<PAGE>   1
                    =======================================
                                  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 AUGUST 3, 1997

                                       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 September 16, 1997, there were 48,568,109 shares of Shoney's,
Inc., $1 par value common stock outstanding.

                    =======================================

<PAGE>   2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.

                         SHONEY'S, INC. AND SUBSIDIARIES
                      Consolidated Condensed Balance Sheet
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                    August 3,             October 27,
                                                                      1997                   1996
                                                                 -------------         ---------------
<S>                                                              <C>                   <C>         
ASSETS
Current assets:
  Cash and cash equivalents                                      $   16,809,796         $   13,968,882
  Notes and accounts receivable, less allowance
     for doubtful accounts of $1,483,000 in 1997
     and $1,504,000 in 1996                                          11,824,844             13,012,160
  Inventories                                                        46,076,422             44,248,060
  Deferred income taxes and other current assets                     43,922,823             38,496,158
  Net assets held for disposal                                       40,619,500             16,605,300
                                                                 --------------         --------------
     Total current assets                                           159,253,385            126,330,560

Property, plant and equipment, at cost                              811,687,480            865,150,325
Less accumulated depreciation and amortization                     (334,262,617)          (317,243,085)
                                                                 --------------         --------------
    Net property, plant and equipment                               477,424,863            547,907,240

Other assets:
  Goodwill (net of accumulated amortization of
     $2,606,000 in 1997 and $622,000 in 1996)                        51,742,545             57,021,411
  Deferred charges and other intangible assets                        5,113,464              7,289,488
  Other assets                                                        9,533,322              8,532,742
                                                                 --------------         --------------
     Total other assets                                              66,389,331             72,843,641
                                                                 --------------         --------------
                                                                 $  703,067,579         $  747,081,441
                                                                 ==============         ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                               $   39,656,843         $   44,746,056
  Federal and state income taxes                                                             3,614,019
  Other accrued liabilities                                         105,611,906            110,294,109
  Reserve for litigation settlement due within one year              21,613,299             22,887,523
  Debt and capital lease obligations
      due within one year                                            85,714,147             33,823,795
                                                                 --------------         --------------
     Total current liabilities                                      252,596,195            215,365,502

Long-term senior debt and capital lease obligations                 255,320,181            334,180,233
Zero coupon subordinated convertible debentures                     101,663,628             95,357,650
Subordinated convertible debentures, net of bond discount
 of $4,088,000 in 1997 and $4,561,000 in 1996                        47,474,630             47,002,392
Reserve for litigation settlement                                       311,670             16,000,000
Deferred credits:
  Income taxes                                                                              17,923,295
  Income and other liabilities                                       22,006,499             20,724,789

Shareholders' equity:
  Common stock, $1 par value: authorized
      200,000,000 shares issued 48,568,109
      in 1997 and 48,458,231 in 1996                                 48,568,109             48,458,231
  Additional paid-in capital                                        136,847,101            113,889,253
  Unrealized gain on securities available for sale                       52,642                243,481
  Retained earnings (deficit)                                      (161,773,076)          (162,063,385)
                                                                 --------------         ---------------
     Total shareholders' equity                                      23,694,776                527,580
                                                                 --------------         --------------
                                                                 $  703,067,579         $  747,081,441
                                                                 ==============         ==============
</TABLE>

See notes to consolidated condensed financial statements.

                                        2

<PAGE>   3

                         SHONEY'S, INC. AND SUBSIDIARIES
                 Consolidated Condensed Statement of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                           Forty
                                                                        Weeks Ended
                                                                  August 3,      August 4,
                                                                    1997            1996
                                                               -------------    ------------
<S>                                                            <C>              <C>         
Revenues
  Net sales                                                    $ 934,227,876    $795,305,943
  Franchise fees                                                  11,573,374      17,160,173
  Other income                                                     7,106,545       2,466,084
                                                               -------------    ------------
                                                                 952,907,795     814,932,200

Costs and expenses
 Cost of sales                                                   844,603,044     711,205,419
 General and administrative expenses                              61,543,570      51,979,171
 Impairment write down of long-lived assets                       17,612,067
 Interest expense                                                 34,972,805      27,599,142
                                                               -------------    ------------
     Total costs and expenses                                    958,731,486     790,783,732

                                                               -------------    ------------
Income (loss) from continuing operations before income taxes      (5,823,691)     24,148,468

Provision for (benefit from) income taxes                         (6,114,000)      9,473,000
                                                               -------------    ------------
Income from continuing operations                                    290,309      14,675,468

Income from discontinued operations, net of income taxes                             397,816

Gain on sale of discontinued operations, net of income taxes                      22,080,375
                                                               -------------    ------------
Net income                                                     $     290,309    $ 37,153,659
                                                               =============    ============


Earnings per common share
    Primary:
        Income from continuing operations                      $        0.01    $       0.35
        Income from discontinued operations                             0.00            0.01
        Gain on sale of discontinued operations                         0.00            0.53
                                                               -------------    ------------
        Net income                                             $        0.01    $       0.89
                                                               =============    ============

     Fully diluted:
        Income from continuing operations                      $        0.01    $       0.39
        Income from discontinued operations                             0.00            0.01
        Gain on sale of discontinued operations                         0.00            0.47
                                                               -------------    ------------
        Net income                                             $        0.01    $       0.87
                                                               =============    ============

Weighted average shares outstanding
     Primary                                                      48,567,993      41,709,280

     Fully diluted                                                48,567,993      46,926,890

Common shares outstanding                                         48,568,109      41,664,367

Dividends per share                                                     NONE            NONE
</TABLE>

See notes to consolidated condensed financial statements.

                                        3

<PAGE>   4


                         SHONEY'S, INC. AND SUBSIDIARIES
                 Consolidated Condensed Statement of Operations
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                               Twelve
                                                                             Weeks Ended
                                                                   August 3,             August 4,
                                                                     1997                  1996
                                                                 -------------          ------------

<S>                                                              <C>                    <C>           
Revenues
  Net sales                                                      $ 288,036,321          $251,150,233
  Franchise fees                                                     3,546,231             5,404,985
  Other income                                                       2,626,199               488,130
                                                                 -------------          ------------
                                                                   294,208,751           257,043,348

Costs and expenses
 Cost of sales                                                     258,043,190           222,523,799
 General and administrative expenses                                18,276,209            15,458,729
 Interest expense                                                   10,405,702             8,633,925
                                                                 -------------          ------------
     Total costs and expenses                                      286,725,101           246,616,453
                                                                 -------------          ------------
Income before income taxes                                           7,483,650            10,426,895

Provision for (benefit from) income taxes                           (1,283,000)            3,806,000
                                                                 -------------          ------------
Net income                                                       $   8,766,650          $  6,620,895
                                                                 =============          ============



Earnings per common share 
  Primary:
    Net income                                                   $        0.18          $       0.16
                                                                 =============          ============


  Fully diluted:
    Net income                                                   $        0.18          $       0.16
                                                                 =============          ============



Weighted average shares outstanding
  Primary                                                           48,596,429            41,808,671

  Fully diluted                                                     48,596,429            41,808,671



Common shares outstanding                                           48,568,109            41,664,367

Dividends per share                                                       NONE                  NONE
</TABLE>

See notes to consolidated condensed financial statements.

                                        4

<PAGE>   5

                         SHONEY'S, INC. AND SUBSIDIARIES
                 Consolidated Condensed Statement of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                   Forty
                                                                                Weeks Ended
                                                                          August 3,      August 4,
                                                                            1997            1996
                                                                        ------------    ------------
<S>                                                                     <C>             <C>         
Operating activities
  Net income                                                            $    290,309    $ 37,153,659
  Adjustments to reconcile net income to net cash
     provided by operating activities:
          Income from discontinued operations, net of taxes                                 (397,816)
          Gain on sale of discontinued operations, net of taxes                          (22,080,375)
          Depreciation and amortization                                   41,528,403      33,995,638
          Amortization of deferred charges and other
              non-cash charges                                             9,964,369       9,259,600
          Impairment write down of long-lived assets                      17,612,067
          Change in deferred income taxes                                  2,390,000       5,544,000
          Changes in operating assets and liabilities                    (17,208,751)    (17,424,262)
                                                                        ------------    ------------
                 Net cash provided by continuing operating activities     54,576,397      46,050,444
                 Net cash used by discontinued operating activities                         (655,622)
                                                                        ------------    ------------
                 Net cash provided by operating activities                54,576,397      45,394,822

Investing activities
  Cash required for property, plant and equipment                        (33,884,102)    (60,416,682)
  Proceeds from disposal of property, plant
     and equipment                                                        26,244,638       8,492,792
  Proceeds from disposal of discontinued operations                                       51,279,601
  Cash required for other assets                                            (442,654)     (5,072,556)
                                                                        ------------    ------------
                Net cash used by investing activities                     (8,082,118)     (5,716,845)

Financing activities
  Payments on long-term debt and
     capital lease obligations                                           (25,790,078)    (75,534,716)
  Proceeds from long-term debt                                                            47,175,000
  Net proceeds from short-term borrowings                                   (452,000)      8,336,000
  Payments on litigation settlement                                      (16,962,554)    (17,515,535)
  Cash required for debt issue costs                                        (604,450)     (3,337,416)
  Proceeds from exercise of employee stock options                           155,717         518,250
                                                                        ------------    ------------
                Net cash used by financing activities                    (43,653,365)    (40,358,417)
                                                                        ------------    ------------
  Change in cash and cash equivalents                                   $  2,840,914    $   (680,440)
                                                                        ============    ============
</TABLE>

See notes to consolidated condensed financial statements.

                                        5

<PAGE>   6

                         SHONEY'S, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
                                 August 3, 1997
                                   (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 1997 presentation. Operating
results for the twelve and forty week periods ended August 3,1997 are not
necessarily indicative of the results that may be expected for all or any
balance of the fiscal year ending October 26, 1997. 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 27,
1996.

NOTE 2 - IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR DISPOSAL

The Company adopted FASB Statement 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 fiscal 1997. Based on a review of the
Company's restaurants which had incurred operating losses or had negative cash
flow during fiscal 1996 and a review of the cash flow from individual restaurant
properties rented to others ("rental properties"), the Company determined that
certain of its restaurant assets and rental properties were impaired and
recorded a loss to write them down to their estimated fair values. The charge
related to the initial adoption of SFAS 121 was $17.6 million ($11.2 million net
of taxes). Approximately $11.2 million of the asset impairment write down
related to properties that are held for disposal and approximately $6.4 million
related to assets to be held and used in the Company's operations.

Management's projections of the expected future undiscounted cash flows from
these restaurants indicated that such cash flows were insufficient to recover
the asset carrying value; therefore, such carrying values were written down to
fair values less estimated costs to sell. Under SFAS 121, the potential
impairment evaluation is made on an individual restaurant basis and involves
considerable management judgment as to the expected future sales and
profitability of each individual restaurant. Actual results of these restaurants
are likely to differ from management's estimates.

In connection with the Company's market rationalization program, which involves
a strategic shift to focus resources for the Company's restaurant operations to
its core 13 state southeastern markets, the Company announced on January 21,
1997, that it was closing approximately 55 under-performing restaurants and
would sell those assets and use the net proceeds to reduce the Company's bank
debt. At August 3, 1997 five of these restaurants continue to be operated due to
lease restrictions that prohibit closure of the units until suitable new tenants
are secured, 14 properties had been sold, subleased or had the lease terminated,
and 41 properties (including the 5 operating units) are being actively marketed.
For the first three quarters

                                        6

<PAGE>   7

of 1997, the five operating restaurants in this group had revenues of $3.3
million and reported operating losses before interest and taxes of approximately
$465,000. In addition, the Company identified 27 other restaurant properties
that it intended to sell, however, the Company has elected to operate these
restaurants until buyers are found. At the end of the third quarter of fiscal
1997, four of these 27 properties had been disposed of or had the lease
terminated and 23 restaurants are being operated while they are being actively
marketed. During the first three quarters of 1997, these 23 restaurants had
revenues of $18.4 million and reported operating losses before interest and
taxes of $1.3 million.

In addition to the properties previously discussed, the Company had available
for future sale approximately 72 surplus properties and 58 rental properties,
most of which are former restaurant sites or land acquired for future expansion.
The Company has been actively marketing approximately 100 of these properties
and will use the proceeds to reduce its bank debt. Through the end of the third
quarter of 1997, the Company had sold, leased or entered into lease
terminations for approximately 37 of such surplus or rental properties. At
August 3, 1997, the Company had a total of approximately 125 properties to be
disposed of (including restaurants closed and to be closed, rental properties
and surplus properties). The carrying value of these properties was
approximately $40.6 million which has been reflected on the balance sheet as
net assets held for disposal. Under the provisions of SFAS 121, depreciation
and amortization are not recorded during the period in which assets are being
held for disposal.

NOTE 3 - ACQUISITIONS

As of September 9, 1996, the Company completed the acquisition of substantially
all the assets of TPI Enterprises, Inc. ("TPI") which operated 176 Shoney's
Restaurants and 67 Captain D's restaurants as a franchisee of the Company. The
purchase price was $164.4 million consisting of the issuance of 6,785,114 shares
of the Company's common stock valued at $59.1 million, the assumption of $46.9
million of TPI 8.25% convertible subordinated debentures, the assumption or
satisfaction of all remaining TPI debt of approximately $59.1 million,
transaction costs of $3.0 million and net of $3.7 million cash acquired. The
Company borrowed $100 million under a bridge loan to finance the acquisition and
to provide additional liquidity and working capital for the Company.
Approximately $43 million of the bridge loan proceeds were utilized to retire
TPI debt at the date of closing.

The acquisition has been accounted for as a purchase and the results of
operations acquired from TPI have been included in the Company's consolidated
financial statements since September 9, 1996. The purchase price was allocated
based on estimated fair values at the date of acquisition and resulted in an
excess of purchase price over net assets acquired (goodwill) of approximately
$50.6 million, which is being amortized on a straight line basis over 20 years.
This allocation was based on preliminary estimates and may be revised at a later
date.

At August 3, 1997, the Company had closed 28 of the acquired Shoney's
Restaurants, two commissary and distribution facilities that had provided TPI's
restaurants with food and supplies, and the former TPI corporate headquarters in
West Palm Beach, Florida. The Company closed 19 of the acquired Shoney's
Restaurants during the first three quarters of 1997 and plans to close an
additional 7 of the acquired Shoney's restaurants in connection with the
Company's strategic focus of its restaurant operations in its core 13 state
southeastern markets. The majority of these 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 the
purchase accounting and consisted principally of severance pay for certain
employees, costs for leased property and equipment, and the accrual of future
minimum lease

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<PAGE>   8

obligations in excess of anticipated sublease rental income. The total amount of
such liabilities included in the purchase price allocation was approximately $21
million. The Company plans to dispose of the owned property and equipment either
by sale or lease. For leased property and equipment, the Company will seek to
terminate the leases or to enter into subleases or lease assignments covering
the remaining term of the leases. During the second quarter of 1997, the TPI
corporate office lease was terminated upon its assumption by a new tenant and
one of the TPI commissaries was subleased to a new tenant.

NOTE 4 - DISCONTINUED OPERATIONS AND RESTRUCTURING

In January 1995, the Company's Board of Directors announced a reorganization
designed to improve the performance and growth of the Shoney's Restaurant
concept. The reorganization included the decision to divest certain non-core
lines of business including Lee's Famous Recipe, Pargo's and Fifth Quarter
restaurants, as well as Mike Rose Foods, Inc., a private label manufacturer of
food products. In July 1995 the Company made a decision to retain the Pargo's
and Fifth Quarter restaurants and to combine them with its BarbWire's concept to
form a casual dining group (See Note 11).

The Company sold its Lee's Famous Recipe restaurants, in October 1995, to RTM
Restaurant Group for $24.5 million cash and a $4 million promissory note. The
transaction removed the Company from the fast-food chicken line of business. The
promissory note is due in monthly installments over five years, is guaranteed by
RTM, Inc. and is further secured by perfected security interests in the Lee's
Famous Recipe trademarks and in the franchise license agreements of Lee's Famous
Recipe. The balance of the note receivable from RTM was $2.5 million at August
3, 1997.

The Company sold Mike Rose Foods, Inc. ("MRF") to Levmark Capital Corporation
for $55 million in cash in the first quarter of 1996. The transaction was
effected through the sale of all issued and outstanding capital shares of MRF
and resulted in a gain on sale of discontinued operations of $22.1 million, net
of income taxes. The Company also entered into a five year supply agreement
through which MRF will continue to be the supplier of salad dressings,
mayonnaise, sauces, condiments, breadings, and a variety of food products for
all company-owned restaurants. The supply agreement contains minimum purchase
commitments generally equal to the actual quantities of various products the
Company purchased from MRF during fiscal 1994 for company-owned restaurants.

For financial reporting purposes, the results of operations and cash flows of
MRF have been treated as discontinued operations in the accompanying financial
statements and are presented net of any related income tax expense.

NOTE 5 - EARNINGS PER SHARE

Primary earnings per share have been computed using the weighted average number
of shares of common stock and common stock equivalents outstanding during each
period presented. Common stock equivalents include all dilutive outstanding
stock options. The fully diluted earnings per share calculation includes the
assumed conversion of the Company's two issues of subordinated convertible
debentures. This calculation adjusts earnings for the interest that would not be
paid if such debentures were converted. The primary and fully diluted earnings
per share for the third quarter and first three quarters of 1997 were computed
using the weighted average number of shares of common stock and common stock
equivalents outstanding. No consideration was given to either of the convertible
debentures for the third quarters of 1997 and 1996 and

                                        8

<PAGE>   9

first three quarters of 1997 because the effect was anti-dilutive. The fully
diluted earnings per share from continuing operations for the first three
quarters of 1996 are anti-dilutive, but have been presented on a fully diluted
basis, as required under generally accepted accounting principles, because fully
diluted net income per share was less than primary net income per share.

NOTE 6 - INCOME TAXES

Income taxes for the forty week periods ended August 3, 1997 and August 4, 1996
were provided based on the Company's estimate of its effective tax rates (36.3%
and 39.2%) for the entire respective fiscal years. During the third quarter of
1997, excess income tax liabilities totaling approximately $26.5 million related
to a fiscal 1993 transaction were reversed. Approximately $22.5 million of the
reduction in tax liability was credited to additional paid in capital since the
related deferred tax liability arose from an equity transaction. The remaining
$4 million, which represented accrued interest, was reversed as a reduction to
income tax expense.

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.

A valuation allowance has been established for tax credit carryforwards that are
not expected to be realized. The Company believes it is more likely than not
that the remaining deferred tax assets will be realized through the reversal of
existing taxable temporary differences within the carryforward period, the
carryback of existing deductible temporary differences to prior years' taxable
income or through the use of alternative tax planning strategies.

NOTE 7 - SENIOR DEBT

The Company has a reducing revolving credit facility ("Revolver") with a
syndicate of financial institutions which matures in October 1999 with scheduled
reductions in the aggregate credit facility that began in October 1995. The
maximum amount available under the Revolver at August 3, 1997 was $159.6
million. Scheduled reductions in the maximum amount available under the Revolver
of $30 million and $37.5 million will occur on October 22, 1997 and April 22,
1998, respectively. At August 3, 1997, the Company had borrowed $135 million
under the Revolver and had outstanding letters of credit of $13.0 million which
also were supported by the Revolver. The interest rate for borrowings under this
facility is a floating rate (the London Interbank Offered Rate ("LIBOR") plus
2%). The weighted average interest rate for borrowings under this facility at
August 3, 1997 was 7.75%.

During the second quarter of 1996, the Company obtained a senior secured Bridge
Loan for $100 million from a bank ("Bridge Loan"). The Bridge Loan was obtained
to provide a source of financing for the 1996 acquisition of substantially all
of the assets of TPI, as well as to provide additional liquidity and working
capital for the Company (See Note 3). The Company borrowed $20 million under the
Bridge Loan concurrent with its execution, and those proceeds were used to
reduce the outstanding balance under the Company's Revolver. The remaining $80
million available under the Bridge Loan was drawn September 9, 1996 concurrent
with the closing of the acquisition. The Bridge Loan bears interest at LIBOR
plus 3.0% (or the announced Alternative Base Rate of the bank plus 2.0%) with
0.5% increases in the interest rate effective September 1997 and March 1998. The
Bridge Loan converts to a term loan on May 3, 1998 if not repaid on or before
that date and the term loan will mature October 22, 1999. Upon conversion to a
term loan, the Company will be required to pay a fee equal to 3% of the
outstanding balance of the Bridge

                                        9

<PAGE>   10

Loan at the conversion date. Under the terms of the Bridge Loan, the Company is
generally required to apply all proceeds from asset sales to reduce the Bridge
Loan unless such assets were encumbered by a mortgage financing arrangement. At
August 3, 1997, the balance outstanding under the Bridge Loan was $83.3 million
and the weighted average interest rate for borrowings under this facility was
8.92%.

At August 3, 1997, the Company had lines of credit of $21.7 million under which
the Company had borrowed $1.7 million. Subsequent to the end of the third
quarter of 1997, one bank line of credit in the amount of $1.7 million was
repaid and will no longer be available. The interest rate on the remaining $20
million secured line of credit was 8.5% at August 3, 1997.

Substantially all material assets of the Company have been pledged as collateral
for the Company's various credit agreements. The Company's senior debt requires
satisfaction of certain financial ratios and tests; imposes limitations on
capital expenditures; limits the ability to incur additional debt, leasehold
obligations and contingent liabilities; prohibits dividends and distributions on
common stock; prohibits mergers, consolidations or similar transactions; and
includes other affirmative and negative covenants. The Company was in compliance
with all of its debt covenants as of August 3, 1997.

The Company has $107.3 million of debt and litigation payments due in the next
twelve months and expects to incur cash interest expense of approximately $32.0
million in that same time period resulting in total cash needs before income
taxes and capital expenditures of approximately $139.3 million. The Company
does not expect its cash flow from operations, supplemented by its available
lines of credit, to be sufficient to meet these obligations and to provide cash
needed for capital expenditures over the next twelve months. In addition,
unless modified by its existing lenders, management expects that at the end of
the fourth quarter it will not be in compliance with certain financial
covenants in its credit agreements, which together with the inability of the
Company to fund the scheduled principal payment due during the fourth quarter
will place the Company in default under its credit agreements and the lenders
may accelerate demand for payment thereunder. As a result, the Company is
seeking to refinance its existing debt obligations and  based on current
discussions believes that a firm commitment for such refinancing will be
executed during the fourth quarter and will provide adequate liquidity for the
immediate needs of its business; however, no assurance can be given that such
commitment will be executed or if executed will be successfully consummated. In
the event that such refinancing does not occur, the Company expects to seek
modification of certain financial covenants and a rescheduling of principal
payments under its existing credit agreements to provide the liquidity and
capital needed for its business; however, there can be no assurance that the
Company will be successful in obtaining the necessary modifications to its
existing credit agreements.
                                                             
NOTE 8 - RESERVE FOR LITIGATION SETTLEMENT

In January 1993, court approval was granted for a consent decree settling
litigation against the Company and a former chairman. The litigation was
certified a class, under Title VII of the Civil Rights Act of 1964, consisting
of black restaurant employees, to represent claims of alleged discriminatory
failure to hire, harassment, failure to promote, discharge and retaliation. This
class consisted only of employees from the Company's "Shoney's" and "Captain
D's" restaurant concepts and the class period was from February 4, 1988 through
April 19, 1991.

Under the consent decree, the Company will pay $105 million to settle these
claims. The settlement covered all of the Company's restaurant concepts and the
corporate offices from February 4, 1985 through November 3, 1992. In addition,
the Company agreed to pay $25.5 million in plaintiffs' attorneys fees and

                                       10

<PAGE>   11

an estimated $2.3 million in applicable payroll taxes and administrative costs.
The settlement resulted in a charge of $77.2 million, net of insurance
recoveries and applicable taxes, in the fourth quarter of 1992. Under the terms
of the consent decree, payments, without interest, are made quarterly and the
remaining payments are $5.5 million each due September 1, 1997 and December 1,
1997 and a final payment of $10.0 million due March 1, 1998.

NOTE 9 - LITIGATION

The Company was a defendant in a federal Court suit styled "J&J Seafood, Inc. 
and Sunbelt Restaurant Management, Inc. v. Shoney's, Inc." which was filed on
December 19, 1994 in U.S. District Court for the Middle District of Tennessee.
The suit was filed by a franchisee of the Company's Captain D's restaurant
concept which claims that the Company imposes a "tying" arrangement by requiring
franchisees to purchase food products from the Company's commissary. The
complaint sought damages for an alleged class of similarly situated plaintiffs
in an amount not to exceed $500 million and treble damages. On May 5, 1994, the
same plaintiff had also filed a state Court suit in the Chancery Court of
Tennessee in Davidson County ("J&J Seafood v. Shoney's, Inc.") making 
essentially the same claims; however, in that suit, the plaintiff did not make
a class action claim. On December 31, 1996, J&J Seafood, Inc. had filed a third
lawsuit against the Company, certain members of the Captain D's franchisee
advisory council and two suppliers styled "J&J Seafood, Inc. v. Shoney's, Inc.
et al.," which was filed in the Chancery Court of Tennessee in Wilson County.
The Plaintiff sought class certification for two unspecified classes of
allegedly similarly situated plaintiffs. Some allegations in the lawsuit were
similar to claims made in the Plaintiff's previous two lawsuits against the
Company and included additional allegations.

The Company and J&J Seafood, Inc. entered into a Settlement Agreement on May 30,
1997. Pursuant to the terms of that agreement, the Company purchased the
franchised Captain D's restaurant operated by J&J Seafood, Inc. for
approximately $900,000. In addition, J&J Seafood, Inc. and the Company have
executed mutual releases, orders of dismissal have been filed with the
respective courts and all litigation has been dismissed with respect to all
defendants. The claims asserted by Sunbelt Restaurant Management, Inc. against
the Company in the lawsuit referenced above also have been dismissed.

On December 1, 1995, five current and/or former Shoney's Restaurant managers or
assistant restaurant managers filed the case of "Robert Belcher, et al. v.
Shoney's, Inc." in the U.S. District Court for the Middle District of Tennessee
claiming that the Company had violated the overtime provisions of the Fair Labor
Standards Act. Plaintiffs purported to act on behalf of similarly situated
current and former employees and requested Court supervised notice of their
lawsuit be sent to other potential plaintiffs. The Court granted provisional
class status, and directed notice be sent to all former and current salaried
general managers and assistant general managers who were employed by the
Company's Shoney's Restaurants during the three years prior to filing of the
suit. Approximately 900 potential class members opted to participate in the suit
as of the cutoff date set by the Court. After the cut-off date set by the Court,
approximately 190 additional potential class members opted to participate in the
suit, but the Court has not yet ruled on their participation in the lawsuit. By
virtue of the provisional class status, the Court could subsequently amend its
decision and either reduce or increase the scope of those individuals who are
similarly situated or determine that certification as a class is altogether
unwarranted.

On August 26, 1997, plaintiffs in the case of "Robert Belcher, et al v. 
Shoney's, Inc." filed a motion to add to their complaint representative
plaintiffs from the Captain D's concept restaurants. Plaintiffs also requested
in their motion that the Court issue notice of the case to present and former
general managers and

                                       11

<PAGE>   12

assistant managers who were employed by the Company at its Captain D's concept
restaurants within the three years preceding December 1, 1995. Plaintiffs seek
to assert the same claims on behalf of Captain D's concept managers and
assistant managers as previously asserted on behalf of Shoney's concept managers
and assistant managers. The Company has filed pleadings opposing plaintiffs'
motion to add representative plaintiffs from the Captain D's concept restaurants
and also has opposed plaintiffs' request for court-supervised notice to present
and former managers and assistant managers employed at the Captain D's concept
restaurants. The Court has not yet ruled on plaintiffs' motion.

On January 2, 1996, five current and/or former Shoney's hourly and/or
fluctuating work week employees filed the case of "Bonnie Belcher, et al. v.
Shoney's, Inc." in the U.S. District Court for the Middle District of Tennessee
claiming that the Company violated the Fair Labor Standards Act by either not
paying them for all hours worked or improperly paying them for regular and/or
overtime hours worked. Plaintiffs purported to act on behalf of similarly
situated current and former employees and requested Court supervised notice of
their lawsuit be sent to other potential plaintiffs. The Court granted
provisional class status and directed notice be sent to all current and former
Shoney's concept hourly and fluctuating work week employees who were employed
during the three years prior to filing of the suit. Approximately 18,000
potential class members opted to participate in this suit as of the cutoff date
set by the Court. After the cut-off date set by the Court, approximately 1,625
additional potential class members opted to participate in the suit, but the
Court has not yet ruled on their participation in the lawsuit. By virtue of the
provisional class status, the Court could subsequently amend its decision and
either reduce or increase the scope of those individuals who are similarly
situated or determine that certification as a class is altogether unwarranted.

In both lawsuits, the plaintiffs claim to be entitled to recover unpaid wages,
liquidated damages, attorneys' fees and expenses, for an unspecified period of
time, claiming that certain of Shoney's acts resulted in a tolling of the
statute of limitations. Discovery is proceeding in both cases, but is in a
preliminary stage. Management believes it has substantial defenses to the claims
made and intends to vigorously defend the cases. However, neither the likelihood
of an unfavorable outcome nor the amount of ultimate liability, if any, with
respect to these cases can be determined at this time. Accordingly, no provision
for any potential liability has been made in the consolidated financial
statements.

In addition to the litigation described in the preceding paragraphs, 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 actions will not materially affect the operating
results or the financial position of the Company.

NOTE 10 - SALE OF SHONEY'S LODGING, INC. AND RELATED INVESTMENTS

As of August 3, 1997, the Company owned approximately 6,500 shares of common
stock of ShoLodge, Inc. ("ShoLodge") obtained as consideration for the 1994 sale
of the Company's minority interest in four Shoney's Inns to ShoLodge. During the
second quarter of 1997, the Company sold approximately 30,000 shares of ShoLodge
common stock and realized a gain of approximately $171,000. At August 3, 1997,
the Company's investment in ShoLodge common stock had a fair value of $104,000
and the Company had an unrealized gain of approximately $53,000, which is
included as a separate component of shareholders' equity. During 1996, the
Company also owned additional shares and certain warrants to acquire ShoLodge
common stock which were obtained in the 1992 sale of the Company's lodging
division to ShoLodge. During 1996 and 1997, under the provisions of FASB
Statement No. 115, "Accounting for Certain

                                       12

<PAGE>   13

Investments in Debt and Equity Securities", the ShoLodge common stock and
certain of these warrants were classified as securities available for sale.
These ShoLodge common shares and warrants have been carried at their fair value
and increases and decreases in fair value are reflected as a component of
shareholders' equity. At October 27, 1996 the Company's investment in ShoLodge
common stock and warrants had a fair value of $506,000 and the Company had an
unrealized gain of $243,000.

NOTE 11 - SALE OF BARBWIRE'S STEAKHOUSE AND SALOON RESTAURANTS

On May 28, 1997 the Company entered into an agreement to sell five of its seven
BarbWire's Steakhouse and Saloon restaurants to TW - TENNESSEE, LLC. The Company
closed the remaining two BarbWire's restaurants during July 1997 and plans to
sell those two properties. The sale of four BarbWire's restaurants closed on
August 1, 1997. The sale of the remaining unit closed on August 5, 1997. The net
proceeds from the sale of the four restaurants of $3.9 million are reflected in
the third quarter financial statements and the proceeds of $1.1 million from the
sale of the remaining unit will be reflected in the Company's fourth quarter
financial statements. The sales price for the five units approximated the
Company's carrying value for these restaurants. The BarbWire's concept had
revenues of $1.9 million and $7.4 million for the third quarter and first three
quarters of fiscal 1997, respectively, and incurred losses before interest and
taxes of $368,000 and $633,000 for the third quarter and first three quarters of
fiscal 1997, respectively.

NOTE 12 - PENDING ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128 ("SFAS 128" ), "Earnings per Share" which
supersedes Accounting Principles Board Opinion 15 ("APB 15"), "Earnings per
Share". SFAS 128 was issued to simplify the computation of earnings per share
("EPS") by replacing Primary EPS, which considers common shares and common stock
equivalents in its denominator, with Basic EPS, which considers only the
weighted average common shares outstanding. SFAS 128 also replaces Fully Diluted
EPS with Diluted EPS, which considers all securities that are exercisable or
convertible into common stock and which would either dilute or not effect Basic
EPS. SFAS 128 is effective for both interim and annual periods ending after
December 15, 1997 and early adoption is not permitted. Therefore, the Company
will adopt this new standard during the first quarter of fiscal 1998. The
Company does not believe that the adoption of SFAS 128 will have a material
impact on reported earnings per share.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". SFAS 130 requires that companies report comprehensive income in either
the Statement of Shareholders' Equity or in the Statement of Operations.
Comprehensive income is the change in shareholders' equity from nonowner
sources. Comprehensive income includes all changes in equity during a period
except those resulting from investments by owners and distributions to owners.
SFAS 130 is effective for fiscal years beginning after December 15, 1997. The
Company plans to adopt SFAS 130 in the first quarter of 1998 and does not
anticipate its adoption to have a material impact on the presentation of the
financial position or results of operations of the Company.

                                       13

<PAGE>   14

NOTE 13 - SUBSEQUENT EVENT

On August 11, 1997 the Company and Raymond D. Schoenbaum, on behalf of the
Shoney's Shareholders' Committee ("Shareholders' Committee"), jointly announced
a settlement of a pending proxy contest initiated by the Shareholders' Committee
to replace the Company's Board of Directors. In connection with the settlement
agreement, the Company agreed to pay $2.5 million for certain legal and
professional expenses incurred by the Shareholders' Committee in conjunction
with their proxy solicitation.

NOTE 14 - COMMITMENTS AND CONTINGENCIES

In June 1997, a dissident shareholder group launched a proxy contest to replace
the Company's Board of Directors and certain key executives. That proxy contest
was settled August 10, 1997 (See Note 13 Subsequent Event). On July 15, 1997, a
committee of the Board of Directors of the Company authorized the execution of
certain Management Retention Agreements with the officers of the Company to
assist in the retention of key management personnel. The agreements provided
for payment of between one and two years of base salary in the event that the
executives were terminated without good cause or if the executives resigned for
"good reason" (as defined in the agreements) within a one year period following
a change in control of the Company. The settlement of the proxy contest did not
constitute a change in control as defined in these agreements. The agreements
restrict the covered executives from owning, managing, operating, controlling
or participating in a competing food service business. The Company's total
contingent liability with respect to these agreements is approximately $4.6
million.

                                       14

<PAGE>   15


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 third quarter and first three
quarters of fiscal 1997 and 1996 covered periods of twelve and forty weeks,
respectively. All references are to fiscal years unless otherwise noted. The
forward-looking statements included in Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") relating to certain
matters, which reflect management's best judgment based on factors currently
known, involve risks and uncertainties, including anticipated financial
performance, availability of financing, adequacy of management personnel
resources, shortages of restaurant labor, commodity price increases, product
shortages, adverse general economic conditions, turnover and retention of key
management personnel and a variety of other factors. 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 MD&A.
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.

         On September 9, 1996, the Company completed the acquisition of
substantially all of the operating assets of TPI Enterprises, Inc. ("TPI"),
which as the Company's largest franchisee, operated 176 Shoney's Restaurants and
67 Captain D's restaurants. The acquisition was accounted for as a purchase and
the results of operations of the acquired business are included in the third
quarter and first three quarters of 1997 financial statements with no comparable
amounts in the same periods of 1996.

RESULTS OF OPERATIONS

REVENUES
         Revenues from continuing operations for the third quarter of 1997
increased 14% ($37.2 million) to $294.2 million as compared to revenues of
$257.0 million in the third quarter of 1996. For the first three quarters of
1997, revenues increased 17% ($138.0 million) to $952.9 million as compared to
the same period in 1996. The following table summarizes the components of the
increase in revenues:


<TABLE>
<CAPTION>
                                           $ in Millions
                                           -------------

                                    12 Weeks               40 Weeks
                                 Ended August 3,        Ended August 3,
                                     1997                   1997
                                     ----                   ----
<S>                              <C>                    <C>
Restaurant revenue                  $ 42.7                 $155.8
Commissary, and other
sales                                 (5.8)                 (16.8)
Franchise fees                        (1.8)                  (5.6)
Other income                           2.1                    4.6
                                    ------                 ------
                                    $ 37.2                 $138.0
                                    ======                 ======

</TABLE>


                                       15

<PAGE>   16

         Restaurant revenues increased $42.7 million during the third quarter
and $155.8 million during the first three quarters of 1997 principally due to
the addition of the TPI restaurants acquired in September 1996. This increase
was partially offset by a 4.1% decline in comparable store sales during the
third quarter and a 3.2% decline in comparable store sales in the first three
quarters of 1997. The comparable store sales decrease during the third quarter
and first three quarters of 1997 included a .8% menu price increase and a 1.6%
menu price increase, respectively. Revenues also declined due to a net reduction
of 59 company operated restaurants during the first three quarters of 1997
stemming principally from the closure of under-performing Shoney's Restaurants.

         The following table summarizes the change in number of restaurants
operated by the Company and its franchisees during the first three quarters of
1997 and 1996:


<TABLE>
<CAPTION>
                                              Forty Weeks            Forty Weeks
                                                 1997                    1996
                                              -----------            -----------

<S>                                           <C>                    <C>  
Company-owned restaurants opened (1)                 11                     31
Company-owned restaurants closed                    (70)                    (5)
Franchised restaurants opened                         8                      5
Franchised restaurants closed (1)                   (27)                   (60)
                                               --------                -------
                                                    (78)                   (29)
                                               ========                =======

</TABLE>

(1)  Includes five and seventeen units acquired from franchisees during the 
first three quarters of 1997 and 1996, respectively.

         The Company's Shoney's Restaurants continue to experience negative
overall comparable store sales. Shoney's Restaurants reported comparable store
sales declines of 4.3% and 3.5% for the third quarter and first three quarters
of 1997, respectively, including the effects of menu price increases of 1.1% in
the third quarter and 2.4% in the first three quarters of 1997. The Company has
implemented a number of performance improvement initiatives for its Shoney's
Restaurants. The goal of these initiatives is to improve food quality, service
and operational consistency which are expected to improve comparable store
sales trends and profitability. These initiatives have not been successful to
date in reversing overall negative trends in comparable store sales. In
addition to operational improvement initiatives, the Company continues to
implement its market rationalization program, which focuses resources on the
Company's core 13 state southeastern markets and includes the divestiture of
under-performing restaurants.

         The Company's Captain D's restaurants reported comparable store sales
decline of 2.4% and 1.6% in the third quarter and the first three quarters of
1997, including the effects of menu price increases of .4% in the third quarter
and .9% in the first three quarters of 1997. The decline in comparable store
sales at the Company's Captain D's restaurants follows a period of comparable
store sales growth during 1996 and the first quarter of 1997. Management
believes that the decline in sales at Captain D's is principally the result of
relatively less effective Captain D's advertising in fiscal 1997. The Company
has taken a number of steps which management believes will address this decline
in comparable store sales including the introduction of a new advertising
campaign, new promotional menu items, such as "Buffalo" (hot and spicy) style
chicken, fish and shrimp dinners and the introduction of a new "Coastal Classic"
menu featuring upscale offerings such as broiled salmon, orange roughy and
broiled flounder dinners in certain key markets.

                                       16

<PAGE>   17

         Commissary and other revenues declined $5.8 million (15%) during the
third quarter of 1997 and declined $16.8 million (13%) for the first three
quarters of 1997 as compared to the same periods last year. This decline in
revenues resulted from a decrease in the number of franchised or third-party
restaurants being served by the Commissary coupled with variations in the volume
purchased by customers. The decline is primarily due to the loss of Lee's Famous
Recipe Chicken as a customer during the fourth quarter of 1996 as well as a net
decrease of 19 franchised restaurants in operation during the first three
quarters of 1997. During the first three quarters of 1997, Commissary revenues
declined approximately $2.3 million as a result of the closure of the Company's
bakery and coleslaw manufacturing operations during the latter half of 1996 and
a decline in revenues at the Company's meat processing plant due to the loss of
sales to TPI following the acquisition of their restaurants in the fourth
quarter of 1996.

         Franchise fees declined $1.8 million (34%) in the third quarter of 1997
and declined $5.6 million (33%) in the first three quarters of 1997 as compared
to the same periods in the prior year as a result of a 271 unit decline in the
number of franchised restaurants in operation as compared to the third quarter
of 1996. This decline in franchised restaurants is principally the result of the
Company's fourth quarter 1996 acquisition of 176 Shoney's and 67 Captain D's
Restaurants from TPI.

         Other income increased $2.1 million and $4.6 million, respectively, in
the third quarter and first three quarters of 1997 as compared to the same
periods last year principally due to an increase in asset sales and additional
revenue from an insurance service operation acquired from TPI during the fourth
quarter of 1996.

COSTS AND EXPENSES

         Cost of sales increased during the third quarter and first three
quarters of 1997 compared to the same period last year principally as a result
of the acquisition from TPI of 176 Shoney's and 67 Captain D's restaurants in
the fourth quarter of 1996. Cost of sales, as a percentage of revenues, for the
third quarter of 1997 increased 1.1% over the same quarter in 1996 to 87.7% in
1997. Cost of sales, as a percentage of revenues, increased by 1.3% for the
first three quarters of 1997 to 88.6% as compared with 87.3% for the same period
last year. Food and supplies costs, as a percentage of revenues, decreased 1.9%
and 1.8% for the first three quarters and third quarter of 1997, respectively,
as compared to the same periods last year, due to the decline in commissary
sales. Commissary sales have a much higher percentage of food cost and lower
operating expenses, as a percentage of revenue, when compared to the Company's
restaurant operations. Therefore, when outside commissary sales decline,
consolidated food and supplies expense, as a percentage of revenues, decreases.
Food and supplies cost at the restaurant level were essentially unchanged for
the third quarter and first three quarters of 1997 compared to the same periods
in the prior year.

         Restaurant labor increased as a percentage of total revenues because of
the decline in Commissary revenue and franchise revenues (which have no
associated restaurant labor in their cost of sales). Restaurant labor as a
percentage of restaurant revenues was 29.3% in the third quarter of 1997
compared with 28.9% in 1996 and was 30.1% for the first three quarters of 1997
as compared with 30.0% in the first three quarters of 1996. Increased average
wage rates at the restaurant level were offset by increased productivity at the
Company's Shoney's Restaurants (as measured by higher sales per dollar of
restaurant labor). Shoney's Restaurants labor costs as a percentage of
restaurant revenues improved by .23% comparing the third quarter of 1997 with
the same period last year and improved by .57% comparing the first three
quarters of 1997 and 1996. However, higher overall restaurant labor costs as a
percentage of restaurant revenues at Captain D's and the Company's Casual Dining
restaurants mitigated these savings for combined restaurant operations.

                                       17

<PAGE>   18

         Operating expenses as a percentage of revenues increased 1.6% in the
third quarter and 1.9% in the first three quarters of 1997 as compared to the
same periods in 1996. This increase was principally due to the decline in
comparable store sales (for Company restaurants combined) of 4.1% and 3.2% for
the third quarter and first three quarters of 1997, respectively. The Company
also experienced increased costs for utilities, repairs and maintenance and
advertising. In addition, the restaurants acquired from TPI in the fourth
quarter of 1996 have lower average unit sales volumes which cause fixed
operating expenses, as a percentage of revenues, to be higher.

         General and administrative expenses increased by $2.8 million and $9.6
million in the third quarter and first three quarters of 1997, respectively, as
compared with the same periods last year. General and administrative expenses as
a percentage of revenues increased to 6.2% in the third quarter of 1997 from
6.0% in the third quarter of 1996 and increased to 6.5% for the first three
quarters of 1997 as compared to 6.4% for the same period last year. The
increases in general and administrative expenses as a percentage of revenues is
partially due to the lower average unit sales volumes of the Shoney's and
Captain D's restaurants acquired from TPI. Higher general and administrative
expense levels resulted from increased goodwill amortization expense associated
with the TPI acquisition, financial advisory, legal and other costs associated
with the Company's proxy contest (settled during the fourth quarter of 1997),
and higher costs for travel, postage and package delivery, consulting fees and
depreciation expense on new computer equipment.

         These increased general and administrative expense levels include
approximately $1.5 million of costs related to the proxy contest accrued during
the third quarter of 1997. The Company expects that expenses of the proxy
contest in the fourth quarter of 1997 will be an additional $4.0 to $4.5
million, including the payment of $2.5 million of expenses incurred by the
dissident shareholder group agreed to under the settlement of the proxy contest.
The Company has taken steps to reduce certain corporate general and
administrative expenses in conjunction with a reduction in revenues due to the
closure of under- performing, non-core market restaurants. Such cost reduction
measures include the downsizing of the real estate, construction and
architectural departments in recognition of the Company's plans to indefinitely
delay construction of new units. Declines in comparable store sales and
increased expenses during 1997 have mitigated these cost savings and overall
general and administrative expenses have increased slightly as a percentage of
revenue. Management intends to seek further reductions in general and
administrative expenses to manage its overhead costs.

         Interest expense for the third quarter and first three quarters of 1997
increased $1.8 million and $7.4 million, respectively, as compared to the same
periods last year. Interest costs increased principally due to higher
outstanding debt used to finance the acquisition of substantially all of the
operating assets of TPI in the fourth quarter of 1996. In addition, interest
expense increased comparing the third quarter of 1997 and the third quarter of
1996 as a result of additional interest expense for capital leases which were
assumed in connection with the TPI acquisition, and the increase in non-cash
interest related to the Company's zero coupon subordinated debentures. For the
first three quarters of 1997, an increase in interest expense occurred due to
the same factors previously discussed as well as an increase in the amortization
of deferred debt issue costs.

                                       18

<PAGE>   19

The following table summarizes the components of the change in pretax profits:


<TABLE>
<CAPTION>

                               EARNINGS BEFORE INTEREST AND TAXES (EBIT)
                                              ($ in millions)
                                              ---------------
                           40 Weeks               40 Weeks
                             Ended                 Ended               Increase
                         August 3,1997         August 4,1996          (Decrease)
                         -------------         -------------          ----------
<S>                      <C>                   <C>                    <C>  
Restaurants               $ 26.6                $ 25.4                 $  1.2
Commissary                   8.7                   8.2                     .5
Franchising                  8.1                  13.1                   (5.0)
Other                        3.4                   5.0                   (1.6)
                          ------                ------                 ------
         Total              46.8                  51.7                   (4.9)
Interest Expense           (35.0)                (27.6)                  (7.4)
                          ------                ------                 ------
Pretax Profit(1)          $ 11.8                $ 24.1                 $(12.3)
                          ======                ======                 ======

</TABLE>


(1) Excludes the $17.6 million non-cash charge ($11.2 million net of taxes)
    for the initial adoption of SFAS 121 (asset impairments) recorded in the
    first quarter of 1997.

The Company recorded an income tax benefit of $6.1 million for the first three
quarters of 1997 on a pretax loss of $5.8 million and an income tax benefit of
$1.3 million for the third quarter of 1997 on pretax income of $7.5 million. The
Company has provided income taxes for fiscal 1997 at an effective tax rate of
36.3% as compared with 36.5% in the third quarter of 1996 and 39.2% for the
first three quarters of 1996. During the third quarter of 1997, excess income
tax liabilities totaling approximately $26.5 million related to a fiscal 1993
transaction were reversed. Approximately $22.5 million of the reduction in tax
liability was credited to additional paid in capital since the related deferred
tax liability arose from an equity transaction. The remaining $4 million
decrease in the tax liability, which represented accrued interest, reduced
income tax expense for the third quarter and the first three quarters of 1997.

LIQUIDITY AND CAPITAL RESOURCES

         The Company historically has met its liquidity requirements with cash
provided by operating activities supplemented by external borrowing, principally
from banks. The Company's cash provided by continuing operating activities
improved by approximately $8.5 million during the first three quarters of 1997
compared with the same period in 1996. Net income for the first three quarters
of 1997 was significantly impacted by a non-cash charge for asset impairments of
$17.6 million ($11.2 million net of taxes) in the first quarter of 1997. The
first quarter of 1996 included a non-recurring gain on sale and income from
discontinued operations totaling approximately $22.4 million (net of taxes).
Cash flow from operating activities increased despite the decline in net income
as a result of a significant increase in depreciation and amortization,
principally related to the September 1996 acquisition of substantially all of
the assets of TPI, and a $17.6 million non-cash asset impairment charge recorded
in the first quarter of 1997. The increase in non-cash expense items was
partially offset by a reduction in deferred income taxes.

         Cash used by investing activities during the first three quarters of
1997 totaled $8.1 million compared to $5.7 million in the same period of 1996.
The Company had $51.3 million in proceeds from the sale of a discontinued
operation (Mike Rose Foods) in the first quarter of 1996 and no comparable
amount in 1997.

                                       19

<PAGE>   20

This decrease in cash flow from 1996 was offset by a $31.2 million decrease in
capital spending for property, plant and equipment and goodwill arising from
franchise acquisitions during the first three quarters of 1997 as compared to
the same period last year and a $17.7 million increase in proceeds from property
disposals associated with the closure and sale of under-performing restaurants
and surplus properties.

         During the first three quarters of 1997, the Company's cash used by
financing activities was $43.7 million compared with $40.4 million in the same
period in 1996. Significant 1997 financing activities included payments to
reduce debt and capital lease obligations of $25.8 million and scheduled
payments of $17.0 million on the Company's litigation settlement liability.
Significant financing activities during the first three quarters of 1996
included long-term debt reduction of $75.5 million, $51.3 million of which was
from the proceeds of the sale of Mike Rose Foods, $27.0 million in borrowings
under the Company's Revolver, net borrowings of $8.3 million from short-term
credit facilities and scheduled payments of $17.5 million on the Company's
litigation settlement liability. In addition, the Company arranged financing of
$100 million under the Bridge Loan during 1996 to provide working capital and a
source of financing for the acquisition of substantially all of the operating
assets of TPI. During the second quarter of 1996, the Company borrowed $20
million under that facility which was used to reduce short term debt under the
Company's Revolver and thereby provide greater liquidity. The remaining $80
million available under the Bridge Loan was drawn in the fourth quarter of 1996
upon closing of the TPI acquisition. The Company intends to retire the Bridge
Loan either through proceeds from asset divestitures or a refinancing of its
overall debt.

         In conjunction with the Company's market rationalization program,
during the first quarter of 1997, the Company elected to close approximately 82
under-performing restaurants, of which 54 had been closed as of August 3, 1997.
The remainder are expected to close as soon as buyers or tenants are located for
the properties. The Company is aggressively marketing these properties and
leasehold interests and will utilize the proceeds to reduce the Bridge Loan or
other debt for which these properties serve as collateral.

         The Company has identified an additional 74 restaurants which have been
given increased supervisory management attention in an effort to immediately
improve their financial performance. If the performance of these restaurants
does not improve, management will consider their potential closure and the sale
or sublease of these properties to generate additional cash flow to reduce debt.
Revenues were $63.8 million and the loss before interest and taxes was $4.8
million for this group of restaurants for the first three quarters of 1997 and
their carrying value was $24.5 million at August 3, 1997. In addition, the
Company has approximately 72 surplus properties and 58 rental properties, most
of which are former Company restaurants or parcels of land acquired for future
expansion. The Company has been actively marketing approximately 100 of these
properties has applied the proceeds from such sales to reduce debt. At the end
of the third quarter, the Company had sold, subleased or terminated leases
related to approximately 37 of such properties.

         Capital expenditures for fiscal 1997 were originally budgeted to be
approximately $65 million. In light of the Company's negative comparable store
sales trends and lower than expected operating performance for the first three
quarters of 1997, management reduced its budgeted capital expenditures for 1997
to approximately $43 million. Actual capital expenditures through the third
quarter of 1997 were approximately $33.9 million. The reduction in capital
spending was achieved by postponement of construction of new and replacement
restaurants, reductions in maintenance capital expenditures and postponement of
the remodeling of certain restaurants acquired from TPI. The curtailment of new
unit construction is not expected to materially impact 1997 results of
operations. The postponement of remodeling expenditures related to the
restaurants acquired from TPI has delayed expected improvements

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<PAGE>   21

in the comparable store sales and operating profits of those units during 1997,
which had a negative impact on cash flow from operations.

         At August 3, 1997, the Company had cash and cash equivalents of
approximately $16.8 million and had lines of credit totaling $21.7 million under
which the Company had borrowed $1.7 million at the end of the third quarter.
Subsequent to the end of the third quarter of 1997, one bank line of credit in
the amount of $1.7 million was repaid and will no longer be available. The
interest rate on the remaining $20 million secured line of credit was 8.5% at
August 3, 1997.

         The Company has $107.3 million of debt and litigation payments due in
the next twelve months and expects to incur cash interest expense of
approximately $32.0 million in that same time period resulting in total cash 
needs before income taxes and capital expenditures of approximately $139.3
million. The Company had $135 million outstanding under its Revolver at August
3, 1997 and had approximately $13.0 million in letters of credit which also are
supported by the Revolver which had a maximum available credit of $159.6
million. The maximum amount available under the Revolver is scheduled to be
reduced by $30 million on October 22, 1997 and by $37.5 million on April 22,
1998. Based on the amount currently outstanding, the Company will be required
to repay $18.4 million to reduce the outstanding balance under the Revolver
(including letters of credit) to the scheduled maximum of $129.6 million in
October 1997. In addition, the Company has a mortgage financing of $17.4
million due November 1, 1997. The Company's credit agreements generally require
proceeds from asset sales to be applied to reduce the Bridge Loan. Accordingly,
cash flows generated from further planned asset sales will not be available to
meet these upcoming debt payments. Based on the Company's operating results
during the first three quarters of 1997, expected operating results for the
fourth quarter, including the expenses incurred in connection with the recently
settled proxy contest, management does not believe that its cash flow from
operations, supplemented by its available unused line of credit, will be
sufficient to permit the Company to fund the scheduled payment of $18.4 million
due on the Revolver on October 22, 1997 and the $17.4 million mortgage
financing due on November 1, 1997.  In addition, unless modified by its
existing lenders, management expects that at the end of the fourth quarter it
will not be in compliance with certain financial covenants in its credit
agreements, which together with the inability of the Company to fund the
scheduled principal payment due during the fourth quarter will place the
Company in default under its credit agreements and the lenders may accelerate
demand for payment thereunder. As a result, the Company is seeking to refinance
its existing debt obligations and  based on current discussions believes that a
firm commitment for such refinancing will be executed during the fourth quarter
and will provide adequate liquidity for the immediate needs of its business;
however, no assurance can be given that such commitment will be executed or if
executed will be successfully consummated. In the event that such refinancing
does not occur, the Company expects to seek modification of certain financial
covenants and a rescheduling of principal payments under its existing credit
agreements to provide the liquidity and capital needed for its business;
however, there can be no assurance that the Company will be successful in
obtaining the necessary modifications to its existing credit agreements.

         As more fully discussed in Note 9 to the consolidated condensed
financial statements, the Company is a defendant in two class action lawsuits
which allege the Company violated provisions of the Fair Labor Standards Act.
Discovery is proceeding in both cases but is in a preliminary stage. Management
believes that it has substantial defenses to the claims made and intends to
vigorously defend these cases. However, neither the likelihood of an unfavorable
outcome nor the amount of ultimate liability, if any, with respect to these
cases can currently be determined and accordingly, no provision for any
potential liability has been accrued in the financial statements. In the event
of an unfavorable outcome in these cases resulting in a material award for the
plaintiffs, the Company's financial position, results of operations and
liquidity could be adversely affected.


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<PAGE>   22


PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

         Item 3 of the Company's Annual Report on Form 10-K, filed with the
Commission on January 27, 1997, is incorporated herein by this reference. See
also Note 9 to the Notes to Consolidated Condensed Financial Statements at pages
11-12 of this Quarterly Report on Form 10-Q.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

         (a) In accordance with the provisions of Item 601 of Regulation S-K,
the following have been furnished as Exhibits to this Quarterly Report on Form
10-Q:

         3(ii)   Restated Bylaws of Shoney's, Inc. dated August 21, 1997.

         10.1    Management Retention Agreement dated as of July 15, 1997
                 between the Company and Betty J. Marshall.

         10.2    Management Retention Agreement dated as of July 15, 1997
                 between the Company and Haney A. Long, Jr.

         10.3    Management Retention Agreement dated as of July 15, 1997
                 between the Company and Robert A. Speck.

         10.4    Management Retention Agreement dated as of July 15, 1997
                 between the Company and James W. Arnett.

         10.5    Management Retention Agreement dated as of July 15, 1997
                 between the Company and David A. Jordan.

         10.6    Management Retention Agreement dated as of July 15, 1997
                 between the Company and Ronald E. Walker.

         10.7    Management Retention Agreement dated as of July 15, 1997
                 between the Company and F.E. McDaniel, Jr.

         10.8    Management Retention Agreement dated as of July 15, 1997
                 between the Company and Gregory A. Hayes.

         11      Statement regarding computation of per share earnings.

         27      Financial Data Schedule.

         (b) The Company filed a report on Form 8-K on June 23, 1997 to report,
under Item 5, the adoption of amended bylaws on June 22, 1997, and the amended
bylaws were filed as Exhibit 3 to such Form 8-K. In addition, the Company filed
a report on Form 8-K on August 12, 1997 to report under Item 5, the Settlement
Agreement dated August 10, 1997, by and among the Company, Raymond D. Schoenbaum
and Betty J. Schoenbaum and, in connection therewith, approved certain
amendments to the Company's Restated Bylaws. The Settlement Agreement and the
Amended Bylaws were filed as Exhibit 10 and Exhibit 3, respectively, to such
Form 8-K.

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<PAGE>   23

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized both on behalf of the registrant and in
his capacity as principal financial officer of the registrant.

Date: September 17, 1997   By:  /s/ W. Craig Barber
                                ------------------------------------------------
                                W. Craig Barber
                                Senior Executive Vice President,
                                Chief Administrative Officer, and Chief
                                Financial Officer (Principal Financial and Chief
                                Accounting Officer)

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