**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

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

### ** **

**FORM 10-Q**

 

**(Mark One)**

 

ý           **QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedMarch 31, 2006, or**

 

o           **TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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

####  

**Commission file number 0-25366**

 

**Western Sizzlin Corporation**

(Exact Name ofRegistrant 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)                       |       | (Zip Code)                            |

 

**(540)345-3195**

(Registrant’s TelephoneNumber Including Area Code)

 

Indicate by check markwhether the registrant: (1)  has filedall reports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes ý  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. (See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.) (Check one):

 

| o  Large Accelerated Filer |   | o  Accelerated Filer |   | ý  Non-Accelerated Filer |
|----------------------------|--------|----------------------|--------|-------------------------------|

 

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

 

As of May 12, 2006, therewere 11,888,571 shares, $0.01 per value, of common stock outstanding.

 

 

----

 

**WesternSizzlin Corporation**

** **

**Form10-Q**

**ThreeMonths Ended March 31, 2006**

**Tableof Contents**

** **
| ** **                                                                                              | **Page**   |
|---------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** |
| **PART I. FINANCIAL INFORMATION**                                                                       | 2          |
|                                                                                                    |       |
| **Item 1. Financial Statements  (Unaudited)**                                                           |       |
|                                                                                                    |       |
| Consolidated Balance Sheets – March  31, 2006 and December 31, 2005                                | 2-3        |
|                                                                                                    |       |
| Consolidated Statements of  Operations - Three Months Ended March 31, 2006 and 2005                     | 4          |
|                                                                                                    |       |
| Consolidated Statement of  Changes in Stockholders’ Equity - Three Months Ended March 31, 2006     | 5          |
|                                                                                                    |       |
| Consolidated Statements of  Cash Flows - Three Months Ended March 31, 2006 and 2005                     | 6          |
|                                                                                                    |       |
| Notes to Consolidated  Financial Statements                                                             | 7-13       |
|                                                                                                    |       |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 14-18      |
|                                                                                                    |       |
| **Item 3. Quantitative and Qualitative  Disclosure about Market Risk**                                  | 18         |
|                                                                                                    |       |
| **Item 4. Controls and Procedures**                                                                     | 18-19      |
|                                                                                                    |       |
| **PART II. OTHER INFORMATION**                                                                          | 20         |
|                                                                                                    |       |
| **Item 1. Legal Proceedings**                                                                           | 20         |
|                                                                                                    |       |
| **Item 6. Exhibits**                                                                                    | 20         |
|                                                                                                    |       |
| **Signatures**                                                                                          | 21         |
|                                                                                                    |       |
| **Exhibit  Index**                                                                                      | 22         |

 

----

 

**PART I. FINANCIAL INFORMATION**

**WESTERN SIZZLIN CORPORATION**

 

Consolidated Balance Sheets

March 31, 2006 and December 31, 2005

 
| ** **                                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                       | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                       | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                  |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                        |       | $                  | 1,662,285  |                  | $          | 1,664,848 |   |
| Short-term investments                                                                                                           |       | —             |       | 260,069               |       |
| Trade accounts receivable, less allowance for doubtful accounts of $462,657  in 2006 and $454,458 in 2005                        |       | 888,626            |       | 910,776               |       |
| Current installments of notes receivable                                                                                         |       | 155,748            |       | 212,187               |       |
| Income tax receivable                                                                                                            |       | 24,233             |       | 17,923                |       |
| Insurance receivables                                                                                                            |       | —             |       | 1,029,954             |       |
| Other receivables                                                                                                                |       | 40,671             |       | 128,375               |       |
| Inventories                                                                                                                      |       | 95,673             |       | 83,506                |       |
| Prepaid expenses                                                                                                                 |       | 323,632            |       | 292,721               |       |
| Deferred income taxes                                                                                                            |       | 247,918            |       | 226,736               |       |
| Total current assets                                                                                                             |       | 3,438,786          |       | 4,827,095             |       |
| Notes receivable, less allowance for doubtful accounts of $140,927 in  2006 and $119,126 in 2005, excluding current installments |       | 891,941            |       | 876,426               |       |
| Property and equipment, net of accumulated depreciation of $3,793,430  in 2006 and $4,218,486 in 2005                            |       | 2,393,928          |       | 1,887,450             |       |
| Franchise royalty contracts, net of accumulated amortization of  $7,721,119 in 2006 and $7,563,545 in 2005                       |       | 1,733,313          |       | 1,890,887             |       |
| Goodwill                                                                                                                         |       | 4,310,200          |       | 4,310,200             |       |
| Financing costs, net of accumulated amortization of $171,124 in 2006 and  $136,446 in 2005                                       |       | 29,086             |       | 63,764                |       |
| Investment in unconsolidated joint venture                                                                                       |       | 304,348            |       | 308,382               |       |
| Deferred income taxes                                                                                                            |       | 548,447            |       | 576,467               |       |
| Asset held for sale                                                                                                              |       | 300,000            |       | 300,000               |       |
| Other assets                                                                                                                     |       | 139,207            |       | 435,161               |       |
|                                                                                                                             |       | $                  | 14,089,256 |                  | $          | 15,475,832 |   |

 

2

----

 

 
| **Liabilities and Stockholders’  Equity**                                                                                                                      |   |       |       |       |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Current liabilities:                                                                                                                                                |   |       |       |       |   |
| Current installments of long-term debt                                                                                                                              |   | $          | 299,907    |       | $      | 1,487,964 |   |
| Accounts payable                                                                                                                                                    |   | 591,266    |       | 523,939    |   |
| Accrued expenses and other                                                                                                                                          |   | 568,630    |       | 814,005    |   |
| Total current liabilities                                                                                                                                           |   | 1,459,803  |       | 2,825,908  |   |
| Long-term debt, excluding current installments                                                                                                                      |   | 808,907    |       | 848,319    |   |
| Other long-term liabilities                                                                                                                                         |   | 49,630     |       | 42,087     |   |
| Commitments and contingencies (Note 7)                                                                                                                              |   |       |       |       |   |
| Stockholders’ equity:                                                                                                                                          |   |       |       |       |   |
| Convertible preferred stock, series A, $10 par value (involuntary  liquidation preference of $10 per share). Authorized 25,000 shares; none  issued and outstanding |   | —     |       | —     |   |
| Convertible preferred stock, series B, $1 par value (involuntary  liquidation preference of $1 per share). Authorized 875,000 shares; none  issued and outstanding  |   | —     |       | —     |   |
| Common stock, $.01 par value. Authorized 20,000,000 shares; 11,888,571  issued and outstanding shares in 2006 and 2005                                              |   | 118,886    |       | 118,886    |   |
| Additional paid-in capital                                                                                                                                          |   | 8,579,878  |       | 8,574,778  |   |
| Retained earnings                                                                                                                                                   |   | 3,072,152  |       | 3,065,854  |   |
| Total stockholders’ equity                                                                                                                                     |   | 11,770,916 |       | 11,759,518 |   |
|                                                                                                                                                                |   | $          | 14,089,256 |       | $      | 15,475,832 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**WESTERN SIZZLIN CORPORATION**

 

Consolidated Statements ofOperations

(Unaudited)

 
| ** **                                        | ** ** | **Three Months**         | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **Ended March 31,** | ** ** |
| ** **                                        | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Revenues:                                         |       |                          |       |   |   |
| Company-operated restaurants                      |       | $                             | 2,997,673  |   | $ | 3,749,611 |   |
| Franchise operations                              |       | 1,053,300                     |       | 1,081,822 |   |
| Other                                             |       | 94,677                        |       | 112,607 |   |
|                                              |       |                          |       |   |   |
| Total revenues                                    |       | 4,145,650                     |       | 4,944,040 |   |
| Costs and expenses:                               |       |                          |       |   |   |
| Cost of company-operated restaurants              |       | 2,116,509                     |       | 2,551,623 |   |
| Cost of franchise operations                      |       | 448,968                       |       | 494,879 |   |
| Other cost of operations                          |       | 83,670                        |       | 88,474 |   |
| Restaurant operating expenses                     |       | 658,434                       |       | 906,141 |   |
| General and administrative                        |       | 456,698                       |       | 526,269 |   |
| Depreciation and amortization                     |       | 260,041                       |       | 278,269 |   |
| Closed store expenses                             |       | —                        |       | 350,279 |   |
| Gain on settlement of insurance claims            |       | —                        |       | (220,351 | ) |
|                                              |       |                          |       |   |   |
| Total costs and expenses                          |       | 4,024,320                     |       | 4,975,583 |   |
|                                              |       |                          |       |   |   |
| Income (loss) from operations                     |       | 121,330                       |       | (31,543 | ) |
|                                              |       |                          |       |   |   |
| Other income (expense):                           |       |                          |       |   |   |
| Interest expense                                  |       | (46,092                       | )          | (88,996 | ) |
| Loss on early extinguishment of long term debt    |       | (92,535                       | )          | — |   |
| Interest income                                   |       | 20,566                        |       | 15,797 |   |
| Equity in loss of joint venture                   |       | (4,034                        | )          | — |   |
| Other                                             |       | 13,902                        |       | 1,650 |   |
|                                              |       |                          |       |   |   |
|                                              |       | (108,193                      | )          | (71,549 | ) |
|                                              |       |                          |       |   |   |
| Income (loss) before income tax expense (benefit) |       | 13,137                        |       | (103,092 | ) |
|                                              |       |                          |       |   |   |
| Income tax expense (benefit)                      |       | 6,839                         |       | (36,511 | ) |
|                                              |       |                          |       |   |   |
| Net income (loss)                                 |       | $                             | 6,298      |   | $ | (66,581 | ) |
|                                              |       |                          |       |   |   |
| Earnings (loss) per share:                        |       |                          |       |   |   |
| Basic                                             |       | $                             | .00        |   | $ | (.01 | ) |
| Diluted                                           |       | $                             | .00        |   | $ | (.01 | ) |

 

See accompanying notes to consolidated financial statements

 

4

----

 

**WESTERN SIZZLIN CORPORATION**

 

Consolidated Statement ofChanges in Stockholders’ Equity

Three Months Ended March 31, 2006

 

(Unaudited)

 
| ** **                                                     | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                                     | ** ** | **Shares**            | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balances, December 31, 2005                                    |       | 11,888,571            |       | $           | 118,886    |           | $          | 8,574,778    |       | $          | 3,065,854  |   | $ | 11,759,518 |   |
| Net income                                                     |       | —                |       | —      |       | —         |       | 6,298        |       | 6,298      |       |
| Compensation expense associated with stock  options plans |       | —                |       | —      |       | 5,100          |       | —       |       | 5,100      |       |
| Balances, March 31, 2006                                       |       | 11,888,571            |       | $           | 118,886    |           | $          | 8,579,878    |       | $          | 3,072,152  |   | $ | 11,770,916 |   |

 

See accompanying notes to consolidated financial statements.

 

5

----

 

**WESTERN SIZZLIN CORPORATION**

 

Consolidated Statements of CashFlows

(Unaudited)

 
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **March 31**                | ** ** |
| ** **                                                                                | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                     |       |                             |       |   |   |
| Net income (loss)                                                                         |       | $                                | 6,298      |   | $ | (66,581 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating  activities: |       |                             |       |   |   |
| Depreciation and amortization of property and equipment                                   |       | 102,467                          |       | 116,150 |   |
| Amortization of franchise royalty contracts                                               |       | 157,574                          |       | 157,575 |   |
| Amortization of financing costs                                                           |       | 4,977                            |       | 4,543 |   |
| Write off of financing costs associated with early extinguishment of  long-term debt      |       | 29,699                           |       | — |   |
| Loss on sale/disposal of property and equipment                                           |       | —                           |       | 570,092 |   |
| Gain on settlement of insurance claims                                                    |       | —                           |       | (220,351 | ) |
| Provision for doubtful accounts                                                           |       | 30,000                           |       | 28,414 |   |
| Shared-based compensation                                                                 |       | 5,100                            |       | — |   |
| Equity in loss of unconsolidated joint venture                                            |       | 4,034                            |       | — |   |
| Provision (benefit) for deferred income taxes                                             |       | 6,838                            |       | (52,406 | ) |
| (Increase) decrease in:                                                                   |       |                             |       |   |   |
| Trade accounts receivable                                                                 |       | (7,850                           | )          | (61,251 | ) |
| Notes receivable                                                                          |       | 40,924                           |       | 35,123 |   |
| Other receivables                                                                         |       | 87,704                           |       | (635,893 | ) |
| Income tax receivable                                                                     |       | (6,310                           | )          | — |   |
| Insurance receivables – business interruption                                        |       | 244,961                          |       | — |   |
| Inventories                                                                               |       | (12,167                          | )          | 52,969 |   |
| Prepaid expenses                                                                          |       | (30,911                          | )          | (105,185 | ) |
| Other assets                                                                              |       | (17,812                          | )          | 363,588 |   |
| Increase (decrease) in:                                                                   |       |                             |       |   |   |
| Accounts payable                                                                          |       | 67,327                           |       | 114,725 |   |
| Accrued expenses                                                                          |       | (245,375                         | )          | 22,601 |   |
| Other long-term liabilities                                                               |       | 7,543                            |       | (14,841 | ) |
| Net cash provided by operating activities                                                 |       | 475,021                          |       | 309,272 |   |
| Cash flows from investing activities:                                                     |       |                             |       |   |   |
| Sale (purchase) of short term investments                                                 |       | 260,069                          |       | (1,063 | ) |
| Additions to property and equipment                                                       |       | (295,177                         | )          | (42,089 | ) |
| Proceeds from sale of property                                                            |       | —                           |       | 8,000 |   |
| Proceeds from fire casualties – property losses                                      |       | 784,993                          |       | — |   |
| Net cash provided by (used in) investing activities                                       |       | 749,885                          |       | (35,152 | ) |
| Cash flows from financing activities:                                                     |       |                             |       |   |   |
| Payments on long-term debt                                                                |       | (1,227,469                       | )          | (136,383 | ) |
| Net cash used in financing activities                                                     |       | (1,227,469                       | )          | (136,383 | ) |
| Net (decrease) increase in cash and cash equivalents                                      |       | (2,563                           | )          | 137,737 |   |
| Cash and cash equivalents at beginning of period                                          |       | 1,664,848                        |       | 2,105,751 |   |
| Cash and cash equivalents at end of period                                                |       | $                                | 1,662,285  |   | $ | 2,243,488 |   |
| Supplemental disclosure of cash flow information:                                         |       |                             |       |   |   |
| Cash payments for interest and prepayment penalties                                       |       | $                                | 114,233    |   | $ | 90,688 |   |
| Income taxes paid                                                                         |       | $                                | 16,341     |   | $ | 15,025 |   |

 

See accompanying notes to consolidated financial statements.

 

6

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**WESTERNSIZZLIN CORPORATION**

** **

Notes to Consolidated Financial Statements

 

Three Months EndedMarch 31, 2006 and 2005

 

(Unaudited)

 

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

 

The accompanyingunaudited consolidated financial statements of Western Sizzlin Corporation,(the “Company”) have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialreporting information and the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andnotes required by accounting principles generally accepted in the United Statesof America for complete financial statements. In the opinion of management, allmaterial reclassifications and adjustments, consisting of normal recurringaccruals, considered necessary for a fair presentation of the results ofoperations, financial position and cash flows for each period shown have beenincluded. The unaudited consolidated financial statements and notes arepresented as permitted by Form 10-Q and do not contain certain informationincluded in the Company’s annual consolidated financial statements and 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, 2005.

 

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

 

The Company has a stock option plan under whichemployees and directors may be granted options to purchase shares of commonstock at the fair market value on the date of the grant. During the threemonths ended March 31, 2006, the contract terms of stock options for resigningboard members were reduced under the provisions of the plan and have beenreflected in the computations of the weighted average contractual term ofoutstanding options below. 

 

Effective January 1, 2006, the Company began recordingcompensation expense associated with the stock options in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment” as interpreted by SEC Staff Accounting Bulletin No. 107. Previouslythe Company had accounted for stock options according to the provisions ofAccounting Principles Board Opinion (“APB”) No. 25,  “Accounting for Stock Issued to Employees,”and, as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation”, norelated compensation expense was recorded for awards granted with no intrinsicvalue. The Company adopted the modified prospective transition method providedfor under SFAS No. 123R, and consequently has not retroactively adjustedresults from prior periods.

 

As a result of adopting SFAS No.123R, the Companyrecorded $5,100 of compensation expense for stock options within compensationcosts in Costs of Franchise Operations for the three-months ended March 31,2006, which had the effect of reducing pre-tax earnings by $5,100, net incomeby $3,162, basic earnings per share by $0 and diluted earnings per share by $0.The adoption of 123R had no impact on the Company’s cash flows.

 

Options granted underthis plan vest at the date of the grant. The fair value of each option awardwas estimated on the date of grant using the Black-Scholes option-pricingmodel. Assumptions utilized in the model were evaluated and revised, asnecessary, to reflect market conditions and experience. The risk-free interestrate for periods within the contractual life of the option is based on the U.S.Treasury yield curve in effect at the time of the grant. Expected volatilitiesare based on the historical volatility of the Company’s stock for a periodequal to the expected term of the options. The expected term of the optionsrepresents the period of time that options granted are outstanding and isestimated using historical exercise and termination experience.

 

The fair value of optionsgranted during the three-month period ended March 31, 2006 was estimated on thedate of grant using the Black-Scholes option pricing model based on theassumptions in the table below. There were no options granted during thethree-month period ended March 31, 2005 and the difference between applying theintrinsic value method under APB No. 25 and the fair value method under SFAS123 was not material.

 

7

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| Expected term  (years)   |   | 5      |   |
|--------------------------|--------|--------|--------|
| Risk-free  interest rate |   | 4.82   | %      |
| Volatility               |   | 35.87  | %      |
| Dividend yield           |   | — |   |

 

There were 10,000 stockoptions granted during the three-month period ended March 31, 2006, all ofwhich have a fair value at the date of grant of $.51.

 

The following tablesummarizes stock options outstandings as of March 31, 2006, as well as activityduring the three-month period then ended:

 
| ** **                 | ** ** | ** **      | ** ** | **Exercise Price Per Share** | ** ** | **Contractual  Term** | ** ** | **Aggregate** | ** ** |
|----------------------------|------------|-----------------|------------|---------------------------------------------|------------|-----------------------|------------|---------------|------------|
| ** **                 | ** ** | **Options**     | ** ** | **Weighted**                                | ** ** | **Weighted**          | ** ** | **Intrinsic** | ** ** |
| ** **                 | ** ** | **Outstanding** | ** ** | **Average**                                 | ** ** | **Average**           | ** ** | **Value**     | ** ** |
| Balance, December 31, 2005 |       | 670,000         |       | $                                           | .90        |                  |       |          |       |   |
| Granted                    |       | 10,000          |       | 1.30                                        |       |                  |       |          |       |
| Exercised                  |       | —          |       |                                        |       |                  |       |          |       |
| Balance, March 31, 2006    |       | 680,000         |       | $                                           | .90        |                  | 4.8        |          | $          | 269,900 |   |
|                            |            |                 |            |                                             |            |                       |            |               |            |  |  |

 

All options outstandingat March 31, 2006 are exercisable. At March 31, 2006, there were 320,000 sharesavailable for future grants under the plan.

 

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

 

The Company conforms tothe provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwilland Other Intangible Assets.”  Under SFASNo. 142, goodwill and intangible assets deemed to have indefinite lives arereviewed for impairment and written down and charged to results of operationswhen their carrying amount exceeds their estimated fair value. The Company isrequired to perform impairment tests each year, or between yearly tests incertain circumstances, for goodwill. There can be no assurance that futureimpairment tests will not result in a charge to earnings.

 

Therewere no changes in the net carrying amount of goodwill for the three monthsended March 31, 2006 or the three months ended March 31, 2005.

 

*AmortizingIntangible Assets*

 

Franchiseroyalty contracts are amortized on a straight-line basis over fifteen years,the estimated average life of the franchise agreements. The Company assessesthe recoverability of this intangible asset by determining whether theamortization of the franchise royalty contracts balance over their remaininglife can be recovered through undiscounted future operating cash flows of theacquired operation. The amount of impairment, if any, is measured based onprojected discounted future operating cash flows using a discount ratereflecting the Company’s average cost of funds.

 
| ** **                     | ** ** | ** **   | ** ** | **As of March 31,  2006** | ** ** | ** **       | ** ** |
|--------------------------------|------------|--------------|------------|------------------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **Gross**    | ** ** | **Weighted average**                | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **carrying** | ** ** | **Amortization**                         | ** ** | **Accumulated**  | ** ** |
| ** **                     | ** ** | **amount**   | ** ** | **Period**                               | ** ** | **Amortization** | ** ** |
| Amortizing  intangible assets: |       |         |       |                                     |       |             |       |
| Franchise Royalty Contracts    |       | $            | 9,454,432  |                                     | 15.0  yrs. |             | $          | 7,721,119 |   |
|                                |            |              |            |                                          |            |                  |            |  |  |

 

8

----

 

Aggregate amortizationexpense for amortizing intangible assets for the three months ended March 31,2006 was $157,574. Estimated amortization expense is $630,300 per year throughDecember 31, 2008.

 

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

 

Basic earnings per shareexcludes dilution and is computed by dividing income available to commonstockholders by the weighted-average number of common shares outstanding forthe period. Diluted earnings per share reflects the potential dilution thatcould occur if securities or other contracts to issue common stock wereexercised or converted into common stock or resulted in the issuance of commonstock that then shared in the earnings of the Company. Stock options for 30,000and 175,000 shares of common stock for the three months ended March 31, 2006and 2005, respectively, were not included in computing diluted earnings becausethe effect of these options are anti-dilutive.

 

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

 
| ** **                             | ** ** | ** **      | ** ** | **Weighted**      | ** ** | **Earnings**       | ** ** |
|----------------------------------------|------------|-----------------|------------|-------------------|------------|--------------------|------------|
| ** **                             | ** ** | **Income**      | ** ** | **Average**       | ** ** | **(Loss)**         | ** ** |
| ** **                             | ** ** | **(Loss)**      | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
| ** **                             | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
| **Three  months ended March 31, 2006** |       |            |       |              |       |               |       |
| Net income – basic                |       | $               | 6,298      |              | 11,888,571 |               | $          | .00 |   |
| Net income – diluted              |       | $               | 6,298      |              | 12,035,070 |               | $          | .00 |   |
|                                   |       |            |       |              |       |               |       |
| **Three months ended March 31, 2005**  |       |            |       |              |       |               |       |
| Net loss – basic                  |       | $               | (66,581    | )                 | 11,908,571 |               | (.01       | ) |
| Net loss – diluted                |       | $               | (66,581    | )                 | 11,908,571 |               | $          | (.01 | ) |

 

**(5)****                                 ClosedStore Expense**

 

In the three months endedMarch 31, 2005, the Company recorded closed store expenses of $350,279, which includedimpairments of $128,471 associated with the end of a subleased property due toa buyout of the lease and impairments related to the closing of a Company-operatedrestaurant of $221,808. There were no additional closed store expenses for thethree months ended March 31, 2006.

 

**(6)****                                 ReportableSegments**

 

The Company has defined two reportable segments:Company-operated restaurants and franchising and other. The Company-operatedrestaurant segment consists of the operations of all Company-operatedrestaurants and derives its revenues from restaurant operations. Thefranchising and other segment consists primarily of franchise sales and supportactivities and derives its revenues from sales of franchise and developmentrights and collection of royalties from franchisees.

 

Generally, the Company evaluates performance andallocates resources based on income from operations before income taxes. Capitalcosts are allocated to segments based upon predetermined rates or actual orestimated resource usage. Corporate and franchise support expenses of $831,149and $1,016,506 for three months ended March 31, 2006 and 2005, respectively,are allocated entirely to franchising and other and are not allocated to Company-operatedrestaurants. The reason for the decrease in 2006 over 2005 for the three monthsended March 31, 2006 is attributable to 2005 spending in growth projectsincluding consumer research, prototype plans, and consulting fees. Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies.

 

Reportable segments are business units that providedifferent products or services. Separate management of each segment is requiredbecause each business unit is subject to different operational issues andstrategies. Through March 31, 2006, all revenues for each business segment werederived from business

 

9

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activities conducted with customers located in theUnited States. No single external customer accounted for 10% or more of theCompany’s consolidated revenues.

 

The following tablesummarizes reportable segment information:

 
| ** **                                              | ** ** | **Three Months**         | ** ** |
|---------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **Ended March 31,** | ** ** |
| ** **                                              | ** ** | **2006**                      | ** ** | **2005** | ** ** |
|                                                    |       |                          |       |   |   |
| Revenues from reportable segments:                      |       |                          |       |   |   |
| Restaurants                                             |       | $                             | 2,997,673  |   | $ | 3,749,611 |   |
| Franchising and other                                   |       | 1,147,977                     |       | 1,194,429 |   |
|                                                    |       |                          |       |   |   |
| Total revenues                                          |       | $                             | 4,145,650  |   | $ | 4,944,040 |   |
| Depreciation and amortization:                          |       |                          |       |   |   |
| Restaurants                                             |       | $                             | 90,735     |   | $ | 106,094 |   |
| Franchising and other                                   |       | 169,306                       |       | 172,175 |   |
| Total depreciation and amortization                     |       | $                             | 260,041    |   | $ | 278,269 |   |
| Interest expense:                                       |       |                          |       |   |   |
| Restaurants                                             |       | $                             | 46,031     |   | $ | 87,976 |   |
| Franchising and other                                   |       | 61                            |       | 1,020 |   |
|                                                    |       |                          |       |   |   |
| Total interest expense                                  |       | $                             | 46,092     |   | $ | 88,996 |   |
|                                                    |       |                          |       |   |   |
| Interest income:                                        |       |                          |       |   |   |
| Restaurants                                             |       | $                             | 19,504     |   | $ | 11,613 |   |
| Franchising and other                                   |       | 1,062                         |       | 4,184 |   |
| Total interest income                                   |       | $                             | 20,566     |   | $ | 15,797 |   |
|                                                    |       |                          |       |   |   |
| Income (loss) before income tax (benefit) expense:      |       |                          |       |   |   |
| Restaurants                                             |       | $                             | (73,430    | ) | $ | (127,061 | ) |
| Franchising and other                                   |       | 86,567                        |       | 23,969 |   |
|                                                    |       |                          |       |   |   |
| Total (loss) income before income tax (benefit) expense |       | $                             | 13,137     |   | $ | (103,092 | ) |

 
| ** **                          | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                          | ** ** | **2006**           | ** ** | **2005**           | ** ** |
| Total assets:                       |       |               |       |               |       |
| Restaurants                         |       | $                  | 10,248,249 |               | $          | 8,646,411 |   |
| Franchising and other               |       | 3,841,007          |       | 7,969,776          |       |
|                                |       |               |       |               |       |
| Total assets                        |       | $                  | 14,089,256 |               | $          | 16,616,187 |   |
|                                |       |               |       |               |       |
| Expenditures for fixed assets:      |       |               |       |               |       |
| Restaurants                         |       | $                  | 293,043    |               | $          | 37,748 |   |
| Franchising and other               |       | 2,134              |       | 4,341              |       |
|                                |       |               |       |               |       |
| Total expenditures for fixed assets |       | $                  | 295,177    |               | $          | 42,089 |   |

 

10

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**(7)****                                 Contingencies**

 

As of March 31, 2006, theCompany accrued approximately $177,000 related to the Dickson, Tennessee claimwhich was settled April 11, 2006 for the amount accrued. In the case of allknown contingencies, the Company accrues for an obligation, including estimatedlegal costs, when a loss is probable and the amount is reasonably estimable. Asfacts concerning contingencies become known to the Company, the Companyreassesses its position with respect to accrued liabilities and other expenses.These estimates are subject to change as events evolve and as additionalinformation becomes available during the litigation process.

 

**FFCA**

 

In January 2001, theCompany executed a series of Master Lease Agreements (“Agreements”) relating tocertain franchised properties formerly operated by other 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, (FFCA), to be legally binding; however, no signed copieswere ever returned to the Company. At the end of January 2002, there remainedonly 25 Former Quincy’s operated by franchisees, FFCA having taken back, in2001 and 2002, other restaurants previously operated by franchisees. TheAgreements, incomplete for a lack of signature by FFCA, provided for rentalpayments from the Company to FFCA. However, the cost of any rental payments waspassed on to the franchisees operating the properties. During 2002 and 2003,nine of the remaining twenty-five properties were closed and the franchiseesdiscontinued making payments to the Company. On May 15, 2003, the Company senta letter to FFCA, providing notice of the Company’s termination of anytenancies at-will on any remaining Former Quincy’s units effective May 31, 2003.The Company has never received a response from FFCA.

 

Following the May 15,2003 termination of the tenancies at-will, the Company advised five franchiseeswho continued to operate former Quincy’s units at that time to make any rentpayments directly to FFCA. With regard to eleven other former Quincy’s units, theCompany became aware, on or about May 15, 2003, that the franchisees hadelected to make their payments directly to FFCA and it is the Company’s understandingthat FFCA has accepted these payments. There can be no assurances that thefranchisees have made their payments and will continue to make their leasepayments in the future or that they even continue to operate these restaurants.The Company’s estimate of the total payments that were made directly to FFCAfor these sixteen franchisees, or former franchisees, is approximately$3,548,000 through December 31, 2005.

 

While the Company disputesany liability for any of the following amounts, to the Company’s knowledge, asof March 31, 2006 a total of approximately $2,635,224 of rental payments hadnot been made by either the franchisees or by the Company with regard to theabove-referenced nine closed properties.

 

In accordance with theCompany’s position, the Company has returned to FFCA any invoice for rentexpense, or tax statement, received after May 15, 2003, with a cover letterexplaining that the Company is not responsible for any such amounts. TheCompany did not receive a response to any of these letters until late June2005, when a representative of FFCA called to inquire about one of theseletters. The Company has provided FFCA with additional copies of previouscorrespondence sent to FFCA. While the Company expects that we may have furtherdiscussions with FFCA regarding this matter in the future, FFCA has notdisputed the Company’s position or made any demand since receiving the copiesof previous correspondence sent to FFCA. The Company intends to vigorouslycontest any potential claims asserted by FFCA. While the Company has previouslyengaged in discussions with FFCA of the properties to resolve any rentalpayments claimed by FFCA under the Agreements, it is not possible at this timeto determine the outcome of these discussions.

 

**Dickson,Tennessee Claim**

 

In 1994, the Companyentered into a lease agreement for a restaurant located in Dickson, Tennessee. Thelease agreement has an original term of 15 years. The Company ceased operationson the premises as a restaurant in 1996 and subsequently subleased the property.The location has been vacant since September 2001. In June 2004, the Companyadvised the landlord that the Company was surrendering the property. TheCompany has asserted that the landlord was obligated to attempt to find areplacement tenant.

 

11

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Thereafter, the landlordfiled several collection actions alleging default under the lease agreement andseeking collection of unpaid rent, real estate taxes and attorney’s fees. Thelandlord’s initial filings were resolved with the payment of rent and relatedobligations. Later filings were defended on the basis that the landlord hadfailed to mitigate any damages. Judgments granted the landlord in a totalamount in excess of $142,000 were appealed.

 

On April 11, 2006, theCompany resolved all disputes with the landlord with the execution of a formalsettlement agreement. The Company has been released from any furtherobligations under the lease, and all pending judgments have been satisfied, inexchange for a payment by the Company to the landlord in the amount of$177,000, also made on April 11, 2006.

 

**ChubbClaim**

 

In November 2004, ChubbInsurance filed suit in the Circuit Court for the City of Roanoke against oursubsidiary, seeking recovery of allegedly unpaid premiums in the amount of$97,249. Western Sizzlin Stores has never been billed by Chubb and never hadany direct contractual relations with Chubb. Payments were sent to an insurancebroker handling insurance needs for Western Sizzlin Stores. Chubb’s claim wassettled in February 6, 2006 with a payment of $15,000.

 

**Lawrenceville,Georgia Casualty**

 

On July 11, 2004, thebuilding, improvements, and contents located on real property owned by theCompany in Lawrenceville, Georgia were completely destroyed by fire. As aresult of this casualty, the Company terminated the lease of the tenantoperating the restaurant on these premises. Insurance proceeds of $591,000 werereceived in April 2005 and a gain on the casualty of $220,351 has been recordedas gain on settlement of insurance claims in the accompanying statement ofoperations for the three months ended March 31, 2005. The land is currently forsale and the Company does not anticipate any impairment on this property basedon current estimates of fair value. In accordance with the note payableagreement related to the property, the insurance proceeds were remitted to theCompany’s lender on April 8, 2005. Subsequently, in February 2006, theremainder of the loan balance, $280,663, was paid off and the lender acceptedthe total repayment of the loan without the application of a prepaymentpenalty.

 

**Waldorf,Maryland Casualty**

 

In July 2005, a building,improvements, and contents, located upon real property leased by the Companyfor operation of a company-owned Great American Buffet restaurant, in Waldorf,Maryland, were totally destroyed by fire. The Company insured the premises,including buildings and contents, against casualty, such as fire. The Companyalso insured the premises for the interruption of business income. The fireoccurred shortly after the Company had provided timely notice to the landlordof our desire to extend the lease through a renewal term ending on December 31,2010. Since the fire, the Company repeatedly demanded that the landlord rebuildthe premises and asserted that the landlord was responsible for any cost torebuild in excess of the available insurance proceeds.

 

In August 2005, thelandlord filed an action for a declaratory judgment in the Circuit Court forCharles County, Maryland. On or about December 14, 2005, the Company enteredinto a settlement agreement with the Landlord which resolved all litigationclaims regarding the parties’ respective interests in the real property andinsurance proceeds covering real and personal property involved in the casualty.Pursuant to this agreement the Company received insurance proceeds ofapproximately $1,030,000 in the first quarter of 2006.

 

Revenues for the threemonths ended March 31, 2005 were $506,000, with an operating loss of $2,000 forthe Waldorf, Maryland location. The net book value of related assets of$171,757 was written off and the insurance proceeds are included in otherreceivables on the accompanying consolidated balance sheets at December 31,2005.

 

12

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**Other**

 

The Company is involvedin various other claims and legal actions which are routine litigation mattersincidental to the business. In the Company’s opinion, the ultimate dispositionof these matters will not have a material adverse effect on the financial condition,results of operations or liquidity.

 

**(8)****                                 Changein Estimate**

 

AtDecember 31, 2005, $83,500 had been accrued for management’s estimate of losseson subleases through the end of the lease termination date of June 30, 2006. Basedon a subsequent guarantee obtained on the rent and subsequent collection ofpast due rents, the Company has reversed the accrual as of March 31, 2006 andhas included the reversal as a reduction of restaurant operating expenses.

 

**(9)****                                 EarlyExtinguishment of Long-Term Debt**

 

Payments on long-termdebt for the quarter ended March 31, 2006 include the extinguishment of notespayable totalling $1,104,482. In connection with the early extinguishment, theCompany wrote-off deferred financing costs of $29,699 and incurred prepayment penaltiesof $62,836. The write-off of deferred financing costs and prepayment penaltieshave been reported as loss on early extinguishment of long-term debt in theaccompanying consolidated statement of operations for the three months endedMarch 31, 2006.

 

**(10)****         Investmentin Unconsolidated Joint Venture**

 

TheCompany is a partner in a 50/50 joint venture with a franchisee, for a newrestaurant in Harrisonburg, Virginia. During October 2005, the joint ventureentered into a loan agreement for $3.05 million and the Company has guaranteed50% of the loan obligation. The Company estimated the fair value of theguarantee to be approximately $30,000 and recorded the amount in otherlong-term liabilities and its investments in unconsolidated joint venture onthe accompanying balance sheet at December 31, 2005. There was no change atMarch 31, 2006. The term of the guarantee extends through July 1, 2026 and theCompany would be required to perform under the guarantee should the jointventure not be able to meet its scheduled principal and interest payments. Pursuantto the joint venture agreement, a cash contribution of $300,000 from each 50/50partner was also made at the closing of this financing. The Company accountsfor its investment using the equity method and the Company’s share of the netloss for the joint venture of $4,553 for the quarter ended March 31, 2006 isincluded in equity in loss of unconsolidated joint venture. The restaurant isscheduled to open during the fourth quarter of 2006.

 

**FinancialData**

 

The following is selectedfinancial information for the joint venture at March 31, 2006:

 
| ** **                            | ** ** | **Three Months  Ended****March 31, 2006** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **(unaudited)**                                          | ** ** |
| **Statement of Operations Data:**     |       |                                                     |       |
| Total revenues                        |       | $—                                                  |       |
| Prototype plan expense                |       | 5,737                                                    |       |
| Interest                              |       | 6,336                                                    |       |
| Net loss                              |       | (9,106                                                   | )          |
| **Balance Sheet Data:**               |       |                                                     |       |
| Cash                                  |       | $22,176                                                  |       |
| Land and leasehold improvements       |       | 990,441                                                  |       |
| Loan costs, net                       |       | 14,615                                                   |       |
| Total assets                          |       | 1,027,232                                                |       |
| Loan payable                          |       | 370,000                                                  |       |
| Accounts payable and accrued expenses |       | 2,000                                                    |       |
| Members’ equity                  |       | 547,658                                                  |       |

 

13

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

 

**Overview**

 

The following discussionmay include forward-looking statements including anticipated financial performance,business prospects, the future opening of Company-operated and franchisedrestaurants, anticipated capital expenditures, and other matters. Allstatements other than statements of historical fact are forward-lookingstatements. Section 27A of the Securities Act of 1933 (as amended) and Section21E of the Securities Exchange Act of 1934 (as amended) provide safe harborsfor forward-looking statements. In order to comply with the terms of these safeharbors, the Company notes that a variety of factors, individually or in theaggregate, could cause the Company’s actual results and experience to differmaterially from the anticipated results or other expectations expressed in theCompany’s forward-looking statements including, without limitation, thefollowing: the ability of the Company or its franchises to obtain suitablelocations for restaurant development; consumer spending trends and habits;competition in the restaurant segment with respect to price, service, location,food quality and personnel resources; weather conditions in the Company’soperating regions; laws and government regulations; general business andeconomic conditions; availability of capital; success of operating initiativesand marketing and promotional efforts; and changes in accounting policies. Inaddition, the Company disclaims any intent or obligation to update thoseforward-looking statements.

 

The Company operated andfranchised a total of 137 restaurants located in 19 states, including 5Company-owned and 132 franchise restaurants as of March 31, 2006. Therestaurants include a family steakhouse concept and a steak and buffet concept.

 

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

###### ** **

Net incomefor the three months ended March 31, 2006 was $6,298 compared to net a loss of$66,581 for the three months ended March 31, 2005.

 

The following table setsforth for the periods presented the percentage relationship to total revenuesof certain items included in the consolidated statements of income and certainrestaurant data for the periods presented:

 
| ** **                              | ** ** | **Three Months**         | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Ended March 31,** | ** ** |
| ** **                              | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| Revenues:                               |       |                          |       |   |   |
| Company-operated restaurants            |       | 72.3                          | %          | 75.8 | % |
| Franchise royalties and fees            |       | 25.4                          |       | 21.9 |   |
| Other sales                             |       | 2.3                           |       | 2.3 |   |
| Total revenues                          |       | 100.0                         |       | 100.0 |   |
|                                    |       |                          |       |   |   |
| Cost of company-operated restaurants    |       | 51.1                          |       | 51.6 |   |
| Cost of franchise operations            |       | 10.8                          |       | 10.0 |   |
| Other cost of operations                |       | 2.0                           |       | 1.9 |   |
| Restaurant operating expenses           |       | 15.9                          |       | 18.3 |   |
| General and administrative              |       | 11.0                          |       | 10.6 |   |
| Depreciation and amortization           |       | 6.3                           |       | 5.6 |   |
| Closed store expenses                   |       | —                        |       | 7.1 |   |
| Gain on settlement of insurance claims  |       | —                        |       | (4.5 | ) |
| Total costs and expenses                |       | 97.1                          |       | 100.6 |   |
|                                    |       |                          |       |   |   |
| Income (loss) income from operations    |       | 2.9                           |       | (.6 | ) |
|                                    |       |                          |       |   |   |
| Other income (expense)                  |       | (2.6                          | )          | (.1 | ) |
|                                    |       |                          |       |   |   |
| Income (loss) before income tax benefit |       | .3                            |       | (.7 | ) |
| Income tax expense (benefit)            |       | .1                            |       | (.7 | ) |
| Net income (loss)                       |       | .2                            | %          | (1.4 | )% |

 

14

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| ** **                              | ** ** | **Three Months**         | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Ended March 31,** | ** ** |
| ** **                              | ** ** | **2006**                      | ** ** | **2005** | ** ** |
| **Restaurant Data**                     |       |                          |       |   |   |
| Number of Company-Operated Restaurants: |       |                          |       |   |   |
| Beginning of period                     |       | 5                             |       | 7 |   |
| Opened                                  |       | —                        |       | — |   |
| Closed                                  |       | —                        |       | 1 |   |
| Franchised                              |       | —                        |       | — |   |
| End of period                           |       | 5                             |       | 6 |   |
|                                    |       |                          |       |   |   |
| Number of U.S. Franchised Restaurants:  |       |                          |       |   |   |
| Beginning of period                     |       | 135                           |       | 147 |   |
| Opened                                  |       | —                        |       | — |   |
| Closed                                  |       | (3                            | )          | (1 | ) |
| End of period                           |       | 132                           |       | 146 |   |

 

**Revenues**

** **

Company-operatedrestaurant revenues decreased by $751,938 (20.1%) to $3.0 million for the threemonths ended March 31, 2006 as compared to $3.7 million for the comparablethree months ended March 31, 2005. The decrease was largely attributable to theclosing of a Company-operated location in February 2005, resulting inapproximately $180,000 in lost revenues for the three months ended March 31,2006, a closing of a Company-operated location in July 2005 due to a total lossby fire casualty resulting in approximately $506,000 in lost revenues for thethree months ended March 31, 2006, and the closing of a Company-operatedlocation in Northern Virginia for three weeks during the three months endedMarch 31, 2006 for remodel. Additionally, same store sales for the three monthsended March 31, 2006, experienced an overall decrease of 2.8% over prior period,which did not take into account the comparable results of the Manassas,Virginia location which was under remodel during the first quarter of 2006.

 

Franchiseand other revenues decreased 3.9% to $1.1 million for the three months endedMarch 31, 2006 as compared to $1.2 million for the comparable three monthsended March 31, 2005. The decrease was attributable to fewer franchised unitsin the system at March 31, 2006 as compared to March 31, 2005. System-widesales for the franchise system for the three months ended March 31, 2006 were$53.6 million compared to $51.5 million for the same period in 2005. Same storesales for the three months ended March 31, 2006 increased 1.81% over 2005.

 

###### **Costs and Expenses**

###### ** **

Costof Company-operated restaurants, consisting primarily of food, beverage, andemployee costs decreased by $435,100 (17.1%) to $2.1 million for the three monthsended March 31, 2006 from $2.6 million for the three months ended March 31, 2005.These costs decreased as a percentage of total revenues from 51.6% in 2005 to51.1% in 2006. The decrease in the costs were largely attributable to theclosing of a Company-operated location in February 2005 and the closing due tofire of a Company-operated location in July 2005.

 

15

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Costof franchise operations and other cost of operations were $532,000 for thethree months ended March 31, 2006 compared to $583,000 in 2005. The decrease wasattributable to increased spending in growth projects for 2005 includingconsumer research of $2,000, prototype plan development of $18,000 andfranchise consulting costs of $6,000 associated with evaluation of the Company’scurrent systems.

 

Restaurantoperating expenses, which include utilities, insurance, maintenance, rent andother such costs of the Company-operated restaurants, decreased by $248,000 (27.4%)for the three months ended March 31, 2006 versus the prior year’s comparableperiod. These expenses as a percentage of total revenues decreased to 15.9% in2006 compared to 18.3% in 2005 for the comparable period. The decrease was attributableto closing a Company-operated location in February 2005 and another in July2005, as well as the reversal of $83,500 for the estimate of losses onsubleases.

 

Forthe three months ended March 31, 2006 and 2005, general and administrativeexpenses were $457,000 and $526,000, respectively and as a percentage of totalrevenue were 11.0% and 10.6%, respectively. The decrease was primarily due tolegal fees associated with litigation matters during the first quarter of 2005.

 

Depreciationand amortization expense was $18,000 (6.6%) less for the three months endedMarch 31, 2006 versus the three months ended March 31, 2005. The decreases wereattributable to write-off of impaired property and equipment and write off offinancing costs due to early extinguishment of long-term debt.

 

Closedstore expenses were $350,000 (7.1%) for the three months ended March 31, 2005. Theseexpenses included impairment of $128,000 associated with the end of a subleasedproperty due to a buyout of the lease and impairments related to the closing ofa Company-operated restaurant of $222,000 in February 2005. The first quarterof 2006 did not include closed store expenses.

 

Gain on settlement ofinsurance claims of $220,351 in the three months ended March 31, 2005 wasattributable to insurance proceeds received on the Lawrenceville, Georgiacasualty. The first quarter of 2006 did not include such gains.

 

**OtherIncome (Expense)**

 

Interest expense decreased$43,000 for the three months ended March 31, 2006 versus the three months endedMarch 31, 2005 due to the payoff of three loans during the first quarter of2006. Prepayment penalties of $63,000 and the write off of financing costs of$30,000 were included in loss on early extinguishment. Interest incomefluctuates according to the levels of available cash balances. The Companyemploys a cash management system whereby available balances are invested on anovernight basis.

 

Other income increasedslightly by $12,000 for the three months ended March 31, 2006 versus the threemonths ended March 31, 2005, based on timing issues in regards to rebates.

 

Income tax expense isdirectly affected by the levels of pretax income. The Company’s effective taxrate was 52.1% and 35.4% for the three months ended March 31, 2006 and 2005,respectively. The increase in 2006 is due to the break-even results of theCompany during the quarter ended March 31, 2006.

 

###### **Liquidity and Capital Resources**

###### ** **

Historically, the Companyhas leased the majority of its restaurants and through a strategy of controlledgrowth and has financed operations from operating cash flows, the utilizationof the Company’s line of credit and long-term debt provided by various lenders.The Company had working capital of $2.0 million at March 31, 2006 and at December31, 2005.

 

Cash flows provided byoperating activities were $475,000 in 2006 compared to $309,000 in 2005. During2005, cash flows provided by operations were primarily due to net loss of $67,000and depreciation and amortization of $278,000, loss on sale/disposal ofproperty and equipment $350,000, offset by increase in trade accountsreceivable and other receivables of $697,000. During 2006, cash flows providedby operations were primarily due to net income of $6,000, depreciation andamortization of $260,000, and insurance proceeds of $245,000. Net cash providedby investing activities of $750,000 in 2006 was for

 

16

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capital expendituresrelated to property and equipment, sale of investments and proceeds forproperty losses while net cash used in investing activities of $35,000 in 2005was for capital expenditures related to property and equipment and purchase ofinvestments. Net cash used in financing activities of $1.2 million in 2006 and$136,000 in 2005 was for payments on long-term debt including the payoff ofthree loans during the first quarter of 2006.

 

Management believes thatthe Company’s short-term cash requirements will include a remodel in FallsChurch, Virginia and capital improvements to Company-operated restaurants.

 

The Company utilizes itsexisting line of credit to provide short-term funding in addition to cash fromoperations. Management reviews available financing alternatives to provide cashfor future expansion, restructure existing debt, and provide additional workingcapital; however, management believes existing financing will provide adequatefunding for cash requirements.

 

# **CRITICALACCOUNTING POLICIES**

# ** **

Our discussion andanalysis of financial condition and results of operations is based on theconsolidated financial statements and accompanying notes that have beenprepared in accordance with United States generally accepted accountingprinciples. The preparation of these consolidated financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

 

Application of thecritical accounting policies discussed below requires significant judgments bymanagement, often as a result of the need to make estimates of matters that areinherently uncertain. If actual results were to differ materially from theestimates made, the reported results could be materially affected. We are notcurrently aware of any reasonably likely events or circumstance that wouldresult in materially different results. Our senior management has reviewed thecritical accounting policies and estimates and the Management’s Discussion andAnalysis regarding them with the Audit Committee of the Board of Directors.

 

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

 

We collect royalties, andin some cases rent, from franchisees. We view trade accounts and notesreceivable and the related allowance for doubtful accounts as a criticalaccounting estimate since the allowance for doubtful accounts is based onjudgments and estimates concerning the likelihood that individual franchiseeswill pay the amounts included as receivables from them. In determining theamount of allowance for doubtful accounts to be recorded for individualfranchisees, we consider the age of the receivable, the financial stability ofthe franchisee, discussions that may have occurred with the franchisee and ourjudgment as to the overall collectibility of the receivable from the franchisee.In addition, we establish an allowance for all other receivables for which nospecific allowances are deemed necessary. If average sales or the financialhealth of franchisees were to deteriorate, we might have to increase theallowance for doubtful accounts.

 

*Long-livedAssets, Franchise Royalty Contracts and Goodwill*

 

We view the determinationof the carrying value of long-lived assets, franchise royalty contracts andgoodwill as critical accounting estimates since we must evaluate the estimatedeconomic useful life in order to properly depreciate or amortize our long-livedassets and franchise royalty contracts and because we must consider if thevalue of any of our long-lived assets have been impaired, requiring adjustmentsto the carrying value. Goodwill is not subject to amortization but is subjectto at least an annual impairment test to determine if the carrying amountexceeds its fair value.

 

Economic useful life isthe duration of time the asset is expected to be productively employed, whichmay be less than its physical life. The estimated economic useful life of anasset is monitored to determine if it continues to be appropriate in light ofchanges in business circumstances.

 

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*Commitmentsand Contingencies*

 

We view accounting forcontingencies as a critical accounting estimate since loss contingenciesarising from claims, assessments, litigation, fines and penalties and othersources require judgment as to any probable liabilities incurred. Actualresults could differ from the expected results determined based on suchestimates.

 

**OTHER**

 

###### **Impact of Inflation**

###### ** **

Theimpact of inflation on the costs of food and beverage products, labor and realestate can affect the Company’s operations. Management believes the Company hashistorically been able to pass on increased costs through certain selected menuprice increases and has offset increased costs by increased productivity andpurchasing efficiencies, but there can be no assurance that the Company will beable to do so in the future. Management anticipates that the average cost ofrestaurant real estate leases and construction cost could increase in thefuture which could affect the Company’s ability to expand. In addition,mandated health care or additional increases in the federal or state minimumwages could significantly increase the Company’s costs of doing business.

 

##### **Impact of Recently Issued Accounting Standards**

#####  

As of March 31, 2006,there were no new accounting standards issued but not yet adopted by theCompany, which are expected to be applicable to the Company’s consolidatedfinancial position, operating results or financial statement disclosures.

 

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

 

The Company does notengage in derivative financial instruments or derivative commodity instruments.As of March 31, 2006, the Company’s financial instruments were not exposed tosignificant market risk due to foreign currency exchange risk. The Company isexposed to market risk related to interest rates, as well as increased pricesin 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 flowsand related weighted average interest rates by expected maturity dates.

 

Debtobligations held for other than trading purposes at March 31, 2006 (dollars inthousands):

 

#### EXPECTED MATURITY DATE

 
| ** **             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------|------------|
| Long-term debt         |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                           |       |
| Fixed Rate             |       | $        | 261        |     | $          | 163      |       | $        | 119        |     | $          | 110            |       | $         | 121        |                           | $          | 335 |   | $ | 1,109 |   | $ | 1,219 |   |
| Average Interest  Rate |       | 9.88     | %          | 9.96     | %          | 10.03    | %          | 10.07    | %          | 10.07    | %          | 10.07          | %          | 10.00     | %          |                           |       |
|                        |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                                |            |  |  |  |  |  |  |  |  |

 

**Item 4. Controlsand Procedures**

 

**Our senior management, including the Chief ExecutiveOfficer and Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of March 31, 2006. Based ontheir evaluation as of December 31, 2005, they had concluded that thedisclosure controls and procedures were ineffective in providing reasonableassurance that the information required to be disclosed by us in our annualreport on Form 10-K was summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and Form 10-K. Amaterial weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected. As of December 31, 2005, management identified amaterial weakness due to limited financial and accounting personnel with theappropriate expertise to ensure that our annual and periodic financialstatements comply with generally accepted**

 

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**accounting principles (“GAAP”) and SEC reportingrequirements. This weakness still exists as of March 31, 2006.**

** **

**The ineffective control over the application of GAAP andSEC reporting requirements related to the financial reporting process couldresult in a material misstatement to our annual or interim financial statementsthat may not be prevented or detected. Management has begun to address thisweakness by formalizing a consulting relationship with an accounting firm otherthan our independent registered public accounting firm with appropriateexpertise in these matters. We intend to use this firm to assist with thepreparation and review of our filings beginning with the second quarter of 2006.There were no other changes in our internal controls or in other factors thatcould significantly affect these controls since the evaluation process wascompleted.**

 

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# **PARTII. OTHER INFORMATION**

# ** **

Item 1.    LegalProceedings

 

In addition to thoseproceedings discussed in the Company’s consolidated financial statementsincluded in Item 1, Part 1, the Company is involved in various other claims andlegal actions which are routine litigation matters incidental to the business. Inthe opinion of the management, the ultimate disposition of these other matterswill not have a material adverse effect on the Company’s financial condition,results of operations or liquidity.

 

Item 6.    Exhibits

 

SeeExhibit Index on page 22.

 

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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**             |                   |
|--------------------|---------------------------------------------|------------------------|
|               | 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: May 12, 2006 |                                        |                   |
|                    |                                             |                        |  |  |  |  |

 

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**EXHIBITINDEX**

 

31.1                           Certificationof Chief Executive Officer pursuant to Rule 13a-14(a).

 

31.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(a).

 

32.1                           Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

 

32.2         Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

 

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