**U.S. SECURITIES AND EXCHANGECOMMISSION**

### **Washington, D.C. 20549**

### ** **

**FORM 10-Q**

 

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

 

**For the period ended September 30, 2004**

 

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

 

#### **For the transition period from                   to                   **

#### ** **

**Commission file number 0-25366**

 

**WESTERN SIZZLIN CORPORATION**

(formally AustinsSteaks & Saloon, Inc.)(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **86-0723400**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1338 Plantation Road**

**Roanoke, Virginia 24012**

(Address of principal executive offices)

 

**(540) 345-3195**

(Issuer’s telephone number)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15 (d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

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

 

As of November 14,2004, there were 11,908,571 shares of the issuer’s common stock outstanding.

 

 

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**WESTERN SIZZLIN CORPORATION**

**(formally Austins Steaks & Saloon, Inc.)**

**Form 10-Q Index**

**Nine Months Ended September 30, 2004**

 
| **PART I.   FINANCIAL INFORMATION** |
|------------------------------------------|
| ** **                               | ** ** |   |
| **Item 1.**                              | **Financial Statements  (Unaudited)** |   |
|                                     |   |   |
|                                     | Consolidated  Balance Sheets – September 30, 2004 and December 31, 2003 | 2 |
|                                     |   |   |
|                                     | Consolidated  Statements of Income - Three Months and Nine Months Ended September 30,  2004 and 2003 | 3 |
|                                     |   |   |
|                                     | Consolidated  Statement of Changes in Stockholders’ Equity - Nine Months Ended September 30,  2004 | 4 |
|                                     |   |   |
|                                     | Consolidated  Statements of Cash Flows - Nine Months Ended September 30, 2004 and 2003 | 5 |
|                                     |   |   |
|                                     | Notes to  Consolidated Financial Statements | 6-11 |
|                                     |   |   |
| **Item 2.**                              | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 11-16 |
|                                     |   |   |
| **Item  3.**                             | **Quantitative  and Qualitative Disclosure about Market Risk** | 16 |
|                                     |   |   |
| **Item 4.**                              | **Controls and  Procedures**  | 16 |
|                                     |   |   |
| **PART II.  OTHER INFORMATION**     |
|                                     |   |   |
| **Item  1.**                             | **Legal  Proceedings** | 17 |
|                                     |   |   |
| **Item 2.**                              | **Change in Securities and  Use of Proceeds** | 17 |
|                                     |   |   |
| **Item 3.**                              | **Defaults Upon Senior  Securities** | 17 |
|                                     |   |   |
| **Item 4.**                              | **Submission of Matters to  a Vote of Security Holders** | 17 |
|                                     |   |   |
| **Item 5.**                              | **Other Information** | 17 |
|                                     |   |   |
| **Item 6. **                        | **Exhibits and  Reports on Form 8-K**  | 17 |
|                                     |   |   |
| **Signatures**                           |   |

 

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**PART I****.  FINANCIALINFORMATION**

 

**Item 1.  Financial Statements**

 

**WESTERN SIZZLIN CORPORATION(formally Austsins Steaks & Saloon, Inc.)**

Consolidated Balance SheetsSeptember 30, 2004 and December 31, 2003

 
|                                                                                                                            |   | **September 30,  2004** |       | **December 31,  2003** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                                                                                                                            |   | **(unaudited)**              |       |                        |   |
| **Assets**                                                                                                                      |   |                         |       |                        |   |
| Current assets:                                                                                                                 |   |                         |       |                        |   |
| Cash and cash equivalents                                                                                                       |   | $                            | 2,087,401  |                        | $      | 682,730 |   |
| Short-term investments, restricted under long-term  debt agreement                                                              |   | 252,801                      |       | 251,426                     |   |
| Trade accounts receivable, net of allowance for  doubtful accounts of $404,231 in 2004 and $329,112 in 2003                     |   | 831,403                      |       | 838,931                     |   |
| Current installments of notes receivable                                                                                        |   | 217,225                      |       | 229,273                     |   |
| Other receivables                                                                                                               |   | 49,955                       |       | 43,329                      |   |
| Inventories                                                                                                                     |   | 91,676                       |       | 66,390                      |   |
| Prepaid expenses                                                                                                                |   | 380,828                      |       | 413,824                     |   |
| Deferred income taxes                                                                                                           |   | 382,428                      |       | 382,428                     |   |
| Total current assets                                                                                                            |   | 4,293,717                    |       | 2,908,331                   |   |
| Notes receivable, less allowance for doubtful  accounts of $69,345 in 2004 and $69,345 in 2003, excluding current  installments |   | 1,093,620                    |       | 1,170,804                   |   |
| Property and equipment, net of accumlated  depreciation of $5,929,973 in 2004 and $4,667,923 in 2003                            |   | 2,911,398                    |       | 3,124,807                   |   |
| Franchise royalty contracts, net of accumulated  amortization of $6,775,675 in 2004 and $6,302,954 in 2003                      |   | 2,678,756                    |       | 3,151,477                   |   |
| Goodwill                                                                                                                        |   | 4,310,200                    |       | 4,310,200                   |   |
| Financing costs, net of accumulated amortization of  $113,895 in 2004 and $100,100 in 2003                                      |   | 86,315                       |       | 100,110                     |   |
| Deferred income taxes                                                                                                           |   | 977,384                      |       | 1,280,025                   |   |
| Asset held for sale                                                                                                             |   | 300,000                      |       | 700,278                     |   |
| Other assets, net                                                                                                               |   | 401,848                      |       | 148,044                     |   |
|                                                                                                                            |   | $                            | 17,053,238 |                        | $      | 16,894,076 |   |
|                                                                                                                            |   |                         |       |                        |   |
| **Liabilities and Stockholders’ Equity**                                                                                   |   |                         |       |                        |   |
| Current  liabilities:                                                                                                           |   |                         |       |                        |   |
| Current installments of long-term debt                                                                                          |   | $                            | 517,315    |                        | $      | 529,645 |   |
| Accounts payable                                                                                                                |   | 1,031,497                    |       | 991,328                     |   |
| Accrued expenses and other                                                                                                      |   | 1,232,404                    |       | 1,246,785                   |   |
| Total current liabilities                                                                                                       |   | 2,781,216                    |       | 2,767,758                   |   |
| Long-term debt, excluding current installments                                                                                  |   | 3,169,501                    |       | 3,548,971                   |   |
| Other long-term liabilities                                                                                                     |   | 34,467                       |       | 50,000                      |   |
| Commitments and contingincies                                                                                                   |   |                         |       |                        |   |
| Stockholders’ equity:                                                                                                      |   |                         |       |                        |   |
| Common stock; $.01 par value. Authorized 20,000,000  shares; 11,908,571 issued and outstanding in 2004 and 2003                 |   | 119,086                      |       | 119,086                     |   |
| Additional paid-in capital                                                                                                      |   | 8,589,578                    |       | 8,589,578                   |   |
| Retained earnings                                                                                                               |   | 2,359,390                    |       | 1,818,683                   |   |
| Total stockholders’ equity                                                                                                 |   | 11,068,054                   |       | 10,527,347                  |   |
|                                                                                                                            |   | $                            | 17,053,238 |                        | $      | 16,894,076 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**WESTERNSIZZLIN CORPORATION(formally Austins Steaks & Saloon, Inc.)**

Consolidated Statements of Income

(Unaudited)

 
| ** **                           | ** ** | **Three Months  Ended September 30** | ** ** | **Nine Months  Ended September 30** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                  | ** ** | **2003**                                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                            |       |                                      |       |                                     |       |   |   |   |   |
| Company-operated restaurants         |       | $                                         | 4,475,230  |                                     | $          | 4,242,932 |   | $ | 12,888,541 |   | $ | 12,276,250 |   |
| Franchise operations                 |       | 1,127,043                                 |       | 1,229,320                                |       | 3,413,090 |   | 3,627,769 |   |
| Other                                |       | 99,527                                    |       | 102,670                                  |       | 294,194 |   | 320,791 |   |
| Total revenues                       |       | 5,701,800                                 |       | 5,574,922                                |       | 16,595,825 |   | 16,224,810 |   |
|                                 |       |                                      |       |                                     |       |   |   |   |   |
| Costs and expenses:                  |       |                                      |       |                                     |       |   |   |   |   |
| Cost of Company-operated restaurants |       | 3,030,878                                 |       | 2,857,604                                |       | 8,787,085 |   | 8,355,222 |   |
| Cost of franchise operations         |       | 511,599                                   |       | 430,586                                  |       | 1,451,630 |   | 1,120,910 |   |
| Other costs of operations            |       | 76,770                                    |       | 77,503                                   |       | 225,547 |   | 244,000 |   |
| Restaurant operating expenses        |       | 932,312                                   |       | 886,490                                  |       | 2,754,730 |   | 2,626,847 |   |
| General and administrative           |       | 469,403                                   |       | 508,860                                  |       | 1,432,638 |   | 1,608,506 |   |
| Depreciation and amortization        |       | 291,373                                   |       | 317,920                                  |       | 898,959 |   | 945,484 |   |
| Total costs and expenses             |       | 5,312,335                                 |       | 5,078,963                                |       | 15,550,589 |   | 14,900,969 |   |
| Income from operations               |       | 389,465                                   |       | 495,959                                  |       | 1,045,236 |   | 1,323,841 |   |
|                                 |       |                                      |       |                                     |       |   |   |   |   |
| Other income (expense):              |       |                                      |       |                                     |       |   |   |   |   |
| Interest expense                     |       | (95,239                                   | )          | (109,209                                 | )          | (294,603 | ) | (346,894 | ) |
| Interest income                      |       | 20,026                                    |       | 23,927                                   |       | 62,415 |   | 70,727 |   |
| Other                                |       | 7,552                                     |       | (8,322                                   | )          | 59,027 |   | 6,857 |   |
|                                 |       | (67,661                                   | )          | (93,604                                  | )          | (173,161 | ) | (269,310 | ) |
| Income before income tax expense     |       | 321,804                                   |       | 402,355                                  |       | 872,075 |   | 1,054,531 |   |
|                                 |       |                                      |       |                                     |       |   |   |   |   |
| Income tax expense                   |       | 122,274                                   |       | 152,895                                  |       | 331,368 |   | 400,737 |   |
| Net income                           |       | $                                         | 199,530    |                                     | $          | 249,460 |   | $ | 540,707 |   | $ | 653,794 |   |
| Earnings per share:                  |       |                                      |       |                                     |       |   |   |   |   |
|                                 |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                |       | $                                         | .02        |                                     | $          | .02 |   | $ | .05 |   | $ | .05 |   |
| Diluted                              |       | $                                         | .02        |                                     | $          | .02 |   | $ | .05 |   | $ | .05 |   |

 

See accompanying notes to consolidated financial statements

 

3

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**WESTERNSIZZLIN CORPORATION**

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

Consolidated Statement of Changes in Stockholders’Equity

Nine Months Ended September 30,2004

(Unaudited)

 
| ** **                        | ** ** | ** **       | ** ** | ** **  | ** **             | **Additional  Paid-in  Capital** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------------|------------|-------------|------------------------|----------------------------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Common Stock** | ** ** | ** **  | **Retained  Earnings** | ** **                       | ** ** | ** ** |
| ** **                        | ** ** | **Shares**       | ** ** | **Dollars** | ** **             | ** **                       | ** ** | **Total**  | ** ** |
| Balances, December 31, 2003  |       | 11,908,571       |       | $           | 119,086                |                             | $          | 8,589,578  |       | $          | 1,818,683  |   | $ | 10,527,347 |   |
|                              |       |             |       |        |                   |                             |       |       |       |       |       |
| Net Income                        |       | —           |       | —      |                   | —                           |       | 540,707    |       | 540,707    |       |
|                              |       |             |       |        |                   |                             |       |       |       |       |       |
| Balances, September 30, 2004 |       | 11,908,571       |       | $           | 119,086                |                             | $          | 8,589,578  |       | $          | 2,359,390  |   | $ | 11,068,054 |   |

 

See accompanying notes to consolidated financial statements

 

4

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**WESTERN SIZZLIN CORPORATION**

**(formally Austin Steak & Saloon,Inc.)**

Consolidated Statements of Cash Flows

Nine Months Ended September 30,2004 and 2003

(Unaudited)

 
| ** **                                                                        | ** ** | **September** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------|------------|
| ** **                                                                        | ** ** | **2004**      | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                             |       |          |       |   |   |
| Net income                                                                        |       | $             | 540,707    |   | $ | 653,794 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities |       |          |       |   |   |
| Depreciation and amortization of property and  equipment                          |       | 412,443       |       | 453,182 |   |
| Amortization of franchise royalty contracts and  financing costs                  |       | 486,516       |       | 492,302 |   |
| (Gain) Loss on disposal of fixed assets                                           |       | (945          | )          | 351 |   |
| Gain on sale of asset held for sale                                               |       |          |       | (790 | ) |
| Provision for deferred income taxes                                               |       | 302,641       |       |   |   |
| Provision for bad debts                                                           |       | 75,119        |       | 37,545 |   |
| (Increase) decrease in:                                                           |       |          |       |   |   |
| Trade accounts receivable                                                         |       | (67,591       | )          | 207,731 |   |
| Notes receivable                                                                  |       | 89,232        |       | 111,474 |   |
| Other receivables                                                                 |       | (6,626        | )          | 44,235 |   |
| Inventories                                                                       |       | (25,286       | )          | (2,212 | ) |
| Prepaid expenses                                                                  |       | 32,996        |       | 30,490 |   |
| Other assets                                                                      |       | 110,284       |       | (55,935 | ) |
| Income taxes refundable                                                           |       | —        |       | 47,198 |   |
| Increase (decrease) in:                                                           |       |          |       |   |   |
| Accounts payable                                                                  |       | 40,169        |       | (339,353 | ) |
| Accrued expenses and other                                                        |       | (14,381       | )          | (161,233 | ) |
| Income taxes payable                                                              |       | —        |       | 295,031 |   |
| Other liabilities                                                                 |       | (15,533       | )          | 50,000 |   |
|                                                                              |       |          |       |   |   |
| Net cash provided by operating activities                                         |       | 1,959,745     |       | 1,863,810 |   |
| Cash flows from investing activities:                                             |       |          |       |   |   |
| Short-term investments                                                            |       | (1,375        | )          | — |   |
| Additions to property and equipment                                               |       | (169,020      | )          | (119,186 | ) |
| Proceeds from sale of assets held for sale/disposal                               |       | 7,121         |       | 414,390 |   |
|                                                                              |       |          |       |   |   |
| Net cash (used in) provided by investing activities                               |       | (163,274      | )          | 295,204 |   |
| Cash flows from financing activities:                                             |       |          |       |   |   |
| Net decrease in bank overdraft                                                    |       | —        |       | (346,351 | ) |
| Net increase (decrease) in credit line note payable                               |       | —        |       | (363,180 | ) |
| Proceeds from note payable                                                        |       | —        |       | 450,000 |   |
| Payments on note payable                                                          |       | —        |       | (450,000 | ) |
| Payments on long-term debt                                                        |       | (391,800      | )          | (377,447 | ) |
| Repurchase of common stock                                                        |       | —        |       | (68,183 | ) |
|                                                                              |       |          |       |   |   |
| Net cash used in financing activities                                             |       | (391,800      | )          | (1,155,161 | ) |
|                                                                              |       |          |       |   |   |
| Net increase in cash and cash equivalents                                         |       | 1,404,671     |       | 1,003,853 |   |
|                                                                              |       |          |       |   |   |
| Cash and cash equivalents at beginning of period                                  |       | 682,730       |       | 131,631 |   |
|                                                                              |       |          |       |   |   |
| Cash and cash equivalents at end of period                                        |       | $             | 2,087,401  |   | $ | 1,135,484 |   |
|                                                                              |       |          |       |   |   |
| Supplemental disclosure of cash flow information:                                 |       |          |       |   |   |
| Cash payments for interest                                                        |       | $             | 294,605    |   | $ | 346,888 |   |
| Income taxes paid                                                                 |       | $             | 30,358     |   | $ | 60,474 |   |
|                                                                                   |            |               |            |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

5

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**WESTERNSIZZLIN CORPORATION**

**(formerly Austins Steaks & Saloon, Inc.)**

 

Notes to Consolidated Financial Statements

 

Nine-Months Ended September 30, 2004 and 2003

 

(Unaudited)

 

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

 

Theaccompanying unaudited consolidated financial statements of Western SizzlinCorporation, formerly Austins Steaks & Saloon, Inc. (the “Company”) havebeen prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial reporting information andthe instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements.  In the opinion of management, all materialreclassifications and adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of operations,financial position and cash flows for each period shown have been included.  Operating results for interim periods are notnecessarily indicative of the results for the full year because, among otherthings, the dining 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 accompanying notes.  Forfurther information, refer to the consolidated financial statements and notesthereto included in the Company’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

**RecentlyIssued Accounting Standards**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation (FIN) 46, “Consolidation of Variable Interest Entities – aninterpretation of “Accounting Research Bulletin” (“ARB”) No. 51”. ThisInterpretation is intended to clarify the application of the majority votinginterest requirement of ARB No. 51, “Consolidated Financial Statements”,to certain entities in which equity investors do not have the characteristicsof a controlling financial interest or do not have sufficient equity at riskfor the entity to finance its activities without additional subordinatedfinancial support from other parties. The controlling financial interest may beachieved through arrangements that do not involve voting interests.

 

Subsequentto issuing FIN 46, the FASB issued FIN 46 (revised) (“FIN 46R”), which replacesFIN 46. Among other things, FIN 46R clarifies and changes the definition andapplication of a number of provisions of FIN 46 including de facto agents,variable interests and variable interest entity (“VIE”). FIN 46R also expandsinstances when FIN 46 should not be applied. FIN 46R was issued December 23,2003 and, for the Company, was effective as of the end of the first quarter of2004.

 

TheCompany has a voting interest in WSI ADRF, Inc. (“ADRF”), an entity formed todevelop national, regional and local advertising campaigns and materials forthe benefit of the Company’s franchised and company-owned restaurants.  The company-owned restaurants andsubstantially all of its franchisees are members of ADRF and therefore arerequired to remit a monthly payment to ADRF. These fees, along with contributions received from certain of theCompany’s vendors, are used by ADRF to develop and produce advertising andrelated materials for the company-owned restaurants and the franchisees.  Total revenues of ADRF were approximately$582,000 for the year ended December 31, 2003.

 

The Company determined that ADRF is avariable interest entity but that neither the Company nor its company-ownedstores are the primary beneficiary of ADRF and that the Company is notobligated to absorb the losses of ADRF, if any. Accordingly, the results of ADRF are not

 

6

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consolidated with the Company.   The Company’s maximum exposure to loss as aresult of its involvement with ADRF is limited to reimbursement of the costs ofproviding certain personnel and space to ADRF. The fee charged to ADRF for these services was $36,000 for each of thethree-month periods ended September 30, 2004 and 2003 and $108,000 foreach of the nine-month periods ended September 30, 2004 and 2003.

 

As of September 30,2004, there are no other new accounting standards issued, but not yet adoptedby the Company, which are expected to be applicable to the Company’sconsolidated financial position, operating results or financial statementdisclosures.

 

**(2)****           StockOptions**

 

TheCompany applies the intrinsic-value-based method of accounting prescribed byAccounting Principles Board (APB) Opinion No. 25, *Accountingfor Stock Issued to Employees,* and related interpretations includingFinancial Accounting Standards Board (FASB) Interpretation No. 44,*Accounting for Certain Transactions involving Stock Compensation, aninterpretation of APB Opinion No. 25*, issued in March 2000, toaccount for its fixed-plan stock options. Under this method, compensationexpense is recorded on the date of grant only if the current market price ofthe underlying stock exceeded the exercise price.  SFAS No. 123, *Accountingfor Stock-Based Compensation,* established accounting and disclosurerequirements using 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, *Accounting for Stock-Based Compensation –Transition and Disclosure, an amendment of SFAS No. 123,* amends thedisclosure requirements of SFAS No.123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting for stock-basedcompensation and the effect of the method on reported results.  The Company granted 10,000 stock options toeach director, totaling 100,000, under a Non-Employee Stock Option Plan adoptedby the Company on June 22, 2004. These options immediately vested on the grant date.

 

Thefollowing table illustrates the effect on net income if the fair-value-basedmethod had been applied to all outstanding awards in each period.

 
| ** **                                                                                                                                            | ** ** | **Three-months  ended  September 30,** | ** ** | **Nine-months  ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                                  |       |                                        |       |                                       |       |   |   |   |   |
| Net Income                                                                                                                                            |       |                                        |       |                                       |       |   |   |   |   |
| As reported                                                                                                                                           |       | $                                           | 199,530    |                                       | $          | 249,460 |   | $ | 540,707 |   | $ | 653,794 |   |
| Deduct total stock-based  employee compensation expense determined under fair-value based method for  all outstanding and unvested awards, net of tax |       | 4,030                                       |       | —                                     |       | 46,167 |   | — |   |
|                                                                                                                                                  |       |                                        |       |                                       |       |   |   |   |   |
| Pro forma                                                                                                                                             |       | $                                           | 195,500    |                                       | $          | 249,460 |   | $ | 494,540 |   | $ | 653,794 |   |
|                                                                                                                                                  |       |                                        |       |                                       |       |   |   |   |   |
| Basic and diluted net income  per share                                                                                                               |       |                                        |       |                                       |       |   |   |   |   |
| As reported                                                                                                                                           |       | $                                           | 0.02       |                                       | $          | 0.02 |   | $ | 0.04 |   | $ | 0.05 |   |
| Pro forma                                                                                                                                             |       | $                                           | 0.02       |                                       | $          | 0.02 |   | $ | 0.04 |   | $ | 0.05 |   |
|                                                                                                                                                       |            |                                             |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

**(3)****           Goodwilland Other Intangible Assets**

 

Goodwilland intangible assets deemed to have indefinite lives are reviewed forimpairment and written down and charged to results of operations when theircarrying amount exceeds their estimated fair value. The Company performs anannual impairment test in the fourth quarter, or between yearly tests incertain circumstances, for goodwill. There can be no assurance that futureimpairment tests will not result in a charge to earnings.

 

7

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There were no changes in the netcarrying amount of goodwill for the three and nine-months ended September 30,2004 and 2003.

 

*AmortizingIntangible Assets*

 

Franchise royalty contracts areamortized on a straight-line basis over fifteen years, the estimated averagelife of the franchise agreements.  TheCompany assesses the recoverability of this intangible asset by determiningwhether the amortization of the franchise royalty contracts balance over theirremaining life can be recovered through undiscounted future operating cashflows of the acquired operation.  Theamount of impairment, if any, is measured based on projected discounted futureoperating cash flows using a discount rate reflecting the Company’s averagecost of funds.

 
| ** **                        | ** ** | ** **                  | ** ** | **As of September 30,  2004**          | ** ** | ** **                    | ** ** |
|-----------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **Gross  carrying  amount** | ** ** | **Weighted  average  Amortization  Period** | ** ** | **Accumulated  Amortization** | ** ** |
| **Amortizing intangible assets:** |       |                        |       |                                        |       |                          |       |
| Franchise Royalty Contracts       |       | $                           | 9,454,431  |                                        | 15.0 yrs.  |                          | $          | 6,775,675 |   |
|                                   |            |                             |            |                                             |            |                               |            |  |  |

 

Aggregateamortization expense for amortizing intangible assets for the three andnine-month period ended September 30, 2004 was $157,573 and $472,721,respectively.  Estimated amortizationexpense is $630,295 per year through December 31, 2009.

 

**(4)****           EarningsPer Share**

 

Basicearnings per share excludes dilution and is computed by dividing incomeavailable to common stockholders by the weighted-average number of commonshares outstanding for the period. Diluted earnings per share reflects the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock or resulted in the issuance of common stock thatthen shared in the earnings of the Company. Stock options for 175,000 shares of common stock were not included incomputing diluted earnings per share for the three and nine-month periods endedSeptember 30, 2004 and 2003 because the effect of these options isanti-dilutive.

 

Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted earnings per share computations for the periods indicated:

 
| ** **                                     | ** ** | **Three-months  ended****September 30,** | ** ** | **Nine-  months ended****September 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                      | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                           |       |                                          |       |                                          |       |   |   |   |   |
| Net Income:                                    |       | $                                             | 199,530    |                                          | $          | 249,460 |   | $ | 540,707 |   | $ | 653,794 |   |
|                                           |       |                                          |       |                                          |       |   |   |   |   |
| Weighted average shares  outstanding:          |       |                                          |       |                                          |       |   |   |   |   |
| Weighted average shares  outstanding (basic)   |       | 11,908,571                                    |       | 12,129,446                                    |       | 11,908,571 |   | 12,143,139 |   |
| Dilutive effect of stock  options              |       | —                                        |       | —                                        |       | 71 |   | — |   |
| Weighted average shares outstanding  (diluted) |       | 11,908,571                                    |       | 12,129,446                                    |       | 11,908,642 |   | 12,143,139 |   |
|                                           |       |                                          |       |                                          |       |   |   |   |   |
| Net income per share:                          |       |                                          |       |                                          |       |   |   |   |   |
| Basic                                          |       | $                                             | 0.02       |                                          | $          | 0.02 |   | $ | 0.05 |   | $ | 0.05 |   |
| Diluted                                        |       | $                                             | 0.02       |                                          | $          | 0.02 |   | $ | 0.05 |   | $ | 0.05 |   |
|                                                |            |                                               |            |                                               |            |  |  |  |  |  |  |  |  |  |  |

 

8

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**(5)****                                 ReportableSegments**

 

TheCompany has defined two reportable segments: Company-operated restaurants andfranchising and other.  TheCompany-operated restaurant segment consists of the operations of allCompany-operated restaurants and derives its revenues from restaurantoperations. The franchising and other segment consists of franchise sales andsupport activities and derives its revenues from sales of franchise anddevelopment rights and collection of royalties from franchisees.  Generally, the Company evaluates performanceand allocates resources based on income from operations before income taxes andeliminations.  Administrative and capitalcosts are allocated to segments based upon predetermined rates or actual orestimated resource usage.

 

Reportablesegments are business units that provide different products or services.  Separate management of each segment isrequired because each business unit is subject to different operational issuesand strategies.  Through September 30,2004, all revenues for each business segment were derived from businessactivities conducted with customers located in the United States.  No single external customer accounted for 10percent or more of the Company’s consolidated revenues.

 

Thefollowing table summarizes reportable segment information:

 
| ** **                              | ** ** | **Three-Months  Ended September 30,** | ** ** | **Nine-months  Ended September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                    |       |                                       |       |                                      |       |   |   |   |   |
| Revenues from reportable  segments:     |       |                                       |       |                                      |       |   |   |   |   |
| Restaurants                             |       | $                                          | 4,475,230  |                                      | $          | 4,242,932 |   | $ | 12,888,541 |   | $ | 12,276,250 |   |
| Franchising and other                   |       | 1,226,570                                  |       | 1,331,990                                 |       | 3,707,284 |   | 3,948,560 |   |
| Total revenues                          |       | $                                          | 5,701,800  |                                      | $          | 5,574,922 |   | $ | 16,595,825 |   | $ | 16,224,810 |   |
|                                    |       |                                       |       |                                      |       |   |   |   |   |
| Depreciation and amortization:          |       |                                       |       |                                      |       |   |   |   |   |
| Restaurants                             |       | $                                          | 114,954    |                                      | $          | 133,982 |   | $ | 371,062 |   | $ | 394,457 |   |
| Franchising and other                   |       | 176,419                                    |       | 183,938                                   |       | 527,897 |   | 551,027 |   |
| Total depreciation and  amortization    |       | $                                          | 291,373    |                                      | $          | 317,920 |   | $ | 898,959 |   | $ | 945,484 |   |
|                                    |       |                                       |       |                                      |       |   |   |   |   |
| Interest expense:                       |       |                                       |       |                                      |       |   |   |   |   |
| Restaurants                             |       | $                                          | 94,780     |                                      | $          | 106,717 |   | $ | 293,380 |   | $ | 329,433 |   |
| Franchising and other                   |       | 459                                        |       | 2,492                                     |       | 1,223 |   | 17,461 |   |
| Total interest expense                  |       | $                                          | 95,239     |                                      | $          | 109,209 |   | $ | 294,603 |   | $ | 346,894 |   |
|                                    |       |                                       |       |                                      |       |   |   |   |   |
| Interest income:                        |       |                                       |       |                                      |       |   |   |   |   |
| Restaurants                             |       | $                                          | 19,857     |                                      | $          | 23,486 |   | $ | 59,144 |   | $ | 68,987 |   |
| Franchising and other                   |       | 169                                        |       | 441                                       |       | 3,271 |   | 1,740 |   |
| Total interest income                   |       | $                                          | 20,026     |                                      | $          | 23,927 |   | $ | 62,415 |   | $ | 70,727 |   |
|                                    |       |                                       |       |                                      |       |   |   |   |   |
| Income before income tax  expense:      |       |                                       |       |                                      |       |   |   |   |   |
| Restaurants                             |       | $                                          | 226,066    |                                      | $          | 117,605 |   | $ | 464,460 |   | $ | 163,494 |   |
| Franchising and other                   |       | 95,738                                     |       | 284,750                                   |       | 407,615 |   | 891,037 |   |
| Total income before income tax  expense |       | $                                          | 321,804    |                                      | $          | 402,355 |   | $ | 872,075 |   | $ | 1,054,531 |   |
|                                         |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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| ** **                                     | ** ** | **September  30,  2004** | ** ** | **September  30,  2003** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Gross property and equipment:                  |       |                     |       |                     |       |
| Restaurants                                    |       | $                        | 7,072,713  |                     | $          | 6,241,972 |   |
| Franchising and other                          |       | 888,878                  |       | 1,457,607                |       |
| Total property and equipment                   |       | $                        | 7,961,591  |                     | $          | 7,699,579 |   |
|                                           |       |                     |       |                     |       |
| Expenditures for property and  equipment:      |       |                     |       |                     |       |
| Restaurants                                    |       | $                        | 136,305    |                     | $          | 110,005 |   |
| Franchising and other                          |       | 32,715                   |       | 9,181                    |       |
| Total expenditures for  property and equipment |       | $                        | 169,020    |                     | $          | 119,186 |   |

 

**(6)****                                 Contingencies**

 

In January 2001,the Company executed a series of Master Lease Agreements (“Agreements”)relating to certain franchised properties formerly operated by other parties as“Quincy’s” restaurants (“Former Quincy’s”). Signed copies of these Agreements were required, pursuant to the termsof the document, to be executed by Franchise Financing Corporation of America,now known as General Electric Franchise Finance Corporation, (the “Lessor”), tobe legally binding; however, no signed copies were ever returned to theCompany.  At the end of January 2002,there remained only 25 Former Quincy’s operated by Company franchisees, theLessor having taken back, in 2001 and 2002, other restaurants previouslyoperated by Company franchisees.  TheAgreements, incomplete for a lack of signature by the Lessor, provided forrental payments from the Company to the Lessor. However, the cost of any rental payments was passed on to thefranchisees operating the properties.  OnMay 15, 2003, the Company sent a letter to the Lessor, providing notice of theCompany’s termination of any tenancies at-will on any remaining Former Quincy’sunits effective May 31, 2003.  Noresponse has ever been received from Lessor.

 

TheCompany intends to vigorously contest any potential claims asserted by GeneralElectric Franchise Finance Corporation. While the Company has previously engaged in discussions with the Lessorof the properties to resolve any rental payments claimed by the Lessor underthe Agreements, it is not possible at this time to determine the outcome ofthese discussions.

 

TheCompany was a guarantor of a lease agreement in Lincoln, Nebraska, with monthlyrentals of approximately $8,200.  Thelease agreement, which originally ran through February 2014, was assignedby the Company to a third party in March 1998 and subsequently by thethird party to another party.  Theassignees apparently failed to make monthly rental, property tax, andassociation payments on the premises.  Asa result the Landlord took possession of the premises and on or about May 12,2004, sold the premises to a third party intending to use the premises for itsown purposes.  The Landlord has allegedthat he has suffered a loss of $149,226, exclusive of interest, through thedate of the sale.

 

In November 2003,the Landlord filed a complaint in the District Court of Lancaster County,Nebraska alleging default under various terms and provisions of the leaseagreement and seeking collection of approximately $43,000 in unpaid rent, realestate taxes and neighborhood association assessments through November 4,2003.  The Company filed a cross-claimagainst its assignee and a Third-Party Complaint against a subsequent assigneefor any accrued but unpaid obligations under the lease and guaranty for whichthe Company may be found liable.  Thelitigation is currently in the pretrial discovery phase.  The Company believes that its maximumexposure is limited to the alleged damage of $149,226, through May 12, 2004,plus pre, and post judgement interest, as the Company believes that the sale ofthe premises terminated the lease and any further obligation.

 

10

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Duringlate 2003, the Company was notified of a claim by Meadowbrook Meat Company,Inc. d/b/a MBM Corporation (MBM) alleging amounts owed by the Company toMBM.  In December 2003, MBM filedsuit in Federal District Court in North Carolina, but only recently served theCompany with that Complaint.  Thecomplaint seeks damages in an amount in excess of $800,000, alleging the breachof an agreement to pay for food and other restaurant supplies, and unjustenrichment.  The Company has generallydenied the allegations of MBM and believes it has factual and legal defenses tomost, if not all, of the claim and is prepared to defend this actionvigorously.  The litigation is currentlyin the pretrial discovery phase.

 

TheCompany entered into a Lease Agreement for restaurant premises located inDickson, Tennessee in 1994.  The LeaseAgreement had an original term of 15 years and requires monthly base rentalpayments of $6,500 for the final five years of the lease term.  The Company ceased operations of the premisesas a restaurant in 1996 and subsequently sub-leased the property.  The location has been vacant since September 2001.  In June 2004, the Company advised theLandlord that it was surrending the property. The Landlord is obligated to, and has advised the Company that he isattempting to find a replacement tenant.

 

TheLandlord has filed complaints in the General Sessions Court of Dickson,Tennessee alleging default under the lease agreement and seeking collection ofunpaid rent, real estate taxes and attorney’s fees for May through October 2004.  The Company has informally resolved thisaction through the payment of rent and real estates taxes, but has continued toassert that it has surrendered the property.

 

On July 11, 2004, the building,improvements, and contents located on real property owned by the Company inLawrenceville, Georgia were completely destroyed by fire.  As a result of this casualty, the Companyterminated the lease of the tenant operating the restaurant on these premises.  The Company is currently in the process ofcollecting insurance proceeds and resolving issues with its lender and theformer tenant.  As of September 30,2004, building, improvements, and contents were classified as other assets andland was classified as asset held for sale. Management does not anticipate any impairment of these assets based oncurrent estimates of the amount of insurable proceeds available to the Companyand the anticipated selling price of the land. The Company plans to sell the land after clean up of debris and theinsurance matter is resolved.

 

TheCompany is involved in various other claims and legal actions arising in theordinary course of business.  In theopinion of the management, the ultimate disposition of these matters will nothave a material adverse effect on the Company’s financial condition, results ofoperations or liquidity.

 

**Item 2.****           Management’s****Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Overview**

 

From time to time, the Company maypublish forward-looking statements relating to certain matters, includinganticipated financial 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 Actof 1995 provided a safe harbor for forward-looking statements.  In order to comply with the terms of thatsafe harbor, the Company notes that a variety of factors, individually or inthe aggregate, could cause the Company’s actual results and experience todiffer materially from the anticipated results or other expectations expressedin the Company’s forward-looking statements including, without limitation, thefollowing:  the ability of the Company orits franchises to obtain suitable locations for restaurant development;consumer spending trends and habits; competition in the restaurant segment withrespect to price, service, location, food quality and personnel resources;weather conditions in the Company’s operating regions; laws and governmentregulations; general business and economic conditions; availability of capital;success of operating

 

11

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initiatives and marketing and promotional efforts; andchanges in accounting policies.  Inaddition, the Company disclaims any intent or obligation to update thoseforward-looking statements.  The Companyoperated and franchised a total of 159 restaurants located in 21 states,including 7 Company-operated and 152 franchise restaurants as of September 30,2004.  The restaurants include a familysteakhouse concept and a steak and buffet concept.

 

###### **Resultsof Operations**

###### ** **

Net income for the three-month andnine-month periods ended September 30, 2004 was $199,530 and $540,707 ascompared to net income of $249,460 and $653,794 for the three-month andnine-month periods ended September 30, 2003.   The decrease is attributable to decreasedrevenues in the franchising segment due to closing of franchised locations,along with increased spending in personnel costs, consumer research, anddevelopment of prototype plans.

 

Thefollowing table sets forth for the periods presented the percentagerelationship to total revenues of certain items included in the consolidatedstatements of operations and certain restaurant data for the periods presented:

 
| ** **                            | ** ** | **Three-Months  Ended September 30,** | ** ** | **Nine-Months  Ended September 30,** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                             |       |                                       |       |                                      |       |   |   |   |   |
| Company-operated restaurants          |       | 78.5                                       | %          | 76.1                                      | %          | 77.7 | % | 75.7 | % |
| Franchise operations                  |       | 19.8                                       |       | 22.0                                      |       | 20.6 |   | 22.4 |   |
| Other Sales                           |       | 1.7                                        |       | 1.9                                       |       | 1.7 |   | 1.9 |   |
| Total revenues                        |       | 100.0                                      |       | 100.0                                     |       | 100.0 |   | 100.0 |   |
| Costs and expenses:                   |       |                                       |       |                                      |       |   |   |   |   |
| Cost of company-operated  restaurants |       | 53.2                                       |       | 51.3                                      |       | 52.9 |   | 51.5 |   |
| Cost of franchise operations          |       | 9.0                                        |       | 7.7                                       |       | 8.8 |   | 6.9 |   |
| Other cost of operations              |       | 1.3                                        |       | 1.4                                       |       | 1.4 |   | 1.5 |   |
| Restaurant operating expenses         |       | 16.4                                       |       | 15.9                                      |       | 16.6 |   | 16.2 |   |
| General and administrative            |       | 8.2                                        |       | 9.1                                       |       | 8.6 |   | 9.9 |   |
| Depreciation and amortization         |       | 5.1                                        |       | 5.7                                       |       | 5.4 |   | 5.8 |   |
| Total costs and expenses              |       | 93.2                                       |       | 91.1                                      |       | 93.7 |   | 91.8 |   |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income from operations                |       | 6.8                                        |       | 8.9                                       |       | 6.3 |   | 8.2 |   |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Other income (expense)                |       | (1.2                                       | )          | (1.7                                      | )          | (1.0 | ) | (1.7 | ) |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income before income tax  expense     |       | 5.6                                        |       | 7.2                                       |       | 5.3 |   | 6.5 |   |
|                                  |       |                                       |       |                                      |       |   |   |   |   |
| Income tax expense                    |       | 2.1                                        |       | 2.7                                       |       | 2.0 |   | 2.5 |   |
| Net income                            |       | 3.5                                        | %          | 4.5                                       | %          | 3.3 | % | 4.0 | % |

 
| ** **                               | ** ** | **Three-Months  Ended September 30,** | ** ** | **Nine-Months  Ended September 30,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                   | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Restaurant Data**                      |       |                                       |       |                                      |       |   |   |   |   |
| Number of Company-Operated  Restaurants: |       |                                       |       |                                      |       |   |   |   |   |
| Beginning of period                      |       | 7                                          |       | 7                                         |       | 7 |   | 7 |   |
| Opened                                   |       | —                                     |       | —                                    |       | — |   | — |   |
| Closed                                   |       | —                                     |       | —                                    |       | — |   | — |   |
| Franchised                               |       | —                                     |       | —                                    |       | — |   | — |   |
| End of period                            |       | 7                                          |       | 7                                         |       | 7 |   | 7 |   |
|                                     |       |                                       |       |                                      |       |   |   |   |   |
| Number of U.S. Franchised  Restaurants:  |       |                                       |       |                                      |       |   |   |   |   |
| Beginning of period                      |       | 152                                        |       | 176                                       |       | 161 |   | 186 |   |
| Opened                                   |       | 1                                          |       | —                                    |       | 3 |   | — |   |
| Closed                                   |       | 1                                          |       | 6                                         |       | 12 |   | 22 |   |
| End of period                            |       | 152                                        |       | 164                                       |       | 152 |   | 164 |   |

 

12

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**Revenues**

** **

Company-operatedrestaurant revenues increased $23,000 (0.5%) to $4.48 million for thethree-month period ended September 30, 2004 as compared to $4.24 millionfor the comparable three-month period ended September 30, 2003.  Revenues for company-operated restaurantsincreased $612,000 (4.8%) to $12.89 million for the nine-month period ended September 30,2004 as compared to $12.28 million for the comparable nine-month period ended September 30,2003. The three-month and nine-month increases over the respective comparableprior periods are attributable to improved performance and priceincreases.   Customer counts decreased by3.84% and 1.10% for the three and nine-month periods.  A price increase went into effect on July 1,2004 to combat the increased costs in commodities.

 

Franchiseand other revenues decreased 8.67% to $1.23 million for the three-month periodended September 30, 2004 as compared to $1.33 million for the comparablethree-month period ended September 30, 2003.  Franchise and other revenues decreased 6.5%to $3.71 million for the nine-month period ended September 30, 2004 ascompared to $3.95 million for the comparable nine-month period ended September 30,2003.  The decrease is attributable toless franchised stores in the system during the three and nine-month periodsended September 30, 2004 as compared to the three and nine-month periodsended September 30, 2003. System-wide sales for the franchise system were $57.6 million and $171.5million for the three and nine-month periods, respectively as compared tosystem-wide sales of $61.5 million and $185.9 million for the three andnine-month periods ending September 30, 2003.  Same store sales decreased .02% for thethree-months ended September 30, 2004 over prior period and increased1.42% for the nine-months ended September 30, 2004 over the prior period.

 

###### **Costsand Expenses**

###### ** **

Costof company-operated restaurants, consisting of food, beverage, and employeecosts increased $173,000 (5.7%) to $3.03 million for the three-month periodended September 30, 2004 from $2.9 million for the comparable three-monthperiod ended September 30, 2003. These costs increased as a percentage of total revenues from 51.3% in2003 to 53.2% in 2004.  For thenine-month period ended September 30, 2004, cost of company-operatedrestaurants increased $432,000 (4.9%) from $8.4 million in 2003 to $8.8 millionin 2004. These costs increased as a percent of total revenues from 51.5% in2003 to 52.9% in 2004.  The increases arelargely due to increased costs in commodities, such as meat.

 

Costof franchise operations and other cost of operations was $588,000 (10.3%) forthe three-month period ended September 30, 2004 compared to $508,000(9.1%) in 2003.   For the nine-monthperiod ended September 30, 2004, cost of franchise operations and othercost of operations was $1.7 million (10.2%) compared to $1.4 million (8.4%) forthe nine-month period ended September 30, 2003.  The increase is attributable to increasedpersonnel costs largely associated with the Company’s chief executive officerposition being filled July 1, 2003. Also, there has been increased spending over prior year in consumerresearch and development of prototype plans.

 

Restaurantoperating expenses, which include utilities, insurance, maintenance, rent andother such costs of the company-operated restaurants, increased $46,000 (4.9%)for the three-month period ended September 30, 2004 over prior year’scomparable period.   For the nine-monthperiod ended September 30, 2004 restaurant-operating expenses increased$128,000 (4.6%) over the comparable prior period. The majority of the slightincreases are due to increased operating costs.

 

13

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Forthe three-month periods ended September 30, 2004 and 2003, general andadministrative expenses were $469,000 and $509,000, respectively and as apercentage of total revenue were 8.2% and 9.1%, respectively.  For the nine-month periods ended September 30,2004 and 2003, general and administrative expenses were $1.4 million and $1.6million, respectively and as a percentage of total revenue were 8.6% and 9.9%,respectively.  The decrease for thenine-month period ended September 30, 2004 over the comparable prior periodis primarily due to less legal fees and contingency accruals incurred in 2004,as well as fees associated with reimbursements to shareholders in 2003 thatwere involved in the proxy contest and settlement in 2002.

 

Depreciationand amortization expense was $27,000 less for the three-month period ended September 30,2004 compared to the comparable period in 2003 and $47,000 less for thecomparable nine-month period then ended. The decreases are attributable to property and equipment becoming fullydepreciated.

 

**OtherIncome (Expense)**

 

Interestexpense decreased $14,000 and $52,000 for the three and nine-month periodsended September 30, 2004 versus the comparable periods in 2003, due to alower average principal outstanding balance. Interest income fluctuatesaccording to the levels of available cash balances.  The Company employs a cash management systemwhereby available balances are invested on an overnight basis.

 

**IncomeTax Expense**

 

Incometax expense is directly affected by the levels of pretax income.  The Company’s effective tax rate ofapproximately 38.0% and 38.0% percent for the three and nine-month periodsended September 30, 2004 is comparable to the rate of 38.0% and 38.0% forthe same periods in 2003.

 

###### **Liquidityand Capital Resources**

###### ** **

As iscustomary in the restaurant industry, the Company has historically operatedwith negative working capital. Historically, the Company has leased the majority of its restaurants andthrough a strategy of controlled growth has financed operations from operatingcash flows, the utilization of the Company’s line of credit and long-term debtprovided by various lenders.  The Companyhad positive working capital of $1.6 million and $141,000 at September 30,2004 and December 31, 2003, respectively.

 

Cashflows provided by operating activities were $2.0 million in 2004 compared to$1.9 million in 2003. During 2004, cash flows provided by operating activitieswere primarily due to net income of $541,000 and depreciation and amortizationof $899,000, decrease in other assets of $110,000 due to sale of an asset,increase in accounts receivables of $71,000 offset by decreases in accruedexpenses of $64,000. During 2003, cash flows provided by operations wereprimarily due to net income of $654,000 and depreciation and amortization of$945,000 offset by decrease in accounts payable and accrued expenses of$501,000. Net cash used in investing activities of $163,000 in 2004 andprovided by investing activities of $295,000 in 2003, was for capitalexpenditures related to property and equipment and proceeds of $414,000 in 2003from sale of property.  Net cash used infinancing activities of $392,000 in 2004 was for payments on long-termdebt.  Net cash used in financingactivities of $1.2 million in 2003 was primarily for repayment of long-termdebt, reduction of credit line and bank overdraft and repurchase of stock.

 

Managementbelieves that the Company’s short-term cash requirements will includesettlements related to certain legal proceedings, capital contribution relatedto a planned joint venture for development of a buffet concept restaurant, andcapital improvements to Company-operated restaurants.

 

TheCompany utilizes its existing line of credit to provide short-term funding inaddition to cash from operations.  Managementreviews available financing alternatives to provide cash for future

 

14

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expansion,restructure existing debt, and provide additional working capital; however,management believes existing financing will provide adequate funding for cashrequirements.

 

# **CRITICALACCOUNTING POLICIES**

# ** **

## **FranchiseRevenue**

##  

Initial franchise fees are recognizedwhen all material services have been substantially performed by the Company andthe restaurant has opened for business. Franchise royalties, which are based on a percentage of monthly sales,are recognized as income on the accrual basis. Costs associated with franchise operations are recognized on the accrualbasis.

 

## **Accounts andNotes Receivable and Allowance for Doubtful Accounts**

##  

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

 

**FranchiseRoyalty Contracts**

 

Franchiseroyalty contracts are amortized on a straight-line basis over fifteen years,the estimated average life of the franchise agreements.  The Company assesses the recoverability ofthis intangible asset by determining whether the amortization of the franchiseroyalty contracts balance over their remaining life can be recovered thoughundiscounted future operating cash flows of the acquired operation.  The amount of impairment, if any, is measuredbased on projected discounted future operating cash flows using a discount ratereflecting the Company’s average cost of funds.

 

**Goodwill**

 

Goodwillrepresents the excess of purchase price over fair value of net assets ofbusinesses acquired. Goodwill and intangible assets acquired in a purchasebusiness combination and determined to have an indefinite useful life are notamortized, but instead tested for impairment at least annually.

 

###### **Impactof Inflation**

###### ** **

Theimpact of inflation on the costs of food and beverage product, labor and realestate can affect the Company’s operations. Over the past few years, inflation has had a lesser impact on theCompany’s operations due to the lower rates of inflation in the nation’seconomy and economic conditions in the Company’s market areas.

 

Managementbelieves the Company has historically been able to pass on increased coststhrough certain selected menu price increases and has offset increased costs byincreased productivity and purchasing efficiencies, but there can be noassurance that the Company will be able to do so in the future.  Management anticipates that the average costof restaurant real estate leases and construction costs could increase in thefuture which could affect the Company’s ability to expand.  In addition, mandated health care oradditional increases in the federal or state minimum wages could significantlyincrease the Company’s costs of doing business.

 

##### **Impact of Recently IssuedAccounting Standards**

#####  

In January 2003,the FASB issued Interpretation No. 46 *Consolidation of VariableInterest Entities, an interpretation of ARB No. 51. *This Interpretation addresses theconsolidation by business enterprises of variable interest entities as definedin the Interpretation.  TheInterpretation

 

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appliesimmediately to variable interest entities created after January 31, 2003,and to variable interests in variable interest entities obtained after January 31,2003.  The application of thisInterpretation did not have any impact on the Company’s consolidated financialposition, results of operations or cash flows of the Company. See Note 1 to theCompany’s consolidated financial statements, which are included in Item 1, PartI for a disassion of Interpretation No. 46.

 

As of September 30,2004, there are no other new accounting standards issued, but not yet adoptedby the Company, which are expected to be applicable to the Company’sconsolidated financial position, operating results or financial statementdisclosures.

 

**Item 3.****           Quantitativeand****Qualitative Disclosureabout Market Risk**

 

TheCompany does not engage in derivative financial instruments or derivative commodityinstruments.  As of September 30,2004, the Company’s financial instruments are not exposed to significant marketrisk due to foreign currency exchange risk. The Company is exposed to market risk related to interest rates, as wellas increased prices in restaurant industry commodities such as beef.

 

Thetable below provides information about the Company’s debt obligations that aresensitive to changes in interest rates. The table presents principal cash flows and related weighted averageinterest rates by expected maturity dates.

 

Debtobligations held for other than trading purposes at September 30, 2004(dollars in thousands):

 

#### **EXPECTED MATURITY DATE**

 
| ** **            | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|---------------------------|------------|
| Long-term debt        |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                      |       |
| Fixed Rate            |       | $        | 139        |     | $          | 505      |       | $        | 522        |     | $          | 361            |       | $         | 337        |                      | $          | 1,823 |   | $ | 3,687 |   | $ | 4,105 |   |
| Average Interest Rate |       | 9.93     | %          | 9.94     | %          | 9.94     | %          | 10.02    | %          | 10.06    | %          | 10.07          | %          | 10.00     | %          |                      |       |
|                       |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                           |            |  |  |  |  |  |  |  |  |

 

**Item 4.****           Controlsand Procedures**

 

Asrequired by Rule 13a-15 under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), as of the end of the period covered by this report, theCompany carried out an evaluation of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures.  This evaluation was carried out under thesupervision and with the participation of the Company’s management, includingthe President and Chief Executive Officer and the Company’s Chief FinancialOfficer.  Based upon their evaluation,the officers concluded that the Company’s disclosure controls and proceduresare effective.  There have been nosignificant changes in the Company’s internal controls, or in other factors,which could significantly affect internal controls subsequent to the date theCompany carried out its evaluation.

 

Disclosurecontrols and procedures are controls and other procedures that are designed toensure that information required to be disclosed in Company reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed in Company reportsfiled under the Exchange Act is accumulated and communicated to management,including the Company’s President and Chief Executive Officer and the VicePresident and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

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**PART II. OTHER**INFORMATION

** **

Item 1.             LegalProceedings

 

The Company is involvedin various other claims and legal actions arising in the ordinary course ofbusiness.  In the opinion of themanagement, the ultimate disposition of these matters will not have a materialadverse effect on the Company’s financial condition, results of operations orliquidity.  For additional discussion,see Note 6 to the Company’s consolidated financial statements, which areincluded in Item 1., Part I.

 

Item 2.             Changein Securities and Use of Proceeds – N/A

 

Item 3.             DefaultsUpon Senior Securities – N/A

 

Item 4.             Submissionof Matters to a Vote of Security Holders – N/A

 

Item 5.             OtherInformation  – N/A

 

Item 6.             Exhibits:

 

(a)                  Exhibits:

10.1Change of Control Agreement of Robyn B. Mabe

31.1 Section 302Certificate of Chief Executive Officer

31.2 Section 302Certificate of Chief Financial Officer

32.1 Section 1350Officer’s Certification

32.2 Section 1350Officer’s Certification

 

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# **SIGNATURES**

# ** **

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly 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                                 |
|                          |   | Vice President  and Chief Financial Officer   |
|                          |   |                                          |
| Date: November 15,  2004 |   |                                          |
|                               |        |                                               |  |  |  |

 

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