**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For theperiod ended June 30, 2004**

 

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

 

**For the transition period from                 to                 **

 

**Commission file number 0-25366**

 

**WESTERN SIZZLIN CORPORATION**

(formerly 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 August 16,2004, there were 11,908,571 shares of common stock outstanding.

 

 

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**WESTERN SIZZLINCORPORATION**

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

**Form 10-Q Index**

**Six Months EndedJune 30, 2004**

** **
|                                                                                                           | **Page**                                                                                                |
|----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                           |                                                                                                    |
| **PART  I.  FINANCIAL INFORMATION**                                                                  |                                                                                                    |
|                                                                                                           |                                                                                                    |
| **Item 1.  Financial Statements (Unaudited)**                                                             |                                                                                                    |
|                                                                                                           |                                                                                                    |   |
|                                                                                                           | Consolidated Balance Sheets  – June 30, 2004 and December 31, 2003                       | 2 |
|                                                                                                           |                                                                                                    |   |
|                                                                                                           | Consolidated  Statements of Operations - Three Months and Six Months Ended June 30,  2004 and 2003 | 3 |
|                                                                                                           |                                                                                                    |   |
|                                                                                                           | Consolidated  Statement of Changes in Stockholders’ Equity - Six Months Ended June 30,  2004  | 4 |
|                                                                                                           |                                                                                                    |   |
|                                                                                                           | Consolidated  Statements of Cash Flows - Six Months Ended June 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.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**WESTERN SIZZLIN CORPORATION**

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

Consolidated Balance Sheets

June 30, 2004 and December 31, 2003

 
|                                                                                                                         |   | **June 30,  2004** |       | **December 31,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|-----------------------------|--------|
|                                                                                                                         |   | **(unaudited)**         |       |                        |   |
| **Assets**                                                                                                                   |   |                    |       |                        |   |
| Current assets:                                                                                                              |   |                    |       |                        |   |
| Cash and cash equivalents                                                                                                    |   | $                       | 1,828,241  |                        | $      | 682,730 |   |
| Short-term investments                                                                                                       |   | 252,801                 |       | 251,426                     |   |
| Trade accounts receivable, net of allowance for  doubtful accounts of $387,112 in 2004 and $329,112 in 2003                  |   | 779,803                 |       | 838,931                     |   |
| Current installments of notes receivable                                                                                     |   | 206,702                 |       | 229,273                     |   |
| Other receivables                                                                                                            |   | 110,178                 |       | 43,329                      |   |
| Inventories                                                                                                                  |   | 110,087                 |       | 66,390                      |   |
| Prepaid expenses                                                                                                             |   | 364,175                 |       | 413,824                     |   |
| Deferred income taxes                                                                                                        |   | 382,428                 |       | 382,428                     |   |
| Total current assets                                                                                                         |   | 4,034,415               |       | 2,908,331                   |   |
| Notes receivable, less allowance for doubtful  accounts of $69,345 in 2004 and $69,345 2003, excluding current installments  |   | 1,140,078               |       | 1,170,804                   |   |
| Property and equipment, net of accumulated  depreciation of $4,914,076 in 2004 and $4,667,923 in 2003                        |   | 2,995,678               |       | 3,124,807                   |   |
| Franchise royalty contracts, net of accumulated  amortization of $6,618,101 in 2004 and $6,302,954 in 2003                   |   | 2,836,330               |       | 3,151,477                   |   |
| Goodwill                                                                                                                     |   | 4,310,200               |       | 4,310,200                   |   |
| Financing costs, net of accumulated amortization of  $109,187 in 2004 and $100,100 in 2003                                   |   | 91,024                  |       | 100,110                     |   |
| Deferred income taxes                                                                                                        |   | 1,075,041               |       | 1,280,025                   |   |
| Asset held for sale                                                                                                          |   | 671,244                 |       | 700,278                     |   |
| Other assets                                                                                                                 |   | 37,760                  |       | 148,044                     |   |
|                                                                                                                         |   | $                       | 17,191,770 |                        | $      | 16,894,076 |   |
| **Liabilities and Stockholders’  Equity**                                                                               |   |                    |       |                        |   |
| Current liabilities:                                                                                                         |   |                    |       |                        |   |
| Current installments of long-term debt                                                                                       |   | $                       | 529,064    |                        | $      | 529,645 |   |
| Accounts payable                                                                                                             |   | 1,335,338               |       | 991,328                     |   |
| Accrued expenses and other                                                                                                   |   | 1,072,155               |       | 1,246,785                   |   |
| Total current liabilities                                                                                                    |   | 2,936,557               |       | 2,767,758                   |   |
| Long-term debt, excluding current installments                                                                               |   | 3,288,074               |       | 3,548,971                   |   |
| Other long-term liabilities                                                                                                  |   | 98,615                  |       | 50,000                      |   |
| Commitments and contingincies                                                                                                |   |                    |       |                        |   |
| Stockholders’ equity:                                                                                                   |   |                    |       |                        |   |
| Common stock; $.01 par value.  Authorized 20,000,000 shares; 11,908,571  issued and outstanding shares in 2004 and 2003 |   | 119,086                 |       | 119,086                     |   |
| Additional paid-in capital                                                                                                   |   | 8,589,578               |       | 8,589,578                   |   |
| Retained earnings                                                                                                            |   | 2,159,860               |       | 1,818,683                   |   |
| Total stockholders’ equity                                                                                              |   | 10,868,524              |       | 10,527,347                  |   |
|                                                                                                                         |   | $                       | 17,191,770 |                        | $      | 16,894,076 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**WESTERN SIZZLIN CORPORATION**

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

Consolidated Statements of Operations

(Unaudited)

 
|                                 |   | **Three Months  Ended June 30** |      | **Six Months  Ended June 30** |   |
|--------------------------------------|--------|--------------------------------------|-----------|------------------------------------|--------|
|                                 |   | **2004**                             |      | **2003**                           |   | **2004** |   | **2003** |   |
| Revenues:                            |   |                                 |      |                               |   |   |   |   |   |
| Company-operated restaurants         |   | $                                    | 4,433,066 |                               | $      | 4,397,448 |   | $ | 8,413,311 |   | $ | 8,033,318 |   |
| Franchise operations                 |   | 1,148,650                            |      | 1,235,046                          |   | 2,286,047 |   | 2,398,449 |   |
| Other                                |   | 94,212                               |      | 110,960                            |   | 194,667 |   | 218,121 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Total revenues                       |   | 5,675,928                            |      | 5,743,454                          |   | 10,894,025 |   | 10,649,888 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Costs and expenses:                  |   |                                 |      |                               |   |   |   |   |   |
| Cost of company-operated restaurants |   | 3,034,080                            |      | 2,919,393                          |   | 5,756,207 |   | 5,497,618 |   |
| Cost of franchise operations         |   | 456,305                              |      | 359,469                            |   | 940,031 |   | 690,324 |   |
| Other cost of operations             |   | 71,024                               |      | 83,111                             |   | 148,777 |   | 166,497 |   |
| Restaurant operating expenses        |   | 904,713                              |      | 882,431                            |   | 1,822,418 |   | 1,740,357 |   |
| General and administrative           |   | 548,168                              |      | 581,214                            |   | 963,235 |   | 1,099,646 |   |
| Depreciation and amortization        |   | 307,711                              |      | 315,766                            |   | 607,586 |   | 627,564 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Total costs and expenses             |   | 5,322,001                            |      | 5,141,384                          |   | 10,238,254 |   | 9,822,006 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Income from operations               |   | 353,927                              |      | 602,070                            |   | 655,771 |   | 827,882 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Other income (expense):              |   |                                 |      |                               |   |   |   |   |   |
| Interest expense                     |   | (98,627                              | )         | (118,386                           | )      | (199,364 | ) | (237,685 | ) |
| Interest income                      |   | 22,635                               |      | 23,235                             |   | 42,389 |   | 46,800 |   |
| Other                                |   | 11,204                               |      | 3,967                              |   | 51,475 |   | 15,179 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Total other income (expense)         |   | (64,788                              | )         | (91,184                            | )      | (105,500 | ) | (175,706 | ) |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Income before income tax expense     |   | 289,139                              |      | 510,886                            |   | 550,271 |   | 652,176 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Income tax expense                   |   | 109,864                              |      | 192,925                            |   | 209,094 |   | 247,842 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Net income                           |   | $                                    | 179,275   |                               | $      | 317,961 |   | $ | 341,177 |   | $ | 404,334 |   |
|                                 |   |                                 |      |                               |   |   |   |   |   |
| Earnings per share:                  |   |                                 |      |                               |   |   |   |   |   |
| Basic                                |   | $                                    | .02       |                               | $      | .03 |   | $ | .03 |   | $ | .03 |   |
| Diluted                              |   | $                                    | .02       |                               | $      | .03 |   | $ | .03 |   | $ | .03 |   |

 

See accompanying notes to consolidated financial statements

 

3

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**WESTERN SIZZLIN CORPORATION**

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

Consolidated Statement of Changes in Stockholders’Equity

Six Months Ended June 30, 2004

(Unaudited)

 
|                             |   | **Common Stock** |   | **Additional  Paid-in  Capital** |    | **Retained  Earnings** |   | **Total** |   |
|----------------------------------|--------|------------------|--------|----------------------------------|---------|------------------------|--------|-----------|--------|
| **Shares**                       |   | **Dollars**      |
|                             |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances, December 31, 2003 |   | 11,908,571       |   | $                                | 119,086 |                   | $      | 8,589,578 |   | $ | 1,818,683 |   | $ | 10,527,347 |   |
|                             |   |             |   |                             |    |                   |   |      |   |   |   |
| Net income                       |   | —           |   | —                           |    | —                 |   | 341,177   |   | 341,177 |   |
|                             |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances, June 30, 2004     |   | 11,908,571       |   | $                                | 119,086 |                   | $      | 8,589,578 |   | $ | 2,159,860 |   | $ | 10,868,524 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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**WESTERN SIZZLIN CORPORATION**

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

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2004 and 2003

(Unaudited)

 
|                                                                               |   | **June**  |      |
|------------------------------------------------------------------------------------|--------|-----------|-----------|
|                                                                               |   | **2004**  |      | **2003** |   |
| Cash flows from operating activities:                                              |   |      |      |   |   |
| Net income                                                                         |   | $         | 341,177   |   | $ | 404,334 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |      |      |   |   |
| Depreciation and amortization of property and  equipment                           |   | 283,357   |      | 296,885 |   |
| Amortization of franchise royalty contracts and  financing costs                   |   | 324,233   |      | 330,679 |   |
| Loss on disposal of fixed assets                                                   |   | 484       |      | 351 |   |
| Gain on sale of asset held for sale                                                |   | —    |      | (790 | ) |
| Provision for doubtful accounts                                                    |   | 58,000    |      | 7,545 |   |
| Provision for deferred income taxes                                                |   | 204,984   |      | — |   |
| (Increase) decrease in:                                                            |   |      |      |   |   |
| Trade accounts receivable                                                          |   | 1,128     |      | 117,542 |   |
| Notes receivable                                                                   |   | 53,297    |      | 65,115 |   |
| Other receivables                                                                  |   | (66,849   | )         | 16,568 |   |
| Inventories                                                                        |   | (43,697   | )         | (14,113 | ) |
| Prepaid expenses                                                                   |   | 49,649    |      | (58,993 | ) |
| Income taxes refundable                                                            |   | —    |      | 47,198 |   |
| Other assets                                                                       |   | 110,284   |      | (33,057 | ) |
| Increase (decrease) in:                                                            |   |      |      |   |   |
| Accounts payable                                                                   |   | 344,010   |      | (165,618 | ) |
| Accrued expenses                                                                   |   | (174,630  | )         | (284,539 | ) |
| Other long-term liabilities                                                        |   | 48,615    |      | 147,993 |   |
|                                                                               |   |      |      |   |   |
| Net cash provided by operating activities                                          |   | 1,534,042 |      | 877,100 |   |
|                                                                               |   |      |      |   |   |
| Cash flows from investing activities:                                              |   |      |      |   |   |
| Short term investments                                                             |   | (1,375    | )         | — |   |
| Additions to property and equipment                                                |   | (128,978  | )         | (46,600 | ) |
| Proceeds from sale of property                                                     |   | 3,300     |      | 414,390 |   |
|                                                                               |   |      |      |   |   |
| Net cash (used in) provided by investing activities                                |   | (127,053  | )         | 367,790 |   |
|                                                                               |   |      |      |   |   |
| Cash flows from financing activities:                                              |   |      |      |   |   |
| Net decrease in bank overdraft                                                     |   | —    |      | (337,110 | ) |
| Net decrease in credit line note payable                                           |   | —    |      | (363,180 | ) |
| Proceeds from note payable                                                         |   | —    |      | 450,000 |   |
| Payments on note payable                                                           |   | —    |      | (150,000 | ) |
| Payments on long-term debt                                                         |   | (261,478  | )         | (248,371 | ) |
|                                                                               |   |      |      |   |   |
| Net cash used in financing activities                                              |   | (261,478  | )         | (648,661 | ) |
|                                                                               |   |      |      |   |   |
| Net increase in cash and cash equivalents                                          |   | 1,145,511 |      | 596,229 |   |
|                                                                               |   |      |      |   |   |
| Cash and cash equivalents at beginning of period                                   |   | 682,730   |      | 131,631 |   |
|                                                                               |   |      |      |   |   |
| Cash and cash equivalents at end of period                                         |   | $         | 1,828,241 |   | $ | 727,860 |   |
|                                                                               |   |      |      |   |   |
| Supplemental disclosure of cash flow information:                                  |   |      |      |   |   |
| Cash payments for interest                                                         |   | $         | 199,986   |   | $ | 223,631 |   |
| Income taxes paid                                                                  |   | $         | 4,110     |   | $ | 52,650 |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**WESTERNSIZZLIN CORPORATION**

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

 

Notes to Consolidated Financial Statements

 

 Six-Months Ended June 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 in theUnited 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 beenincluded.  Operating results for interimperiods are not necessarily indicative of the results for the full yearbecause, among other things, the dining habits of the Company’s customers cannotbe certain.  The unaudited consolidatedfinancial statements and notes are presented as permitted by Form 10-Q and donot contain certain information included in the Company’s annual consolidatedfinancial statements and accompanying notes. For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s annual report on Form 10-K for theyear ended December 31, 2003.

 

**Recently Issued 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 issuedDecember 23, 2003 and, for the Company, was effective as of the end of thefirst quarter of 2004.

 

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 are requiredto 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.

 

TheCompany determined that ADRF is a variable interest entity but that neither theCompany nor its company-owned stores are the primary beneficiary of ADRF andthat the Company is not obligated 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 June 30, 2004 and 2003 and $72,000 for each ofthe six-month periods ended June 30, 2004 and 2003.

 

As ofJune 30, 2004, there are no other new accounting standards issued, but notyet adopted by the Company, which are expected to be applicable to theCompany’s consolidated financial position, operating results or financialstatement disclosures.

 

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

 

TheCompany applies the intrinsic-value-based method of accounting prescribed byAccounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued toEmployees,* and related interpretations including FinancialAccounting Standards Board (FASB) Interpretation No. 44,*Accounting for Certain Transactionsinvolving Stock Compensation, an interpretation of APB Opinion No. 25*,issued in March 2000, to account for its fixed-plan stock options. Underthis method, compensation expense is recorded on the date of grant only if thecurrent market 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 statementsabout the method of accounting for stock-based compensation and the effect ofthe method on reported results.  TheCompany granted 10,000 stock options to each director, totaling 100,000, undera Non-Employee Stock Option Plan adopted by the Company on June 22,2004.  These options immediately vestedon 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  June 30,** |    | **Six months ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                                                                                                                    |   | **2004**                              |    | **2003**                            |   | **2004** |   | **2003** |   |
|                                                                                                                                                    |   |                                  |    |                                |   |   |   |   |   |
| Net Income                                                                                                                                              |   |                                  |    |                                |   |   |   |   |   |
| As reported                                                                                                                                             |   | $                                     | 179,275 |                                | $      | 317,961 |   | $ | 341,177 |   | $ | 404,334 |   |
| Deduct total stock-based  employee compensation  expense  determined under fair-value based method for all outstanding and unvested  awards, net of tax |   | 38,130                                |    | —                              |   | 42,137 |   | — |   |
|                                                                                                                                                    |   |                                  |    |                                |   |   |   |   |   |
| Pro forma                                                                                                                                               |   | $                                     | 141,145 |                                | $      | 317,961 |   | $ | 299,040 |   | $ | 404,334 |   |
|                                                                                                                                                    |   |                                  |    |                                |   |   |   |   |   |
| Basic and diluted net income  per share                                                                                                                 |   |                                  |    |                                |   |   |   |   |   |
| As reported                                                                                                                                             |   | $                                     | 0.02    |                                | $      | 0.03 |   | $ | 0.03 |   | $ | 0.03 |   |
| Pro forma                                                                                                                                               |   | $                                     | 0.01    |                                | $      | 0.03 |   | $ | 0.03 |   | $ | 0.03 |   |

 

**(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 six-months ended June 30,2004 and 2003.

 

*Amortizing Intangible 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 June 30, 2004**               |      |                          |   |
|--------------------------------|--------|-----------------------------|-----------|--------------------------------------------|-----------|-------------------------------|--------|
|                           |   | **Gross  carrying  amount** |      | **Weighted average  Amortization  Period** |      | **Accumulated  Amortization** |   |
| Amortizing intangible  assets: |   |                        |      |                                       |      |                          |   |
| Franchise Royalty Contracts    |   | $                           | 9,454,431 |                                       | 15.0 yrs. |                          | $      | 6,618,101 |   |
|                                |        |                             |           |                                            |           |                               |        |  |  |

 

Aggregateamortization expense for amortizing intangible assets for the three andsix-month periods ended June 30, 2004 was $157,573 and $315,147,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

for75,000 shares of common stock were not included in computing diluted earningsper share for the three and six-month periods ended June 30, 2004 and 2003because the effect of these options is anti-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  June 30,** |    | **Six- months ended  June 30,** |   |
|------------------------------------------------|--------|---------------------------------------|---------|--------------------------------------|--------|
|                                           |   | **2004**                              |    | **2003**                             |   | **2004** |   | **2003** |   |
|                                           |   |                                  |    |                                 |   |   |   |   |   |
| Net Income:                                    |   | $                                     | 179,275 |                                 | $      | 317,961 |   | $ | 341,177 |   | $ | 404,334 |   |
|                                           |   |                                  |    |                                 |   |   |   |   |   |
| Weighted average shares  outstanding:          |   |                                  |    |                                 |   |   |   |   |   |
| Weighted average shares  outstanding (basic)   |   | 11,908,571                            |    | 12,150,099                           |   | 11,908,571 |   | 12,150,099 |   |
| Dilutive effect of stock  options              |   | 214                                   |    | —                               |   | 107 |   | — |   |
| Weighted average shares  outstanding (diluted) |   | 11,908,785                            |    | 12,150,099                           |   | 11,908,678 |   | 15,150,099 |   |
|                                           |   |                                  |    |                                 |   |   |   |   |   |
| Net income per share:                          |   |                                  |    |                                 |   |   |   |   |   |
| Basic                                          |   | $                                     | 0.02    |                                 | $      | 0.03 |   | $ | 0.03 |   | $ | 0.03 |   |
| Diluted                                        |   | $                                     | 0.02    |                                 | $      | 0.03 |   | $ | 0.03 |   | $ | 0.03 |   |

 

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 andcapital costs are allocated to segments based upon predetermined rates oractual or estimated 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 June 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 June 30,** |      | **Six-months  Ended June 30,** |   |
|-----------------------------------------|--------|---------------------------------------|-----------|-------------------------------------|--------|
|                                    |   | **2004**                              |      | **2003**                            |   | **2004** |   | **2003** |   |
|                                    |   |                                  |      |                                |   |   |   |   |   |
| Revenues from reportable  segments:     |   |                                  |      |                                |   |   |   |   |   |
|                                    |   |                                  |      |                                |   |   |   |   |   |
| Restaurants                             |   | $                                     | 4,433,066 |                                | $      | 4,397,448 |   | $ | 8,413,311 |   | $ | 8,033,318 |   |
| Franchising and other                   |   | 1,242,862                             |      | 1,346,006                           |   | 2,480,714 |   | 2,616,570 |   |
| Total revenues                          |   | $                                     | 5,675,928 |                                | $      | 5,743,454 |   | $ | 10,894,025 |   | $ | 10,649,888 |   |
|                                    |   |                                  |      |                                |   |   |   |   |   |
| Depreciation and amortization:          |   |                                  |      |                                |   |   |   |   |   |
| Restaurants                             |   | $                                     | 129,736   |                                | $      | 132,151 |   | $ | 256,112 |   | $ | 260,475 |   |
| Franchising and other                   |   | 177,975                               |      | 183,615                             |   | 351,478 |   | 367,089 |   |
| Total depreciation and  amortization    |   | $                                     | 307,711   |                                | $      | 315,766 |   | $ | 607,590 |   | $ | 627,564 |   |
|                                    |   |                                  |      |                                |   |   |   |   |   |
| Interest expense:                       |   |                                  |      |                                |   |   |   |   |   |
| Restaurants                             |   | $                                     | 98,083    |                                | $      | 109,775 |   | $ | 198,600 |   | $ | 222,716 |   |
| Franchising and other                   |   | 544                                   |      | 8,611                               |   | 764 |   | 14,969 |   |
| Total interest expense                  |   | $                                     | 98,627    |                                | $      | 118,386 |   | $ | 199,364 |   | $ | 237,685 |   |
|                                    |   |                                  |      |                                |   |   |   |   |   |
| Interest income:                        |   |                                  |      |                                |   |   |   |   |   |
| Restaurants                             |   | $                                     | 20,573    |                                | $      | 22,658 |   | $ | 39,287 |   | $ | 45,501 |   |
| Franchising and other                   |   | 2,062                                 |      | 577                                 |   | 3,102 |   | 1,299 |   |
| Total interest income                   |   | $                                     | 22,635    |                                | $      | 23,235 |   | $ | 42,389 |   | $ | 46,800 |   |
|                                    |   |                                  |      |                                |   |   |   |   |   |
| Income before income tax  expense:      |   |                                  |      |                                |   |   |   |   |   |
| Restaurants                             |   | $                                     | 181,355   |                                | $      | 191,237 |   | $ | 238,394 |   | $ | 45,889 |   |
| Franchising and other                   |   | 107,784                               |      | 319,649                             |   | 311,877 |   | 606,287 |   |
| Total income before income tax  expense |   | $                                     | 289,139   |                                | $      | 510,886 |   | $ | 550,271 |   | $ | 652,176 |   |

 

9

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|                                           |   | **June 30,  2004** |      |   |   | **June 30,  2003** |   |      |   |
|------------------------------------------------|--------|-------------------------|-----------|--------|--------|-------------------------|--------|-----------|--------|
| Gross property and equipment:                  |   |                    |      |   |   |                    |   |      |   |
| Restaurants                                    |   | $                       | 7,013,488 |   |   |                    | $      | 6,176,502 |   |   |   |
| Franchising and other                          |   | 896,265                 |      |   |   | 1,450,978               |   |      |   |
| Total property and equipment                   |   | $                       | 7,909,753 |   |   |                    | $      | 7,627,480 |   |   |   |
|                                           |   |                    |      |   |   |                    |   |      |   |
| Expenditures for property and  equipment:      |   |                    |      |   |   |                    |   |      |   |
| Restaurants                                    |   | $                       | 100,831   |   |   |                    | $      | 44,537    |   |   |   |
| Franchising and other                          |   | 28,147                  |      |   |   | 2,063                   |   |      |   |
| Total expenditures for  property and equipment |   | $                       | 128,978   |   |   |                    | $      | 46,600    |   |   |   |

 

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

 

InJanuary 2001, the Company executed a series of Master Lease Agreements(“Agreements”) relating to certain franchised properties formerly operated byother parties as “Quincy’s” restaurants (“Former Quincy’s”).  Signed copies of these Agreements wererequired, pursuant to the terms of the document, to be executed by FranchiseFinancing Corporation of America, now known as General Electric FranchiseFinance Corporation, (the “Lessor”), to be legally binding; however, no signedcopies were ever returned to the Company. At the end of January 2002, there remained only 25 Former Quincy’soperated by Company franchisees, the Lessor having taken back, in 2001 and2002, other restaurants previously operated by Company franchisees.  The Agreements, incomplete for a lack ofsignature by the Lessor, provided for rental payments from the Company to theLessor.  However, the cost of any rentalpayments was passed on to the franchisees operating the properties.  On May 15, 2003, the Company sent a letterto the Lessor, providing notice of the Company’s termination of any tenanciesat-will on any remaining Former Quincy’s units effective May 31, 2003.  No response has ever been received fromLessor.

 

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. As a result the Landlord took possession of the premises and on or aboutMay 12, 2004, sold the premises to a third party intending to use the premisesfor its own purposes.  The Landlord hasalleged that he has suffered a loss of $149,226, exclusive of interest, throughthe date of the sale.

 

InNovember 2003, the Landlord filed a complaint in the District Court ofLancaster County, Nebraska alleging default under various terms and provisionsof the lease agreement and seeking collection of approximately $43,000 inunpaid rent, real estate taxes and neighborhood association assessments throughNovember 4, 2003.  The Companyfiled a cross-claim against its assignee and a Third-Party Complaint against asubsequent assignee for any accrued but unpaid obligations under the lease andguaranty for which the Company may be found liable.  The litigation 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.

 

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 the

 

10

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Companywith that Complaint.  The complaintseeks damages in an amount in excess of $800,000, alleging the breach of anagreement 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 thepremises as a restaurant in 1996 and subsequently sub-leased the property.  The location has been vacant sinceSeptember 2001.  In June 2004,the Company advised the Landlord that it was surrending the property.  The Landlord is obligated to, and hasadvised the Company that he is attempting to find a replacement tenant.

 

InJuly 2004, the Landlord filed a complaint in the General Sessions Court ofDickson, Tennessee alleging default under the lease agreement and seekingcollection of unpaid rent, real estate taxes and attorney’s fees for May andJune 2004.  The Company hasinformally resolved this action through the payment of rent and real estatestaxes, but has continued to assert that it has surrendered the property.

 

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 not havea material adverse effect on the Company’s financial condition, results ofoperations or liquidity.

 

**(7)****                                 SubsequentEvent**

 

OnJuly 11, 2004, the building, improvements, and contents located on realproperty owned by the Company in Lawrenceville, Georgia were completelydestroyed by fire.  The Company iscurrently in the process of collecting insurance proceeds and resolving issueswith its lender.  As a result of thiscasualty, the Company has terminated the lease of the tenant who operated aChinese restaurant on these premises, that was unaffiliated with theCompany.  As of June 30, 2004,these assets were classified as held for sale and management does notanticipate any impairment of these assets as a result of the fire.

 

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

 

**Overview**

 

Fromtime to time, the Company may publish forward-looking statements relating tocertain matters, including anticipated financial performance, businessprospects, the future opening of Company-operated and franchised restaurants,anticipated capital expenditures, and other matters.  All statements other than statements of historical fact containedin the Form 10-Q or in any other report of the Company are forward-lookingstatements.  The Private SecuritiesLitigation Reform Act of 1995 provided a safe harbor for forward-lookingstatements.  In order to comply with theterms of that safe harbor, the Company notes that a variety of factors,individually or in the aggregate, could cause the Company’s actual results andexperience to differ materially from the anticipated results or otherexpectations expressed in the Company’s forward-looking statements including,without limitation, the following:  theability of the Company or its franchises to obtain suitable locations forrestaurant development; consumer spending trends and habits; competition in therestaurant segment with respect to price, service, location, food quality andpersonnel resources; weather conditions in the Company’s operating regions;laws and government regulations; general business and economic conditions;availability of capital; success of operating initiatives and marketing andpromotional efforts; and changes in accounting policies.  In addition, the Company disclaims anyintent or obligation to update those forward-looking statements.

 

TheCompany operated and franchised a total of 159 restaurants located in 21states, including 7 Company-operated and 152 franchise restaurants as ofJune 30, 2004.  The restaurantsinclude a family steakhouse concept and a steak and buffet concept.

 

11

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**Results of Operations**

 

Net income for the three-month andsix-month periods ended June 30, 2004 was $179,275 and $341,177 as comparedto net income of $317,961 and $404,334 for the three-month and six-monthperiods ended June 30, 2003.  Thedecrease is attributable to decreased revenues in the franchising segment dueto closing of franchised locations, along with increased spending in cost offranchising.

 

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 June 30,** |   | **Six-Months  Ended June 30,** |   |
|---------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
|                                  |   | **2004**                              |   | **2003**                            |   | **2004** |   | **2003** |   |
| Revenues:                             |   |                                  |   |                                |   |   |   |   |   |
| Company-operated restaurants          |   | 78.1                                  | %      | 76.6                                | %      | 77.2 | % | 75.5 | % |
| Franchise operations                  |   | 20.2                                  |   | 21.5                                |   | 21.0 |   | 22.5 |   |
| Other Sales                           |   | 1.7                                   |   | 1.9                                 |   | 1.8 |   | 2.0 |   |
| Total revenues                        |   | 100.0                                 |   | 100.0                               |   | 100.0 |   | 100.0 |   |
| Costs and expenses:                   |   |                                  |   |                                |   |   |   |   |   |
| Cost of company-operated  restaurants |   | 53.5                                  |   | 50.8                                |   | 52.8 |   | 51.6 |   |
| Cost of franchise operations          |   | 8.0                                   |   | 6.3                                 |   | 8.6 |   | 6.5 |   |
| Other cost of operations              |   | 1.3                                   |   | 1.4                                 |   | 1.4 |   | 1.6 |   |
| Restaurant operating expenses         |   | 15.9                                  |   | 15.4                                |   | 16.7 |   | 16.3 |   |
| General and administrative            |   | 9.7                                   |   | 10.1                                |   | 8.8 |   | 10.3 |   |
| Depreciation and amortization         |   | 5.4                                   |   | 5.5                                 |   | 5.7 |   | 5.9 |   |
| Total costs and expenses              |   | 93.8                                  |   | 89.5                                |   | 94.0 |   | 92.2 |   |
|                                  |   |                                  |   |                                |   |   |   |   |   |
| Income from operations                |   | 6.2                                   |   | 10.5                                |   | 6.0 |   | 7.8 |   |
|                                  |   |                                  |   |                                |   |   |   |   |   |
| Other income (expense)                |   | (1.1                                  | )      | (1.6                                | )      | (1.0 | ) | (1.7 | ) |
|                                  |   |                                  |   |                                |   |   |   |   |   |
| Income before income tax  expense     |   | 5.1                                   |   | 8.9                                 |   | 5.0 |   | 6.1 |   |
|                                  |   |                                  |   |                                |   |   |   |   |   |
| Income tax expense                    |   | 1.9                                   |   | 3.4                                 |   | 1.9 |   | 2.3 |   |
| Net income                            |   | 3.2                                   | %      | 5.5                                 | %      | 3.1 | % | 3.8 | % |

 

|                                     |   | **Three-Months  Ended June 30,** |   | **Six-Months  Ended June 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                      |   | 159                                   |   | 174                                 |   | 161 |   | 186 |   |
| Opened                                   |   | 1                                     |   | —                              |   | 2 |   | — |   |
| Closed                                   |   | 8                                     |   | 4                                   |   | 11 |   | 16 |   |
| End of period                            |   | 152                                   |   | 170                                 |   | 152 |   | 170 |   |

** **

**12**

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** **

**Revenues**

 

Company-operatedrestaurant revenues increased $36,000 (0.8%) to $4.43 million for thethree-month period ended June 30, 2004 as compared to $4.40 million forthe comparable three-month period ended June 30, 2003.  Revenues for company-operated restaurantsincreased $380,000 (4.5%) to $8.41 million for the six-month period endedJune 30, 2004 as compared to $8.03 million for the comparable six-monthperiod ended June 30, 2003. The three-month and six-month increases overthe respective comparable prior periods are attributable to improvedperformance.   Customer counts increasedby 2.78% and .37% for the three and six-month periods.  A price increase went into effect onJuly 1, 2004 to combat the increased costs in commodities.

 

Franchiseand other revenues decreased 8.3% to $1.24 million for the three-month periodended June 30, 2004 as compared to $1.35 million for the comparablethree-month period ended June 30, 2003. Franchise and other revenues decreased 5.5% to $2.48 million for thesix-month period ended June 30, 2003 as compared to $2.62 million for thecomparable six-month period ended June 30, 2003.  The decrease is attributable to less franchised stores in thesystem during the period ended June 30, 2004 as compared to June 30,2003.  System-wide sales for thefranchise system were $56.7 million and $114.1 million for the three and six-monthperiods, respectively.  Same store salesincreased 4.52% for the three-months ended March 31, 2004 over priorperiod and increased 2.27% for the six-months ended June 30, 2004 over theprior period.

 

**Costs and Expenses**

 

Costof company-operated restaurants, consisting of food, beverage, and employee costsincreased $115,000 (3.8%) to $3.03 million for the three-month period endedJune 30, 2004 from $2.92 million for the comparable three-month periodended June 30, 2003.  These costsincreased as a percentage of total revenues from 50.8% in 2003 to 53.5% in2004.  For the six-month period endedJune 30, 2004, cost of company-operated restaurants increased $259,000(4.5%) from $5.5 million in 2003 to $5.8 million in 2004. These costs increasedas a percent of total revenues from 51.6% in 2003 to 52.8% in 2004.  The increases are due to increased costs incommodities, such as meat.

 

Costof franchise operations and other cost of operations was $527,000 (9.3%) forthe three-month period ended June 30, 2004 compared to $443,000 (7.7%) in2003.   For the six-month period endedJune 30, 2004, cost of franchise operations and other cost of operationswas $1.1 million (10.0%) compared to $857,000 (8.0%) for the six-month periodended June 30, 2003.  The increaseis attributable to increased personnel costs largely associated with theCompany’s chief executive officer position being filled July 1, 2003.  Also, there has been increased spending overprior year in consumer research and development of prototype plans.

 

Restaurantoperating expenses, which include utilities, insurance, maintenance, rent andother such costs of the company-operated restaurants, increased $22,000 (2.5%)for the three-month period ended June 30, 2004 over prior year’scomparable period.   For the six-monthperiod ended June 30, 2004 restaurant operating expenses increased $82,000(4.5%) over the comparable prior period. The majority of the slight increasesare due to increased operating costs.

 

Forthe three-month periods ended June 30, 2004 and 2003, general andadministrative expenses were $548,000 and $581,000, respectively and as apercentage of total revenue were 9.7% and 10.1%, respectively.  For the six-month periods endedJune 30, 2004 and 2003, general and administrative expenses were $963,000and $1.1 million, respectively and as a percentage of total revenue were 8.8%and 10.3%, respectively.  The decreasefor the six-month period ended June 30, 2004 over the comparable priorperiod is primarily due to less legal fees incurred in 2004, as

 

13

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wellas fees associated with reimbursements to shareholders in 2003 that wereinvolved in the proxy contest and settlement in 2002.

 

Depreciationand amortization expense was $8,000 less for the three-month period endedJune 30, 2004 compared to the comparable period in 2003 and $20,000 lessfor the comparable six-month period then ended.  The decreases are attributable to property and equipment becomingfully depreciated.

 

**Other Income (Expense)**

 

Interestexpense decreased $19,800 and $38,000 for the three and six-month periods endedJune 30, 2004 versus the comparable periods in 2003, due to a loweraverage principal outstanding balance. Interest income fluctuates according tothe levels of available cash balances. The Company employs a cash management system whereby available balancesare invested on an overnight basis.

 

**Income Tax 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 six-month periods endedJune 30, 2004 is comparable to the rate of 37.8% and 38.0% for the sameperiods in 2003.

 

**Liquidity and 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.  TheCompany had positive working capital of $1.1 million and $414,000 atJune 30, 2004 and December 31, 2003, respectively.

 

Cashflows provided by operating activities were $1.5 million in 2004 compared to$877,000 in 2003. During 2004, cash flows provided by operating activities wereprimarily due to net income of $341,000 and depreciation and amortization of$608,000, decrease in other assets of $110,000 due to sale of an asset,increase in accounts payables of $344,000 offset by decreases in accruedexpenses of $154,000. During 2003, cash flows provided by operations wereprimarily due to net income of $404,000 and depreciation and amortization of$628,000 offset by decrease accounts payable and accrued expenses of $450,000.Net cash used in investing activities of $127,000 in 2004 and provided byinvesting activities of $368,000 in 2003, was for capital expenditures relatedto property and equipment and proceeds of $414,000 in 2003 from sale ofproperty.  Net cash used in financingactivities of $131,000 in 2004 was for payments on long-term debt.

 

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. Management reviews available financing alternatives to provide cash forfuture expansion, restructure existing debt, and provide additional workingcapital; however, management believes existing financing will provide adequatefunding for cash requirements.

 

14

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**CRITICAL ACCOUNTING POLICIES**

 

**Franchise Revenue**

 

Initial franchise fees are recognized when all materialservices have been substantially performed by the Company and the restauranthas opened for business.  Franchiseroyalties, which are based on a percentage of monthly sales, are recognized asincome on the accrual basis.  Costsassociated with franchise operations are recognized on the accrual basis.

 

**Accounts and Notes Receivable and Allowance for DoubtfulAccounts**

 

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 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**

 

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, ismeasured based on projected discounted future operating cash flows using adiscount rate reflecting 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.

 

**Impact of 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 Issued AccountingStandards**

 

InJanuary 2003, the FASB issued Interpretation No. 46 *Consolidation of Variable InterestEntities, an interpretation of ARB No. 51. *This Interpretation addresses the consolidation by businessenterprises of variable interest entities as defined in theInterpretation.  The Interpretationapplies immediately to variable interest entities created afterJanuary 31, 2003, and to variable

 

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interestsin variable interest entities obtained after January 31, 2003.  The application of this Interpretation didnot have any impact on the Company’s consolidated financial position, resultsof operations or cash flows of the Company. See Note 1 to the Company’sconsolidated financial statements, which are included in Item 1, Part I for adisassion of Interpretation No. 46.

 

As ofJune 30, 2004, there are no other new accounting standards issued, but notyet adopted by the Company, which are expected to be applicable to theCompany’s consolidated financial position, operating results or financialstatement disclosures.

 

**Item3.****           Quantitativeand Qualitative Disclosure about Market Risk**

 

TheCompany does not engage in derivative financial instruments or derivativecommodity instruments.  As ofJune 30, 2004, the Company’s financial instruments are not exposed tosignificant market risk due to foreign currency exchange risk.  The Company is exposed to market riskrelated to interest rates, as well as increased prices in restaurant industrycommodities 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.

 

Debt obligations held for other than trading purposesat June 30, 2004 (dollars in thousands):

 

EXPECTED MATURITY DATE

 
|                  |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Estimated  Fair Value** |   |
|-----------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|---------------------------|--------|
| Long-term debt        |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Fixed Rate            |   | $        | 269    |     | $      | 505      |   | $        | 522    |     | $      | 361            |   | $         | 337    |                      | $      | 1,822 |   | $ | 3,816 |   | $ | 4,409 |   |
| Average Interest Rate |   | 9.93     | %      | 9.94     | %      | 9.94     | %      | 10.02    | %      | 10.06    | %      | 10.07          | %      | 10.00     | %      |                      |   |
|                       |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |                           |        |  |  |  |  |  |  |  |  |

 

**Item4.****    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. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed inCompany reports filed under the Exchange Act is accumulated and communicated tomanagement, including the Company’s President and Chief Executive Officer andthe Vice President and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

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**PARTII. OTHER INFORMATION**

 

Item 1.    Legal Proceedings

 

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.  For additionaldiscussion, see Note 6 to the Company’s consolidated financial statements,which are included in Item 1., Part I.

 

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

 

Item 3.    Defaults Upon Senior Securities – N/A

 

Item 4.    Submission of Matters to aVote of Security Holders – At the Annual Meeting of the Shareholders heldJune 22, 2004, the following persons were elected to the Board ofDirectors:

 
| **Nominees**             |   | **Shares  voted for** |   | **Shares  withheld** |   |
|--------------------------|--------|-----------------------|--------|----------------------|--------|
|                     |   |                  |   |                 |   |
| Paul C. Schorr, III      |   | 9,141,437             |   | 0                    |   |
| Thomas M. Hontzas        |   | 9,141,437             |   | 0                    |   |
| Stanley L. Bozeman, Jr.  |   | 9,053,937             |   | 87,500               |   |
| William E. Proffitt      |   | 9,141,437             |   | 0                    |   |
| Jesse M. Harrington, III |   | 9,141,437             |   | 0                    |   |
| A. Jones Yorke           |   | 9,091,437             |   | 50,000               |   |
| Roger D. Sack            |   | 9,091,437             |   | 50,000               |   |
| Titus W. Greene          |   | 9,141,437             |   | 0                    |   |
| Pat Vezertzis            |   | 9,141,437             |   | 0                    |   |
| J. Alan Cowart           |   | 9,053,937             |   | 87,500               |   |

 

Item 5.    Other Information – N/A

 

Item 6.    Exhibits and Reports on Form 8-K:

 

(a)   Exhibits:

10.1Employment Agreement of James C. Verney

10.22004 Non-Employee Directors Stock Option Plan

31.1Section 302 Certificate of Chief Executive Officer

31.2        Section 302Certificate of Chief Financial Officer

32.1  Section 1350 Officer’s Certification

32.2Section 1350 Officer’s Certification

 

(b)   Reportson Form 8-K :

Form8-K/A, filed April 1, 2004, reporting under Item 4, a change inregistrant’s certifying accountant

 

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**SIGNATURES**

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned 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                                 |
|                             |   | Vice President  and Chief Financial Officer   |
|                             |   |                                          |
|                             |   |                                          |
| Date:  August 16, 2004 |   |                                          |
|                                  |        |                                               |  |  |  |

 

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