** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| ý                                               | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF**      |
|------------------------------------------------------|------------|---------------------------------------------------------------|
|                                                 | ** ** | **THE SECURITIES EXCHANGE ACT OF 1934**                       |
|                                                 |
| **For the quarterly period ended June 30, 2005, or** |
|                                                 |
| o                                                    | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
|                                                 |       | **SECURITIES EXCHANGE ACT OF 1934**                           |

 

 

**For the transition period from                        to**

 

Commission file number **0-25366**

 

**WesternSizzlin 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’sTelephone Number Including Area Code)

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceeding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý Noo

 

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 15, 2005,there were 11,888,571 shares of common stock outstanding.

 

 

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** **

**Western Sizzlin Corporation**

** **

**Form 10-Q**

**Six Months Ended June 30, 2005**

**Table of Contents**

** **

** **

** **

 
| **PART I. FINANCIAL INFORMATION**                                                                       |
|---------------------------------------------------------------------------------------------------------|
|                                                                                                    |   |
| **Item 1. Financial Statements  (Unaudited)**                                                           |   |
|                                                                                                    |   |
| Consolidated Balance Sheets — June  30, 2005 and December 31, 2004                                 |   |
|                                                                                                    |   |
| Consolidated Statements of  Operations - Three Months and Six Ended June 30, 2005 and 2004              |   |
|                                                                                                    |   |
| Consolidated Statement of  Changes in Stockholders’ Equity - Six Months Ended June 30, 2005        |   |
|                                                                                                    |   |
| Consolidated Statements of  Cash Flows - Six Months Ended June 30, 2005 and 2004                        |   |
|                                                                                                    |   |
| Notes to Consolidated  Financial Statements                                                             |   |
|                                                                                                    |   |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |   |
|                                                                                                    |   |
| **Item 3. Quantitative and  Qualitative Disclosure about Market Risk**                                  |   |
|                                                                                                    |   |
| **Item  4. Controls and Procedures**                                                                    |   |
|                                                                                                    |   |
| **PART II. OTHER INFORMATION**                                                                          |   |
|                                                                                                    |   |
| **Item 1. Legal Proceedings**                                                                           |   |
|                                                                                                    |   |
| **Item 4. Submission of  Matters to a Vote of Security Holders**                                        |   |
|                                                                                                    |   |
| **Item 6. Exhibits**                                                                                    |   |
|                                                                                                    |   |
| **Signatures**                                                                                          |   |
|                                                                                                    |   |
| **Exhibit Index**                                                                                       |   |

 

----

 

**PART I. FINANCIAL INFORMATION**

**WESTERN SIZZLIN CORPORATION**

** **

Consolidated Balance Sheets

June 30, 2005 and December 31, 2004

 
| ** **                                                                                                                                                   | ** ** | **June 30,**    | ** ** | ** **       | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2005**        | ** ** | **December 31,** | ** ** |
| **Assets**                                                                                                                                                   | ** ** | **(unaudited)** | ** ** | **2004**         | ** ** |
| Current assets:                                                                                                                                              |       |            |       |             |       |
| Cash and cash equivalents                                                                                                                                    |       | $               | 2,195,261  |             | $          | 2,105,751 |   |
| Short-term investments                                                                                                                                       |       | 256,992         |       | 254,654          |       |
| Trade accounts receivable,  less allowance for doubtful accounts of $412,506 in 2005 and $388,500 in 2004                                                    |       | 870,108         |       | 842,269          |       |
| Current installments of notes  receivable                                                                                                                    |       | 213,080         |       | 229,818          |       |
| Other receivables                                                                                                                                            |       | 59,770          |       | 107,896          |       |
| Inventories                                                                                                                                                  |       | 74,737          |       | 122,197          |       |
| Prepaid expenses                                                                                                                                             |       | 350,647         |       | 308,087          |       |
| Deferred income taxes                                                                                                                                        |       | 449,977         |       | 400,629          |       |
| Total current assets                                                                                                                                         |       | 4,470,572       |       | 4,371,301        |       |
| Notes receivable, less allowance for doubtful accounts  of $95,893 in 2005 and 2004, excluding current installments                                          |       | 967,099         |       | 1,035,485        |       |
| Property and equipment, net of accumulated  depreciation of $4,311,211 in 2005 and $5,061,285 in 2004                                                        |       | 2,267,949       |       | 2,774,646        |       |
| Franchise royalty contracts, net of accumulated  amortization of $7,248,398 in 2005 and $6,933,249 in 2004                                                   |       | 2,206,034       |       | 2,521,183        |       |
| Goodwill                                                                                                                                                     |       | 4,310,200       |       | 4,310,200        |       |
| Financing costs, net of accumulated amortization of  $127,359 in 2005 and $118,273 in 2004                                                                   |       | 72,851          |       | 81,937           |       |
| Deferred income taxes                                                                                                                                        |       | 798,737         |       | 933,226          |       |
| Asset held for sale                                                                                                                                          |       | 300,000         |       | 300,000          |       |
| Other assets                                                                                                                                                 |       | 203,402         |       | 368,688          |       |
|                                                                                                                                                         |       | $               | 15,596,844 |             | $          | 16,696,666 |   |
| **Liabilities and  Stockholders’ Equity**                                                                                                               |       |            |       |             |       |
| Current liabilities:                                                                                                                                         |       |            |       |             |       |
| Current installments of long-term debt                                                                                                                       |       | $               | 881,702    |             | $          | 839,987 |   |
| Accounts payable                                                                                                                                             |       | 1,012,954       |       | 831,883          |       |
| Accrued expenses and other                                                                                                                                   |       | 716,054         |       | 1,219,147        |       |
| Total current liabilities                                                                                                                                    |       | 2,610,710       |       | 2,891,017        |       |
| Long-term debt, excluding current installments                                                                                                               |       | 1,732,532       |       | 2,697,650        |       |
| Other long-term liabilities                                                                                                                                  |       | —          |       | 14,841           |       |
| Commitments and contingencies (Note 7)                                                                                                                       |       |            |       |             |       |
| Stockholders’ equity:                                                                                                                                   |       |            |       |             |       |
| Common stock, $.01 par value. Authorized 20,000,000  shares; 11,888,571 issued and outstanding shares in 2005 and 11,908,571  issued and outstanding in 2004 |       | 118,886         |       | 119,086          |       |
| Additional paid-in capital                                                                                                                                   |       | 8,574,778       |       | 8,589,578        |       |
| Retained earnings                                                                                                                                            |       | 2,559,938       |       | 2,384,494        |       |
| Total stockholders’ equity                                                                                                                              |       | 11,253,602      |       | 11,093,158       |       |
|                                                                                                                                                         |       | $               | 15,596,844 |             | $          | 16,696,666 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

----

 

**WESTERN SIZZLIN CORPORATION**

** **

Consolidated Statements of Operations

(Unaudited)

 
| ** **                           | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** |
|--------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                           | ** ** | **Ended June 30** | ** ** | **Ended June 30** | ** ** |
| ** **                           | ** ** | **2005**          | ** ** | **2004**          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                            |       |              |       |              |       |   |   |   |   |
| Company-operated restaurants         |       | $                 | 4,224,188  |              | $          | 4,433,066 |   | $ | 7,973,799 |   | $ | 8,413,311 |   |
| Franchise operations                 |       | 1,104,122         |       | 1,148,650         |       | 2,185,944 |   | 2,286,047 |   |
| Other                                |       | 116,948           |       | 94,212            |       | 229,555 |   | 194,667 |   |
| Total revenues                       |       | 5,445,258         |       | 5,675,928         |       | 10,389,298 |   | 10,894,025 |   |
| Costs  and expenses:                 |       |              |       |              |       |   |   |   |   |
| Cost of company-operated restaurants |       | 2,778,266         |       | 3,034,080         |       | 5,329,889 |   | 5,756,207 |   |
| Cost of franchise operations         |       | 429,464           |       | 456,305           |       | 924,343 |   | 940,031 |   |
| Other cost of operations             |       | 76,936            |       | 71,024            |       | 165,410 |   | 148,777 |   |
| Restaurant operating expenses        |       | 837,288           |       | 904,713           |       | 1,743,429 |   | 1,822,418 |   |
| General and administrative           |       | 636,095           |       | 548,168           |       | 1,162,364 |   | 963,235 |   |
| Depreciation and amortization        |       | 270,705           |       | 307,711           |       | 548,974 |   | 607,586 |   |
| Closed store expenses                |       | —            |       | —            |       | 350,279 |   | — |   |
| Total costs and expenses             |       | 5,028,754         |       | 5,322,001         |       | 10,224,688 |   | 10,238,254 |   |
| Income from operations               |       | 416,504           |       | 353,927           |       | 164,610 |   | 655,771 |   |
| Other  income (expense):             |       |              |       |              |       |   |   |   |   |
| Interest expense                     |       | (68,921           | )          | (98,627           | )          | (157,917 | ) | (199,364 | ) |
| Interest income                      |       | 18,397            |       | 22,635            |       | 34,194 |   | 42,389 |   |
| Other                                |       | 23,792            |       | 11,204            |       | 245,793 |   | 51,475 |   |
|                                 |       | (26,732           | )          | (64,788           | )          | 122,070 |   | (105,500 | ) |
| Income before income tax expense     |       | 389,772           |       | 289,139           |       | 286,680 |   | 550,271 |   |
| Income  tax expense                  |       | 147,747           |       | 109,864           |       | 111,236 |   | 209,094 |   |
| Net Income                           |       | $                 | 242,025    |              | $          | 179,275 |   | $ | 175,444 |   | $ | 341,177 |   |
| Earnings  per share:                 |       |              |       |              |       |   |   |   |   |
| Basic                                |       | $                 | .02        |              | $          | .02 |   | $ | .01 |   | $ | .03 |   |
| Diluted                              |       | $                 | .02        |              | $          | .02 |   | $ | .01 |   | $ | .03 |   |
|                                      |            |                   |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

3

----

 

**WESTERN SIZZLIN CORPORATION**

** **

Consolidated Statement of Changes in Stockholders’ Equity

Six Months Ended June 30, 2005

(Unaudited)

 
| ** **                                                           | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                                           | ** ** | **Shares**       | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balances, December 31, 2004                                          |       | 11,908,571       |       | $           | 119,086    |           | $          | 8,589,578    |       | $          | 2,384,494  |   | $ | 11,093,158 |   |
| Common stock received related to termination of franchise  agreement |       | (20,000          | )          | (200        | )          | (14,800        | )          | —       |       | (15,000    | )          |
| Net Income                                                           |       | —           |       | —      |       | —         |       | 175,444      |       | 175,444    |       |
| Balances, June 30, 2005                                              |       | 11,888,571       |       | $           | 118,886    |           | $          | 8,574,778    |       | $          | 2,559,938  |   | $ | 11,253,602 |   |

 

See accompanying notes to consolidated financial statements.

** **

**4**

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** **

**WESTERN SIZZLIN CORPORATION**

** **

Consolidated Statements of Cash Flows

(Unaudited)

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30**          | ** ** |
| ** **                                                                         | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                              |       |                 |       |   |   |
| Net income                                                                         |       | $                    | 175,444    |   | $ | 341,177 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                 |       |   |   |
| Depreciation and amortization of property and  equipment                           |       | 224,741              |       | 283,357 |   |
| Amortization of franchise royalty contracts                                        |       | 315,149              |       | 324,233 |   |
| Amortization of financing costs                                                    |       | 9,086                |       | — |   |
| Loss on sale/disposal of property and equipment                                    |       | 359,776              |       | 484 |   |
| Gain from fire casualty                                                            |       | (220,351             | )          | — |   |
| Common stock received related to termination of franchise  agreement               |       | (15,000              | )          |   |   |
| Provision for doubtful accounts                                                    |       | 50,320               |       | 58,000 |   |
| Provision for deferred income taxes                                                |       | 85,141               |       | 204,984 |   |
| (Increase) decrease in:                                                            |       |                 |       |   |   |
| Trade accounts receivable                                                          |       | (78,159              | )          | 1,128 |   |
| Notes receivable                                                                   |       | 85,124               |       | 53,297 |   |
| Other receivables                                                                  |       | 48,126               |       | (66,849 | ) |
| Inventories                                                                        |       | 47,460               |       | (43,697 | ) |
| Prepaid expenses                                                                   |       | (42,560              | )          | 49,649 |   |
| Other assets                                                                       |       | (267,327             | )          | 110,284 |   |
| Increase (decrease) in:                                                            |       |                 |       |   |   |
| Accounts payable                                                                   |       | 181,071              |       | 344,010 |   |
| Accrued expenses                                                                   |       | (503,093             | )          | (174,630 | ) |
| Other long-term liabilities                                                        |       | (14,841              | )          | 48,615 |   |
| Net cash provided by operating activities                                          |       | 440,107              |       | 1,534,042 |   |
| Cash flows from investing activities:                                              |       |                 |       |   |   |
| Short term investments                                                             |       | (2,338               | )          | (1,375 | ) |
| Additions to property and equipment                                                |       | (85,820              | )          | (128,978 | ) |
| Proceeds from sale of property                                                     |       | 8,000                |       | 3,300 |   |
| Proceeds from fire casualty                                                        |       | 652,964              |       | — |   |
| Net cash provided by (used in) investing activities                                |       | 572,806              |       | (127,053 | ) |
| Cash flows from financing activities:                                              |       |                 |       |   |   |
| Payments on long-term debt                                                         |       | (923,403             | )          | (261,478 | ) |
| Net cash used in financing activities                                              |       | (923,403             | )          | (261,478 | ) |
| Net increase in cash and cash equivalents                                          |       | 89,510               |       | 1,145,511 |   |
| Cash and cash equivalents at beginning of period                                   |       | 2,105,751            |       | 682,730 |   |
| Cash and cash equivalents at end of period                                         |       | $                    | 2,195,261  |   | $ | 1,828,241 |   |
| Supplemental disclosure of cash flow information:                                  |       |                 |       |   |   |
| Cash payments for interest                                                         |       | $                    | 165,939    |   | $ | 199,986 |   |
| Income taxes paid                                                                  |       | $                    | 25,225     |   | $ | 4,110 |   |
|                                                                                    |            |                      |            |  |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

** **

**5**

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** **

**WESTERNSIZZLIN CORPORATION**

 

Notes toConsolidated Financial Statements

 

Six Months EndedJune 30, 2005 and 2004

 

(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. Operating results for interim periods are not necessarily indicativeof the results for the full year because, among other things, the dining habitsof the Company’s customers cannot be 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 notes. For further information, refer to theconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2004.

 

**(2)****        ****Stock Options**

 

The Company applies the intrinsic-value-based method of accountingprescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting forStock Issued to Employees, and related interpretations including FASBInterpretation No. 44, Accounting for Certain Transactions involving StockCompensation, an interpretation of APB Opinion No. 25, issued in March 2000, toaccount for its fixed-plan stock options. Under this method, compensationexpense is recorded on the date of grant only if the current market price ofthe underlying stock exceeded the exercise price. Statement No. 123, Accountingfor Stock-Based Compensation, established accounting and disclosurerequirements using a fair-value-based method of accounting for stock-basedemployee compensation plans. As allowed by Statement No. 123, the Company haselected to continue to apply the intrinsic-value-based method of accountingdescribed above, and has adopted only the disclosure requirements of StatementNo. 123. Statement No. 148, Accounting for Stock-Based Compensation —Transition and Disclosure, an amendment of SFAS No. 123, amends the disclosurerequirements of Statement No.123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method on reported results. 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,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| Net  Income:                                                                                                                                              |       | **2005**                           |       | **2004**                         |       | **2005** |   | **2004** |   |
| As reported                                                                                                                                               |       | $                                  | 242,025    |                             | $          | 179,275 |   | $ | 175,444 |   | $ | 341,177 |   |
| Deduct total stock-based employee compensationexpense  determined under fair-value based method for all  outstanding and unvested awards, net of tax |       | 24,552                             |       | 38,130                           |       | 24,552 |   | 42,137 |   |
|                                                                                                                                                      |       |                               |       |                             |       |   |   |   |   |
| Pro forma                                                                                                                                                 |       | $                                  | 217,473    |                             | $          | 141,145 |   | $ | 150,892 |   | $ | 299,040 |   |
|                                                                                                                                                      |       |                               |       |                             |       |   |   |   |   |
| Basic  and diluted net income per share:                                                                                                                  |       |                               |       |                             |       |   |   |   |   |
| As reported                                                                                                                                               |       | $                                  | 0.02       |                             | $          | 0.02 |   | $ | 0.01 |   | $ | 0.03 |   |
| Pro forma                                                                                                                                                 |       | $                                  | 0.02       |                             | $          | 0.01 |   | $ | 0.01 |   | $ | 0.03 |   |
|                                                                                                                                                           |            |                                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |

 

6

----

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement 123 (revised 2004), *Share-Based**Payment*(Statement 123(R)). This Statementis a revision to Statement 123, *Accounting for Stock-BasedCompensation*, and supersedes Opinion 25, *Accountingfor Stock Issued to Employees*. Statement 123(R) requires themeasurement of the cost of employee services received in exchange for an awardof equity instruments based on the grant-date fair value of the award. The costwill be recognized over the period during which an employee is required toprovide service in exchange for the award. No compensation cost is recognizedfor equity instruments for which employees do not render service. The Companywill adopt Statement 123(R) on January 1, 2006, requiring compensation cost tobe recognized as expense for the portion of outstanding unvested awards, basedon the grant-date fair value of those awards calculated using the Black-Scholesoption pricing model under Statement 123 for pro forma disclosures. Althoughmanagement is currently evaluating the impact of Statement 123(R), the Companydoes not expect that the adoption of Statement 123(R) will have a materialimpact on the Company’s financial position or future results of operations asit relates to options outstanding at June 30, 2005. However, Statement 123(R)will likely have a material impact on the Company’s financial statements to theextent options are issued in the future.

 

**(3)****        ****Goodwill and Other IntangibleAssets**

 

The Company conforms tothe provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwilland Other Intangible Assets.” Under SFAS No. 142, goodwill and intangibleassets deemed to have indefinite lives are reviewed for impairment and writtendown and charged to results of operations when their carrying amount exceedstheir estimated fair value. The Company is required to perform impairment testseach year, or between yearly tests in certain circumstances, for goodwill.There can be no assurance that future impairment tests will not result in acharge to earnings.

 

Therewere no changes in the net carrying amount of goodwill for the three andsix-months ended June 30, 2005 and 2004.

 

*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****June  30, 2005** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **Gross**                   | ** ** | **Weighted average** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **carrying**                | ** ** | **Amortization** | ** ** | **Accumulated** | ** ** |
| ** **                     | ** ** | **amount**                  | ** ** | **Period** | ** ** | **Amortization** | ** ** |
| Amortizing intangible  assets: |       |                        |       |   |   |   |   |
| Franchise  Royalty Contracts   |       | $                           | 9,454,432  |   | 15.0 yrs. |   | $ | 7,248,398 |   |
|                                |            |                             |            |  |  |  |  |  |  |

 

Aggregate amortizationexpense for amortizing intangible assets for the three and six-month periodsended June 30, 2005 was $157,575 and $315,149, respectively. Estimatedamortization expense is $630,300 per year through December 31, 2008.

 

**(4)****        ****Earnings Per 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

 

7

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for 265,000 and 175,000shares of common stock for the three and six month periods ended June 30, 2005and 75,000 shares for the three and six month period ended June 20, 2004,respectively, were not included in computing diluted earnings because theeffect 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**      | ** ** | ** **    | ** ** |
|------------------------------------------|------------|-----------------|------------|-------------------|------------|---------------|------------|
| ** **                               | ** ** | ** **      | ** ** | **Average**       | ** ** | **Earnings**  | ** ** |
| ** **                               | ** ** | **Income**      | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
| ** **                               | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**    | ** ** |
| **Three months ended June 30,  2005**    |       |            |       |              |       |          |       |
| Net  income - basic and diluted          |       | $               | 242,025    |              | 11,888,571 |          | $          | .02 |   |
|                                     |       |            |       |              |       |          |       |
| **Three  months ended****June 30, 2004** |       |            |       |              |       |          |       |
| Net  income — basic and diluted     |       | $               | 179,275    |              | 11,908,785 |          | $          | .02 |   |
|                                     |       |            |       |              |       |          |       |
| Six months ended June  30, 2005          |       |            |       |              |       |          |       |
| Net  income - basic and diluted          |       | $               | 175,444    |              | 11,898,571 |          | $          | .01 |   |
|                                     |       |            |       |              |       |          |       |
| **Six  months ended****June 30, 2004**   |       |            |       |              |       |          |       |
| Net  income — basic and diluted     |       | $               | 341,177    |              | 11,908,678 |          | $          | .03 |   |
|                                          |            |                 |            |                   |            |               |            |  |  |  |

 

** (5)          ClosedStore Expense**

 

Closed store expense forthe six months ended June 30, 2005 and 2004 was $350,279 and $0, respectively. Inthe three months ended March 31, 2005, the Company recorded closed storeexpenses of $350,279, which included impairments of $128,471 associated withthe end of a subleased property due to a buyout of the lease and impairmentsrelated to the closing of a Company-operated restaurant of $221,808. There wasno additional closed store expense or impairments recorded in the three monthsended June 30, 2005.

 

** (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.Capital costs are allocated to segments based upon predetermined rates oractual or estimated resource usage. Corporate and franchise support expenses of$445,209 and $864,934 for three and six months ended June 30, 2005 and $597,131and $883,795 for the three and six months ended June 30, 2004, are allocatedentirely to franchising and other and are not allocated to Company-operatedrestaurants. The accounting policies of the segments are the same as thosedescribed in the summary 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 June 30, 2005, all revenues for each business segment werederived from business activities conducted with customers located in the UnitedStates. No single external customer accounted for 10% or more of the Company’sconsolidated revenues.

 

8

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The following tablesummarizes reportable segment information:

 
| ** **                                  | ** ** | **Three Months****Ended June 30,** | ** ** | **Six Months****Ended June 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2005**                           | ** ** | **2004**                         | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        |       |                               |       |                             |       |   |   |   |   |
| Revenues  from reportable segments:         |       |                               |       |                             |       |   |   |   |   |
| Restaurants                                 |       | $                                  | 4,224,188  |                             | $          | 4,433,066 |   | $ | 7,973,799 |   | $ | 8,413,311 |   |
| Franchising and other                       |       | 1,221,070                          |       | 1,242,862                        |       | 2,415,499 |   | 2,480,714 |   |
|                                        |       |                               |       |                             |       |   |   |   |   |
| Total revenues                              |       | $                                  | 5,445,258  |                             | $          | 5,675,928 |   | $ | 10,389,298 |   | $ | 10,894,025 |   |
| Depreciation  and amortization:             |       |                               |       |                             |       |   |   |   |   |
| Restaurants                                 |       | $                                  | 99,549     |                             | $          | 129,736 |   | $ | 205,643 |   | $ | 256,112 |   |
| Franchising and other                       |       | 171,156                            |       | 177,975                          |       | 343,331 |   | 351,474 |   |
| Total depreciation and amortization         |       | $                                  | 270,705    |                             | $          | 307,711 |   | $ | 548,974 |   | $ | 607,586 |   |
| Interest  expense:                          |       |                               |       |                             |       |   |   |   |   |
| Restaurants                                 |       | $                                  | 68,921     |                             | $          | 98,083 |   | $ | 156,897 |   | $ | 198,600 |   |
| Franchising and other                       |       | —                             |       | 544                              |       | 1,020 |   | 764 |   |
|                                        |       |                               |       |                             |       |   |   |   |   |
| Total interest expense                      |       | $                                  | 68,921     |                             | $          | 98,627 |   | $ | 157,917 |   | $ | 199,364 |   |
|                                        |       |                               |       |                             |       |   |   |   |   |
| Interest  income:                           |       |                               |       |                             |       |   |   |   |   |
| Restaurants                                 |       | $                                  | 16,989     |                             | $          | 20,573 |   | $ | 31,417 |   | $ | 39,287 |   |
| Franchising and other                       |       | 1,408                              |       | 2,062                            |       | 2,777 |   | 3,102 |   |
| Total interest income                       |       | $                                  | 18,397     |                             | $          | 22,635 |   | $ | 34,194 |   | $ | 42,389 |   |
|                                        |       |                               |       |                             |       |   |   |   |   |
| Income  before income tax expense:          |       |                               |       |                             |       |   |   |   |   |
| Restaurants                                 |       | $                                  | 345,298    |                             | $          | 181,355 |   | $ | 218,237 |   | $ | 238,394 |   |
| Franchising and other                       |       | 44,474                             |       | 107,784                          |       | 68,443 |   | 311,877 |   |
|                                        |       |                               |       |                             |       |   |   |   |   |
| Total income before income tax expense |       | $                                  | 389,772    |                             | $          | 289,139 |   | $ | 286,680 |   | $ | 550,271 |   |
|                                        |       |                               |       |                             |       |   |   |   |   |
| ** **                                  |       | **June 30,**                       |       | **June 30,**                     |       |   |   |   |   |
| ** **                                  |       | **2005**                           |       | **2004**                         |       |   |   |   |   |
| Total  assets:                              |       |                               |       |                             |       |   |   |   |   |
| Restaurants                                 |       | $                                  | 10,378,918 |                             | $          | 10,723,109 |   |   |   |   |   |
| Franchising and other                       |       | 5,217,926                          |       | 6,468,661                        |       |   |   |   |   |
|                                        |       |                               |       |                             |       |   |   |   |   |
| Total assets                                |       | $                                  | 15,596,844 |                             | $          | 17,191,770 |   |   |   |   |   |
|                                             |            |                                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**(7)           Contingencies**

 

As of June 30,2005, the Company has accrued approximately $145,000 related to the mattersdiscussed below. In the case of all known contingencies, the Company accruesfor an obligation, including estimated legal costs, when a loss is probable andthe amount is reasonably estimable. As facts concerning contingencies becomeknown to the Company, the Company reassesses its position with respect toaccrued liabilities and other expenses. These estimates are subject to changeas events evolve and as additional information becomes available during thelitigation process.

 

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**FFCA**

 

In January 2001,the Company executed a series of Master Lease Agreements (“Agreements”)relating to certain franchised properties formerly operated by other parties as“Quincy’s” restaurants (“Former Quincy’s”). Signed copies of these Agreementswere required, pursuant to the terms of the document, to be executed byFranchise Financing Corporation of America, now known as General ElectricFranchise Finance Corporation, (the “Lessor”), to be legally binding; however,no signed copies were ever returned to the Company. At the end of January 2002,there remained only 25 Former Quincy’s operated by Company franchisees, theLessor having taken back, in 2001 and 2002, other restaurants previouslyoperated by Company franchisees. The Agreements, incomplete for a lack ofsignature by the Lessor, provided for rental payments from the Company to theLessor. However, the cost of any rental payments was passed on to the franchiseesoperating the properties. During 2002 and 2003, nine of the remainingtwenty-five properties were closed and the franchisees discontinued makingpayments to the Company. On May 15, 2003, the Company sent a letter to theLessor, providing notice of the Company’s termination of any tenancies at-willon any remaining Former Quincy’s units effective May 31, 2003. No response hasever been received from Lessor.

 

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,the Company became aware, on or about May 15, 2003, that the franchisees hadelected to make their payments directly to FFCA and it is the Company’sunderstanding that FFCA has accepted these payments. There can be no assurancesthat the franchisees have made their payments and will continue to make theirlease payments in the future or that they even continue to operate theserestaurants. The Company’s estimate of the total payments that were madedirectly to the lessor for these sixteen franchisees, or former franchisees, isapproximately $2,854,000 through June 30, 2005. In addition, total payments dueby the sixteen franchisees for the period July 1, 2005 through December 31,2005 (the end of the lease term) would be approximately $1,387,000.

 

While the Companydisputes any liability for any of the following amounts, to the Company’sknowledge, as of June 30, 2005 a total of approximately $2,024,000 of rentalpayments had not been made by either the franchisees or by the Company withregard to the above-referenced nine closed properties. Rent for these nineproperties, for the period of July 1, 2005 through December 31, 2005 (the endof the lease term), according to the payment schedule set out in theagreements, would approximate $815,000.

 

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 intends to vigorously contest any potential claims asserted by GeneralElectric Franchise Finance Corporation. While the Company has previouslyengaged in discussions with the Lessor of the properties to resolve any rentalpayments claimed by the Lessor under the Agreements, it is not possible at thistime to determine the outcome of these discussions.

 

**Lincoln,Nebraska Lease Claim**

 

The Company was aguarantor of a lease agreement in Lincoln, Nebraska, with monthly rentals ofapproximately $8,200. The lease agreement, which ran through February 2014, wasassigned by the Company to a third party in March 1998 and subsequently by thethird party to another party. When the assignees failed to make recent monthlyrental, property tax and association payments on the premises, the landlordtook possession of the premises, and on or about May 12, 2004, sold thepremises to a third party intending to use the premises for its own purposes. TheCompany resolved the landlord’s lawsuit filed in the District Court ofLancaster County, Nebraska and received a release from all claims inconjunction with this claim upon payment of $50,000 on April 18, 2005.

 

10

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**MBM Claim**

 

During 2003, the Companywas notified of a claim by MBM Distributors (MBM) involving amounts alleged tobe owed by the Company to MBM for product delivered on open account andinventory arising out of a distribution agreement. In December 2003; MBM filedsuit in Federal District Court in North Carolina seeking damages of an amountin excess of $800,000. The claim was settled during mediation on April 19, 2005with the Company’s payment of $365,000.

 

**Dickson,Tennessee Claim**

 

In 1994, the Companyentered into a lease agreement for a restaurant premise located in Dickson,Tennessee. The lease agreement has an original term of 15 years and requiresmonthly base rental payments of $6,500 for the final five years of the leaseterm. The Company ceased operations of the premises as a restaurant in 1996 andsubsequently subleased the property. The location has been vacant sinceSeptember 2001. In June 2004, the Company advised the landlord that the Companywas surrendering the property. The landlord is obligated to, and has advisedthe Company that he is attempting to find a replacement tenant.

 

On several occasions, thelandlord has filed Complaints in the General Sessions Court of Dickson,Tennessee alleging default under the lease agreement and seeking collection ofunpaid rent, real estate taxes and attorney’s fees. The Company has advised the landlord that it hassurrendered the premises, and has put the landlord on notice of the landlord’sobligation to mitigate any damages. Following the landlord’s initiation ofcollection actions in the General Sessions Court of Dickson County, Tennessee,the Company paid rent and related costs for the months of May, June, July,August, September, and October 2004, but continued to assert that itsurrendered the property.

 

The Landlord has filedseparate collection actions, again in the General Sessions Court in DicksonCounty, Tennessee, to collect rent from November 2004 through January 2005,attorney’s fees and real estate taxes.  TheCompany appealed these claims (as amended to include rent through June 2005,and related claims for attorneys’ fees, taxes and certain maintenance andrepair costs) to the Circuit Court of Dickson County, Tennessee, for trial denovo, and asserted a defense of failure to mitigate damages. On June 9, 2005,the Circuit Court granted the Landlord judgment against the Company in thetotal amount of $90,986. The Company has further appealed to the TennesseeCourt of Appeals. The Company intends to vigorously contest all claims assertedby the landlord.

 

**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 recordedin other income in the accompanying consolidated statement of operations duringthe first quarter of 2005. The land is currently for sale and management doesnot anticipate any impairment on this property based on current estimates offair value. In accordance with the note payable agreement related to theproperty, the insurance proceeds were remitted to the Company’s lender on April8, 2005. The Company has listed the real estate for sale and will remit anyproceeds from a sale to the lender in partial or total satisfaction of theremaining indebtedness on the property. The Lender has indicated that it willaccept any partial or total repayment of the loan from the proceeds of the realestate without the application of a prepayment penalty.

 

**ChubbClaim**

 

In November 2004, ChubbInsurance filed suit in the Circuit Court for the City of Roanoke againstWestern Sizzlin Stores of Virginia, Inc., seeking recovery of allegedly unpaidpremiums in the amount of $97,249. Western Sizzlin Stores of Virginia, Inc. hasfiled a grounds of defense and served discovery. Western Sizzlin Stores ofVirginia, Inc. has never been billed by Chubb and has never had any directcontractual relations with them.

 

11

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**Other**

 

The Company is involvedin various other claims and legal actions arising in the ordinary course ofbusiness. In the opinion of the management, the ultimate disposition of thesematters will not have a material adverse effect on the Company’s financial condition,results of operations or liquidity.

 

**(8)           Subsequent Event**

 

**Waldorf,MD Casualty**

 

On or about July 19,2005, a building, improvements, and contents, located upon real property leasedby the Company for operation of a Company-owned Great American Buffetrestaurant, at 3135 Crain Highway, Waldorf, Maryland, (the Premises) weretotally destroyed by fire. The Company insured the Premises, includingbuildings and contents, against casualty, such as fire. The Company also hasinsured the Premises for the interruption of business income. The Company hasinitiated discussions with its landlord and insurance company regarding issuesarising from the casualty loss. Revenues for the six months ended June 30, 2005were $1.1 million, with operating income of $77,000 for the Waldorf, Marylandlocation.

 

**Item 2.    Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

                **Overview**

 

The following discussionmay include forward-looking statements including anticipated financialperformance, business prospects, the future opening of Company-operated andfranchised restaurants, 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 150 restaurants located in 21 states, including 6Company-owned and 144 franchise restaurants as of June 30, 2005. Therestaurants include a family steakhouse concept and a steak and buffet concept.

###### ** **

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

 

Netincome for the three and six months ended June 30, 2005 was $242,025 and$175,444 compared to net income of $179,275 and $341,177 for the three and sixmonths ended June 30, 2004.

 

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:

 

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| ** **                               | ** ** | **Three Months**   | ** ** | **Six Months**     | ** ** |
|------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                               | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                               | ** ** | **2005**           | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                |       |               |       |               |       |   |   |   |   |
| Company-operated restaurants             |       | 77.6               | %          | 76.3               | %          | 76.8 | % | 77.2 | % |
| Franchise royalties and fees             |       | 20.2               |       | 21.8               |       | 21.0 |   | 21.0 |   |
| Other sales                              |       | 2.2                |       | 1.9                |       | 2.2 |   | 1.8 |   |
| Total revenues                           |       | 100.0              |       | 100.0              |       | 100.0 |   | 100.0 |   |
|                                     |       |               |       |               |       |   |   |   |   |
| Cost of company-operated restaurants     |       | 51.0               |       | 52.2               |       | 51.3 |   | 52.8 |   |
| Cost of franchise operations             |       | 7.9                |       | 9.3                |       | 8.8 |   | 8.6 |   |
| Other cost of operations                 |       | 1.4                |       | 1.5                |       | 1.6 |   | 1.4 |   |
| Restaurant operating expenses            |       | 15.4               |       | 17.6               |       | 16.8 |   | 16.7 |   |
| General and administrative               |       | 11.7               |       | 8.0                |       | 11.2 |   | 8.8 |   |
| Depreciation and amortization            |       | 5.0                |       | 5.6                |       | 5.3 |   | 5.7 |   |
| Closed store expenses                    |       | 0.0                |       | —             |       | 3.4 |   | — |   |
| Total costs and expenses                 |       | 92.4               |       | 94.2               |       | 98.4 |   | 94.0 |   |
|                                     |       |               |       |               |       |   |   |   |   |
| Income from operations                   |       | 7.6                |       | 5.8                |       | 1.6 |   | 6.0 |   |
|                                     |       |               |       |               |       |   |   |   |   |
| Other  income (expense)                  |       | (.05               | )          | (0.8               | )          | 1.2 |   | (1.0 | ) |
|                                     |       |               |       |               |       |   |   |   |   |
| Income before income tax expense         |       | 7.1                |       | 5.1                |       | 2.8 |   | 5.0 |   |
| Income tax expense                       |       | 2.7                |       | 1.9                |       | 1.1 |   | 1.9 |   |
| Net income                               |       | 4.4                | %          | 3.2                | %          | 1.7 | % | 3.1 | % |
|                                     |       |               |       |               |       |   |   |   |   |
| ** **                               | ** ** | **Three Months**   | ** ** | **Six Months**     | ** ** |
| ** **                               | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                               | ** ** | **2005**           | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |               |       |               |       |   |   |   |   |
| **Restaurant  Data**                     |       |               |       |               |       |   |   |   |   |
| Number  of Company-Operated Restaurants: |       |               |       |               |       |   |   |   |   |
| Beginning of period                      |       | 6                  |       | 7                  |       | 7 |   | 7 |   |
| Opened                                   |       | —             |       | —             |       | — |   | — |   |
| Closed                                   |       | —             |       | —             |       | 1 |   | — |   |
| Franchised                               |       | —             |       | —             |       | — |   | — |   |
| End of period                            |       | 6                  |       | 7                  |       | 6 |   | 7 |   |
|                                     |       |               |       |               |       |   |   |   |   |
| Number  of U.S. Franchised Restaurants:  |       |               |       |               |       |   |   |   |   |
| Beginning of period                      |       | 146                |       | 159                |       | 147 |   | 161 |   |
| Opened                                   |       | 2                  |       | 1                  |       | 2 |   | 2 |   |
| Closed                                   |       | 4                  |       | 8                  |       | 5 |   | 11 |   |
| End of period                            |       | 144                |       | 152                |       | 144 |   | 152 |   |

** **

**Revenues**

 

Company-operatedrestaurant revenues decreased $208,878 (4.7%) to $4.2 million for the threemonths ended June 30, 2005 as compared to $4.4 million for the comparable threemonths ended June 30, 2004.  Revenues forcompany-operated restaurants decreased $439,512 (5.2%) to $8.0 million for thesix months ended June 30, 3005 as compared to $8.4 million for the comparablesix months ended June 30, 3004. The decreases are largely attributable to theclosing of a Company-operated location in February, 2005, totalingapproximately $340,000 and $520,000 in lost revenues over the three and sixmonths ended June 30, 3005 over prior periods. Same store sales

 

13

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forthe three and six months ended June 30, 2005, experienced an overall increaseof 2.6% and 0.51%, respectively.

 

Franchiseand other revenues decreased 1.8% to $1.2 million for the three months ended June30, 2005 as compared to $1.2 million for the comparable three months ended June30, 2004. Franchise and other revenues decreased 2.6% to $2.4 million for thesix months ended June 30, 2005 as compared to $2.5 million for the six monthsended June 30, 2004. The decreases are attributable to fewer franchised unitsin the system at June 30, 2005 as compared to June 30, 2004. Same store salesfor the three and six months ended June 30, 2005, experienced an overallincrease of 1.85% and 0.84%, respectively.

 

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

 

Costof Company-operated restaurants, consisting primarily of food, beverage, andemployee costs decreased $256,500 (8.4%) to $2.8 million for the three monthsended June 30, 2005 from $3.0 million for the three months ended June 30, 2004.  These costs for the three month periodsdecreased as a percentage of total revenues from 52.2% in 2004 to 51.0% in2005. For the six month period ended June 30, 2005, cost of Company-operatedrestaurants decreased $426,000 (7.4%) to $5.3 million from $5.8 million in2004. These costs for the six month periods decreased as a percentage of total revenuesfrom 52.8% in 2004 to 51.3% in 2005.  Thedecrease in the costs were largely attributable to the closing of aCompany-operated location in February 2005 and decreases in labor costs bymonitoring staffing requirements more effectively.

 

Costof franchise operations and other cost of operations were $506,000 for thethree months ended June 30, 2005 compared to $527,000 in 2004, and were 9.3% asa percentage of total revenues for 2005 and 2004. Cost of franchise operationsand other cost of operations were $1.1 million for the six month periods endedJune 30, 2005 and 2004, and were 10.5% and 10.0% as a percentage of totalrevenues, respectively. These costs are comparable year to year for the periodspresented.

 

Restaurantoperating expenses, which include utilities, insurance, maintenance, rent andother such costs of the Company-operated restaurants, decreased by $67,000 (7.4%)for the three months ended March 31, 2005 versus the prior year’s comparableperiod. These costs for the three month periods decreased as a percentage oftotal revenues from 17.6% in 2004 to 15.4% in 2005. For the six months endedJune 30, 2005, restaurant operating expenses decreased by $79,000 (4.3%) versusthe prior year’s comparable period. These costs for the six month periods werecomparable as a percentage of total revenues at 16.8% in 2005 and 16.7% in2004. The decreases are attributable to closing a Company-operated location inFebruary 2005.

 

Forthe three months ended June 30, 2005 and 2004, general and administrativeexpenses were $636,000 and $548,000, respectively and as a percentage of totalrevenue were 11.7% and 8.0%, respectively. For the six months ended June 30,2005 and 2004, general and administrative expenses were $1.2 million and$963,000, respectively, and as percentage of total revenues were 11.2% and8.8%, respectively. The increase was primarily due to legal fees associatedwith litigation matters during 2005 and write off of leasehold improvementsassociated with closed stores.

 

Depreciationand amortization expense was $37,000 (12.0%) less for the three months ended June30, 2005 versus the three months ended June 30, 2004 and $59,000 (9.6%) lessfor the comparable six month period then ended. The decreases were attributableto certain property and equipment becoming fully depreciated.

 

Closedstore expenses were $0 and $350,000 for the three and six months ended June 30,2005 and no closed store expense in 2004 for the comparable periods. The firstquarter 2005 expenses included impairment of $128,000 associated with the endof a subleased property due to a buyout of the lease and impairments related tothe closing of a Company-operated restaurant of $222,000 in February 2005.

 

14

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**OtherIncome (Expense)**

 

Interest expensedecreased $30,000 and $42,000 for the three and six months ended June 30, 2005 overthe comparable periods in 2004 due to a lower average principal outstandingbalance. Interest income fluctuates according to the levels of available cashbalances. The Company employs a cash management system whereby availablebalances are invested on an overnight basis.

 

Other income increased$13,000 and $194,000 for the three and six months ended June 30, 2005 over thecomparable periods in 2004 due largely to a gain of $220,000 attributable toinsurance proceeds received on the Lawrenceville, Georgia casualty recorded inthe first quarter of 2005.

 

Income tax expense isdirectly affected by the levels of pretax income. The Company’s effective taxrate was 37.9% and 38.8% for the three and six months ended June 30, 2005 and38.0% and $38.0% for the same periods in 2004.

 

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

 

As is customary in therestaurant industry, the Company has historically operated with negativeworking capital. Historically, the Company has leased the majority of itsrestaurants and through a strategy of controlled growth has financed operationsfrom operating cash flows, the utilization of the Company’s line of credit andlong-term debt provided by various lenders. The Company had a positive workingcapital of $1.9 million and $1.5 million at June 30, 2005 and December 31,2004, respectively.

 

Cash flows provided byoperating activities were $440,000 in 2005 compared to $1.5 million in 2004.During 2004, cash flows provided by operating activities were primarily due tonet income of $341,000 and depreciation and amortization of $608,000, and an increasein accounts payable of $344,000. During 2005, cash flows provided by operationswere primarily due to net income of $175,000 and depreciation and amortizationof $540,000, loss on sale/disposal of property and equipment $360,000, offsetby gain from fire casualty of $220,000, increase in prepaid expenses of $241,000and decrease in accrued expenses of $503,000. Net cash provided by investingactivities of $573,000 in 2005 and used in investing activities of $127,000 in2004, was primarily for capital expenditures related to property and equipmentfor both periods presented and proceeds of $653,000 in 2005 from fire casualty.Net cash used in financing activities of $923,000 in 2005 and $261,000 in 2004was for payments on long-term debt in 2005 and 2004. The increase in 2005 over2004 was due to the receipt of insurance proceeds on the Lawrenceville, GAcasualty which were fully remitted to the lender.

 

Management believes thatthe Company’s short-term cash requirements will include possible settlements ofcertain legal proceedings, a capital contribution related to a planned jointventure for development of a buffet concept restaurant, and capitalimprovements to Company-operated restaurants of approximately $1.2 million.

 

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 additional availablefinancing alternatives, and provide additional working capital; however,management believes existing financing and additional available financing alternativeswill provide adequate funding for cash requirements.

 

# **CRITICALACCOUNTING POLICIES**

 

## **Franchise Revenue**

 

Initial franchisefees are recognized when all material services have been substantiallyperformed by the Company and the restaurant has opened for business. Franchiseroyalties, which are based on a percentage of monthly sales, are recognized asincome on the accrual basis. Costs associated with franchise operations arerecognized on the accrual basis.

 

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## **Accounts and Notes Receivable and Allowance forDoubtful Accounts**

 

Inconnection with franchise fees charged to franchisees, the Company has accountsand notes receivable outstanding from our franchisees at any given time. TheCompany reviews outstanding accounts and notes receivable monthly and recordallowances for doubtful accounts as deemed appropriate for certain individualfranchisees. In determining the amount of allowance for doubtful accounts to berecorded, the Company considers the age of the receivable, the financialstability of the franchisee, discussions that may have been had with thefranchisee and the Company’s judgement as to the overall collectibility of thereceivable from that franchisee.

 

**FranchiseRoyalty Contracts**

 

Franchiseroyalty contracts are amortized on a straight-line basis over fifteen years, theestimated average life of the franchise agreements. The Company assesses therecoverability of this intangible asset by determining whether the amortizationof the franchise royalty contracts balance over their remaining life can berecovered through undiscounted future operating cash flows of the acquiredoperation. The amount of impairment, if any, is measured based on projecteddiscounted future operating cash flows using a discount rate reflecting theCompany’s average cost of funds.

 

                **Goodwill**

 

Goodwill represents theexcess of purchase price over fair value of net assets of businesses acquired. Goodwilland intangible assets acquired in a purchase business combination anddetermined to have an indefinite useful life are not amortized, but instead testedfor impairment at least annually.

 

**OTHER**

###### ** **

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

 

Theimpact of inflation on the costs of food and beverage products, labor and realestate can affect the Company’s operations. Over the past few years, inflationhas had a lesser impact on the Company’s operations due to the lower rates ofinflation in the nation’s economy and economic conditions in the Company’smarket 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. Managementanticipates that the average cost of restaurant real estate leases andconstruction cost could increase in the future which could affect the Company’sability to expand. In addition, mandated health care or additional increases inthe federal or state minimum wages could significantly increase the Company’scosts of doing business.

 

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

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement 123 (revised 2004), *Share-Based**Payment*(Statement 123(R)). ThisStatement is a revision to Statement 123, *Accounting for Stock-BasedCompensation*, and supersedes Opinion 25, *Accountingfor Stock Issued to Employees*. Statement 123(R) requires themeasurement of the cost of employee services received in exchange for an awardof equity instruments based on the grant-date fair value of the award. The costwill be recognized over the period during which an employee is required toprovide service in exchange for the award. No compensation cost is recognizedfor equity instruments for which employees do not render service. The Companywill adopt Statement 123(R) on January 1, 2006, requiring compensation cost tobe recognized as expense for the portion of outstanding unvested awards, basedon the grant-date fair value of those awards calculated using the Black-Scholesoption pricing model under Statement 123 for pro forma disclosures. Althoughmanagement is currently evaluating the impact of Statement 123(R), the Companydoes not expect that the adoption of Statement 123(R) will have a material impact

 

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on the Company’s financial position or future resultsof operations as it relates to options outstanding at June 30, 2005. However,Statement 123(R) will likely have a material impact on the Company’s financialstatements to the extent options are issued in the future.

 

As of June 30, 2005,there were no other 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.      Quantitative and Qualitative Disclosure about Market Risk**

 

The Company does notengage in derivative financial instruments or derivative commodity instruments.As of June 30, 2005, 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 June 30, 2005 (dollars inthousands):

####  

#### EXPECTED MATURITY DATE

| ** **             | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|---------------------------|------------|
| Long-term debt         |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                      |       |
| Fixed  Rate            |       | $        | 688        |     | $          | 450      |       | $        | 333        |     | $          | 285            |       | $         | 180        |                      | $          | 678 |   | $ | 2,614 |   | $ | 2,708 |   |
| Average  Interest Rate |       | 10.00    | %          | 9.95     | %          | 10.01    | %          | 10.07    | %          | 10.07    | %          | 10.07          | %          | 10.00     | %          |                      |       |
|                        |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                           |            |  |  |  |  |  |  |  |  |

 

**Item 4. Controls andProcedures**

 

**Seniormanagement, including the Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the Company’s disclosure controls and proceduresas of June 30, 2005. Based on this evaluation process, the Chief ExecutiveOfficer and Chief Financial Officer have concluded that the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed in reports filed and submitted under the SecuritiesExchange Act of 1934 (as amended) is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms. Additionally,there have been no changes in the Company’s internal control over financialreporting that occurred during the last fiscal quarter that have materiallyaffected, or are reasonable likely to materially affect, the Company’s internalcontrol over financial reporting.**

 

# **PART II. OTHERINFORMATION**

 

Item 1.    Legal Proceedings

 

In addition to thoseproceedings discussed in Note 7 to the Company’s consolidated financialstatements included in Item 1, Part 1, the Company is involved in various otherclaims and legal actions arising in the ordinary course of business. In theopinion of the management, the ultimate disposition of these other matters willnot have a material adverse effect on the Company’s financial condition,results of operations or liquidity.

 

Two claims previouslyreported in the Company’s filings were resolved during the three months endedJune 30, 2005. The claim by MBM Distributors was settled during mediation onApril 19, 2005 with the Company’s payment of $365,000. The Company alsoresolved the Lincoln, Nebraska lease agreement claim and received a fullrelease for payment of $50,000 on April 18, 2005.

 

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Item 4.             Submission of Matters to a Vote of Security Holders

 

 At the Annual Meeting of the Stockholders heldJune 22, 2005, the following persons were elected to the Board of Directors:

 

| ** **                | ** ** | **Shares**    | ** ** | **Shares**   | ** ** |
|---------------------------|------------|---------------|------------|--------------|------------|
| **Nominees**              | ** ** | **voted for** | ** ** | **withheld** | ** ** |
|                      |       |          |       |         |       |
| Paul C. Schorr, III       |       | 9,712,209     |       | 51,695       |       |
| Thomas M. Hontzas         |       | 9,712,847     |       | 51,057       |       |
| Stanley L. Bozeman, Jr.   |       | 9,424,324     |       | 339,580      |       |
| Jesse M. Harrington,  III |       | 9,453,347     |       | 310,557      |       |
| A. Jones Yorke            |       | 9,688,209     |       | 75,695       |       |
| Roger D. Sack             |       | 9,688,209     |       | 75,695       |       |
| Titus W. Greene           |       | 9,712,847     |       | 51,057       |       |
| Pat Vezertzis             |       | 9,712,847     |       | 51,057       |       |
| J. Alan Cowart            |       | 9,429,347     |       | 334,557      |       |

 

Also at the AnnualMeeting, the 2005 Stock Option Plan received a majority of the shares presentin person or by proxy and entitled to vote and has been declared as approvedand adopted. The votes were as follows:

 

| Shares  for      |   | 5,740,868 |   |
|------------------|--------|-----------|--------|
| Shares against   |   | 551,549   |   |
| Shares withheld  |   | 159       |   |
| Shares abstained |   | 478       |   |
| Non-votes        |   | 5,595,517 |   |

 

Item 6. Exhibits

                See Exhibit Index on page 20.

 

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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: August 15, 2005 |                            |                                        |   |

 

 

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**EXHIBITINDEX**

 
| 10.3   |   | 2005 Stock Option Plan  (incorporated by reference to the Company’s Schedule 14A Definitive Proxy  Statement filed April 29, 2005). |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                     |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a).                                                                    |
|   |   |                                                                                                                                     |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a).                                                                    |
|   |   |                                                                                                                                     |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350.                                                            |
|   |   |                                                                                                                                     |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350.                                                            |

 

 

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