UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 18, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________ to__________ Commission file number 0-4377 -------------------------- SHONEY'S, INC. (Exact name of registrant as specified in its charter) Tennessee 62-0799798 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1727 Elm Hill Pike, Nashville, TN 37210 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (615) 391-5201 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ---- ---- As of March 28, 2001, there were 51,693,846 shares of Shoney's, Inc. $1 par value common stock outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. SHONEY'S, INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheet (Unaudited)

~~SHONEY'S,~~February ~~INC. AND SUBSIDIARIES Consolidated Condensed Balance Sheet (Unaudited) August 6~~18, October 3129, 2001 2000 ~~1999~~ -------------- -----------~~---~~ ASSETS Current assets: Cash and cash equivalents $ 58,~~096~~969,~~871~~523 $ 107,~~991~~980,~~872~~996 Notes and accounts receivable, less allowance for doubtful accounts of $1,~~220~~233,000 in ~~2000~~2001 and $1,~~497~~221,000 in ~~1999~~2000 10,~~408~~997,~~286~~747 811,~~397~~318,~~342~~035 Inventories 3426,~~688~~552,~~497~~280 3729,~~347~~552,~~025~~651 Prepaid expenses and other current assets 45,~~743~~643,~~424~~168 5,~~038,982 Net current assets of discontinued operations 870,773 1,~~406,~~612~~559 Net property, plant and equipment held for sale 921,~~838~~584,~~468~~398 2722,~~282~~887,~~950~~211 --------------- --------------- Total current assets 6573,~~646~~747,~~319~~116 9077,~~464~~145,~~783~~452 Property, plant and equipment, at lower of cost or market ~~588~~541,~~901~~520,~~223~~040 ~~608~~546,~~937~~271,~~944~~873 Less accumulated depreciation and amortization (~~335~~317,~~799~~906,~~620~~908) (~~332~~315,~~728~~773,~~963~~546) --------------- --------------- Net property, plant and equipment ~~253~~223,~~101~~613,~~603~~132 ~~276~~230,~~208~~498,~~981~~327 Other assets: Goodwill (net of accumulated amortization of $67,~~888~~656,000 in ~~2000~~2001 and $7,~~001~~318,000 in ~~1999~~2000) 1512,~~583~~708,~~078~~128 1913,~~720~~200,~~435~~847 Deferred charges and other intangible assets 512,~~248~~624,~~412~~076 513,~~930~~673,~~275~~118 ~~Net non-current assets of discontinued operations 0 9,460,324~~ Other assets 3,~~885~~693,~~979~~085 3,~~870~~910,~~368~~392 --------------- --------------- Total other assets 2429,~~717~~025,~~469~~289 3830,~~981~~784,~~402~~357 --------------- --------------- $ ~~343~~326,~~465~~385,~~391~~537 $ ~~405~~338,~~655~~428,~~166~~136 =============== =============== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 2327,~~062~~085,~~216~~435 $ 2826,~~346~~655,~~517~~872 Other accrued liabilities 6054,~~842~~689,~~753~~318 6357,~~532~~810,~~776~~119 ~~Reserve for litigation settlements due within one year 3,872,961~~ Debt and capital lease obligations due within one year 27141,~~029~~923,~~070~~118 2921,~~333~~106,~~548~~938 --------------- --------------- Total current liabilities ~~110~~223,~~934~~697,~~039~~871 ~~125~~105,~~085~~572,~~802~~929 Long-term ~~senior~~ debt and capital lease obligations ~~154~~145,~~629~~536,~~713~~983 ~~186~~263,~~349~~341,~~492~~756 Zero coupon subordinated convertible debentures 130,582,386 122,520,712 Subordinated convertible debentures, net of bond discount of $1,848,000 in 2000 and $2,505,000 in 1999 49,715,169 49,057,719 Reserve for litigation settlements 158,687 Other liabilities 2552,~~419~~792,~~955~~619 2855,~~568~~500,~~820~~272 ~~Self insurance reserves 31,521,958 41,051,290~~ Shareholders' deficit: Common stock, $1 par value: authorized 200,000,000; issued 5051,~~625~~693,~~410~~846 in ~~2000~~2001 and 4950,~~492~~659,~~514~~282 in ~~1999~~2000 5051,~~625~~693,~~410~~846 4950,~~492~~659,~~514~~282 Additional paid-in capital ~~137~~136,~~672~~921,~~469~~990 137,~~674~~521,~~675~~843 Accumulated other comprehensive loss (997,629) Accumulated deficit (~~347~~283,~~635~~260,~~708~~143) (~~334~~274,~~304~~167,~~545~~946) --------------- --------------- Total shareholders' deficit (~~159~~95,~~337~~641,~~829~~936) (~~147~~85,~~137~~986,~~356~~821) --------------- --------------- $ ~~343~~326,~~465~~385,~~391~~537 $ ~~405~~338,~~655~~428,~~166~~136 =============== ===============

See notes to consolidated condensed financial statements. 2 SHONEY'S, INC. AND SUBSIDIARIES Consolidated Condensed Statement of Operations (Unaudited)

~~SHONEY'S,~~Sixteen ~~INC. AND SUBSIDIARIES Consolidated Condensed Statement of Operations (Unaudited) Forty~~ Weeks Ended ~~August~~February 618, ~~August~~February 120, 2001 2000 ~~1999~~ ------------- ------------- Revenues Net sales $ ~~633~~219,~~620~~018,~~084~~686 $ ~~715~~234,~~636~~557,~~463~~911 Franchise fees 113,~~622~~782,~~980~~236 114,~~491~~140,~~143~~748 Other income 83,~~050~~728,~~295~~068 173,~~569~~927,~~532~~941 -------------- -------------- ~~653~~226,~~293~~528,~~359~~990 ~~744~~242,~~697~~626,~~138~~600 Costs and expenses Cost of sales ~~576~~205,~~744~~511,~~891~~409 ~~649~~216,~~613~~171,~~363~~110 General and administrative expenses 4818,~~758~~990,~~674~~543 ~~58,832,813 Impairment write down of long-lived assets 12,845,777~~ 18,~~422~~540,~~554~~944 ~~Restructuring expenses 441,365 Litigation settlement 14,500,000~~ Interest expense 2811,~~604~~047,~~561~~235 3211,~~800~~761,~~556~~795 -------------- -------------- Total costs and expenses ~~666~~235,~~953~~549,~~903~~187 ~~774~~246,~~610~~473,~~651~~849 -------------- -------------- Loss from continuing operations before income taxes (139,~~660~~020,~~544~~197) (293,~~913~~847,~~513~~249) Provision for income taxes ~~436~~72,000 112,000 -------------- -------------- Net loss from continuing operations (149,~~096~~092,~~544~~197) (293,~~913~~959,~~513~~249) Discontinued operations, net of income taxes ~~190~~(15,~~290~~488) ~~1,508,339 Gain on sale of discontinued operations, 575,091 net of income taxes~~ -------------- -------------- Net loss $ (139,~~331~~092,~~163~~197) $ (283,~~405~~974,~~174~~737) ============== ============== Earnings per common share Basic and diluted Net loss from continuing operations $ (~~0.28)~~ $ (0.6118) ~~Discontinued operations, net of income taxes 0.00 0.03 Gain on sale of discontinued operations, net of income taxes 0.01 Net loss $~~ (~~0.26)~~ $ (0.5808) ~~Diluted: Net loss from continuing operations $ (0.28) $ (0.61)~~ Discontinued operations, net of income taxes 0.00 0.0300 ~~Gain on sale of discontinued operations, net of income taxes 0.01~~ -------~~-------~~ -------~~------~~ Net loss $ ($0.2618) $ ($0.5808) =======~~=======~~ =======~~======~~ Weighted average shares outstanding Basic ~~50,361,065~~and 49diluted 51,~~295~~196,~~460~~068 ~~Diluted~~ 50,~~361~~028,~~065~~705 ~~49,295,460~~ Common shares outstanding 5051,~~625~~693,~~410~~846 4950,~~455~~515,~~016~~363 Dividends per share NONE NONE

See notes to consolidated condensed financial statements. 3 SHONEY'S, INC. AND SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited)

~~SHONEY'S,~~Sixteen ~~INC. AND SUBSIDIARIES Consolidated Condensed Statement of Operations (Unaudited) Twelve~~ Weeks Ended ~~August~~February 618, ~~August~~February 120, 2001 2000 ~~1999~~ ------------- ------------- ~~Revenues~~Operating activities Net ~~sales~~loss $ ~~194~~(9,~~835~~092,~~376~~197) $ ~~216~~(3,~~977~~974,~~985~~737) ~~Franchise~~Adjustments ~~fees~~to ~~3,765,629~~reconcile ~~3,690,101~~net ~~Other~~loss ~~income~~to ~~2,166,115~~net ~~1,642,998~~cash ~~-------------~~used ~~-------------~~by ~~200,767,120~~operating ~~222,311,084~~activities: ~~Costs~~Loss ~~and~~from ~~expenses~~discontinued ~~Cost~~operations, net of ~~sales~~income ~~178,795,880~~taxes ~~196~~15,~~333,306~~488 ~~General~~Depreciation and ~~administrative~~amortization ~~expenses 15~~9,~~256~~167,~~010~~916 1610,~~354~~872,~~939~~296 ~~Impairment~~Amortization ~~write~~of ~~down~~deferred ofcharges ~~long~~and other non-~~lived~~cash ~~assets~~charges 122,~~845~~202,~~777~~919 184,~~422~~630,~~554~~811 ~~Restructuring~~Gain ~~expenses~~on ~~441~~disposal of property,~~365~~ ~~Interest~~plant ~~expense~~and 8equipment (2,~~171~~980,~~254~~001) 9(3,~~092~~690,~~222~~137) ~~-------------~~Changes ~~-------------~~in ~~Total~~operating ~~costs~~assets and ~~expenses~~liabilities ~~215~~(1,~~068~~471,~~921~~157) ~~240~~(12,~~644~~911,~~386~~558) -------------- -------------- ~~Loss~~Net ~~from~~cash ~~continuing~~used ~~operations~~by ~~before~~continuing ~~income~~operating ~~taxes~~activities (142,~~301~~172,~~801~~520) (185,~~333~~057,~~302~~837) ~~Provision~~Net ~~for~~cash ~~income~~provided ~~taxes~~by ~~164~~discontinued operating activities 493,~~000~~085 - -------------- -------------- ~~Loss~~Net ~~from~~cash ~~continuing~~used ~~operations~~by operating activities (142,~~465~~172,~~801~~520) (184,~~333~~564,~~302~~752) ~~Discontinued~~Investing ~~operations~~activities Cash required for property, ~~net~~plant ofand ~~income~~equipment ~~taxes~~(4,507,593) (~~339~~6,~~931~~411,460) ~~815~~Cash required for assets held for sale (233,~~472~~469) Proceeds from disposal of property, plant and equipment 5,368,071 12,024,276 Cash provided by other assets 174,814 15,831 -------------- -------------- Net ~~loss~~cash $provided by investing activities 1,035,292 5,395,178 Financing activities Payments on long-term debt and capital lease obligations (1419,~~805~~339,~~732~~237) $ (1713,~~517~~753,~~830~~388) ~~==============~~Proceeds ~~==============~~from ~~Earnings~~long-term ~~per~~debt ~~common~~23,000,000 ~~share~~15,000,000 ~~Basic:~~ Net ~~loss~~payments ~~from~~on ~~continuing~~short-term ~~operations~~debt $(747,300) (~~0.29~~3,444,000) $Payments on litigation settlements (~~0.37~~22,664) ~~Discontinued~~Cash ~~operations,~~required ~~net~~for ofdebt ~~income~~issue ~~taxes~~costs (~~0.01~~787,708) ~~0.02~~(746,075) -------------- -------------- Net ~~loss~~cash $provided (~~0.29~~used) $by ~~(0.35)~~financing ~~==============~~activities ~~============== Diluted: Net loss from continuing operations $ (0.29) $ (0.37) Discontinued operations~~2,125,755 ~~net of income taxes~~ (~~0.01~~2,966,127) ~~0.02~~ -------------- -------------- ~~Net~~Change ~~loss~~in cash and cash equivalents $ ~~(0.29)~~988,527 $ (~~0.35~~2,135,701) ============== ============== ~~Weighted average shares outstanding Basic 50,611,911 49,451,512 Diluted 50,611,911 49,451,512 Common shares outstanding 50,625,410 49,455,016 Dividends per share NONE NONE~~

See notes to consolidated condensed financial statements. 4 The forward-looking statements included in this Form 10-Q relating to certain matters involve risks and uncertainties, including the ability of management to successfully implement its strategy for improving Shoney's Restaurants performance, the ability of management to effect asset sales consistent with projected proceeds and timing expectations, the results of pending and threatened litigation, adequacy of management personnel resources, shortages of restaurant labor, commodity price increases, product shortages, adverse general economic conditions, adverse weather conditions that may affect the Company's markets, turnover and a variety of other similar matters. Forward- looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "could," "anticipate," "believe," or "continue" (or the negative thereof) or similar terminology. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward- looking statements as a result of a number of factors, including but not limited to those discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and under the caption "Risk Factors" therein. Forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. 5 SHONEY'S, INC. AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements February 18, 2001 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited Consolidated Condensed Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. As a result, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The Company, in management's opinion, has included all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations. Certain reclassifications have been made in the Consolidated Condensed Financial Statements to conform to the 2001 presentation. Operating results for the sixteen-week period ended February 18, 2001 are not necessarily indicative of the results that may be expected for all or any balance of the fiscal year ending October 28, 2001. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Shoney's, Inc. Annual Report on Form 10-K for the year ended October 29, 2000. NOTE 2 - DISCONTINUED OPERATIONS During the second quarter of 2000, the Company sold its Pargo's restaurants and made the decision to either close or sell its remaining Fifth Quarter restaurants. As a result, the Company has presented the casual dining line of business as discontinued operations in the accompanying financial statements, net of any related income tax expense. All prior periods have been restated. This discontinued line of business had total revenue and net loss as follows:

~~SHONEY'S,~~Quarter ~~INC.~~Ended ~~AND~~Quarter ~~SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited) Forty Weeks~~ Ended ~~August 6, August 1, 2000 1999 -------------- -------------- Operating activities Net loss $~~ (~~13,331,163)~~ $ ~~(28,405,174)~~in ~~Adjustments to reconcile net loss to net cash provided by operating activities: Income from discontinued operations, net of income taxes (190,290~~thousands) ~~(1,508,339)~~February Gain on sale of discontinued operations, net of income taxes (575,091) Depreciation and amortization 27,199,240 31,195,961 Amortization of deferred charges and other non-cash charges 10,564,791 12,981,083 Gain on disposal of property, plant and equipment (6,627,111) (16,122,391) Impairment write down of long-lived assets 12,845,777 18,~~422,554~~ ~~Litigation~~2001 ~~settlement~~February 1420,~~500,000~~ ~~Changes~~2000 ~~in operating assets and liabilities (15,970,341) 8,984,544~~ -------------- ---~~-----------~~ ~~Net cash provided by continuing operating activities 13,915,812 40,048,238 Net cash provided by discontinued operating activities 613,231 763,788~~ -------------- ---~~-----------~~ ~~Net~~Total ~~cash~~revenue ~~provided~~$ by operating activities 14,529,043 40,812,026 Investing activities Cash required for property, plant and equipment (17,278,229) (18,973,306) Cash required for assets held for sale (275,533) (510,008) Proceeds from disposal of property, plant and equipment 23,193,690 57,239,566 Proceeds from disposal of discontinued operations 11,854,139 5,519,429 Cash provided by other assets 18,393 40,704 --~~------------~~ ~~--------------~~$ ~~Net cash provided by investing activities 17~~9,~~512,460~~010 ~~43,316,385 Financing activities Payments on long-term debt and capital lease obligations (48,831,209) (73,800,428) Proceeds from long-term debt 18,500,000~~ Net ~~payments~~loss on$ ~~short~~-~~term debt (2,168,490) Payments on litigation settlements (3,726,680) (11,050,994) Cash required for debt issue costs (1,710,125) (180,093)~~ -~~-------------~~ ~~-------------- Net cash used by financing activities (37,936,504) (85,031,515) -------------- -------------- Change in cash and cash equivalents~~ $ (~~5,895,001~~15) ~~$ (903,104) ============== ==============~~

NOTE 3 - ACQUISITIONS On September 9, 1996, the Company completed the acquisition of substantially all of the assets of TPI Enterprises, Inc. ("TPI") which, as the then largest franchisee of the Company, operated 176 Shoney's Restaurants and 67 Captain D's restaurants. Twenty-eight of TPI's restaurants had been targeted for closure during the Company's due diligence process as under-performing units. Costs to exit these businesses were accrued as liabilities assumed in purchase accounting and consisted principally of severance pay for certain employees and the accrual of future minimum lease obligations in excess of anticipated sublease rental income. The total amount of such liabilities included in the TPI purchase price allocation was approximately $21.0 million. During the first quarter of 2001, approximately $0.1 million in costs to exit restaurants acquired were charged to this liability. During the first quarter of 2000, approximately $0.3 million in costs were charged to this liability. Approximately $4.3 million of anticipated exit costs related to the TPI acquisition remain accrued at February 18, 2001. 6 NOTE 4 - IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), at the beginning of the first quarter of 1997. At February 18, 2001, the carrying value of the 44 properties to be disposed of was $21.6 million and is reflected on the Consolidated Condensed Balance Sheet as net property, plant and equipment held for sale. Under the provisions of SFAS 121, depreciation and amortization are not recorded on assets held for sale during the period in which such assets are being held for disposal. NOTE 5 - RESTRUCTURING EXPENSE When the decision to close a restaurant is made, the Company incurs certain exit costs generally for the accrual of the remaining leasehold obligations less anticipated sublease income related to leased units that are targeted to be closed. There were no exit costs recorded in the first quarter of 2001 or the first quarter of 2000. The Company charged approximately $0.8 million and $1.5 million against these exit costs reserves in the first quarter of 2001 and the first quarter of 2000, respectively. Approximately $5.9 million of accrued exit costs remain at February 18, 2001. During 2000, the Company closed 13 Company-owned restaurants and sold 12 Shoney's Restaurants to franchisees. During the first sixteen weeks of 2001, three Shoney's and two Captain D's restaurants were closed. Six Captain D's were sold to franchisees during the first quarter of 2001. Below are sales and EBIT as defined, which is defined by the Company as operating income before asset impairment charges, restructuring charges and litigation settlements, for the first sixteen weeks of 2001 and 2000 for restaurants closed or sold prior to February 18, 2001.

~~Forty Forty~~ Quarter Ended Quarter Ended ~~Weeks Ended Weeks Ended~~ ($ in thousands) ~~August~~February 618, ~~2000~~2001 ~~August~~February 120, ~~1999 August 6,~~ 2000 ~~August 1, 1999~~ -------------- --- ----------- ------ EBIT as EBIT as Sales defined Sales defined ----- --- ---- ----- ------- ~~Net~~Stores ~~income~~closed ~~(loss)~~or sold $ ~~(340)~~867 $ ~~815~~(234) $ ~~190~~10,681 $ (1,~~508~~117) ~~Gains~~===== on======= ~~sale~~======== ~~of discontinued operations $ - - $ 575 -~~=========

7 NOTE 6 - EARNINGS PER SHARE The table below presents the computation of basic and diluted loss per share in accordance with Financial Accounting Standards No. 128:

~~Forty~~(in ~~Forty~~thousands ~~Quarter~~except ~~Ended~~EPS) Quarter Ended ~~Weeks~~Quarter Ended ~~Weeks~~February ~~Ended ($ in thousands) August 6~~18, ~~2000~~2001 ~~August~~February 120, ~~1999 August 6,~~ 2000 ~~August 1, 1999~~ -------------- --- -------------- --- Numerator: ------------ Loss from continuing operations -~~---------------~~ ~~EBIT~~numerator asfor ~~EBIT~~Basic asEPS ~~EBIT~~$ as(9,092) ~~EBIT~~$ as(3,959) ~~Sales~~Loss ~~defined~~from ~~Sales~~continuing ~~defined~~operations ~~Sales~~after ~~defined~~assumed ~~Sales~~conversion ~~defined~~of debentures - numerator for Diluted EPS $ (9,092) $ (3,959) Denominator: ------------ Weighted-average shares outstanding - denominator for Basic EPS 51,196 50,029 Dilutive potential shares -~~--------------------------------------------------------~~ ~~Stores~~denominator ~~closed~~for orDiluted ~~sold~~EPS ~~$124~~51,196 50,029 Basic EPS loss from continuing operations $ (~~189~~0.18) $~~26,157~~ $(~~1,879~~0.08) ~~$6,425~~Diluted EPS loss from continuing operations $ (~~983~~0.18) $~~96,926~~ $(~~8,455~~0.08) ~~========================================================================~~

As of February 18, 2001, the Company had outstanding approximately 6,907,882 options to purchase shares at prices ranging from $0.44 to $25.51. The Company also has outstanding subordinated zero coupon convertible debentures and 8.25% subordinated convertible debentures, which are convertible into common stock at the option of the debenture holder. As of February 18, 2001, the Company had reserved 537,908 and 266,581 shares, respectively, related to these convertible debentures. The zero coupon debentures are due in April 2004 and the 8.25% debentures are due in July 2002. Because the Company reported a net loss from continuing operations before extraordinary items for both periods presented, the effect of considering these potentially dilutive convertible securities was anti-dilutive and was not included in the calculation of Diluted EPS. NOTE 7 - INCOME TAXES The Company is estimating an effective tax rate for the sixteen weeks ended February 18, 2001 and February 20, 2000 of (0.8)% and (2.9)%, respectively, and has recorded an income tax provision of $0.1 million and $0.1 million for the sixteen weeks ended February 18, 2001 and February 20, 2000, respectively. This effective tax rate differs from the Federal statutory rate of 35% primarily due to goodwill amortization, which is not deductible for Federal income taxes, and an increase in the valuation allowance against the gross deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of February 18, 2001, the Company increased the valuation allowance for gross deferred tax assets for tax credit carry forwards and net operating loss carry forwards. The deferred tax asset valuation adjustment is in accordance with Statement of Financial Accounting Standards No. 109 which requires 8 that a deferred tax asset valuation allowance be established if certain criteria are not met. If the deferred tax assets are realized in the future, the related tax benefits will reduce income tax expense. NOTE 8 -DEBT AND OBLIGATIONS UNDER CAPITAL LEASES Debt and obligations under capital leases at February 18, 2001 and October 29, 2000 consisted of the following:

~~Forty~~2001 ~~Forty~~2000 ~~(in~~---- ~~thousands~~---- ~~except~~Shoney's ~~EPS)~~- ~~Quarter~~Mortgage ~~Ended~~Financing ~~Quarter~~$ ~~Ended~~98,540,365 ~~Weeks~~$ ~~Ended~~99,000,000 ~~Weeks~~Shoney's ~~Ended~~- ~~August~~Line of Credit 12,014,959 6,345,000 ~~2000~~Captain ~~August~~D's 1- Term Notes 115,000,000 ~~1999~~115,000,000 ~~August~~Captain 6D's - Line of Credit 7,750,000 ~~2000~~7,500,000 ~~August~~COI 1- Line of Credit 11,221,009 ~~1999~~13,218,309 Subordinated zero coupon convertible debentures, due April 2004 14,111,382 13,753,168 Subordinated convertible debentures, due July 2002 5,137,917 5,109,530 Industrial revenue bonds 10,165,000 10,165,000 Notes payable to others 3,648,388 3,763,744 -------------- -------------- 277,589,020 273,854,751 Obligations under capital leases 9,871,081 10,593,943 -------------- -------------- ~~Numerator: ---------- Net loss - numerator for Basic EPS $ (14~~287,~~806) $ (17~~460,~~518)~~101 ~~$ (13~~284,~~331) $ (28~~448,~~405)~~694 ~~Net~~Less ~~loss~~amounts ~~after~~due ~~assumed~~within ~~conversion~~one ofyear ~~debentures - numerator for Diluted EPS $ (14~~141,~~806) $ (17~~923,~~518)~~118 ~~$ (13~~21,~~331) $ (28~~106,~~405)~~938 ~~Denominator:~~ ------------ ~~Weighted~~-~~average~~ ~~shares outstanding~~ ------------- ~~denominator~~Amounts ~~for~~due ~~Basic~~after ~~EPS~~one ~~50,612~~year ~~49,452~~$ 50145,~~361 49~~536,~~295~~983 ~~Dilutive~~$ ~~potential shares - denominator for Diluted EPS 50~~263,~~612 49~~341,~~452~~756 ~~50,361~~============= ~~49,295 Basic EPS loss $ (0.29) $ (0.35) $ (0.26) $ (0.58) Diluted EPS loss $ (0.29) $ (0.35) $ (0.26) $ (0.58)~~=============

SENIOR DEBT REFINANCING On September 6, 2000, the Company completed a cash tender offer (the "Tender Offer") that resulted in the purchase of approximately 90% of the outstanding subordinated convertible debentures (the "TPI Debentures") and zero coupon convertible debentures (the "LYONs") for an aggregate price of approximately $71.8 million. In order to consummate the Tender Offer, the Company was required to refinance the indebtedness outstanding under the Company's 1997 Credit Facility in addition to receiving financing necessary to effect the Tender Offer (the "Refinancing"). Consummation of the Tender Offer and the Refinancing resulted in an extraordinary gain on the early retirement of debt of approximately $82.5 million in the Company's fourth quarter of fiscal 2000, net of expenses and taxes. In order to complete the Refinancing, the Company restructured its restaurant operations by separating its Shoney's and Captain D's operations (the "Reorganization"). The Reorganization included transferring substantially all of the assets comprising the Company's Captain D's restaurant operations to a wholly-owned subsidiary, Captain D's, Inc. ("Captain D's"). The reorganization allowed each of the Company's operating segments (Shoney's, Captain D's, and Commissary Operations, Inc. ("COI") to be separately financed. As a result of the Reorganization and the Refinancing, each operating segment is intended to operate as an independent business unit and be responsible for its own indebtedness and working capital needs. The new senior lending agreements generally prohibit the movement of cash and other assets between the operating segments except for payments under certain tax sharing arrangements and payments for goods and services. 9 SHONEY'S - MORTGAGE FINANCING In connection with the Refinancing, on September 6, 2000 the Company entered into a $99.0 million, twenty-year mortgage financing which is secured by the land, buildings and equipment of 142 Shoney's Restaurants. The carrying value of the collateral for the mortgage financing was $91.4 million at February 18, 2001. Principal reductions of approximately $1.6 million are scheduled during 2001. A portion of this debt carries a fixed rate of interest and the remainder is at a floating rate, which is reset monthly, based on the London Interbank Offered Rate (LIBOR). As of February 18, 2001, the effective interest rates on this debt were as follows:

($Principal inAmount ~~thousands)~~Fixed/Floating ~~August~~Interest 6,Rate ~~2000 October 31, 1999~~ -------------- -- -------------- ~~Senior debt~~ - ~~Line of Credit $ 23,719 $ 10,887 Senior debt~~ - ~~Term A Note 29,994 45,672 Senior debt~~ - Term B Note 103,022 130,801 Subordinated zero coupon convertible debentures 130,582 122,521 Subordinated convertible debentures 49,715 49,058 Industrial revenue bonds 10,165 10,315 Notes payable to others 3,938 4,420 --------- -~~--------~~ ~~351,135~~$ ~~373~~67,~~674~~391,595 ~~Obligations~~Fixed ~~under capital leases~~ 10~~,821~~.23% ~~13,587~~$ ~~--------- --------- 361~~8,~~956 387~~709,~~261~~458 ~~Less~~Fixed ~~amounts~~10.35% ~~due within one year 27,029 29,334 --------- --------- Amount due after one year~~ $ ~~334~~22,~~927 $ 357~~439,~~927~~312 ~~=========~~Floating ~~=========~~10.00%

SHONEY'S - LINE OF CREDIT On September 6, 2000, the Company entered into an amendment and restatement of the 1997 Credit Facility, which provided Shoney's with a $40.0 million line of credit ("the Shoney's Line of Credit"). The Shoney's Line of Credit has a two-year term expiring on September 6, 2002 and is secured by all of the Shoney's Restaurant properties not serving as collateral for the Shoney's Mortgage Financing or other debt and certain surplus, office and miscellaneous properties owned and leased by the Company. The carrying value of the collateral for the Shoney's Line of Credit was $27.7 million at February 18, 2001. The Company has agreed to sell up to $10.0 million of certain properties serving as collateral for the Shoney's Line of Credit, pay down outstanding amounts under the line and permanently reduce the availability during 2001. As of February 18, 2001, the Company had sold $2.8 million of the $10.0 million of collateral properties and had reduced availability accordingly. Available credit under the Shoney's Line of Credit is also reduced by letters of credit. At February 18, 2001, the Company had borrowings under the Shoney's Line of Credit of $12.0 million and had outstanding letters of credit of $19.7 million, resulting in available credit of $5.5 million. Also, pursuant to the terms of the Shoney's Line of Credit, the Company may sell certain other properties serving as collateral for the Shoney's Line of Credit, retain and use in the business the first $15.0 million of the sale proceeds, and, thereafter, use the sale proceeds to either repay drawings under the line, which will also permanently reduce availability, or cash collateralize the line. As of February 18, 2001, the Company had sold and retained in the business $6.1 million of asset sale proceeds since September 6, 2000. The Company pays a commitment fee of 0.50% for unused available credit under the facility. The interest rate for this facility is at floating rates (4.25% over LIBOR or 3.25% over the prime rate) and at February 18, 2001 the interest rate on this line of credit was 11.10%. CAPTAIN D'S - TERM NOTES AND LINE OF CREDIT Captain D's, in connection with the Refinancing, entered into a credit facility on September 6, 2000 for up to $135.0 million consisting of term notes totaling $115.0 million and a $20.0 million line of credit (the "Captain D's Facility"). This facility, which terminates on December 31, 2001, is secured by all of the assets owned by Captain D's including owned land, buildings and equipment, certain leased restaurant properties, and a pledge of certain other assets of Captain D's. The carrying value of the collateral for the Captain D's Facility was $86.2 million at February 18, 2001. At February 18, 2001, there was $115.0 million outstanding under the term notes and $7.8 million outstanding under the line of credit. There are no scheduled payments under the term notes or the line of credit prior to the termination date of the Captain D's Facility. 10 Available credit under the line of credit is reduced by outstanding letters of credit. At February 18, 2001, Captain D's outstanding letters of credit totaled $4.0 million, resulting in available credit of $8.2 million. Captain D's pays a commitment fee of .50% for unused available credit under the line of credit. The interest rate on term notes totaling $85.0 million is at floating rates (4% over LIBOR or 3% over the prime rate) and, in respect of term notes totaling $30.0 million, the initial interest rate was at floating rates of 4% over LIBOR or 3% over the prime rate. On January 1, 2001, the interest rate for the $30.0 million term notes increased by 0.50% and is scheduled to increase by 0.50% on the last day of each calendar quarter thereafter. The interest rate for the line of credit ranges from 3% to 4% over LIBOR or 2% to 3% over the prime rate, based on certain defined financial ratios. At February 18, 2001, the effective interest rate for the term notes and the line of credit was 10.20% and 10.71%, respectively. COI - REVOLVING CREDIT FACILITY As part of the refinancing, on August 31, 2000, COI entered into a $30.0 million revolving credit facility which is secured by substantially all of COI's assets including land, buildings and equipment, inventory and accounts receivable. The carrying value of the collateral for the COI revolving credit facility was $27.8 million at February 18, 2001. The revolving credit facility has a three-year term expiring on August 31, 2003. Available credit under this facility is based on a formula which allows for borrowings on predetermined percentages of eligible accounts receivable and inventory. Available credit is reduced by $1.8 million outstanding letters of credit, other reserves determined to be reasonably necessary by the lender and $11.2 million of drawings at February 18, 2001. At February 18, 2001, available credit under this facility was approximately $2.3 million. COI pays a commitment fee of .50% for unused credit under the facility. At February 18, 2001, the effective interest rate on this line of credit was 9.19%. INTEREST RATE HEDGE PROGRAMS The 1997 Credit Facility, which was amended and restated to become the Shoney's Line of Credit, required the Company to enter into an interest rate hedge program covering a notional amount of not less than $50.0 million and not greater than $100.0 million within 60 days from the date of the original loan closing. The amount of the Company's debt covered by the hedge program was $100.0 million at October 31, 1999, which was comprised of two $40.0 million agreements, for which the interest rates were fixed at approximately 6.1% and 5.9%, respectively, plus the applicable margin, and an additional $20.0 million agreement which fixed the interest rate on the covered amount of debt at 5.6% plus the applicable margin. On May 11, 2000, the Company sold $50.0 million of swap agreements for a gain of $0.3 million. The interest rate swap agreements which were sold consisted of notional amounts of $10.0 million and $40.0 million with fixed interest rates of 6.1% and 5.9%, respectively, and were scheduled to terminate on January 8, 2001. The gain was deferred and amortized over the remaining term of the interest rate swap agreements. Of the remaining $50.0 million of interest rate swaps, $20.0 million of the interest rate swaps with a fixed interest rate of 5.6% terminated on October 8, 2000 and $30.0 million of the interest rate swaps with a fixed rate of 6.1% terminated on January 8, 2001. The Shoney's Line of Credit does not require a hedge program. The Captain D's credit agreement required Captain D's, Inc. to enter into an interest rate hedge program covering a notional amount of not less than 50% of the term notes outstanding ($57.5 million) within 45 days of the date of the loan closing. On October 16, 2000, Captain D's entered into an interest rate swap agreement covering $57.5 million of debt which fixes the interest rate at 6.7% plus the applicable margin for the term of the Captain D's credit agreement. Additionally on December 29, 2000 and January 2, 2001, Captain D's entered into interest rate swap agreements covering $25.0 million and $32.5 million of 11 debt, respectively, which fixed the interest rate at 5.9% and 5.8%, respectively, plus the applicable margin for the term of the Captain D's credit agreement. At February 18, 2001, the estimated cost to Captain D's to exit the interest rate swap agreements was approximately $1.0 million. In July and August 2000, the Company entered into forward agreements to lock the interest rate on a portion of the Shoney's Mortgage Financing. The interest rate on this fixed rate debt was to be based on the ten year U.S. Treasury Note rate between two and ten days prior to the closing of the transaction. Because the ten year U.S. Treasury Note rate decreased between the date of the agreement and the date the financing was consummated (September 6, 2000), the Company paid the interest rate differential between the agreed upon interest rate and the market rate of the ten year U.S. Treasury Note. This amount is being amortized and recognized as an adjustment to interest expense over the 20-year term of the financing. LOAN COVENANTS The Company's senior debt agreements (consisting of the Shoney's Line of Credit, the Captain D's Facility, the COI Revolving Credit Facility and the Shoney's Mortgage Financing) are secured by substantially all of the Company's assets. These debt agreements (1) require satisfaction of certain financial ratios and tests (some of which become more restrictive each year); (2) impose limitations on capital expenditures; (3) limit the ability to incur additional debt and contingent liabilities; (4) prohibit dividends and distributions on common stock; (5) prohibit mergers, consolidations or similar transactions; and (6) include other affirmative and negative covenants. Based on current operating results and forecasted operating trends, it is probable that a covenant violation could occur in November 2001 under the Shoney's Mortgage Financing agreements. The Company has available to it remedies which may prevent probable covenant violations and, alternatively, management believes that loan covenant modifications, if required, could be obtained. Remedies available to the Company to prevent covenant violations are as follows: 1) under-performing properties may be replaced by properties with better fixed charge coverage ratios, and 2) properties may be sold to franchisees or converted to rental properties if the royalty and rental income streams improve the fixed charge coverage. Historically, the Company has been able to secure financial covenant modifications when needed; however, no assurance can be given that the modifications could be obtained on terms satisfactory to the Company. If the Company were unable to obtain modifications, the Company's financial condition, results of operations and liquidity would be materially adversely affected. Except as noted above, the Company expects to be in compliance with its remaining financial covenants in 2001 and was in compliance with its financial covenants at the end of the first quarter of 2001. SUBORDINATED ZERO COUPON CONVERTIBLE DEBENTURES, 8.5%, DUE APRIL 2004 The subordinated zero coupon convertible debentures were issued at $286.89 per $1,000 note (aggregate amount of $57.7 million). There are no periodic cash payments of interest. The issue price represents a yield to maturity of 8.5% based on a semi-annual bond equivalent basis. Each note is convertible into 29.349 shares of the Company's common stock at the option of the holder. Following completion of the Tender Offer, the Company has reserved 537,908 shares for future issuance pursuant to these debentures. 12 SUBORDINATED ZERO COUPON CONVERTIBLE DEBENTURES, 8.25%, DUE JULY 2002 In connection with the acquisition of substantially all of the assets of TPI in September 1996, the Company assumed, through a supplemental indenture, $51.6 million (principal amount) of 8.25% subordinated convertible debentures due July 15, 2002. The bonds are convertible at the holder's option, subject to compliance with the provisions of the supplemental indenture, into 50.508 shares of the Company's stock for each $1,000 debenture. In addition, upon conversion, debenture holders are entitled to a cash distribution per share equal to the cash distributions made by TPI to its common shareholders in connection with the liquidation and dissolution of TPI. Interest on the bonds is due semi-annually in January and July. Following completion of the Tender Offer, the Company has reserved 266,581 shares for future issuance pursuant to the debentures. OTHER DEBT INFORMATION The Company's industrial revenue bonds include $9.2 million at fixed interest rates ranging from 9.0% to 10.0% and $0.9 million at a floating interest rate subject to a floor of 7.5% and a ceiling of 15.0%. NOTE 9 - LITIGATION SETTLEMENT In 1999, the court entered final judgment approving a global settlement of three class action cases that claimed that the Company had violated the Fair Labor Standards Act. Under the settlement, the Company agreed to pay $18.0 million to settle these claims. Of this amount, $3.5 million was accrued as a liability during the fourth quarter of 1998 following an adverse ruling in one of the cases on the issue of liability. In accordance with the approved settlement, the Company made payments into a qualified settlement fund of $11.0 million, $3.5 million and $3.5 million on July 14, 1999, October 1, 1999 and March 1, 2000, respectively. NOTE 10 - LITIGATION The Company is a party to other legal proceedings incidental to its business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these other actions will not materially affect the operating results or the financial position of the Company. NOTE 11 - CONCENTRATION OF RISKS AND USE OF ESTIMATES As of February 18, 2001, the Company operated and franchised a chain of 1,006 restaurants in 27 states, which consists of two restaurant divisions: Shoney's Restaurants and Captain D's. The majority of the Company's restaurants are located in the southeastern United States. The Company also operates COI, a food service business that manufactures and distributes food and supplies to Company-owned restaurants, certain franchised restaurants and other customers. The Company's restaurant concepts are Shoney's Restaurants, which are family dining restaurants offering full table service and a broad menu, and Captain D's restaurants, which are quick-service restaurants specializing in seafood. The Company extends credit to franchisee customers for franchise fees and the sale of food and supplies on customary credit terms which generally do not require customers to provide collateral or other security to the Company. The Company believes there is no concentration of risk with any single customer, supplier, or small group of customers or suppliers whose failure or nonperformance would materially affect the Company's results of operations. 13 The preparation of financial statements in conformity with generally accepted accounting principles requires management to use judgment and make estimates that affect the amounts reported in the Consolidated Condensed Financial Statements. Management believes that such estimates have been based on reasonable and supportable assumptions and that the resulting estimates are reasonable for use in the preparation of the Consolidated Condensed Financial Statements. Changes in such estimates will be made as appropriate as additional information becomes available and may affect amounts reported in future periods. NOTE 12 - LEASEHOLD INTERESTS ASSIGNED OR SUBLET TO OTHERS Assigned Leases - The Company has assigned its leasehold interest to third parties with respect to approximately 45 properties on which the Company remains contingently liable to the landlord for the performance of all obligations of the party to whom the lease was assigned in the event that party does not perform its obligations under the lease. The assigned leases are for restaurant sites that the Company has closed. The Company estimates its contingent liability associated with these assigned leases as of February 18, 2001 to be approximately $14.0 million. Property Sublet to Others - The Company subleases approximately 57 properties to others. The Company remains liable for the leasehold obligations in the event these third parties do not make the required lease payments. The majority of the sublet properties are former restaurant sites that the Company has closed or franchised. The Company estimates its contingent liability associated with these sublet properties as of February 18, 2001 to be approximately $6.6 million. NOTE 13 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In May 1998, the AICPA issued Statement of Position 98-5 "Reporting on the Costs of Startup Activities" ("SOP 98-5"). SOP 98-5 requires companies to expense the costs of startup activities (including organization costs) as incurred. The Company's prior accounting policy expensed costs associated with startup activities systematically over a period not to exceed twelve months. The Company adopted SOP 98-5 effective the first day of fiscal 2000. The adoption of SOP 98-5 did not have a material effect on the Company's results of operations during 2000. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company adopted SFAS 133 effective the first day of fiscal 2001. NOTE 14 - SEGMENT INFORMATION The Company operates entirely in the food service industry with substantially all revenues resulting from the sale of menu products from restaurants operated by the Company. The Company has operations principally in three industry segments, two of which are restaurant concepts. The restaurant concepts are Shoney's and Captain D's. The remaining segment, COI, is a food service distribution and manufacturing operation. COI operates three food service distribution centers and a food processing facility that provide food and supplies to Company-owned restaurants, certain franchised restaurants and other customers. Effective with the first quarter of 2001, the Company began allocating its general 14 corporate overhead expenses to the three operating segments. All prior periods have been restated. In addition, certain asset gains or losses may be recognized in segment EBIT as defined where previously all gains or losses had been reported in "other" revenue. The Company's other income and expenses consist primarily of gains from the sale of property, plant, and equipment, rental and interest and miscellaneous income and do not constitute a reportable segment of the Company as contemplated by SFAS No. 131. EBIT, when that term is used in this Quarterly Report on Form 10-Q, means income before interest, taxes, asset impairment charges, restructuring charges and litigation settlements. EBIT is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income (or any other measure of performance under generally accepted accounting principles) as a measure of performance or to cash flows from operating, investing or financing activities as an indication of cash flows or as a measure of liquidity. The Company evaluates performance based on several factors, of which the primary financial measure is income before interest, taxes, restructuring charges, litigation settlements and impairment charges ("EBIT as defined"). The accounting policies of the business segments are the same as the Company's. Inter-segment revenues consist of food and supply sales by COI to Company- owned restaurants.

REVENUE ~~Quarters~~Quarter Ended ~~Forty Weeks Ended~~ ($ in thousands) ~~August~~February 618, ~~August~~February 120, ~~August~~2001 ~~6, August 1,~~ 2000 ~~1999 2000 1999~~ -------------------------------~~-----------------~~ Shoney's Restaurants $ 92100,~~162~~117 $ ~~118~~109,~~988~~130 ~~$ 293,625 $ 386,931~~ Franchise fees 21,~~494~~994 2,~~407~~562 ~~7,438~~Other 7income 2,~~230~~333 543 ------------------------------~~-----------------~~ Total Shoney's 94104,~~656~~444 ~~121~~112,~~395~~235 ~~301,063 394,161~~ Captain D's restaurants 7389,~~579~~300 7192,~~830~~413 ~~245,241 242,309~~ Franchise fees 1,~~272~~788 1,~~259~~579 ~~4,185~~Other 4income 1,~~181~~050 87 ------------------------------~~-----------------~~ Total Captain D's 7492,~~851~~138 7394,~~089~~079 ~~249,426 246,490~~ COI 92102,~~515~~048 ~~100~~110,~~222~~695 ~~301,298~~Other ~~332~~1,~~531~~191 ~~Corporate and other 2~~4,~~722~~238 ~~2,685 10,573 21,256~~ ------------------------------~~-----------------~~ Total revenue for reportable segments ~~264~~299,~~744~~821 ~~297~~321,~~391~~247 ~~862,360 994,438~~ Elimination of inter-segment revenue 6373,~~977~~292 7578,~~080~~620 ~~209,067 249,741~~ ------------------------------~~-----------------~~ Total consolidated revenue $ ~~200~~226,~~767~~529 $ ~~222~~242,~~311~~627 ~~$ 653,293 $ 744,697~~ ==============================~~=================~~

EBIT asAS ~~Defined~~DEFINED ~~Quarters~~Quarter Ended ~~Forty Weeks Ended~~ ($ in thousands) ~~August~~February 618, ~~August~~February 120, ~~August~~2001 ~~6, August 1,~~ 2000 ~~1999 2000 1999~~ ------------------------------- Shoney's operations $ (5,664) $ (2,895) Shoney's gains on asset sales 1,480 - ------------------------------- Total Shoney's ~~$ 1,306 $~~ (4,~~497~~184) ~~$ 5~~(2,~~703~~895) ~~$ 7,286~~ Captain D's ~~7,866~~operations 75,~~675~~672 ~~28,620 29,515 COI 1,512 1,731 3,561~~ 6,~~693~~758 ~~Corporate~~Captain ~~and~~D's ~~other~~gains ~~(3,969)~~on ~~(4,721)~~asset ~~(10,094)~~sales ~~(7,684)~~939 - -------------------------------~~-----------------------~~ Total ~~EBIT~~Captain asD's ~~defined for reportable segments~~ 6,~~715~~611 96,~~182~~758 ~~27,790~~COI 35(1,~~810~~483) 248 Other ~~Charges:~~income ~~Interest~~554 ~~expense~~237 ~~8,171~~Other ~~9,092~~gains ~~28,605~~on ~~32,801~~asset ~~Impairment~~sales of529 ~~long-lived assets 12~~3,~~846~~567 ~~18,423 12,846 18,423 Litigation settlement~~ -- -- -- ~~14,500~~ ------------------------- Total EBIT as defined for reportable segments 2,027 7,915 Other Charges: Interest expense 11,047 11,762 ------------------------------- Consolidated loss from continuing operations before income taxes $~~(14,302)~~ $(189,~~333~~020) $~~(13,661)~~ $(293,~~914~~847) ===============================~~========================~~

DEPRECIATION AND AMORTIZATION ~~Quarters~~Quarter Ended ~~Forty Weeks Ended~~ ($ in thousands) ~~August~~February 618, ~~August~~February 120, ~~August~~2001 ~~6, August 1,~~ 2000 ~~1999 2000 1999~~ -------------------------------~~------------------------~~ Shoney's $ 4,~~092~~649 $ 45,~~865~~874 ~~$ 13,592 $ 16,499~~ Captain D's 23,~~662~~724 23,~~583~~612 ~~8,584 8,665~~ COI ~~339~~305 ~~393~~479 ~~1,169~~Other ~~1,429~~490 ~~Corporate~~907 ~~and other 1,154 1,452 3,854 4,603~~ -------------------------------~~-----------------------~~ Total consolidated depreciation and amortization $ ~~8,247 $~~ 9,~~293~~168 $ 2710,~~199~~872 ~~$ 31,196~~ ===============================~~=======================~~

NOTE 15 - ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended ("SFAS 133"). This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 and accordingly, the Company adopted SFAS 133 effective October 30, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Derivatives that are not hedges must be adjusted to fair value 16 through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. On October 30, 2000, the date of the Company's adoption of SFAS 133, the cumulative effect of adoption was a charge to other comprehensive income of $0.1 million. At February 18, 2001, the fair value of the Company's derivatives was ($1.0 million), resulting in an additional charge to other comprehensive income of $0.9 million. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the Consolidated Condensed Financial Statements and Notes thereto. The first quarter of fiscal 2001 and 2000 covered periods of sixteen weeks. All references are to fiscal years unless otherwise noted. CONSOLIDATED RESULTS OF OPERATIONS CONSOLIDATED REVENUES Consolidated revenue for the first quarter of 2001 and 2000 is as follows:

~~AMOUNT~~Quarter ~~FINANCED~~Ended ~~SEGMENT~~($ ~~DESCRIPTION~~in OFmillions) ~~FINANCING~~February AT18, ~~CLOSING~~February ~~TERM~~20, ~~INTEREST~~2001 ~~RATE~~2000 -------------------------------~~-------------------------------------------------------------------------~~ ~~Shoney's~~Net ~~$99~~sales ~~million mortgage financing~~ $99 ~~million 20 years $31~~219.30 ~~million floating rate of 4.1% over Libor~~ $~~67.7~~ ~~million fixed rate of 10~~234.~~23%~~6 ~~$40~~Franchise ~~million~~fees ~~revolving credit $23~~3.48 ~~million for Two years~~ 4.~~25%~~1 ~~over~~Other ~~Libor~~income ~~facility under an amendment and letters of credit, or~~ 3.~~25%~~7 ~~over the restatement of the 1997 Credit $8.4 million funded prime rate Facility Captain D's $115 million term loans $115 million 16 months 4% over Libor or~~ 3~~% over the prime rate $20 million revolving credit $4~~.09 ~~million~~--------- ~~for~~--------- ~~16 months 3% to 4% over Libor or 2% facility letters of credit, to 3% over the prime rate,~~ $10 ~~million funded based on certain defined financial ratios COI $30 million revolving credit $1~~226.~~8 million for Three years 2.75% over Libor or .~~5% ~~facility letters of credit, over the prime rate~~ $16 ~~million~~242.6 ~~funded~~========= =========

Changes in the number of restaurants for the first sixteen weeks of 2001 and the first sixteen weeks of 2000 are as follows:

~~Quarters~~February ~~Ended~~18, ~~Forty~~Restaurants ~~Weeks~~Restaurants ~~Ended~~October ($29, inFebruary ~~millions)~~20, ~~August~~Restaurants 6,Restaurants ~~August~~October 131, ~~August~~2001 6,Opened ~~August~~Closed 1,2000 2000 ~~1999~~Opened ~~2000~~Closed 1999 ------------------------------------------------------------------------------------------------- ~~Net~~Shoney's ~~sales~~Company-owned $242 ~~194.8~~- $3 ~~217.0~~245 $264 ~~633.6~~- $3(2) ~~715.6~~267 ~~Franchise~~Franchised ~~fees~~201 - 13 214 257 3.8(2) 4 258 ------------------------------------------------------------------------------------------------- 443 - 16 459 521 3. 7 ~~11.6~~525 ~~11.5~~================================================================================================= ~~Other~~Captain ~~income~~D's ~~2.2~~Company-owned ~~1.6~~352 - 8.(1) ~~17.6~~360 363 1 - 362 Franchised 211 7(1) - 204 204 - 1 205 ------------------------------------------------------------------------------------------------- $563 ~~200.~~7 8 $564 ~~222.3~~567 $1 ~~653.3~~1 $567 ~~744.7~~ =================================================================================================

(1) Includes six restaurants sold to franchisees (2) Includes three restaurants sold to franchisees 18 Revenues for the first quarter of 2001 declined $16.1 million, or 6.6%, to $226.5 million, as compared to revenues of $242.6 million in the first quarter of 2000. The components of the change in consolidated revenues are summarized as follows:

~~August~~($ 6,in ~~Restaurants~~millions) ~~Restaurants~~Quarter ~~October~~Ended ~~31,~~February ~~August 1~~18, ~~Restaurants~~2001 ~~Restaurants October 25, 2000 Opened Closed 1999 1999 Opened Closed 1998~~ -----------------~~-------------------------------------------------------------------------------~~ ~~Shoney's~~Restaurant ~~Company-owned~~revenue ~~254~~$ ~~- 13~~(12.1) ~~267~~COI ~~348~~and 1other 61sales (23.4) ~~408~~Franchise ~~Franchised~~revenue ~~229 12~~(1.4) 41Other ~~258~~income ~~255 10~~(.2) ~~16 261~~ --------~~-------------------------------------------------------------------------------------~~ ~~483~~$ ~~12 54 525 603 11 77 669 ============================================================================================= Captain D's Company-owned 362~~ (16.1) ~~1 362 365 - - 365 Franchised 203 - 2 205 206 1 6 211 --------------------------------------------------------------------------------------------- 565 1 3 567 571 1 6 576~~ ========~~===================================================================================== (1) Includes 12 restaurants sold to franchisees (2) Includes 10 restaurants sold to franchisees~~

The decline in restaurant revenue during the first quarter of 2001 when compared to the first quarter of 2000 was principally due to a net decline in the number of restaurants in operation and the effect of unfavorable weather conditions in many of the Company's markets in the first quarter of 2001 when compared to the first quarter of 2000. During 2000, the Company closed 13 Company-owned restaurants, sold 12 Shoney's Restaurants to franchisees and opened one Captain D's restaurant. During the first sixteen weeks of 2001, three Shoney's and two Captain D's restaurants were closed and six Captain D's were sold to franchisees. The table below presents comparable store sales for Company-owned restaurants for the first quarter of 2001:

~~($ in millions)~~ Quarter ~~Forty~~Ended ~~weeks~~February ~~ended ended August 6~~18, ~~2000~~2001 ~~August 6, 2000~~ -----------------~~--------------------~~ ~~Restaurant~~Shoney's ~~revenue~~Restaurants $ (~~25.0) $ (90.4) COI and other sales 2.9 8.4 Franchise revenues .~~1 .~~1 Other income .5 (9.5~~3)% ~~-----------------------------------~~Captain $D's (212.50)% $Combined (911.46) ~~===================================~~%

COI and other sales decreased $3.4 million in the first quarter of 2001. The decrease in COI and other revenues was primarily due to a loss of franchise customers serviced by COI. Franchise revenues decreased $0.4 million during the first quarter of 2001 when compared to the same period last year. The decrease in franchise revenue was primarily the result of a net decline of 57 Shoney's franchise restaurants since the beginning of fiscal 2000. Other income decreased $0.2 million during the first quarter of 2001 when compared to the same period in 2000. The decrease in other income during the first quarter was primarily the result of lower gains from asset sales when compared to the prior year partially offset by higher rental income. The principal components of other income for the first quarter of 2001 were net gains on asset sales ($3.0 million), interest and other income ($0.1 million) and rental income ($0.6 million). 19 CONSOLIDATED COSTS AND EXPENSES Consolidated cost of sales includes food and supplies, restaurant labor and operating expenses. A summary of cost of sales as a percentage of consolidated revenues is shown below:

Quarter ~~Forty~~Ended ~~weeks~~Quarter ~~ended~~Ended ~~ended~~February ~~August 6~~18, ~~2000~~2001 ~~August~~February 620, 2000 ----------------- -----------------~~------~~ ~~Shoney's~~Food ~~Restaurants~~and (2supplies 37.4)8% (138.8)5% ~~Captain~~Restaurant ~~D's~~labor 328.01% 27.0% 1Operating expenses 24.8% 23.6% ~~Combined~~----------------- (0----------------- Total cost of sales 90.1)7% (089.2)1% ================= =================

As compared to restaurant revenues, COI revenues have a higher percentage of food and supply costs, a lower percentage of operating expenses and have no associated restaurant labor. As a result, changes in COI revenue relative to the change in restaurant revenue can have an exaggerated effect on these expenses as a percentage of total revenues. Food and supply costs, as a percentage of revenues, decreased 0.7% in the first quarter of 2001 when compared to the first quarter of 2000. The decrease in food and supply costs in the first quarter of 2001, as a percentage of sales, was primarily the result of the decrease in COI revenue relative to the decline in restaurant revenue and lower food and supply costs as a percentage of sales in Captain D's. Consolidated restaurant labor increased 1.1% as a percentage of revenues in the first quarter of 2001 when compared to the prior year, primarily the result of higher labor costs as a percentage of sales at the restaurant level. Wage rates increased during the first quarter of 2001 because of low unemployment conditions in many markets and a very competitive restaurant labor market. Restaurant labor increased, as a percentage of sales, in both Shoney's and Captain D's in the first quarter when compared to the prior year period. The Company expects continued upward pressure on consolidated restaurant labor in both restaurant concepts as part of its ongoing strategy to enhance customer service in an attempt to improve comparable store sales. Consolidated operating expenses increased 1.2% as a percentage of total revenues in the first quarter of 2001 when compared to the prior year. The increase in consolidated operating expenses, as a percentage of sales, was primarily caused by higher utilities, labor costs at COI, rent expense and the effect of the decline in comparable store revenue. A summary of consolidated general and administrative expenses and interest expense as a percentage of consolidated revenue is shown below:

~~Quarters~~Quarter Ended ~~Forty~~Quarter ~~Weeks~~ Ended ~~August~~February 618, ~~2000~~2001 ~~August~~February 120, ~~1999 August 6,~~ 2000 ~~August 1, 1999~~ -------------- ---~~-----------~~ -------------- ---~~-----------~~ ~~Food~~Consolidated general and ~~supplies~~administrative ~~39.1% 37.1% 39.1% 36.7% Restaurant labor 27.2% 27.9% 26.5% 27.0% Operating~~ expenses 228.74% ~~23.3% 22.~~7~~% 23~~.56% ~~-----~~Consolidated ~~-----~~interest ~~-----~~expense ~~----- Total cost of sales 89~~4.09% 884.39% ~~88.3% 87.2% ===== ===== ===== =====~~

Consolidated general and administrative expenses increased 0.8% as a percentage of revenue in the first quarter of 2001 when compared to the same period in 2000. The increase in general and administrative expenses, as a percentage of sales, was primarily due to $0.4 million of severance costs incurred in the first quarter of 2001 and the effect of the overall decline in comparable store revenue. The severance costs in the first quarter of 2001 resulted from the elimination of thirty-four administrative positions. 20 Consolidated interest expense declined $0.7 million in the first quarter of 2001 compared to the same period of 2000. The reduction in interest expense is primarily due to lower debt outstanding when compared to the prior year period, largely offset by the effect of higher interest rates on the debt incurred in the Refinancing. The Company had an effective tax rate of (0.8)% and (2.9)% in the first quarter of 2001 and first quarter of 2000, respectively. This effective tax rate differs from the federal statutory rate of 35% primarily due to goodwill amortization which is not deductible for federal income tax purposes and an adjustment in the valuation allowance against deferred tax assets. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of February 18, 2001, the Company increased the valuation allowance for gross deferred tax assets for tax credit carry forwards and net operating loss carry forwards. The deferred tax asset valuation adjustment is in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires that a deferred tax asset valuation allowance be established if certain criteria are not met. If the deferred tax assets are realized in the future, the related tax benefits will reduce income tax expense. OPERATING SEGMENTS SHONEY'S RESTAURANTS

~~Quarters~~($ ~~Ended~~in ~~Forty~~thousands ~~Weeks~~except comparable Quarter Ended ~~August~~store 6sales and operating data) February 18, February 20, 2001 2000 ~~August~~---------------------------------- 1,Restaurant ~~1999~~revenue ~~August~~$ 6100,117 ~~2000~~$ ~~August~~109,130 Franchise revenue 1,994 ~~1999~~2,562 Other income 2,333 543 -------------- -------------------- Total Shoney's revenue 104,444 112,235 Expenses 108,628 115,130 -------------- -------------------- ~~Consolidated~~EBIT ~~general~~as ~~and~~defined(b) ~~administrative~~$ ~~expenses~~(4,184) ~~7.6%~~$ ~~7.4%~~(2,895) ~~7.5%~~================================== ~~7.9%~~Comparable ~~Consolidated~~store ~~interest~~sales ~~expense~~decrease(a) 4.(1~~% 4~~.13)% 4(3.48)% ~~4.4%~~Operating restaurants at end of quarter: Company-owned 242 264 Franchised 201 257 ---------------------------------- Total 443 521 ==================================

(a) Prior year amounts have not been restated for comparable restaurants. (b) EBIT, when that term is used in this Quarterly Report on Form 10- Q, means income before interest, taxes, asset impairment charges, restructuring charges and litigation settlements. EBIT is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income (or any other measure of performance under generally accepted accounting principles) as a measure of performance or to cash flows from operating, investing or financing activities as an indication of cash flows or as a measure of liquidity. The Company evaluates performance based on several factors, of which the primary financial measure is income before interest, taxes, asset impairment charges, litigation settlements and restructuring charges, or EBIT as defined. 21 Shoney's concept total revenue declined $7.8 million, or 6.9%, in the first quarter of 2001 when compared to the prior year. The components of the change in Shoney's concept revenue are summarized as follows:

~~Quarters~~Quarter Ended ~~Forty Weeks Ended~~ ($ in ~~thousands~~millions) ~~August~~February 618, ~~August~~2001 ~~1, August 6, August 1, 2000 1999 2000 1999~~ -----------------~~------------------------------------~~ ~~Restaurant~~Sales ~~sales~~from $operating ~~92,162~~restaurants $ ~~118,988~~(0.9) $Closed ~~293,625~~restaurants $(8.1) ~~386,931 Franchise revenue 2,494 2,407 7,438 7,230~~ -----------------~~------------------------------------~~ Total ~~Shoney's~~change ~~revenue~~in ~~94,656~~restaurant 121,395 301,063 394,161 Expenses 93,350 116,898 295,360 386,875 ----------------------------------------------------- EBIT as defined $ 1,306 $ 4,497 $ 5,703 $ 7,286 ===================================================== Comparable store sales ~~increase~~ (~~decrease~~9.0) ~~(a)~~Franchise ~~(2.4)%~~revenue (4.46)% (Other income 1.8)% ~~(5.3)% Operating restaurants at end of quarter: Company~~-~~owned 254 348 Franchised 229 255~~ ----------------~~--------------------------------------~~ Total ~~483~~$ ~~603~~(7.8) =================~~===================================== (a) Prior year amounts have not been restated for comparable restaurants~~

Revenues were significantly reduced by the closing of ten under-performing Company-owned restaurants in 2000 and three additional restaurants in 2001. In addition, twelve Company-owned restaurants were sold to franchisees in fiscal 2000. Sales were also affected by unfavorable weather conditions in many of the Company's markets in the first quarter of 2001 when compared to the first quarter of 2000. Sales and EBIT as defined for Shoney's Restaurants closed or sold are as follows:

Quarter Ended ~~Forty Weeks Ended~~ ($ in ~~millions~~thousands) ~~August~~February 618, ~~2000~~February ~~August 6~~20, 2001 2000 -------------- ----------------- ~~Sales from operating restaurants $ (1.3) $ (4.4) Closed restaurants (25.5) (88.9)~~ ----------~~----~~ Sales EBIT as Sales EBIT as defined defined ----------------- ~~Total change in restaurant sales (26.8) (93.3) Franchise revenues .1 .2~~ -------------- ----------~~-------~~ ~~Total~~Stores closed or sold $ 99 $ (~~26.7~~203) $ 8,232 $ (~~93.~~1,125) ~~============== =================~~

Shoney's Restaurants comparable store sales declined in the first quarter of 2001 by 1.3%. Franchise revenue decreased $0.6 million in the first quarter of 2001 when compared to the prior year. The decrease in franchise revenue in the first quarter of 2001 is primarily the result of a net decline of 57 franchise restaurants since the beginning of the first quarter of 2000. Other income increased $1.8 million primarily due to gains on asset sales of $1.5 million in the first quarter of 2001 compared to no gains in the first quarter of 2000 and higher rental income. In April 2000, the Company hired a new President and CEO for the Shoney's concept. His first priority was to assemble a new senior management team. This team developed a re-branding strategy, which enhanced the offerings on the food bar while reducing the number of menu items in an effort to simplify operations. A major component of this strategy was to create and nurture a culture that provides a level of service perceived by the guest as exceptional. This strategy is also available to franchised restaurants. As of February 18, 2000, 152 company-owned and ten franchised restaurants have converted to this menu. In November 2000, Shoney's Restaurants hired a new Senior Vice President of Research and Development who is a Certified Master Chef. His mission is to provide new and innovative products for both the cook-to-order menu and the food bar. The Company continued to focus on the use of Store Waste Attack Tool ("SWAT") implemented in 1999 in its Shoney's restaurants. SWAT assists management in identifying waste and theft. During 2000, the Company developed and tested a new labor scheduling system, which schedules employees based on anticipated hourly sales. The Company has begun to implement this labor scheduling system in fiscal 2001. Expenses declined $6.5 million, or 5.6%, in the first quarter of 2001, when compared to the same period in 2000. Expenses as a percentage of revenue were 104.0% in the first quarter of 2001 compared to 102.6% in 22 the first quarter of 2000. The increase in expenses in the first quarter of 2001, as a percentage of revenues, was the result of increases in food and supply costs, restaurant labor, operating expenses and multi-unit supervisory expenses. As a result of the above, EBIT as defined decreased $1.3 million in the first quarter of 2001, when compared to the comparable prior year period. The Company continually evaluates the operating performance of each of its restaurants. This evaluation process takes into account the anticipated resources required to improve the operating performance of under-performing restaurants to acceptable standards and the expected benefit from that improvement. As a result of these evaluations, the Company could close additional restaurants in the future. The Company also may sell additional operating restaurants to franchisees. CAPTAIN D'S RESTAURANTS

~~Quarters Ended Forty Weeks Ended~~ ($ in thousands) ~~August~~except 6,comparable ~~August~~store 1,Quarter ~~August~~Ended 6,sales ~~August~~and 1,operating ~~2000~~data) ~~1999~~February ~~2000~~18, ~~1999~~February ~~Sales~~20, ~~EBIT~~2001 as2000 ~~Sales EBIT as Sales EBIT as Sales EBIT as defined defined defined defined~~ ---------------------------- Restaurant revenue $ 89,300 $ 92,413 Franchise revenue 1,788 1,579 Other income 1,050 87 ---------------------------- Total Captain D's revenue 92,138 94,079 Expenses 85,527 87,321 ----------------------------- ~~Stores~~EBIT ~~closed~~as ~~or sold $ - $~~ defined(~~184~~b) $ 256,~~533~~611 $ (16,~~829)~~758 ~~$ 5,869 $ (1,003) $ 94,750 $ (8,373)~~ ============================ Comparable store sales decrease(a) (2.0)% (0.1)% Operating restaurants at end of quarter: Company-owned 352 363 Franchised 211 204 ---------------------------- Total 563 567 ============================~~=============================~~

(a) Prior year amounts have not been restated for comparable restaurants. (b) See Note (b) "Operating Segments - Shoney's Restaurants" on page 21 hereof. Captain D's total revenue decreased $1.9 million, or 2.1%, in the first quarter of 2001, when compared with the comparable prior year period. The components of the change in Captain D's concept revenue are summarized as follows:

~~Quarters Ended Forty Weeks Ended~~ ($ in ~~thousands~~millions) ~~August~~Quarter 6,Ended ~~August~~February 118, ~~August~~2001 ~~6, August 1, 2000 1999 2000 1999~~ -----------------~~-------------------------------------~~ ~~Restaurant~~Sales ~~sales~~from $operating ~~73,579~~restaurants $ ~~71,830~~(1.4) $Closed ~~245,241~~or $sold ~~242,309~~restaurants ~~Franchise revenue~~ (1~~,272~~.7) ~~1,259 4,185 4,181~~ -----------------~~-------------------------------------~~ Total ~~Captain~~change ~~D's~~in ~~revenue~~restaurant 74,851 73,089 249,426 246,490 Expenses 66,985 65,414 220,806 216,975 ------------------------------------------------------ EBIT as defined $ 7,866 $ 7,675 $ 28,620 $ 29,515 ====================================================== Comparable store sales ~~increase~~ (a) 3.0%1) Franchise revenues 0.5%2 Other income 1.~~8% 3.~~0% ~~Operating restaurants at end of quarter: Company~~-~~owned 362 365 Franchised 203 206~~ ----------------~~---------------------------------------~~ Total ~~565~~$ ~~571~~(1.9) =================~~====================================== (a) Prior year amounts have not been restated for comparable restaurants~~

23 Revenues were reduced by closing three under-performing Company-owned restaurants in 2000 and two under-performing restaurants in 2001. Restaurant revenues were also reduced by the sale of six Company-owned restaurants in the first quarter of 2001 and unfavorable weather conditions in many of the Company's markets in the first quarter of 2001 when compared to the first quarter of 2000. Sales and EBIT as defined for Captain D's restaurants closed or sold are as follows:

Quarter Ended ($ in ~~millions~~thousands) ~~Quarter~~February ~~Ended Forty Weeks Ended August 6~~18, ~~2000~~February ~~August 6~~20, 2001 2000 -------------- ----------------- ~~Sales from operating restaurants $ 2.3 $ 4.5 Closed restaurants (0.5) (1.6)~~ ---------~~-----~~ ~~-----------------~~Sales ~~Total~~EBIT ~~change~~as inSales ~~restaurant~~EBIT ~~sales~~as ~~1.8~~defined ~~2.9~~defined ~~Franchise revenues~~ - - -------------- ------------------------ ~~Total~~Stores closed or sold $ ~~1.8~~768 $ (31) $ 2.9,449 $ 8 ============== ==========================

Franchise revenue increased $0.2 million in the first quarter of 2001 when compared to the same period in 2000. The increase was primarily the result of initial fees from the six Company-owned restaurants sold to franchisees during the quarter. Other income increased $1.0 million over the prior year quarter primarily due to $0.9 million of gains on asset sales in the first quarter of 2001 compared to no gains in the first quarter of 2000. Expenses decreased $1.8 million, or 2.1%, in the first quarter of 2001, when compared to the same period in 2000. However, as a percentage of sales, decreases in food and supply costs in the first quarter were more than offset by increases in restaurant labor, operating expenses and multi-unit supervisory costs. As a result of the above, EBIT as defined decreased $0.1 million in the first quarter of 2001 when compared to the comparable prior year quarter. The Company continually evaluates the operating performance of each of its restaurants. This evaluation process takes into account the anticipated resources required to improve the operating performance of under-performing restaurants to acceptable standards and the expected benefit from this improvement. As a result of these evaluations, the Company could close additional restaurants in the future. The Company also may sell operating restaurants to franchisees. COI

~~Quarters~~Quarter Ended ~~Forty Weeks Ended~~ ($ in thousands) ~~August~~February 618, ~~August~~February 120, ~~August~~2001 ~~6, August 1,~~ 2000 ~~1999 2000 1999 Sales EBIT as Sales EBIT as Sales EBIT as Sales EBIT as defined defined defined defined~~ ---------------------------- Outside sales $ 28,756 $ 32,075 Inter-company sales 73,292 78,620 ---------------------------- Total COI revenue 102,048 110,695 Expenses 103,531 110,447 ---------------------------- ~~Stores~~EBIT ~~closed~~as ~~$ 124 $~~ defined(5a) $ ~~624 $~~ (511,483) $ ~~555~~248 ~~$ 19 $ 2,176 $ (82)~~ ============================ Distribution centers at end of quarter 3 3 ============================~~======================~~

(a) See Note (b) "Operating Segments-Shoney's Restaurants" on page 21 hereof. Total revenue declined $8.6 million, or 7.8%, in the first quarter of 2001 when compared to the prior year period. Outside revenues of COI decreased by $3.3 million in the first quarter of 2001. The decrease in 24 outside revenues for the first quarter of 2001 resulted primarily from a decrease in the number of outside customers. Inter-company sales declined in the first quarter of 2001 when compared to the prior year period primarily as a result of closing Company-owned restaurants. Expenses declined $6.9 million, or 6.3%, in the first quarter of 2001, when compared to the prior year period. Expenses, as a percentage of sales, were 101.5% and 99.8% in the first quarter of 2001 and 2000, respectively. The increase in expenses, as a percentage of sales, is due to higher cost of goods sold, labor and administrative expenses. As a result of the above, EBIT as defined decreased $1.7 million in the first quarter of 2001 when compared to the prior year period. LIQUIDITY AND CAPITAL RESOURCES The Company historically has met its liquidity requirements with cash provided by operating activities supplemented by external borrowings. The Company historically has operated with a substantial working capital deficit. Management does not believe that the deficit hinders the Company's ability to meet its obligations as they become due as the Company's credit facilities include lines of credit that are available to cover short term working capital requirements. However, in 2001, current liabilities include $141.9 million of current maturities of long-term debt. This current portion of long-term debt includes $122.8 million of Captain D's term notes and revolver that matures on December 31, 2001 (see Risk Factors). Cash used by continuing operating activities improved by $2.9 million in the first quarter of 2001 compared to the first quarter of 2000. Cash used by continuing operating activities was positively affected by a $1.5 million use of cash by operating assets and liabilities compared to a use of $12.9 million in the first quarter of 2000. The use of cash by operating assets and liabilities in the first quarter of 2000 was primarily the result of cash required for increased levels of inventory and cash required for a reduction of other liabilities. Cash used by operating activities in 2001, when compared to 2000, was negatively affected by the decline in operating income from the Company's Shoney's Restaurants and COI and lower depreciation and amortization. Cash provided by investing activities in the first quarter of 2001 was $1.0 million. During 2001, the Company received $5.4 million in cash proceeds from the sale of closed and operating restaurant properties. Cash used for property, plant and equipment additions was $4.5 million. Cash provided by investing activities in the first quarter of 2000 was $5.4 million. During the first quarter of 2000, the Company received $12.0 million in cash proceeds from the sale of closed and operating restaurant properties. Cash used for property, plant and equipment additions in the first quarter of 2000 was $6.4 million and cash used for assets held for sale was $0.2 million. The Company balances its capital spending plan throughout the year based on operating results and may from time to time decrease capital spending to balance cash from operations and debt service requirements. Since the beginning of 2000, the Company has closed or sold 36 under-performing restaurants. These properties, as well as real estate from prior restaurant closings, other surplus properties, rental properties and leasehold interests, have been sold or are being actively marketed. Cash provided by financing activities was $2.1 million in the first quarter of 2001 compared to a use of cash of $3.0 million in the first quarter of 2000. On June 28, 2000, the Company announced its intention to commence the Tender Offer to purchase all of its outstanding subordinated Debentures and LYONs for an aggregate price of approximately $80 million. The Tender Offer was subject to the satisfaction of certain terms and conditions including receipt of financing and the valid tender of at least 90% of the 25 aggregate principal amount of each of the debenture issues. In order to consummate the Tender Offer, the Company was required to effect the Refinancing. In order to accommodate the timing of the Refinancing, the Tender Offer was extended until September 6, 2000 at which time the Refinancing was completed and the Tender Offer was consummated. Upon completion of the Tender Offer the Company repurchased approximately 90% of each of the Debentures and the LYONS. Consummation of the Tender Offer and the Refinancing resulted in an extraordinary gain on the early retirement of debt of approximately $82.5 million in the fourth quarter of 2000, net of expenses and income taxes. Proceeds from long-term debt in 2001 included $19.0 million of long-term borrowings under the Shoney's Line of Credit and $4.0 million of borrowings under the Captain D's revolver. Payments on long-term debt included $13.3 million of payments under the Shoney's Line of Credit and $5.0 million of payments under the Captain D's revolver. Financing activities for 2001 also included $0.8 million of payments for debt issue costs. In order to complete the Refinancing, the Company restructured its restaurant operations by separating its Shoney's and Captain D's operations (the "Reorganization"). In the Reorganization, all of the assets comprising the Company's Captain D's restaurant operations were transferred to Captain D's, Inc., a wholly-owned subsidiary of the Company. The Reorganization of the Company's operations allowed each of the Company's operating segments (Shoney's, Captain D's, and COI) to be separately financed. As a result of the Reorganization and the Refinancing, each operating segment is intended to operate as an independent business unit and be responsible for its own indebtedness and working capital needs. The new senior lending agreements generally prohibit the movement of cash and other assets between the operating segments except for payments under certain tax sharing arrangements and payments for goods and services. The Company's senior loan agreements (consisting of the Shoney's Line of Credit, the Captain D's Facility, the COI Revolving Credit Facility and the Shoney's Mortgage Financing) are secured by substantially all of the Company's assets. The debt agreements (1) require satisfaction of certain financial ratios and tests (some of which become more restrictive each year); (2) impose limitations on capital expenditures; (3) limit the ability to incur additional debt and contingent liabilities; (4) prohibit dividends and distributions on common stock; (5) prohibit mergers, consolidations or similar transactions; and (6) include other affirmative and negative covenants. The Company's senior debt structure requires that working capital sources be available for each operating segment. The Shoney's Restaurant segment's liquidity is provided by a $40.0 million working capital line of credit (the "Shoney's Line of Credit"). The Company has agreed to sell during fiscal 2001 up to $10.0 million of properties serving as collateral for the Shoney's Line of Credit, pay down outstanding amounts under the line and permanently reduce the availability. As of February 18, 2001, the Company had sold $2.8 million of the $10.0 million of collateral properties resulting in $37.2 million of aggregate availability under the Shoney's Line of Credit. Availability under the Shoney's Line of Credit is further reduced by outstanding letters of credit of approximately $19.7 million, resulting in approximately $17.5 million of availability of which $12.0 million was drawn at February 18, 2001. As of March 24, 2001 the Company had sold $5.0 million of the $10.0 million of collateral properties resulting in $15.3 million of aggregate availability (after letters of credit) under the Shoney's Line of Credit of which $10.4 million was drawn. Liquidity for the Shoney's segment is expected to be enhanced by proceeds of up to $15.0 million from certain asset sales that the Company is allowed to retain for its working capital needs. Following the Company's retention of $15.0 million from expected asset sales, the Company may sell certain other properties serving as collateral for the Shoney's Line of Credit and use the cash proceeds to either repay drawings under the line (which will also permanently reduce availability) or cash collateralize the line. As of March 24, 2001 the Company had sold 26 $6.4 million of properties subject to the $15.0 million limitations and retained the proceeds to use in the Company's operations. If the Shoney's segment's operating trends vary from those forecasted or if anticipated timing and levels of asset sales are not met by the Company, the liquidity, financial condition and results of operations will be materially adversely affected. Management expects liquidity for the Shoney's segment to improve in the second quarter of 2001 over the first quarter as sales and cash flows historically have improved during the spring and summer. Liquidity for the Captain D's segment is provided by a $20.0 million line of credit (the "Captain D's Line of Credit"). Availability under the Captain D's Line of Credit is reduced by outstanding letters of credit of approximately $4.0 million resulting in availability of approximately $16.0 million, of which $7.8 million was drawn at February 18, 2001. Liquidity for COI is provided by a line of credit (the "COI Line of Credit") of up to $30.0 million. The COI Line of Credit is an asset-based loan under which the availability will increase or decrease as inventory and accounts receivable change. Availability under the line is reduced by $1.8 million of letters of credit, other reserves determined to be reasonably necessary by the lender and $11.2 million of drawings at February 18, 2001. At February 18, 2001, availability under the COI facility was approximately $2.3 million. Financing activities in the first quarter of 2000 included $13.8 million of payments on senior indebtedness, net borrowings under the Company's line of credit of $11.6 million and cash required for debt issue costs of $0.7 million. RISK FACTORS The Company's business is highly competitive with respect to food quality, concept, location, service and price. In addition, there are a number of well-established food service competitors with substantially greater financial and other resources compared to the Company. The Company's Shoney's Restaurants have experienced declining customer traffic during the past eight years as a result of intense competition and a decline in operational focus occasioned by high management turnover. The Company has initiated a number of programs to address the decline in customer traffic; however, performance improvement efforts for the Shoney's Restaurants during the past four years have not resulted in improvements in sales and margins and there can be no assurance that the current programs will be successful. The Company has experienced increased costs for labor and operating expenses at its restaurant concepts which, coupled with a decrease in average restaurant sales volumes in its Shoney's Restaurants, have reduced its operating margins. The Company does not expect to be able to significantly improve Shoney's Restaurants operating margins until it can consistently increase its comparable restaurant sales. The Company is highly leveraged and, under the terms of its credit agreements, generally is not permitted to incur additional debt and is limited to annual capital expenditures of approximately $18.5 million. Management believes the annual capital expenditures permitted under the credit agreements are sufficient for the execution of its business plan. The Captain D's indebtedness, incurred as part of the Refinancing, matures on December 31, 2001. The Company expects to refinance this indebtedness prior to maturity. However, no assurance can be given that the refinancing can be obtained on terms satisfactory to the Company. If the Company were unable to refinance the Captain D's indebtedness on terms satisfactory to the Company, the Company's financial condition, results of operations and liquidity would be materially adversely affected. Based on current operating results and forecasted operating trends, it is probable that a covenant violation could occur in November 2001 under the Shoney's mortgage financing debt agreements. The Company has available to it remedies which can prevent probable covenant violations, and additionally, management 27 believes that loan covenant modifications, if required, could be obtained. Remedies available to the Company to prevent covenant violations are as follows: 1) under-performing properties may be replaced by properties with better fixed charge coverage ratios, and 2) properties may be sold to franchisees or converted to rental properties if the franchise and rental income streams improve the fixed charge coverage. Historically, the Company has been able to secure financial covenant modifications when needed. However, no assurance can be given that the modifications could be obtained on terms satisfactory to the Company. If the Company were unable to obtain modifications, the Company's financial condition, results of operations and liquidity would be materially adversely affected. Except as noted above, the Company expects to be in compliance with its remaining financial covenants in 2001 and was in compliance with its financial covenants at the end of the first quarter of 2001. 28 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Item 7A of the Company's Annual Report on Form 10-K, filed with the Commission on January 29, 2001 (as amended by Form 10-K/A, filed with the Commission on February 26, 2001), is incorporated herein by this reference. PART II--OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. --------- 10.1 Amendment No. 2 to the Credit Agreement, dated as of April 2, 2001, among Captain D's, Inc., the banks, financial institutions and other institutional lenders parties to the Credit Agreement, and Bank of America, N.A., as Administrative Agent. (b) Reports on Form 8-K. None -------------------- 29 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized both on behalf of the registrant and in his capacity as principal financial officer of the registrant. Date: April 4, 2001 By: /s/ James M. Beltrame ---------------------------- James M. Beltrame Chief Financial Officer, Principal Financial and Chief Accounting Officer 30 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1 Amendment No. 2 to the Credit Agreement, dated as of April 2, 2001, among Captain D's, Inc., the banks, financial institutions and other institutional lenders parties to the Credit Agreement, and Bank of America, N.A., as Administrative Agent.

Quarters Ended Forty Weeks Ended ($ in thousands) August 6, August 1, August 6, August 1, 2000 1999 2000 1999 ------------------------------------------------------ Outside sales $ 28,538 $ 25,142 $ 92,231 $ 82,790 Inter-company sales 63,977 75,080 209,067 249,741 ------------------------------------------------------ Total COI revenue 92,515 100,222 301,298 332,531 Expenses 91,003 98,491 297,737 325,838 ------------------------------------------------------ EBIT as defined $ 1,512 $ 1,731 $ 3,561 $ 6,693 ====================================================== Distribution centers at end of quarter 3 3

AMOUNT FINANCED SEGMENT DESCRIPTION OF FINANCING AT CLOSING TERM INTEREST RATE -------------------------------------------------------------------------------------------------------- Shoney's $99 million mortgage financing $99 million 20 years $31.3 million floating rate of 4.1% over Libor $67.7 million fixed rate of 10.23% $40 million revolving credit $23.4 million for Two years 4.25% over Libor facility under an amendment and letters of credit, or 3.25% over the restatement of the 1997 Credit $8.4 million funded prime rate Facility Captain D's $115 million term loans $115 million 16 months 4% over Libor or 3% over the prime rate $20 million revolving credit $4.0 million for 16 months 3% to 4% over Libor or 2% facility letters of credit, to 3% over the prime rate, $10 million funded based on certain defined financial ratios COI $30 million revolving credit $1.8 million for Three years 2.75% over Libor or .5% facility letters of credit, over the prime rate $16 million funded

Pro Forma as of ($ in thousands) August 6,2000 September 6, 2000 ------------- ----------------- Senior debt - Line of Credit $ 23,719 $ 1,921 Senior debt - Term A Note 29,994 -- Senior debt - Term B Note 103,022 -- Shoney's Inc. Line of Credit -- 8,345 Shoney's Inc. Mortgage financing -- 99,000 Captain D's Line of Credit -- 10,000 Captain D's term notes -- 115,000 COI Line of Credit -- 16,000 Subordinated zero coupon convertible debentures 130,582 13,130 Subordinated convertible debentures 49,715 4,902 Industrial revenue bonds 10,165 10,165 Notes payable to others 3,938 3,938 --------- --------- 351,135 282,401 Obligations under capital leases 10,821 10,821 --------- --------- $ 361,956 $ 293,222 ========= =========

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