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The Company's Common Stock is traded on the New York Stock Exchange under the symbol "PIC." The following table sets forth the high and low sales prices for each quarter within the last two years. As of September 8, 2000, there were approximately 2,561 record holders of the Company's Common Stock.

Piccadilly is the largest cafeteria chain in the United States with 238 cafeterias, and is the dominant cafeteria chain in the Southeastern and Mid-Atlantic regions. We serve a diverse and extremely loyal customer base consisting of families, groups of friends and co-workers, senior citizens, couples and students. Our patrons enjoy a wide selection of convenient, healthy, freshly prepared "home cooked" meals at value-oriented prices for lunch and dinner.

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

The Morrison Acquisition. In May 1998, we acquired Morrison Restaurants, Inc. ("Morrison") for $57.3 million of total consideration (the "Morrison Acquisition"). The discussion that follows refers to the cafeterias acquired in the Morrison Acquisition as "Morrison cafeterias." All other cafeterias are referred to as "Piccadilly cafeterias." At the time of the Morrison Acquisition, Morrison was the largest cafeteria chain in the Southeastern and Mid-Atlantic regions with 142 cafeterias in operation. Morrison cafeterias were similar to our traditional Piccadilly cafeterias in terms of size and markets served. We believe the Morrison Acquisition allowed us to increase our penetration in our regional markets, enhance our purchasing power and eliminate redundant costs.

We began converting Morrison cafeterias to Piccadilly-style cafeterias (the "Morrison Conversions") in fiscal 1999. As of September 30, 1999, we had completed 112 Morrison Conversions, and there have been no additional Morrison Conversions since September 30, 1999. Since the Morrison Acquisition, we closed 27 unprofitable cafeterias. Expenses associated with the Morrison Conversions averaged approximately $40,000 per cafeteria for training-team labor, new uniforms, repairs, and supplies. Additional costs of approximately $25,000 per cafeteria, primarily for signage, were capitalized. In aggregate, we spent approximately $7.3 million on the Morrison Conversions. Ten Morrison cafeterias had not been converted as of June 30, 2000, and will continue to operate as Morrison cafeterias. The table below shows the number of Morrison Conversions by quarter:

Ralph and Kacoo's Sale. In March 1999, we sold six Ralph & Kacoo's seafood restaurants for $21.3 million in cash. Ralph & Kacoo's generated approximately $24.3 million of sales and $3.9 million of EBITDA in the twelve-month period prior to the sale. Net proceeds from the sale were used to reduce bank debt. We sold Ralph & Kacoo's in order to focus on our traditional cafeteria operations.

Net Sales. Total net sales for the year ended June 30, 2000 were $450.3 million, a 9.2% reduction from 1999 net sales of $495.7 million. Included in net sales for 1999 was $17.7 million realized from the Ralph & Kacoo's seafood restaurants, which were sold on March 30, 1999. The $27.7 million decline in cafeteria net sales was due to a $3.9 million decrease relating to fewer cafeterias in operation and a decline of $23.8 million in same-store sales. The following table reconciles total cafeteria sales to same-store cafeteria sales (cafeterias that were open for 12 full months in both periods) for the years ended June 30, 2000 and 1999:

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The net decrease in same-store sales of $23.8 million, or 5.2%, reflects a decline in same-store customer traffic of 6.6%, which was partially offset by a check average increase of 1.5%. The check average increase resulted from various price increases implemented at certain cafeterias since June 30, 1999.

Approximately 73% of the declines in same-store sales was attributable to the Morrison cafeterias. During fiscal 1999 and 2000, the Company was focused on the integration of the Morrison cafeterias. The cafeteria closing and conversion phases of this integration process were completed by the end of the first quarter of fiscal 2000. The next phase of our integration plan was improving same-store sales, and during the balance of fiscal 2000, the Company tested several sales-building initiatives at 16 cafeteria locations in order to attract and retain new customers and to increase sales to existing customers. These sales-building initiatives included simplified menu pricing, neighborhood and direct mail marketing and the sponsorship of employee contests. These initiatives have been well received by our customers. Specifically, we have experienced a consistent trend of year-over-year sales improvement at these 16 cafeterias, from a decline in monthly sales of 14% in January 2000 to an increase of 7% in June 2000, primarily due to improved customer traffic. We are building on this success by implementing these initiatives at our other cafeterias over the next several months.

It is possible that additional declines in same-store sales at individual cafeterias could result in the closing of such cafeterias or additional non-cash charges, including impairment of good-will, under SFAS 121. As of June 30, 2000 no impairment adjustments for Morrison-related goodwill were necessary.

The following table illustrates cost of sales, other operating expenses, general and administrative expenses and other expenses as a percentage of net sales for the comparative periods, net of the Ralph & Kacoo's operations in fiscal 1999 results.

Restaurant-Level Income. During fiscal 2000 and 1999, restaurant-level income (net sales less cost of sales and other operating expenses) was $23.7 million, or 5.3% of net sales, and $26.9 million, or 5.4% of net sales, respectively. Excluding the operations of Ralph & Kacoo's seafood restaurants, restaurant-level income was $24.7 million, or 5.2% of net sales, in fiscal 1999.

Cost of Sales. Cost of sales as a percentage of net sales declined 1.1%. That decline is a combination of a 0.9% decrease in food costs as a percentage of net sales and a 0.2% decrease in labor costs as a percentage of net sales. Food costs as a percentage of net sales improved primarily because food cost efficiency experienced in Morrison cafeterias began to more closely match the operations of Piccadilly cafeterias.

Improvement in labor costs, as a percentage of net sales, was due principally to our beginning to realize labor efficiencies at Morrison cafeterias in the second quarter of 2000, as well as a substantially lower level of labor costs associated with the conversion of Morrison cafeterias to Piccadilly-style cafeterias, with only 13 cafeterias being converted in fiscal 2000 compared to 99 conversions in fiscal 1999.

Factors that offset the labor costs improvements as a percentage of sales include labor costs associated with the opening of five new cafeterias in fiscal 2000. No new cafeterias were opened in fiscal 1999.

Other operating expenses. Other operating expenses (net of Ralph & Kacoo's related expenses in fiscal 1999) decreased $4.9 million, but increased 1.0% as a percentage of net sales. The net movement in other operating expenses was the result of several factors. First, other operating expenses in fiscal 1999 included costs relating to 99 Morrison Conversions (at a cost of approximately $40,000 per cafeteria) compared to 13 Morrison Conversions in fiscal 2000. Other operating expenses increased as a percentage of net sales due primarily to the generally fixed nature of these expenses relative to the decline in net sales.

General and administrative expenses. General and administrative expenses (net of Ralph & Kacoo's related expenses in fiscal 1999) as a percentage of net sales decreased 0.1% and decreased in absolute dollars by $1.7 million. Transitional costs were incurred in fiscal 1999 that related to the integration of the Morrison and Piccadilly reporting systems. Additionally, fiscal 1999 costs include certain Morrison costs that were eliminated.

Interest expense. Interest expense increased $0.9 million as a result of a higher interest rate on our existing credit facility, the effect of which was partially mitigated by lower debt levels in fiscal 2000 compared to fiscal 1999. Amortization of financing costs included in interest expense in fiscal 2000 and fiscal 1999 was $0.8 million and $0.1 million, respectively.

Other income. Other income in fiscal 2000 included income of $0.6 million from the Company's receipt of stock in a whole life insurance company which had converted to a stock company from a mututal company, and through which we own whole life insurance policies. Fiscal 1999 other income included a $0.5 million gain from the sale of a catering facility.

Income taxes. Our fiscal 2000 income tax expense was reduced by $786,000 for the reversal of taxes over-accrued in prior years that primarily relates to minimum tax credits generated on the carryback in fiscal 2000 of the fiscal 1999 tax net operating loss to prior years and the review of the results of IRS examinations for prior years. At June 30, 2000, the Company had net operating loss carryforwards of $26.2 million and general business tax credit carryforwards of $1.0 million. See Note 5 of the Notes to Consolidated Financial Statements included elsewhere herein. At June 30, 2000, the Company provided no valuation allowance for deferred tax assets. Management believes that the deferred tax assets at June 30, 2000 are realizable through future reversals of existing taxable temporary differences, and, if necessary, the implementation of tax planning strategies. Uncertainties that affect the ultimate realization of deferred tax assets include the risk of not being able to complete tax planning strategies, such as sale-leaseback transactions. This factor has been considered in determining the valuation allowance.

Net sales. Net sales for fiscal 1999 increased $160.3 million, or 47.8%, from fiscal 1998. Cafeteria net sales increased $168.2 million. The increase in cafeteria net sales is the net result of the Morrison Acquisition, customer traffic changes, new cafeteria openings and cafeteria closings.

The following table reconciles total cafeteria sales to same-store cafeteria sales (cafeterias that were open for 12 full months in both periods) for the fiscal years ended June 30, 1999 and 1998:

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The decrease in same-store sales of 2.6% was the net result of a 3.5% decline in customer traffic and a 1.2% increase in check average. We made no significant price changes during fiscal 1999.

Sales relating to the Morrison Acquisition accounted for $177.1 million of the overall net sales increase. The fiscal 1998 results included only the sales from May 28, 1998 (the effective date of the Morrison Acquisition) to June 30, 1998.

Ralph & Kacoo's restaurant sales decreased $7.9 million. The decrease resulted from Ralph & Kacoo's only being included in operating results for the first three quarters of fiscal 1999 as these operations were sold on March 30, 1999. See Note 3 of the Notes to Consolidated Financial Statements included elsewhere herein for further discussion.

Beginning in the third quarter of fiscal 1999, we accelerated the Morrison Conversions, which had a significant impact on the operating results for those cafeterias. 71 cafeterias were converted in the third and fourth quarters of fiscal 1999, compared to 28 conversions in the first two quarters of fiscal 1999. Expenses associated with each conversion averaged approximately $40,000 for training team labor, new uniforms and supplies. Additional costs amounting to approximately $25,000 per cafeteria, primarily for signage, were capitalized.

The operating efficiency of a converted cafeteria was impacted by the conversion process. Food and labor costs are initially higher in cafeterias for periods subsequent to the conversion to ensure that high quality food and excellent dining room service are provided to our customers.

Restaurant-level income. During fiscal 1999 and 1998, restaurant-level income (net sales less cost of sales and other operating expenses) was $26.9 million, or 5.4% of net sales, and $30.8 million, or 9.2% of net sales, respectively. Food costs as a percentage of net sales increased 0.6% due to the Morrison Acquisition. Food costs as a percentage of sales for Morrison cafeterias were higher than for Piccadilly cafeterias. Labor costs increased 1.5% reflecting higher hourly wage rates, an increase in the average number of managers employed at the Morrison cafeterias, and the Morrison Conversions. Other operating expenses as a percentage of net sales increased 1.6% due to the Morrison Conversions and a higher ratio of leased cafeterias to total cafeterias resulting from the Morrison Acquisition.

Provision for unit impairments and closings. During the fourth quarter of fiscal 1999, we recorded a $1.4 million charge for the lease related costs of operating cafeterias for which closure decisions were made. See further discussion in Notes 2 and 4 of the Notes to Consolidated Financial Statements included elsewhere herein.

General and administrative expenses. General and administrative expenses as a percentage of net sales decreased in fiscal 1999 from 3.8% to 3.4% reflecting the leveraging effect of the Morrison Acquisition on corporate overhead.

Interest expense. Interest expense increased $3.7 million in fiscal 1999 reflecting the increased debt levels associated with the Morrison Acquisition.

Income taxes. Our effective income tax rate for fiscal 1999 was impacted by the non-deductibility of goodwill amortization, resulting in a higher rate than in the prior year. Excluding the tax benefit from the Ralph & Kacoo's sale, the Company's effective tax rate would have been 43.6% for fiscal 1999 compared to 37.1% in the prior year.

The Company has a $90 million credit facility with a syndicated group of banks maturing on June 22, 2001. The credit facility is secured by a first priority lien on substantially all of the current and future assets of the Company. Under the credit facility, the Board may only declare a dividend to the extent of the Company's net income for the prior fiscal quarter. Accordingly, the Company's ability to declare dividends in compliance with the terms of the credit facility is determined by its operating performance.

On February 7, 2000, the Board elected to suspend the Company's regular quarterly dividend of $.12 per share. The suspension of the dividend saves approximately $1.3 million per quarter. The Board concluded that until the Company had demonstrated a sustained operating performance that would support a dividend that could be safely maintained, suspension of the dividend was the prudent course of action.

The balance outstanding under the credit facility is classified as current at June 30, 2000 because the facility matures on June 22, 2001. At June 30, 2000, approximately $5.0 million was available under the credit facility. The Company is evaluating various financing alternatives, including but not limited to credit facility arrangements, high-yield capital market issuances and sale-leaseback arrangements, and is working toward completing such a transaction prior to June 22, 2001. The Company believes that the terms of a new credit arrangement will be less favorable than the existing credit facility.

In fiscal 2000, the Company made $3.8 million of maintenance capital expenditures. In fiscal 2001, the Company expects to make approximately $6 million of capital expenditures. No new cafeterias are scheduled to open in fiscal 2001.

Management believes that its cash from operations, together with remaining credit available under the credit facility will be sufficient to provide for the Company's operational needs for the foreseeable future.

Forward-looking statements regarding management's present plans or expectations for new unit openings, remodels, other capital expenditures, sales-building and cost-saving strategies, advertising expenditures,the refinancing of its existing credit facility, and the disposition of impaired units involve risks and uncertainties relative to return expectations and related allocation of resources, and changing economic or competitive conditions, as well as the negotiation of agreements with third parties, which could cause actual results to differ from present plans or expectations, and such differences could be material. Similarly, forward-looking statements regarding management's present expectations for operating results involve risks and uncertainties relative to these and other factors, such as advertising effectiveness and the ability to achieve cost reductions, which also would cause actual results to differ from present plans. Such differences could be material. Management does not expect to update such forward-looking statements continually as conditions change, and readers should consider that such statements speak only as to the date thereof.

Use of Estimates. The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of Piccadilly Cafeterias, Inc. and its subsidiaries (hereinafter referred to as the Company). All significant intercompany balances and transactions have been eliminated in consolidation.

Industry. The Company's principal industry is the operation of Company-owned cafeterias primarily in the Southeast and Mid-Atlantic regions of the United States.

Inventories. Inventories consist primarily of food and supplies and are stated at the lower of cost (first-in, first-out method) or market.

Property, Plant and Equipment. Property, plant and equipment (PP&E) is stated at cost, except for PP&E that has been impaired, for which the carrying amount is reduced to estimated fair value. Depreciation is provided using the straight-line method for financial reporting purposes on the following estimated useful lives:

Leasehold improvements are amortized over the original lease term, including expected renewal periods if applicable. The cost of leasehold improvements has been reduced by the amount of construction allowances received from developers and landlords. Repairs and maintenance are charged to operations as incurred. Expenditures for renewals and betterments which increase the value or extend the lives of assets are capitalized and depreciated over their estimated useful lives. When assets are retired, or are otherwise disposed of, cost and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is included in the determination of income.

Impairment of Long-Lived Assets. The Company reviews long-lived assets, including goodwill, to be held and used in the business for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or a group of assets may not be recoverable. The Company considers a history of operating losses to be its primary indicator of potential impairment. Except for goodwill, assets are evaluated for impairment at the operating unit level. Goodwill is evaluated in total for the Morrison units acquired. An asset is deemed to be impaired if a forecast of undiscounted future operating cash flows directly related to the asset, including disposal value, if any, is less than its carrying amount. If an asset is determined to be impaired, the loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. The Company generally estimates fair value by discounting estimated future cash flows. Considerable management judgment is necessary to estimate cash flows. Accordingly, it is reasonably possible that actual results could vary significantly from such estimates.

Income Taxes. The Company accounts for income taxes using the liability method. Under this method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income taxes.

Stock-Based Compensation. The Company accounts for its stock compensation arrangements under the provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees," and makes the pro forma information disclosures required under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."

Earnings Per Share. Earnings per share of Common Stock are calculated under the provisions of SFAS No. 128, "Earnings Per Share".

Advertising Expense. The cost of advertising is expense as incurred. The Company incurred $6,541,000, $5,801,000 and $3,203,000 in advertising costs during 2000, 1999, and 1998, respectively.

On May 28, 1998, the Company completed a $5.00 per share cash tender offer for all outstanding shares of Morrison Restaurant, Inc. (Morrison), acquiring approximately 89% of the outstanding Morrison shares. The merger was completed on July 31, 1998 when the Company purchased the remaining outstanding Morrison shares for $5.00 per share (the Morrison Acquisition). The total acquisition cost, including $9,588,000 of debt assumed, was approximately $57,270,000. On May 28, 1998, Morrison operated 142 restaurants in 13 southeastern and mid-Atlantic states.

This acquisition has been accounted for using the purchase method of accounting and the results of operations have been included in the accompanying Consolidated Financial Statements since May 28, 1998. At the acquisition date, a preliminary allocation of the purchase price of Morrison was made, resulting in goodwill of $12,467,000. During 1999, management revised certain estimates used in determining the allocation of purchase price to the assets and liabilities acquired, resulting in a $1,047,000 net increase in goodwill. The final allocation of purchase price based on the fair value of assets and liabilities acquired resulted in recording assets of $88,520,000 and liabilities of $54,352,000. Goodwill is being amortized using the straight-line method over 30 years.

In connection with the Morrison Acquisition, the Company recorded liabilities of $13,460,000 at the date of acquisition for lease buyouts, occupancy costs and employee termination costs (Morrison Closing Costs) related to the planned closing of 18 Morrison units and for 23 Morrison units that were closed prior to the acquisition date. As of June 30, 2000, the Company has closed 27 of the Morrison units compared to the original estimate of 18. During 1999, the Company revised its original estimate of Morrison Closing Costs and reduced the recorded liability and goodwill by $6,777,000. During 2000 and 1999, the Company paid Morrison Closing Costs of $1,784,000 and $1,134,000 respectively. The Company does not anticipate closing any Morrison units in the foreseeable future, other than those units with expiring leases.

On March 30, 1999, the Company completed the sale of the Ralph & Kacoo's seafood restaurants and related commissary business (Cajun Bayou Distributors & Management, Inc.) to Cobb Investment Company, Inc. for $21,314,000 in cash. The transaction resulted in a recorded gain of $1,556,000, and a net tax benefit of $826,000.

The tax benefit was the result of the sale of the stock of Cajun Bayou Distributors & Management, Inc. The tax basis in the stock was $6,057,000 higher than the book basis in the stock due to differences that were not classified as temporary differences under SFAS 109, and resulted in a loss on the stock sale for tax purposes when compared to the amount recorded for financial statement purposes. The tax loss on the stock sale generated a net overall tax loss on the sale of Ralph & Kacoo's.

The remaining portion of the Ralph & Kacoo's business, a catering facility sold on June 1, 1999, generated a gain of $491,000 and is included in Other income.

During 1999 and 1998, the Company recorded charges of $1,350,000 ($851,000 after tax or $.08 per share) and $3,453,000 ($2,175,000 after tax or $.21 per share), respectively, for asset write-downs and the lease related costs of operating units for which closure decisions were made. The closure decisions primarily related to certain Piccadilly units expected to close in connection with the Morrison Acquisition.

The Company is responsible for minimum rent obligations of $12,024,000 related to 22 closed units, $3,521,000 of which relate to the Morrison Acquisition. Sublease arrangements exist relating to 15 of these units providing for future sublease rentals of $10,305,000. The Company has recorded liabilities of $10,101,000 to settle the minimum rent obligations and other lease-related charges. During 2000 and 1999, the Company charged $2,592,000 and $2,091,000, respectively, against these reserves for lease settlements and lease-related payments net of sublease rentals received, of which $1,784,000 and $1,134,000, respectively, relate to the Morrison Acquisition (see Note 2 for further discussion).

Significant components of the Company's deferred tax liabilities and assets are as follows:

At June 30, 2000 the Company has net operating loss carryforwards of $26,185,000 and general business tax credit carryforwards of $1,001,000, including $17,234,000 and $291,000, resulting from the Morrison Acquisition. These carryforwards, which expire from 2010 through 2020, give rise to deferred tax assets. SFAS 109 specifies that deferred tax assets are to be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. Provisions of the Internal Revenue Code limit the amount of the Morrison-related net operating loss and tax credit carryforwards that can be utilized each year to $2,332,000. Management believes that future reversals of existing taxable differences, and tax planning strategies should be sufficient to realize all of the Company's deferred tax assets; therefore, a valuation allowance has not been established.

The components of the provision for income taxes are as follows:

Differences between the provision for income taxes and the amount computed by applying the federal statutory income tax rate to income before income taxes are as follows:

The Company rents most of its cafeteria and restaurant facilities under long-term leases with varying provisions and with original lease terms generally of 20 to 30 years. The Company has the option to renew the leases for specified periods subsequent to their original terms. Minimum future lease commitments, as of June 30, 1999, including $12,757,000 for closed units, are as follows:

The leases generally provide for percentage rentals based on sales. Certain leases also provide for payments of executory costs such as real estate taxes, insurance, maintenance and other miscellaneous charges. Rentals for the periods shown below does not include these executory costs.

The fair value of the Company's long-term borrowings approximates their recorded values. Fair value is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

The Company has a credit facility with a syndicated group of banks maturing on June 22, 2001. As reported in the Company's Report on Form 8-K dated November 18, 1999, the Company and its lenders amended the credit facility to revise certain financial covenants effective September 30, 1999, such that the Company was in compliance with all covenants as of September 30, 1999. The Company is in compliance with all covenants as of June 30, 2000.

The financial covenants, as amended, are designed to correlate with the Company's projected performance over the remaining term of the credit facility. Negative variance from projected performance with respect to sales, operating performance, or other unforeseen matters may cause the Company to be in non-compliance with those covenants. Failure to meet these covenants could result in the Company being placed in default of the amended credit facility.

As amended, the credit facility provides for: (i) an increase in the effective interest rate from LIBOR plus 175 basis points to LIBOR plus 300 basis points, and an increase to the fees payable with respect to letters of credit, with the amount of the interest rate and letter of credit fees subject to adjustment at the end of each fiscal quarter based on the Company's ratio of total debt to EBITDA; (ii) mandatory step downs in the total amount of credit available under the facility from $100,000,000 to $95,000,000 as of the effective date of the amendment, from $95,000,000 to $90,000,000 on or before March 31, 2000 and from $90,000,000 to $80,000,000 on or before March 31, 2001, together with additional mandatory commitment reductions in an amount equal to the net proceeds in excess of $5,000,000 in the aggregate from sales of certain assets; (iii) financial covenants with respect to the ratio of total debt to EBITDA and the fixed charge coverage ratio; (iv) a restriction on the Company's ability to make capital expenditures; (v) the replacement of the funded debt to total capital financial covenant with a financial covenant requiring a minimum adjusted tangible net worth; (vi) a further restriction commencing with the third fiscal quarter ended March 31, 2000 on the ability of the Company to pay dividends to an amount that does not exceed the amount of net income for the prior fiscal quarter; (vii) a prohibition on acquisitions; (viii) the requirement that the credit facility will be secured by substantially all the assets of the Company; and (ix) the payment of an amendment fee to each bank that signs the amendment. This credit agreement contains a prepayment option, without penalty, which can be exercised at any time during its term.

The Company is currently in evaluating alternatives and expects to have a new credit arrangement in place prior to June 22, 2001.

The Company capitalized interest costs of $80,000 in 2000, $145,000 in 1999 and $120,000 in 1998 with respect to qualifying construction. Total interest cost incurred was $7,257,000 in 2000, $6,400,000 in 1999 and $2,634,000 in 1998.

The Company has a defined benefit pension plan covering substantially all employees, except for Morrison employees, who meet certain age and length-of-service requirements. Retirement benefits are based upon an employee's years of credited service and final average compensation. Annual contributions are made in amounts sufficient to fund normal costs as accrued and to amortize prior service costs over a 40-year period. Assets of the plan are invested principally in obligations of the United States Government and other marketable debt and equity securities including 367,662 shares of the Company's Common Stock held at June 30, 2000 and 1999 with a fair value of $1,011,000 and $3,056,000, respectively.

At the time of its acquisition by the Company on May 28, 1998, Morrison maintained two non-qualified employee defined benefit pension plans and one frozen qualified defined benefit pension plan.

The two Morrison non-qualified employee defined benefit pension plans continue to accrue benefits for covered employees. To provide a source for the payment of benefits under these plans, the Company owns whole-life insurance contracts on some participants.

Morrison is a co-sponsor of the Morrison Restaurants Inc. Retirement Plan along with Ruby Tuesday, Inc. and Morrison Management Specialists, Inc. The MRI Retirement Plan, a qualified defined benefit pension plan, was frozen on December 31, 1987. The Plan's assets include common stock, fixed income securities, short-term investments and cash. The Company will continue to share in future expenses of the Plan, and will make contributions to the Plan as necessary.

The Company has adopted SFAS No. 132, "Employers' Disclosures about Pension and Other Postretirement Benefits", which revises the required disclosures about pension and other postretirement benefit plans. Changes in plan assets and obligations during the years ended June 30, 2000 and 1999 and the funded status of the defined pension plans described in the preceding paragraphs (referred to collectively as "Pension Benefits") at June 30, 2000 and 1999 were as follows:

Net periodic pension cost for the Pension Benefits for 2000, 1999 and 1998 include the following components:

Assumptions used in actuarial calculations were as follows:

On August 3, 1987, the Board of Directors adopted the Piccadilly Cafeterias, Inc. Dividend Reinvestment and Stock Purchase Plan. Shareholders of record may reinvest quarterly dividends and/or up to $5,000 per quarter in the Company's Common Stock. Stock obtained through reinvested dividends is issued at a 5% discount. At June 30, 2000, there were 255,389 unissued Common Shares reserved under the plan.

On November 2, 1998, the Company's stockholders approved the Amended and Restated Piccadilly Cafeterias, Inc. 1993 Incentive Compensation Plan (the 1993 Plan). Under the terms of the plan, which amends and restates the Piccadilly Cafeterias, Inc. 1993 Stock Option Plan (the 1988 Plan), incentive stock options and non-qualified stock options, stock appreciation rights, stock awards, restricted stock, performance shares, and cash awards may be granted to officers, key employees, or the Chairman of the Board of Directors of the Company. Options to purchase shares of the Company's Common Stock may be issued at no less than 100% of the fair market value on the date of grant. The Company has reserved 1,450,000 shares, in total, for issuance under the 1993 and 1988 Plans. At June 30, 2000, 401,500 shares were available for future option grants and options to purchase 941,900 shares were exercisable. Options outstanding at June 30, 2000, have exercise prices which range from $3.13 to $12.00 and a weighted average remaining contractual life of 7.2 years. Transactions under the 1993 Plan for the last three years are summarized as follows:

PRO FORMA SFAS NO. 123 RESULTS. Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.0%; dividend yield of 5.0%; volatility factors of the expected market price of the Company's common stock of 23%; and a weighted average expected life of the options of 5.0 years. The weighted average fair value of the stock options granted in 2000, 1999 and 1998 were $0.48, $1.32 and $1.84 per share, respectively. Pro forma net income and net income per share for 2000, assuming that the Company had accounted for its employee stock options using the fair value method would not be different from those reported. 1999 and 1998 pro forma net income and net income per share, assuming that the Company had accounted for its employee stock options using the fair value method, would have been reduced by $111,000 and $.01 and $624,000 and $.06, respectively.

EARNINGS PER SHARE. A reconciliation of the income and common stock share amounts used in the calculation of basic and diluted net income per share for the years ended June 30, 2000, 1999 and 1998 are as follows (net income in thousands).

During the quarter ended June 30, 1999 the Company recorded a $1,350,000 ($851,000 after-tax or $.08 per share), for the write-down of long-lived assets in accordance with SFAS No. 121 and lease related costs for units to be closed (see Note 4 for further discussion).

During the quarter ended March 31, 1999, the Company sold its Ralph & Kacoo's seafood restaurants and related commissary business resulting in a recorded gain of $1,556,000, and a net tax benefit of $826,000 (see Note 3 for further discussion).

Shareholders and Board of Directors

Piccadilly Cafeterias, Inc.

Baton Rouge, Louisiana

We have audited the accompanying consolidated balance sheets of Piccadilly Cafeterias, Inc. as of June 30, 2000 and 1999, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Piccadilly Cafeterias, Inc. at June 30, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

New Orleans, Louisiana

August 2, 2000