**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

ý   **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the period ended September 30, 2003**

 

**o****   TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT**

 

**For thetransition periodfrom               to               **

 

**Commissionfile number 0-25366**

 

**WESTERN SIZZLIN CORPORATION**

**(formerlyAustins Steaks & Saloon, Inc.)**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **Delaware**                                                     |   | **86-0723400**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |
| **317  Kimball Avenue, N.E.  Roanoke, Virginia  24016**     |
| (Address of principal  executive offices)                        |
|                                                             |
| **(540)  345-3195**                                              |
| (Issuer’s telephone  number)                                |

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15 (d) of the Exchange Act during the past 12 months (or for suchshorter 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  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý

 

As of November 14, 2003, there were 12,050,099 shares of the issuer’scommon stock outstanding.

 

 

----

 

**WESTERNSIZZLIN CORPORATION**

**(formerlyAustins Steaks & Saloon, Inc.)**

**Form10-Q Index**

**NineMonths Ended September 30, 2003**

 
| **PART I.**  | **FINANCIAL INFORMATION** |
|--------------|---------------------------|
|         |                      |
|         | **Item 1.**               | **Financial Statements (Unaudited)** |   |
|         |                      |   |   |
|         |                      | Consolidated Balance Sheets  – September 30, 2003 and December 31, 2002 | 2 |
|         |                      |   |   |
|         |                      | Consolidated  Statements of Operations - Three Months and Nine Months Ended September 30,  2003 and 2002 | 3 |
|         |                      |   |   |
|         |                      | Consolidated  Statement of Changes in Stockholders’ Equity - Nine Months Ended September  30, 2003 | 4 |
|         |                      |   |   |
|         |                      | Consolidated  Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002 | 5 |
|         |                      |   |   |
|         |                      | Notes to  Consolidated Financial Statements | 6-12 |
|         |                      |   |   |
|         | **Item 2.**               | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | 12-17 |
|         |                      |   |   |
|         | **Item 3.**               | **Quantitative and Qualitative Disclosure about  Market Risk** | 17 |
|         |                      |   |   |
|         | **Item 4.**               | **Controls and Procedures** | 18 |
|         |                      |
| **PART II.** | **OTHER INFORMATION**     |
|         |                      |
|         | **Item 1.**               | **Legal Proceedings** | 18-19 |
|         |                      |   |   |
|         | **Item 2.**               | **Change in Securities and Use of Proceeds** | 19 |
|         |                      |   |   |
|         | **Item 3.**               | **Defaults Upon Senior Securities** | 19 |
|         |                      |   |   |
|         | **Item 4.**               | **Submission of Matters to a Vote of Security  Holders** | 19 |
|         |                      |   |   |
|         | **Item 5.**               | **Other Information** | 19 |
|         |                      |   |   |
|         | **Item 6.**               | **Exhibits and Reports on Form 8-K** | 19 |
|         |                      |
|         | **Signatures**            |

 

----

 

**PART I****.  FINANCIAL INFORMATION**

**Item 1****.  FinancialStatements**

**WESTERNSIZZLIN CORPORATION**

**(formerlyAustins Steaks & Saloon, Inc.)**

Consolidated Balance Sheets

September 30, 2003 andDecember 31, 2002

 
|                                                                                                                                                |   | **September 30,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
|                                                                                                                                                |   | **(unaudited)**         |       |                   |       |
| **Assets**                                                                                                                                          |   |                    | ** ** |                   | ** ** |
| Current assets:                                                                                                                                     |   |                    |       |                   |       |
| Cash and cash  equivalents                                                                                                                          |   | $                       | 1,135,484  |                   | $          | 131,631 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $364,836 in 2003 and  $379,887 in 2002                                        |   | 840,904                 |       | 1,086,180              |       |
| Current  installments of notes receivable                                                                                                           |   | 188,344                 |       | 203,821                |       |
| Other  receivables                                                                                                                                  |   | 51,292                  |       | 95,527                 |       |
| Inventories                                                                                                                                         |   | 97,669                  |       | 95,457                 |       |
| Prepaid expenses                                                                                                                                    |   | 297,831                 |       | 328,321                |       |
| Income taxes  refundable                                                                                                                            |   | —                  |       | 47,198                 |       |
| Deferred income  taxes                                                                                                                              |   | 274,026                 |       | 274,026                |       |
| Total current  assets                                                                                                                               |   | 2,885,550               |       | 2,262,161              |       |
| Notes  receivable, less allowance for doubtful accounts of $47,595 in 2003 and 2002,  excluding current installments                                |   | 1,190,909               |       | 1,286,906              |       |
| Property and  equipment, net                                                                                                                        |   | 3,153,854               |       | 3,443,380              |       |
| Franchise  royalty contracts, net of accumulated amortization of $6,145,380 in 2003 and  $5,672,658 in 2002                                         |   | 3,309,051               |       | 3,781,773              |       |
| Goodwill, net of  accumulated amortization of $2,513,602 in 2003 and 2002                                                                           |   | 4,310,200               |       | 4,310,200              |       |
| Financing costs,  net of accumulated amortization of $91,600 in 2003 and $72,020 in 2002                                                            |   | 98,703                  |       | 118,283                |       |
| Deferred income  taxes                                                                                                                              |   | 1,480,174               |       | 1,480,174              |       |
| Assets held for  sale                                                                                                                               |   | 715,179                 |       | 1,200,000              |       |
| Other assets,  net                                                                                                                                  |   | 212,483                 |       | 156,548                |       |
|                                                                                                                                                |   | $                       | 17,356,103 |                   | $          | 18,039,425 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                      |   |                    |       |                   |       |
| Current  liabilities:                                                                                                                               |   |                    |       |                   |       |
| Bank overdraft                                                                                                                                      |   | $                       | —     |                   | $          | 346,351 |   |
| Credit line note  payable to bank                                                                                                                   |   | —                  |       | 363,180                |       |
| Current  installments of long-term debt                                                                                                             |   | 511,819                 |       | 507,590                |       |
| Accounts payable                                                                                                                                    |   | 989,460                 |       | 1,328,813              |       |
| Accrued expenses  and other                                                                                                                         |   | 708,864                 |       | 896,497                |       |
| Income taxes  payable                                                                                                                               |   | 295,031                 |       | —                 |       |
| Total current  liabilities                                                                                                                          |   | 2,505,174               |       | 3,442,431              |       |
| Long-term debt,  excluding current installments                                                                                                     |   | 3,692,913               |       | 4,074,589              |       |
| Other  liabilities                                                                                                                                  |   | 50,000                  |       | —                 |       |
| Total  liabilities                                                                                                                                  |   | 6,248,087               |       | 7,517,020              |       |
| Stockholders’  equity:                                                                                                                         |   |                    |       |                   |       |
| Common stock;  $.01 par value.  Authorized 20,000,000  shares; issued and outstanding 12,050,099 shares in 2003 and 12,150,099  shares in 2002 |   | 120,501                 |       | 121,501                |       |
| Additional  paid-in capital                                                                                                                         |   | 8,607,663               |       | 8,674,846              |       |
| Retained  earnings                                                                                                                                  |   | 2,379,852               |       | 1,726,058              |       |
| Total  stockholders’ equity                                                                                                                    |   | 11,108,016              |       | 10,522,405             |       |
| Commitments and  contingencies                                                                                                                      |   |                    |       |                   |       |
|                                                                                                                                                |   | $                       | 17,356,103 |                   | $          | 18,039,425 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

----

** **

**WESTERNSIZZLIN CORPORATION**

**(formerlyAustins Steaks & Saloon, Inc.)**

Consolidated Statementsof Operations

(Unaudited)

 
|                                               |   | **Three Months  Ended September 30** |      | **Nine Months  Ended September 30** |   |
|----------------------------------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                                               |   | **2003**                             |      | **2002**                            |   | **2003** |   | **2002** |   |
| Revenues:                                          |   |                                 |      |                                |   |   |   |   |   |
| Company-operated  restaurants                      |   | $                                    | 4,242,932 |                                | $      | 5,870,739 |   | $ | 12,276,250 |   | $ | 19,049,574 |   |
| Franchise  operations                              |   | 1,229,320                            |      | 1,311,763                           |   | 3,627,769 |   | 4,060,462 |   |
| Other                                              |   | 102,670                              |      | 117,351                             |   | 320,791 |   | 345,219 |   |
| Total revenues                                     |   | 5,574,922                            |      | 7,299,853                           |   | 16,224,810 |   | 23,455,255 |   |
|                                               |   |                                 |      |                                |   |   |   |   |   |
| Costs and  expenses:                               |   |                                 |      |                                |   |   |   |   |   |
| Cost of  Company-operated restaurants              |   | 2,857,604                            |      | 4,043,666                           |   | 8,355,222 |   | 13,001,003 |   |
| Cost of  franchise operations                      |   | 430,586                              |      | 490,308                             |   | 1,120,910 |   | 1,487,939 |   |
| Other cost of  operations                          |   | 77,503                               |      | 86,679                              |   | 244,000 |   | 255,764 |   |
| Restaurant  operating expenses                     |   | 886,490                              |      | 1,416,167                           |   | 2,626,847 |   | 4,442,313 |   |
| General and  administrative                        |   | 508,860                              |      | 905,935                             |   | 1,608,506 |   | 1,951,490 |   |
| Depreciation and  amortization                     |   | 317,920                              |      | 411,246                             |   | 945,484 |   | 1,308,177 |   |
| Closed  Company-operated restaurants               |   | —                               |      | 568,997                             |   | — |   | 1,595,286 |   |
| Total costs and  expenses                          |   | 5,078,963                            |      | 7,922,998                           |   | 14,900,969 |   | 24,041,972 |   |
| Income (loss)  from operations                     |   | 495,959                              |      | (623,145                            | )      | 1,323,841 |   | (586,717 | ) |
|                                               |   |                                 |      |                                |   |   |   |   |   |
| Other income  (expense):                           |   |                                 |      |                                |   |   |   |   |   |
| Interest expense                                   |   | (109,209                             | )         | (123,500                            | )      | (346,894 | ) | (388,905 | ) |
| Interest income                                    |   | 23,927                               |      | 7,112                               |   | 70,727 |   | 28,305 |   |
| Other                                              |   | (8,322                               | )         | 125,569                             |   | 6,857 |   | 325,420 |   |
|                                               |   | (93,604)                             |      | 9,181                               |   | (269,310 | ) | (35,180 | ) |
| Income (loss)  before income tax expense (benefit) |   | 402,355                              |      | (613,964                            | )      | 1,054,531 |   | (621,897 | ) |
| Income tax  expense (benefit)                      |   | 152,895                              |      | (233,430                            | )      | 400,737 |   | (236,400 | ) |
| Net income  (loss)                                 |   | $                                    | 249,460   |                                | $      | (380,534 | ) | $ | 653,794 |   | $ | (385,497 | ) |
|                                               |   |                                 |      |                                |   |   |   |   |   |
| Earnings (loss)  per share:                        |   |                                 |      |                                |   |   |   |   |   |
| Basic                                              |   | $                                    | .02       |                                | (.03   | ) | .05 |   | (.03 | ) |
| Diluted                                            |   | $                                    | .02       |                                | (.03   | ) | .05 |   | (.03 | ) |

 

See accompanying notes toconsolidated financial statements

 

3

----

 

**WESTERNSIZZLIN CORPORATION**

**(formerlyAustins Steaks & Saloon, Inc.)**

Consolidated Statement ofChanges in Stockholders’ Equity

Nine Months EndedSeptember 30, 2003

(Unaudited)

 
|                          |   | **Common Stock** |   | **Additional  Paid-in  Capital** |    | **Retained  Earnings** |   | **Total** |   |
|-------------------------------|--------|------------------|--------|----------------------------------|---------|------------------------|--------|-----------|--------|
| **Shares**                    |   | **Dollars**      |
|                          |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances,  December 31, 2002  |   | 12,150,099       |   | $                                | 121,501 |                   | $      | 8,674,846 |   | $ | 1,726,058 |   | $ | 10,522,405 |   |
|                          |   |             |   |                             |    |                   |   |      |   |   |   |
| Net Income                    |   | —           |   | —                           |    | —                 |   | 653,794   |   | 653,794 |   |
|                          |   |             |   |                             |    |                   |   |      |   |   |   |
| Repurchase of  common stock   |   | (100,000         | )      | (1,000                           | )       | (67,183                | )      | —    |   | (68,183 | ) |
|                          |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances,  September 30, 2003 |   | 12,050,099       |   | $                                | 120,501 |                   | $      | 8,607,663 |   | $ | 2,379,852 |   | $ | 11,108,016 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

**WESTERNSIZZLIN CORPORATION**

**(formerlyAustins Steaks & Saloon, Inc.)**

Consolidated Statements of Cash Flows

Nine Months EndedSeptember 30, 2003 and 2002

(Unaudited)

 
|                                                                                      |   | **September** |      |
|-------------------------------------------------------------------------------------------|--------|---------------|-----------|
|                                                                                      |   | **2003**      |      | **2002** |   |
| Cash flows from  operating activities:                                                    |   |          |      |   |   |
| Net income  (loss)                                                                        |   | $             | 653,794   |   | $ | (385,497 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |   |          |      |   |   |
| Depreciation and  amortization of property and equipment                                  |   | 453,182       |      | 789,623 |   |
| Amortization of  franchise royalty contracts and financing costs                          |   | 492,302       |      | 518,554 |   |
| Loss on disposal  of fixed assets                                                         |   | 351           |      | — |   |
| Gain on sale of  asset held for sale                                                      |   | (790          | )         | — |   |
| Impairment of  property and equipment                                                     |   | —        |      | 826,286 |   |
| Closed  Company-operated restaurants expense accrual                                      |   | —        |      | 500,000 |   |
| Provision for  bad debts                                                                  |   | 37,545        |      | 65,000 |   |
| (Increase)  decrease in:                                                                  |   |          |      |   |   |
| Trade accounts  receivable                                                                |   | 207,731       |      | 68,109 |   |
| Notes receivable                                                                          |   | 111,474       |      | 60,871 |   |
| Other receivables                                                                         |   | 44,235        |      | (5,981 | ) |
| Inventories                                                                               |   | (2,212        | )         | 43,311 |   |
| Prepaid expenses                                                                          |   | 30,490        |      | (50,277 | ) |
| Other assets                                                                              |   | (55,935       | )         | 7,530 |   |
| Income taxes  refundable                                                                  |   | 47,198        |      | (257,962 | ) |
| Increase  (decrease) in:                                                                  |   |          |      |   |   |
| Accounts payable                                                                          |   | (339,353      | )         | (1,216,981 | ) |
| Accrued expenses  and other                                                               |   | (161,233      | )         | 186,492 |   |
| Income taxes  payable                                                                     |   | 295,031       |      | — |   |
| Other  liabilities                                                                        |   | 50,000        |      | — |   |
| Net cash  provided by operating activities                                                |   | 1,863,810     |      | 1,149,078 |   |
|                                                                                      |   |          |      |   |   |
| Cash flows from  investing activities:                                                    |   |          |      |   |   |
| Additions to  property and equipment                                                      |   | (119,186      | )         | (136,235 | ) |
| Proceeds from  sale of assets held for sale                                               |   | 414,390       |      | — |   |
| Net cash  provided by (used in) investing activities                                      |   | 295,204       |      | (136,235 | ) |
|                                                                                      |   |          |      |   |   |
| Cash flows from  financing activities:                                                    |   |          |      |   |   |
| Net decrease in  bank overdraft                                                           |   | (346,351      | )         | (390,794 | ) |
| Net increase  (decrease) in credit line note payable                                      |   | (363,180      | )         | 74,400 |   |
| Proceeds from  note payable                                                               |   | 450,000       |      | — |   |
| Payments on note  payable                                                                 |   | (450,000      | )         | — |   |
| Payments on  long-term debt                                                               |   | (377,447      | )         | (373,032 | ) |
| Payments of  dividends on common stock                                                    |   | —        |      | (365,364 | ) |
| Repurchase of  common stock                                                               |   | (68,183       | )         | — |   |
| Net cash used in  financing activities                                                    |   | (1,155,161    | )         | (1,054,790 | ) |
| Net increase  (decrease) in cash and cash equivalents                                     |   | 1,003,853     |      | (41,947 | ) |
| Cash and cash  equivalents at beginning of period                                         |   | 131,631       |      | 449,075 |   |
| Cash and cash  equivalents at end of period                                               |   | $             | 1,135,484 |   | $ | 407,128 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

----

 

**WESTERNSIZZLIN CORPORATION**

**(formerlyAustins Steaks & Saloon, Inc.)**

 

Notes to ConsolidatedFinancial Statements

 

Nine-Months EndedSeptember 30, 2003 and 2002

 

(Unaudited)

 

**(1)****                                 General**

 

The accompanying unaudited consolidated financialstatements have been prepared by Western Sizzlin Corporation (formerly Austin Steaks & Saloon, Inc. (the “Company”) in accordance withaccounting principles generally accepted in the United States of America forinterim financial reporting information and the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and notesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all material reclassifications andadjustments, consisting of normal recurring accruals, considered necessary fora fair presentation of the results of operations, financial position and cashflows for each period shown have been included.  Operating results for interim periods are not necessarilyindicative of the results for the full year because, among other things, thedining habits of the Company’s customers cannot be certain.  The unaudited consolidated financialstatements and notes are presented as permitted by Form 10-Q and do not containcertain information included in the Company’s annual consolidated financialstatements and notes.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in the Company’s annual report on Form 10-K for the year endedDecember 31, 2002.

 

**(2)****                                 Goodwilland Other Intangible Assets**

 

The Company conforms to the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, “Goodwill and Other IntangibleAssets.”  Under SFAS No. 142, goodwill andintangible assets deemed to have indefinite lives are reviewed for impairmentand written down and charged to results of operations when their carryingamount exceeds their estimated fair value. The Company is required to perform impairment tests each year, orbetween yearly tests in certain circumstances, for goodwill.  There can be no assurance that futureimpairment tests will not result in a charge to earnings.

 

The changes in the net carrying amount of goodwill, byreporting segment, for the nine-month period ended September 30, 2003 are asfollows:

 
| **Segment**                   |   | **Goodwill  at  January 1, 2003** |      | **Impairment  Losses** |   | **Goodwill  at  September 30, 2003** |   |
|-------------------------------|--------|-----------------------------------|-----------|------------------------|--------|--------------------------------------|--------|
|                          |   |                              |      |                   |   |                                 |   |
| Company-operated  restaurants |   | $                                 | 4,310,200 |                   | $      | —                               |   | $ | 4,310,200 |   |
| Franchise  operations         |   | —                            |      | —                 |   | —                               |   |
| Total                         |   | $                                 | 4,310,200 |                   | $      | —                               |   | $ | 4,310,200 |   |

 

The changes in the net carrying amount of goodwill, byreporting segment, for the nine-month period ended September 30, 2002 are asfollows:

 
| **Segment**                   |   | **Goodwill  at  January 1, 2002** |      | **Impairment  Losses** |   | **Goodwill  at  September 30, 2002** |   |
|-------------------------------|--------|-----------------------------------|-----------|------------------------|--------|--------------------------------------|--------|
|                          |   |                              |      |                   |   |                                 |   |
| Company-operated  restaurants |   | $                                 | 4,310,200 |                   | $      | —                               |   | $ | 4,310,200 |   |
| Franchise  operations         |   | —                            |      | —                 |   | —                               |   |
| Total                         |   | $                                 | 4,310,200 |                   | $      | —                               |   | $ | 4,310,200 |   |

 

6

----

 

*AmortizingIntangible Assets*

 

Franchise royalty contracts are amortized on astraight-line basis over fifteen years, the estimated average life of thefranchise agreements.  The Companyassesses the recoverability of this intangible asset by determining whether theamortization of the franchise royalty contracts balance over their remaininglife can be recovered through undiscounted future operating cash flows of theacquired operation.  The amount ofimpairment, if any, is measured based on projected discounted future operatingcash flows using a discount rate reflecting the Company’s average cost offunds.

 
|                          |   |                        |      | **As of September 30,  2003**              |       |                          |      |
|-------------------------------|--------|-----------------------------|-----------|--------------------------------------------|------------|-------------------------------|-----------|
|                          |   | **Gross  Carrying  Amount** |      | **Weighted average  Amortization  Period** |       | **Accumulated  Amortization** |      |
| Amortizing intangible assets: |   |                        |      |                                       |       |                          |      |
| Franchise Royalty Contracts   |   | $                           | 9,454,431 |                                       | 15.0  yrs. |                          | 6,145,380 |   |
|                               |        |                             |           |                                            |            |                               |           |  |

 

Aggregate amortization expense for amortizingintangible assets for the three-month and nine-month periods ended September30, 2003 was $157,574 and $472,722 respectively.  Estimated amortization expense is $630,295 per year.

 

**(3)****                                 EarningsPer Share and Stock Option Plan**

 

Basic earnings per share excludes dilution and iscomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the Company.  Stock options

for shares of common stock were not included incomputing diluted earnings per share for the three-month and nine-month periodsended September 30, 2003 and 2002 because these effects are anti-dilutive.

 

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per share computations forthe periods indicated:

 

 
|                                       |   | **Weighted  Income  (Loss)  (Numerator)** |     | **Earnings  Average  Shares  (Denominator)** |       | **(Loss)  Per Share  Amount** |   |
|--------------------------------------------|--------|-------------------------------------------|----------|----------------------------------------------|------------|-------------------------------|--------|
| **Three-months  ended September 30, 2003** |   |                                      |     |                                         |       |                          |   |
|                                       |   |                                      |     |                                         |       |                          |   |
| Net income - basic and diluted             |   | $                                         | 249,460  |                                         | 12,129,446 |                          | $      | .02 |   |
|                                       |   |                                      |     |                                         |       |                          |   |
| **Three-months  ended September 30, 2002** |   |                                      |     |                                         |       |                          |   |
|                                       |   |                                      |     |                                         |       |                          |   |
| Net loss - basic and diluted               |   | $                                         | (380,534 | )                                            | 12,178,800 |                          | $      | (.03 | ) |

 

7

----

 
|                                      |   | **Weighted  Income  (Loss)  (Numerator)** |     | **Earnings  Average  Shares  (Denominator)** |       | **(Loss)  Per Share  Amount** |   |
|-------------------------------------------|--------|-------------------------------------------|----------|----------------------------------------------|------------|-------------------------------|--------|
| **Nine-months  ended September 30, 2003** |   |                                      |     |                                         |       |                          |   |
|                                      |   |                                      |     |                                         |       |                          |   |
| Net income - basic and diluted            |   | $                                         | 653,794  |                                         | 12,143,139 |                          | $      | .05 |   |
|                                      |   |                                      |     |                                         |       |                          |   |
| **Nine-months  ended September 30, 2002** |   |                                      |     |                                         |       |                          |   |
|                                      |   |                                      |     |                                         |       |                          |   |
| Net loss - basic and diluted              |   | $                                         | (385,497 | )                                            | 12,178,800 |                          | $      | (.03 | ) |

 

The Company applies the intrinsic-value-based methodof accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related interpretations includingFinancial Accounting Standards Board (FASB) Interpretation No. 44, *Accountingfor Certain Transactions involving Stock Compensation, an interpretation of APBOpinion No. 25,* issued in March 2000, to account for its fixed-planstock options.  Under this method,compensation expense is recorded on the date of grant only if the currentmarket price of the underlying stock exceeded the exercise price.  SFAS No. 123, *Accounting for Stock-BasedCompensation,* established accounting and disclosure requirementsusing a fair-value-based method of accounting for stock-based employeecompensation plans.  As allowed by SFASNo. 123, the Company has elected to continue to apply the intrinsic-value-basedmethod of accounting described above, and has adopted only the disclosurerequirements of SFAS No. 123.  SFAS No.148, *Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment of SFASNo. 123,* amends the disclosure requirements of SFAS No. 123 torequire prominent disclosures, in both annual and interim financial statements,about the method of accounting for stock-based compensation and the effect ofthe method on reported results.  Duringthe three-month period ended September 30, 2003 the Company issued stockoptions to an officer of the Company to purchase 75,000 shares of the Company’scommon stock at $0.88 per share.  Theoptions vest after eighteen months of employment.

 

The Company had no stock-based employee compensationexpense using the intrinsic-value method for the three-month and nine-monthperiods ended September 30, 2003 and 2002.

 

**(4)****                                 ReportableSegments**

 

The Company has defined two reportable segments:Company-operated restaurants and franchising and other.  The Company-operated restaurant segmentconsists of the operations of all Company-operated restaurants and derives itsrevenues from restaurant operations. The franchising and other segment consistsof franchise sales and support activities and derives its revenues from salesof franchise and development rights and collection of royalties fromfranchisees.

 

Generally, the Company evaluates performance andallocates resources based on income from operations before income taxes andeliminations.  Administrative andcapital costs are allocated to segments based upon predetermined rates oractual or estimated resource usage.  TheCompany

 

8

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accounts for intercompany sales and transfers as ifthe sales or transfers were with third parties and eliminates the relatedprofit in consolidation.

 

Reportable segments are business units that providedifferent products or services. Separate management of each segment is required because each businessunit is subject to different operational issues and strategies.  Through September 30, 2003, all revenues foreach business segment were derived from business activities conducted withcustomers located in the United States. No single external customer accounted for 10 percent or more of theCompany’s consolidated revenues.

 

The following table summarizes reportable segmentinformation:

 
|                                                    |   | **Three-Months  Ended September 30,** |      | **Nine-months  Ended September 30,** |      |
|---------------------------------------------------------|--------|---------------------------------------|-----------|--------------------------------------|-----------|
|                                                    |   | **2003**                              |      | **2002**                             |      | **2003** |   | **2002** |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Revenues from reportable segments:                      |   |                                  |      |                                 |      |   |   |   |   |
| Company-operated Restaurants                            |   | $                                     | 4,242,932 |                                 | 5,870,739 |   | 12,276,250 |   | 19,049,574 |   |
| Franchising and other                                   |   | 1,331,990                             |      | 1,429,114                            |      | 3,948,560 |   | 4,405,681 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total revenues                                          |   | $                                     | 5,574,922 |                                 | 7,299,853 |   | 16,224,810 |   | 23,455,255 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Depreciation and amortization:                          |   |                                  |      |                                 |      |   |   |   |   |
| Company-operated Restaurants                            |   | 133,982                               |      | 225,231                              |      | 394,457 |   | 745,948 |   |
| Franchising and other                                   |   | 183,938                               |      | 186,015                              |      | 551,027 |   | 562,229 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total depreciation and amortization                     |   | $                                     | 317,920   |                                 | 411,246   |   | 945,484 |   | 1,308,177 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Interest expense:                                       |   |                                  |      |                                 |      |   |   |   |   |
| Company-operated Restaurants                            |   | 106,717                               |      | 118,280                              |      | 329,433 |   | 365,446 |   |
| Franchising and other                                   |   | 2,492                                 |      | 5,220                                |      | 17,461 |   | 23,459 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total interest expense                                  |   | $                                     | 109,209   |                                 | 123,500   |   | 346,894 |   | 388,905 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Interest income:                                        |   |                                  |      |                                 |      |   |   |   |   |
| Company-operated Restaurants                            |   | 23,486                                |      | 6,942                                |      | 68,987 |   | 25,823 |   |
| Franchising and other                                   |   | 441                                   |      | 170                                  |      | 1,740 |   | 2,482 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total interest income                                   |   | $                                     | 23,927    |                                 | 7,112     |   | 70,727 |   | 28,305 |   |
|                                                    |   |                                  |      |                                 |      |   |   |   |   |
| Income (loss) before income tax expense (benefit):      |   |                                  |      |                                 |      |   |   |   |   |
| Company-operated Restaurants                            |   | 117,605                               |      | (732,648                             | )         | 163,494 |   | (1,580,387 | ) |
| Franchising and other                                   |   | 284,750                               |      | 118,684                              |      | 891,037 |   | 958,490 |   |
| Total income (loss) before income tax expense (benefit) |   | $                                     | 402,355   |                                 | (613,964  | ) | 1,054,531 |   | (621,897 | ) |

 

9

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|                                |   | **September 30,  2003** |      | **September 30  2002** |       |
|-------------------------------------|--------|-------------------------|-----------|------------------------|------------|
| Gross fixed assets:                 |   |                    |      |                   |       |
| Company-operated Restaurants        |   | 6,241,972               |      | 12,341,111             |       |
| Franchising and other               |   | 1,457,607               |      | 1,565,347              |       |
|                                |   |                    |      |                   |       |
| Total gross fixed assets            |   | $                       | 7,699,579 |                   | 13,906,458 |   |
|                                |   |                    |      |                   |       |
| Expenditures for fixed assets:      |   |                    |      |                   |       |
| Company-operated Restaurants        |   | 110,005                 |      | 116,224                |       |
| Franchising and other               |   | 9,181                   |      | 20,011                 |       |
|                                |   |                    |      |                   |       |
| Total expenditures for fixed assets |   | $                       | 119,186   |                   | 136,235    |   |

 

**(5)****                                 Contingencies**

 

In January 2001, the Company executed a series ofMaster Lease Agreements (Agreements) relating to certain franchised propertiesformerly operated by other parties as “Quincy’s” restaurants (hereinafter“Former Quincy’s”).  Signed copies ofthese Agreements (which were required, pursuant to the terms of the document,to be executed by Franchise Financing Corporation of America (the Lessor), tobe legally binding) were never returned to the Company.  At the end of January 2002, there remainedonly 25 Former Quincy’s operated by Company franchisees, the Lessor havingtaken back, in 2001 and 2002, other restaurants previously operated by Companyfranchisees.

 

The Agreements, incomplete for a lack of signature bythe Lessor, provided for rental payments from the Company to the Lessor.  However, the cost of any rental payments waspassed on to the Company franchisees operating the properties.  During 2002, seven of the remaining 25properties were closed and the franchisees discontinued making payments to theCompany.  During the nine-month periodended September 30, 2003, two additional properties were closed and thesefranchisees also discontinued making payments to the Company.  To the Company’s knowledge, as of September30, 2003, a total of approximately $859,000 of rent payments had not been madeby either the franchisees or the Company with regard to the above-referencednine properties.  The Company disputesany liability for these amounts.

 

Rent for the nine properties for the period fromOctober 1, 2003 through December 31, 2005 (the end of the lease term) accordingto the payment schedule set out in the Agreements, would approximate $1.78million.  However, as noted above, theLessor has never delivered executed Agreements to the Company.  Accordingly, on May 15, 2003, the Companysent a letter to the Lessor, providing notice of the Company’s termination ofany tenancies at-will on any remaining Former Quincy’s units effective May 31,2003.

 

Consistent with this notice, the Company advised fivefranchisees to make any payments directly to the Lessor.  On eleven other properties the Company hasbecome aware that the franchisees have elected to make their payments directlyto the Lessor, and the Lessor has accepted these payments.  There can be no assurance that thesefranchisees will continue to make their lease payments in the future.

 

While the Company has previously engaged in discussionswith the Lessor of the properties to resolve any rental payments claimed by theLessor under the Agreements, it is not possible at this time to determine theoutcome of these discussions. Nevertheless, the Company has claims against the Lessor which itbelieves will at least offset the significant portion of any claim by theLessor.  Accordingly, no amount has beenaccrued at September 30, 2003.

 

10

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The Company is also a guarantor on three leaseagreements for restaurants, which the Company originally operated, but whichwere sold in 2002.  The total monthlypayments on these leases are $20,680 through September 30, 2012 and paymentsare due from the Company if the lessee is unable to fulfill its obligation tothe lessor.  At September 30, 2003 it isnot probable that the Company will be required to make payments under itsguarantees.  Thus, no liability has beenaccrued related to the Company’s obligation under this agreement.

 

The Company is also the guarantor of a lease agreementin Lincoln, NE with monthly rentals of approximately $8,200 per month. Thelease agreement, which runs through February 2014, was assigned by the Companyto a third party in March 1998. The Assignee, and its subsequent Assignee, havefailed to make recent monthly rental payments and payment of property taxes,and association dues on the premises. The Landlord has taken possession of the premises and is obligated toand is attempting to find a replacement tenant.  Nevertheless, the Landlord made a demand upon all parties inSeptember 2003, including the Assignees and the Company as Guarantor, to payaccrued but unpaid obligations under the lease and Guaranty of $30,494 as ofSeptember 30, 2003.  The Landlord hasthreatened litigation to collect these amounts.  The Company’s maximum exposure for the period from October 1,2003 through February 2014 includes rent of approximately $1,000,000 plus anyunpaid property taxes and association dues. In the event of litigation, the Company would have a claim against theAssignees for any accrued but unpaid obligations under the lease and Guarantyfor which the Company may be found liable. No amount has been accrued at September 30, 2003, as the amount of loss,if any, cannot be reasonably estimated.

 

The Company filed an action in the First JudicialDistrict Court for the Parish of Caddo, Louisiana in October, 2001, againstKenneth A. Greenway, and others as owners and lessors of five restaurantlocations requesting (1) lessors to allow a sublease according to terms of thelease; (2) payment of lease revenues due to the Company from Mr. Greenway forbillboards located on three of the restaurant locations; (3) to reimburse theCompany for damages incurred as a result of lessors’ breach of a warrantywithin the lease that the equipment was in normal operating condition with nomajor repairs required; and (4) to make repairs required as a result of haildamage for which lessor has collected insurance proceeds and cash payments fromthe Company.

 

Mr. Greenway filed a counterclaim against the Company,seeking to evict the Company from the five restaurant locations, from which theCompany departed when the lease expired on September 30, 2002.  Mr. Greenway alleged that the Company failedto maintain the properties in first class condition.  Mr. Greenway prevailed on his counterclaim the lawsuit at thedistrict court level and won an appeal to the second Circuit of the LouisianaState Court of Appeals in June 2002. The Company filed a writ with the Louisiana Supreme Court, which wasrejected.

 

In January 2003, Mr. Greenway amended his counterclaimseeking damages for an alleged failure by the Company to deliver theproperties, at eviction, in the condition in which the properties had been maintainedat the inception of the lease.  Mr.Greenway has also alleged that the Company removed numerous items from theleased premises and has refused to return these items.  Company management believes the Companycompleted any necessary repairs before leaving the leased premises.

 

The Company’s claims and the defendant’s counterclaimfor alleged damage are proceeding through the pretrial discovery phase.  The District Court has recently rejectedcross-motions for summary judgement with regard to the right to certainbillboard revenue generated by the premises.

 

Management believes that the Company has meritoriousclaims against the lessors as a result of its litigation and that even if thelessors were to prevail on their claims regarding the condition and equipmentof the premises, those costs would be approximately offset by the Company’sclaims against lessors.  Management doesnot anticipate a material effect upon its financial condition, results ofoperations or liquidity as a result of this litigation.

 

11

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During the third quarter, the Company received anasserted claim of $538,000 by e-mail transmission from a previous vendorassociated with the Quincy’s transaction during 2000 and 2001 no legal action hasbeen filed.  The Company feels it has noliability and will defend vigorously if necessary.

 

The Company is involved in various other claims andlegal actions arising in the ordinary course of business.  In the opinion of the management, theultimate disposition of these matters will not have a material adverse effecton the Company’s financial condition, results of operations or liquidity.

 

**Item 2****.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Overview**

 

From time to time, the Company may publishforward-looking statements relating to certain matters, including anticipatedfinancial performance, business prospects, the future opening ofCompany-operated and franchised restaurants, anticipated capital expenditures,and other matters.  All statements otherthan statements of historical fact contained in the Form 10-Q or in any otherreport of the Company are forward-looking statements.  The Private Securities Litigation Reform Act of 1995 provided asafe harbor for forward-looking statements. In order to comply with the terms of that safe harbor, the Company notesthat a variety of factors, individually or in the aggregate, could cause theCompany’s actual results and experience to differ materially from the anticipatedresults or other expectations expressed in the Company’s forward-lookingstatements including, without limitation, the following:  the ability of the Company or its franchisesto obtain suitable locations for restaurant development; consumer spending trendsand habits; competition in the restaurant segment with respect to price,service, location, food quality and personnel resources; weather conditions inthe Company’s operating regions; laws and government regulations; generalbusiness and economic conditions; availability of capital; success of operatinginitiatives and marketing and promotional efforts; and changes in accountingpolicies.  In addition, the Companydisclaims any intent or obligation to update those forward-looking statements.

 

The Company operated and franchised a total of 171restaurants located in 22 states, including seven Company-operated restaurantsand 164 franchised restaurants as of September 30, 2003.  The restaurants include a family steakhouseconcept and a steak and buffet concept.

 

###### **Results ofOperations**

 

Net income for the three-month and nine-month periodsended September 30, 2003 was $249,460 and $653,794 as compared to net loss of($380,534) and ($385,497) for the three-month and nine-month periods endedSeptember 30, 2002.  The net lossesincurred in 2002 are primarily attributable to the following: recordingimpairment and expenses for the five closed Company-operated restaurantslocated in Louisiana, totaling $69,000 and $1,095,000 for the three-month andnine-month periods ended September 30, 2002; recording impairment and expenseson the five Austins locations totaling $500,000 for the three-month andnine-month periods ended September 30, 2002; and expenses totalingapproximately $453,000 for the three-month and nine-month periods endedSeptember 30, 2002 related to the dissident group of four shareholders seekingto replace six of the Company’s board of directors.

 

The following table sets forth for the periodspresented the percentage relationship to total revenues of certain itemsincluded in the consolidated statements of operations and certain restaurantdata for the periods presented:

 

12

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|                                              |   | **Three-Months  Ended September 30,** |   | **Nine-Months  Ended September 30,** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                              |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Revenues:                                         |   |                                  |   |                                 |   |   |   |   |   |
| Company-operated restaurants                      |   | 76.1                                  | %      | 80.4                                 | %      | 75.7 | % | 81.2 | % |
| Franchise operations                              |   | 22.0                                  |   | 18.0                                 |   | 22.4 |   | 17.3 |   |
| Other                                             |   | 1.9                                   |   | 1.6                                  |   | 1.9 |   | 1.5 |   |
| Total revenues                                    |   | 100.0                                 |   | 100.0                                |   | 100.0 |   | 100.0 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Costs and expenses:                               |   |                                  |   |                                 |   |   |   |   |   |
| Cost of Company-operated restaurants              |   | 51.3                                  |   | 55.4                                 |   | 51.5 |   | 55.4 |   |
| Cost of franchise operations                      |   | 7.7                                   |   | 6.7                                  |   | 6.9 |   | 6.4 |   |
| Other cost of operations                          |   | 1.4                                   |   | 1.2                                  |   | 1.5 |   | 1.1 |   |
| Restaurant operating expenses                     |   | 15.9                                  |   | 19.4                                 |   | 16.2 |   | 18.9 |   |
| General and administrative                        |   | 9.1                                   |   | 12.4                                 |   | 9.9 |   | 8.3 |   |
| Depreciation and amortization                     |   | 5.7                                   |   | 5.6                                  |   | 5.8 |   | 5.6 |   |
| Closed Company-operated restaurants               |   | —                                |   | 7.8                                  |   | — |   | 6.8 |   |
| Total costs and expenses                          |   | 91.1                                  |   | 108.5                                |   | 91.8 |   | 102.5 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss) from operations                     |   | 8.9                                   |   | (8.5                                 | )      | 8.2 |   | (2.5 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Other income (expense)                            |   | (1.7                                  | )      | 0.1                                  |   | (1.7 | ) | (0.1 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss) before income tax expense (benefit) |   | 7.2                                   |   | (8.4                                 | )      | 6.5 |   | (2.6 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Income tax expense (benefit)                      |   | 2.7                                   |   | (3.2                                 | )      | 2.5 |   | (1.0 | ) |
| Net income (loss)                                 |   | 4.5                                   | %      | (5.2                                 | )%     | 4.0 | % | (1.6 | )% |

 
|                                    |   | **Three-Months  Ended September 30,** |   | **Nine-Months  Ended September 30,** |   |
|-----------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                    |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                    |   |                                  |   |                                 |   |   |   |   |   |
| **Restaurant  Data**                    |   |                                  |   |                                 |   |   |   |   |   |
| Number of Company-Operated Restaurants: |   |                                  |   |                                 |   |   |   |   |   |
| Beginning of period                     |   | 7                                     |   | 14                                   |   | 7 |   | 17 |   |
| Opened                                  |   | —                                |   | —                               |   | — |   | — |   |
| Closed                                  |   | —                                |   | 3                                    |   | — |   | 3 |   |
| Franchised                              |   | —                                |   | —                               |   | — |   | 3 |   |
| End of period                           |   | 7                                     |   | 11                                   |   | 7 |   | 11 |   |
|                                    |   |                                  |   |                                 |   |   |   |   |   |
| Number of U.S. Franchised Restaurants:  |   |                                  |   |                                 |   |   |   |   |   |
| Beginning of period                     |   | 170                                   |   | 203                                  |   | 186 |   | 215 |   |
| Opened                                  |   | —                                |   | 1                                    |   | — |   | 2 |   |
| Closed                                  |   | 6                                     |   | 12                                   |   | 22 |   | 28 |   |
| Franchised                              |   | —                                |   | —                               |   | — |   | 3 |   |
| End of period                           |   | 164                                   |   | 192                                  |   | 164 |   | 192 |   |

 

13

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**Revenues**

 

Company-operatedrestaurants revenue decreased $1.6 million (27.7%) to $4.3 million for thethree-month period ended September 30, 2003 as compared to $5.9 million for thecomparable three-month period ended September 30, 2002.  Revenues for Company-operated restaurantsdecreased $6.8 million (35.6%) to $12.3 million for the nine-month period endedSeptember 30, 2003 as compared to $19.1 million for the comparable nine-monthperiod ended September 30, 2002. The three-month and nine-month decreases overthe respective comparable prior periods is attributable to the closing ofunder-performing company restaurants and the transfer of certain companyoperations to franchise units during 2002.

 

Franchise and otherrevenues decreased 6.8% to $1.3 million for the three-month period endedSeptember 30, 2003 as compared to $1.4 million for the comparable three-monthperiod ended September 30, 2002. Franchise and other revenues decreased 10.4% to $3.9 million for thenine-month period ended September 30, 2003 as compared to $4.4 million for thecomparable nine-month period ended September 30, 2002.  The decrease is attributable to lessfranchised stores in the system at September 30, 2003 as compared to September30, 2002.

 

**Costsand Expenses**

 

Cost of Company-operatedrestaurants, consisting of food, beverage, and employee costs decreased $1.2million (29.3%) for the three-month period ended September 30, 2003 from $4.1million in 2002 to $2.9 million in 2003 and as a percentage of total revenuesfrom 55.4% in 2002 to 51.3% in 2003. For the nine-month period ended September 30, 2003, cost ofCompany-operated restaurants decreased $4.6 million (35.7%) from $13.0 millionin 2002 to $8.4 million in 2003 and as a percent of total revenues from 55.4%in 2002 to 51.5% in 2003.  The decreasesare due to fewer Company-operated restaurants in 2003 due to the closing ofunder-performing Company restaurants in 2002 and the franchising of three unitsin 2002.

 

Cost of franchiseoperations and other cost of operations as a percentage of total revenues was9.1% and $508,000 for the three-month period ended September 30, 2003 comparedto 7.9% and $577,000 in 2002.  For thenine-month period ended September 30, 2003, cost of franchise operations andother cost of operations as a percentage of total revenues was 8.4% and $1.4million compared to 7.5% and $1.7 million for the nine-month period endedSeptember 30, 2002.  The decrease isattributable to less franchised stores in the system at September 30, 2003.

 

Restaurant operatingexpenses, which include utilities, insurance, maintenance, rent and other suchcosts of the Company-operated restaurants, decreased $530,000 (37.4%) for thethree-month period ended September 30, 2003 over prior year’s comparableperiod.  For the nine-month period endedSeptember 30, 2003 restaurant operating expenses decreased $1.8 million (40.9%)over the prior year’s comparable period. The majority of the decrease is due tothe closing and franchising of Company-operated restaurants during 2002.  These expenses as a percentage of totalrevenues decreased slightly to 15.9% and 16.2% in 2003 from 19.4% and 18.9% in2002, respectively.  The decrease isattributable to closing under-performing Company operations.

 

For the three-monthperiods ended September 30, 2003 and 2002, general and administrative expenseswere $509,000 and $906,000, respectively and as a percentage of total revenuewere 9.1% and 12.4% respectively.  Forthe nine-month periods ended September 30, 2003 and 2002, general andadministrative expenses were $1.6 million and $2.0 million respectively and asa percentage of total revenue were 9.9% and 8.3% respectively.  The decrease for the nine-month period endedSeptember 30,2003 over the comparable prior period is primarily due toadditional legal fees incurred for litigation matters, as well as feesassociated with reimbursement to shareholders in 2003 that were involved in theproxy contest and settlement in 2002.

 

14

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Depreciation andamortization expense decreased $93,000 for the three-month period endedSeptember 30, 2003 versus the comparable period in 2002 and $363,000 for thenine-month period ended September 30 2003 versus the comparable period in 2002,primarily due to closings of under-performing Company-operated restaurants andretirement of their related long-lived assets.

 

Closed Company-operatedrestaurants expense of $569,000 and $1.6 million for the three-month andnine-month periods ended September 30, 2002 is due to the impairment andaccrued expenses recorded for the five locations in the Louisiana market andfour locations run as Austins Steak & Saloon in Omaha, Nebraska and onelocation in Scottsdale, Arizona.

 

**Other Income (Expense)**

 

Interest expensedecreased $14,000 and $42,000 for the three-month and nine month periods endedSeptember 30, 2003 versus the comparable period in 2002 due to a lower averageprincipal outstanding balance comparing the respective periods and to lowerinterest rates in 2003.  Interest incomefluctuates according to the levels of available and investable cashbalances.  The Company employs a cashmanagement system whereby available balances are invested on an overnightbasis.

 

**Income Tax Expense (Benefit)**

 

Income tax expense(benefit) is directly affected by the levels of pretax income (loss).  The Company’s effective tax rate wasapproximately 38.0% for the three-month and nine-month periods ended September30, 2003 and 2002.

 

**Liquidityand Capital Resources**

 

As is customary in therestaurant industry, the Company has operated with negative working capital.  Historically, the Company has leased themajority of its restaurants and through a strategy of controlled growth hasfinanced expansions from operating cash flow, proceeds from the sale of commonstock, the utilization of the Company’s line of credit and long-term debtprovided by various lenders.

 

Cash flows provided byoperating activities were $1.9 million in 2003 compared to $1.1 million in2002. During the first nine months of 2003, depreciation and amortization of$945,000, net income of $654,000, increase in trade accounts receivable of$208,000 offset by decreases in accounts payables and accrued expenses of$501,000 were the major items.  During2002, cash flows provided by operations were primarily due to a $1.2 milliondecrease in accounts payable and net loss of $(385,000), offset by depreciationand amortization of $1.3 million, impairment to property and equipment of$826,000, and closed Company-operated restaurants expense accrual of$500,000.  Net cash provided byinvesting activities of $295,000 in 2003 included $414,000 proceeds from thesale of an asset held for sale offset by expenditures related to property andequipment of $119,000.  Net cash used ininvesting activities of $136,000 in 2002 was primarily for expenditures relatedto property and equipment. Net cash used in financing activities of $1.2million in 2003 was primarily for repayment of long-term debt, reduction ofcredit line and bank overdraft and repurchase of common stock.  Net cash used in financing activities of$1.1 million in 2002 was primarily for repayment of long-term debt and thepayment of two cash dividends to shareholders during 2002 totaling $365,000which included a dividend that was declared in 2001.

 

Management continues toreview available financing alternatives to provide cash for future expansion,restructure existing debt, and provide additional working capital; however,management believes existing financing provides adequate funding.

 

15

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**CRITICALACCOUNTING POLICIES**

 

**FranchiseRevenue**

 

Initial franchise feesare recognized when all material services have been substantially performed bythe Company and the restaurant has opened for business.  Franchise royalties, which are based on apercentage of monthly sales, are recognized as income on the accrual basis.

 

**TradeAccounts and Notes Receivable and Allowance for Doubtful Accounts**

 

In connection withfranchise fees charged to our franchisees, we have trade accounts and notesreceivable outstanding from our franchisees at any given time.  We review outstanding trade accounts andnotes receivable monthly and record allowances for doubtful accounts as deemedappropriate for certain individual franchisees.  In determining the amount of allowance for doubtful accounts tobe recorded, we consider the age of the receivable, the financial stability ofthe franchisee, discussions that may have been had with the franchisee and ourjudgement as to the overall collectibility of the receivable from thatfranchisee.

 

**Franchise Royalty Contracts**

 

Franchise royaltycontracts are amortized on a straight-line basis over fifteen years, theestimated average life of the franchise agreements.  The Company assesses the recoverability of this intangible assetby determining whether the amortization of the franchise royalty contractsbalance over their remaining life can be recovered through indicated futureoperating cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized for theamount by which the carrying amount of the asset exceeds the fair value of theasset.

 

**Goodwill**

 

Goodwill represents theexcess of purchase price over fair vale of net assets of businessacquired.  The Company applies theprovisions of Statement of Financial Accounting Standards (SFAS) No. 142, *Goodwill andOther Intangible Assets.* Goodwill and intangible assets acquired in a purchase businesscombination and determined to have an indefinite useful life are not amortized,but instead tested for impairment at least annually in accordance with theprovisions of SFAS No. 142.

 

**Impactof Inflation**

 

The impact of inflationon the costs of food and beverage products, labor and real estate can affectthe Company’s operations.  Over the pastfew years, inflation has had a lesser impact on the Company’s operations due tothe lower rates of inflation in the nation’s economy and economic conditions inthe Company’s market areas.

 

Management believes theCompany has historically been able to pass on increased costs through certainselected menu price increases and has offset increased costs by increasedproductivity and purchasing efficiencies, but there can be no assurance thatthe Company will be able to do so in the future.  Management anticipates that the average cost of restaurant realestate leases and construction cost could increase in the future which couldaffect the Company’s ability to expand. In addition, mandated health care or additional increases in the federalor state minimum wages could significantly increase the Company’s costs ofdoing business.

 

**Impactof Recently Issued Accounting Standards**

 

In December 2002, theFASB issued SFAS No. 148 *Accounting for Stock-Based Compensation – Transitionand Disclosure, an amendment of FASB Statement No. 123.*  This

 

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Statement amends FASB Statement No. 123 *Accountingfor Stock-Based Compensation*, to provide alternative methods oftransition of voluntary change to the fair value method of accounting forstock-based employee compensation.  Inaddition, this Statement amends the disclosure requirements of Statement No.123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method on reported results.  The adoption of the disclosure provisions of SFAS No. 148 did nothave a material effect on the Company’s consolidated financial position,results of operations or cash flows of the Company.

 

In November 2002, theFASB issued Interpretation (FIN) No. 45 *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees Including Indirect Guarantees of Indebtedness of others*,which elaborates on the disclosures to be made by a guarantor in its interimand annual financial statements about its obligations under certain guaranteesthat it has issued.  It also clarifiesthat a guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The initial recognition andinitial measurement provisions of FIN No. 45 are applicable on a prospectivebasis to guarantees issued or modified after December 31, 2002, irrespective ofthe guarantor’s fiscal year end.  Theadoption of FIN No. 45 did not have a material effect on the Company’sconsolidated financial position, results of operations or cash flows of theCompany.

 

In January 2003, the FASBissued Interpretation No. 46 *Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51. *ThisInterpretation addresses the consolidation by business enterprises of variableinterest entities as defined in the Interpretation.  The Interpretation applies immediately to variable interestentities created after January 31, 2003, and to variable interests in variableinterest entities obtained after January 31, 2003.  The application of this Interpretation did not have any impact onthe Company’s consolidated financial position, results of operations or cashflows of the Company.

 

As of September 30, 2003,there are no new accounting standards issued, but not yet adopted by theCompany, which are expected to be applicable to the Company’s consolidatedfinancial position, operating results or financial statement disclosures.

 

**Item 3****.****           Quantitativeand Qualitative Disclosure about Market Risk**

 

The Company does notengage in derivative financial instruments or derivative commodityinstruments.  As of September 30, 2003,the Company’s financial instruments are not exposed to significant market riskdue to foreign currency exchange risk or commodity price risk.  However, the Company is exposed to marketrisk related to interest rates.

 

The table below providesinformation about the Company’s debt obligations that are sensitive to changesin interest rates.  The table presentsprincipal cash flows and related weighted average interest rates by expectedmaturity dates.

 

Debt obligations held for other than trading purposesat September 30, 2003 (dollars in thousands):

 

EXPECTED MATURITY DATE

 
|                   |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Estimated  Fair Value** |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|---------------------------|--------|
| Long-term debt         |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Fixed Rate             |   | $        | 135    |     | $      | 532      |   | $        | 505    |     | $      | 522            |   | $         | 361    |                      | $      | 2,150 |   | $ | 4,205 |   | $ | 4,947 |   |
| Average Interest  Rate |   | 9.95     | %      | 9.94     | %      | 9.94     | %      | 9.94     | %      | 9.94     | %      | 10.06          | %      | 10.00     | %      |                      |   |
|                        |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |                           |        |  |  |  |  |  |  |  |  |

 

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**Item 4****.  Controls and Procedures**

 

As required by Rule13a-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as of the end of the period covered by this report, the Company carriedout an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. This evaluation was carried out under the supervision and with theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Company’s Chief Operating Officer who is also theCompany’s Chief Financial Officer. Based upon their evaluation, the officers concluded that the Company’sdisclosure controls and procedures are effective.  There have been no significant changes in the Company’s internalcontrols, or in other factors, which could significantly affect internalcontrols subsequent to the date the Company carried out its evaluation.

 

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in Company reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms. Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed in Company reports filed under the Exchange Act is accumulated andcommunicated to management, including the Company’s President and ChiefExecutive Officer and the Chief Operating and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

 

**PART II****. OTHER INFORMATION**

 

Item 1.             Legal Proceedings

 

The Company filed anaction in the First Judicial District Court for the Parish of Caddo, Louisianain October, 2001, against Kenneth A. Greenway, and others as owners and lessorsof five restaurant locations requesting (1) lessors to allow a subleaseaccording to terms of the lease; (2) payment of lease revenues due to theCompany from Mr. Greenway for billboards located on three of the restaurantlocations; (3) to reimburse the Company for damages incurred as a result oflessors’ breach of a warranty within the lease that the equipment was in normaloperating condition with no major repairs required; and (4) to make repairsrequired as a result of hail damage for which lessor has collected insuranceproceeds and cash payments from the Company.

 

Mr. Greenway filed acounterclaim against the Company, seeking to evict the Company from the fiverestaurant locations, from which the Company departed when the lease expired onSeptember 30, 2002.  Mr. Greenwayalleged that the Company failed to maintain the properties in first classcondition.  Mr. Greenway prevailed onhis counterclaim the lawsuit at the district court level and won an appeal tothe second Circuit of the Louisiana State Court of Appeals in June 2002.  The Company filed a writ with the LouisianaSupreme Court, which was rejected.

 

In January 2003, Mr.Greenway amended his counterclaim seeking damages for an alleged failure by theCompany to deliver the properties, at eviction, in the condition in which theproperties had been maintained at the inception of the lease.  Mr. Greenway has also alleged that theCompany removed numerous items from the leased premises and has refused toreturn these items.  Company managementbelieves the Company completed any necessary repairs before leaving the leasedpremises.

 

The Company’s claims andthe defendant’s counterclaim for alleged damage are proceeding through thepretrial discovery phase.  The DistrictCourt has recently rejected cross-motions for summary judgement with regard tothe right to certain billboard revenue generated by the premises.

 

Management believes thatthe Company has meritorious claims against the lessors as a result of itslitigation and that even if the lessors were to prevail on their claimsregarding the condition and equipment of the premises, those costs would beapproximately offset by the

 

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Company’s claims against lessors.  Management does not anticipate a materialeffect upon its financial condition, results of operations or liquidity as aresult of this litigation

 

Item 2.             Change inSecurities and Use of Proceeds – N/A

 

Item 3.             Defaults UponSenior Securities – N/A

 

Item 4.             Submission ofMatters to a Vote of Security Holders – N/A

(See Form 8-K, filed October 1, 2003)

 

Item 5.             Other Information– N/A

 

Item 6.             Exhibits andReports on Form 8-K –

 

a)              Exhibits:

31.1   Section 302 Certificate ofChief Executive Officer

31.2    Section 302 Certificate ofChief Financial Officer

32.1         Section 906 Officer’sCertification

32.2         Section 906 Officer’sCertification

 

b)             Reports on Form 8-K

Form 8-K, October 1, 2003

 

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**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 theundersigned hereunto duly authorized.

 
|                           |   | **Western Sizzlin Corporation  (formerly Austins Steaks & Saloon, Inc.)** |
|--------------------------------|--------|-------------------------------------------------------------------------------|
|                           |   |                                                                          |
|                           |   | By:                                                                           | /s*/  James C.  Verney* |   |
|                           |   | James C. Verney                                                               |
|                           |   | President and Chief  Executive Officer                                        |
|                           |   |                                                                          |
|                           |   | By:                                                                           | */s/  Robyn B. Mabe* |   |
|                           |   | Robyn B. Mabe                                                                 |
|                           |   | Chief Financial Officer  and Chief Operating Officer                          |
|                           |   |                                                                          |
|                           |   |                                                                          |
| Date:   November 14, 2003 |   |                                                                          |
|                                |        |                                                                               |  |  |  |

 

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