**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

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

 

 

**FORM 10-Q**

 

 

**(Mark One)**

 

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

 

**For thequarterly period ended September 30, 2005, or**

 

o         **TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

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

 

 

**Commissionfile number 0-25366**

 

 

**Western Sizzlin Corporation**

(ExactName of Registrant as Specified in Its Charter)

 
| **Delaware**                     | ** ** | **86-0723400**       |
|----------------------------------|------------|----------------------|
| (State  or Other Jurisdiction of |       | (I.R.S.  Employer    |
| Incorporation  or Organization)  |       | Identification  No.) |

 
| **1338 Plantation Road Roanoke, Virginia** | ** ** | **24012**   |
|--------------------------------------------|------------|-------------|
| (Address  of Principal Executive Offices)  |       | (Zip  Code) |

 

**(540)345-3195**

(Registrant’sTelephone Number Including Area Code)

 

 

                Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 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  No o

 

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

 

                Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes o  No ý

 

 

                Asof November 14, 2005, there were 11,888,571 shares of common stock outstanding.

 

 

** **

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** **

**WesternSizzlin Corporation**

** **

**Form10-Q**

**NineMonths Ended September 30, 2005**

**Tableof Contents**

** **

** **

** **
| ** **        | ** **                                                                                                      | ** ** |
|-------------------|-----------------------------------------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                                                      | **Page**   |
|              | **PART I. FINANCIAL INFORMATION**                                                                               |       |
|              |                                                                                                            |       |
| **Item 1.**       | **Financial Statements (Unaudited)**                                                                            |       |
|              |                                                                                                            |       |
|              | Consolidated  Balance Sheets—September 30, 2005 and December 31, 2004                            | 2          |
|              |                                                                                                            |       |
|              | Consolidated  Statements of Operations—Three and Nine Months Ended September 30, 2005  and 2004       | 3          |
|              |                                                                                                            |       |
|              | Consolidated  Statement of Changes in Stockholders’ Equity—Nine Months Ended  September 30, 2005 | 4          |
|              |                                                                                                            |       |
|              | Consolidated  Statements of Cash Flows—Nine Months Ended September 30, 2005 and 2004                  | 5          |
|              |                                                                                                            |       |
|              | Notes  to Consolidated Financial Statements                                                                     | 6-13       |
|              |                                                                                                            |       |
| **Item  2.**      | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                 | 13-18      |
|              |                                                                                                            |       |
| **Item  3.**      | **Quantitative  and Qualitative Disclosure about Market Risk**                                                  | 18         |
|              |                                                                                                            |       |
| **Item 4.**       | **Controls  and Procedures**                                                                                    | 18         |
|              |                                                                                                            |       |
|              | **PART II. OTHER  INFORMATION**                                                                                 |       |
|              |                                                                                                            |       |
| **Item 1.**       | **Legal  Proceedings**                                                                                          | 19         |
|              |                                                                                                            |       |
| **Item 6.**       | **Exhibits**                                                                                                    | 19         |
|              |                                                                                                            |       |
| **Signatures**    | 20                                                                                                              |
|              |                                                                                                            |       |
| **Exhibit Index** | 21                                                                                                              |

 

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** **

**PART I.  FINANCIALINFORMATION**

**Item 1.  FinancialStatements**

 

**WESTERN SIZZLIN CORPORATION**

ConsolidatedBalance Sheets

September30, 2005 and December 31, 2004

 
| ** **                                                                                                                                    | ** ** | **September  30,  2005** | ** ** | **December  31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                                                                                                          |       | **(unaudited)**          |       |                    |       |
| **Assets**                                                                                                                                    |       |                     |       |                    |       |
| Current assets:                                                                                                                               |       |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                     |       | $                        | 1,903,344  |                    | $          | 2,105,751 |   |
| Short-term investments, restricted under long-term debt agreement                                                                             |       | 258,456                  |       | 254,654                 |       |
| Trade accounts receivable, net of allowance for doubtful accounts of  $462,506 in 2005 and $388,500 in 2004                                   |       | 840,004                  |       | 842,269                 |       |
| Current installments of notes receivable                                                                                                      |       | 208,753                  |       | 229,818                 |       |
| Other receivables                                                                                                                             |       | 225,273                  |       | 107,896                 |       |
| Inventories                                                                                                                                   |       | 90,341                   |       | 122,197                 |       |
| Prepaid expenses                                                                                                                              |       | 285,766                  |       | 308,087                 |       |
| Deferred income taxes                                                                                                                         |       | 269,325                  |       | 400,629                 |       |
| Total current assets                                                                                                                          |       | 4,081,262                |       | 4,371,301               |       |
| Notes receivable, less allowance for doubtful accounts of $95,893 in  2005 and 2004, excluding current installments                           |       | 932,937                  |       | 1,035,485               |       |
| Property and equipment, net of accumlated depreciation of $3,982,045  in 2005 and $5,061,285 in 2004                                          |       | 2,091,293                |       | 2,774,646               |       |
| Franchise royalty contracts, net of accumulated amortization of  $7,405,971 in 2005 and $6,933,249 in 2004                                    |       | 2,048,461                |       | 2,521,183               |       |
| Goodwill                                                                                                                                      |       | 4,310,200                |       | 4,310,200               |       |
| Financing costs, net of accumulated amortization of $131,903 in 2005 and  $118,273 in 2004                                                    |       | 68,307                   |       | 81,937                  |       |
| Deferred income taxes                                                                                                                         |       | 853,484                  |       | 933,226                 |       |
| Asset held for sale                                                                                                                           |       | 300,000                  |       | 300,000                 |       |
| Other assets, net                                                                                                                             |       | 293,682                  |       | 368,688                 |       |
|                                                                                                                                          |       | $                        | 14,979,626 |                    | $          | 16,696,666 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                |       |                     |       |                    |       |
| Current liabilities:                                                                                                                          |       |                     |       |                    |       |
| Current installments of long-term debt                                                                                                        |       | $                        | 1,357,435  |                    | $          | 839,987 |   |
| Accounts payable                                                                                                                              |       | 422,868                  |       | 831,883                 |       |
| Accrued expenses and other                                                                                                                    |       | 621,732                  |       | 1,219,147               |       |
| Total current liabilities                                                                                                                     |       | 2,402,035                |       | 2,891,017               |       |
| Long-term debt, excluding current installments                                                                                                |       | 1,120,441                |       | 2,697,650               |       |
| Other long-term liabilities                                                                                                                   |       | —                   |       | 14,841                  |       |
| Commitments and contingincies                                                                                                                 |       |                     |       |                    |       |
| Stockholders’ equity:                                                                                                                    |       |                     |       |                    |       |
| Common stock; $.01 par value. Authorized 20,000,000 shares;  11,888,571 and 11,908,571 issued and outstanding in 2005 and 2004,  respectively |       | 118,886                  |       | 119,086                 |       |
| Additional paid-in capital                                                                                                                    |       | 8,574,778                |       | 8,589,578               |       |
| Retained earnings                                                                                                                             |       | 2,763,486                |       | 2,384,494               |       |
| Total stockholders’ equity                                                                                                               |       | 11,457,150               |       | 11,093,158              |       |
|                                                                                                                                          |       | $                        | 14,979,626 |                    | $          | 16,696,666 |   |
|                                                                                                                                               |            |                          |            |                         |            |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

** **

**2**

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** **

**WESTERN SIZZLIN CORPORATION**

ConsolidatedStatements of Income

(Unaudited)

 
| ** **                           | ** ** | **Three Months  Ended September 30** | ** ** | **Nine Months  Ended September 30** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                            |       |                                      |       |                                     |       |   |   |   |   |
| Company-operated restaurants         |       | $                                         | 3,655,713  |                                     | $          | 4,475,230 |   | $ | 11,629,512 |   | $ | 12,888,541 |   |
| Franchise operations                 |       | 1,055,895                                 |       | 1,127,043                                |       | 3,241,839 |   | 3,413,090 |   |
| Other                                |       | 100,147                                   |       | 99,527                                   |       | 329,702 |   | 294,194 |   |
| Total revenues                       |       | 4,811,755                                 |       | 5,701,800                                |       | 15,201,053 |   | 16,595,825 |   |
| Costs and expenses:                  |       |                                      |       |                                     |       |   |   |   |   |
| Cost of Company-operated restaurants |       | 2,345,450                                 |       | 3,030,878                                |       | 7,675,339 |   | 8,787,085 |   |
| Cost of franchise operations         |       | 471,666                                   |       | 511,599                                  |       | 1,396,009 |   | 1,451,630 |   |
| Other costs of operations            |       | 68,417                                    |       | 76,770                                   |       | 233,827 |   | 225,547 |   |
| Restaurant operating expenses        |       | 800,755                                   |       | 932,312                                  |       | 2,544,184 |   | 2,754,730 |   |
| General and administrative           |       | 487,508                                   |       | 469,403                                  |       | 1,649,872 |   | 1,432,638 |   |
| Depreciation and amortization        |       | 262,104                                   |       | 291,373                                  |       | 811,078 |   | 898,959 |   |
| Closed store expense                 |       | —                                    |       | —                                   |       | 350,279 |   | — |   |
| Total costs and expenses             |       | 4,435,900                                 |       | 5,312,335                                |       | 14,660,588 |   | 15,550,589 |   |
|                                 |       |                                      |       |                                     |       |   |   |   |   |
| Income from operations               |       | 375,855                                   |       | 389,465                                  |       | 540,465 |   | 1,045,236 |   |
| Other income (expense):              |       |                                      |       |                                     |       |   |   |   |   |
| Interest expense                     |       | (63,511                                   | )          | (95,239                                  | )          | (221,428 | ) | (294,603 | ) |
| Interest income                      |       | 19,021                                    |       | 20,026                                   |       | 53,215 |   | 62,415 |   |
| Other                                |       | (2,450                                    | )          | 7,552                                    |       | 243,343 |   | 59,027 |   |
|                                 |       | (46,940                                   | )          | (67,661                                  | )          | 75,130 |   | (173,161 | ) |
| Income before income tax expense     |       | 328,915                                   |       | 321,804                                  |       | 615,595 |   | 872,075 |   |
| Income tax expense                   |       | 125,367                                   |       | 122,274                                  |       | 236,603 |   | 331,368 |   |
| Net income                           |       | $                                         | 203,548    |                                     | $          | 199,530 |   | $ | 378,992 |   | $ | 540,707 |   |
| Earnings per share:                  |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                |       | $                                         | .02        |                                     | $          | .02 |   | $ | .03 |   | $ | .05 |   |
| Diluted                              |       | $                                         | .02        |                                     | $          | .02 |   | $ | .03 |   | $ | .05 |   |
|                                      |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements

** **

**3**

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** **

**WESTERN SIZZLIN CORPORATION**

ConsolidatedStatement of Changes in Stockholders’ Equity

NineMonths Ended September 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                                                          |       | —           |       | —      |       | —         |       | 378,992      |       | 378,992    |       |
| Balances, September 30, 2005                                        |       | 11,888,571       |       | $           | 118,886    |           | $          | 8,574,778    |       | $          | 2,763,486  |   | $ | 11,457,150 |   |
|                                                                     |            |                  |            |             |            |                |            |              |            |            |            |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

** **

**4**

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** **

**WESTERN SIZZLIN CORPORATION**

ConsolidatedStatements of Cash Flows

NineMonths Ended September 30, 2005 and 2004

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Cash flows from operating  activities:                                             |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 378,992    |   | $ | 540,707 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                 |       |   |   |
| Depreciation and amortization of property and equipment                            |       | 324,726                              |       | 412,443 |   |
| Amortization of franchise royalty contracts                                        |       | 472,722                              |       | 472,721 |   |
| Amortization of financing costs                                                    |       | 13,630                               |       | 13,795 |   |
| (Gain) Loss on sale/disposal of property and equipment                             |       | 359,776                              |       | (945 | ) |
| Gain from fire casualty                                                            |       | (220,351                             | )          | — |   |
| Common stock received related to termination of franchise agreement                |       | (15,000                              | )          | — |   |
| Provision for doubtful accounts                                                    |       | 100,320                              |       | 75,119 |   |
| Provision for deferred income taxes                                                |       | 211,046                              |       | 302,641 |   |
| (Increase) decrease in:                                                            |       |                                 |       |   |   |
| Trade accounts receivable                                                          |       | (98,055                              | )          | (67,591 | ) |
| Notes receivable                                                                   |       | 123,616                              |       | 89,232 |   |
| Other receivables                                                                  |       | (117,377                             | )          | (6,626 | ) |
| Inventories                                                                        |       | 31,856                               |       | (25,286 | ) |
| Prepaid expenses                                                                   |       | 22,322                               |       | 32,996 |   |
| Other assets                                                                       |       | (357,607                             | )          | 110,284 |   |
| Increase (decrease) in:                                                            |       |                                 |       |   |   |
| Accounts payable                                                                   |       | (409,016                             | )          | 40,169 |   |
| Accrued expenses                                                                   |       | (597,415                             | )          | (14,381 | ) |
| Other long-term liabilities                                                        |       | (14,841                              | )          | (15,533 | ) |
| Net cash provided by operating activities                                          |       | 209,344                              |       | 1,959,745 |   |
| Cash flows from investing  activities:                                             |       |                                 |       |   |   |
| Short-term investments                                                             |       | (3,802                               | )          | (1,375 | ) |
| Additions to property and equipment                                                |       | (180,909                             | )          | (169,020 | ) |
| Proceeds from sale of property                                                     |       | 179,757                              |       | 7,121 |   |
| Proceeds from fire casualty                                                        |       | 652,964                              |       | — |   |
| Net cash provided by (used in) investing activities                                |       | 648,010                              |       | (163,274 | ) |
| Cash flows from financing  activities:                                             |       |                                 |       |   |   |
| Payments on long-term debt                                                         |       | (1,059,761                           | )          | (391,800 | ) |
| Net cash used in financing activities                                              |       | (1,059,761                           | )          | (391,800 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | (202,407                             | )          | 1,404,671 |   |
| Cash and cash equivalents  at beginning of period                                  |       | 2,105,751                            |       | 682,730 |   |
| Cash and cash equivalents  at end of period                                        |       | $                                    | 1,903,344  |   | $ | 2,087,401 |   |
| Supplemental disclosure of  cash flow information:                                 |       |                                 |       |   |   |
| Cash payments for interest                                                         |       | $                                    | 230,662    |   | $ | 294,605 |   |
| Income taxes paid                                                                  |       | $                                    | 25,557     |   | $ | 30,358 |   |
|                                                                                    |            |                                      |            |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

** **

**5**

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** **

**WESTERN SIZZLIN CORPORATION**

Notesto Consolidated Financial Statements

 

NineMonths Ended September 30, 2005 and 2004

 

(Unaudited)

**(1)           General**

 

The accompanying unauditedconsolidated financial statements of Western Sizzlin Corporation, (the “Company”)have been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial reporting information andthe instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements.  In the opinion of management, all materialreclassifications and adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of operations,financial position and cash flows for each period shown have beenincluded.  Operating results for interimperiods are not necessarily indicative of the results for the full yearbecause, among other things, the dining habits of the Company’s customerscannot be certain.  The unauditedconsolidated financial statements and notes are presented as permitted by Form10-Q and do not contain certain information included in the Company’s annualconsolidated financial statements and notes. For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s annual report on Form 10-K for theyear ended December 31, 2004.

 

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

 

The Company applies theintrinsic-value-based method of accounting prescribed by Accounting PrinciplesBoard (APB) Opinion No. 25, *Accounting for StockIssued to Employees,* and related interpretations including FASBInterpretation No. 44,*Accounting for CertainTransactions involving Stock Compensation, an interpretation of APB Opinion No.25*, issued in March 2000, to account for its fixed-plan stockoptions. Under this method, compensation expense is recorded on the date ofgrant only if the current market price of the underlying stock exceeded theexercise price.  Statement No. 123, *Accounting for Stock-Based Compensation,* establishedaccounting and disclosure requirements using a fair-value-based method ofaccounting for stock-based employee compensation plans.  As allowed by Statement No. 123, the Companyhas elected 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, anamendment of SFAS No. 123,* amends the disclosure requirements ofStatement No.123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method on reported results.  The following table illustrates the effect onnet income if the fair-value-based method had been applied to all outstandingawards in each period:

 

| ** **                                                                                                                                            | ** ** | **Three Months Ended****September 30,** | ** ** | **Nine Months Ended****September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2005**                                | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income:                                                                                                                                           |       |                                    |       |                                   |       |   |   |   |   |
| As reported                                                                                                                                           |       | $                                       | 203,548    |                                   | $          | 199,530 |   | $ | 378,992 |   | $ | 540,707 |   |
| Deduct total stock-based employee compensation  expense determined under fair-value based method for all outstanding and  unvested awards, net of tax |       | 96,432                                  |       | 4,030                                  |       | 130,594 |   | 46,167 |   |
| Pro forma                                                                                                                                             |       | $                                       | 107,116    |                                   | $          | 195,500 |   | $ | 248,398 |   | $ | 494,540 |   |
| Basic and diluted net income per share:                                                                                                               |       |                                    |       |                                   |       |   |   |   |   |
| As reported                                                                                                                                           |       | $                                       | 0.02       |                                   | $          | 0.02 |   | $ | 0.02 |   | $ | 0.04 |   |
| Pro forma                                                                                                                                             |       | $                                       | 0.02       |                                   | $          | 0.02 |   | $ | 0.02 |   | $ | 0.04 |   |
|                                                                                                                                                       |            |                                         |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

6

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In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement 123 (revised 2004), *Share-Based**Payment*(Statement 123(R)).  This Statement is a revision to Statement123, *Accounting for Stock-Based Compensation*,and supersedes Opinion 25, *Accounting for StockIssued to Employees*. Statement 123(R) requires the measurement of the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award.  Thecost will be recognized over the period during which an employee is required toprovide service in exchange for the award. No compensation cost is recognized for equity instruments for whichemployees do not render service.  TheCompany will adopt Statement 123(R) on January 1, 2006, requiring compensationcost to be recognized as expense for the portion of outstanding unvestedawards, based on the grant-date fair value of those awards calculated using theBlack-Scholes option pricing model under Statement 123 for pro formadisclosures.  Although management iscurrently evaluating the impact of Statement 123(R), the Company does notexpect that the adoption of Statement 123(R) will have a material impact on theCompany’s financial position or future results of operations as it relates tooptions outstanding at September 30, 2005. However, Statement 123(R) will likely have a material impact on theCompany’s financial statements to the extent options are issued in the future.

 

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

 

The Company conforms to theprovisions 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 andnine-months ended September 30, 2005 and 2004.

 

*Amortizing IntangibleAssets*

 

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

 

| ** **                     | ** ** | ** **                  | ** ** | **As of****September 30,   2005**     | ** ** | ** **                    | ** ** |
|--------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Gross  carrying  amount** | ** ** | **Weighted average  Amortization  Period** | ** ** | **Accumulated  Amortization** | ** ** |
| Amortizing intangible  assets: |       |                        |       |                                       |       |                          |       |
| Franchise  Royalty Contracts   |       | $                           | 9,454,432  |                                       | 15.0 yrs.  |                          | $          | 7,405,971 |   |
|                                |            |                             |            |                                            |            |                               |            |  |  |

 

Aggregate amortizationexpense for amortizing intangible assets for the three and nine-month periodsended September 30, 2005 was $157,574 and $472,722, respectively.  Estimated amortization expense is $630,300per year through December 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 reflectsthe potential dilution that could occur if securities or 

 

7

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other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the Company.  Stock options of 325,000 and 465,000 sharesof common stock for the three and nine-month periods ended September 30, 2005and 175,000 shares for the three and nine-month period ended September 30,2004, respectively, were not included in computing diluted earnings because theeffect of these options are anti-dilutive.

 

The following is a reconciliation of the numerators anddenominators of the basic and diluted earnings per share computations for theperiods indicated:

 
| ** **                                     | ** ** | **Income  (Numerator)** | ** ** | **Weighted  Average  Shares  (Denominator)** | ** ** | **Earnings  Per Share  Amount** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|---------------------------------|------------|
| **Three months ended September  30, 2005**     |       |                    |       |                                         |       |                            |       |
| Net  income—basic and diluted             |       | $                       | 203,548    |                                         | 11,888,571 |                            | $          | 0.02 |   |
| ** **                                     |       |                    |       |                                         |       |                            |       |
| **Three  months ended September****30,  2004** |       |                    |       |                                         |       |                            |       |
| Net  income—basic and diluted             |       | $                       | 199,530    |                                         | 11,908,571 |                            | $          | 0.02 |   |
|                                           |       |                    |       |                                         |       |                            |       |
| **Nine months ended September 30,  2005**      |       |                    |       |                                         |       |                            |       |
| Net  income—basic and diluted             |       | $                       | 378,992    |                                         | 11,895,338 |                            | $          | 0.03 |   |
| ** **                                     |       |                    |       |                                         |       |                            |       |
| **Nine  months ended September****30,  2004**  |       |                    |       |                                         |       |                            |       |
| Net  income—basic and diluted             |       | $                       | 540,707    |                                         | 11,908,642 |                            | $          | 0.05 |   |

 

**(5)           Closed Store Expense**

 

Closed store expense for thenine months ended September 30, 2005 and 2004 was $350,279 and $0,respectively.  In the three months endedMarch 31, 2005, the Company recorded closed store expenses of $350,279, whichincluded impairments of $128,471 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 $221,808. There was no additional closed storeexpense or impairments recorded in the three months ended June 30, 2005 orthree months ended September 30, 2005.

 

** (6)          ReportableSegments**

 

The Company has defined two reportable segments:Company-operated restaurants and franchising and other.  The Company-operated restaurant segmentconsists of the operations of all Company-operated restaurants and derives itsrevenues from restaurant operations.  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 and allocatesresources based on income from operations before income taxes. Capital costsare allocated to segments based upon predetermined rates or actual or estimatedresource usage.  Corporate and franchisesupport expenses of $449,711

and $1,308,645 for three and nine months ended September 30,2005 and $476,489 and $1,360,284 for the three and nine months ended September30, 2004, are allocated entirely to franchising and other and are not allocatedto Company-operated restaurants.  Theaccounting policies of the segments are the same as those described in thesummary of significant accounting policies.

 

Reportable segments are business units that provide differentproducts or services.  Separatemanagement of each segment is required because each business unit is subject todifferent 

 

8

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operational issues and strategies.  Through September 30, 2005, all revenues foreach business segment were derived from business activities conducted withcustomers located in the United States. No single external customer accounted for 10% or more of the Company’sconsolidated revenues.

 

The following tablesummarizes reportable segment information:

 
| ** **                                  | ** ** | **Three Months****Ended September 30,** | ** ** | **Nine Months****Ended September 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues  from reportable segments:         |       |                                    |       |                                   |       |   |   |   |   |
| Restaurants                                 |       | $                                       | 3,655,713  |                                   | $          | 4,475,230 |   | $ | 11,629,512 |   | $ | 12,888,541 |   |
| Franchising and other                       |       | 1,156,042                               |       | 1,226,570                              |       | 3,571,541 |   | 3,707,284 |   |
| Total revenues                              |       | $                                       | 4,811,755  |                                   | $          | 5,701,800 |   | $ | 15,201,053 |   | $ | 16,595,825 |   |
| Depreciation  and amortization:             |       |                                    |       |                                   |       |   |   |   |   |
| Restaurants                                 |       | $                                       | 92,542     |                                   | $          | 114,954 |   | $ | 298,185 |   | $ | 371,062 |   |
| Franchising and other                       |       | 169,562                                 |       | 176,419                                |       | 512,893 |   | 527,897 |   |
| Total depreciation and amortization         |       | $                                       | 262,104    |                                   | $          | 291,373 |   | $ | 811,078 |   | $ | 898,959 |   |
| Interest  expense:                          |       |                                    |       |                                   |       |   |   |   |   |
| Restaurants                                 |       | $                                       | 63,468     |                                   | $          | 94,780 |   | $ | 220,365 |   | $ | 293,380 |   |
| Franchising and other                       |       | 43                                      |       | 459                                    |       | 1,063 |   | 1,223 |   |
| Total interest expense                      |       | $                                       | 63,511     |                                   | $          | 95,239 |   | $ | 221,428 |   | $ | 294,603 |   |
| Interest  income:                           |       |                                    |       |                                   |       |   |   |   |   |
| Restaurants                                 |       | $                                       | 17,383     |                                   | $          | 19,857 |   | $ | 48,800 |   | $ | 59,144 |   |
| Franchising and other                       |       | 1,638                                   |       | 169                                    |       | 4,415 |   | 3,271 |   |
| Total interest income                       |       | $                                       | 19,021     |                                   | $          | 20,026 |   | $ | 53,215 |   | $ | 62,415 |   |
| Income  before income tax expense:          |       |                                    |       |                                   |       |   |   |   |   |
| Restaurants                                 |       | $                                       | 247,699    |                                   | $          | 226,066 |   | $ | 465,936 |   | $ | 464,460 |   |
| Franchising and other                       |       | 81,216                                  |       | 95,738                                 |       | 149,659 |   | 407,615 |   |
| Total income before income tax expense |       | $                                       | 328,915    |                                   | $          | 321,804 |   | $ | 615,595 |   | $ | 872,075 |   |
|                                             |            |                                         |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **            | ** ** | **September 30  2005** | ** ** | **September 30  2004** | ** ** |
|-----------------------|------------|------------------------|------------|------------------------|------------|
| Total  assets:        |       |                   |       |                   |       |
| Restaurants           |       | $                      | 10,024,790 |                   | $          | 10,820,877 |   |
| Franchising and other |       | 4,954,836              |       | 6,232,361              |       |
| Total assets          |       | $                      | 14,979,626 |                   | $          | 17,053,238 |   |

 

**(7)           Contingencies**

 

As of September 30, 2005, the Company has accrued approximately$180,000 related to the matters discussed below.  In the case of all known contingencies, theCompany accrues for an obligation, including estimated legal costs, when a lossis probable and the amount is reasonably estimable.  As facts concerning contingencies becomeknown to the Company, the Company 

 

9

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reassesses its position with respect to accrued liabilities and otherexpenses.  These estimates are subject tochange as events evolve and as additional information becomes available duringthe litigation process.

 

**FFCA**

 

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

 

Following the May 15, 2003termination of the tenancies at-will, the Company advised five franchisees whocontinued to operate former Quincy’s units at that time to make any rentpayments directly to the Lessor.  Withregard to eleven other former Quincy’s units, the Company became aware, on orabout May 15, 2003, that the franchisees had elected to make their paymentsdirectly to the Lessor and it is the Company’s understanding that the Lessorhas accepted these payments.  There canbe no assurances that the franchisees have made their payments and willcontinue to make their lease payments in the future or that they even continueto operate these restaurants.  TheCompany’s estimate of the total payments that were made directly to the lessorfor these sixteen franchisees, or former franchisees, is approximately$3,200,000 through September 30, 2005. In addition, total payments due by the sixteen franchisees for theperiod October 1, 2005 through December 31, 2005 (the end of the lease term)would be approximately $347,000.

 

While the Company disputesany liability for any of the following amounts, to the Company’s knowledge, asof September 30, 2005 a total of approximately $2,227,000 of rental paymentshad not been made by either the franchisees or by the Company with regard tothe above-referenced nine closed properties. Rent for these nine properties, for the period of October 1, 2005through December 31, 2005 (the end of the lease term), according to the paymentschedule set out in the agreements, would approximate $204,000.

 

In accordance with theCompany’s position, the Company has returned to the Lessor 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.  The Company intends to vigorously contest anypotential claims asserted by the Lessor. While the Company has previously engaged in discussions with the Lessorof the properties to resolve any rental payments claimed by the Lessor under theAgreements, it is not possible at this time to determine the outcome of thesediscussions.

 

**Lincoln,Nebraska Lease Claim**

 

The Company was a guarantorof a lease agreement in Lincoln, Nebraska, with monthly rentals ofapproximately $8,200.  The lease agreement,which ran through February 2014, was assigned by the Company to a third partyin March 1998 and subsequently by the third party to another party.  When the assignees failed to make recentmonthly rental, property tax and association payments on the premises, thelandlord took possession of the premises, and on or about May 12, 2004, soldthe premises to a third party intending to use the premises for its ownpurposes.  The Company 

 

10

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resolved the landlord’slawsuit filed in the District Court of Lancaster County, Nebraska and receiveda release from all claims in conjunction with this claim upon payment of$50,000 on April 18, 2005.

 

**MBMClaim**

 

During 2003, the Company wasnotified of a claim by MBM Distributors (MBM) involving amounts alleged to beowed by the Company to MBM for product delivered on open account and inventoryarising out of a distribution agreement. In December 2003, MBM filed suit in Federal District Court in NorthCarolina seeking damages of an amount in excess of $800,000.  The claim was settled during mediation onApril 19, 2005 with the Company’s payment of $365,000.

 

**Dickson,Tennessee Claim**

 

In 1994, the Company enteredinto a lease agreement for a restaurant located in Dickson, Tennessee.  The lease agreement has an original term of15 years and requires monthly base rental payments of $6,500 for the final fiveyears of the lease term.  The Companyceased operations on the premises as a restaurant in 1996 and subsequently subleasedthe property.  The location has beenvacant since September 2001.  In June2004, the Company advised the landlord that the Company was surrendering theproperty.  The landlord is obligated to,and has advised the 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 ithas surrendered the premises, and has put the landlord on notice of thelandlord’s obligation to mitigate any damages. Following the landlord’sinitiation of collection actions in the General Sessions Court of DicksonCounty, Tennessee, the Company paid rent and related costs for the months ofMay, June, July, August, September, and October 2004, but continued to assertthat it surrendered 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 grantedthe landlord judgment against the Company in the total amount of $90,986.  The Company has further appealed to theTennessee Court of Appeals.  The Companyintends to vigorously contest any future action seeking to collect rent, taxes,other expenses or fees on the grounds of the landlord’s failure to mitigatecontinues.

 

**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 a result of this casualty, the Companyterminated the lease of the tenant operating the restaurant on thesepremises.  Insurance proceeds of $591,000were received in April 2005 and a gain on the casualty of $220,351 has beenrecorded in other income in the accompanying consolidated statement of incomeduring the first quarter of 2005.  Theland is currently for sale and management does not anticipate any impairment onthis property based on current estimates of fair value.  In accordance with the note payable agreementrelated to the property, the insurance proceeds were remitted to the Company’slender on April 8, 2005.  The Company haslisted the real estate for sale and will remit any proceeds from a sale to thelender in partial or total satisfaction of the remaining indebtedness on theproperty.  The lender has indicated thatit will accept any partial or total repayment of the loan from the proceeds ofthe real estate without the application of a prepayment penalty.

 

11

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**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.  WesternSizzlin Stores of Virginia, Inc. has filed a grounds of defense and serveddiscovery.  Western Sizzlin Stores ofVirginia, Inc. has never been billed by Chubb and has never had any directcontractual relations with them. Payments were sent to an insurance broker handling insurance needs forWestern Sizzlin Stores of Virginia, Inc. Western Sizzlin Stores of Virginia, Inc. has repeatedly requestedinformation from Chubb how payments to the broker were applied to Chubb’spremiums.  To date Chubb has not beenable or willing to provide.

 

**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, (the Premises) were totally destroyed by fire.  The Company insured the Premises, includingbuildings and contents, against casualty, such as fire.  The Company also has insured the Premises forthe interruption of business income.  Thefire occurred shortly after the Company had provided timely notice to thelandlord of its desire to extend the lease through a renewal term.  The lease is now scheduled to expire onDecember 31, 2010.  Since the fire, theCompany has repeatedly demanded that the landlord rebuild the premises and hasconsistently taken the position that the landlord is responsible for any costto rebuild in excess of the available insurance proceeds.

 

In response, in August 2005,the landlord filed an action for a declaratory judgment in the Circuit Court forCharles County, Maryland. The action alleges that the Company was in defaultbefore it provided timely notice to extend the lease due to a failure toproperly assign the lease; a failure to maintain sufficient replacement valueinsurance and to name the landlord as an additional insured; a failure to remitcertain “additional rent;” and a failure to assume any cost to rebuild thepremises which exceeds the available insurance proceeds.  The action seeks to have the lease declaredto have been terminated and also seeks an award of damages in the amount of theinsurance proceeds related to the building.

 

The Company has answered thelandlord’s lawsuit, denying the above-referenced allegations.  The Company intends to vigorously contest allclaims asserted by the landlord.  TheCompany has also filed a counterclaim seeking a declaratory judgement that thelease remains in effect, that the landlord has an obligation to rebuild, thatthe landlord is responsible for all costs to rebuild in excess of insurance proceedsand seeking damages.

 

Revenues for the six monthsended June 30, 2005 were $1.1 million, with operating income of $77,000 for theWaldorf, Maryland location.  The net bookvalue of related assets of $171,757 has been written off and recorded as a currentreceivable in anticipation of insurance proceeds on personal property on theWaldorf location.

 

**Other**

 

The Company is involved invarious other claims and legal actions arising in the ordinary course ofbusiness.  In the opinion of themanagement, the ultimate disposition of these matters will not have a materialadverse effect on the Company’s financial condition, results of operations orliquidity.

 

**(8)           Subsequent Event**

 

The Company is a partner ina 50/50 joint venture with a franchisee, for a new restaurant in Harrisonburg,Virginia.  During October 2005, the jointventure entered into a loan agreement for $3.05 million.  The Company has guaranteed 50% of the loanobligation.  Pursuant to the joint 

 

12

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venture agreement, a cashcontribution of $300,000 from each 50/50 partner was also made at the closingof this financing.  The Company iscurrently evaluating the accounting treatment for our investment in the jointventure as well as the guarantee of one loan discussed herein.  Land has been secured for this new location,which is scheduled to open by mid 2006.

 

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

 

                **Overview**

 

The following discussion mayinclude forward-looking statements including anticipated financial performance,business prospects, the future opening of Company-operated and franchisedrestaurants, anticipated capital expenditures, and other matters.  All statements other than statements of historicalfact are forward-looking statements. Section 27A of the Securities Act of 1933 (as amended) and Section 21Eof the Securities Exchange Act of 1934 (as amended) provide safe harbors forforward-looking statements.  In order tocomply with the terms of these safe harbors, the Company notes that a varietyof factors, individually or in the aggregate, could cause the Company’s actualresults and experience to differ materially from the anticipated results orother expectations expressed in the Company’s forward-looking statementsincluding, without limitation, the following: the ability of the Company or itsfranchises to obtain suitable locations for restaurant development; consumerspending trends and habits; competition in the restaurant segment with respectto price, service, location, food quality and personnel resources; weatherconditions in the Company’s operating regions; laws and government regulations;general business and economic conditions; availability of capital; success ofoperating initiatives and marketing and promotional efforts; and changes inaccounting policies.  In addition, theCompany disclaims any intent or obligation to update those forward-lookingstatements.

 

The Company operated andfranchised a total of 145 restaurants located in 21 states, including 5Company-owned and 140 franchise restaurants as of September 30, 2005.  The restaurants include a family steakhouseconcept and a steak and buffet concept.

###### ** **

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

 

Netincome for the three and nine months ended September 30, 2005 was $203,548 and$378,992 compared to net income of $199,530 and $540,707 for the three and ninemonths ended September 30, 2004.

 

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

 

| ** **                           | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2005**                              | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                            |       |                                  |       |                                 |       |   |   |   |   |
| Company-operated restaurants         |       | 76.0                                  | %          | 78.5                                 | %          | 76.5 | % | 77.7 | % |
| Franchise royalties and fees         |       | 21.9                                  |       | 19.8                                 |       | 21.3 |   | 20.6 |   |
| Other sales                          |       | 2.1                                   |       | 1.7                                  |       | 2.2 |   | 1.7 |   |
| Total revenues                       |       | 100.0                                 |       | 100.0                                |       | 100.0 |   | 100.0 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Cost of company-operated restaurants |       | 48.8                                  |       | 53.2                                 |       | 50.6 |   | 52.9 |   |
| Cost of franchise operations         |       | 9.8                                   |       | 9.0                                  |       | 9.2 |   | 8.8 |   |
| Other cost of operations             |       | 1.4                                   |       | 1.3                                  |       | 1.5 |   | 1.4 |   |
| Restaurant operating expenses        |       | 16.6                                  |       | 16.4                                 |       | 16.7 |   | 16.6 |   |
| General and administrative           |       | 10.1                                  |       | 8.2                                  |       | 10.9 |   | 8.6 |   |
| Depreciation and amortization        |       | 5.5                                   |       | 5.1                                  |       | 5.3 |   | 5.4 |   |
| Closed store expenses                |       | —                                |       | —                               |       | 2.3 |   | — |   |
| Total costs and expenses             |       | 92.2                                  |       | 93.2                                 |       | 96.5 |   | 93.7 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Income from operations               |       | 7.8                                   |       | 6.8                                  |       | 3.5 |   | 6.3 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Other income (expense)               |       | (1.0                                  | )          | (1.2                                 | )          | .6 |   | (1.0 | ) |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Income before income tax expense     |       | 6.8                                   |       | 5.6                                  |       | 4.1 |   | 5.3 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Income tax expense                   |       | 2.6                                   |       | 2.1                                  |       | 1.6 |   | 2.0 |   |
| Net income                           |       | 4.2                                   | %          | 3.5                                  | %          | 2.5 | % | 3.3 | % |

 

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| ** **                               | ** ** | **Three Months  Ended September 30** | ** ** | **Nine Months  Ended September 30** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                               | ** ** | **2005**                             | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Restaurant  Data**                     |       |                                 |       |                                |       |   |   |   |   |
| Number  of Company-Operated Restaurants: |       |                                 |       |                                |       |   |   |   |   |
| Beginning of period                      |       | 6                                    |       | 7                                   |       | 6 |   | 7 |   |
| Opened                                   |       | —                               |       | —                              |       | — |   | — |   |
| Closed                                   |       | 1                                    |       | —                              |       | 1 |   | — |   |
| Franchised                               |       | —                               |       | —                              |       | — |   | — |   |
| End of period                            |       | 5                                    |       | 7                                   |       | 5 |   | 7 |   |
|                                     |       |                                 |       |                                |       |   |   |   |   |
| Number  of U.S. Franchised Restaurants:  |       |                                 |       |                                |       |   |   |   |   |
| Beginning of period                      |       | 144                                  |       | 152                                 |       | 148 |   | 161 |   |
| Opened                                   |       | 1                                    |       | 1                                   |       | 3 |   | 3 |   |
| Closed                                   |       | 5                                    |       | 1                                   |       | 11 |   | 12 |   |
| End of period                            |       | 140                                  |       | 152                                 |       | 140 |   | 152 |   |

** **

**Revenues**

 

Company-operatedrestaurant revenues decreased $819,500 (18.3%) to $3.7 million for the threemonths ended September 30, 2005 as compared to $4.5 million for the comparablethree months ended September 30, 2004.  Revenuesfor company-operated restaurants decreased $1.3 million (9.8%) to $11.6 millionfor the nine months ended September 30, 2005 as compared to $12.9 million forthe comparable nine months ended September 30, 2004. The decreases are largelyattributable to the closing of a Company-operated location in February, 2005,totaling approximately $470,000 and $830,000 in lost revenues over the threeand nine months ended September 30, 2005, respectively, when compared tocorresponding prior periods and a closing of a Company-operated location inJuly, 2005 due to a total loss by fire casualty totaling approximately $321,000and $370,000 in lost revenues over the three and nine months ended September30, 2005 over prior periods.  Same storesales for the three and nine months ended September 30, 2005, experienced anoverall decrease of 2.43% and 0.52%, respectively.

 

Franchiseand other revenues decreased 5.8% to $1.2 million for the three months endedSeptember 30, 2005 as compared to $1.2 million for the comparable three monthsended September 30, 2004.  Franchise andother revenues decreased 3.7% to $3.6 million for the nine months endedSeptember 30, 2005 as compared to $3.7 million for the nine months endedSeptember 30, 2004.  The decreases areattributable to fewer franchised units in the system at September 30, 2005 ascompared to September 30, 2004.  Samestore sales for the three and nine months ended September 30, 2005, experiencedan overall decrease of 0.31% and 0.56%, respectively.

 

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

 

Costof Company-operated restaurants, consisting primarily of food, beverage, andemployee costs decreased $685,300 (22.6%) to $2.3 million for the three monthsended September 30, 2005 from $3.0 million for the three months ended September30, 2004.  These costs for the threemonth periods decreased as a percentage of Company-operated restaurants revenuefrom 67.7% in 2004 to 64.2% in 2005. For the nine month period ended September30, 2005, cost of Company-operated restaurants decreased $1.1 million (12.7%)to $7.7 million from $8.8 million in 2004. These costs for the nine month periods decreased as a percentage ofCompany-operated restaurants revenue from 68.2% in 2004 to 66.0% in 2005.  The decrease in the costs was largelyattributable to the closing of a Company-operated location in February 2005 andthe closing due to fire of a Company-operated location in July, 2005.

 

Costof franchise operations and other cost of operations were $472,000 for thethree months ended September 30, 2005 compared to $512,000 in 2004, and were9.8% and 9.0% as a percentage of total revenues for 2005 and 2004,respectively.  Cost of franchiseoperations and other cost of operations were $1.4 and $1.5 million for the ninemonth periods ended September 30, 2005 and 2004, and were 9.2% and 8.7% as apercentage of total revenues, respectively. These costs are comparable year to year for the periods presented.

 

Restaurantoperating expenses, which include utilities, insurance, maintenance, rent andother such costs of the Company-operated restaurants, decreased by $132,000(14.2%) for the three months ended September 30, 2005 versus the prior year’scomparable period. These costs for the three month periods increased slightlyas a percentage of Company-operated restaurants revenues from 20.8% in 2004 to21.9% in 2005.  For the nine months endedSeptember 30, 2005, restaurant operating expenses decreased by 210,500 (7.6%)versus the prior year’s comparable period. These costs for the nine month periods decreased as a percentage ofCompany-operated restaurants revenues at 21.9% in 2005 and 29.1% in 2004.  The decreases are attributable to closing aCompany-operated location in February 2005 and another in July 2005.

 

Forthe three months ended September 30, 2005 and 2004, general and administrativeexpenses were $488,000 and $469,000, respectively and as a percentage of totalrevenue were 10.1% and 8.2%, respectively. For the nine months ended September30, 2005 and 2004, general and administrative expenses were $1.6 million and$1.4 million, respectively, and as percentage of total revenues were 10.9% and8.6%, respectively.  The increase wasprimarily due to legal fees associated with litigation matters during 2005.

 

Depreciationand amortization expense was $29,200 (10.0%) less for the three months endedSeptember 30, 2005 versus the three months ended September 30, 2004 and $88,000(6.1%) less for the comparable nine month period then ended.  The decreases were attributable to certainproperty and equipment becoming fully depreciated and the disposal andwrite-off of assets.

 

Closedstore expenses were $0 and $350,000 for the three and nine months endedSeptember 30, 2005 and there was no closed store expense in 2004 for thecomparable periods.  The first quarter2005 expenses included impairment of $128,000 associated with the end of asubleased property due to a buyout of the lease and impairments related to theclosing of a Company-operated restaurant of $222,000 in February 2005.

 

**OtherIncome (Expense)**

 

Interest expense decreased$31,700 and $73,100 for the three and nine months ended September 30, 2005 overthe comparable periods in 2004 due to a lower average principal outstandingbalance.  Interest income fluctuates accordingto the levels of available cash balances. The Company employs a cash management system whereby available balancesare invested on an overnight basis.

 

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Other income (expense)decreased $10,000 for the three months ended September 30, 2005 and increased$184,300 for the nine months ended September 30, 2005 over the comparableperiods in 2004 due largely to a gain of $220,000 attributable to insuranceproceeds received on the Lawrenceville, Georgia casualty recorded in the firstquarter of 2005.

 

Income tax expense isdirectly affected by the levels of pretax income. The Company’s effective taxrate was 38.1% and 38.4% for the three and nine months ended September 30, 2005and 37.9% and $37.9% for the same periods in 2004.

 

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

 

As is customary in therestaurant industry, the Company had historically operated with negativeworking capital.  Historically, theCompany has leased the majority of its restaurants and through a strategy ofcontrolled growth has financed operations from operating cash flows, theutilization of the Company’s line of credit and long-term debt provided byvarious lenders.  The Company had apositive working capital of $1.9 million and $1.5 million at September 30, 2005and December 31, 2004, respectively.

 

Cash flows provided byoperating activities were $209,000 in 2005 compared to $2.0 million in 2004.During 2004, cash flows provided by operating activities were primarily due tonet income of $540,000, depreciation and amortization of $871,000 and aprovision for deferred income taxes of $303,000. During 2005, cash flowsprovided by operations were primarily due to net income of $379,000,depreciation and amortization of $797,000, loss on sale/disposal of propertyand equipment $360,000, offset by gain from fire casualty of $220,000 anddecrease in accounts payable and accrued expenses of $1.1 million due topayments on two lawsuit settlements and two less company stores at September31, 2005. Net cash provided by investing activities of $648,000 in 2005 andused in investing activities of $163,000 in 2004, was primarily for capitalexpenditures related to property and equipment for both periods presented andproceeds of $653,000 in 2005 from fire casualty in Lawrenceville, Georgia.  Net cash used in financing activities of $1.1million in 2005 and $392,000 in 2004 was for payments on long-term debt in 2005and 2004.  The increase in 2005 over 2004was due to the receipt of insurance proceeds on the Lawrenceville, GA casualtywhich were fully remitted to the lender.

 

Management believes that theCompany’s short-term cash requirements will include possible settlements ofcertain legal proceedings, capital improvements to Company-operated restaurantsof approximately $1.2 million, and the $300,000 cash contribution made by theCompany in October 2005 related to the joint venture in Note 7.

 

The Company utilizes itsexisting line of credit to provide short-term funding in addition to cash fromoperations.  Management reviews availablefinancing alternatives to provide cash for future expansion, restructureexisting debt and additional available financing alternatives, and provideadditional working capital; however, management believes existing financingwill provide adequate funding for cash requirements.

 

# **CRITICAL ACCOUNTING POLICIES**

 

## **Franchise Revenue**

 

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

 

## **Accounts and Notes Receivable andAllowance for Doubtful Accounts**

 

Inconnection with franchise fees charged to franchisees, the Company has accountsand notes receivable outstanding from our franchisees at any given time.  The Company reviews outstanding accounts andnotes receivable monthly and record allowances for doubtful accounts as deemed 

 

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appropriatefor certain individual franchisees.  Indetermining the amount of allowance for doubtful accounts to be recorded, theCompany considers the age of the receivable, the financial stability of thefranchisee, discussions that may have been had with the franchisee and theCompany’s judgment as to the overall collectiblity of the receivable from thatfranchisee.

 

**FranchiseRoyalty Contracts**

 

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

 

                **Goodwill**

 

Goodwill represents theexcess of purchase price over fair value of net assets of businessesacquired.  Goodwill and intangible assetsacquired in a purchase business combination and determined to have anindefinite useful life are not amortized, but instead tested for impairment atleast annually.

 

**OTHER**

###### ** **

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

 

Theimpact of inflation on the costs of food and beverage products, labor and realestate can affect the Company’s operations. Higher gas prices, and to some extent weather conditions fromhurricanes, in 2005 has affected sales performance and operations.

 

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

 

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

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement 123 (revised 2004), *Share-Based**Payment*(Statement 123(R)).  This Statement is a revision to Statement123, *Accounting for Stock-Based Compensation*,and supersedes Opinion 25, *Accounting for StockIssued to Employees*. Statement 123(R) requires the measurement of the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award.  Thecost will be recognized over the period during which an employee is required toprovide service in exchange for the award. No compensation cost is recognized for equity instruments for whichemployees do not render service.  TheCompany will adopt Statement 123(R) on January 1, 2006, requiring compensationcost to be recognized as expense for the portion of outstanding unvestedawards, based on the grant-date fair value of those awards calculated using theBlack-Scholes option pricing model under Statement 123 for pro formadisclosures.  Although management iscurrently evaluating the impact of Statement 123(R), the Company does notexpect that the adoption of Statement 123(R) will have a material impact on theCompany’s financial position or future results of operations as it relates tooptions outstanding at September 30, 2005. However, Statement 123(R) will likely have a material impact on theCompany’s financial statements to the extent options are issued in the future.

 

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As of September 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 Disclosureabout Market Risk**

 

The Company does not engagein derivative financial instruments or derivative commodity instruments.  As of September 30, 2005, the Company’sfinancial instruments were not exposed to significant market risk due toforeign currency exchange risk.  TheCompany is exposed to market risk related to interest rates, as well asincreased prices in restaurant industry commodities such as beef.

 

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

Debtobligations held for other than trading purposes at September 30, 2005 (dollarsin thousands):

####  

#### EXPECTEDMATURITY DATE

 
| ** **            | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated Fair Value** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------|------------|
| Long-term debt        |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                     |       |
| Fixed Rate            |       | $        | 907        |     | $          | 450      |       | $        | 333        |     | $          | 285            |       | $         | 180        |                     | $          | 323 |   | $ | 2,478 |   | $ | 3,180 |   |
| Average Interest Rate |       | 10.00    | %          | 9.95     | %          | 10.01    | %          | 10.07    | %          | 10.07    | %          | 10.07          | %          | 10.00     | %          |                     |       |
|                       |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                          |            |  |  |  |  |  |  |  |  |

 

**Item4.  Controls and Procedures**

 

**Senior management, including the Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as of September 30, 2005.  Based on this evaluation process, the ChiefExecutive Officer 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 inthe Company’s internal control over financial reporting that occurred duringthe last fiscal quarter that have materially affected, or are reasonable likelyto materially affect, the Company’s internal control over financial reporting.**

 

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**PART II. OTHER INFORMATION**

 

 

Item 1.    Legal Proceedings

 

The Company is involved invarious other claims and legal actions arising in the ordinary course ofbusiness.  In the opinion of the management,the ultimate disposition of these matters will not have a material adverseeffect on the Company’s financial condition, results of operations orliquidity.  For additional discussion,see Note 7 to the Company’s consolidated financial statements, which areincluded in Item 1., Part I.

 

Item 6.    Exhibits :

 

                See Exhibit Index on page 21.

 

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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:  November 14, 2005

 

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**EXHIBIT INDEX**

 

 
| 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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