10-K 1 a07-5691_110k.htm 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

x               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006

OR

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

For the transition period from            to

Commission file number   0-25366

WESTERN SIZZLIN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

 

86-0723400

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1338 Plantation Road, Roanoke, Virginia

 

24012

(Address of principal executive offices)

 

(Zip Code)

 

(540) 345-3195

 

Registrant’s telephone number, including area code Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

None

 

None

 

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes   x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of theAct. 

o Yes   x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý Yes   o No

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant’s knowledge, in definitive proxy or informational statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

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

o  Large Accelerated Filer   o  Accelerated Filer   x  Non-Accelerated Filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x No

The aggregated market value of the Company’s voting common stock held by non-affiliates, based upon the average bid and asked price as of June 30, 2006, was approximately $13,088,000. For purposes of this computation, the registrant assumed that its Directors and Executive Officers were “affiliates.”

As of March 15, 2007, there were 1,787,750 shares, $0.01 par value, of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s Proxy Statement for its Annual Meeting of the Stockholders are incorporated by reference in Part III,  Items 10, 11, 12, 13, and 14.

 




WESTERN SIZZLIN CORPORATION
FORM 10-K
For the Fiscal Year Ended December 31, 2006

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

 

Item 1.

 

Business

 

1-5

 

Item 1A.

 

Risk Factors

 

5-9

 

Item 1B.

 

Unresolved Staff Comments

 

9

 

Item 2.

 

Properties

 

9

 

Item 3.

 

Legal Proceedings

 

10

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

10

 

 

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity , Related Stockholder Matters and Issuer Purchases of Equity Securities

 

10-11

 

Item 6.

 

Selected Financial Data

 

11-12

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

12-20

 

Item 7A.

 

Quantitative and Qualitative Disclosure about Market Risk

 

21

 

Item 8.

 

Financial Statements and Supplementary Data

 

21

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

21

 

Item 9A.

 

Controls and Procedures

 

21

 

Item 9B.

 

Other Information

 

22

 

 

 

 

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item 10.

 

Directors and Executive Officers and Corporate Governance

 

22

 

Item 11.

 

Executive Compensation

 

22

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

22

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

22

 

Item 14.

 

Principal Accountant Fees and Services

 

22

 

 

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

22

 

 

 

 

 

 

 

SIGNATURES

 

23-24

 

 

 

 

 

 

 

Exhibit Index

 

25-26

 

 




Part I

Item 1. Business

We make forward-looking statements in this report that are subject to risks and uncertainties.  These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us.  These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us.  Our actual results could vary materially from those expressed in our forward-looking statements.

When we use the words “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “plan,” or similar expressions, we intend to identify forward-looking statements.  Forward-looking statements also include the assumptions that underlie such statements.  We assume no obligation to update any of our forward-looking statements.

You should not place undue reliance on these forward-looking statements because they depend on assumptions, data or methodology that may be incorrect or imprecise and we may not be able to realize them.

Our Business

Western Sizzlin Corporation (formerly Austins Steaks & Saloon Inc.) operates and/or franchises, WesterN SizzliN, WesterN SizzliN Wood Grill, Great American Steak & Buffet, and Quincy Steakhouses.  We changed our name to Western Sizzlin Corporation effective October 1, 2003, in connection with a merger of a wholly owned subsidiary into the Company.  Item 6 of this report sets forth further details on the merger transaction, name change and recent format restructuring.

We operate and franchise a total of 129 restaurants in 19 states, including five Company-owned, 123 franchise restaurants, and one joint venture restaurant.  The restaurants include a family steakhouse concept and a buffet concept.  We have seen a decline in our franchise base in recent years.  We are undertaking concerted efforts to revitalize our brand and franchise new restaurants and have made efforts toward addressing this challenge.  We are also focused, on an opportunistic basis, on transactions with or investments in related or unrelated lines of business.

Our objective is to maximize our intrinsic business value per share over the long term.  In meeting this objective, we will evaluate all investment alternatives to achieve above-average returns on capital.

As of December 31, 2006 we operated 5 Great American Steak & Buffet restaurants. In addition, approximately 85 franchisees operated 123 WesterN SizzliN, WesterN SizzliN Wood Grill, Great American Steak & Buffet and Quincy Steakhouses.

Restaurant Operations and Support

We have always set guest satisfaction as our first priority. Currently, we operate under the following trade name concepts:

·                                          WesterN SizzliN Steak & More

·                                          WesterN SizzliN Wood Grill

·                                          Great American Steak & Buffet Company

·                                          Quincy Steakhouses

·                                          Austin’s

Our aim is to deliver a dining experience that exceeds customer expectations.  Consistently providing high quality, flavorful food products with both a full line of entree offerings and an enhanced buffet bar offering can be a challenge. Our goal is not only to meet this challenge, but to exceed the guest expectation of both quality and service, and to offer a price point that the guest will perceive as an exceptional value.

There are several factors necessary for achieving our goal:

·                                          Food Quality:

·                                          Our restaurants use high quality ingredients in all menu offerings. Additionally, all food preparation is done on premises, by either small batch or large batch cooking procedures. Guest flow determines which type will be used.

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·                                          We strive to ensure that each recipe is prepared and served promptly to guarantee maximum freshness, appeal and that proper serving temperatures are maintained. We believe that our food preparation and delivery system enables us to produce higher quality and more flavorful food than is possible in other steak and buffet or cafeteria style restaurants.

·                                          Menu Selection:

Our restaurants emphasize two traditional American style offerings:

·                                          The first is the traditional family style steakhouse, which became popular during the 1960’s. Since that time, the primary red meat offering has grown extensively and now includes a vast array of chicken, pork, seafood and many other protein dishes.

·                                          The second is a full line of both hot & cold food buffet, which has become a very appealing option for our guests. Our rotating daily menu offerings, displayed on one of our many scatter bars in the buffet area, clearly demonstrate our home cooking flavor profile.

We believe that our extensive food offering provides the guest with delicious variety and a flavorful dining experience that will encourage them to visit our restaurants time after time.

·                                          Price/Value Relationship:

We are committed to providing our guests with excellent price to value alternatives in the full-service casual dining restaurant sector and traditional steak and buffet restaurants. At our restaurants, the guests are provided with a choice of many different entree offerings and they can also choose to enjoy our “all-you-care-to-eat” unlimited food or buffet bar offerings. We believe the perceived price value is excellent, with lunch ranging between $5.00 and $9.75 and dinner ranging between $7.00 and $15.50. Additionally, our restaurants normally offer special reduced prices for senior citizens and children under 12 and other special promotions from time to time.

·                                          Efficient Food Service and Delivery System:

The scatter bar format, food preparation methods and restaurant layout are all designed to efficiently serve a large number of guests, while enhancing the overall quality of the dining experience. In addition, preparing food in the proper amounts, serving it in several easily accessible areas (scatter bars) and closely monitoring consumption will shorten guest lines, increase frequency of table turns, improve over-all quality and reduce waste; thereby increasing guest satisfaction and restaurant level profitability.  Our restaurants range in size from approximately 5,200 square feet to 12,000 square feet.  A description of these properties is provided in Item 2.

Site Selection and Construction

In selecting new restaurant locations, we consider target population density, local competition, household income levels and trade area demographics, as well as specific characteristics, including visibility, accessibility, parking capacity and traffic volume. An important factor in site selection is the convenience of the potential location to both lunch and dinner guests and the occupancy cost of the proposed site. We also take into account the success of other chain restaurants operating in the area.

Potential site locations are identified by a potential franchisee and/or corporate personnel, consultants and independent real estate brokers. Our executive management team will approve or disapprove any proposed restaurant site. The majority of restaurants are free-standing but some restaurants are developed in other formats such as strip centers.

Historically when a restaurant has been built in an existing facility, renovation and construction has taken approximately 60 to 120 days after the required construction permits have been obtained. New construction of free-standing restaurants requires a longer period of time and can range from 120 to 180 days. Also, when obtaining a construction permit, we have generally experienced a waiting period ranging from approximately 20 to 90 days.

Restaurants are constructed by outside general contractors. We expect to continue this practice for the foreseeable future.

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Restaurant Management and Employees

The management staff of a typical restaurant consists of one General Manager, one Assistant General Manager and one or two Associate Managers. Individual restaurants typically employ between 40 and 80 non-management hourly employees (a mix of both part-time and full-time workers), depending on restaurant size and sales volume.

The General Manager of a restaurant has responsibility for the day-to-day operation of a restaurant, acts independently to maximize restaurant performance, and follows company-established management policies. The General Manager makes personnel decisions and determines orders for produce and dairy products, as well as, centrally contracted food items and other supplies.

Recruiting

We attempt to attract and train high quality employees at all levels of restaurant operations. Generally, restaurant management is either recruited from outside the company and has had significant prior restaurant experience or has been promoted through the system as experience levels increased.  As we continue to grow, our management will continue to recruit restaurant management personnel from among non-management employees within our system and supplement these resources through outside hiring.

Management Training

We have implemented strict operating standards. We maintain a strong standardized training process which plays a critical role in maintaining operational propriety. All management employees, including Assistant Managers, regardless of former experience, participate in a six to eight week formal course of training. Periodically, additional training is provided during each calendar year through a series of two to three day seminars, to provide the most current information on a variety of topics including sales building techniques, labor controls and food cost management. Non-management employees are generally trained at the local restaurant site.

Purchasing

In 2004, we negotiated a national, five-year contract with a broadline distributor and one to twelve month agreements with other vendors, as well. This allows us to maximize our buying power based on volume and also works towards our goals of system-wide consistency.  We utilize velocity reports supplied by our various distributors to look for opportunities to consolidate our purchases resulting in cost of food savings.  Our stores are divided into areas based on geographical location.  While each store places their own orders with the various distributors, the most successful stores are the ones who support the areas and use the volume of the combined buying power to be as economically efficient as possible.

Hours of Operation

Our restaurants are open seven days a week, typically from 11:00 a.m. to 10:00 p.m.

Franchise Operations

Our standard franchise agreement has a 20-year term, with one ten-year renewal option. It generally provides for a one-time payment to us of an initial franchise fee and a continuing royalty fee based on gross sales. We collect weekly and monthly sales reports from our franchisees as well as periodic and annual financial statements.

Each franchisee is responsible for selecting the location for its restaurant, subject to our approval. We consider such factors as demographics, competition, traffic volume and patterns, parking, site layout, size and other physical characteristics in approving proposed sites.

Franchisees must operate their restaurants in compliance with our operating and recipe manuals. Franchisees are not required to purchase food products or other supplies through our suppliers, but are required to purchase proprietary products from us. Each franchised restaurant must have a designated General Manager and Assistant Manager who have completed our six-week manager training program or who have been otherwise approved by us. For the opening of a restaurant, we provide consultation and make our personnel generally available to a franchisee. In addition, we send a team of personnel to the restaurant for up to two weeks to assist the franchisee and its managers in the opening, the initial marketing and training effort, as well as the overall operation of the restaurant.

3




We may terminate a franchise agreement for a number of reasons, including a franchisee’s failure to pay royalty fees when due, failure to comply with applicable laws, or repeated failure to comply with one or more requirements of the franchise agreement. Many state franchise laws limit our ability to terminate or refuse to renew a franchise. A franchisee may terminate a franchise agreement and continue to operate the restaurant as a competitive concept by paying liquidated damages to us. We do not anticipate that the termination of any single franchise agreement would have a materially adverse effect on our operations. Termination by a multiple-unit franchisee of several franchise agreements for various locations could, however, have a materially adverse effect on our operations.

Our franchise agreement contains provisions that prohibit franchisees from disclosing proprietary information about our restaurant operating system. Our standard franchise agreement also contains non-competition provisions that, for the duration of the agreement and for one or two years following termination, prohibit a franchisee from directly or indirectly competing with us or soliciting employees to leave us. There is no assurance that these contractual provisions will effectively prevent the appropriation by franchisees of business opportunities and proprietary information. More discussion is contained in the caption “Government Regulation.”

Marketing and Promotion

Marketing and operations work hand-in-hand for all of our company concepts where a shared mutual vision provides value to the guest through hard work, quality and high standards. We know that communication plays a strong role in the fulfillment of our goals.

The Advertising Development and Research Fund or ADRF, financed through vendor support and member dues, is our franchisee-controlled graphic art design/marketing agency. It is incorporated under the name WSI ADRF, Inc.

ADRF creates, designs and produces each marketing campaign for the company and our franchisees. Production includes several major marketing campaigns annually in addition to menus, table tents, posters, indoor and outdoor signage, gift certificates and other marketing tools.

The marketing effort is communicated through a vast system of printed materials such as a corporate newsletter, internet webpages, training manuals, tapes and videos.

The marketing department is primarily self-sufficient in production capabilities with some of the most sophisticated computer and graphic equipment available. ADRF is staffed by professionals experienced in all phases of marketing, graphics / design, and communications. Their efforts have produced and coordinated promotions that include national sweepstakes campaigns, television commercials, national convention materials and training videos.

The coordinated efforts of ADRF, area field consultants, training instructors, corporate personnel, franchise owners, managers and the entire system of operators share in the ongoing success of marketing programs.  Our programs utilize virtually all types of media including billboards, newspapers, television and radio.

Restaurant Industry and Competition

The restaurant industry is extremely competitive. We compete on the basis of the quality and value of food products offered, price, service, ambiance and overall dining experience. Our competitors include a large and diverse group of restaurant chains and individually owned restaurants. The number of restaurants with operations generally similar to ours has grown considerably in the last several years. We believe competition among this style of restaurant is increasing.

In addition, our business is affected by changes in consumer tastes, national, regional and local economic conditions and market trends. The performance of individual restaurants may be affected by factors such as traffic patterns, demographic considerations and the type, number and location of competing restaurants. Our significant investment in, and long-term commitment to, each of our restaurant sites limits our ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect our operations. Our continued success is dependent to a substantial extent on our reputation for providing high quality and value and this reputation may be affected not only by the performance of company-owned restaurants but also by the performance of franchisee-owned restaurants over which we have limited control.

 Government Regulation

Our business is subject to and affected by various federal, state and local laws. Each restaurant must comply with state, county and municipal licensing and regulation requirements relating to health, safety, sanitation, building construction and fire prevention. Difficulties in obtaining or failure to obtain required licenses or approvals could delay or prevent the development of additional restaurants. We have not experienced significant difficulties in obtaining such licenses and approvals to date.

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We are subject to Federal Trade Commission (FTC) regulation and various state laws that regulate the offer and sale of franchises. The FTC requires us to provide prospective franchisees with a franchise offering circular containing prescribed information about us and our franchise operations. Some states in which we have existing franchises and a number of states in which we might consider franchising regulate the sale of franchises. Several states require the registration of franchise offering circulars. Beyond state registration requirements, several states regulate the substance of the franchisor-franchisee relationship and, from time to time, bills are introduced in Congress aimed at imposing federal registration on franchisors. Many of the state franchise laws limit, among other things, the duration and scope of noncompetition and termination provisions of franchise agreements.

Our restaurants are subject to federal and state laws governing wages, working conditions, citizenship requirements and overtime. From time-to-time, federal and state legislatures increase minimum wages or mandate other work-place changes that involve additional costs for our restaurants. There is no assurance that we will be able to pass such increased costs on to our guests or that, if we were able to do so, we could do so in a short period of time.

Trademarks

We believe our rights in our trademarks and service marks are important to our marketing efforts and a valuable part of our business. Following are marks that are registered for restaurant services on the Principal Register of the U.S. Patent and Trademark Office: “WesterN SizzliN”, “WesterN SizzliN Steak House”, “WesterN”, “SizzliN”, “WesterN SizzliN Cow”, “WesterN SizzliN Steak & More”, “WesterN SizzliN County Fair Buffet and Bakery”, “Flamekist”, “Marshall”, “Gun Smoke”, “Six Shooter”, “Big Tex”, “Dude”, “Trailblazer”, “Ranger”, “Cheyenne”, “Colt 45”, “Cookin’ What America Loves Best”, “Great American Steak and Buffet Company”, “Great American Buffet”, “WesterN SizzliN Wood Grill and Buffet”, and “WesterN SizzliN Wood Grill”.

Employees

As of December 31, 2006, we employed approximately 290 persons, of whom approximately 245 were restaurant employees, 23 were restaurant management and supervisory personnel, and 14 were corporate personnel. Restaurant employees include both full-time and part-time workers and all are paid on an hourly basis.  None of our employees is covered by a collective bargaining agreement and we consider our employee relations to be good.

Item 1A. Risk Factors

We are dependent on key personnel.

We believe that our success depends in part on the services of Sardar Biglari, our Chairman, and of key executives, including James C. Verney, President and Chief Executive Officer, and Robyn B. Mabe, Vice President and Chief Financial Officer. The loss of the services of Messrs. Biglari or Verney, or of Mrs. Mabe, could have a material adverse effect upon our business, financial condition and results of operations. Qualified replacements may not be available in a timely manner, if at all. Our continued growth will also depend on our ability to attract and retain additional skilled management personnel.

Our stock price could be volatile.

Fluctuations in our stock price may result from general market conditions, perceived changes in the underlying characteristics of our business, and the relative price of competing investments. The volume of trading in the market for our common stock is typically very limited. As a consequence, liquidating your investment could cause a decline in our stock price. Because of changes in the balance of buy and sell orders, notwithstanding other relevant factors, the price of our common stock can fluctuate for reasons unrelated to the performance of our business.

A sale of a substantial number of shares of our common stock could cause the market price to decline.

The sale of a substantial number of shares of our common stock in the public market could substantially reduce the prevailing market price of our common stock. As of December 31, 2006, 1,787,750 shares of common stock were outstanding. In addition, there were 58,000 shares issuable upon exercise of outstanding stock options at exercise prices ranging from $8.20 to $10.30. We cannot predict any effect that sales of shares of our common stock or the availability of shares for sale will have on prevailing market prices. However, substantial amounts of our common stock could be sold in the public market, which may adversely affect prevailing market prices for the common stock.

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We are controlled by two stockholders.

Two stockholders, Sardar Biglari, our Chairman, and Jonathan Dash, a Director, beneficially own or exercise voting power through related entities for over 50% of our common stock. In particular, Mr. Biglari controls approximately 34% and Mr. Dash approximately 26% of our outstanding common stock. Further details on their respective holdings are reflected in their Forms 13-D, as amended, which are filed with the Securities and Exchange Commission.  The sale of a substantial number of shares of our common stock by these two stockholders, or other principal stockholders in the public market, could substantially reduce the prevailing market price of our common stock.

Our Board of Directors has recently undergone significant change.

In November 2005, we added three new members to our Board of Directors, namely Sardar Biglari, Philip L. Cooley and Paul D. Sonkin. Subsequently, in March 2006, six of the incumbent directors, Paul C. Schorr, III (our former Chairman), A. Jones Yorke, J. Alan Cowart, Jr., Pat  Vezertzis, Jesse M. Harrington and Roger D. Sack, resigned from the Board. At that same time Mr. Sonkin indicated that he would not stand for reelection at the 2006 annual meeting of stockholders. He ultimately resigned prior to the annual meeting. Mr. Jonathan Dash was elected to the Board in March 2006. Mr. Thomas M. Hontzas resigned from the Board in August 2006. Mr. Kenneth R. Cooper was elected to the Board in March 2007.  While we believe that the Board of Directors as presently constituted with Mr. Biglari as Chairman, Philip L. Cooley, Ph.D. as Vice Chairman and Directors Titus W. Greene, Jonathan Dash and Kenneth Cooper will function at least as well as the Board had done previously, there is no guarantee this will be the case. The failure of the new members of the Board to function adequately together would have a material adverse effect on our business. This could result in an adverse impact on our financial condition, results of operations and our stock price.

The Audit and Finance Committee of the Board of Directors did not have the number of directors required by NASDAQ rules until March 2007.

Our common stock is not listed on a stock exchange, but is quoted on the OTC Bulletin Board. In accordance with applicable Securities and Exchange Commission rules, the Board of Directors has elected to measure its corporate governance by the rules applicable to companies listed on the NASDAQ Capital Market. Those rules provide that an audit committee be composed of at least three directors meeting special independence requirements. Until recently, Our Audit and Finance Committee presently had one member, Dr. Cooley.   With the election of Kenneth Cooper to the Board in March 2007, the Board reconstituted the Audit and Finance Committee to include Mr. Cooper and Titus Greene.  The Board has determined that all three members meet the special independence requirements of the NASDAQ’s rules for audit committee members.  We cannot guarantee that the new committee will function adequately.

We are dependent on one key person for investment and capital allocation decisions.

Investment decisions and all major capital allocation decisions are made for our business by Sardar Biglari, Chairman of the Board of Directors. Although there are limitations on Mr. Biglari’s authority and the Board monitors his investment and capital allocation decisions, there is risk in having concentrated decision-making authority. Mr. Biglari’s decisions could either independently or in the aggregate involve amounts that are material to our business. Additionally, if for any reason the services of Mr. Biglari were to become unavailable, there could be a material adverse effect on our business, since he is singularly responsible for these decisions.

Our investment portfolio in marketable securities is highly concentrated.

In 2006 we invested in shares of the common stock of Friendly Ice Cream Corporation, which is traded on AMEX under the symbol “FRN”.  This constitutes our sole investment in publicly traded securities and was a material percentage of our assets on December 31, 2006.  A decline in the price of Friendly’s common stock may produce a material decrease in our stockholders’ equity and our stock price.

Our investment activities may involve the purchase of securities on margin.

We may purchase securities on margin in connection with our investment activities. If we do so, a significant decrease in the value of the securities that collateralize the margin line of credit could result in a margin call. If we do not have sufficient cash available from other sources in the event of a margin call, we may be required to sell those securities which could result in a loss.

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Our investment activities could require registration as an Investment Company.

While we have historically been principally engaged in franchising and operating restaurants, our recent investment activities could bring us within the definition of an “investment company” and require us to register as an investment company under the Investment Company Act of 1940.  The Board of Directors has adopted a policy requiring management to restrict the Company’s operations and investment activities to avoid becoming an investment company, until and unless the Board approves otherwise. We do not intend to change our principal business and the Board has not approved otherwise.

Notwithstanding our Board policy, if our investment activities inadvertently result in our being determined to be an investment company and we fail to register as an investment company, we might be unable to enforce contracts with third parties, and third parties could seek rescission of transactions with us undertaken during the period that we were an unregistered investment company, subject to equitable considerations set forth in the Investment Company Act.  In addition, we might be subject to monetary penalties or injunctive relief, or both, in an action brought against us by the SEC.

We are experiencing a decline in our franchise base.

We have experienced steady declines in our existing franchise base for the past several years. Since January 1, 2004, we had a total of 37 closures and currently have a total of 124 franchised restaurants. Of the 37 closed restaurants the majority were Western Sizzlin brand restaurants. The average sales of our franchised restaurants are approximately $1.6 million. The average sales of the closed restaurants were $1.0 million or less. The closures of franchised restaurants were caused by their operating at a competitive disadvantage which stemmed from such factors as location, facility, lack of reinvestment, mismanagement, among others factors. There is no guarantee that these reasons will be eliminated. Moreover, these closures occurred during generally favorable economic conditions and it is possible that this trend could accelerate in the event of an economic downturn or recession. While we are striving to reverse this trend by revitalizing our franchise models, there is no assurance that we will be successful in doing so and as a result our franchise base may continue to decline regardless of the economic environment.

Our restaurants operate in a highly competitive environment.

Our restaurants, both franchised and Company-owned, operate in a highly competitive industry comprised of a large number of restaurants, including national and regional restaurant chains and franchised restaurant operations, as well as locally-owned, independent restaurants. Price, restaurant location, food quality, service and attractiveness of facilities are important aspects of competition. The competitive environment is often affected by factors beyond a particular restaurant management’s control, including changes in the public’s taste and eating habits, population and traffic patterns and economic conditions. New competitors may emerge at any time. We may not be able to compete successfully against our competitors in the future. Competition may have a material adverse effect on our operations or earnings.

We are highly dependent on attracting and retaining qualified employees while also controlling labor costs.

We are extremely dependent upon the availability of qualified restaurant personnel. Availability of staff varies widely from location to location. If restaurant management and staff turnover trends increase, we would suffer higher direct costs associated with recruiting and retaining replacement personnel. We could suffer from significant indirect costs, including restaurant disruptions due to management changeover and potential delays in new store openings due to staff shortages. Competition for qualified employees exerts upward pressure on wages paid to attract personnel, resulting in higher labor costs, together with greater expense to recruit and train them. Many of our employees are hourly workers whose wages are likely to be impacted by an increase in the federal or state minimum wage. Proposals have been made at federal and state levels to increase minimum wage levels. An increase in the minimum wage may require an increase or create pressure to increase the pay scale for our employees. A shortage in the labor pool or other general inflationary pressures or changes could also increase our labor costs.

We are dependent upon the timely delivery of fresh ingredients.

Our restaurant operations are dependent on timely deliveries of fresh ingredients, including fresh produce, dairy products and meat. The cost, availability and quality of the ingredients we use to prepare our food are subject to a range of factors, many of which are beyond our control. Fluctuations in weather, supply and demand and economic and political conditions could adversely affect the cost, availability and quality of our ingredients. Historically, when operating expenses increased due to inflation or increases in food costs, we generally have been able to offset these higher costs by increasing our menu prices. We may not be able to recover increased costs in the future because competition may limit or even prohibit such future increases. If the variety or quality of our food products declines due to the lack or lower quality of our ingredients or due to interruptions in the flow of fresh ingredients and similar factors, customer traffic may decline and negatively affect our sales.

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General economic factors may adversely affect our results of operations.

National, regional, and local economic conditions, such as recessionary economic cycles or a worsening economy, could adversely affect disposable consumer income and consumer confidence. Unfavorable changes in these factors or in other business and economic conditions affecting our customers could reduce customer traffic in some or all of our restaurants, impose practical limits on our pricing and increase our costs. Any of these factors could lower our profit margins and have a material adverse affect on our results of operations. The impact of inflation on food, beverages, labor, utilities and other aspects of our business can negatively affect our results of operations. Although we attempt to offset inflation through periodic menu price increases, cost controls and incremental improvement in operating margins, we may not be able to completely do so. This may negatively affect our results of operations.

We face the risk of adverse publicity and litigation relating to food-borne illness, employment and other matters that could have a material adverse affect on our business and financial performance.

We may be the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. While the risk of food-borne illness is real, whether it results from improper operations, new diseases or from chemicals in certain food products, the risk would generally only affect a limited number of our restaurants. As soon as any food issues became known to us, those food items that were potentially at risk would be no longer served to customers.

While the risk of food-borne illness or injury would likely be localized, the risk of the adverse publicity that might result from such an incident is more generalized and accordingly much greater. The general public’s response to adverse publicity relating to our restaurant brands could materially adversely affect a significant number of our restaurants. This could be true whether the allegations underlying the adverse publicity are valid or whether we are liable.

Furthermore, more generalized health concerns about the consumption of beef or chicken due to reported incidents of diseases such as Bovine Spongiform Encephalopathy (“mad cow disease”) or Avian Influenza (“bird flu”) could lead to changes in customer preferences, reduce consumption of our products and adversely affect our financial performance. These events could also reduce the available supply of beef or chicken or significantly raise the prices of beef or chicken.

In addition, we are subject to employee claims alleging injuries, wage and hour violations, discrimination, harassment or wrongful termination. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace, employment and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our financial performance. A significant judgment for any claim(s) could materially adversely affect our financial condition or results of operations.

Our planned sales growth through new, relocated or remodeled restaurants, both Company-owned and franchised locations, may not be successful.

Our ability to open and profitably operate restaurants is subject to various risks such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable terms for new locations, the need to obtain the required government permits (including zoning approvals) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the availability of construction materials and labor, the ability to meet construction schedules and budgets, increases in labor and building material costs, changes in weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources. If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated revenues and earnings in future periods.

We are regulated by the federal and state government.

The restaurant industry is subject to extensive federal, state and local laws and regulations. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites. Those are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and building codes. Federal and state laws govern our relationships with employees, including the Fair Labor Standards Act and applicable minimum wage requirements, overtime, employment tax rates, family leave, tip credits, working conditions, safety standards and citizenship requirements. Federal and state laws prohibit discrimination and other laws regulating the design and operation of facilities, such as the American with Disabilities Act of 1990. In addition, we are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations could increase our compliance and other costs of doing business. These could adversely affect our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability.

8




Adverse weather conditions or losses due to casualties such as fire could negatively impact our financial performance.

Although we maintain, and require our franchisees to maintain, property and casualty insurance to protect against property damage caused by casualties and natural disasters, inclement weather, flooding, hurricanes, fire and other acts of God can adversely impact our sales in several ways. For example, severe weather typically discourages potential customers from dining out. In addition, a restaurant that is damaged by a natural disaster can be inoperable for a significant amount of time due to either physical damage or to a shortage of employees resulting from a relocation of the general population.

As disclosed in detail in our Forms 10-K for the fiscal years ended December 31, 2004 and 2005, we experienced losses due to fire in each of 2005 and 2004. The 2005 fire involved a company-owned restaurant and the 2004 fire consumed a subleased property. In both instances insurance covered the loss and we recorded a gain from the insurance proceeds received.

Pending litigation could have a material adverse effect on our financial position, cash flows and results of operations.

In September 2006, the Company was served with a lawsuit filed in the Circuit Court of Pulaski County, Arkansas, captioned Parks Land Company, LLLP, et al. v. Western Sizzlin Corporation, et al. The plaintiffs are owners/landlords of four restaurant premises located in the Little Rock, Arkansas metropolitan area which had been leased pursuant to a single lease agreement and previously occupied by the Company.  Most recently, each of these premises has been subleased to various operators.  The lease agreement expired pursuant to its terms on June 30, 2006.  The plaintiffs have claimed in their lawsuit unspecified damages allegedly owing for certain repair and maintenance expenses on the premises, for the replacement of certain equipment, for diminution of property value, and for loss of rental income, as well as interest and costs.  At this time the likelihood of an unfavorable court outcome, or any potential loss, cannot be made with certainty.  However, the Company is prepared to vigorously contest the plaintiff’s claims and will pursue applicable cross claims and counterclaims.

We are also from time to time a party to various other legal actions which are ordinary routine matters incidental to our business. While we believe that the ultimate outcome of these matters individually and in the aggregate will not have a material impact on our financial position, we cannot assure that an adverse outcome on any of these matters would not, in fact, materially impact our financial position, cash flows and results of operations.

We are involved in a potential proxy contest for two seats on the Board of Directors of Friendly Ice Cream Corporation.

We have recently become involved in a joint effort with The Lion Fund, LP, the private investment fund operated by Mr. Biglari, to nominate two individuals, Mr. Biglari and Dr. Cooley, as nominees for the Board of Directors of Friendly Ice Cream Corporation.  Our Board has determined that seeking these seats is in the best interest of our stockholders given our substantial investment in Friendly’s. We intend to engage in a proxy solicitation to get our nominees elected to Friendly’s Board of Directors, and have agreed to share the expenses of this effort with The Lion Fund, LP, on a pro-rata basis. There is no guarantee that our effort will be successful, and the costs associated with this effort could prove to be substantial regardless of the outcome and could materially impact our financial position.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

At December 31, 2006, our five (5) Company-owned restaurants are located in leased space ranging from 8,000 square feet to 10,000 square feet.  Leases are negotiated with initial terms of five to twenty years, with multiple renewal options.  All of our leases provide for a minimum annual rent, with certain locations subject to additional rent based on sales volume at the particular locations over specified minimum levels.  Generally, the leases are net leases which require us to pay the costs of insurance, taxes, and a pro rata portion of lessors’ common area costs.

See the discussion contained in Item 7 under “Operating Leases”, regarding certain lease properties with General Electric Franchise Finance Corporation.

We currently lease our executive office, approximately 8,300 square feet, which is located at 1338 Plantation Road, Roanoke, Virginia 24012.

9




Item 3.  Legal Proceedings

We accrue for an obligation in all known contigencies, including estimated legal costs, when a loss is probable and the amount is reasonably estimable.  As facts concerning contingencies become known to us, we reassess our position with respect to accrued liabilities and other expenses.  These estimates are subject to change as events evolve and as additional information becomes available during the litigation process.

Little Rock, Arkansas Lease

In September 2006, we were served with a lawsuit filed in the Circuit Court of Pulaski County, Arkansas, captioned Parks Land Company, LLLP, et al. v. Western Sizzlin Corporation, et al. The plaintiffs are owners/landlords of four restaurant premises located in the Little Rock, Arkansas metropolitan area which had been leased pursuant to a single lease agreement and previously occupied by us.  Most recently, each of these premises has been subleased to various operators.  The lease agreement expired pursuant to its terms on June 30, 2006.  The plaintiffs have claimed in their lawsuit unspecified damages allegedly owing for certain repair and maintenance expenses on the premises, for the replacement of certain equipment, for diminution of property value, and for loss of rental income, as well as interest and costs.  At this time the likelihood of an unfavorable court outcome, or any potential loss, cannot be made with certainty.  However, we are prepared to vigorously contest the plaintiff’s claims and will pursue applicable cross claims and counterclaims.

Other

As we previously reported in our quarterly filings, several legal proceedings were resolved during 2006, namely:  Dickson, Tennessee Claim, Chubb Claim, Lawrenceville, Georgia Claim, and Waldorf, Maryland Claim.

We are involved in various other claims and legal actions arising in the ordinary course of business.  In the opinion of our management, the ultimate disposition of these matters will not have a material adverse effect on our financial condition, results of operations or liquidity.

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

None.

Part II

Item 5.         Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer’s Purchases of Equity Securities

Common Stock Price and Dividend Data

Our common stock is quoted on the OTC Bulletin Board under the symbol “WSZL.”  The following table sets forth, for the periods indicated, the range of high and low bid prices for the common stock as reported on the OTC Bulletin Board.  Please note that quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not necessarily represent actual transactions.  The prices have been calculated retroactively to reflect the effect of the rights offering in the fourth quarter of 2006 and the 1 for 10 stock split and the third quarter of 2006.

Fiscal Years Ended December 31, 2006 and 2005

 

High

 

Low

 

First Quarter 2006

 

$

9.90

 

$

9.20

 

Second Quarter 2006

 

$

10.87

 

$

8.33

 

Third Quarter 2006

 

$

9.83

 

$

8.50

 

Fourth Quarter 2006

 

$

9.80

 

$

7.17

 

First Quarter 2005

 

$

9.00

 

$

6.86

 

Second Quarter 2005

 

$

8.32

 

$

7.32

 

Third Quarter 2005

 

$

8.67

 

$

7.80

 

Fourth Quarter 2005

 

$

10.73

 

$

7.80

 

 

As of March 15, 2007 there were approximately 450 stockholders of record of our common stock.

Our Board of Directors has not declared a dividend in either of the two most recent fiscal years.  Our Board of Directors declares dividends when, in its discretion, it determines that a dividend payment, as opposed to another use of our cash, is in the best interests of the stockholders.  Such decisions are based on the facts and circumstances then-existing.  As a result, we cannot predict when, or whether, another dividend will be declared in the future.

10




Purchases of Equity Securities by the Issuer

The Company’s investments in marketable equity securities are held for an indefinite period and thus are classified as available for sale. Available-for-sale securities are recorded at fair value in Investments in Marketable Security on the balance sheet, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income.  The Company’s investment in Friendly Ice Cream Corporation is recorded as a long-term asset.

Following is a summary of our marketable equity security at December 31, 2006.  We had no such investments at December 31, 2005:

 

December 31, 2006

 

 

 

Cost

 

Fair Value

 

Gross Unrealized Gains

 

Friendly Ice Cream Corp

 

$

4,543,768

 

$

6,508,645

 

$

1,964,877

 

 

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information on securities authorized for issuance under our equity compensation plans as of December 31, 2006:

 

Plan Category

 

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

 

Weighted-average
exercise price of
outstanding
options, warrants
and rights

 

Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a))

 

 

 

(a)

 

(b)

 

(c)

 

Equity compensation plans approved by security holders

 

32,000

 

9.10

 

25,500

 

Equity compensation plans not approved by security holders

 

26,000

 

8.94

 

13,500

 

Total

 

58,000

 

9.00

 

39,000

 

 

The Company has three stock option plans: the 2005 Stock Option Plan, the 2004 Non-Employee Directors’ Stock Option Plan, and the 1994 Incentive and Non-qualified Stock Option Plan.  Both the 2005 and 1994 Plans were adopted with the approval of our stockholders.  Under the 2004 Plan, our Non-Employee Directors are granted options to purchase 1,000 shares of common stock, priced at fair market value on the date of the option grant.  Options are granted automatically each year on the date of the Annual Meeting of Stockholders, or in the case of new Directors, on the first business day following their election to the Board.  All options are exercisable immediately upon grant.

Item 6.       Selected Financial Data,

October 2003 Merger, Name Change and Format Restructuring

Effective October 21, 2003, we merged our wholly owned subsidiary, The WesterN SizzliN Corporation, a Delaware corporation, into Austins Steak and Saloon, Inc., with Austins  being the surviving entity.  At the same time, we changed our name to “Western Sizzlin Corporation” by amending our Certificate of Incorporation.  The amendment was approved by solicitation of written stockholder consents without a meeting pursuant to Section 288 of the General Corporation Law of Delaware.  On September 30, 2003, the 60th day following the date of the first consent received, stockholders voting 6,495,149 shares or 53.4% of the outstanding common stock submitted written consents to the action.

Effective January 1, 2007, we restructured our operations into a holding company/subsidiary format whereby all of our operations are now conducted through wholly-owned subsidiaries.  This restructuring is not anticipated to have any tax impact and will have no impact on our financial reporting as we will continue to report consolidated financial statements.

11




Financial Data

The following selected historical consolidated financial information for each of the years ended December 31, 2002 through 2006 has been derived from our consolidated financial statements.  For additional information see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in this report. The information set forth below is qualified by reference to, and should be read in conjunction with, the consolidated financial statements and related notes included in this report.

 

 

Years Ended December 31

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(In thousands, except per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

17,404

 

$

19,372

 

$

21,708

 

$

21,060

 

$

39,443

 

Income (loss) from operations

 

628

 

1,426

 

1,174

 

783

 

(1,680

)

Net income (loss)

 

274

 

681

 

566

 

212

 

(1,053

)

Basic and diluted earnings (loss) per share

 

$

0.23

 

$

0.57

 

$

0.48

 

$

0.17

 

(0.86

)

Shares used in computing basic earnings per share

 

1,215

 

1,189

 

1,190

 

1,212

 

1,217

 

Shares used in computing diluted earnings per share

 

1,225

 

1,190

 

1,190

 

1,212

 

1,217

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Working capital surplus (deficit)

 

3,238

 

2,001

 

1,480

 

$

141

 

$

(1,180

)

Total assets

 

19,820

 

15,476

 

16,697

 

16,894

 

18,039

 

Long-term debt, excluding current maturities

 

685

 

848

 

2,698

 

3,549

 

4,075

 

Other long-term liabilities

 

464

 

42

 

15

 

50

 

 

Stockholders’ equity

 

17,398

 

11,760

 

10,093

 

10,527

 

11,522

 

Other Financial Data:

 

 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 

 

119

 

183

 

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

The following tables set forth the percentage relationship to total revenues, unless otherwise indicated, of certain income statement data, and certain restaurant data for the years indicated:

 

 

Year Ended December 31

 

Income Statement Data:

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

Company-operated restaurants

 

74.6

%

75.8

%

77.0

%

Franchise operations

 

23.1

 

21.9

 

21.2

 

Other

 

2.3

 

2.3

 

1.8

 

Total revenues

 

100.0

 

100.0

 

100.0

 

Costs and expenses:

 

 

 

 

 

 

 

Cost of company-operated restaurants — food, beverage and labor costs

 

53.4

 

54.2

 

56.5

 

Restaurant occupancy and other

 

14.1

 

13.5

 

14.1

 

Sub-leased properties

 

1.9

 

.9

 

0

 

Franchise operations — direct support

 

7.1

 

7.3

 

6.6

 

Corporate expenses

 

13.4

 

13.7

 

11.9

 

Depreciation and amortization expense

 

6.1

 

5.5

 

5.5

 

Closed restaurants expense

 

 

1.8

 

 

Impairment and other charges

 

.3

 

1.7

 

 

 

Gain on settlement of insurance claims

 

 

(6.0

)

 

Income from operations

 

3.7

 

7.4

 

5.4

 

Other income (expense)

 

(1.0

)

(1.0

)

(1.2

)

Income before income tax expense

 

2.7

 

6.4

 

4.2

 

Income tax expense

 

1.1

 

2.8

 

1.6

 

Net income

 

1.6

%

3.6

%

2.6

%

 

12




 

 

 

Years Ended December 31

 

 

 

2006

 

2005

 

2004

 

Restaurant Data:

 

 

 

 

 

 

 

Percentage increase (decrease) in average sales for Company-operated restaurants

 

(2.5

)

11.6

 

5.0

 

Number of Company-operated restaurants included in the average sales computation

 

5

 

5

 

7

 

Average sales for Company-operated restaurants

 

$

2,599,000

 

$

2,665,000

 

$

2,387,000

 

Number of Company-operated Restaurants:

 

 

 

 

 

 

 

Beginning of period

 

5

 

7

 

7

 

Opened

 

 

 

 

Closed/Franchised

 

 

2

 

 

End of period

 

5

 

5

 

7

 

Number of U.S. Franchised Restaurants:

 

 

 

 

 

 

 

Beginning of period

 

135

 

147

 

161

 

Opened

 

 

3

 

4

 

Closed

 

12

 

15

 

18

 

End of period

 

123

 

135

 

147

 

Number of Joint Venture Restaurants:

 

 

 

 

 

 

 

Beginning of period

 

 

 

 

Opened

 

1

 

 

 

Closed

 

 

 

 

End of period

 

1

 

 

 

 

Overview

We operated and franchised a total of 129 restaurants located in 19 states, including 5 Company-owned and 123 franchise restaurants and one joint venture restaurant as of December 31, 2006.  The restaurants include a family steakhouse concept and a steak and buffet concept.

Our objective is to maximize our intrinsic business value per share over the long term.  In meeting this objective, the Company will evaluate all investment alternatives to achieve above-average returns on capital.

We seek to invest in stocks of businesses at prices below their intrinsic business value. Our preferred strategy is to allocate a meaningful amount of capital in each investment, resulting in concentration.  As of December 31, 2006, the equity investment portfolio included one stock, Friendly Ice Cream Corporation. The carrying values of our equity securities are exposed to market price fluctuations, which may be accentuated by a concentrated equity portfolio. A significant decline in the price of major investments may produce a large decrease in the our stockholder’s equity. Operating decisions are made by management. As described previously, investment and all other capital allocation decisions are made by Mr. Biglari, Chairman of the Board of Directors.

We announced a strategic alliance with Star Buffet, Inc. in April 2006.  Star Buffet announced plans to convert certain of its existing restaurants to the Western Sizzlin brand and to test a newly developed Western Sizzlin buffet prototype. As of the date of this filing, Star Buffet has become the licensee of two existing Western Sizzlin brand restaurants.

On August 10, 2006, we affected a 1-for-10 reverse stock split pursuant to the discretionary authority granted by the stockholders at the Annual Meeting of Stockholders on June 20, 2006.

We undertook a rights offering in the fourth quarter of 2006.  Our Form S-3 Registration Statement (as amended) was effective on November 7, 2006.  The record date for receiving rights in the offering was November 9, 2006 and the offering expired December 8, 2006.

13




2006 COMPARED TO 2005

Revenues

Total revenues decreased 10.2% to $17.4 million in 2006, from $19.4 million in 2005.  Company-operated restaurant sales decreased 11.6% to $13.0 million in 2006, from $14.7 million in 2005. This decrease was due to the closing of a Company-operated location in February 2005 and a closing of a Company-operated location in July 2005 due to a total loss by fire casualty.  Same store sales for 2006 experienced an overall decrease of 2.45% over 2005. Customer counts decreased 8.24% over 2005.  Price increases were implemented on the remodeled locations in 2006, with an average beverage increase of 10% and an average buffet increase of 4%.

Franchise and other revenues decreased 5.7% to $4.4 million in 2006, from $4.7 million in 2005. The decrease is primarily attributable to 12 less franchised restaurants during 2006.  Same store sales for 2006 experienced an overall increase of 1.10% over 2005.

Costs and Expenses

Cost of Company-operated restaurants, consisting primarily of food, beverage, and labor costs decreased $1.2 million (11.5%) to $9.3 million for the year ended December 31, 2006 from $10.5 million for the year ended December 31, 2005.   These costs for both years stayed the same as a percentage of Company-operated restaurants revenue of 71.5% in 2005 and 2006.  The decrease in the costs was largely attributable to the closing of a Company-operated location in February 2005 and the closing due to fire of a Company-operated location in July, 2005.

Restaurant occupancy and other, which include utilities, insurance, maintenance, rent and other such costs of the Company-operated restaurants, decreased by $155,100 (5.9%) for the year ended December 31, 2006 versus the prior year’s comparable period. These costs for the year increased as a percentage of Company-operated restaurant revenues from 17.8% in 2005 to 18.9% in 2006.  The decreases were attributable to the closings of two Company-operated locations in 2005.

Subleased restaurant expenses include net costs associated with subleasing former Company operations and maintenance of vacant premises.  These expenses decreased by $160,000 (86.5%) versus the prior year’s comparable period.  The decreases were largely attributable to additional expenses incurred on repair and maintenance of the facilities and uncollectible rents during 2005.

Cost of franchise operations direct support expense decreased $175,000 (12.4%) to $1.2 million for the year ended December 31, 2006 from $1.4 million for the year ended December 31, 2005.  The decreases are attributable to personnel reductions and targeted expense reductions during 2006 and additional spending in 2005 on consumer research and prototype plans.

Unallocated corporate expenses consist of certain expenses not allocated to any business segment.  These expenses include legal, accounting, stockholder relations, personnel not directly related to a segment, information systems, and other headquarter activities.  These expenses decreased by $319,000 (12.0%) for the year ended December 31, 2006 versus the prior year’s comparable period.  The decreases are attributable to personnel reductions and targeted expense reductions during 2006.

Depreciation and amortization for 2006 were comparable to 2005.

Closed restaurants expense of $350,279 in 2005 included impairment of $128,000 associated with the end of a subleased property due to a buyout of the lease and impairments related to the closing of a company-operated restaurant of $222,000 in February, 2005.  No such charges were experienced in 2006.

Impairment and other charges of $319,830 in 2005 included impairments associated with a subleased property consisting of a write down of assets deemed non-recoverable of $236,330 and $83,500 of related rent payments deemed non-collectible as of December 31, 2005.  Impairment and other charges of $46,284 in 2006 included impairments associated with subleased properties related to an expiring lease as of June 30, 2006.

Gain on settlement of insurance claims of $1,166,683 in 2005 included a gain of $220,351 attributable to insurance proceeds received on the Lawrenceville, Georgia casualty and a gain of $946,332 attributable to insurance proceeds received on the Waldorf, Maryland casualty. No such items were recorded in 2006.

Other income (expense) decreased from ($199,500) in 2005 to ($168,000) in 2006.  Interest expense decreased $120,000 (44.5%) comparing 2006 to 2005.  The decrease is due to a lower average principal outstanding balance.  Loss on early extinguishment of long term debt of $92,535 associated with payoff of certain loans was recorded in 2006.  Equity in the losses of a joint venture were $160,902 in 2006 compared to a loss of $21,618 in 2005. Included in 2006 is termination fee income of $163,000 associated with a negotiated settlement of certain franchise agreements.

14




Income tax expense is directly affected by levels of pretax income.  The Company’s effective tax rate was 40.4% and 44.5% for the years ended December 31, 2006 and 2005, respectively.

2005 COMPARED TO 2004

Revenues

Total revenues decreased 10.8% to $19.4 million in 2005, from $21.7 million in 2004.  Through mid-July of 2005, our system overall was experiencing increases in same store sales over 2004 by 1%. Company-operated restaurant sales decreased 12.1% to $14.7 million in 2005, from $16.7 million in 2004. This decrease was due to the closing of a company-operated location in February, 2005 totaling approximately $1.1 million in lost revenues in 2005 compared to 2004 and a closing of a company-operated location in July, 2005 due to a total loss by fire casualty totaling approximately $851,000 in lost revenues in 2005 over 2004.  Same store sales for 2005 experienced an overall decrease of .33% over 2004. Customer counts decreased 5% over 2004.  The Company implemented an average menu price increase of 4% on January 1, 2005.

Franchise and other revenues decreased 6.3% to $4.7 million in 2005, from $5.0 million in 2004. The decrease is primarily attributable to 12 less franchised restaurants during 2005.  Same store sales for 2005 experienced an overall increase of .25% over 2004.

Costs and Expenses

Cost of Company-operated restaurants, consisting primarily of food, beverage, and labor costs decreased $1.8 million (14.3%) to $10.5 million for the year ended December 31, 2005 from $12.3 million for the year ended December 31, 2004, and as a percentage of Company-operated restaurants revenue from 73.4% in 2004, to 71.5% in 2005.  The decreases are largely due to the closing of a company-operated location in February, 2005 and the closing due to a fire of a company-operated location in July, 2005.

Restaurant occupancy and other, which include utilities, insurance, maintenance, rent and other such costs of the Company-operated restaurants, decreased by $437,400 (14.3%) for the year ended December 31, 2005 versus the prior year’s comparable period. These costs for the year increased as a percentage of Company-operated restaurant revenues from 18.3% in 2004 to 17.8% in 2005.  The decreases were attributable to the closings of two Company-operated locations in 2005.

Subleased restaurant expenses include net costs associated with subleasing former Company operations and maintenance of vacant premises.  These expenses increased by $170,000 versus the prior year’s comparable period.  The increases were largely attributable to additional expenses incurred on repair and maintenance of the facilities, and uncollectible rents during 2005, and the increase of subleased properties in 2005.

Cost of franchise operations direct support expense decreased $20,000 (1.4%) to $1.4 million for the year ended December 31, 2005 from $1.4 million for the year ended December 31, 2004.

Unallocated corporate expenses consist of certain expenses not allocated to any business segment.  These expenses include legal, accounting, stockholder relations, personnel not directly related to a segment, information systems, and other headquarter’s activities.  These expenses increased by $72,000 (2.8%) for the year ended December 31, 2005 versus the prior year’s comparable period.

Depreciation and amortization for 2005 were comparable to 2004.

Closed restaurants expense of $350,279 in 2005 included impairment of $128,000 associated with the end of a subleased property due to a buyout of the lease and impairments related to the closing of a company-operated restaurant of $222,000 in February, 2005.  No such impairments were experienced in 2004.

Impairment and other charges of $319,830 in 2005 included impairments associated with a subleased property consisting of a write down of assets deemed non-recoverable of $236,330 and $83,500 of related rent payments deemed non-collectible as of December 31, 2005. No such charges were recorded in 2004.

15




Gain on settlement of insurance claims of $1,166,683 in 2005 included a gain of $220,351 attributable to insurance proceeds received on the Lawrenceville, Georgia casualty and a gain of $946,332 attributable to insurance proceeds received on the Waldorf, Maryland casualty. No such items were recorded in 2004.

Other income (expense) decreased from ($253,000) in 2004 to ($199,500) in 2005.  Interest expense decreased $93,000 (24.9%) comparing 2005 to 2004.  The decrease is due to a lower average principal outstanding balance.  Equity in the losses of a joint venture were $21,618 in 2005, with no such loss in 2004.

Income tax expense is directly affected by levels of pretax income.  The Company’s effective tax rate was 44.5% and 38.6% for the years ended December 31, 2005 and 2004, respectively. The increase in the effective tax rate in 2005 was due to a revision in the estimated state income tax rate and the expiration of certain state net operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

As of December 31, 2006, we had $2.3 million of cash and cash equivalents as compared to $1.7 million and $2.1 million as of December 31, 2005 and 2004, respectively.  The increase in cash and cash equivalents was largely attributable to proceeds from a rights offering during the fourth quarter of 2006 of $4.2 million at December 31, 2006, offset by a purchase of an investment in a marketable security of $4.5 million during the third and fourth quarters of 2006 and payments of long-term debt during all three years presented.

Investment of Available Capital

Our cash flows have exceeded  working capital, financing and capital investment requirements. Management expects that our cash flows will continue to exceed our operating cash needs for the foreseeable future.  We regularly evaluate how best to use available capital to increase stockholder value.  We may pursue investments in the form of acquisitions, joint ventures and partnerships where we believe attractive returns can be obtained.  Further, we  may determine under certain market conditions that available capital is best utilized to fund investments that we believe offer attractive returns, whether or not related to our ongoing business activities.

As previously disclosed, our Board of Directors has delegated authority to direct investment of surplus cash to our Chairman, Sardar Biglari, subject to Board reporting requirements and various limitations that have been or may be from time to time adopted by the Board of Directors.  We are using, and may in the future use, a portion of its available capital to invest in other securities.  These investments may include significant and highly concentrated direct investments with respect to the equity securities of public companies.  Any such investments will involve risks, and stockholders should recognize that our balance sheet may change depending on the extent of excess funds and the timing, magnitude and performance of such investments.  Furthermore, such investments could be subject to volatility that may affect both the recorded value of the investments as well as our periodic earnings. See Risk Factors, page 5.

Operating Activities and Cash Flows

We generated approximately $1.8 million, $1.1 million, and $2.4 million in operating cash flows for the years ended December 31, 2006, 2005 and 2004, respectively.  Our primary source of operating cash flows is the operating profits generated from Company operations and franchise operations.

Investing Activities

During the year ended December 31, 2006, we spent $492,000 on capital expenditures compared to $313,000 and $322,000 during the equivalent period in the year ended December 31, 2005 and 2004 respectively.  Capital expenditures for 2006 of $425,000 included the remodel of two Company-operated stores in Northern Virginia.  A total of $803,000 has been spent on these two remodels since 2005.  Also included in investing activities for 2006 is $4.5 million purchase of investment in marketable security.  Offsetting uses of cash for investing activities were proceeds from fire casualties of $785,000 and $695,000 for the years ended December 31, 2006 and 2005, respectively.  Also included in investing activities for 2006 are proceeds of $300,000 from the sale of land in Lawrenceville, Georgia.

16




Financing Activities

We made payments of long-term debt of $1.5 million, $1.2 million and $541,000 for the years ended December 31, 2006, 2005 and 2004, respectively.  Also during 2006, financing activities included cash received from a rights offering of $4.2 million, offset by costs of the rights offering of $123,000 and cash received from exercise of stock options of $28,000.

Liquidity

Our primary sources of liquidity are cash generated from operations and, if needed, borrowings under its existing line of credit. We continually review available financing alternatives.  In addition, we may consider, on an opportunistic basis, strategic decisions to create value and improve operational performance.

Total capital expenditures for 2007 are presently not expected to exceed $100,000, and will be primarily used for necessary replacement of certain restaurant equipment.

We believe that cash flows generated by operations will be adequate to fund our operations and required debt repayments for at least the next twelve months.

INVESTMENT IN UNCONSOLIDATED JOINT VENTURE

We are a partner in a 50/50 joint venture with a franchisee, for a new restaurant in Harrisonburg, Virginia.  During October 2005, the joint venture entered into a loan agreement for $3.05 million and we guaranteed 50% of the loan obligation.  We estimate the fair value of the guarantee to be approximately $30,000 and recorded the amount in other long-term liabilities and in investments in unconsolidated joint venture on the accompanying balance sheet at December 31, 2006.  The term of the guarantee extends through July 1, 2026 and we would be required to perform under the guarantee should the joint venture not to be able to meet its scheduled principal and interest payments.  Pursuant to the joint venture agreement, a cash contribution of $300,000 from each 50/50 partner was also made at the closing of this financing.  We are accounting for our investment using the equity method and our share of the net loss for the joint venture of $160,902 for the year ended December 31, 2006 is included in equity in earnings of unconsolidated joint venture.  The restaurant opened for business on December 14, 2006.

Financial Data

The following is selected financial information for the joint venture at December 31, 2006:

 

 

Year Ended
December 31, 2006
(unaudited)

 

Statement of Operations Data:

 

 

 

Total revenues

$

272,511

 

Cost of food

 

131,891

 

Payroll expense

 

218,374

 

Marketing and smallware expense

 

90,005

 

General and administrative

 

86,001

 

Interest

 

73,897

 

Net loss

 

(321,805

)

Balance Sheet Data:

 

 

 

Cash

$

319,410

 

Current receivables

 

114,813

 

Prepaid insurance

 

6,274

 

Inventory

 

17,811

 

Land, leasehold improvements, and
construction in progress, net

 

3,936,400

 

Loan costs, net

 

13,471

 

Total assets

 

4,408,378

 

Loan payable

 

3,300,000

 

Accounts payable and accrued expenses

 

873,418

 

Members’ equity

 

234,960

 

 

 

17




CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The table below sets forth a summary of our contractual obligations and commitments that will impact our future liquidity:

 

 

 

 

 

 

Years Ending December 31,

 

 

 

 

 

Contractual Obligations and Commitments

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

Totals

 

Long-term debt

 

$

163,089

 

$

118,783

 

$

109,803

 

$

121,385

 

$

134,189

 

$

200,876

 

$

848,125

 

Operating leases, net (1)

 

757,240

 

657,776

 

615,467

 

623,880

 

367,611

 

1,571,165

 

4,593,139

 

Interest expense (2)

 

77,846

 

62,834

 

52,041

 

40,459

 

27,655

 

14,603

 

275,438

 

Totals

 

$

998,175

 

$

839,393

 

$

777,311

 

$

785,724

 

$

529,455

 

$

1,786,644

 

$

5,716,702

 


(1)                                  Operating lease commitments are presented net of sublease rentals.  Gross operating lease commitments for the periods above aggregate to approximately $4.6 million, offset by sublease rentals for the same periods of approximately $95,000.

(2)                                  Reflects future interest payments through scheduled maturity dates based upon average borrowing rates, outstanding debt balances and scheduled principal payments on long-term debt.

Bank Line of Credit

At December 25, 2006, a $700,000 secured line of credit from a commercial bank payable expired.  There were no amounts outstanding under the line of credit at expiration.  On March 15, 2007, we obtained a new $2 million line of credit, payable on demand, subject to annual renewal by the bank with an automatic renewal at March 15, 2008, interest rate of prime minus 0.05% and collateralized by accounts receivable and the assignment of franchise royalty contracts. As of the date of this report, there were no amounts outstanding under the line.

Operating Leases

Operating lease commitments are presented net of sublease rentals.  Gross operating lease commitments for the periods above aggregate to approximately $4.6 million, offset by sublease rentals for the same periods of approximately $95,000.

FFCA Acquisition Corporation, an entity related to Franchise Finance Corporation of America, now known as General Electric Franchise Finance Corporation “FFCA” is or was the owner of 43 former Quincy’s restaurant locations “Former Quincy’s Units”.  WesterN SizzliN Stores of Virginia, Inc. (“WSSVA”) executed certain Master Leases (“the Leases”) dated as of January 1, 2001, covering the Former Quincy’s Units.  However, pursuant to Paragraph 47 of the Leases, the Leases never became effective as FFCA did not execute and/or deliver the Leases.

In 2001 and 2002, several Former Quincy’s Units were properly turned back to FFCA.  Certain franchisees who continued to operate Former Quincy’s Units owned by FFCA remitted all rental payments directly to FFCA, and FFCA accepted these payments.  Based on these developments, and the lack of any binding Master Lease Agreement with FFCA, on May 15, 2003, we sent a letter to the Lessor, providing notice of our termination of any tenancies at-will on any remaining Former Quincy’s units effective May 31, 2003.  In accordance with our position, we have returned to FFCA every invoice for rent expense, or tax statement, received after May 15, 2003, with a cover letter explaining that we are not responsible for any such amounts.  FFCA has not disputed the our position.

Revenue Recognition

Revenue at Company-operated restaurants is recognized as customers pay for products at the time of sale.  Franchise operations revenue consists of royalties and franchise fees.  Royalties are recognized in the month earned at estimated realizable amounts.  Franchise fees are recognized when the related services have been performed and do not include significant contingencies.  Other revenues consist of sales of seasonings and marinades to franchisees and are recognized when the products are shipped to the franchisee.

18




CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with United States generally accepted accounting principles.  The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Note 1 to the consolidated financial statements provides a summary of our significant accounting policies.  The following are areas requiring significant judgments and estimates due to uncertainties as of the reporting date: trade accounts and notes receivables and the allowance for doubtful accounts, classification of marketable security, determination of useful lives and the evaluation of any impairment of long-lived assets (including franchise royalty contracts, goodwill and property and equipment), and commitments and contingencies.

Application of the critical accounting policies discussed below requires significant judgments by management, often as a result of the need to make estimates of matters that are inherently uncertain.  If actual results were to differ materially from the estimates made, the reported results could be materially affected.  We are not currently aware of any reasonably likely events or circumstance that would result in materially different results. Our senior management has reviewed the critical accounting policies and estimates and the Management’s Discussion and Analysis regarding them with the Audit and Finance Committee of the Board of Directors.

Trade Accounts and Notes Receivable and the Allowance for Doubtful Accounts

We collect royalties, and in some cases rent, from franchisees.  We view trade accounts and notes receivable and the related allowance for doubtful accounts as a critical accounting estimate since the allowance for doubtful accounts is based on judgments and estimates concerning the likelihood that individual franchisees will pay the amounts included as receivables from them.  In determining the amount of allowance for doubtful accounts to be recorded for individual franchisees, we consider the age of the receivable, the financial stability of the franchisee, discussions that may have occurred with the franchisee and our judgment as to the overall collectibility of the receivable from the franchisee.  In addition, we establish an allowance for all other receivables for which no specific allowances are deemed necessary.  If average sales or the financial health of franchisees were to deteriorate, we might have to increase the allowance for doubtful accounts.

Classification of Marketable Securities

The Company’s investments in marketable equity securities are held for an indefinite period and thus are classified as available for sale. Available-for-sale securities are recorded at fair value in Investments in Marketable Security on the balance sheet, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other comprehensive income.

Long-lived Assets, Franchise Royalty Contracts and Goodwill

We view the determination of the carrying value of long-lived assets, franchise royalty contracts and goodwill as critical accounting estimates since we must evaluate the estimated economic useful life in order to properly depreciate or amortize our long-lived assets and franchise royalty contracts and because we must consider if the value of any of our long-lived assets have been impaired, requiring adjustments to the carrying value.  Goodwill is not subject to amortization but is subject to at least an annual impairment test to determine if the carrying amount exceeds its fair value.

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

We must also consider similar issues when determining whether or not an asset has been impaired to the extent that we must recognize a loss on such impairment, including goodwill impairment. In 2005, we recorded closed restaurants expense of $350,279, due to a buyout of a lease and impairment and charges of $319,830 associated with subleased properties.  In 2006, there were no such expenses (see Notes 12 and 13).

19




Commitments and Contingencies

We view accounting for contingencies as a critical accounting estimate since loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources require judgment as to any probable liabilities incurred.  Actual results could differ from the expected results determined based on such estimates.

IMPACT OF INFLATION

The impact of inflation on the costs of food and beverage products, labor and real estate can affect our operations.  Over the past few years, inflation has had a lesser impact on our operations due to the lower rates of inflation in the nation’s economy and economic conditions in our market areas.

We believe that we have historically been able to pass on increased costs through certain selected menu price increases and have offset increased costs by increased productivity and purchasing efficiencies, but there can be no assurance that we will be able to do so in the future.  We anticipate that the average cost of restaurant real estate leases and construction cost could increase in the future which could affect our ability to expand.  In addition, mandated health care or additional increases in the federal or state minimum wages could significantly increase our costs of doing business.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2006, the FASB issued FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, (“FIN 48”).  FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken in a tax return.  We must determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements.  FIN 48 applies to all tax positions related to income taxes subject to FASB Statement No. 109, Accounting for Income Taxes.  We will adopt the provisions in this statement beginning in the first quarter of 2007.  Based on our evaluation to date, we believe the cumulative effect of applying the provisions of FIN 48 will be reported as a decrease to the opening balance of retained earnings on January 1, 2007 of approximately $100,000 to $200,000.  However, our evaluation is not complete and the ultimate effect upon adoption may exceed this amount.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption permitted. We have not yet determined the impact, if any, that the implementation of SFAS No. 157 will have on our results of operations or financial condition.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material and therefore must be quantified. SAB No. 108 is effective for our fiscal years ending December 31, 2006. The effect of the application of SAB No. 108 did not impact our results of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115, (“SFAS 159”), which is effective January 1, 2008.  This Standard permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the use of fair value measurement, with is consistent with the Board’s long-term measurement objectives for accounting for financial instruments.  We are currently evaluating the effect, if any, that the adoption of SFAS 159 will have on our consolidated financial statements on the adoption date of January 1, 2008.

20




Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As of December 31, 2006, our financial instruments are not exposed to significant market risk due to foreign currency exchange risk or commodity price risk.  However, we are exposed to market risk related to changes in market prices of our marketable security and to interest rates related to our debt obligations.  Our marketable security is currently concentrated in a single investment, common stock of Friendly Ice Cream Corporation.  A change in market prices also exposes us to market risk related to our investment in the marketable security.  As of December 31, 2006, we held $6.5 million in available-for-sale marketable securities.  A hypothetical 10% decline in the market value would result in $650,000 of unrealized losses and a corresponding decline would not affect our cash flows unless the security was disposed of.

The table below provides information about our debt obligations that are sensitive to changes in interest rates.  The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

Debt obligations held for other than trading purposes at December 31, 2006 (dollars in thousands):

EXPECTED MATURITY DATE

 

 

2007

 

2008

 

2009

 

2010

 

2011

 

Thereafter

 

Total

 

Estimated
Fair Value

 

Long-term debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Rate

 

$

163

 

$

119

 

$

110

 

$

121

 

$

134

 

$

201

 

$

848

 

$

890

 

Average Interest Rate

 

9.96

%

10.03

%

10.07

%

10.07

%

10.07

%

10.07

%

10.00

%

 

 

 

Item 8. Consolidated Financial Statements and Supplementary Data

The information required by this item is set forth on pages F-1 through F-22 of this report.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.  Controls and Procedures

Our senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2006. Based on their evaluation, they concluded that the disclosure controls and procedures were ineffective in providing reasonable assurance that the information required to be disclosed by us in our annual report on 10-K was summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and Form 10-K due to the material weaknesses discussed below.

A material weakness is a control deficiency (as defined by the PCAOB), or a combination of control deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

 Based on their evaluation as of December 31, 2006, the review of the system of controls surrounding the information technology system revealed that the Chief Financial Officer has access to the journal entry module within our accounting system, leading to a segregation of duties issue.  We are currently evaluating how to restrict access to that particular module from the Chief Financial Officer, as well as additional procedures necessary to fully remediate the material weakness.  We anticipate the steps necessary to address this deficiency will be remediated by June 30, 2007.

In addition, in connection with the audit of our 2006 financial results, Grant Thornton LLP, (our independent registered public accounting firm), detected an error related to how we accounted for expenses associated with the rights offering that expired on December 8, 2006. We believe this error is a result of a material weakness in our controls over accounting for non-routine transactions due to a lack of qualified resources. We are evaluating initiatives needed to remediate this material weakness in our internal controls, and thus lower the risk level to remote of other potential material errors or omissions.  We plan to expand the use of independent reviews by outside financial reporting experts and implement this review by June 30, 2007.

There were no other changes in our internal controls or in other factors that could significantly affect these controls since the evaluation process was completed as of December 31, 2006.

21




Item 9B.  Other Information

None.

Part III

Item 10.  Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders expected to be filed on or before April 30, 2007.

We have adopted a Code of Ethics applicable to our directors, officers and employees.  We will provide, without charge, a copy upon written request made to the Chief Financial Officer.

Item 11.  Executive Compensation

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders expected to be filed on or before April 30, 2007.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders expected to be filed on or before April 30, 2007.

Item 13.  Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders expected to be filed on or before April 30, 2007.

Item 14.   Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to our Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders expected to be filed on or before April 30, 2007.

Part IV

Item 15.  Exhibits and Financial Statement Schedules

(a)           Financial Statements: See our Consolidated Financial Statements filed under Item 8.

(b)                                 Exhibits required by Item 601 of Regulation S-K:  See Exhibit Index on pages 25 and 26.

22




SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

WESTERN SIZZLIN CORPORATION

 

 

 

 

Dated: March 23, 2007

 

By: /s/ James C. Verney

 

 

 

James C. Verney

 

 

President and Chief Executive Officer

 

 

 

 

 

Dated: March 23, 2007

 

By: /s/ Robyn B. Mabe

 

 

 

Robyn B. Mabe

 

Vice President and Chief Financial Officer

 

 

23




Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

 

 

 

Title

 

Date

 

 

 

 

 

/s/ Sardar Biglari

 

Chairman of the Board

 

March 23, 2007

Sardar Biglari

 

 

 

 

 

 

 

 

 

/s/ Philip L. Cooley

 

Vice Chairman

 

March 23, 2007

Philip L. Cooley

 

 

 

 

 

 

 

 

 

/s/ Titus W. Greene

 

Director

 

March 23, 2007

Titus W. Greene

 

 

 

 

 

 

 

 

 

/s/ Jonathan Dash

 

Director

 

March 23, 2007

Jonathan Dash

 

 

 

 

 

 

 

 

 

/s/ Kenneth R. Cooper

 

Director

 

March 23, 2007

Kenneth R. Cooper

 

 

 

 

24




Exhibit Index

2.

0

 

Plan of Amendment and Merger dated April 30, 1999, between Austins Steaks and Saloon, Inc. and The WesterN SizzliN Corporation. (incorporated by reference to the specific exhibit to the From S-4 Registration Statement, as filed with the Securities and Exchange Commission on May 13, 1999, Registration No. 333- 78375)

 

 

 

 

3.

1.1

 

Restated Certificate of Incorporation dated January 24, 1996. (incorporated by reference to the Form 10-Q for the quarter ended September 30, 2002)

 

 

 

 

3.

1.2

 

Certificate of Amendment to Certificate of Incorporation dated October 23, 2003 (incorporated by reference to the Form 8-K filed October 6, 2003)

 

 

 

 

3.

1.3

 

Amendment to Certificate of Incorporation dated June 30, 1999 (incorporated by reference to the Form 10-K for the year ended December 31, 2004)

 

 

 

 

3.

2

 

Restated Bylaws of the Corporation (incorporated by reference to the Form 10-K for the year ended December 31, 2005)

 

 

 

 

3.

2.1

 

Amendment No. 1 to Restated Bylaws (incorporated by reference to the Form 10-K for the year ended December 31, 2005)

 

 

 

 

3.

2.2

 

Amendment No. 2 to Restated Bylaws Bylaws (incorporated by reference to the Form 10-K for the year ended December 31, 2005)

 

 

 

 

4.

0

 

Captec Promissory Notes and related loan documents (incorporated by reference to the Form 10-Q for the period ended June 30, 2002)

 

 

 

 

+10.

1

 

November 2001 Severance Agreement (incorporated by reference to the Form 10-Q for the period ended June 30, 2002)

 

 

 

 

+10.

1.2

 

Employment Agreement of James C. Verney (incorporated by reference to the Form 10-Q for period ended September 30, 2004)

 

 

 

 

+10.

1.3

 

Memorandum of Understanding with James C. Verney (incorporated by reference to the Form 10-K for the year ended December 31, 2005)

 

 

 

 

+10.

1.4

 

Change of Control Agreement of Robyn B. Mabe (incorporated by reference to the Form 10-Q for period ended September 30, 2004)

 

 

 

 

+10.

2

 

2004 Non-Employee Directors’ Stock Option Plan (incorporated by reference to the Form 10-Q for period ended June 30, 2004)

 

 

 

 

+10.

3

 

2005 Stock Option Plan (incorporated by reference to the Schedule 14A Definitive Proxy Statement filed April 29, 2005)

 

 

 

 

+10.

11

 

1994 Austins Steaks & Saloon, Inc. Incentive and Nonqualified Stock Option Plan, as amended (incorporated by reference to the specific exhibit to the Form SB-2 Registration Statement, as filed with the Securities and Exchange Commission on January 23, 1995, Registration No. 33-84440-D)

 

 

 

 

+10.

11.1

 

Amendment No. 2 to the 1994 Incentive and Nonqualified Stock Option Plan of the Company (incorporated by reference to the specific exhibit to the Form S-4 Registration Statement, as filed with the Securities and Exchange Commission on May 13, 1999, Registration No. 333-78375)

 

25




 

+10.

11.2

 

Amendment No. 3 to the 1994 Incentive and Nonqualified Stock Option Plan of the Company (incorporated by reference to the specific exhibit to the Form S-4 Registration Statement, as filed with the Securities and Exchange Commission on May 13, 1999, Registration No. 333-78375)

 

 

 

 

10.

12

 

September 27, 2002, Settlement with group of Company Stockholders in an anticipated proxy battle (incorporated by reference to the Form 8-K filed September 27, 2002)

 

 

 

 

10.

13

 

Letter Agreement with KPMG, LLP (incorporated by reference to the Form 10-K for the year ended December 31, 2005)

 

 

 

 

21

 

 

Subsidiaries of the Issuer:

 

 

 

The WesterN SizzliN Stores, Inc.

 

 

 

The WesterN SizzliN Stores of Little Rock, Inc.

 

 

 

The WesterN SizzliN Stores of Louisiana, Inc.

 

 

 

Missouri Development Company

 

 

 

Austins Albuquerque, Inc.

 

 

 

Austins Omaha, Inc.

 

 

 

Austins 72nd, Inc.

 

 

 

Austins Lincoln, Inc.

 

 

 

Austins New Mexico, Inc.

 

 

 

Austins Old Market, Inc.

 

 

 

Austins Scottsdale, Inc.

 

 

 

Austins Rio Rancho, Inc.

 

 

 

Austins Albuquerque East, Inc.

 

 

 

WesterN SizzliN Stores of Virginia, Inc.

 

 

 

Western Sizzlin Franchises, Inc.

 

 

 

Woodgrill Franchises, Inc.

 

 

 

Western Sizzlin Franchise Corporation

 

 

 

 

23.

0

 

Consent of Grant Thornton LLP

 

 

 

 

31.

1

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)

 

 

 

 

31.

2

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)

 

 

 

 

32.

1

 

Chief Executive Officer’s Certification pursuant to 18 U.S.C. SEC-1350

 

 

 

 

32.

2

 

Chief Financial Officer’s Certification pursuant to 18 U.S.C. SEC-1350


+                    Management contract or compensatory benefit plan.

26




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Western Sizzlin Corporation:

We have audited the accompanying consolidated balance sheets of Western Sizzlin Corporation (a Delaware Corporation), and subsidiaries as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Western Sizzlin Corporation and subsidiaries as of December 31, 2006 and 2005 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 123 (R), “Share-Based Payment”, on January 1, 2006.

/s/ GRANT THORNTON LLP

 

Greensboro, North Carolina

March 16, 2007

F-1




WESTERN SIZZLIN CORPORATION
AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2006 and 2005

 

 

2006

 

2005

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,344,644

 

$

1,664,848

 

Restricted short-term investments

 

 

260,069

 

Trade accounts receivable, less allowance for doubtful accounts of $470,758 in 2006 and $454,458 in 2005

 

866,565

 

910,776

 

Current installments of notes receivable, less allowance for impaired notes of $17,409 in 2006 and $0 in 2005

 

205,624

 

212,187

 

Other receivables

 

239,531

 

128,375

 

Income tax receivable

 

248,559

 

17,923

 

Insurance receivables

 

 

1,029,954

 

Inventories

 

55,207

 

83,506

 

Prepaid expenses

 

253,556

 

292,721

 

Deferred income taxes

 

296,671

 

226,736

 

 

 

 

 

 

 

Total current assets

 

4,510,357

 

4,827,095

 

 

 

 

 

 

 

Notes receivable, less allowance for impaired notes receivable of $164,396 in 2006 and $119,126 in 2005, excluding current installments

 

800,841

 

876,426

 

Property and equipment, net

 

2,270,300

 

1,887,450

 

Investment in marketable security (Note 5)

 

6,508,645

 

 

Franchise royalty contracts, net of accumulated amortization of $8,193,840 in 2006 and $7,563,545 in 2005

 

1,260,592

 

1,890,887

 

Goodwill

 

4,310,200

 

4,310,200

 

Financing costs, net of accumulated amortization of $188,670 in 2006 and $136,446 in 2005

 

11,540

 

63,764

 

Investment in unconsolidated joint venture

 

147,479

 

308,382

 

Deferred income taxes

 

 

576,467

 

Asset held for sale

 

 

300,000

 

Other assets

 

 

435,161

 

 

 

 

 

 

 

 

 

$

19,819,954

 

$

15,475,832

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current installments of long-term debt

 

$

163,089

 

$

1,487,964

 

Accounts payable

 

555,110

 

523,939

 

Accrued expenses and other

 

554,443

 

814,005

 

 

 

 

 

 

 

Total current liabilities

 

1,272,642

 

2,825,908

 

 

 

 

 

 

 

Long-term debt, excluding current installments

 

685,036

 

848,319

 

Other long-term liabilities

 

69,370

 

42,087

 

Deferred income taxes

 

394,885

 

 

 

 

 

 

 

 

 

 

2,421,933

 

3,716,314

 

Commitments and contingencies (Notes 7 and 16)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Convertible preferred stock, series A, $10 par value (involuntary liquidation preference of $10 per share). Authorized 25,000 shares; none issued and outstanding

 

 

 

Convertible preferred stock, series B, $1 par value (involuntary liquidation preference of $1 per share). Authorized 875,000 shares; none issued and outstanding

 

 

 

Common stock, $0.01 par value.  Authorized 2,000,000 shares; issued and outstanding 1,787,750 in 2006 and 1,188,850 shares in 2005

 

17,878

 

11,889

 

Additional paid-in capital

 

12,790,681

 

8,681,775

 

Retained earnings

 

3,340,193

 

3,065,854

 

Accumulated other comprehensive income — unrealized holding gains, net of taxes

 

1,249,269

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

17,398,021

 

11,759,518

 

 

 

 

 

 

 

 

 

$

19,819,954

 

$

15,475,832

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statement.

F-2




WESTERN SIZZLIN CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Operations
Years ended December 31, 2006, 2005 and 2004

 

 

2006

 

2005

 

2004

 

Revenues:

 

 

 

 

 

 

 

Company-operated restaurants

 

$

12,985,109

 

$

14,688,360

 

$

16,707,958

 

Franchise operations

 

4,011,740

 

4,251,615

 

4,607,878

 

Other

 

407,091

 

432,078

 

391,928

 

 

 

 

 

 

 

 

 

Total revenues

 

17,403,940

 

19,372,053

 

21,707,764

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

Company-operated restaurants — food, beverage and labor costs

 

9,294,432

 

10,503,746

 

12,262,792

 

Restaurant occupancy and other

 

2,458,666

 

2,613,764

 

3,051,159

 

Subleased properties

 

343,789

 

184,383

 

14,458

 

Franchise operations — direct support

 

1,234,256

 

1,408,784

 

1,428,363

 

Corporate expenses

 

2,340,909

 

2,659,497

 

2,588,299

 

Depreciation and amortization expense

 

1,057,492

 

1,072,334

 

1,188,308

 

Closed restaurants expense

 

 

350,279

 

 

Impairment and other charges

 

46,284

 

319,830

 

 

Gain on settlement of insurance claims

 

 

(1,166,683

)

 

Total costs and expenses

 

16,775,828

 

17,945,934

 

20,533,379

 

 

 

 

 

 

 

 

 

Income from operations

 

628,112

 

1,426,119

 

1,174,385

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

Interest expense

 

(159,518

)

(279,612

)

(372,232

)

Loss on early extinguishment of long-term debt

 

(92,535

)

 

 

Interest income

 

69,269

 

69,950

 

87,858

 

Equity in loss of joint venture

 

(160,902

)

(21,618

)

 

Other, net

 

175,721

 

31,779

 

31,655

 

Total other expenses, net

 

(167,965

)

(199,501

)

(252,719

)

 

 

 

 

 

 

 

 

Income before income tax expense

 

460,147

 

1,226,618

 

921,666

 

 

 

 

 

 

 

 

 

Income tax expense

 

185,808

 

545,258

 

355,855

 

 

 

 

 

 

 

 

 

Net income

 

$

274,339

 

$

681,360

 

565,811

 

 

 

 

 

 

 

 

 

Earnings per share (basic and diluted):

 

 

 

 

 

 

 

Net income

 

$

0.23

 

$

0.57

 

$

0.48

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

F-3




WESTERN SIZZLIN CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity
Years ended December 31, 2006, 2005 and 2004

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Common stock

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

 

 

Shares

 

Dollars

 

Capital

 

Earnings

 

Income

 

Total

 

Balances, December 31, 2003

 

1,190,850

 

$

11,909

 

$

8,696,755

 

$

1,818,683

 

 

$

10,527,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

565,811

 

 

565,811

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2004

 

1,190,850

 

11,909

 

8,696,755

 

2,384,494

 

 

11,093,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock received related to termination of franchise agreement

 

(2,000

)

(20

)

(14,980

)

 

 

(15,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

681,360

 

 

681,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2005

 

1,188,850

 

11,889

 

8,681,775

 

3,065,854

 

 

11,759,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

274,339

 

 

274,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized holding gains, net of taxes of $715,608

 

 

 

 

 

1,249,269

 

1,249,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

1,523,608

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation expense associated with stock option plans

 

 

 

39,100

 

 

 

39,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

3,000

 

30

 

27,570

 

 

 

27,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs incurred in rights offering

 

 

—-

 

(123,280

)

 

 

(123,280

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued in rights offering

 

595,900

 

5,959

 

4,165,516

 

 

 

4,171,475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, December 31, 2006

 

1,787,750

 

$

17,878

 

$

12,790,681

 

$

3,340,193

 

$

1,249,269

 

$

17,398,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

F-4




WESTERN SIZZLIN CORPORATION
AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years ended December 31, 2006, 2005 and 2004

 

 

2006

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

274,339

 

$

681,360

 

$

565,811

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization of property and equipment

 

427,195

 

423,865

 

539,841

 

Amortization of franchise royalty contracts and other assets

 

630,295

 

648,469

 

648,467

 

Write-off of financing costs related to early extinguishment of long-term debt

 

29,699

 

 

 

Amortization of finance costs

 

22,525

 

 

 

Provision for doubtful accounts

 

110,000

 

129,940

 

105,119

 

Share-based compensation

 

39,100

 

 

 

Provision for deferred taxes

 

185,808

 

530,651

 

328,598

 

Loss on disposal of property and equipment

 

11,434

 

137,969

 

28,072

 

Gain on settlement of insurance claims

 

 

(1,166,683

)

 

Loss on sale of asset held for sale

 

501

 

 

 

Common stock received related to termination of franchise agreement

 

 

(15,000

)

 

Impairment charges

 

46,284

 

458,138

 

 

Equity in loss of unconsolidated joint venture

 

160,902

 

21,618

 

 

(Increase) decrease in:

 

 

 

 

 

 

 

Trade accounts receivable

 

(65,789

)

(198,447

)

(108,457

)

Notes receivable

 

82,148

 

176,690

 

134,774

 

Other receivables

 

(111,156

)

(20,479

)

(64,567

)

Income tax receivable

 

(230,636

)

(17,923

)

 

Insurance receivable — business interruption

 

244,961

 

(21,865

)

 

Inventories

 

28,299

 

38,691

 

(55,807

)

Prepaid expenses

 

39,165

 

15,366

 

105,737

 

Other assets

 

56,706

 

(52,106

)

143,442

 

Increase (decrease) in:

 

 

 

 

 

 

 

Accounts payable

 

31,172

 

(307,944

)

(159,445

)

Other liabilities

 

27,283

 

(2,754

)

(35,159

)

Accrued expenses and other

 

(259,562

)

(405,142

)

214,603

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

1,780,673

 

1,054,414

 

2,391,029

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Investment in unconsolidated joint venture

 

 

(300,000

)

 

Change in short-term investments

 

260,069

 

(5,415

)

(3,226

)

Additions to property and equipment

 

(492,107

)

(312,532

)

(323,156

)

Purchases of marketable security

 

(4,543,768

)

 

 

Proceeds from fire casualties

 

784,993

 

694,439

 

18,441

 

Proceeds from sale of property

 

2,800

 

8,000

 

 

Proceeds from sale of asset held for sale

 

299,499

 

 

 

Deposits on construction

 

 

(378,455

)

 

Net cash used in investing activities

 

(3,688,514

)

(293,963

)

(307,941

)

 

F-5




WESTERN SIZZLIN CORPORATION

AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2006, 2005 and 2004

 

 

2006

 

2005

 

2004

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Cash received from exercise of stock options

 

27,600

 

 

 

Cash received from stock rights offering

 

4,171,475

 

 

 

Payments on stock rights offering

 

(123,280

)

 

 

 

 

Payments on long-term debt

 

(1,488,158

)

(1,201,354

)

(540,979

)

Cash received from line of credit borrowings

 

695,000

 

 

 

Payment on line of credit borrowings

 

(695,000

)

 

 

Borrowings related to margin debt

 

1,760,393

 

 

 

Payments on margin debt

 

(1,760,393

)

 

 

Dividends paid

 

 

 

(119,086

)

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

2,587,637

 

(1,201,354

)

(660,065

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

679,796

 

(440,903

)

1,423,023

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of the year

 

1,664,848

 

2,105,751

 

682,728

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of the year

 

2,344,644

 

1,664,848

 

2,105,751

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash payments for interest

 

$

87,380

 

$

291,745

 

$

357,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes paid

 

$

402,761

 

$

25,557

 

$

28,126

 

Noncash investing and financing activities:

During 2006, deposits on construction of $378,455 were reclassified to property and equipment upon the related assets being placed in service.

During 2005, the Company guaranteed the debt of an unconsolidated joint venture and recorded the fair value of the guarantee of $30,000 in other long term liabilities and investment in unconsolidated joint venture.

During 2004, the Company reclassified $36,192 from property and equipment to assets held for sale and $364,088 in assets held for sale to other assets.

For the years ended December 31, 2006, 2005 and 2004, write-offs of accounts and notes receivable were $31,021, $26,755 and $42,177, respectively.

See accompanying notes to consolidated financial statements.

F-6




WESTERN SIZZLIN CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

December 31, 2006, 2005 and 2004

(1)                     Summary of Significant Accounting Policies

(a)                      Description of Business and Principles of Consolidation

Western Sizzlin Corporation (formerly Austins Steaks & Saloon, Inc.) and subsidiaries is a franchisor and operator of restaurants. At December 31, 2006, the Company had 123 franchised, 5 Company-operated and 1 joint venture restaurant operating in 19 states. The consolidated financial statements include the accounts of Western Sizzlin Corporation and its wholly owned subsidiaries, The WesterN SizzliN Stores, Inc., WesterN SizzliN Stores of Little Rock, Inc., WesterN SizzliN Stores of Louisiana, Inc., Austins of Omaha, Inc., and Western Sizzlin Stores of Virginia, Inc. (collectively the Company). All significant intercompany accounts and transactions have been eliminated in consolidation.

(b)                      Stock Option Plans

Effective January 1, 2006, the Company began recording compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” as interpreted by SEC Staff Accounting Bulletin No. 107.  Previously the Company had accounted for stock options according to the provisions of Accounting Principles Board Opinion (“APB”) No. 25,  “Accounting for Stock Issued to Employees,” and as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation”, therefore, no related compensation expense was recorded in periods prior to January 1, 2006 for awards granted with no intrinsic value.  The Company adopted the modified prospective transition method provided for under SFAS No. 123R, and consequently has not retroactively adjusted results from prior periods.

As a result of adopting SFAS No.123R, the Company recorded $39,100 of compensation expense for stock options in Corporate expenses for the year ended December 31, 2006, which had the effect of reducing pre-tax earnings by $39,100, net income by approximately $24,000, basic earnings per share by $0.02 and diluted earnings per share by $0.02 for year ended December 31, 2006. The adoption of SFAS No.123R had no impact on the Company’s cash flows.

The following table illustrates the effect on net income if the fair-value-based method of SFAS No. 123R had been applied to all outstanding and unvested awards in the years ended December 31, 2005 and 2004:

 

 

2005

 

2004

 

 

 

 

 

 

 

Net income:

 

 

 

 

 

As reported

 

$

681,360

 

$

565,811

 

Deduct total stock-based employee compensation
expense determined under fair-value-based method for all awards, net
of tax

 

(172,174

)

(50,197

)

 

 

 

 

 

 

Pro forma net income

 

$

509,186

 

$

515,614

 

 

 

 

 

 

 

Basic net income per share:

 

 

 

 

 

As reported

 

$

0.57

 

$

0.48

 

Pro forma

 

$

0.43

 

$

0.43

 

 

 

 

 

 

 

Diluted net income per share:

 

 

 

 

 

As reported

 

$

0.57

 

$

0.48

 

Pro forma

 

$

0.43

 

$

0.43

 

 

F-7




(c)                       Cash Equivalents and Restricted Short-Term Investments

Cash equivalents include overnight repurchase agreements at December 31, 2006 and 2005, respectively. The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

Restricted short-term investments represent funds securing certain of the Company’s notes payable as required by the Company’s lender.  As such, the investments are not available for use in the Company’s general operations.  The funds were invested in a certificate of deposit at December 31, 2005 and were liquidated in 2006 due to the repayment of the related notes payable.

(d)                      Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amounts, which generally are due thirty days after the invoice date and are are considered past due after thirty days. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its franchisees.

(e)                       Notes Receivable

Notes receivable are recorded at cost, less an allowance for impaired notes receivable. Management, considering current information and events regarding the borrowers’ ability to repay their obligations, considers a note receivable to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the note agreement. When a note receivable is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the note’s effective interest rate. Impairment losses are included in the allowance for impaired notes receivable through a charge to provision for bad debts. Interest income on impaired notes is recognized on the cash basis and is not material.

(f)                         Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist primarily of food, beverages, and restaurant supplies.

(g)                      Property and Equipment

Property and equipment are stated at cost and depreciated on the straight-line basis over useful lives of 3 to 10 years. Leasehold improvements are amortized over the shorter of the asset’s estimated useful life or the lease term. If the estimated useful life of a leasehold improvement exceeds the lease term and the lease allows for a renewable term and renewal is reasonably assured, the estimated useful life of the leasehold improvement is used for amortization purposes. Gains or losses are recognized upon the disposal of property and equipment and the cost and the related accumulated depreciation and amortization are removed from the accounts. Maintenance, repairs, and betterments which do not enhance the value of or increase the life of the assets are expensed as incurred.

(h)                      Franchise Royalty Contracts

Franchise royalty contracts are amortized on a straight-line basis over fifteen years, the estimated average life of the franchise agreements. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the franchise royalty contracts’ balance over their remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds.

(i)                         Goodwill

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill determined to have an indefinite useful life is not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Intangible Assets. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

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Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.  No impairments to goodwill were recognized in 2006, 2005 or 2004.

(k)                      Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of

Long-lived assets, such as property and equipment, and franchise royalty contracts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets held for sale are separately presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

(l)&#