**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**(Mark One)**

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

**Forthe quarterly period ended June 30, 2006, or**

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

**Forthe transition period from                           to                             **

**Commission file number 0-25366**

**Western Sizzlin Corporation**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                                |   | **86-0723400**       |
|---------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of            |   | (I.R.S. Employer     |
| Incorporation or  Organization)             |   | Identification  No.) |
|                                        |   |                 |
| **1338  Plantation Road Roanoke, Virginia** |   | **24012**            |
| (Address of  Principal Executive Offices)   |   | (Zip Code)           |

 

**(540) 345-3195**

(Registrant’s TelephoneNumber Including Area Code)

Indicate by check mark whether the registrant:(1)  has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x   No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. (Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.) (Check one):
| o  Large Accelerated Filer | o  Accelerated Filer | x  Non-Accelerated Filer |
|----------------------------|----------------------|--------------------------|

 

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

Asof August 11, 2006, there were 1,189,850 shares of common stock outstanding.

 

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** **

**Western SizzlinCorporation**

**Form 10-QSix Months Ended June 30, 2006Table of Contents**
|                   | ** **                                                                                             | **Page**   |
|-------------------|--------------------------------------------------------------------------------------------------------|------------|
|                   | **PART I.  FINANCIAL INFORMATION**                                                                     | ** ** |
| ** **        | ** **                                                                                             | ** ** |
| **Item  1.**      | **Financial  Statements (Unaudited)**                                                                  | ** ** |
| ** **        | ** **                                                                                             | ** ** |
| ** **        | Consolidated Balance Sheets — June 30, 2006 and  December 31, 2005                                | 2          |
|              |                                                                                                   |       |
| ** **        | Consolidated Statements of Operations — Three Months  and Six Months Ended June 30, 2006 and 2005 | 3          |
|              |                                                                                                   |       |
| ** **        | Consolidated Statement of Changes in Stockholders’  Equity — Six Months Ended June 30, 2006  | 4          |
|              |                                                                                                   |       |
| ** **        | Consolidated Statements of Cash Flows — Six Months  Ended June 30, 2006 and 2005                  | 5          |
|              |                                                                                                   |       |
| ** **        | Notes to Consolidated Financial Statements                                                             | 6-14       |
|              |                                                                                                   |       |
| **Item 2.**       | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations**        | 14-21      |
| ** **        | ** **                                                                                             | ** ** |
| **Item 3.**       | **Quantitative and Qualitative Disclosure about Market  Risk**                                         | 21         |
| ** **        | ** **                                                                                             | ** ** |
| **Item 4.**       | **Controls and Procedures**                                                                            | 21         |
| ** **        | ** **                                                                                             | ** ** |
| ** **        | **PART  II. OTHER INFORMATION**                                                                        | ** ** |
| ** **        | ** **                                                                                             | ** ** |
| **Item  1.**      | **Legal  Proceedings**                                                                                 | 22         |
| ** **        | ** **                                                                                             | ** ** |
| **Item  1A.**     | **Risk  Factors**                                                                                      | 22         |
| ** **        | ** **                                                                                             | ** ** |
| **Item 4.**       | **Submission of Matters to a Vote of Security Holders**                                                | 22-23      |
| ** **        | ** **                                                                                             | ** ** |
| **Item 6.**       | **Exhibits**                                                                                           | 23         |
| ** **        | ** **                                                                                             | ** ** |
| **Signatures**    | 24                                                                                                     |
| ** **        | ** **                                                                                             | ** ** |
| **Exhibit Index** | 25                                                                                                     |

 

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**PART I. FINANCIAL INFORMATION**

**WESTERN SIZZLIN CORPORATION**

**Consolidated Balance Sheets**June 30, 2006 and December 31, 2005
| ** **                                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  assets:                                                                                                                            |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                   |       | $                 | 2,030,687  |                  | $          | 1,664,848 |   |
| Short-term investments                                                                                                                      |       | —            |       | 260,069               |       |
| Trade accounts receivable,  less allowance for doubtful accounts of $482,675 in 2006 and $454,458 in 2005                                   |       | 824,931           |       | 910,776               |       |
| Current installments of notes  receivable                                                                                                   |       | 196,653           |       | 212,187               |       |
| Income tax receivable                                                                                                                       |       | 24,233            |       | 17,923                |       |
| Insurance receivables                                                                                                                       |       | —            |       | 1,029,954             |       |
| Other receivables                                                                                                                           |       | 43,437            |       | 128,375               |       |
| Inventories                                                                                                                                 |       | 100,374           |       | 83,506                |       |
| Prepaid expenses                                                                                                                            |       | 278,944           |       | 292,721               |       |
| Deferred income taxes                                                                                                                       |       | 138,316           |       | 226,736               |       |
| Total current assets                                                                                                                        |       | 3,637,575         |       | 4,827,095             |       |
| Notes receivable, less allowance for doubtful accounts of $140,909 in  2006 and $119,126 in 2005, excluding current installments            |       | 880,854           |       | 876,426               |       |
| Property and equipment, net of accumulated depreciation of $3,668,298  in 2006 and $3,690,965 in 2005                                       |       | 2,316,852         |       | 1,887,450             |       |
| Franchise royalty contracts, net of accumulated amortization of  $7,878,693 in 2006 and $7,563,545 in 2005                                  |       | 1,575,739         |       | 1,890,887             |       |
| Goodwill                                                                                                                                    |       | 4,310,200         |       | 4,310,200             |       |
| Financing costs, net of accumulated amortization of $167,066 in 2006  and $136,446 in 2005                                                  |       | 23,238            |       | 63,764                |       |
| Investment in unconsolidated joint venture                                                                                                  |       | 270,154           |       | 308,382               |       |
| Other receivables                                                                                                                           |       | 64,484            |       | —                |       |
| Deferred income taxes                                                                                                                       |       | 566,918           |       | 576,467               |       |
| Asset held for sale                                                                                                                         |       | 300,000           |       | 300,000               |       |
| Other assets                                                                                                                                |       | 137,351           |       | 435,161               |       |
| ** **                                                                                                                                  |       | $                 | 14,083,365 |                  | $          | 15,475,832 |   |
| **Liabilities and Stockholders’ Equity**                                                                                               |       |              |       |                  |       |
| Current  liabilities:                                                                                                                       |       |              |       |                  |       |
| Current installments of  long-term debt                                                                                                     |       | $                 | 255,410    |                  | $          | 1,487,964 |   |
| Accounts payable                                                                                                                            |       | 507,974           |       | 523,939               |       |
| Accrued expenses and other                                                                                                                  |       | 537,338           |       | 814,005               |       |
| Total current liabilities                                                                                                                   |       | 1,300,722         |       | 2,825,908             |       |
| Long-term debt, excluding current installments                                                                                              |       | 768,660           |       | 848,319               |       |
| Other long-term liabilities                                                                                                                 |       | 56,761            |       | 42,087                |       |
| Commitments  and contingencies (Note 7)                                                                                                     |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                 |       |              |       |                  |       |
| Common stock, $.01 par value.  Authorized 2,000,000 shares; 1,189,850 issued and outstanding shares in 2006  and 1,188,850 in 2005 (Note 2) |       | 11,899            |       | 11,889                |       |
| Additional paid-in capital                                                                                                                  |       | 8,730,065         |       | 8,681,775             |       |
| Retained earnings                                                                                                                           |       | 3,215,258         |       | 3,065,854             |       |
| Total stockholders’ equity                                                                                                             |       | 11,957,222        |       | 11,759,518            |       |
| ** **                                                                                                                                  |       | $                 | 14,083,365 |                  | $          | 15,475,832 |   |

 

See accompanying notes toconsolidated financial statements.

2

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**WESTERN SIZZLIN CORPORATION**

**Consolidated Statements ofOperations**(Unaudited)
| ** **                                      | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                                      | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                       |       |                         |       |                         |       |   |   |   |   |
| Company-operated restaurants                    |       | $                            | 3,579,938  |                         | $          | 4,224,188 |   | $ | 6,577,611 |   | $ | 7,973,799 |   |
| Franchise operations                            |       | 1,040,372                    |       | 1,104,122                    |       | 2,093,672 |   | 2,185,944 |   |
| Other                                           |       | 96,415                       |       | 116,948                      |       | 191,092 |   | 229,555 |   |
| Total revenues                                  |       | 4,716,725                    |       | 5,445,258                    |       | 8,862,375 |   | 10,389,298 |   |
| Costs  and expenses:                            |       |                         |       |                         |       |   |   |   |   |
| Cost of company-operated  restaurants           |       | 2,292,610                    |       | 2,778,266                    |       | 4,409,119 |   | 5,329,889 |   |
| Cost of franchise operations                    |       | 521,662                      |       | 429,464                      |       | 970,630 |   | 924,343 |   |
| Other cost of operations                        |       | 87,852                       |       | 76,936                       |       | 171,522 |   | 165,410 |   |
| Restaurant operating expenses                   |       | 732,738                      |       | 837,288                      |       | 1,391,172 |   | 1,743,429 |   |
| General and administrative                      |       | 539,454                      |       | 636,095                      |       | 996,152 |   | 1,162,364 |   |
| Depreciation and amortization                   |       | 263,940                      |       | 270,705                      |       | 523,981 |   | 548,974 |   |
| Closed store expenses                           |       | —                       |       | —                       |       | — |   | 350,279 |   |
| Gain on settlement of  insurance claims         |       | —                       |       | —                       |       | — |   | (220,351 | ) |
| Total costs and expenses                        |       | 4,438,256                    |       | 5,028,754                    |       | 8,462,576 |   | 10,004,337 |   |
| Income from operations                          |       | 278,469                      |       | 416,504                      |       | 399,799 |   | 384,961 |   |
| Other  income (expense):                        |       |                         |       |                         |       |   |   |   |   |
| Interest expense                                |       | (32,255                      | )          | (68,921                      | )          | (78,347 | ) | (157,917 | ) |
| Loss on early extinguishment  of long term debt |       | —                       |       | —                       |       | (92,535 | ) | — |   |
| Interest income                                 |       | 16,534                       |       | 18,397                       |       | 37,100 |   | 34,194 |   |
| Equity in loss of joint  venture                |       | (34,194                      | )          | —                       |       | (38,228 | ) | — |   |
| Other                                           |       | 5,682                        |       | 23,792                       |       | 19,584 |   | 25,442 |   |
| ** **                                      |       | (44,233                      | )          | (26,732                      | )          | (152,426 | ) | (98,281 | ) |
| Income before income tax  expense               |       | 234,236                      |       | 389,772                      |       | 247,373 |   | 286,680 |   |
| Income  tax expense:                            |       |                         |       |                         |       |   |   |   |   |
| Current                                         |       | —                       |       | 10,200                       |       | — |   | 26,095 |   |
| Deferred                                        |       | 91,130                       |       | 137,547                      |       | 97,969 |   | 85,141 |   |
| Total income tax expense                        |       | 91,130                       |       | 147,747                      |       | 97,969 |   | 111,236 |   |
| Net Income                                      |       | $                            | 143,106    |                         | $          | 242,025 |   | $ | 149,404 |   | $ | 175,444 |   |
| Earnings  per share (Note 2):              |       |                         |       |                         |       |   |   |   |   |
| Basic                                           |       | $                            | .12        |                         | $          | .20 |   | $ | .13 |   | $ | .15 |   |
| Diluted                                         |       | $                            | .12        |                         | $          | .20 |   | $ | .12 |   | $ | .15 |   |

 

See accompanying notes toconsolidated financial statements.

3

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**WESTERN SIZZLIN CORPORATION**

**Consolidated Statement ofChanges in Stockholders’ Equity**Six Months Ended June 30, 2006

**(Unaudited)**
| ** **                                               | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------|------------|
| ** **                                               | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** **   | ** ** |
| ** **                                               | ** ** | **Shares**            | ** ** | **Dollars** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Total**  | ** ** |
| Balances, December 31, 2005                              |       | 1,188,850             |       | $           | 11,889     |           | $          | 8,681,775    |       | $          | 3,065,854  |   | $ | 11,759,518 |   |
| Net income                                               |       | —                |       | —      |       | —         |       | 149,404      |       | 149,404    |       |
| Compensation expense associated with stock options plans |       | —                |       | —      |       | 39,100         |       | —       |       | 39,100     |       |
| Stock options exercised                                  |       | 1,000                 |       | 10          |       | 9,190          |       | —       |       | 9,200      |       |
| Balances, June 30, 2006                                  |       | 1,189,850             |       | $           | 11,899     |           | $          | 8,730,065    |       | $          | 3,215,258  |   | $ | 11,957,222 |   |

 

See accompanying notes toconsolidated financial statements.

4

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**WESTERN SIZZLIN CORPORATION**

**Consolidated Statements ofCash Flows**(Unaudited)
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**              | ** ** |
| ** **                                                                         | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| Cash  flows from operating activities:                                             |       |                           |       |   |   |
| Net income                                                                         |       | $                              | 149,404    |   | $ | 175,444 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                           |       |   |   |
| Depreciation and amortization  of property and equipment                           |       | 208,832                        |       | 224,741 |   |
| Amortization of franchise  royalty contracts                                       |       | 315,148                        |       | 315,149 |   |
| Write off of financing costs  related to early extinguishment of long term debt    |       | 29,699                         |       | — |   |
| Amortization of financing  costs                                                   |       | 10,827                         |       | 9,086 |   |
| Loss on sale/disposal of  property and equipment                                   |       | 57,717                         |       | 359,776 |   |
| Gain from fire casualty                                                            |       | —                         |       | (220,351 | ) |
| Common stock related to  termination of Franchise Agreement                        |       | —                         |       | (15,000 | ) |
| Provision for doubtful  accounts                                                   |       | 50,000                         |       | 50,320 |   |
| Share based compensation                                                           |       | 39,100                         |       | — |   |
| Equity in loss of unconsolidated  joint venture                                    |       | 38,228                         |       | — |   |
| Provision for deferred income  taxes                                               |       | 97,969                         |       | 85,141 |   |
| (Increase) decrease in:                                                            |       |                           |       |   |   |
| Trade accounts receivable and  notes receivable                                    |       | 46,951                         |       | 6,965 |   |
| Income tax receivable                                                              |       | (6,310                         | )          | — |   |
| Insurance receivable — business  interruption                                 |       | 244,961                        |       | — |   |
| Other receivables                                                                  |       | 20,454                         |       | 48,126 |   |
| Inventories                                                                        |       | (16,868                        | )          | 47,460 |   |
| Prepaid expenses                                                                   |       | 13,777                         |       | (42,560 | ) |
| Other assets                                                                       |       | (22,526                        | )          | (267,327 | ) |
| Increase (decrease) in:                                                            |       |                           |       |   |   |
| Accounts payable                                                                   |       | (15,965                        | )          | 181,071 |   |
| Accrued expenses                                                                   |       | (276,667                       | )          | (503,093 | ) |
| Other long-term liabilities                                                        |       | 14,674                         |       | (14,841 | ) |
| Net cash provided by operating  activities                                         |       | 999,405                        |       | 440,107 |   |
| Cash  flows from investing activities:                                             |       |                           |       |   |   |
| Short term investments                                                             |       | 260,069                        |       | (2,338 | ) |
| Additions to property and  equipment                                               |       | (378,415                       | )          | (85,820 | ) |
| Proceeds from sale of property                                                     |       | 2,800                          |       | 8,000 |   |
| Proceeds from fire casualty                                                        |       | 784,993                        |       | 652,964 |   |
| Net cash provided by investing  activities                                         |       | 669,447                        |       | 572,806 |   |
| Cash  flows from financing activities:                                             |       |                           |       |   |   |
| Payments on long-term debt                                                         |       | (1,312,213                     | )          | (923,403 | ) |
| Cash received from exercise of  stock options                                      |       | 9,200                          |       | — |   |
| Net cash used in financing  activities                                             |       | (1,303,013                     | )          | (923,403 | ) |
| Net increase in cash and cash  equivalents                                         |       | 365,839                        |       | 89,510 |   |
| Cash and cash equivalents at beginning of period                                   |       | 1,664,848                      |       | 2,105,751 |   |
| Cash and cash equivalents at end of period                                         |       | $                              | 2,030,687  |   | $ | 2,195,261 |   |
| Supplemental  disclosure of cash flow information:                                 |       |                           |       |   |   |
| Cash payments for interest and  prepayment penalties                               |       | $                              | 141,337    |   | $ | 165,939 |   |
| Income taxes paid                                                                  |       | $                              | 16,341     |   | $ | 25,225 |   |
|                                                                               |       |                           |       |   |   |
| Non-cash  investing activities:                                                    |       |                           |       |   |   |
| Reclassification of deposits from other assets to property and  equipment          |       | $                              | 320,336    |   | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

5

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**WESTERN SIZZLINCORPORATION**

**Notes to Consolidated Financial Statements**

**Six Months Ended June 30, 2006 and 2005**

**(Unaudited)**

**(1)           General**

The accompanying unaudited consolidated financial statements of WesternSizzlin Corporation, (the “Company”) have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial reporting information and the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and notes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all material reclassifications and adjustments,consisting of normal recurring accruals, considered necessary for a fairpresentation of the results of operations, financial position and cash flowsfor each period shown have been included. The unaudited consolidated financialstatements and notes are presented as permitted by Form 10-Q and do notcontain certain information included in the Company’s annual consolidatedfinancial statements and notes. For further information, refer to theconsolidated financial statements and notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2005.

**(2)           Reverse Stock Split**

On July 31, 2006, the Board of Directors approved a 1-for-10 reversestock split ratio. The record date of the transaction is August 10, 2006. Nofractional shares will be issued in connection with the reverse stock split. Thepar value of the Common Stock will remain at $0.01 per share after the reversestock split. Unless otherwise indicated, the capital stock accounts and allshare and earnings per share data in this report give effect to the reversestock split, applied retroactively to all periods presented.

**(3)           Stock Options**

The Company has three stock option plans: the 2005 Stock Option Plan,the 2004 Non-Employee Directors’ Stock Option Plan, and the 1994 Incentive andNon-qualified Stock Option Plan. Options are no longer granted under the 1994Plan and only 7,500 options granted to James C. Verney remain outstandingunder that plan. Under the 2005 and 2004 Plans, employees and directors may begranted options to purchase shares of common stock at the fair market value onthe date of the grant. During the six months ended June 30, 2006, underthe provisions of the plans, the contract terms of stock options for resigningdirectors were reduced and have been reflected in the computations of theweighted average contractual term of the outstanding options. Since thismodification did not increase the value of the awards, the modification had noimpact on compensation expense.

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

As a result of adopting SFAS No.123R, the Company recorded $34,000 and$39,100 of compensation expense for stock options in General and Administrativeexpenses for the three and six months ended June 30, 2006, which had theeffect 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

6

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share by $0.02 for the six months ended June 30, 2006. Theadoption of 123R had no impact on the Company’s cash flows.

Options granted under the 2005 and 2004 Plans vest at the date of thegrant, with the exception of options granted to James C. Verney whichvested according to a schedule in his Employment Agreement. The fair value ofeach option award was estimated on the date of grant using the Black-Scholesoption-pricing model. Assumptions utilized in the model were evaluated andrevised, as necessary, to reflect market conditions and experience. Therisk-free interest rate for periods within the contractual life of the optionis based on the U.S. Treasury yield curve in effect at the time of the grant. Expectedvolatilities are based on the historical volatility of the Company’s stock fora period equal to the expected term of the options. The expected term of theoptions represents the period of time that options granted are outstanding andis estimated using historical exercise and termination experience.

Prior to the adoption of SFAS 123R, the benefit of tax deductionsin excess of recognized stock compensation expense was reported as a reductionof taxes paid within operating cash flows. SFAS 123R requires that suchbenefits be recognized as a financing cash flow. The benefit of tax deductionsin excess of recognized stock compensation expense for the six months ended June 30,2006 was immaterial.

The following table illustrates the effect of net earnings and earningsper share if the Company had applied the fair value recognition provisions ofSFAS No. 123 to options granted under the Company’s option plans for thethree and six months ended June 30, 2005:

|                                                                                                                                                       | ** ** | **Three Months** | ** ** | **Six Months** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                                            | ** ** | **Ended**             | ** ** | **Ended**           | ** ** |
| ** **                                                                                                                                            | ** ** | **June 30,**     | ** ** | **June 30,**   | ** ** |
| ** **                                                                                                                                            | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Net Income:                                                                                                                                           |       |                  |       |                |       |
| As reported                                                                                                                                           |       | $                     | 242,025    |                | $          | 175,444 |   |
| Deduct total stock-based employee compensation  expense determined under fair value based method for all outstanding and  unvested awards, net of tax |       | 24,552                |       | 24,552              |       |
|                                                                                                                                                  |       |                  |       |                |       |
| Pro forma                                                                                                                                             |       | $                     | 217,473    |                | $          | 150,892 |   |
|                                                                                                                                                  |       |                  |       |                |       |
| Basic and  diluted net income per share:                                                                                                              |       |                  |       |                |       |
| As reported                                                                                                                                           |       | $                     | 0.20       |                | $          | 0.15 |   |
| Pro forma                                                                                                                                             |       | $                     | 0.18       |                | $          | 0.13 |   |

 

The fair value of options granted during the six months ended June 30,2006 and 2005 was estimated on the date of grant using the Black-Scholes optionpricing model based on the following weighted average assumptions in the tablebelow:

|                          | ** ** | **Six Months**          | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **Ended June 30,** | ** ** |
| ** **               | ** ** | **2006**                     | ** ** | **2005** | ** ** |
|                     |       |                         |       |   |   |
| Expected term  (years)   |       | 5                            |       | 5 |   |
| Risk-free  interest rate |       | 5.08                         | %          | 3.72 | % |
| Volatility               |       | 84.03                        | %          | 53.60 | % |
| Dividend yield           |       | —                       |       | — |   |

 

7

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There were 5,000 and 6,000 stock options granted during the three andsix month periods ended June 30, 2006, which had an estimated fair valueat the date of grant of $5.10 for the 1,000 stock options granted during thefirst quarter of 2006 and $6.80 for the 5,000 stock options granted during thethree months ended June 30, 2006. The estimated weighted average fairvalue of the stock options granted during the six-month period ended June 30,2006 was $6.50. There were 9,000 stock options granted during the six-monthperiod ended June 30, 2005, all at an estimated fair value of $4.40.

The following table summarizes stock options outstanding as of June 30,2006, as well as activity during the six-month period then ended:

|                              | ** ** | ** **      | ** ** | **Exercise Price** | ** ** | **Contractual** | ** ** | ** **    | ** ** |
|------------------------------|------------|-----------------|------------|-------------------------|------------|-----------------|------------|---------------|------------|
| ** **                   | ** ** | ** **      | ** ** | **Per Share**      | ** ** | **Term**        | ** ** | **Aggregate** | ** ** |
| ** **                   | ** ** | **Options**     | ** ** | **Weighted**            | ** ** | **Weighted**    | ** ** | **Intrinsic** | ** ** |
| ** **                   | ** ** | **Outstanding** | ** ** | **Average**             | ** ** | **Average**     | ** ** | **Value**     | ** ** |
| Balance, December 31, 2005   |       | 67,000          |       | $                       | 9.00       |            |       |          |       |   |
| Granted                      |       | 6,000           |       | 9.80                    |       |            |       |          |       |
| Exercised                    |       | (1,000          | )          | 9.20                    |       |            |       | $             | 0          |   |
| Expired                      |       | (7,000          | )          | 9.20                    |       |            |       |          |       |
| Balance,  June 30, 2006 |       | 65,000          |       | $                       | 9.00       |            | 4.9        |          | $          | 114,500 |   |

 

All options outstanding at June 30, 2006 are exercisable. At June 30,2006, there were 27,000 shares available for future grants under the plan. Thepresentation above reflects the reverse stock split effective August 10, 2006(Note 2).

**(4)           Goodwill and Other Intangible Assets**

The Company conforms to the provisions of Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill and Other IntangibleAssets.” Under SFAS No. 142, goodwill and intangible assets deemed to haveindefinite lives are reviewed for impairment and written down and charged toresults of operations when their carrying amount exceeds their estimated fairvalue. The Company is required to perform impairment tests each year, orbetween yearly tests in certain circumstances, for goodwill. There can be noassurance that future impairment tests will not result in a charge to earnings.

Therewere no changes in the net carrying amount of goodwill for the three andsix-months ended June 30, 2006 and 2005.

*AmortizingIntangible Assets*

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

|                                | ** ** | ** **   | ** ** | **As of June 30, 2006** | ** ** | ** **       | ** ** |
|--------------------------------|------------|--------------|------------|---------------------------------------------|------------|------------------|------------|
| ** **                     | ** ** | **Gross**    | ** ** | **Weighted average**                   | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **carrying** | ** ** | **amortization**                            | ** ** | **Accumulated**  | ** ** |
| ** **                     | ** ** | **amount**   | ** ** | **period**                                  | ** ** | **amortization** | ** ** |
| Amortizing  intangible assets: |       |         |       |                                        |       |             |       |
| Franchise  Royalty Contracts   |       | $            | 9,454,431  |                                        | 15.0 yrs.  |             | $          | 7,878,693 |   |
|                                |            |              |            |                                             |            |                  |            |  |  |

 

8

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Aggregate amortization expense for amortizing intangible assets for thethree and six-month periods ended June 30, 2006 was $157,574 and $315,148,respectively. Estimated amortization expense is $630,300 per year throughDecember 31, 2008.

**(5)           Earnings Per Share**

Basic earnings per share excludes dilution and is computed by dividingincome available to common stockholders by the weighted-average number ofcommon shares outstanding for the period. Diluted earnings per share reflectsthe potential dilution that could occur if securities or other contracts toissue common stock were exercised or converted into common stock or resulted inthe issuance of common stock that then shared in the earnings of the Company. Stockoptions for 1,000 shares of common stock for the three and six month periodsended June 30, 2006 and 26,500 and 17,500 shares for the three and sixmonth period ended June 20, 2005 were not included in computing dilutedearnings because the effect of these options are anti-dilutive. Thepresentation reflects the reverse stock split effective August 10, 2006 (Note2).

The following is areconciliation of the numerators and denominators of the basic and dilutedearnings per share computations for the periods indicated:
| ** **                                 | ** ** | ** **      | ** ** | **Weighted**      | ** ** | ** **         | ** ** |
|--------------------------------------------|------------|-----------------|------------|-------------------|------------|--------------------|------------|
| ** **                                 | ** ** | ** **      | ** ** | **Average**       | ** ** | **Earnings**       | ** ** |
| ** **                                 | ** ** | **Income**      | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
| ** **                                 | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
| **Three months ended  June 30, 2006** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net income — basic                    |       | $               | 143,106    |              | 1,188,967  |               | $          | .12 |   |
| Net income — diluted                  |       | $               | 143,106    |              | 1,194,066  |               | $          | .12 |   |
| ** **                                 | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| **Three  months ended June 30, 2005** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net income — basic                    |       | $               | 242,025    |              | 1,188,857  |               | $          | .20 |   |
| Net income — diluted                  |       | $               | 242,025    |              | 1,189,095  |               | $          | .20 |   |
| **Six months ended June 30,  2006**   | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net income — basic                    |       | $               | 149,404    |              | 1,188,967  |               | $          | .13 |   |
| Net income — diluted                  |       | $               | 149,404    |              | 1,197,841  |               | $          | .12 |   |
| **Six  months ended June 30, 2005**   | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net income — basic                    |       | $               | 175,444    |              | 1,189,857  |               | $          | .15 |   |
| Net  income — diluted                 |       | $               | 175,444    |              | 1,189,976  |               | $          | .15 |   |

 

**(6)           Closed Store Expense**

Closed store expense for the six months ended June 30, 2005 was$350,279, which included impairments of $128,471 associated with the end of asubleased property due to a buyout of the lease and impairments related to theclosing of a Company-operated restaurant of $221,808. There were no additionalclosed store expenses or impairments recorded in the six months ended June 30,2006.

**(7)           Reportable Segments**

The Company has definedtwo reportable segments: Company-operated restaurants and franchising andother. The Company-operated restaurant segment consists of the operations ofall Company-operated restaurants and derives its revenues from restaurantoperations. The franchising and other segment consists primarily of franchisesales and support activities and derives its revenues from sales of franchiseand development rights and collection of royalties from franchisees. 

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Generally, the Companyevaluates performance and allocates resources based on income from operationsbefore income taxes. Capital costs are allocated to segments based uponpredetermined rates or actual or estimated resource usage. Corporate andfranchise support expenses of $442,009 and $862,272 for three and six monthsended June 30, 2006 and $445,209 and $864,934 for the three and six monthsended June 30, 2005, are allocated entirely to franchising and other andare not allocated to Company-operated restaurants. The accounting policies ofthe segments are the same as those described in the summary of significantaccounting policies.

Reportable segments are businessunits that provide different products or services. Separate management of eachsegment is required because each business unit is subject to differentoperational issues and strategies. Through June 30, 2006, all revenues foreach business segment were derived from business activities conducted withcustomers located in the United States. No single external customer accountedfor 10% or more of the Company’s consolidated revenues.

The following table summarizes reportable segment information:
| ** **                             | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                             | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                             | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Revenues  from reportable segments:    |       |                         |       |                         |       |   |   |   |   |
| Restaurants                            |       | $                            | 3,579,938  |                         | 4,224,188  |   | 6,577,611 |   | 7,973,799 |   |
| Franchising and other                  |       | 1,136,787                    |       | 1,221,070                    |       | 2,284,764 |   | 2,415,499 |   |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Total revenues                         |       | $                            | 4,716,725  |                         | 5,445,258  |   | 8,862,375 |   | 10,398,298 |   |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Depreciation  and amortization:        |       |                         |       |                         |       |   |   |   |   |
| Restaurants                            |       | $                            | 96,409     |                         | 99,549     |   | 187,144 |   | 205,643 |   |
| Franchising and other                  |       | 167,531                      |       | 171,156                      |       | 336,837 |   | 343,331 |   |
| Total depreciation and  amortization   |       | $                            | 263,940    |                         | 270,705    |   | 523,981 |   | 548,974 |   |
| Interest  expense:                     |       |                         |       |                         |       |   |   |   |   |
| Restaurants                            |       | $                            | 32,247     |                         | 68,921     |   | 78,278 |   | 156,897 |   |
| Franchising and other                  |       | 8                            |       | —                       |       | 69 |   | 1,020 |   |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Total interest expense                 |       | $                            | 32,255     |                         | 68,921     |   | 78,347 |   | 157,917 |   |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Interest  income:                      |       |                         |       |                         |       |   |   |   |   |
| Restaurants                            |       | $                            | 16,484     |                         | 16,989     |   | 35,988 |   | 31,417 |   |
| Franchising and other                  |       | 50                           |       | 1,408                        |       | 1,112 |   | 2,777 |   |
| Total interest income                  |       | $                            | 16,534     |                         | 18,397     |   | 37,100 |   | 34,194 |   |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Income  before income tax expense:     |       |                         |       |                         |       |   |   |   |   |
| Restaurants                            |       | $                            | 193,212    |                         | 345,298    |   | 119,782 |   | 218,237 |   |
| Franchising and other                  |       | 41,024                       |       | 44,474                       |       | 127,591 |   | 68,443 |   |
|                                   |       |                         |       |                         |       |   |   |   |   |
| Total income before income tax expense |       | $                            | 234,236    |                         | 389,772    |   | 247,373 |   | 286,680 |   |

 

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|                       | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
|-----------------------|------------|-------------------|------------|-------------------|------------|
| ** **            | ** ** | **2006**          | ** ** | **2005**          | ** ** |
| Total  assets:        |       |              |       |              |       |
| Restaurants           |       | $                 | 10,231,942 |              | 10,378,918 |   |
| Franchising and other |       | 3,851,423         |       | 5,217,926         |       |
|                  |       |              |       |              |       |
| Total assets          |       | $                 | 14,083,365 |              | 15,596,844 |   |

 

**(8)           Contingencies**

In the case of allknown contingencies, the Company accrues for an obligation, including estimatedlegal costs, when a loss is probable and the amount is reasonably estimable. Asfacts concerning contingencies become known to the Company, the Companyreassesses its position with respect to accrued liabilities and other expenses.These estimates are subject to change as events evolve and as additionalinformation becomes available during the litigation process. As of June 30,2006, the Company has accrued $100,000 related to the items discussed below.

**LittleRock, Arkansas Lease**

One June 30,2006 the Company’s lease of four restaurant premises in the Little Rock,Arkansas, metropolitan area, expired. The Company had subleased three of thefour leased premises. The owner/landlord of the Little Rock premises hasasserted that the Company will be responsible for certain repair andmaintenance expenses for the premises, and for the replacement of certainequipment. One of the Company’s subtenants may assert some claim against theCompany for termination of the Lease prior to the expiration of its sublease. TheCompany has certain claims against the owner/landlord arising out of the leaserelationship. All parties are currently engaged in discussions to determine andsatisfy the respective obligations of the parties and to resolve any and allpossible claims. The Company has accrued an amount that it believes is areasonable estimate of its obligation under the lease.

**FFCA**

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

Following the May 15, 2003 termination of the tenancies at-will, theCompany advised five franchisees who continued to operate former Quincy’s unitsat that time to make any rent payments directly to FFCA. With regard to elevenother former Quincy’s units, the Company became aware, on or about May 15,2003, that the franchisees had elected to make their payments directly to FFCAand it is the Company’s understanding that FFCA has accepted these payments. Therecan be no assurances that the franchisees have made their payments and willcontinue to make their lease payments in the future or that they even continueto operate these restaurants. The Company’s estimate of the total payments thatwere made directly to the lessor for these

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sixteen franchisees, or former franchisees, is approximately $3,548,000through December 31, 2005.

While the Company disputes any liability for any of the followingamounts, to the Company’s knowledge, as of June 30, 2006 a total ofapproximately $2,850,000 of rental payments had not been made by either thefranchisees or by the Company with regard to the above-referenced nine closedproperties.

In accordance with the Company’s position, the Company has returned toFFCA any invoice for rent expense, or tax statement, received after May 15,2003, with a cover letter explaining that the Company is not responsible forany such amounts. The Company intends to vigorously contest any potentialclaims asserted by General Electric Franchise Finance Corporation. While theCompany has previously engaged in discussions with the Lessor of the propertiesto resolve any rental payments claimed by the Lessor under the Agreements, itis not possible at this time to determine the outcome of these discussions.

**Dickson, Tennessee Claim**

In 1994, the Company entered into a lease agreement for a restaurantlocated in Dickson, Tennessee. The lease agreement has an original term of 15years. The Company ceased operations on the premises as a restaurant in 1996and subsequently subleased the property. The location had been vacant sinceSeptember 2001. In June 2004, the Company advised the landlord that theCompany was surrendering the property. The Company asserted that the landlordwas obligated to attempt to find a replacement tenant.

Thereafter, the landlord filed several collection actions allegingdefault under the lease agreement and seeking collection of unpaid rent, realestate taxes and attorney’s fees. The landlord’s initial filings were resolvedwith the payment of rent and related obligations. Later filings were defendedon the basis that the landlord had failed to mitigate any damages. Judgmentsgranted the landlord in a total amount in excess of $142,000 were appealed.

On April 11, 2006, the Company resolved all disputes with the landlordwith the execution of a formal settlement agreement. The Company has beenreleased from any further obligations under the lease, and all pendingjudgments have been satisfied, in exchange for a payment by the Company to thelandlord in the amount of $177,000, also made on April 11, 2006.

**Chubb Claim**

In November 2004, Chubb Insurance filed suit in the Circuit Court forthe City of Roanoke against our subsidiary, seeking recovery of allegedlyunpaid premiums in the amount of $97,249. Western Sizzlin Stores has never beenbilled by Chubb and never had any direct contractual relations with Chubb. Paymentswere sent to an insurance broker handling insurance needs for Western SizzlinStores. Chubb’s claim was settled on February 6, 2006 with a payment of$15,000.

**Lawrenceville, Georgia Casualty**

On July 11, 2004, the building, improvements, and contents locatedon real property owned by the Company in Lawrenceville, Georgia were completelydestroyed by fire. As a result of this casualty, the Company terminated the leaseof the tenant operating the restaurant on these premises. Insurance proceeds of$591,000 were received in April 2005 and a gain on the casualty of $220,351 wasrecorded as gain on settlement of insurance claims during the first quarter of2005. The land is currently for sale and the Company does not anticipate anyimpairment on this property based on current estimates of fair value. Inaccordance with the note payable agreement related to the property, theinsurance proceeds were remitted to the Company’s lender on April 8, 2005. Subsequently,in February 2006, the remainder of the loan balance, $280,663, was paid off andthe lender accepted the total repayment of the loan without the application ofa prepayment penalty.

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**Waldorf, Maryland Casualty**

In July 2005, a building, improvements, and contents, located uponreal property leased by the Company for operation of a company-owned GreatAmerican Buffet restaurant, in Waldorf, Maryland, were totally destroyed byfire. The Company insured the premises, including buildings and contents,against casualty, such as fire. The Company also insured the premises for theinterruption of business income. The fire occurred shortly after the Companyhad provided timely notice to the landlord of our desire to extend the leasethrough a renewal term ending on December 31, 2010. Since the fire, the Companyrepeatedly demanded that the landlord rebuild the premises and asserted thatthe landlord was responsible for any cost to rebuild in excess of the availableinsurance proceeds.

In August 2005, the landlord filed an action for a declaratory judgmentin the Circuit Court for Charles County, Maryland. On or about December 14,2005, the Company entered into a settlement agreement with the Landlord whichresolved all litigation claims regarding the parties’ respective interests inthe real property and insurance proceeds covering real and personal propertyinvolved in the casualty. Pursuant to this agreement the Company receivedinsurance proceeds of approximately $1,030,000 in the first quarter of 2006.

**Other**

The Company is involved in various other claims and legal actionsarising in the ordinary course of business. In the opinion of the management,the ultimate disposition of these matters will not have a material adverse effecton the Company’s financial condition, results of operations or liquidity.

**(9)           Change in Estimate**

At December 31, 2005, $83,500 had beenaccrued for management’s estimate of losses on subleases through the end of thelease termination date of June 30, 2006. Based on a subsequent guaranteeobtained on the rent and subsequent collection of past due rents, the Companyreversed the accrual as of March 31, 2006 and has included the reversal as areduction of restaurant operating expenses. There has been no change inestimate as of June 30, 2006, the lease termination date.

**(10)         Early Extinguishments of Long-Term Debt**

During the first quarter of 2006, the Company paid off three loans. Thepayoffs included a write off of financing costs associated with the earlyextinguishments of long-term debt of $29,699 and a prepayment penalty assessedon one of the loans of $62,836.

**(11)         Investment in Unconsolidated Joint Venture**

The Company is a partner in a 50/50 jointventure with a franchisee, for a new restaurant in Harrisonburg, Virginia. DuringOctober 2005, the joint venture entered into a loan agreement for $3.05 millionand the Company has guaranteed 50% of the loan obligation. The Companyestimated the fair value of the guarantee to be approximately $30,000 and recordedthe amount in other long-term liabilities and its investments in unconsolidatedjoint venture on the accompanying balance sheet at December 31, 2005. There wasno change at June 30, 2006 based on the Company’s current estimate of thefair value of the guarantee. The term of the guarantee extends through July 1,2026 and the Company would be required to perform under the guarantee shouldthe joint venture not be able to meet its scheduled principal and interestpayments. Pursuant to the joint venture agreement, a cash contribution of$300,000 from each 50/50 partner was also made at the closing of thisfinancing. The Company accounts for its investment using the equity method andthe Company’s share of the net loss for the joint venture of $67,873 and $76,979for the three and six months ended June 30, 2006 is included in equity inloss of unconsolidated joint venture. The restaurant is scheduled to openduring the fourth quarter of 2006.

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**FinancialData**

The following is selected financial information for the joint ventureat June 30, 2006:

|                                       | ** ** | **Three Months**       | ** ** | **Six Months**         | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                            | ** ** | **June 30, 2006** | ** ** | **June 30, 2006** | ** ** |
| ** **                            | ** ** | **(unaudited)**             | ** ** | **(unaudited)**             | ** ** |
| **Statement  of Operations Data:**    |       |                        |       |                        |       |
| Total revenues                        |       | $                           | —     |                        | $          | — |   |
| Prototype plan expense                |       | 5,226                       |       | 10,963                      |       |
| Interest                              |       | 8,227                       |       | 14,563                      |       |
| Net loss                              |       | (67,873                     | )          | (76,979                     | )          |
| **Balance  Sheet Data:**              |       |                        |       |                        |       |
| Cash                                  |       |                        |       | $                           | 16,730     |   |
| Land and leasehold improvements       |       |                        |       | 1,299,910                   |       |
| Loan costs, net                       |       |                        |       | 14,233                      |       |
| Total assets                          |       |                        |       | 1,331,805                   |       |
| Loan payable                          |       |                        |       | 691,681                     |       |
| Accounts payable and accrued expenses |       |                        |       | 11,503                      |       |
| Members’  equity                 |       |                        |       | 479,785                     |       |
|                                       |            |                             |            |                             |            |  |  |

 

**(12)         Impact of Recently Issued Accounting Standards**

In July 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in a company’s financial statements in accordance with FAS 109,“Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. The requirements ofFIN 48 are effective for our fiscal year beginning January 1, 2007. We arein the process of evaluating this guidance and therefore have not yetdetermined the impact that FIN 48 will have on our financial statements uponadoption.

**(13)         Subsequent Event**

Subsequent to June 30, 2006, the Company has invested inmarketable securities including the use of margin accounts to purchase suchsecurities. The investments have been made by Mr. Biglari, the Company’sChairman, subject to various limitations and reporting requirements set by theBoard of Directors.

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

**Overview**

The following discussion may include forward-looking statementsincluding anticipated financial performance, business prospects, the futureopening of Company-operated and franchised restaurants, anticipated capitalexpenditures, and other matters. All statements other than statements ofhistorical fact are forward-looking statements. Section 27A of theSecurities Act of 1933 (as amended) and Section 21E of the SecuritiesExchange Act of 1934 (as amended) provide safe harbors for forward-lookingstatements. In order to comply with the terms of these safe harbors, theCompany notes that a variety of factors, individually or in the aggregate,could cause the Company’s actual results and experience to differ materiallyfrom the anticipated results or other expectations expressed in the Company’sforward-looking statements including, without limitation, the following: theability of the Company or its franchisees to obtain suitable locations

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for restaurant development; consumer spending trends and habits;competition in the restaurant segment with respect to price, service, location,food quality and personnel resources; weather conditions in the Company’soperating regions; laws and government regulations; general business andeconomic conditions; availability of capital; success of operating initiativesand marketing and promotional efforts; and changes in accounting policies. Inaddition, the Company disclaims any intent or obligation to update thoseforward-looking statements.

The Company operated and franchised a total of 135 restaurants locatedin 19 states, including 5 Company-owned and 130 franchise restaurants as of June 30,2006. The restaurants include a family steakhouse concept and a steak andbuffet concept.

**Corporate Strategy**

The Company’s objective is to maximize its intrinsic business value pershare over the long term. In meeting this objective, the Company will evaluateall investment alternatives to achieve above-average returns on capital. TheCompany will continue to focus on franchising restaurants and has made effortsbeginning in the second quarter of 2006 on marketing the Wood Grill by WesternSizzlin buffet concept. Wood Grill by Western Sizzlin is very similar to the GreatAmerican Buffet Company-operated restaurants.

The Board of Directors delegated authority to its Chairman, SardarBiglari, to make capital allocation and investment decisions concerning theCompany’s surplus cash, subject to various limitations and reportingrequirements set by the Board and/or the Audit & Finance Committee of theBoard. Mr. Biglari is also the Chairman and Chief Executive Officer of BiglariCapital Corp., an investment advisory firm that is the general partner of TheLion Fund, LP, a private investment fund. None of Mr. Biglari, Biglari CapitalCorp., or The Lion Fund, LP will receive any compensation for any suchinvestment activities undertaken on behalf of the Company. The Lion Fund, LPbeneficially owned approximately 24.3% of the Company’s outstanding commonstock as of June 30, 2006. As of the date of this filing, Mr. Biglari hasauthority to manage surplus cash up to $2.5 million, and, in addition, hasauthority to borrow a maximum of $1 million towards making additionalinvestments. The Company is currently investing in marketable securities. Investmentswere made subsequent to June 30, 2006.

To clarify the expectations that the Board of Directors has withrespect to the investment of the Company’s surplus cash, the Board has renounced,in accordance with Delaware law, any interest or expectancy of the Companyassociated with any investment opportunities in securities that may come to theattention of Mr. Biglari or any employee, officer, director or adviser toBiglari Capital Corp., and/or The Lion Fund, LP, and their affiliatedinvestment entities, if any, who also serves as an officer or director of theCompany (each a “covered party”) other than (a) investment opportunities thatcome to such covered party’s attention directly and exclusively in such coveredparty’s capacity as a director, officer or employee of the Company, (b) controlinvestments in companies in the restaurant industry, and (c) investmentopportunities in companies or assets with a significant role in the Company’srestaurant businesses including investment in real estate currently leased bythe Company or its franchisees, or in suppliers for which the Company is asubstantial customer representing over 10% of such companies’ revenues butexcluding pre-existing investments of Mr. Biglari, Biglari Capital Corp. and/orThe Lion Fund, LP, as of July 11, 2006, the date of the Board’s delegationof authority.

The remodeling of two Company-operated locations in Northern Virginiais complete. The Chantilly, Virginia location, originally planned as a locationfor a Company-operated restaurant opening in 2006, is currently being marketedas a franchised location. The Western Sizzlin Flamekist Grill joint ventureproject in Fayetteville, Georgia has been abandoned. The Company had incurredapproximately $75,000 in expenses on the Flamekist Grill project to date. TheCompany continues to research the Flamekist Grill concept as a franchise modelfor potential investors in our brand, but has no commitments at this time.

A strategic alliance with Star Buffet, Inc. was announced in April2006. Star Buffet announced plans to convert certain of its existingrestaurants to the Western Sizzlin brand and to test a newly

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developed Western Sizzlin buffet prototype. As of June 30, 2006, StarBuffet had not opened or converted any restaurants into a Western Sizzlinbrand.

On August 10, 2006, the Company effected a 1-for-10 reverse stock splitpursuant to the discretionary authority granted by the stockholders at theAnnual Meeting of Stockholders on June 20, 2006.

**Equity Price Risk**

The Company seeks to invest in stocks of businesses at prices belowtheir intrinsic business value. The Company’s preferred strategy is to allocatea meaningful amount of capital in each investee, resulting in concentration. Asof the date of this filing, the equity investment portfolio included one stock.

The carrying values of the Company’s equity securities are exposed to marketprice fluctuations, which may be accentuated by a concentrated equityportfolio. A significant decline in the price of major investments may producea large decrease in the Company’s stockholder’s equity.

Operating decisions for the Company are made by management. Asdescribed above, investment and all other capital allocation decisions are madefor the Company by Mr. Biglari, Chairman of the Board of Directors.

**Results of Operations**

Netincome for the three and six months ended June 30, 2006 was $143,106 and$149,404 compared to net income of $242,025 and $175,444 for the three and sixmonths ended June 30, 2005.

The following table sets forth for the periods presented the percentagerelationship to total revenues of certain items included in the consolidatedstatements of income and certain restaurant data for the periods presented:

|                                         | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                              | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                               |       |                         |       |                         |       |   |   |   |   |
| Company-operated restaurants            |       | 75.9                         | %          | 77.6                         | %          | 74.2 | % | 76.8 | % |
| Franchise royalties and fees            |       | 22.1                         |       | 20.3                         |       | 23.6 |   | 21.0 |   |
| Other sales                             |       | 2.0                          |       | 2.1                          |       | 2.2 |   | 2.2 |   |
| Total revenues                          |       | 100.0                        |       | 100.0                        |       | 100.0 |   | 100.0 |   |
|                                    |       |                         |       |                         |       |   |   |   |   |
| Cost of company-operated  restaurants   |       | 48.6                         |       | 51.0                         |       | 49.8 |   | 51.3 |   |
| Cost of franchise operations            |       | 11.1                         |       | 7.9                          |       | 11.0 |   | 8.8 |   |
| Other cost of operations                |       | 1.9                          |       | 1.4                          |       | 1.9 |   | 1.6 |   |
| Restaurant operating expenses           |       | 15.5                         |       | 15.4                         |       | 15.7 |   | 16.8 |   |
| General and administrative              |       | 11.4                         |       | 11.7                         |       | 11.2 |   | 11.2 |   |
| Depreciation and amortization           |       | 5.6                          |       | 5.0                          |       | 5.9 |   | 5.3 |   |
| Closed store expenses                   |       | —                       |       | —                       |       | — |   | 3.4 |   |
| Gain on settlement of  insurance claims |       | —                       |       | —                       |       | — |   | (2.1 | ) |
| Total costs and expenses                |       | 94.1                         |       | 92.4                         |       | 95.5 |   | 96.3 |   |
| Income from operations                  |       | 5.9                          |       | 7.6                          |       | 4.5 |   | 3.7 |   |
|                                    |       |                         |       |                         |       |   |   |   |   |
| Other income (expense)                  |       | (.9                          | )          | (0.5                         | )          | (1.7 | ) | (.9 | ) |
|                                    |       |                         |       |                         |       |   |   |   |   |
| Income before income tax  expense       |       | 5.0                          |       | 7.1                          |       | 2.8 |   | 2.8 |   |
| Income tax expense                      |       | 1.9                          |       | 2.7                          |       | 1.1 |   | 1.1 |   |
| Net income                              |       | 3.1                          | %          | 4.4                          | %          | 1.7 | % | 1.7 | % |

 

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|                                          | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                               | ** ** | **2006**                     | ** ** | **2005**                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Restaurant  Data**                     |       |                         |       |                         |       |   |   |   |   |
| Number  of Company-Operated Restaurants: |       |                         |       |                         |       |   |   |   |   |
| Beginning of period                      |       | 5                            |       | 6                            |       | 5 |   | 7 |   |
| Opened                                   |       | —                       |       | —                       |       | — |   | — |   |
| Closed                                   |       | —                       |       | —                       |       | — |   | 1 |   |
| Franchised                               |       | —                       |       | —                       |       | — |   | — |   |
| End of period                            |       | 5                            |       | 6                            |       | 5 |   | 6 |   |
|                                     |       |                         |       |                         |       |   |   |   |   |
| Number  of U.S. Franchised Restaurants:  |       |                         |       |                         |       |   |   |   |   |
| Beginning of period                      |       | 133                          |       | 146                          |       | 135 |   | 147 |   |
| Opened                                   |       | —                       |       | 2                            |       | — |   | 2 |   |
| Closed                                   |       | 3                            |       | 4                            |       | 5 |   | 5 |   |
| End of period                            |       | 130                          |       | 144                          |       | 130 |   | 144 |   |

 

**Revenues**

Company-operatedrestaurants revenues decreased by $644,250 (15.3%) to $3.6 million for thethree months ended June 30, 2006 as compared to $4.2 million for thecomparable three months ended June 30, 2005. Revenues for Company-Operatedrestaurants decreased $1.4 million (17.5%) to $6.6 million for thesix months ended June 30, 2006 as compared to $8.0 million for thecomparable six months ended June 30, 2005. The decreases are largelyattributable to the closing of a Company-operated location in February 2005,resulting in approximately $180,000 in lost revenues for the six months ended June 30,2006, a closing of a Company-operated location in July 2005 due to a totalloss by fire casualty resulting in approximately $506,000 in lost revenues forthe six months ended June 30, 2006, and the temporary closing of aCompany-operated location in Northern Virginia for three weeks during the sixmonths ended June 30, 2006 for remodel. Additionally, same store sales forthe three months ended June 30, 2006 experienced an increase of .74% and adecrease of .95% for the six months ended June 30, 2006, excluding the comparableresults of the Manassas, Virginia location which was under remodel during thefirst quarter of 2006.

Franchiseand other revenues decreased 6.9% to $1.1 million for the three monthsended June 30, 2006 as compared to $1.2 million for the comparablethree months ended June 30, 2005. Franchise and other revenues decreased5.4% to $2.3 million for the six months ended June 30, 2006 ascompared to $2.4 million for the six months ended June 30, 2005. Thedecreases are attributable to fewer franchised units in the system at June 30,2006 as compared to June 30, 2005. Same store sales for the three and sixmonths ended June 30, 2006, experienced an overall increase of 3.15% and2.57%, respectively.

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######  

**Costs and Expenses**

Costof Company-operated restaurants, consisting primarily of food, beverage, andemployee costs decreased $486,000 (17.5%) to $2.3 million for the threemonths ended June 30, 2006 from $2.8 million for the three monthsended June 30, 2005. These costs for the three month periods decreased asa percentage of total revenues from 51.0% in 2005 to 48.6% in 2006. For the sixmonth period ended June 30, 2006, cost of Company-operated restaurantsdecreased $921,000 (17.3%) to $4.4 million from $5.3 million in 2005.These costs for the six month periods decreased as a percentage of totalrevenues from 51.3% in 2005 to 49.8% in 2006. The decrease in the costs werelargely attributable to the closing of a Company-operated location in February2005 and the closing due to a fire of a Company-operated location in July 2005.

Costof franchise operations and other cost of operations were $610,000 for thethree months ended June 30, 2006 compared to $507,000 in 2005, and were13.0% and 9.3% as a percentage of total revenues for 2006 and 2005,respectively. Cost of franchise operations and other cost of operations were$1,143,000 and $1,089,000 for the six month periods ended June 30, 2006and 2005, respectively, and were 12.9% and 10.4% as a percentage of totalrevenues, respectively. The increase is largely due to the accrual of severancepackages due to layoffs during the three months ended June 30, 2006 ofapproximately $54,000.

Restaurantoperating expenses, which include utilities, insurance, maintenance, rent andother such costs of the Company-operated restaurants, decreased by $105,000(12.54%) for the three months ended June 30, 2006 versus the prior year’scomparable period. These costs for the three month periods were comparable as apercentage of total revenues from 15.4% in 2005 to 15.5% in 2006. For the sixmonths ended June 30, 2006, restaurant operating expenses decreased by$352,000 (20.2%) versus the prior year’s comparable period. These costs for thesix month periods were comparable as a percentage of total revenues at 15.7% in2006 and 16.8% in 2005. The decreases are attributable to closing aCompany-operated location in February 2005.

Forthe three months ended June 30, 2006 and 2005, general and administrativeexpenses were $539,000 and $636,000, respectively and as a percentage of totalrevenue were 11.4% and 11.7%, respectively. For the six months ended June 30,2006 and 2005, general and administrative expenses were $996,000 and $1.2 million,respectively, and as percentage of total revenues were 11.2% for both periodsthen ended. The decreases were primarily due to legal fees associated withlitigation matters incurred in 2005 and write off of leasehold improvementsassociated with closed stores in 2005.

Depreciationand amortization expense was $7,000 (2.5%) less for the three months ended June 30,2006 versus the three months ended June 30, 2005 and $25,000 (4.6%) lessfor the comparable six month period then ended. The decreases were attributableto certain property and equipment becoming fully depreciated.

Closedstore expenses were $0 and $350,000 for the three and six months ended June 30,2005 and no closed store expense in 2006 for the comparable periods. The firstquarter 2005 expenses included impairment of $128,000 associated with the endof a subleased property due to a buyout of the lease and impairments related tothe closing of a Company-operated restaurant of $222,000 in February 2005.

Gain on the settlement of insurance claims of $220,351 in the sixmonths ended June 30, 2005 was attributable to insurance proceeds receivedon the Lawrenceville, Georgia casualty. There were no such gains during 2006.

**Other Income (Expense)**

Interest expense decreased $37,000 and $80,000 for the three and sixmonths ended June 30, 2006 over the comparable periods in 2005 due to thepay off of three loans during the first quarter of 2006. Prepayment penaltiesof $63,000 and the write off of financing costs of $30,000 were included inloss on early extinguishment of debt during the six months ended June 30,2006. Interest income fluctuates according to the levels of available cashbalances.

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Other income decreased $18,000 and $6,000 for the three and six monthsended June 30, 2006 over the comparable periods in 2005.

Income tax expense is directly affected by the levels of pretax income.The Company’s effective tax rate was 38.9% and 39.6% for the three and sixmonths ended June 30, 2006 and 37.9% and 38.8% for the same periods in2005.

**Liquidity and Capital Resources**

Historically, the Company has leased the majority of its restaurantsand through a strategy of controlled growth has financed operations fromoperating cash flows, the utilization of the Company’s line of credit andlong-term debt provided by various lenders. The Company had working capital of$2.3 million and $2.0 million at June 30, 2006 and December 31,2005, respectively.

Cash flows provided by operating activities were $1.0 million in2006 compared to $440,000 in 2005. During 2005, cash flows provided byoperations were primarily due to net income of $175,000, depreciation andamortization of $540,000, loss on sale/disposal of property and equipment$360,000, offset by gain from fire casualty of $220,000, increase in otherassets of $267,000 and decrease in accrued expenses of $503,000. During 2006,cash flows provided by operations were primarily due to net income of $149,000,depreciation and amortization of $524,000, insurance proceeds of $245,000,offset by a decrease in accrued expenses of $277,000.

Net cash provided by investing activities of $669,000 in 2006 and$573,000 in 2005, was primarily for capital expenditures related to propertyand equipment for both periods presented and proceeds of $785,000 and $653,000in 2006 and 2005, respectively, from fire casualties. Capital expenditures forthe two remodels of Company-operated locations in Northern Virginia totaled$350,000 for the six months ended June 30, 2006. The balance of thecapital expenditures was for necessary replacement of equipment and leaseholdimprovements in the other three Company-operated locations. The Company’smanagement anticipates that it will spend an additional $500,000 for capitalexpenditures for the remaining six months of 2006.

Net cash used in financing activities of $1.3 million in 2006 and$923,000 in 2005 was for payments on long-term debt including the payoff ofthree loans during the first quarter of 2006, and a portion of insuranceproceeds from fire casualty that was received in 2005, and fully submitted tothe lender.

The Company’s need for liquidity is to fund working capitalrequirements of its franchise operations, capital expenditures, and for generalcorporate purposes. The Company believes that these needs will be adequatelyfunded by operating cash flows, credit terms by vendors, and borrowings underits existing line of credit. The Company continually reviews availablefinancing alternatives. In addition, the Company may consider, on anopportunistic basis, strategic decisions to create value and improveoperational performance, which may include acquisitions, dispositions,restructuring, joint ventures, strategic alliances, and other forms ofpartnership.

The Company’s liquidity includes equity investments made by Mr.Biglari, Chairman of the Board. The practice of concentrating in a few issues,rather than diversifying, follows Mr. Biglari’s investment philosophy andstrategy. As previously discussed, the Board of Directors delegated authorityto its Chairman to make capital allocation and investment decisions, subject tovarious limitations and reporting requirements.

**CRITICALACCOUNTING POLICIES**

Our discussion and analysis of financial condition andresults of operations is based on the consolidated financial statements andaccompanying notes that have been prepared in accordance with United Statesgenerally accepted accounting principles. The preparation of these consolidatedfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure of contingentassets and

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liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

Application of the critical accounting policiesdiscussed below requires significant judgments by management, often as a resultof the need to make estimates of matters that are inherently uncertain. Ifactual results were to differ materially from the estimates made, the reportedresults could be materially affected. We are not currently aware of anyreasonably likely events or circumstance that would result in materiallydifferent results. Our senior management has reviewed the critical accountingpolicies and estimates and the Management’s Discussion and Analysis regardingthem with the Audit Committee of the Board of Directors.

*Trade Accounts and Notes Receivable and theAllowance for Doubtful Accounts*

We collect royalties, and in some cases rent, fromfranchisees. We view trade accounts and notes receivable and the relatedallowance for doubtful accounts as a critical accounting estimate since theallowance for doubtful accounts is based on judgments and estimates concerningthe likelihood that individual franchisees will pay the amounts included asreceivables from them. In determining the amount of allowance for doubtfulaccounts to be recorded for individual franchisees, we consider the age of thereceivable, the financial stability of the franchisee, discussions that mayhave occurred with the franchisee and our judgment as to the overallcollectibility of the receivable from the franchisee. In addition, we establishan allowance for all other receivables for which no specific allowances aredeemed necessary. If average sales or the financial health of franchisees wereto deteriorate, we might have to increase the allowance for doubtful accounts.

*Long-lived Assets, Franchise Royalty Contracts andGoodwill*

We view the determination of the carrying value oflong-lived assets, franchise royalty contracts and goodwill as criticalaccounting estimates since we must evaluate the estimated economic useful lifein order to properly depreciate or amortize our long-lived assets and franchiseroyalty contracts and because we must consider if the value of any of ourlong-lived assets have been impaired, requiring adjustments to the carryingvalue. Goodwill is not subject to amortization but is subject to at least anannual impairment test to determine if the carrying amount exceeds its fairvalue.

Economic useful life is the duration of time the assetis expected to be productively employed, which may be less than its physicallife. The estimated economic useful life of an asset is monitored to determineif it continues to be appropriate in light of changes in businesscircumstances.

*Commitments and Contingencies*

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

**OTHER**

**Impact of Inflation**

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

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##### **Impact of Recently Issued AccountingStandards**

In July 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109”(“FIN 48”). FIN 48 clarifies the accounting for uncertainty in incometaxes recognized in a company’s financial statements in accordance with FAS 109,“Accounting for Income Taxes”. FIN 48 prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. FIN 48also provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure and transition. Therequirements of FIN 48 are effective for our fiscal year beginning January 1,2007. We are in the process of evaluating this guidance and therefore have notyet determined the impact that FIN 48 will have on our financialstatements upon adoption.

**Item 3.    Quantitative and Qualitative Disclosureabout Market Risk**

The Company does not engage in derivative financial instruments orderivative commodity instruments. As of June 30, 2006, the Company’sfinancial instruments were not exposed to significant market risk due toforeign currency exchange risk. The Company is exposed to market risk relatedto interest rates, as well as increased prices in restaurant industrycommodities such as beef.

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

Debtobligations held for other than trading purposes at June 30, 2006 (dollarsin thousands):

#### EXPECTEDMATURITY DATE

| ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | **Estimated**       | ** ** |
|------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|---------------------|------------|
| ** **             | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** | **Fair Value** | ** ** |
| Long-term debt         |       |       |       |       |       |       |       |       |       |       |       |           |       |       |       |                |       |
| Fixed Rate             |       | $          | 176        |       | $          | 163        |       | $          | 119        |       | $          | 110            |       | $          | 121        |                | $          | 335 |   | $ | 1,024 |   | $ | 1,051 |   |
| Average Interest  Rate |       | 9.88       | %          | 9.96       | %          | 10.03      | %          | 10.07      | %          | 10.07      | %          | 10.07          | %          | 10.00      | %          |                |       |
|                        |            |            |            |            |            |            |            |            |            |            |            |                |            |            |            |                     |            |  |  |  |  |  |  |  |  |

 

**Item 4.    Controlsand Procedures**

**Oursenior management, including the Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended) as of June 30, 2006. Based on their evaluation as of December 31,2005, they had concluded that the disclosure controls and procedures wereineffective in providing reasonable assurance that the information required tobe disclosed by us in our annual report on Form 10-K was summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and Form 10-K. A material weakness is a controldeficiency, or combination of control deficiencies, that results in more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. As of December 31,2005, management identified a material weakness due to limited financial andaccounting personnel with the appropriate expertise to ensure that our annualand periodic financial statements comply with generally accepted accountingprinciples (“GAAP”) and SEC reporting requirements.**

**Theineffective control over the application of GAAP and SEC reporting requirementsrelated to the financial reporting process could result in a materialmisstatement to our annual or interim financial statements that may not beprevented or detected. Management is addressing this weakness by having formeda consulting relationship with an accounting firm other than our independentregistered public accounting firm with appropriate expertise in these matters. Weare using this firm to assist with the preparation and review of our filingsbeginning with the second quarter of 2006. There were no other changes in ourinternal controls or in other factors that could significantly affect thesecontrols since the evaluation process was completed.**

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** **

**PART II. OTHERINFORMATION**

Item 1.    LegalProceedings

In addition to those proceedings discussed in the Company’sconsolidated financial statements included in Item 1, Part 1, the Company isinvolved in various other claims and legal actions which are routine litigationmatters incidental to the business. In the opinion of the management, theultimate disposition of these other matters will not have a material adverseeffect on the Company’s financial condition, results of operations orliquidity.

Item 1A. RiskFactors

An investment in the common stock of any company involves a degree ofrisk. Investors should consider carefully the risks and uncertainties describedbelow, which update and are in addition to those detailed in the Company’sAnnual Report on Form 10-K, and those other risks described elsewhere inthis report, before deciding whether to purchase our common stock. Additionalrisks and uncertainties not currently known to us or that we currently deemimmaterial may also become important factors that may harm the Company’sbusiness, financial condition, and results of operations. The occurrence ofrisk factors set forth below could harm the Company’s business, financialcondition, and results of operations for company operations, as well asfranchised operations. The trading price of the Company’s common stock coulddecline due to any of these risks and uncertainties, and stockholders may losepart or all of their investment.

**The Company is dependent on one key person for itsinvestment and capital allocation decisions**.

Investment decisions and all major capital allocation decisions aremade for the Company’s business by Sardar Biglari, Chairman of the Board ofDirectors. Although there are limitations on Mr. Biglari’s authority and theBoard monitors his investment and capital allocation decisions, there is riskto the Company in having concentrated decision-making authority. Mr. Biglari’sdecisions could either independently or in the aggregate involve amounts thatare material to the Company. Additionally, if for any reason the services ofMr. Biglari were to become unavailable, there could be a material adverseeffect on the Company, since he is singularly responsible for these decisions.

Item 4.    Submissionof Matters to a Vote of Security Holders

At the Annual Meeting of the Stockholders held June 20, 2006, thefollowing persons were elected to the Board of Directors for a one-year term,until the 2007 Annual Meeting of Stockholders, or until their successors areelected and qualified:

|                    | ** ** | **Shares**         | ** ** | **Shares**   | ** ** |
|--------------------|------------|--------------------|------------|--------------|------------|
| **Nominees**       | ** ** | **voted for** | ** ** | **withheld** | ** ** |
| Sardar Biglari     |       | 526,251            |       | 125,781      |       |
| Philip L. Cooley   |       | 528,690            |       | 123,343      |       |
| Titus W. Greene    |       | 528,594            |       | 123,441      |       |
| Thomas M.  Hontzas |       | 651,961            |       | 72           |       |
| Jonathan Dash      |       | 528,690            |       | 123,343      |       |

 

Also at the Annual Meeting, discretionary authority for the Board ofDirectors to amend the Company’s Restated Certificate of Incorporation toeffect a reverse stock split at one of two ratios received the affirmativevotes of a majority of the shares outstanding and was declared as approved andadopted. The votes were as follows:

| Shares for       |   | 634,478 |   |
|------------------|--------|---------|--------|
| Shares against   |   | 1,053   |   |
| Shares withheld  |   | —  |   |
| Shares abstained |   | 16,501  |   |
| Non-votes        |   | 536,825 |   |

 

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The above presentation of votes at the 2006 Annual Meeting ofStockholders has been adjusted to reflect the reverse stock split effectiveAugust 10, 2006 (Note 2).

Item 6.    Exhibits

See Exhibit Index on page26.

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#  

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.
|                       | **Western Sizzlin Corporation** |
|-----------------------|---------------------------------|
|                  |                            | * * |
|                  | By:                             | */s/  James  C. Verney* | * * |
|                  |                            | James C. Verney |
|                  |                            | President and Chief Executive Officer |
|                  |                            | * * |
|                  | By:                             | */s/  Robyn  B. Mabe* | * * |
|                  |                            | Robyn B. Mabe |
|                  |                            | Vice President and Chief Financial Officer |
| Date: August 14, 2006 |                            |   |

 

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**EXHIBIT INDEX**
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a).         |
|--------|--------|-------------------------------------------------------------------------------|
|   |   |                                                                          |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a).         |
|   |   |                                                                          |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350. |
|   |   |                                                                          |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350. |

 

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