately 72% of meals served in fiscal 2003 were sold as “bundled” meals. We continuously evaluate our pricing structure to assure that we deliver value-oriented meals to our guests.

Meal Preparation. Cafeteria team members cook and prepare most of our food from scratch using standardized recipes. Menus are varied at the discretion of cafeteria management in response to local and seasonal guest preferences.

Purchasing and Distribution. Currently, the general managers at each of our cafeterias have purchasing responsibility for approximately 15% of the food ingredients used in our recipes, with each general manager negotiating with local or regional suppliers for that particular cafeteria, subject to meeting company-proscribed quality specifications. The remaining 85% of the food ingredients used in our recipes is purchased centrally and distributed through two regional distributors. By maximizing our central purchasing capabilities, we believe we benefit from volume purchase discounts, as well as consistency in food quality across all of our cafeterias.

Currently, our two regional distributors have distribution centers in Baton Rouge, Louisiana and Atlanta, Georgia. The food items that are not obtained through these distributors are primarily fresh produce, dairy products and some fresh poultry products. These items are purchased from local suppliers and delivered directly to our cafeterias. We believe that there are numerous other distributors available to process our shipments should these distributors be unable to meet our distribution needs.

Employees. We refer to our employees as team members. At the end of fiscal 2003, we had approximately 7,153 team members, of whom all but 83 corporate headquarters team members worked at our cafeterias. On average, each cafeteria operates with two to four managers and assistant managers and employs 34 to 55 team members.

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Most team members are paid on an hourly basis, except cafeteria managers. Our team members are not unionized. We have experienced no significant work stoppages and believe that our team member relations are good.

Trademarks and Trade Names. Our cafeterias operate principally under the PICCADILLY, PICCADILLY CAFETERIA, and PICCADILLY EXPRESS service marks and trade names, for which we own six registrations with the United States Patent and Trademark Office. These registrations may be renewed continually for 10-year periods. The earliest filing date to maintain any of our registrations is March 28, 2006. We regard our service marks and trademarks as having significant value and being an important factor in the development of the Piccadilly concept. Our policy is to pursue and maintain registration of our service marks and trademarks whenever possible and to oppose vigorously any infringement or dilution of our service marks and trademarks.

Risks Factors Relating to Our Business

Our sales initiatives may not be successful. We have experienced a long-term, relatively consistent decline in guest traffic and net sales from our cafeteria operations. We have been able to offset some of the effects of this decline by various cost-saving initiatives that we discuss elsewhere in Item 1 of this Form 10-K. However, our ability to sustain a consistent and improving level of profitability in the future will largely depend upon our ability to successfully implement sales initiatives that increase guest traffic at our cafeterias without sacrificing profitability. Our past sales initiatives have had mixed results with any positive impact on sales being largely offset and in some cases entirely offset by the costs of such initiatives.

We are vulnerable to increasing labor costs. We are dependent upon an available labor pool of unskilled and semi-skilled team members, many of whom are hourly team members whose minimum wages are government proscribed. Numerous proposals have been made on federal, state, and municipal levels to increase minimum wage levels. Because a significant number of our team members are paid at rates tied to the federal minimum wage, an increase in the minimum wage would increase our labor costs. A shortage in the labor pool or other general inflationary pressures or changes could also increase labor costs. An increase in labor costs could have a material adverse effect on our financial results and no assurance can be given that we will be able to pass through any cost increases to our guests.

We are vulnerable to fluctuations in the cost, availability, and quality of our ingredients. The cost, availability, and quality of the ingredients we use to prepare our food are subject to a range of factors, many of which are beyond our control. Fluctuations in economic conditions, weather, and demand could adversely affect the cost of our ingredients. We require fresh produce, dairy products, and meat, and are therefore subject to the risk that shortages or interruptions in supply of these food products could develop. All of these factors could have a material adverse effect on our financial results. Although we believe that we could find alternative suppliers for these ingredients, we have no control over fluctuations in the price of commodities, and no assurance can be given that we will be able to pass through any cost increases to our guests.

We face intense competition. All aspects of the restaurant business are highly competitive. Price, restaurant locations, food quality, service and attractiveness of facilities are important aspects of competition, and the competitive environment is often affected by factors beyond a particular restaurant management’s control, including changes in the public’s eating habits, population and traffic patterns, and economic conditions. Our cafeterias compete with a large number of other restaurants, including national and regional restaurant chains and franchised restaurant operations, as well as locally owned, independent restaurants. Many of our competitors have greater financial resources than we have. There can be no assurance that we will be able to compete successfully against our competitors in the future or that competition will not have a material adverse effect on our financial results.

We are vulnerable to changes in consumer preferences and economic conditions. Food service businesses are often affected by changes in consumer tastes, national, regional, and local economic conditions, and demographic trends. Factors such as traffic patterns, demographics, and the type, number and location of competing restaurants may adversely affect the performance of individual cafeterias. In addition, inflation, increased food, labor, energy, employee benefit costs, and insurance rates, national, regional and local regulations, regional weather conditions, and the availability of experienced management and hourly employees may harm the restaurant industry in general and our cafeterias in particular. Adverse changes in any of these factors could reduce guest traffic or impose practical limits on pricing, which could have a material adverse effect on our financial results. Our continued success will depend in part on our ability to anticipate, identify, and respond to changing consumer preferences and economic conditions.

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We face risks because of the number of cafeterias that we lease. Our success depends in part on our ability to renew leases in existing locations at rental rates we believe to be reasonable. We currently lease all of our cafeterias located in strip shopping centers and malls and we lease the land for all but 10 of our freestanding cafeterias. Many of our leases have terms expiring during the next five years. Each lease agreement also provides that the landlord may terminate the lease for a number of reasons, including if we default in any payment of rent or taxes or if we breach any covenants or agreements in the lease. We can offer no assurances that we will always comply with all lease covenants and agreements nor that we will succeed in renewing such leases in the future at rental rates that we believe to be reasonable or at all. Moreover, if certain locations should prove to be unprofitable, we would remain obligated for lease payments if we decided to withdraw from such locations. Termination of any of our leases could harm our financial results.

We are required to make additional contributions to our frozen defined benefit pension plans. We sponsor two qualified defined benefit pension plans. Both of these plans are frozen so covered team members are not currently accruing benefits under these plans. These plans are subject to the minimum funding levels of the Employee Retirement Income Security Act of 1974. Several market-driven factors, over which we have no control, influence the funding level of these plans and thus the timing and extent to which we are required to fund contributions to these plans. The net present value of obligations of the plans is subject to fluctuations in interest rates and the fair value of plan assets is subject to market volatility. Our defined benefit pension plans were underfunded at the end of fiscal 2003 by $41.7 million. During fiscal 2003 we made pension contributions of $0.8 million. Initial estimates provided to us by our consulting actuaries indicate that the required contributions during calendar 2004 will range from $7 million to $12 million. It is likely that we will be required to use a substantial portion of our available liquidity to fund minimum required contributions to the plans. There can be no assurance that we will have sufficient liquidity to fund the minimum required contributions when they become due. Moreover, there can be no assurance that after such contributions are made, the remaining liquidity will be sufficient for operating purposes.

We may not be able to reach a definitive agreement for the sale of the Company. In late July, the Company and PMCM invited expressions of interest from potential strategic and financial buyers. Approximately 40 of the parties who were contacted executed confidentiality agreements and reviewed the Company's descriptive memorandum. Of that group, six parties subsequently indicated an interest in conducting due diligence at the Company's data room and receiving a presentation from management. The Company is now engaged in ongoing discussions with several of these parties who have a potential interest in acquiring the Company's profitable operations and locations. The Company's discussions with interested purchasers have developed to the point that management and PMCM are now pursuing negotiating the parameters of a sale and the terms and process leading to a definitive agreement and the consummation of a transaction. If all of these efforts succeed and we do not encounter delays, the Company could sign and announce a definitive sale agreement and file for Chapter 11 in October 2003 and consummate the transaction in early 2004. If we cannot reach a definitive agreement with a prospective purchaser, we expect to file to reorganize the Company under Chapter 11 of the Bankruptcy Code before the end of October 2003. In that case, without a purchaser to pay cash to the Company for its business, the Company would seek to renegotiate the terms of its existing debt and have a plan of reorganization confirmed by its creditors and approved by the bankruptcy court. The outcome for all of the Company's creditors under a plan of reorganization is unclear, but the shareholders would receive little or no value for their equity interests under any plan of reorganization.

We are subject to restrictions under the terms of our debt agreements; Possibility of default of Term A Senior Secured Notes. Our Senior Credit Facility includes covenants that require us to maintain specified financial ratios, including fixed charge coverage and leverage ratios and a minimum level of earnings before interest, income tax, depreciation, and amortization expenses. In addition, our Senior Credit Facility and Senior Note Indenture (collectively, our “Debt Agreements”) contain covenants that restrict, among other things, our ability to incur additional indebtedness and dispose of assets, incur or guarantee obligations, repay indebtedness or amend debt instruments, pay dividends, create liens on assets, make investments, make acquisitions, engage in mergers or consolidations, make capital expenditures and engage in certain transactions with subsidiaries or affiliates.

The terms of our Term A Senior Secured Notes obligate the Company to make an excess cash flow offer of $5 million on September 30, 2003. However, given the likelihood that the Company will seek protection under the federal bankruptcy laws in the near future, the Company decided to not provide the required notice. Under the terms of the Term A Senior Secured Notes, the Trustee for the Noteholders will have the right to notify the Company of its contractual breach which, if not cured timely, would accelerate the Company’s $39.2 million indebtedness. If such a notice is received, the Company does not intend to cure the breach.

We face the risk of adverse publicity and litigation. We may from time to time be the subject of complaints or litigation from guests alleging illness, injury, or other food quality, health, or operational concerns. Negative publicity resulting from these allegations could have a material adverse effect on our financial results, regardless of whether the allegations are valid or whether we are liable. In addition, employee claims against us based on, among other things, discrimination, harassment, or wrongful termination may divert our financial and management

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resources that would otherwise be used to benefit the performance of our operations. We have been subject to such employee claims from time to time, and although these claims have not historically had a material impact on our operations, a significant increase in the number of these claims or an increase in the number of successful claims could have a material adverse effect on our financial results.

We face risks associated with government regulation. Each of our cafeterias is subject to licensing and regulation by the health, sanitation, safety, building, and fire agencies of the respective states and municipalities in which the cafeteria is located. A failure to comply with one or more regulations could result in the imposition of sanctions, including the closing of facilities for an indeterminate period of time or third-party litigation, either of which could have a material adverse effect on our financial results. Under various federal, state and local laws, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such liability may be imposed without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Although we are not aware of any material environmental conditions that require remediation by us under federal, state, or local law at our properties, we have not conducted a comprehensive environmental review of our properties or operations and no assurance can be given that we have identified all of the potential environmental liabilities at our properties or that such liabilities would not have a material adverse effect on our financial condition.

Item 2. Properties

All of our cafeterias are located in urban and suburban areas, in a variety of strip shopping centers, malls, and freestanding buildings. We lease all of the cafeterias located in strip shopping centers and malls. Of the 70 cafeterias located in freestanding buildings, we own the building and land for 10 of the cafeterias, and the remaining freestanding cafeterias are operated in buildings we constructed on leased land under long-term leases. We rent most of our cafeteria facilities under long-term leases with varying provisions and with original lease terms generally of 20 to 30 years and in most cases, with options to renew for several successive five-year periods. Leases provide for monthly rentals, typically computed on the basis of a fixed amount plus a percent of sales. We evaluate the sales trends and the forecasted operating results for cafeterias with expiring lease terms to determine whether to exercise renewal options or negotiate lease extensions.

Our cafeteria locations by state as of July 31, 2003, are as follows:

⁽¹⁾ Includes two quick service cafeterias in mall food courts.

Our corporate headquarters occupies approximately two-thirds of a Company-owned 45,000 square foot office building and is located on a Company-owned tract that, together with a freestanding cafeteria immediately next door, comprises approximately five acres in Baton Rouge, Louisiana. The remainder of the building is leased to commercial tenants.

Item 3. Legal Proceedings

We are not a party to and do not have any property that is the subject of any legal proceedings pending or, to our knowledge, threatened, other than ordinary routine litigation incidental to our business and proceedings that is not material or as to which we believe we have adequate insurance.

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

None.

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PART II

Item 5. Market for the Registrant’s Common Stock and Related Security Holder Matters

Our Common Stock is traded on the American Stock Exchange under the symbol “PIC.” The following table sets forth the high and low sales prices for each quarter within the last two fiscal years. As of September 22, 2003, there were approximately 2,365 record holders of our Common Stock.

We have not paid a dividend on our Common Stock since the Board suspended our regular quarterly dividend on February 7, 2000. Our Senior Credit Facility prohibits payment of dividends. For further discussion, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” and Note 9 to the Financial Statements.

Equity Compensation Plan Information

The table below summarizes certain information regarding securities authorized for issuance to our employees, officers and directors under our equity compensation plans as of the end of fiscal 2003:

See Note 11 to the Financial Statements for further discussion.

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Item 6. Selected Financial and Operating Data

(1)

Excludes amortization of deferred financing costs. Includes $5.0 million write-off of goodwill for fiscal 2001 (see Note 2 to the Financial Statements in Item 8 for further discussion).

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(2)		Maintenance capital expenditures are those expenditures unrelated to opening new cafeterias, but are required to remodel and otherwise improve existing cafeteria facilities and equipment and which increase the value or extend the lives of assets and are therefore capitalized and depreciated over their estimated useful lives. The term “maintenance capital expenditures” does not include repairs and maintenance expenditures that are charged to operations as incurred.
(3)		“Same-stores” are cafeterias that were open for twelve full accounting months in both comparative periods. Since Morrison was acquired on May 28, 1998, the Morrison Acquisition does not affect the total same-store sales comparison for fiscal 1999.
(4)		Relates to an IRS refund for the carry back of fiscal 2002 net operating losses to prior fiscal years (see Note 7 to the Financial Statements in Item 8 for further discussion).
(5)		Relates to an IRS refund for the carry back of fiscal 2001 net operating losses to fiscal 1996 (see Note 7 to the Financial Statements in Item 8 for further discussion).
(6)		Includes a $15.7 million valuation allowance for deferred tax assets (see Note 7 to the Financial Statements in Item 8 for further discussion).
(7)		The sale of Ralph & Kacoo’s was completed on March 30, 1999. Results for fiscal 1999 include nine months of Ralph & Kacoo’s operations.
(8)		The sale of Ralph & Kacoo’s resulted in a reported gain of $1.6 million and a net tax benefit of $0.8 million.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Financial Statements contained in this annual report on Form 10-K. References to “Notes” are to the Notes to Financial Statements in Item 8.

Piccadilly is the largest cafeteria chain in the Southeastern and Mid-Atlantic regions with 170 cafeterias operating at September 29, 2003. We serve a diverse and loyal customer base consisting of families, groups of friends and co-workers, senior citizens, couples and students. Our patrons enjoy a wide selection of convenient, healthy, freshly prepared “home cooked” meals at value-oriented prices for lunch and dinner.

We categorize our operating expenses into three major categories: cost of sales, other operating expenses, and general and administrative expenses. Cost of sales consists of labor and food costs. Other operating expenses consist primarily of advertising, building and security costs, meal discounts, insurance, payroll taxes, repairs, supplies, utilities, cafeteria-level performance incentives, depreciation, rent, and other cafeteria-level expenses. General and administrative expenses consist of executive and regional manager salaries and related benefits and taxes, travel expenses, legal and professional fees, depreciation, amortization, and various other costs related to administrative functions.

Impact of a Chapter 11 Filing on the Company's Creditors and Stockholders

The terms of a potential sale of the Company’s assets under Section 363 of the Bankruptcy Code, or the terms of a reorganization plan ultimately confirmed by a bankruptcy court, will compromise significantly the Company’s ability to discharge our various pre-petition debts and will greatly diminish or eliminate any value of our equity securities. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies. A bankruptcy filing will result in holders of Piccadilly common stock receiving little or no value for their interests. Because of such possibilities, the value of the common stock is highly speculative. We urge that appropriate caution be exercised with respect to existing and future investments in any of the Company’s debt obligations and/or its common stock.

Forward-Looking Statements

Statements contained in this report that are not statements of historical fact may be forward-looking statements. Generally, forward-looking statements contain terms such as “expect,” “forecast,” “will,” “may,” or “believe.” Forward-looking statements regarding our present plans or expectations for credit facilities, cash flows, liquidity, pension accounting and cash contribution assumptions, capital expenditures, sales-building and cost-saving strategies, advertising expenditures, determinations of impairments of long-lived assets, and the disposition of closed cafeterias and surplus properties involve risks and uncertainties relative to return expectations and related allocation of resources, and changing economic or competitive conditions, which could cause actual results to differ from present plans or expectations, and such differences could be material. Similarly, forward-looking statements regarding our present expectations for operating results involve risks and uncertainties relative to these and other factors, such as the effectiveness of advertising, new product development, and the ability to achieve cost reductions, which also would cause actual results to differ from present plans. Such differences could be material. We do not expect to update such forward-looking statements continually as conditions change, and readers should consider that such statements speak only as the date hereof.

Critical Accounting Policies and Judgments

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. The financial statements are based on the application of certain accounting policies, the most significant of which are described in Note 1 to the Financial Statements, Summary of Significant Accounting Policies. Certain of these policies require estimates and strategic or economic assumptions that may prove inaccurate or subject to variations and may significantly affect our reported results and financial position for the period or in future periods. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on our future financial condition and results of operations. We consider the following policies to be the most critical in understanding the judgments that are involved in preparing our Financial Statements.

Property, Plant and Equipment. Property, plant, and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following useful lives: buildings and leasehold improvements—lesser of lease life or 30 years; furniture, fixtures and equipment—four to ten years. Lease renewal option periods are included in determining leasehold improvement useful lives when, in our opinion, it is likely that we will exercise such renewal options.

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Our accounting policies regarding land, buildings, and equipment include judgments regarding the estimated useful lives of such assets, the estimated residual values to which the assets are depreciated, and the determination as to what constitutes increasing the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense that would be reported if different assumptions were used. As discussed further below, these judgments may also impact the need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized. In addition, the actual life of the asset and residual value may be different from the estimates used to prepare financial statements in prior periods.

Impairment of Long-Lived Assets. We determine whether impairment write-downs are necessary for cafeteria locations when events or changes in circumstances indicate that the total carrying value of that location’s assets might not be recoverable. Recovery is measured by comparing the carrying value of the location’s assets to the future undiscounted net cash flows that we expect such assets to generate. Assets are considered impaired to the extent that the asset carrying value exceeds the future undiscounted cash flow associated with such asset. An impairment charge is recorded at an amount that is usually equal to the difference between the asset carrying value and the estimated present value of future net cash flows.

Some of the assumptions that are used to estimate future net cash flow include guest traffic, average meal price, specific lease provisions such as rent escalation clauses, costs associated with the ongoing maintenance and improvements of the assets, other operating expenses, and disposal value, if any. Our judgments related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as changes in economic conditions and changes in operating performance. If material adverse changes in these factors occur, or if our assumptions used to estimate future net cash flow are materially incorrect, impairment charges may become necessary in the future, and such charges could be material. During fiscal 2003, we recorded asset impairment charges of $6.7 million relating to 49 “Non-Core Cafeterias”. Based on our evaluation of recent sales trends at these 49 cafeterias, we concluded that continued efforts to build guest traffic in these cafeterias were not likely to yield the future cash flows necessary to recover their net carrying values. See Note 2 to the Financial Statements for further discussion.

Goodwill. We adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effective for July 1, 2001. SFAS No. 142 required that we analyze goodwill for impairment issues within the first six months of adopting SFAS No 142. We completed that evaluation and determined that no impairment charges were required.

At the end of fiscal 2003, goodwill is $3.2 million, or 2.9% of total assets. All of our goodwill resulted from the acquisition of Morrison Restaurants, Inc. in 1998 (the “Morrison Acquisition”). Goodwill is evaluated at the reporting unit level, as required. We consider individual cafeterias to be our reporting units. All of the goodwill remaining relates to seven cafeterias. In assessing the recoverability of recorded goodwill we make assumptions regarding estimated future cash flows and other factors. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for goodwill. We performed the annual impairment tests at the ends of fiscal 2003 and fiscal 2002, and the tests determined that there was no goodwill impairment. See Note 2 to the Financial Statements for further discussion.

Liabilities of Ongoing Obligations Related to Closed Cafeterias. We periodically review the historical operating cash flow and forecasts of future operating cash flow for each cafeteria. Forecasted cafeteria-level cash flow is a primary determinant in whether the cafeteria will continue to operate or be closed. In April 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that we recognize a liability for a cost associated with an exit or disposal activity when the liability is incurred. Under previous accounting principles, we recognized a liability for an exit cost at the date of our commitment to an exit plan. We adopted the provisions of SFAS No. 146 effective for exit or disposal activities that were initiated after December 31, 2002. Prior to the adoption of SFAS No. 146, for those cafeterias which we decided to close, we recorded charges in accordance with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (EITF 94-3). EITF 94-3 requires that such charges be recorded in the period in which we approve an exit plan that will result in the incurrence of costs that have no future economic benefit. Charges recorded under both SFAS No. 146 and EITF 94-3 typically relate to rent and other occupancy costs to be incurred after closing a cafeteria. We reduce these charges by our estimates of recoveries from subleasing activity, net of an allowance for uncollected sublease income, or our estimates of reductions from negotiations with the landlord, if any. The primary factors we consider when evaluating whether to include expected recoveries from subleasing activity are whether a sublease is under contract or if not, whether

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sufficient time remains under the lease contract for the property to be reasonably marketable. We require a minimum of five years remaining under the lease contract to consider recoveries from potential subleasing activities in determining the net charge reflected in the financial statements. If the actual results of our efforts to mitigate the ongoing obligations related to closed cafeterias are different from our estimates, a material adjustment to record additional liabilities or reduce recorded liabilities may be required.

As of the end of fiscal 2003, we have 29 closed cafeteria locations with remaining lease obligations. The total estimated remaining obligation relating to these leases was $14.7 million at the end of fiscal 2003. We have entered sublease arrangements with respect to 13 of these locations that offset $6.4 million of our remaining obligations. See Note 3 to the Financial Statements for further discussion.

Income Taxes. We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

We periodically review the valuation allowance and adjust its amount, if necessary. The factors used to assess whether such an adjustment is appropriate are our forecasts of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. At the end of fiscal 2003, we have a valuation allowance equal to the net deferred tax asset. See Note 7 to the Financial Statements for further discussion.

Liabilities for Workers’ Compensation and General Liability Claims. We are subject to workers’ compensation and general liability claims and lawsuits. To mitigate a portion of these risks, we maintain insurance for individual claims exceeding $250,000. An unrelated third-party claims administrator using historical claims data, demographic factors, severity factors, and other actuarial assumptions estimates losses relating to the self-insured retention portion of known claims. In addition, we estimate losses for unreported claims and the further development of known claims based on historical claims data. The estimated losses could be significantly affected should current and future occurrences differ from historical claims trends. While we monitor current claims closely and consider outcomes when estimating our insurance liabilities, the complexity of the claims and wide range of potential outcomes can affect our ability to make timely adjustments to the assumptions used in the estimates. Adjustments to these estimates could be material.

Pension Accounting. We sponsor noncontributory defined benefit pension plans. As of December 31, 2001, accrual of additional team member benefits under these plans was frozen. The plans provide pension benefits that are based on an average of the team member’s earnings and years of credited service. Our funding policy for the plans is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Security Act of 1974, plus any additional amounts that we may determine appropriate. We account for the defined benefit pension plans in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” which requires that amounts recognized in financial statements be determined on an actuarial basis. A minimum liability is required to be established on the Balance Sheet to the extent of any unfunded accrued pension cost, which is the difference between the accumulated benefit obligation and the fair value of the plan assets. When it is necessary to establish a minimum pension liability, an equal amount, plus the carrying value of any related prepaid pension asset, is recorded as a reduction to shareholders’ equity (deficit) (in accumulated other comprehensive loss, net of tax), in the Balance Sheet.

To determine whether a minimum pension liability is required under Statement No. 87, we must make certain assumptions. First, we use a discount rate to calculate the present value of the accumulated benefit obligation. In determining the discount rate, we consider rates of return on high-quality fixed-income investments. At the end of fiscal 2003, we determined this rate to be 6.00 percent compared to 7.25 percent used for fiscal 2002. Second, we establish an assumption for the expected long-term rate of return on pension plan assets that is used to measure the expected return on plan assets component of the net periodic pension cost for the upcoming year. At the end of fiscal 2003, we determined the rate for measuring fiscal 2004 net periodic pension cost to be 8.50% compared to 9.00% for fiscal 2003 and fiscal 2002. If we experience a difference between the actual return on plan assets and the expected return, then the amount of that difference is deferred and is amortized into periodic pension expense (income).

At the end of fiscal 2003, our net balance sheet liability for accrued pension cost was $41.7 million. We contributed $0.8 million to the pension plans during fiscal 2003 and we expect that the required contributions during fiscal 2004 will be approximately $8 million. For fiscal 2003, we recognized pension expense of $2.0 million. We currently expect pension expense for fiscal 2004 to be approximately $4.1 million. See Note 10 to the Financial Statements for further discussion.

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Results of Operations

Fiscal Year-End Reporting Period Change

Effective April 1, 2002, we adopted a 52-53 week fiscal reporting period for our 2002 fiscal year, resulting in a 2003 and 2002 fiscal year-end dates of July 1, 2003 and July 2, 2002, respectively. Prior to the change, our fiscal years ended on June 30. After the change, quarterly reporting includes 13-week periods except for a 53-week year in which the fourth quarter of that fiscal year will include 14 weeks. The change from a monthly reporting period to a 52-53 week reporting period is consistent with our industry. We refer to the fiscal year ended July 1, 2003 as fiscal 2003, the fiscal year ended July 2, 2002 as fiscal 2002 and the fiscal year ended June 30, 2001 as fiscal 2001.

As a result of the fiscal year-end reporting period change, fiscal 2003 had 364 days, fiscal 2002 had 367 days and fiscal 2001 had 365 days. Three fewer days for fiscal 2003 compared to fiscal 2002 resulted in comparatively lower net sales of approximately $2.8. Two additional days for fiscal year 2002 compared to fiscal 2001 resulted in comparatively higher net sales for fiscal 2002 of approximately $1.8 million.

Fiscal 2003 Compared to Fiscal 2002

Net sales. Total net sales for fiscal 2003 were $320.3 million, an 8.4% reduction from net sales of $349.7 million for fiscal 2002. Comparative net sales declined $2.8 million due to three fewer days. Cafeterias closed in fiscal 2002 accounted for $7.7 million, or approximately 26%, of the total decline in net sales. The remaining decline of $20.7 million is attributable to lower same-store net sales. Same-store cafeterias are cafeterias that were open for the entire period in both fiscal years. The decrease in same-store net sales of 7.3% reflects a decline in same-store guest traffic of 9.1%, which was partially offset by a check average increase of 1.8%. Approximately 64% of the check average increase is attributable to price increases and the remainder is due to various menu promotions.

Comparative same-store net sales by quarter for fiscal 2003 were (3.4)%, (3.8)%, (6.6)%, and (8.1)%, respectively for the first through fourth quarters. The family-dining segment of the restaurant industry in which we operate, and in particular, cafeteria chains, have experienced significant sales declines. We believe that the weakened economy, sluggish retail environment, international events, and the uncertainty created by a volatile stock market during fiscal 2003 have each had a negative impact on our segment of the restaurant industry. Furthermore, a significant portion of our guest base is comprised of mature guests who are more likely than other demographic groups to be dependent on fixed income. We believe that this group has curtailed its discretionary spending, materially contributing to the decline in guest visits to our cafeterias.

The guest count decline was more significant in our cafeterias located in regional shopping malls. These cafeterias comprise approximately one-half of our cafeterias. Fiscal 2003 same-store net sales for mall cafeterias were down 11.3% while non-mall cafeterias were down 7.6%, a difference of 3.7%. Fiscal 2003 same-store net sales for Non-Core Cafeterias were down 10.1% while Core Cafeterias were down 4.2%, a difference of 5.9%.

The following table illustrates cost of sales, other operating expenses, general and administrative expenses, and other expenses (income) as a percent of net sales for the comparative periods.

Cafeteria-Level Income. Cafeteria-level income (net sales less cost of sales and other operating expenses) as a percent of net sales was 5.7% and 7.3% for fiscal 2003 and fiscal 2002, respectively. The reasons for this change are discussed below.

Cost of sales. Cost of sales as a percent of net sales increased 1.0%. That increase is a combination of a 0.8% increase in food costs as a percent of net sales and a 0.2% increase in labor costs as a percent of net sales.

Most of the food cost increase relates to various marketing promotions during fiscal 2003. These programs were aimed at increasing the high-quality food reputation of the Piccadilly brand and increasing the brand’s perception for

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great value. For example, we enhanced one of our highest selling items, catfish, by increasing the meal portion 50% for many of our guests and promoting an “All-You-Can-Eat Catfish” special during portions of our first and second fiscal quarters. The catfish promotions increased the frequency of catfish meal sales by approximately 45% and increased the quantity of catfish consumed by guests by approximately 120% during the promotion period. Coincident with the catfish promotions, the market price of catfish increased significantly, while the retail price charged to our guests was maintained. We discontinued the catfish promotions during the second quarter. Since the end of the promotion, we have mitigated the increase in catfish prices by purchasing similar products at lower costs from other suppliers.

The increase in labor costs, as a percent of net sales, is due to the decline in net sales in relationship to the fixed component of labor costs, primarily cafeteria management staff. Hourly labor costs, as a percent of net sales, was down 0.2% from fiscal 2002.

Other operating expenses. Other operating expenses increased 0.7% as a percent of net sales. Marketing expenses increased to 2.6% of net sales in fiscal 2003 compared to 2.2% of net sales in fiscal 2002.

Team member benefit costs as a percent of net sales were 1.4% in fiscal 2003 compared to 2.1% in fiscal 2002. Team member benefit costs decreased $3.3 million. Approximately $2.3 million of the decrease in benefit costs resulted from changes made during fiscal 2002 to our team member benefit plans. Additionally, we reduced benefit costs in fiscal 2003 by utilizing assets from a Morrison Restaurants, Inc. (Morrison) trust fund (the Trust) that had been established to provide benefits under a self-insured medical reimbursement plan. Effective January 1, 1999, we terminated the Morrison plan and team members formerly eligible to participate in that plan were then eligible to participate in the Piccadilly Cafeterias, Inc. Health Insurance Plan. The Trust continued to pay run-off claims that were incurred prior to January 1, 1999. As of March 2000, all run-off claims had been paid, the Trust had remaining cash balances of $1.2 million, and the Trust was effectively frozen. The remaining Trust assets were used to pay team member benefit costs during fiscal 2003, reducing our operating expenses by $1.2 million. All funds from the Trust were used as of the end of fiscal 2003.

The savings in team member costs were partially offset by increases, as a percent of net sales, of 0.4% in supplies expense, 0.2% in repairs and maintenance costs, and 0.5% in utilities expense. The increase in supplies expense as a percent of net sales is largely due to an increase in “Piccadilly To-Go” packaging costs related to the use of plastic meal containers rather than styrofoam meal containers.

General and administrative expenses. General and administrative expenses increased $0.1 million and increased 0.4% as a percent of net sales. Legal and professional fees increased $0.7 million over fiscal 2002 including $0.3 million paid to PMCM. Decreases in insurance costs and executive bonuses largely offset the increase in legal and professional fees.

Other income. During fiscal 2003 we sold a cafeteria that was closed before the start of fiscal 2003 resulting in a $0.4 million gain this year. Since the cafeteria was closed before fiscal 2003, the gain is not included in Discontinued Operations in our Results of Operations. Other income in fiscal 2002 includes $0.2 million of interest income associated with a federal income tax refund received in fiscal 2002.

Interest expense. Fiscal 2003 interest expense was down $0.8 million compared to fiscal 2002 because of debt repayments in fiscal 2002 and in fiscal 2003. Amortization of financing costs and original issue discount, included in interest expense, was $1.5 million and $1.8 million, respectively for fiscal 2003 and fiscal 2002. While amortization of financing costs and original issue discount on our senior secured debt are lower due to the debt repayments, these savings have been partially offset by higher amortization costs related to our Senior Credit Facility.

Loss on early retirement of debt. As discussed in Note 4 to the Financial Statements we repurchased $8.3 million of our long-term debt in fiscal 2003 pursuant to excess cash flow offers required under the terms of our Debt Agreements. We recorded a charge of $1.3 million for early retirement of debt. The charge is comprised of $0.7 million premium paid over the repaid debt’s carrying value and $0.6 million for related unamortized financing costs. During fiscal 2002, we repurchased $13.0 million of our long-term debt and we refinanced our credit facility. We recorded charges in fiscal 2002 in the amount of $1.9 million, principally for the prorata portion of unamortized financing costs.

Provision for cafeteria impairments. As discussed in Note 2 to the Financial Statements, we recorded asset impairment charges of $6.7 million in fiscal 2003. We recorded $0.4 million of asset impairment charges in fiscal 2002.

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Provision for cafeteria closing costs: As discussed in Note 3 to the Financial Statements, we recorded reserves for cafeteria closing costs of $5.3 million in fiscal 2003.

Provision for income taxes (benefit). During fiscal 2003, we applied to the Internal Revenue Service for certain tax accounting method changes. As a result of these changes, we also filed a $2.5 million refund claim to carry back the tax net operating loss generated in fiscal 2002 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. Likewise, in fiscal 2002 we filed a $2.0 million refund claim with the Internal Revenue Service to carry back net operating losses recognized in fiscal 2001 to the June 30, 1996 tax 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 and $2.0 million for fiscal 2002. We received approximately $2.4 million of the $2.5 million refund during fiscal 2003 and the remaining $0.1 million in the first quarter of fiscal 2004. Under SFAS No. 109, Accounting for Income Taxes, a valuation allowance is still recorded for the remaining net deferred tax assets.

Discontinued operations. Discontinued operations include the net operating results of 32 cafeterias closed since the end of fiscal 2002. The 32 cafeterias closed in fiscal 2003 had net losses in fiscal 2003 and fiscal 2002, excluding the allocation of corporate overhead and excluding gain on sale of properties, of $3.5 million and $3.0 million, respectively. During fiscal 2003, we closed and then sold a cafeteria property yielding a gain of $0.8 million.

Fiscal 2002 Compared to Fiscal 2001

Net Sales. Total net sales for fiscal 2002, were $349.7 million, a 9.1% reduction from fiscal 2001 net sales of $384.7 million. Fiscal 2002 includes two additional days resulting from the adoption of a 52-53 week fiscal year reporting period during fiscal 2002 (see “Fiscal Year-End Reporting Period Change” above for further discussion). Net sales for these two additional days were $1.8 million. Cafeteria closings in fiscal 2001 and fiscal 2002 accounted for $25.3 million of the total decline in net sales. The remaining decline of $15.7 million is attributable to comparatively lower same-store net sales. Same-store cafeterias are cafeterias that were open for twelve full periods in both fiscal years. The same-store net sales decrease of 4.0% reflects a decline in same-store guest traffic of 7.6%, which was partially offset by a check average increase of 3.9%. The check average increase is primarily due to a price increase implemented mid-way in fiscal 2001 and various meal promotions during fiscal 2002 that were designed to enhance check average.

Comparative same-store net sales by quarter for fiscal 2002 were (4.9)%, (6.0)%, (4.0)%, and (1.0)%, respectively for the first through fourth quarters. After September 11, 2001, we experienced a steeper decline in our net same-store sales. We believe the steeper decline was attributable to lower traffic in regional shopping malls. Approximately one-half of our cafeterias are located in regional shopping malls. In November 2001, we began a two-month marketing and advertising campaign designed to increase guest traffic. We believe the campaign was partially responsible for improving guest traffic trends to pre-September 11 levels by mid-December. In March 2002 we began a four-month advertising campaign that included television and/or radio advertising in markets covering approximately one-half of our cafeterias. All of our cafeteria markets were included in a related direct mail promotion. Comparative same-store sales for April were down 3.7%, while comparative same-store sales for May and June were up 0.1% and 0.6%, respectively. We believe that the most recent advertising campaign was partially responsible for improving the year-over-year sales comparisons for the fourth quarter, particularly for the last two months of the quarter.

The following table illustrates cost of sales, other operating expenses, general and administrative expenses, and other expenses (income) as a percent of net sales for the comparative fiscal years.

Cafeteria-Level Income. Cafeteria-level income (net sales less cost of sales and other operating expenses) as a percent of net sales was 7.3% and 5.3% for fiscal 2002 and fiscal 2001, respectively. The reasons for the improvement are discussed below.

Cost of Sales. Cost of sales as a percent of net sales decreased 1.5%. That decline is a combination of a 0.2% decrease in food costs as a percent of net sales and a 1.3% decrease in labor costs as a percent of net sales. The decrease in food costs, as a percent of net sales, is primarily due to the price increase implemented mid-way in fiscal

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2002.     The improvement in labor costs, as a percent of net sales, is due primarily to savings realized from reduced labor hours combined with the price increase. On average, labor hours, primarily in the kitchen production area, are approximately 26 hours per day per cafeteria lower than a year ago. This reduction in labor hours is due to lower sales level, staff reductions, and scheduling efficiencies.

Other Operating Expenses. Other operating expenses decreased 0.5% as a percent of net sales. Meal discounts declined 0.7% as a percent of net sales after various sales promotions were eliminated. Manager compensation declined 0.6% as a percent of net sales as a result of a newly designed management incentive compensation plan implemented in fiscal 2002. Utility costs decreased 0.5% as a percent of net sales reflecting lower gas costs.

The decreases in other operating expenses were partially offset by other categories that increased as a percent of sales. Rent expense increased 0.6% as a percent of net sales primarily from the sale-leaseback transactions completed in March and July 2001. Advertising expenses increased 0.5% as a percent of net sales reflecting the sales-building advertising campaigns introduced during fiscal 2002. Team member benefits costs increased 0.2% as a percent of net sales due to an increase in health claims costs and an increase in pension expense in the first six months of the fiscal year. We addressed the increases in team member benefit costs by restructuring our team member health insurance program and freezing our defined benefit pension plan effective January 1, 2002. The team members that were formerly eligible for benefits under the defined benefit pension plan are now eligible for benefits in our 401(k) plan.

Provision for Cafeteria Impairments and Closings. We recorded cafeteria impairment charges of $0.4 million in fiscal 2002. We recorded a $0.2 million charge related to closing a cafeteria for which we exercised our right to exit the operating lease. We recorded a $0.2 million charge related to closing a cafeteria for which the landlord exercised his right to terminate our lease. In fiscal 2001, we recorded impairment charges of $9.9 million related to the impairment of long-lived assets and $0.5 million for exit costs related to cafeterias that were scheduled to close (see Note 2 and Note 3 to the Financial Statements for further discussion).

Amortization and Write-off of Goodwill. Of the 61 cafeterias included in the fiscal 2001 impairment charge, 47 were acquired in the Morrison Acquisition. Consequently, we recorded a $4.7 million impairment charge against goodwill. Also during fiscal 2001, we recorded a charge of $0.3 million to write-off goodwill associated with four Morrison cafeterias closed in fiscal 2001 (see Note 2 to the Financial Statements for further discussion).

General and Administrative Expenses. Fiscal 2002 general and administrative expenses declined $4.0 million and as a percent of net sales decreased 0.8%. In May 2001, we initiated and completed a management reorganization plan that eliminated 25 executive and district operations management positions. Included in fiscal 2001 general and administrative expense is $1.5 million for severance costs. Substantially all of the $1.5 million of severance costs was paid as of the end of fiscal 2001, with the remainder paid during the first quarter of fiscal 2002. Excluding the effects of the $1.5 million charge, general and administrative expenses, as a percent of net sales was 3.0% for fiscal 2002, compared to 3.3% for fiscal 2001. The decline is attributable to the ongoing benefits of the reorganization plan.

Interest Expense. Fiscal 2002 interest expense was down $2.0 million compared to fiscal 2001 because debt levels were lower. Amortization of financing costs and original issue discount, included in interest expense, was lower in the fiscal 2002 by $0.7 million.

Other expense (income). Fiscal 2002 other expense (income) includes interest income related to an IRS refund discussed in Note 2 to the Financial Statements in the amount of $0.2 million. Fiscal 2001 includes a gain on a sale of a piece of land in the amount of $0.3 million.

Provision for Income Taxes. As discussed in Note 7 to the Financial Statements, on March 7, 2002, the Job Creation and Worker Assistance Act of 2002 was enacted. A provision of that Act allows a five-year carry back period for net operating losses for the 2001 tax year. In fiscal 2002 we filed a refund claim with the IRS to carry back net operating losses to 1996 that resulted in a refund of $2.0 million. Because a valuation allowance had previously been established for these net operating losses, this refund resulted in an adjustment to the valuation allowance, which resulted in a tax benefit of $2.0 million in fiscal 2002.

Discontinued operations. Discontinued operations include the net operating results of 32 cafeterias closed since the end of fiscal 2002. The 32 cafeterias closed in fiscal 2003 had net losses in fiscal 2002 and fiscal 2001, excluding the allocation of corporate overhead and excluding gain on sale of properties, of $3.0 million and $1.8 million, respectively.

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Liquidity and Capital Resources

Liquidity. We expect to file for protection under the federal bankruptcy laws during our second fiscal quarter ending December 31, 2003. If the Company files for bankruptcy in connection with a sale of a significant portion of its operating assets under Section 363 of the Bankruptcy Code, then, based on the indicative purchase prices being discussed with interested parties, the cash realized from the 363 sale, together with any net cash realized in liquidating the Company's remaining assets, will not be sufficient to pay the Company's liabilities in full. If we cannot reach a definitive agreement, we expect to reorganize under Chapter 11 of the Bankruptcy Code in October 2003. In that case, without a purchaser to pay cash to the Company for its business, the Company would seek to renegotiate the terms of its existing debt and have a plan of reorganization confirmed by its creditors and approved by the bankruptcy court. The outcome for all of the Company's creditors under a plan of reorganization is unclear, but the shareholders would receive little or no value for their equity interests under any plan of reorganization. We believe, based on our current cash flow projections, that during the pendency of the bankruptcy proceeding we will have sufficient cash available to fund operating needs without the necessity of debtor-in-possession financing.

Our current financial projections indicate that if we continue to experience declining sales trends, our ability to maintain compliance with the financial covenants of the Senior Credit Facility will be impaired during fiscal 2004. As further discussed below, we have significant obligations that are due during fiscal 2004 including contributions to our pension plans and mandatory debt retirement provisions of our Term A Senior Secured Notes. Borrowing limitations under the Senior Credit Facility could prevent us from accessing amounts otherwise available thereby impairing our ability to meet our obligations. At the end of fiscal 2003, such limitations reduced the borrowing availability under the Senior Credit Facility by $3.2 million.

If we default under the terms of the Senior Credit Facility, the lender has the right to terminate the Senior Credit Facility, accelerate the maturity of any outstanding obligations under the Senior Credit Facility, and require that additional collateral be provided to secure the lender’s exposure with regard to any outstanding commercial letters of credit issued on our behalf. Additionally, under the provisions of an intercreditor agreement between our lenders, we may also be in default of our senior secured debt. We are uncertain as to our ability to obtain i) alternative sources of liquidity in the event of a default under the Senior Credit Facility or ii) additional sources of liquidity if the borrowing availability under our Senior Credit Facility is insufficient. Given the recent financial performance of the Company, such alternative sources of liquidity would be difficult to obtain on commercially acceptable terms or at all.

Pension contributions. We made pension contributions to our defined benefit plans during fiscal 2003 of $0.8 million. Our consulting actuaries have estimated that annual cash contributions to the Piccadilly defined benefit pension plan for the 2004 plan year (which is a calendar year) might range from $7 million to $12 million commencing in April 2004 and might average $7 million over the following four plan years. The ultimate amount of the contributions owing for the 2004 plan year cannot be ascertained until we determine the fair value of the pension assets at December 31, 2003. The significant increase in expected pension plan contributions is attributable to first, the portfolio of pension assets has yielded market losses over the past several years, reducing the fair market value of the invested assets and secondly, to declines in market interest rates that have increased the present value of future benefit obligations. Our consulting actuaries have further advised us that proposals currently under consideration by the United States Congress will not provide significant relief to next year’s contribution range.

Early retirement of debt. We are required each year to make offers to repurchase the Term A Senior Secured Notes (the “Senior Notes”) utilizing excess cash flow from the immediately preceding fiscal year. Excess cash flow is defined as EBITDA (as defined below) less interest expense, income tax expense, and capital expenditures. Specifically, the Senior Notes require that, if during any fiscal year we have excess cash flow of more than $2.5 million, we must make an offer to repurchase Senior Notes at 101% of the principal amount thereof, plus accrued interest. The excess cash flow offer must be in an amount equal to the lesser of $5 million or the excess cash flow. Based on our current projections, we expect to have the ability to satisfy excess cash flow payment requirements by using cash balances then on hand and cash that will be available under our Senior Credit Facility. However, given the likelihood that the Company will seek protection under the federal bankruptcy laws in the near future, the Company decided to not provide the required notice. Under the terms of the Term A Senior Secured Notes, the Trustee for the Noteholders will have the right to notify the Company of its contractual breach which, if not cured timely, would accelerate the Company’s $39.2 million indebtedness. If such a notice is received, the Company does not intend to cure the breach.

Senior Credit Facility. We have a $20 million senior credit facility with Wells Fargo Foothill (the “Senior Credit Facility ”). The Senior Credit Facility matures in December 2004 and bears interest at the Wells Fargo prime rate plus 2.0%. The Senior Credit Facility contains financial covenants that require (i) a minimum earnings before interest expense, income taxes, depreciation, and amortization (EBITDA), (ii) a maximum ratio of the Senior Credit Facility commitment to EBITDA, (iii) a maximum ratio of net funded debt to EBITDA, and (iv) a minimum ratio of fixed charges. The financial covenant requirements are predetermined and adjust over the term of the Senior Credit Facility. Compliance with the financial covenants, formerly measured quarterly, is now measured monthly. All of our financial covenant tests are measured with results for the most recent twelve-month period. As of the end of fiscal 2003, we complied with all of the financial covenants of the Senior Credit Facility.

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As of August 15, 2003, there were no outstanding borrowings under the Senior Credit Facility. Approximately $13.7 million of the Senior Credit Facility was used for outstanding commercial letters of credit and $6.3 million was available for borrowing, subject to a $3.2 million borrowing base reserve, for working capital and for other corporate purposes.

Capital expenditures. Purchases of property, plant and equipment for fiscal 2003 were $7.0 million, compared to $5.0 million for fiscal 2002. The increase in capital expenditures was related to $0.6 million to buyout certain cafeteria equipment formerly leased, $0.7 million to purchase and install new menu signage, $0.3 million for computer equipment and software, and $0.5 million for replacement cafeteria equipment and major repairs to extend the life of certain cafeteria properties. Our maintenance capital expenditures are limited to $8.0 million per fiscal year and investments in new cafeterias are limited to $6.0 million per fiscal year under the terms of our Senior Notes and Senior Credit Facility.

Rating Agencies. Moody’s and Standard & Poor’s (S&P) initially assigned first-time ratings of B2 and B+, respectively, to our senior secured debt. Subsequently, Moody’s downgraded its rating from B2 to Caa1 and S&P downgraded its rating from B+ to CCC-. These ratings are subject to revision or withdrawal at any time. Moody’s assigns a “Caa1” credit rating to bonds it “judges to be of poor standing and are subject to very high credit risk..” S&P assigns a “CCC-” rating to obligations for which it considers “has very weak financial security characteristics, and is dependent on favorable business conditions to meet financial commitments.” A plus (+) or minus (-) sign is added “to show relative standing with the major rating categories.” We express no opinion on the ratings assigned to the notes by Moody’s and S&P and do not believe that these ratings downgrades will have a material adverse impact on our ability to repay the Senior Notes, our Senior Credit Facility, or our liquidity in the foreseeable future. We have no credit facilities or commitments containing rating triggers.

Dividends. We have not paid a dividend on our Common Stock since the Board of Directors suspended our regular quarterly dividend on February 7, 2000. Our Senior Credit Facility prohibits payment of dividends.

Trends and Uncertainties

Pension plan liability. We are the sponsor of two defined benefit pension plans (see Note 10 to the Financial Statements for further discussion). Each of these plans is frozen so no ongoing employee service cost is credited. Events relative to these plans that are beyond the control of management have significantly impacted our operating results and our liquidity outlook. Overall, the portfolio of pension assets has yielded market losses over the past several years, reducing the fair market value of the invested assets. Secondly, declines in market interest rates have increased the present value of future benefit obligations. The net result is that the pension plans are underfunded at the end of fiscal 2003.

We do not administer or control the Morrison Restaurants, Inc. Retirement Plan. Ruby Tuesday, Inc. administers that plan. The Pension Committee of the Company administers the Piccadilly Cafeterias, Inc. Pension Plan (the “Plan”) but does not direct investment decisions relative to the assets of the Plan. Rather, investment managers hired by the Pension Committee make these decisions. The Pension Committee is comprised of members of management. The Pension Committee has hired an investment advisor who meets with and provides quarterly performance reports of the investment managers hired by the Pension Committee.

Management has little influence in the market performance of the Plan’s invested assets and has no influence over market interest rates. Substantial volatility in the financial markets has resulted in material pension liabilities on our Balance Sheets which liabilities, at the end of fiscal 2003, exceed shareholders’ equity. We cannot forecast whether the market performance of Plan assets together with increases in market interest rates could recover to the point that the recorded liabilities would be eliminated nor can we forecast whether such a recovery, if any, would occur before substantial cash contributions to these plans are required. We cannot be certain that we will have sufficient liquidity necessary to make required cash contributions to these plans as they become due.

Cafeteria impairment and closing charges. We periodically review the historical operating cash flow and forecasts of operating cash flow for each cafeteria. Forecasted cafeteria-level cash flow is a primary determinant of whether the cafeteria will continue to operate or be closed. In cases where we determine that a cafeteria’s potential operating cash flow (before occupancy costs) is not sufficient to cover occupancy costs, we will generally close that cafeteria. These cafeterias have relatively low sales volumes and little or no positive cash flow, and in some cases, negative cash flow. In the event that a cafeteria is closed before the end of its lease, charges are recorded for the net remaining lease obligation, other costs to close the cafeteria, and remaining unrecoverable asset book value as dictated by the circumstances. Charges for the minimum remaining obligations under a lease are reduced by expected recoveries from subleasing activity, if any, or expected reductions from negotiations with landlords, if any.

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If we expect to continue to operate the cafeteria, we consider whether the forecasted cafeteria-level operating cash flow indicates that the long-lived assets associated with the individual cafeterias are impaired. Under our accounting policy for impairment of long-lived assets, an asset is deemed to be impaired if a forecast of undiscounted future operating cash flow, including assumptions regarding disposal values and lease renewals, is less than its carrying amount. In cases where we determine that a cafeteria lease will likely not be renewed, for purposes of computing depreciation, the useful lives of the related assets are reduced, if necessary, to reflect the remaining life of the lease.

We categorize our cafeterias into “Core Cafeterias” and “Non-Core Cafeterias”. Non-Core Cafeterias are those locations with relatively low net sales and low levels of operating earnings. For fiscal 2003, average net sales for Non-Core Cafeterias were $1.3 million compared to $2.0 million for Core Cafeterias. Average net loss, excluding allocation of corporate overhead, impairment charges and depreciation charges, for Non-Core Cafeterias was approximately $(13,000) compared to approximately $211,000 on average for Core Cafeterias. 69% of Non-Core Cafeterias are located in regional shopping malls while only 33% of other cafeterias are in similar locations.

The table below quantifies the number of Non-Core Cafeterias and Core Cafeterias as of July 31, 2003 by the fiscal year in which the current lease terms expire.

Minimum Wage Increase. From time to time the United States Congress considers increases to the federally mandated minimum wage. Historically, we have passed the cost of such increases to our guests in higher prices. There can be no guarantee that future government mandated minimum wage increases could be absorbed into higher prices for our products. We have estimated that the cost of a $1.00 per hour increase in the federal minimum wage would increase our total wages and related payroll tax expenses by a range from $1.6 million to $2.4 million annually.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our Senior Notes bear interest at 12.0%, subject to annual adjustment on November 1. The interest rate is adjusted each year to 12.0% plus 0.50% for every $1.0 million of EBITDA (for the preceding fiscal year) in excess of $27.0 million, not to exceed a 1.5% increase in any one year, and not to exceed a rate of 16.5%. Our EBITDA for fiscal 2003 was $16.6 million. Therefore, the interest rate on our Senior Notes will remain fixed at 12.0% through October 31, 2003.

Our Senior Credit Facility bears interest at the Wells Fargo prime interest rate plus 2.0%. At the end of fiscal 2003, we had outstanding borrowings under this facility of $2.0 million. As of September 29, 2003, there were no outstanding borrowings under the Senior Credit Facility.

Because no active market has developed for the Senior Notes, it is not practicable to estimate the fair value of our long-term borrowings. This discussion does not consider the effects of the reduced level of overall economic activity that could exist following such changes. We have not used derivative instruments to engage in speculative transactions or hedging activities.

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Item 8. Financial Statements and Supplementary Data

Balance Sheets

See Notes to Financial Statements

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Statements of Operations

See Notes to Financial Statements

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Statements of Changes in Shareholders’ Equity (Deficit)