**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**(Mark One)**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                              |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                |
| ** ** | ** ** | **For the  quarterly period ended June 30, 2007, or**                                                                                                                                     |
| ** ** | ** ** | ** **                                                                                                                                                                                |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                |
| ** ** | ** ** | **For the  transition period from                            to** |

 

**Commissionfile number 0-25366**

**WesternSizzlin Corporation**

(Exact Name ofRegistrant as Specified in Its Charter)
| **Delaware**                                                    |   | **86-0723400**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **416  South Jefferson Street, Suite 600**                      |   | **24011**                             |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                            |

 

**(540) 345-3195**(Registrant’s Telephone Number Including Area Code)

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

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

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). 

o Yes xNo

As of August 14, 2007,there were 1,797,750 shares of common stock outstanding.

 

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**Western SizzlinCorporation**

**Form 10-QSix Months Ended June 30, 2007Table of Contents**
|                                                                                                         | ** **                                                                                            | **Page**   |
|---------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **PART I.  FINANCIAL INFORMATION**                                                                      | ** **                                                                                            | ** ** |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **Item 1. Financial Statements (Unaudited)**                                                            | ** **                                                                                            | ** ** |
|                                                                                                    |                                                                                                  |       |
|                                                                                                    | Consolidated  Balance Sheets —June 30, 2007 and December 31, 2006                                | 3          |
|                                                                                                    |                                                                                                  |       |
|                                                                                                    | Consolidated Statements of Income — Three Months and  Six Months Ended June 30, 2007 and 2006    | 4          |
|                                                                                                    |                                                                                                  |       |
|                                                                                                    | Consolidated Statement of Changes in Stockholders’  Equity — Six Months Ended June 30, 2007 | 5          |
|                                                                                                    |                                                                                                  |       |
|                                                                                                    | Consolidated Statements of Cash Flows — Six Months  Ended June 30, 2007 and 2006                 | 6          |
|                                                                                                    |                                                                                                  |       |
|                                                                                                    | Notes to Consolidated Financial Statements                                                            | 7-14       |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **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**                                                                     |                                                                                                  | 21-22      |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **PART  II. OTHER INFORMATION**                                                                         | ** **                                                                                            | ** ** |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **Item  1. Legal Proceedings**                                                                          |                                                                                                  | 23         |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **Item  1.A. Risk Factors**                                                                             |                                                                                                  | 23-24      |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **Item 4. Submission of Matters to a Vote of Security  Holders**                                        |                                                                                                  | 25         |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **Item 6. Exhibits**                                                                                    |                                                                                                  | 25         |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **Signatures**                                                                                          |                                                                                                  | 26         |
| ** **                                                                                              | ** **                                                                                            | ** ** |
| **Exhibit Index**                                                                                       |                                                                                                  | 27         |
|                                                                                                         |                                                                                                       |            |  |

 

 

2

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**PART I. FINANCIALINFORMATIONWESTERN SIZZLIN CORPORATION**

**ConsolidatedBalance Sheets**

**June 30, 2007 and December 31, 2006**
| ** **                                                                                                                                                                           | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                      |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                           |       | $                       | 2,782,133  |                        | $          | 2,344,644 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $517,142 in 2007 and  $470,758 in 2006                                                                         |       | 931,803                 |       | 866,565                     |       |
| Current  installments of notes receivable, less allowance for impaired notes of  $28,480 in 2007 and $17,409 in 2006                                                                 |       | 219,399                 |       | 205,624                     |       |
| Other  receivables                                                                                                                                                                   |       | 248,110                 |       | 239,531                     |       |
| Income taxes  receivable                                                                                                                                                             |       | 249,695                 |       | 248,559                     |       |
| Inventories                                                                                                                                                                          |       | 83,167                  |       | 55,207                      |       |
| Prepaid expenses                                                                                                                                                                     |       | 256,044                 |       | 253,556                     |       |
| Deferred income  taxes                                                                                                                                                               |       | 337,281                 |       | 296,671                     |       |
| Total current  assets                                                                                                                                                                |       | 5,107,632               |       | 4,510,357                   |       |
|                                                                                                                                                                                 |       |                    |       |                        |       |
| Notes receivable, less  allowance for impaired notes receivable of $163,327 and $164,396 in 2006,  excluding current installments                                                    |       | 708,412                 |       | 800,841                     |       |
| Property and equipment,  net                                                                                                                                                         |       | 2,070,044               |       | 2,270,300                   |       |
| Investments in  marketable securities (Note 3)                                                                                                                                       |       | 8,938,433               |       | 6,508,645                   |       |
| Cash held by broker                                                                                                                                                                  |       | 9,882                   |       | —                      |       |
| Franchise royalty  contracts, net of accumulated amortization of $8,508,988 in 2007 and  $8,193,840 in 2006                                                                          |       | 945,443                 |       | 1,260,592                   |       |
| Goodwill                                                                                                                                                                             |       | 4,310,200               |       | 4,310,200                   |       |
| Financing costs, net of  accumulated amortization of $190,753 in 2007 and $188,670 in 2006                                                                                           |       | 9,457                   |       | 11,540                      |       |
| Investment in  unconsolidated joint venture                                                                                                                                          |       | 213,155                 |       | 147,479                     |       |
|                                                                                                                                                                                 |       | $                       | 22,312,658 |                        | $          | 19,819,954 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                 |       |                    |       |                        |       |
| Current  installments of long-term debt                                                                                                                                              |       | $                       | 145,315    |                        | $          | 163,089 |   |
| Accounts payable                                                                                                                                                                     |       | 633,782                 |       | 555,110                     |       |
| Accrued expenses  and other                                                                                                                                                          |       | 680,101                 |       | 554,443                     |       |
| Income taxes  payable                                                                                                                                                                |       | 135,208                 |       | —                      |       |
| Total current  liabilities                                                                                                                                                           |       | 1,594,406               |       | 1,272,642                   |       |
|                                                                                                                                                                                 |       |                    |       |                        |       |
| Long-term debt,  excluding current installments                                                                                                                                      |       | 623,296                 |       | 685,036                     |       |
| Other long-term  liabilities                                                                                                                                                         |       | 80,480                  |       | 69,370                      |       |
| Deferred income taxes                                                                                                                                                                |       | 1,302,782               |       | 394,885                     |       |
|                                                                                                                                                                                 |       | 3,600,963               |       | 2,421,933                   |       |
|                                                                                                                                                                                 |       |                    |       |                        |       |
| Commitments and  contingencies (Note 8)                                                                                                                                              |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                                           |       |                    |       |                        |       |
| Common stock,  $.01 par value. Authorized 4,000,000 shares (2,000,000 shares at December 31,  2006); 1,797,750 issued and outstanding shares in 2007 and 1,787,750 in 2006  (Note 2) |       | 17,978                  |       | 17,878                      |       |
| Additional  paid-in capital                                                                                                                                                          |       | 12,881,791              |       | 12,790,681                  |       |
| Retained  earnings                                                                                                                                                                   |       | 3,603,938               |       | 3,340,193                   |       |
| Accumulated  other comprehensive income — unrealized holding gains, net of taxes                                                                                                |       | 2,207,987               |       | 1,249,269                   |       |
| Total  stockholders’ equity                                                                                                                                                     |       | 18,711,694              |       | 17,398,021                  |       |
|                                                                                                                                                                                 |       | $                       | 22,312,658 |                        | $          | 19,819,954 |   |

 

See accompanying notes toconsolidated financial statements.

3

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**WESTERN SIZZLINCORPORATION**

**ConsolidatedStatements of Income**

**Three Months and Six Months Ended June 30, 2007 and2006(Unaudited)**

** **
| ** **                                                         | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Company-operated  restaurants                                      |       | $                                               | 3,542,157  |                                          | $          | 3,579,938 |   | $ | 6,590,457 |   | $ | 6,577,611 |   |
| Franchise  operations                                              |       | 1,148,414                                       |       | 1,136,787                                     |       | 2,229,804 |   | 2,284,764 |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Total revenues                                                     |       | 4,690,571                                       |       | 4,716,725                                     |       | 8,820,261 |   | 8,862,375 |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Costs and  expenses:                                               |       |                                            |       |                                          |       |   |   |   |   |
| Company-operated restaurants —food, beverage and  labor costs |       | 2,460,149                                       |       | 2,449,659                                     |       | 4,706,135 |   | 4,732,858 |   |
| Restaurant occupancy and other                                     |       | 575,785                                         |       | 586,374                                       |       | 1,178,751 |   | 1,172,288 |   |
| Subleased properties                                               |       | 52,645                                          |       | 194,816                                       |       | 86,748 |   | 154,254 |   |
| Franchise operations — direct support                         |       | 275,246                                         |       | 306,494                                       |       | 504,194 |   | 610,783 |   |
| Corporate expenses                                                 |       | 729,585                                         |       | 659,180                                       |       | 1,243,260 |   | 1,284,507 |   |
| Depreciation and amortization                                      |       | 265,674                                         |       | 263,940                                       |       | 531,608 |   | 523,981 |   |
| Total costs and expenses                                           |       | 4,359,084                                       |       | 4,460,463                                     |       | 8,250,696 |   | 8,478,671 |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Income from operations                                             |       | 331,487                                         |       | 256,262                                       |       | 569,565 |   | 383,704 |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Other income  (expense):                                           |       |                                            |       |                                          |       |   |   |   |   |
| Interest expense                                                   |       | (19,727                                         | )          | (32,255                                       | )          | (40,051 | ) | (78,347 | ) |
| Loss on early extinguishment of long term debt                     |       | —                                          |       | —                                        |       | — |   | (92,535 | ) |
| Interest income                                                    |       | 13,775                                          |       | 16,534                                        |       | 30,353 |   | 37,100 |   |
| Equity in joint venture                                            |       | 51,973                                          |       | (34,194                                       | )          | 65,675 |   | (38,228 | ) |
| Other                                                              |       | 501                                             |       | 27,889                                        |       | 4,198 |   | 35,679 |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
|                                                               |       | 46,522                                          |       | (22,026                                       | )          | 60,175 |   | (136,331 | ) |
| Income before income tax expense                                   |       | 378,009                                         |       | 234,236                                       |       | 629,740 |   | 247,373 |   |
| ** **                                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income tax  expense:                                               |       |                                            |       |                                          |       |   |   |   |   |
| Current                                                            |       | 8,257                                           |       | —                                        |       | 18,184 |   | — |   |
| Deferred                                                           |       | 137,589                                         |       | 91,130                                        |       | 229,436 |   | 97,969 |   |
| Total income tax expense                                           |       | 145,846                                         |       | 91,130                                        |       | 247,620 |   | 97,969 |   |
| Net income                                                         |       | $                                               | 232,163    |                                          | $          | 143,106 |   | $ | 382,120 |   | $ | 149,404 |   |
|                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Earnings per  share (Note 6):                                      |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                              |       | $                                               | .13        |                                          | $          | .12 |   | .21 |   | $ | .13 |   |
| Diluted                                                            |       | $                                               | .13        |                                          | $          | .12 |   | .21 |   | $ | .12 |   |

 

See accompanying notes toconsolidated financial statements.

4

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**WESTERN SIZZLINCORPORATION**

**Consolidated Statement of Changes in Stockholders’Equity**

**Six Months Ended June 30, 2007(Unaudited)**
| ** **                                        | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **Shares**            | ** ** | **Dollars**             | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income** | ** ** | **Total** | ** ** |
| Balances,  December 31, 2006                      |       | 1,787,750             |       | $                       | 17,878     |         | $          | 12,790,681                            |       | $          | 3,340,193  |   | $ | 1,249,269 |   | $ | 17,398,021 |   |
| Net income                                        |       | —                |       | —                  |       | —       |       | 382,120                               |       | —     |       | 382,120 |   |
| Change in  unrealized holding gains, net of taxes |       | —                |       | —                  |       | —       |       | —                                |       | 958,718    |       | 958,718 |   |
| Comprehensive  income                             |       |                  |       |                    |       |         |       |                                  |       |       |       | 1,340,838 |   |
| Share based  compensation                         |       | —                |       | —                  |       | 5,920        |       | —                                |       | —     |       | 5,920 |   |
| Cumulative  effect of adopting FIN 48             |       | —                |       | —                  |       |         |       | (118,375                              | )          | —     |       | (118,375 | ) |
| Stock options  exercised                          |       | 10,000                |       | 100                     |       | 85,190       |       |                                  |       | —     |       | 85,290 |   |
| Balances, June 30, 2007                           |       | 1,797,750             |       | $                       | 17,978     |         | $          | 12,881,791                            |       | 3,603,938  |       | $ | 2,207,987 |   | $ | 18,711,694 |   |
|                                                   |            |                       |            |                         |            |              |            |                                       |            |            |            |  |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

5

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**WESTERN SIZZLIN CORPORATION**

Consolidated Statements of Cash Flows

Six Months Ended June 30,2007 and 2006(Unaudited)
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 382,120    |   | $ | 149,404 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization of property and  equipment                           |       | 214,376                                           |       | 208,832 |   |
| Amortization of franchise royalty contracts                                        |       | 315,149                                           |       | 315,148 |   |
| Amortization of financing costs                                                    |       | 2,083                                             |       | 10,827 |   |
| Loss on sale/disposal of property and equipment                                    |       | —                                            |       | 57,717 |   |
| Write off of financing costs related to early  extinguishment of long term debt    |       | —                                            |       | 29,699 |   |
| Provision for doubtful accounts                                                    |       | 60,000                                            |       | 50,000 |   |
| Share-based compensation                                                           |       | 5,920                                             |       | 39,100 |   |
| Equity in (income) loss of unconsolidated joint  venture                           |       | (65,676                                           | )          | 38,228 |   |
| Provision for deferred income taxes                                                |       | 229,435                                           |       | 97,969 |   |
| (Increase) decrease in:                                                            |       |                                              |       |   |   |
| Trade accounts receivable and notes receivable                                     |       | (46,584                                           | )          | 46,951 |   |
| Other receivables                                                                  |       | (8,579                                            | )          | 20,454 |   |
| Income taxes receivable                                                            |       | (1,136                                            | )          | (6,310 | ) |
| Insurance receivable — business interruption                                  |       | —                                            |       | 244,961 |   |
| Inventories                                                                        |       | (27,960                                           | )          | (16,868 | ) |
| Prepaid expenses                                                                   |       | (2,488                                            | )          | 13,777 |   |
| Other assets                                                                       |       | —                                            |       | (22,526 | ) |
| Cash held by broker                                                                |       | (9,882                                            | )          | — |   |
| Increase (decrease) in:                                                            |       |                                              |       |   |   |
| Accounts payable                                                                   |       | 78,672                                            |       | (15,965 | ) |
| Accrued expenses                                                                   |       | 125,658                                           |       | (276,667 | ) |
| Income taxes payable                                                               |       | 16,833                                            |       | — |   |
| Other long-term liabilities                                                        |       | 11,110                                            |       | 14,674 |   |
| Net cash provided by operating activities                                          |       | 1,279,051                                         |       | 999,405 |   |
|                                                                               |       |                                              |       |   |   |
| Cash flows from  investing activities:                                             |       |                                              |       |   |   |
| Change in short-term investments                                                   |       | —                                            |       | 260,069 |   |
| Additions to property and equipment                                                |       | (14,120                                           | )          | (378,415 | ) |
| Proceeds from sale of property                                                     |       | —                                            |       | 2,800 |   |
| Purchases of marketable securities                                                 |       | (833,218                                          | )          | — |   |
| Proceeds from fire casualties                                                      |       | —                                            |       | 784,993 |   |
|                                                                               |       |                                              |       |   |   |
| Net cash (used in) provided by investing activities                                |       | (847,338                                          | )          | 669,447 |   |
|                                                                               |       |                                              |       |   |   |
| Cash flows from  financing activities:                                             |       |                                              |       |   |   |
| Cash received from exercise of stock options                                       |       | 85,290                                            |       | 9,200 |   |
| Payments on long-term debt                                                         |       | (79,514                                           | )          | (1,312,213 | ) |
|                                                                               |       |                                              |       |   |   |
| Net cash provided by (used in) financing activities                                |       | 5,776                                             |       | (1,303,013 | ) |
|                                                                               |       |                                              |       |   |   |
| Net increase in cash and cash equivalents                                          |       | 437,489                                           |       | 365,839 |   |
|                                                                               |       |                                              |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 2,344,644                                         |       | 1,664,848 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                 | 2,782,133  |   | $ | 2,030,687 |   |
| Supplemental  disclosure of cash flow information:                                 |       |                                              |       |   |   |
| Cash payments for interest                                                         |       | $                                                 | 40,710     |   | $ | 141,337 |   |
| Income taxes paid                                                                  |       | $                                                 | 2,485      |   | $ | 16,341 |   |
| Adoption of FIN 48 (non-cash)                                                      |       | $                                                 | 118,375    |   | $ | — |   |
| Non-cash  investing activities:                                                    |       |                                              |       |   |   |
| Reclassification of deposits from other assets to  property and equipment          |       | $                                                 | —     |   | $ | 320,336 |   |
| Gross unrealized  gains from marketable equity securities                          |       | $                                                 | 1,600,612  |   | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

6

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**WESTERNSIZZLIN CORPORATION**

Notes toConsolidated Financial Statements

Six Months Ended June 30, 2007 and 2006(Unaudited)

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

The accompanying unaudited consolidated financialstatements of Western Sizzlin Corporation, (the “Company”) have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America for interim financial reporting information and theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the informationand notes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements.  In the opinion of management, all materialreclassifications and adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of operations,financial position and cash flows for each period shown have been included. Theunaudited consolidated financial statements and notes are presented aspermitted by Form 10-Q and do not contain certain information included in theCompany’s annual consolidated financial 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, 2006.

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

The Company has three stock option plans: the 2005Stock Option Plan, the 2004 Non-Employee Directors’ Stock Option Plan, and the1994 Incentive and Non-qualified Stock Option Plan. The 1994 Plan has expiredfor purposes of granting options and only 7,500 options granted to James C.Verney remain outstanding under that plan. Under the 2005 and 2004 Plans, employees and directors may be grantedoptions to purchase shares of common stock at the fair market value on the dateof the grant.  During the six monthsended June 30, 2007, under the provisions of the plans, the contract terms ofstock options for resigning directors were reduced and have been reflected inthe computations of the weighted average contractual term of the outstandingoptions.  In February 2007, Mr. Biglariinformed the Board that he did not wish to receive future grants of stockoptions and that he relinquished all stock options previously granted tohim.  Since these modifications did notincrease the value of the awards, the modification had no impact oncompensation expense.

Effective January 1, 2006, the Company began recordingcompensation expense associated with the stock options in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-BasedPayment” as interpreted by SEC Staff Accounting Bulletin No. 107.  The Company adopted the modified prospectivetransition method provided for under SFAS No. 123R.

The Company recorded $0 and $5,920 compensationexpense for stock options for the three and six months ended June 30, 2007,respectively.

Options granted under the 2005 and 2004 Plans vest atthe date of the grant, with the exception of options granted to James C.Verney, which vested according to a schedule in his Employment Agreement andare currently all vested.  The fair valueof each 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.  The risk-free interest rate for periodswithin the contractual life of the option is based on the U.S. Treasury yieldcurve in effect at the time of the grant. Expected volatilities are based on the historical volatility of theCompany’s stock for a period equal to the expected term of the options.  The expected term of the options representsthe period of time that options granted are outstanding and is estimated usinghistorical exercise and termination experience.

The fair values of options granted during the sixmonths ended June 30, 2007 and 2006 were estimated on the date of grant usingthe Black-Scholes option pricing model based on the following weighted averageassumptions in the table below:

7

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| ** **               | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
|                     |       |                                          |       |   |   |
| Expected term  (years)   |       | 5                                             |       | 5 |   |
| Risk-free  interest rate |       | 4.50                                          | %          | 5.08 | % |
| Volatility               |       | 78.83                                         | %          | 84.03 | % |
| Dividend yield           |       | —                                        |       | — |   |

 

There were -0- and 1,000 stock options granted duringthe three and six month periods ended June 30, 2007, respectively, all at anestimated fair value of $5.92.  Therewere 5,000 and 6,000 stock options granted during the three and six monthperiods ended June 30, 2006, respectively, which had an estimated fair value atthe date of grant of $5.10 for the 1,000 granted during the second quarter of2006 and $6.80 for the 5,000 stock options granted during the first quarter of2006.

The following table summarizes stock optionsoutstanding as of June 30, 2007, as well as activity during the six monthperiod then ended:
| ** **                 | ** ** | **Options  Outstanding** | ** ** | **Exercise Price  Per Share  Weighted  Average** | ** ** | **Contractual  Term  Weighted  Average** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------|------------|--------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|
| Balance, December 31, 2006 |       | 58,000                   |       | $                                                          | 9.00       |                                     | —     |                            | —     |   |
| Granted                    |       | 1,000                    |       | 9.15                                                       |       | —                                   |       | —                          |       |
| Exercised                  |       | (10,000                  | )          | 8.53                                                       |       | —                                   |       | —                          |       |
| Expired/Forfeited          |       | (13,000                  | )          | 8.75                                                       |       | —                                   |       | —                          |       |
| Balance,  June 30, 2007    |       | 36,000                   |       | $                                                          | 8.42       |                                     | 6.35       |                            | $          | 262,555 |   |
|                            |            |                          |            |                                                            |            |                                          |            |                                 |            |  |  |

 

All options outstanding at June 30, 2007 areexercisable.  At June 30, 2007, therewere 36,000 shares available for future grants under the plans, however, onApril 25, 2007, the Company’s Board of Directors elected to suspend futuregrants under all plans indefinitely.

**(3)****                                 Investmentsin Marketable Securities**

The Company purchased a significant percentage ofcommon stock of Friendly Ice Cream Corporation and smaller amounts of othersecurities. All investments and other capital allocation decisions are made byMr. Biglari, the Company’s Chairman, under limited authority delegated by theBoard of Directors.  The delegatedauthority includes the authority to borrow funds in connection with makinginvestments in marketable securities or derivative securities, subject to Boardreporting requirements and various limitations. As of the date of this filing, Mr. Biglari has authority to manage surpluscash up to $10 million, and in addition, has authority to borrow a maximum of$5 million.  The Company has a marginsecurities account with Jefferies & Company, Inc. (Jefferies). The marginaccount bears interest at the Federal Funds Target Rate quoted by the WallStreet Journal, plus .5%, or approximately 5.75% as of the date of this report,with the minimum and maximum amount of any particular loan to be determined byJefferies, in its discretion, from time to time.  The collateral securing the margin loans arethe Company’s holdings in the marketable security.  The minimum and maximum amount of anyparticular margin may be established by Jefferies, in its discretion,regardless of the amount of collateral delivered to Jefferies, and Jefferiesmay change such minimum and maximum amounts from time to time.  The Company’s balance of margin debt was $0as of June 30, 2007.  As of June 30,2007, the Company had $9,882 held by a broker in a margin account.  The Company intends to invest these funds inadditional marketable equity securities.

The Company’s investments in marketable equitysecurities are held for an indefinite period and thus are classified asavailable-for-sale. Available-for-sale securities are recorded at fair value inInvestments in Marketable Securities on the consolidated balance sheet, withthe change in fair value during the period excluded from earnings and recordednet of tax as a component of other comprehensive income.  Investments in derivative securities areclassified as trading securities, with both realized and unrealized gains andlosses on those derivative instruments included in the statement ofincome.  The Company realized a gain of$4,613 during the six months ended June 30, 2007 from expired put optionspreviously written by the Company.

8

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Following is a summary of marketable equity securitiesas of June 30, 2007 and December 31, 2006: 
| ** **              | ** ** | **June 30, 2007** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Cost**                    | ** ** | **Fair Value** | ** ** | **Gross Unrealized  Gains** | ** ** |
| Friendly Ice Cream Corp |       | $                           | 4,539,726  |   | $ | 8,054,781 |   | $ | 3,515,055 |   |
| Other Investments       |       | 833,218                     |       | 883,652 |   | 50,434 |   |
|                    |       | $                           | 5,372,944  |   | $ | 8,938,433 |   | $ | 3,565,489 |   |

 
| ** **               | ** ** | **December 31, 2006** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **Cost**                        | ** ** | **Fair Value** | ** ** | **Gross Unrealized  Gains** | ** ** |
| Friendly  Ice Cream Corp |       | $                               | 4,543,768  |   | $ | 6,508,645 |   | $ | 1,964,877 |   |
|                          |            |                                 |            |  |  |  |  |  |  |  |

 

On June 17, 2007, Friendly Ice Cream Corp entered intoa definitive merger agreement that upon closing, Friendly Ice Cream Corp wouldresult in Friendly being privately held. For each share publicly held, Friendly shareholders would have the right to receive $15.50 incash.  The agreement is subject toFriendly shareholder approval.  Uponadoption by the shareholders of Friendly, the Company would  realize gains on this investment. The Companyentered into a written agreement in June 2007 with Friendly to vote in favor ofthe sale.   The Company also sold aportion of its common stock in Friendly’s during July 2007 with realized gainsof approximately $786,000.

**(4)****                                 Goodwilland Other Intangible Assets**

The Company conforms to the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, “Goodwill and Other IntangibleAssets.”  Under SFAS No. 142, goodwilland intangible assets deemed to have indefinite lives are reviewed forimpairment and written down and charged to results of operations when theircarrying amount exceeds their estimated fair value. The Company is required toperform impairment tests each year, or between yearly tests in certaincircumstances, for goodwill. There can be no assurance that future impairmenttests will not result in a charge to earnings.

Therewere no changes in the net carrying amount of goodwill for the three and sixmonth periods ended June 30, 2007 and 2006.

*Amortizing Intangible Assets*

Franchiseroyalty contracts are amortized on a straight-line basis over fifteen years,the estimated average life of the franchise agreements.  The Company assesses the recoverability ofthis intangible asset by determining whether the amortization of the franchiseroyalty contracts balance over their remaining life can be recovered throughundiscounted future operating cash flows of the acquired operation.  The amount of impairment, if any, is measuredbased on projected discounted future operating cash flows using a discount ratereflecting the Company’s average cost of funds.
| ** **                     | ** ** | **As of June 30, 2007** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **Gross  carrying  amount**                 | ** ** | **Weighted average  amortization  period** | ** ** | **Accumulated  amortization** | ** ** |
| ** **                     | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortizing  intangible assets: |       |                                        |       |   |   |   |   |
| Franchise  Royalty Contracts   |       | $                                           | 9,454,431  |   | 15.0 yrs. |   | $ | 8,508,988 |   |
|                                |            |                                             |            |  |  |  |  |  |  |

 

Aggregate amortization expense for amortizingintangible assets for the three and six month periods ended June 30, 2007 was$157,574 and $315,148, repectively. Estimated amortization expense is $630,300per year through December 31, 2008.

**(5)           Income Taxes**

The Company adopted the provisions of FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No.109” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a liabilityfor uncertain tax positions in the amount of $118,375, including interest of$25,595, which was accounted for as an adjustment to the beginning balance ofretained earnings.   As of June 30, 2007,the Company has a recorded liability of $134,536, including interest of $30,784,for such uncertain tax positions.

9

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The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense.   For the three andsix month periods ended June 30, 2007, the Company recognized approximately$1,930 and $5,189, respectively, of accrued interest associated with uncertaintax positions.

The Company anticipates that the accrued liability foruncertain tax positions will significantly decrease in the next twelve monthsas the Company files tax returns and remits any taxes due.  As of June 30, 2007, the earliest tax yearopen to examination by a major taxing jurisdiction is 2003.

**(6)****                                 EarningsPer Share**

Basic earnings per share excludes dilution and iscomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the Company.  Stock options for 1,000 shares of commonstock were not included in computing diluted earnings for the three and sixmonths ended June 30, 2006 because the effects of these options wereanti-dilutive.

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per share computations forthe periods indicated:
| ** **                            | ** ** | **Income  (Numerator)** | ** ** | **Weighted  Average  Shares  (Denominator)** | ** ** | **Earnings  Per Share  Amount** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                            | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| **Three  months ended June 30, 2007** | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic               |       | $                       | 232,163    |                                         | 1,792,574  |                                 | $          | .13 |   |
| Net income — diluted             |       | $                       | 232,163    |                                         | 1,801,502  |                                 | $          | .13 |   |
|                                  |       |                    |       |                                         |       |                                 |       |
| **Three months ended June 30, 2006**  | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic               |       | $                       | 143,106    |                                         | 1,188,967  |                                 | $          | .12 |   |
| Net income — diluted             |       | $                       | 143,106    |                                         | 1,194,066  |                                 | $          | .12 |   |
| ** **                            | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| **Six  months ended June 30, 2007**   | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic               |       | $                       | 382,120    |                                         | 1,790,319  |                                 | $          | .21 |   |
| Net income — diluted             |       | $                       | 382,120    |                                         | 1,796,855  |                                 | $          | .21 |   |
|                                  |       |                    |       |                                         |       |                                 |       |
| **Six months ended June, 2006**       | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic               |       | $                       | 149,404    |                                         | 1,188,967  |                                 | $          | .13 |   |
| Net  income — diluted            |       | $                       | 149,404    |                                         | 1,197,841  |                                 | $          | .12 |   |

 

On July 9, 2007, the Company filed a registrationstatement on Form S-3 with the SEC in preparation of conducting a rightsoffering to its stockholders.  The Company is seeking registration of897,375 shares of its common stock and 1,794,750 rights to purchase theseshares.  The registration statement is not yet effective and the offeringhas not commenced.

**(7)****                                 ReportableSegments**

TheCompany has organized segment reporting to reflect how the Company views itsbusiness activities.  During the thirdquarter of 2006, the Company identified operating segments based on separatefinancial information that is evaluated regularly in deciding how to allocateresources and in assessing performance. As a result, certain reclassificationshave been made to the accompanying 2006 information to conform to the 2007information. The Company-operated Restaurant segment consists of the operationsof all Company-operated restaurants and derives its revenues from restaurantoperations.  This segment also includesnet costs incurred from subleases of previously operated locations, which ispresented separately. The Franchising segment consists primarily of franchisesales and support activities and derives its revenues from sales of franchiseand development rights and collection of royalties from franchisees. TheCompany incurs certain costs which include expenses of the following functions:legal, accounting, stockholder relations, personnel not directly related to asegment, information systems and other 

10

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headquarteractivities.  These expenses aredesignated as corporate expenses.

Thefollowing table summarizes reportable segment information:
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues from reportable segments:   |       |                                            |       |                                          |       |   |   |   |   |
| Restaurants                          |       | $                                               | 3,542,157  |                                          | $          | 3,579,938 |   | $ | 6,590,457 |   | $ | 6,577,611 |   |
| Franchising                          |       | 1,148,414                                       |       | 1,136,787                                     |       | 2,229,804 |   | 2,284,764 |   |
| Total revenues                       |       | $                                               | 4,690,571  |                                          | $          | 4,716,725 |   | $ | 8,820,261 |   | $ | 8,862,375 |   |
| Depreciation and amortization:       |       |                                            |       |                                          |       |   |   |   |   |
| Restaurants                          |       | $                                               | 100,304    |                                          | $          | 96,409 |   | $ | 200,799 |   | $ | 187,144 |   |
| Franchising                          |       | 165,370                                         |       | 167,531                                       |       | 330,809 |   | 336,837 |   |
| Total depreciation and  amortization |       | $                                               | 265,674    |                                          | $          | 263,940 |   | $ | 531,608 |   | $ | 523,981 |   |
| Interest Expense:                    |       |                                            |       |                                          |       |   |   |   |   |
| Restaurants                          |       | $                                               | 19,727     |                                          | $          | 32,247 |   | $ | 40,051 |   | $ | 78,278 |   |
| Corporate                            |       | —                                          |       | 8                                             |       | — |   | 69 |   |
| Total interest expense               |       | $                                               | 19,727     |                                          | $          | 32,255 |   | $ | 40,051 |   | $ | 78,347 |   |
| Interest Income:                     |       |                                            |       |                                          |       |   |   |   |   |
| Corporate                            |       | $                                               | 13,775     |                                          | $          | 16,534 |   | $ | 30,353 |   | $ | 37,100 |   |
| Total interest income                |       | $                                               | 13,775     |                                          | $          | 16,534 |   | $ | 30,353 |   | $ | 37,100 |   |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Equity in joint venture:             |       | $                                               | 51,973     |                                          | $          | (34,194 | ) | $ | 65,675 |   | $ | (38,228 | ) |
| Total equity in joint venture        |       | $                                               | 51,973     |                                          | $          | (34,194 | ) | $ | 65,675 |   | $ | (38,228 | ) |
|                                 |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss) from operations:       |       |                                            |       |                                          |       |   |   |   |   |
| Restaurants                          |       | $                                               | 405,919    |                                          | $          | 447,496 |   | $ | 504,772 |   | $ | 485,321 |   |
| Subleased properties                 |       | (52,645                                         | )          | (194,816                                      | )          | (86,748 | ) | (154,254 | ) |
| Franchising                          |       | 707,798                                         |       | 662,762                                       |       | 1,394,801 |   | 1,337,144 |   |
| Corporate                            |       | (729,585                                        | )          | (659,180                                      | )          | (1,243,260 | ) | (1,284,507 | ) |
| Total income from operations:        |       | $                                               | 331,487    |                                          | $          | 256,262 |   | $ | 569,565 |   | $ | 383,704 |   |

 

|                                       | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Total assets:                         |       |                    |       |                        |       |
| Restaurants                           |       | $                       | 7,625,687  |                        | $          | 6,615,074 |   |
| Franchising                           |       | 4,844,111               |       | 5,605,981                   |       |
| Corporate                             |       | 904,427                 |       | 1,090,254                   |       |
| Investments in marketable  securities |       | 8,938,433               |       | 6,508,645                   |       |
| Total assets                          |       | $                       | 22,312,658 |                        | $          | 19,819,954 |   |

 

**(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 reasonablyestimable.  As facts concerningcontingencies become known to the Company, the Company reassesses its positionwith respect to accrued liabilities and other expenses.  These estimates are subject to change asevents evolve and as additional information becomes available during thelitigation process.

11

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**LittleRock, Arkansas Lease**

In September 2006,the Company was served with a lawsuit filed in the Circuit Court of PulaskiCounty, Arkansas, captioned *Parks Land Company, LLLP,et al. v. Western Sizzlin Corporation, et al.* The plaintiffs areowners/landlords of four restaurant premises located in the Little Rock,Arkansas metropolitan area which had been leased pursuant to a single leaseagreement and previously occupied by the Company.  Each of these premises had been subleased tovarious operators.  The lease agreementexpired pursuant to its terms on June 30, 2006. The plaintiffs have claimed in their lawsuit unspecified damagesallegedly owing for certain repair and maintenance expenses on the premises,for the replacement of certain equipment, for diminution of property value, andfor loss of rental income, as well as interest and costs.  At this time the likelihood of an unfavorablecourt outcome, or any potential loss, cannot be made with certainty.  However, the Company is prepared tovigorously contest the plaintiff’s claims and will pursue applicable crossclaims and counterclaims.  The case ispresently set for trial in February 2008 in Little Rock, Arkansas.

**FFCA**

FFCA Acquisition Corporation, an entity related toFranchise Finance Corporation of America, now known as General ElectricFranchise Finance Corporation “FFCA” is or was the owner of 43 former Quincy’srestaurant locations “Former Quincy’s Units.” Western Sizzlin Stores of Virginia, Inc. (“WSSVA”), a wholly-ownedsubsidiary of Western Sizzlin Corporation, executed certain Master Leases (“theLeases”) dated as of January 1, 2001, covering the Former Quincy’s Units.  However, pursuant to Paragraph 47 of theLeases, the Leases never became effective as FFCA did not execute and/ordeliver the Leases.

In 2001 and 2002, several Former Quincy’s Units wereproperly turned back to FFCA.  Certainfranchisees who continued to operate Former Quincy’s Units owned by FFCAremitted all rental payments directly to FFCA, and FFCA accepted thesepayments.  Based on these developments,and the lack of any binding Master Lease Agreement with FFCA, on May 15, 2003,the Company sent a letter to the Lessor, providing notice of the Company’stermination of any tenancies at-will on any remaining Former Quincy’s unitseffective May 31, 2003.  In accordancewith the Company’s position, the Company has returned to FFCA every invoice forrent expense, or tax statement, received after May 15, 2003, with a coverletter explaining that the Company is not responsible for any suchamounts.  FFCA has not disputed theCompany’s position.

**Other**

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

**(9)****           Investmentin Unconsolidated Joint Venture**

The Company is apartner in a 50/50 joint venture with a franchisee for a new restaurant inHarrisonburg, Virginia.  During October2005, the joint venture entered into a loan agreement and the Companyguaranteed 50% of the loan obligation. The estimated fair value of the guarantee of approximately $30,000 isrecorded in other long-term liabilities and in investments in unconsolidatedjoint venture on the accompanying consolidated balance sheet at June 30,2007.  The term of the guarantee extendsthrough July 1, 2026 and the Company would be required to perform under theguarantee should the joint venture not to be able to meet its scheduledprincipal and interest payments. Pursuant to the joint venture agreement, a cash contribution of $300,000from each 50/50 partner was also made at the closing of this financing.  The Company is accounting for the investmentusing the equity method and the Company’s share of the net income (loss) of thejoint venture of $51,973 and $65,675 for the three and six month periods endedJune 30, 2007 and ($34,194) and ($38,228) for the three and six months endedJune 30, 2006, is included in equity in joint venture.  At June 30, 2007, the Company has areceivable due from the joint venture of $94,418 for start-up costs paid by theCompany on behalf of the the joint venture.  The balance due from the joint venture was $139,418 at December 31,2006.  The restaurant opened for businesson December 14, 2006.

**Financial Data**

The following is selected financial information forthe joint venture at June 30, 2007:

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| ** **                                                       | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                       | ** ** | **(unaudited)**                                       | ** ** | **(unaudited)**                                     | ** ** |
| **Statement of Operations Data:**                                | ** ** | ** **                                            | ** ** | ** **                                          | ** ** |
| Total revenues                                                   |       | $                                                     | 1,257,868  |                                                | $          | 2,586,993 |   |
| Cost of food                                                     |       | 530,927                                               |       | 1,126,420                                           |       |
| Payroll expense                                                  |       | 372,578                                               |       | 793,397                                             |       |
| Marketing and smallware expense                                  |       | 9,067                                                 |       | 17,554                                              |       |
| General and administrative                                       |       | 121,805                                               |       | 293,533                                             |       |
| Interest                                                         |       | 56,376                                                |       | 111,872                                             |       |
| Depreciation and amortization                                    |       | 50,622                                                |       | 100,321                                             |       |
| Net income                                                       |       | 103,946                                               |       | 131,349                                             |       |
| **Balance Sheet Data:**                                          | ** ** | ** **                                            | ** ** | ** **                                          | ** ** |
| Cash                                                             |       |                                                  |       | $                                                   | 188,352    |   |
| Prepaid insurance                                                |       |                                                  |       | 12,515                                              |       |
| Inventory                                                        |       |                                                  |       | 20,838                                              |       |
| Land, leasehold improvements (net), and construction in progress |       |                                                  |       | 3,847,166                                           |       |
| Loan costs, net                                                  |       |                                                  |       | 12,708                                              |       |
| Total assets                                                     |       |                                                  |       | 4,088,978                                           |       |
| Loan payable                                                     |       |                                                  |       | 3,226,761                                           |       |
| Accounts payable and accrued expenses                            |       |                                                  |       | 267,172                                             |       |
| Members’  equity                                            |       |                                                  |       | 366,308                                             |       |
|                                                                  |            |                                                       |            |                                                     |            |  |  |

 

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

In July 2006, the FASBissued FASB Interpretation Number 48, *Accounting for Uncertaintyin Income Taxes, an Interpretation of FASB Statement No. 109,*(“FIN48”).  FIN 48 prescribes a recognitionthreshold and measurement attributes for the financial statement recognitionand measurement of a tax position taken in a tax return.  The Company must determine whether it is “more-likely-than-not”that a tax position will be sustained upon examination, including resolution ofany related appeals or litigation processes, based on the technical merits ofthe position.  Once it is determined thata position meets the more-likely-than-not recognition threshold, the positionis measured to determine the amount of benefit to recognize in the financialstatements.  FIN 48 applies to all taxpositions related to income taxes subject to FASB Statement No. 109, *Accounting for Income Taxes.*The requirements of FIN 48 wereadopted during the first quarter of 2007. Refer to Note 5 for further discussion.

In September 2006, the FASB issuedStatement of Financial Accounting Standards No. 157, *Fair ValueMeasurements* (“SFAS No. 157”). SFAS No. 157 clarifies theprinciple that fair value should be based on the assumptions marketparticipants would use when pricing an asset or liability and establishes afair value hierarchy that prioritizes the information used to develop thoseassumptions. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years, with early adoption permitted. The Company has not yetdetermined the impact, if any, that the implementation of SFAS No. 157will have on our results of operations or financial condition.

In February 2007, the FASB issuedSFAS No. 159, *The Fair Value Option for Financial Assetsand Financial Liabilities-Including an amendment of FASB Statement No. 115, (*“SFAS159”), which is effective January 1, 2008. This Standard permits entities to choose to measure many financialinstruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the useof fair value measurement, with is consistent with the Board’s long-termmeasurement objectives for accounting for financial instruments.  The Company is currently evaluating theeffect, if any, that the adoption of SFAS 159 will have on our consolidatedfinancial statements on the adoption date of January 1, 2008.

In March 2006, the FASB EmergingIssues Task Force issued Issue 06-3 (“EITF 06-3”), *How SalesTaxes Collected From Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement. *Thisstandard requires that a company disclose its accounting policy (i.e., gross ornet presentation) regarding presentation of taxes within the scope of EITF06-3.  If taxes are significant andreported on a gross basis, a 

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company should disclose the amount ofsuch taxes for each period for which an income statement is presented.  The guidance is effective for the Companybeginning January 1, 2007.  The Companypresents revenues net of sales taxes in its consolidated statements of income.

**(11)         Recent Developments and Subsequent Events**

On June 17, 2007, Friendly Ice Cream Corp entered intoa definitive merger agreement that upon closing, Friendly Ice Cream Corp wouldresult in Friendly being privately held. For each share publicly held, Friendly shareholders would have the right to receive $15.50 in cash.  The agreement is subject to Friendlyshareholder approval.  If adopted by theshareholders of Friendly, the Company would then dispose of its investmentand  realize gains. The Company enteredinto a written agreement in June 2007 with Friendly to vote in favor of thesale.   The Company also sold a portionof its common stock in Friendly’s during July 2007 with realized gains ofapproximately $786,000.

On July 9, 2007, the Company filed a registrationstatement on Form S-3 with the SEC in preparation of conducting a rightsoffering to its stockholders.  The Company is seeking registration of897,375 shares of its common stock and 1,794,750 rights to purchase theseshares.  The registration statement is not yet effective and the offeringhas not commenced.

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

**Overview**

The following discussion may include forward-lookingstatements including anticipated financial performance, business prospects, thefuture opening of Company-operated and franchised restaurants, anticipatedcapital expenditures, and other matters. All statements other than statements of historical fact areforward-looking statements.  Section 27Aof the Securities 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 theterms of these safe harbors, the Company notes that a variety of factors,individually or in the aggregate, could cause the Company’s actual results andexperience to differ materially from the anticipated results or otherexpectations expressed in the Company’s forward-looking statements including,without limitation, the following: the ability of the Company or its franchisesto obtain suitable locations for restaurant development; consumer spendingtrends and habits; competition in the restaurant segment with respect to price,service, location, food quality and personnel resources; weather conditions inthe Company’s operating regions; laws and government regulations; generalbusiness and economic conditions; availability of capital; success of operatinginitiatives and marketing and promotional efforts; and changes in accountingpolicies.  In addition, the Companydisclaims any intent or obligation to update those forward-looking statements.

Effective January1, 2007, the Company restructured the operations into a holdingcompany/subsidiary format whereby all operations are now conducted throughwholly-owned subsidiaries.  Thisrestructuring is not anticipated to have any tax impact and will have no impacton the financial reporting as the Company will continue to report consolidatedfinancial statements.

In April 2007 the Company formed Western Investments,Inc., a Delaware corporation and wholly-owned subsidiary to serve as thegeneral partner of Western Acquisitions, L.P., a Delaware limited partnershipthat will operate as a private investment fund. Through Western Investments, Mr. Biglari will operate as the portfolioadvisor to the fund.  At this time,Western Investments does not intend to, but it may in the future, register withthe SEC as an investment adviser pursuant to the Investment Advisers Act of1940, as amended.  Separately, it may berequired to register as an investment adviser with the regulatory authoritiesin one or more states.

Western Investments’ role as the general partnercarries with it the obligation to manage the operations of the fund, and inthis regard it will be assisted by a professional fund administrator.  Furthermore, Western Investments will agreeto reimburse certain investors for the first 30% of any loss that they maysuffer as a result of an investment in the fund, a commitment which carriessignificant risk.  See “Risk Factors” onpage 24.

For serving as the fund’s general partner, WesternInvestments will receive a monthly management fee equal to one-twelfth of 1% ofthe value of the capital account of each limited partner.  It will also receive an annual incentiveallocation equal to 20% of the portion of each limited partner’s pro rata shareof the fund’s net profits for each fiscal 

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year in excess of net losses allocated to each limitedpartner and carried forward from prior years. The fund has made no investments as of the date of this prospectus.  Other investors in the fund will be “accreditedinvestors” under SEC rules, though the fund has no investors as of the date ofthis prospectus.

The Company intends to be a minority investor in thefund, and in exchange for the Company’s limited partnership interest it intendsto contribute cash and certain of the Company’s marketable securities.  The fund intends to invest primarily inequity securities of U.S. publicly traded companies.  This may include investments both in therestaurant industry, in an effort to leverage familiarity with the restaurantbusiness, as was the case with the Company’s investment in Friendly’s, and alsoinvestments outside the restaurant business. The fund may seek either controlling positions or minority positions.

While the Company has historically been principallyengaged, and intends at this time to remain principally engaged, in franchisingand operating restaurants, the recent investment activities could bring theCompany within the definition of an “investment company” and require theCompany to register as an investment company under the Investment Company Actof 1940.  The Company’s Board ofDirectors had adopted a policy requiring management to restrict the Company’soperations and investment activities to avoid becoming an investment company,until and unless the Board approves otherwise. Although  the Company does notpresently intend to change its principal business, and the Board has notapproved any such change, the Company has expanded its investment activities,and  may decide in the future to registeras an investment company under the Investment Company Act.  Under certain circumstances, if the Companyis successful in investment activities, then the Company may inadvertently fallwithin the definition of an investment company, in which event it may be requiredto register as an investment company.  Ifthe Company decides or is required to register as an investment company, thenthe Company would become subject to various provisions of the InvestmentCompany Act and the regulations adopted under such Act, which are veryextensive and could adversely affect the Company’s operations.

On June 17, 2007, the Company along with The LionFund, L.P., Biglari Capital Corp., Sardar Biglari and Philip L. Cooley, enteredinto a Stockholders Agreement with an affiliate of Sun Capital Corp., pursuantto which the Company agreed to vote the Company’s shares of Friendly Ice CreamCorporation in favor of a merger agreement that will result in the acquisitionof Friendly by an affiliate of Sun for $15.50 per share in cash subject tostockholder approval and other conditions. The Stockholders Agreement was filed with the SEC as an exhibit to ourSchedule 13D (as amended).

The Company operated and franchised a total of 125restaurants located in 19 states, including 5 Company-owned, 119 franchiserestaurants and one joint venture as of June 30, 2007.  The restaurants include a family steakhouseconcept and a buffet concept.

The Company’s objective is to maximize its intrinsicbusiness value per share over the long term. In meeting this objective, the Company will evaluate all investmentalternatives to achieve above-average returns on capital. The Company willcontinue to franchise restaurants and maximize operating results of the fiveCompany-operated restaurants.

The Company seeks to invest in stocks of businesses atprices below their intrinsic business value. The Company’s preferred strategyis to allocate a meaningful amount of capital in each investee, resulting inconcentration.  The carrying values ofthe Company’s equity securities are exposed to market price fluctuations, whichmay be accentuated by a concentrated equity portfolio. A significant decline inthe price of major investments may produce a large decrease in the Company’sstockholder’s equity (See Note 3).  Investmentand all other capital allocation decisions are made for the Company by Mr.Biglari.

**Results of Operations**

Netincome for the three and six months ended June 30, 2007 was $232,163 and$382,120 compared to net income of $143,106 and $149,404 for the three and sixmonths ended June 30, 2006.

The following table sets forth for the periodspresented the percentage relationship to total revenues of certain itemsincluded in the consolidated statements of income and certain restaurant datafor the periods presented:

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| ** **                                                   | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                    |       |                                            |       |                                          |       |   |   |   |   |
| Company-operated restaurants                                 |       | 75.5                                            | %          | 75.9                                          | %          | 74.7 | % | 74.2 | % |
| Franchise operations                                         |       | 24.5                                            |       | 24.1                                          |       | 25.3 |   | 25.8 |   |
| Total revenues                                               |       | 100.0                                           |       | 100.0                                         |       | 100.0 |   | 100.0 |   |
|                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Company-operated restaurants — food, beverage and labor |       | 52.4                                            |       | 51.9                                          |       | 53.4 |   | 53.4 |   |
| Restaurant occupancy and other                               |       | 12.3                                            |       | 12.4                                          |       | 13.4 |   | 13.2 |   |
| Subleased properties                                         |       | 1.1                                             |       | 4.1                                           |       | 1.0 |   | 1.7 |   |
| Franchise operations — direct support                   |       | 5.9                                             |       | 6.5                                           |       | 5.7 |   | 6.9 |   |
| Corporate expenses                                           |       | 15.6                                            |       | 14.0                                          |       | 14.1 |   | 14.5 |   |
| Depreciation and amortization                                |       | 5.7                                             |       | 5.6                                           |       | 6.0 |   | 5.9 |   |
| Total costs and expenses                                     |       | 93.0                                            |       | 94.5                                          |       | 93.6 |   | 95.6 |   |
|                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Income from operations                                       |       | 7.0                                             |       | 5.5                                           |       | 6.4 |   | 4.4 |   |
|                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Other  income (expense)                                      |       | 1.0                                             |       | (.5                                           | )          | .7 |   | (1.5 | ) |
|                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Income before income tax expense                             |       | 8.0                                             |       | 5.0                                           |       | 7.1 |   | 2.9 |   |
| Income tax expense                                           |       | 3.1                                             |       | 1.9                                           |       | 2.8 |   | 1.1 |   |
| Net  income                                                  |       | 4.9                                             | %          | 3.1                                           | %          | 4.3 | % | 1.8 | % |

 
| ** **                               | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------|
| ** **                               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007**   | ** ** | **2006** | ** ** | ** ** |
| **Restaurant  Data**                     | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number  of Company-Operated Restaurants: |       |                                            |       |                                          |       |       |   |   |   |   |
| Beginning  of period                     |       | 5                                               |       | 5                                             |       | 5          |   | 5 |   |   |
| Opened                                   |       | —                                          |       | —                                        |       | —     |   | — |   |   |
| Closed                                   |       | —                                          |       | —                                        |       | —     |   | — |   |   |
| Franchised                               |       | —                                          |       | —                                        |       | —     |   | — |   |   |
| End  of period                           |       | 5                                               |       | 5                                             |       | 5          |   | 5 |   |   |
|                                     |       |                                            |       |                                          |       |       |   |   |   |   |

 
| ** **                              | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------|
| ** **                              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007**   | ** ** | **2006** | ** ** | ** ** |   |
| Number  of U.S. Franchised Restaurants: |       |                                            |       |                                          |       |       |   |   |   |   |
| Beginning  of period                    |       | 121                                             |       | 133                                           |       | 123        |   | 135 |   |   |
| Opened                                  |       | —                                          |       | —                                        |       | —     |   | — |   |   |
| Closed                                  |       | 2                                               |       | 3                                             |       | 4          |   | 5 |   |   |
| End  of period                          |       | 119                                             |       | 130                                           |       | 119        |   | 130 |   |   |
|                                         |            |                                                 |            |                                               |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007**   | ** ** | **2006** | ** ** | ** ** |   |
| Number of Joint Venture Restaurants: |       |                                            |       |                                          |       |       |   |   |   |   |
| Beginning of period                  |       | 1                                               |       | —                                        |       | 1          |   | — |   |   |
| Opened                               |       | —                                          |       | —                                        |       | —     |   | — |   |   |
| Closed                               |       | —                                          |       | —                                        |       | —     |   | — |   |   |
| End of period                        |       | 1                                               |       | —                                        |       | 1          |   | — |   |   |
|                                      |            |                                                 |            |                                               |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Revenues**

Totalrevenues decreased 0.6% to $4.69 million for the three months ended June 30,2007 from $4.72 million for the comparable three months ended June 30, 2006.Total revenues decreased 0.5% to $8.82 million for the six months ended June30, 2007 from $8.86 million for the comparable six months ended June 30, 2006.Company-operated restaurant revenues decreased 1.06% to $3.54 million for thethree months ended June 30, 2007 as compared to $3.58 million for thecomparable three months ended June 30, 2006. Company-operated restaurant revenuesincreased 0.20% to $6.59 million for the six months ended June 30, 2007 ascompared to $6.58 million for the comparable six months ended June 30, 2006.The slight increase for the six months ended June 30, 2007 is largelyattributable to the temporary closing for 21 days of a Company-operatedlocation for remodeling during 2006, which resulted in lost revenues ofapproximately $183,000 in the first six months of 2006.  Same store sales at Company-operatedrestaurants for the three and six months ended June 30, 2007, experienced anoverall decrease of  1.1% and an increaseof 0.2%, respectively.   Franchiserevenues increased 1.02% to $1.15 million for the three months ended June 30,2007 as compared to $1.14 million for the comparable three months ended June30, 2006. Franchise revenues decreased 2.41% to $2.23 million for the sixmonths ended June 30, 2007 as compared to $2.28 million for the comparable sixmonths ended June 30, 2006. The slight increase during the three months endedJune 30, 2007 is attributable to increased franchise transfer fees in 2007 of$20,000.  The overall decrease infranchise revenues for the six months ended June 30, 2007 is attributable tofewer franchised units in the system at June 30, 2007 as compared to June 30,2006.  Same store sales at franchiseoperations for the three and six months ended June 30, 2007, experienced anoverall increase of 0.4% and decrease of 0.6%, respectively.

**Costs and Expenses**

Costof Company-operated restaurants, consisting primarily of food, beverage, andlabor costs increased $10,490 (4.3%) to $2.46 million for the three monthsended June 30, 2007 from $2.45 million for the three months ended June 30,2006.   These costs for the three monthperiod as a percentage of Company-operated restaurants revenue were 69.5% and68.4% for the three months ended June 30, 2007 and 2006, respectively.   Cost of Company-operated restaurantsdecreased $27,000 (0.6%) to $4.71 million for the six months ended June 30,2007 from $4.73 million for the six months ended June 30, 2006.   These costs for the six month period as apercentage of Company-operated restaurants revenue were 71.4% and 71.9% for thesix months ended June 30, 2007 and 2006, respectively.  The decrease in the costs for the six monthsended June 30, 2007 was largely attributable to the temporary closing of aCompany-operated location during the first quarter of 2006 for remodel.  These costs overall have increased due to therising costs of commodities.

Restaurantoccupancy and other, which include utilities, insurance, maintenance, rent andother such costs of the Company-operated restaurants, decreased by $11,000(1.8%) for the three months ended June 30, 2007 versus the prior year’scomparable period. These costs for the three month period decreased as apercentage of Company-operated restaurant revenues from 16.8% in 2006 to 16.3%in 2007.  Restaurant occupancy and otherincreased by $6,000 (0.6%) for the six months ended June 30, 2007 versus theprior year’s comparable period. These costs for the six month period werecomparable as a percentage of Company-operated restaurant revenues of 17.9% in2006 and 17.9% in 2007.

Subleasedproperties include net costs associated with subleasing former Companyoperations and maintenance of vacant premises. These expenses decreased by $142,000 and $68,000 for the three and sixmonths ended June 30, 2007 versus the prior years’ comparable periods.  The decreases were largely attributable totermination of certain leased property arrangements during 2006.

Costof franchise operations direct support expense decreased by $31,000 and$107,000 for the three and six months ended June 30, 2007 versus the prioryears’ comparable periods.  The decreaseswere largely attributable to personnel reductions and targeted expense reductionsduring the third and fourth quarters of 2006.

Corporateexpenses consist of certain expenses not directly associated with any businesssegment.  These expenses include legal,accounting, stockholder relations, personnel not directly related to a segment,information systems, and other headquarter’s activities.  These expenses increased by $70,000 for thethree months ended June 30, 2007 and decreased $41,000 for the six months endedJune 30, 2007 versus the prior years’ comparable periods.  Overall, these expenses have decreased for2007 due to personnel reductions and targeted expense reductions during thethird and fourth quarters of 2006, but was offset by an increase in legalexpenses associated with the Friendly Ice Cream 

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Corp  investment beginning in the third quarter of2006.  Legal expenses related to theinvestment in Friendly Ice Cream Corp were $65,000 and $107,000 for the threeand six month periods ended June 30, 2007, respectively.

Depreciationand amortization expense increased by $2,000 and $8,000 for the three and sixmonths ended June 30, 2007 versus the prior years’ comparable periods. Theincreases were attributable to an increase in capital expenditures placed inservice due to remodels of two Company-operated locations during 2006.

**Other Income (Expense)**

Interest expense decreased $13,000 and $38,000 for thethree and six months ended June 30, 2007 versus the prior years’ comparableperiods due to a lower average principal outstanding balance.  Interest income fluctuates according to thelevels of available cash balances.  TheCompany employs a cash management system whereby available balances areinvested on an overnight basis.

Other income decreased $27,000 and $31,000 for thethree and six months ended June 30, 2007 versus the prior years’ comparableperiods.

**Income Tax Expense**

Income tax expense is directly affected by the levelsof pretax income. The Company’s effective tax rate was 38.6% and 38.9% for thethree months ended June 30, 2007 and 2006, respectively and 39.3% and 39.5% forthe six months ended June 30, 2007 and 2006, respectively.

**Cash and Cash Equivalents**

As of June 30, 2007, the Company had $2.78 million ofcash and cash equivalents as compared to $2.34 million as of December 31, 2006.

**Investment of Available Capital**

The Company’s cash flows have exceeded its workingcapital, financing and capital investment needs, and management expects thatthe Company’s cash flows will continue to exceed its operating cash needs forthe foreseeable future.  The Companyregularly evaluates how best to use available capital to increase stockholdervalue.  The Company may pursueinvestments in the form of acquisitions, joint ventures and partnerships wherethe Company believes attractive returns can be obtained.  Further, the Company may determine undercertain market conditions that available capital is best utilized to fundinvestments that it believes offer the Company attractive return opportunities,whether or not related to its ongoing business activities.

As previously discussed in Note 3 of Notes to theConsolidated Financial Statements in Part I, Item 1 of this Form 10-Q, theCompany’s Board of Directors has delegated authority to direct investment ofthe Company’s surplus cash to its Chairman, Sardar Biglari, subject to Boardreporting requirements and various limitations that have been or may be fromtime to time adopted by the Board of Directors. These investments may include significant and highly concentrated directinvestments with respect to the equity securities of public companies.  Any such investments will involve risks, andstockholders should recognize that the Company’s balance sheet may changedepending on the performance of investments. Furthermore, such investments could be subject to volatility that mayaffect both the recorded value of the investments as well as the Company’speriodic earnings.

**Operating Activities and Cash Flows**

The Company generated approximately $1.3 million and$999,000 in operating cash flows for the six months ended June 30, 2007 and 2006,respectively.  The Company’s primarysource of operating cash flows is the operating profits generated from Companyoperations and franchise operations.

**Investing Activities**

During the six months ended June 30, 2007, the Companyspent $14,000 on capital expenditures compared to $378,000 spent during theequivalent period in the prior year. Capital expenditures for 2006 included amounts attributable to theremodel of the Company-operated store in Northern Virginia.  The balance of the capital expenditures wasfor necessary replacement of equipment and leasehold improvements in the otherCompany-operated locations. Also included in investing activities for 2007 isan $833,000 investment in marketable securities.

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**Financing Activities**

The Company made payments of long-term debt of $80,000and $1.3 million for the six months ended June 30, 2007 and 2006,respectively.  Also, during the sixmonths ended June 30, 2007, the Company received $85,290          from the exercise of stock options.

**Liquidity**

The Company’s primary sources of liquidity are cashgenerated from operations and, if needed, borrowings under its existing line ofcredit. The Company continually reviews available financing alternatives.  In addition, the Company may consider, on anopportunistic basis, strategic decisions to create value and improveoperational performance.  The Company’sdebt agreements contain certain minimum financial covenant requirements.  As of June 30, 2007, the Company was in compliance with all debt covenants.

**CONTRACTUALOBLIGATIONS**

The table belowsets forth a summary of contractual obligations that will impact futureliquidity as of June 30, 2007:
| ** **                       | ** ** | **Payment due by period** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Totals** | ** ** |
| Long-term debt                   |       | $                                        | 83,576     |   | 118,783 |   | 109,803 |   | 121,385 |   | 134,189 |   | 200,875 |   | 768,611 |   |
| Operating  leases, net (1)       |       | 380,324                                  |       | 705,339 |   | 634,425 |   | 623,880 |   | 367,611 |   | 1,571,165 |   | 4,282,744 |   |
| Interest expense  (2)            |       | 36,902                                   |       | 62,834 |   | 52,041 |   | 40,459 |   | 27,655 |   | 14,603 |   | 234,494 |   |
| Tax obligations  (3)             |       | 134,536                                  |       | — |   | — |   | — |   | — |   | — |   | 134,536 |   |
| Totals                           |       | $                                        | 635,338    |   | 886,956 |   | 796,269 |   | 785,724 |   | 529,455 |   | 1,786,643 |   | 5,420,385 |   |

 

(1)             Operatinglease commitments are presented net of sublease rentals.  Gross operating lease commitments for theperiods above aggregate to approximately $4.4 million, offset by subleaserentals for the same periods of approximately $95,000.

(2)             Reflectsfuture interest payments through scheduled maturity dates based upon averageborrowing rates, outstanding debt balances and scheduled principal payments onlong-term debt.

(3)             Reflectrecognized liabilities for uncertain tax positions under the provision FIN48.  (See Note 5.)

**CRITICALACCOUNTING POLICIES**

The discussion andanalysis of financial condition and results of operations is based on theconsolidated financial statements and accompanying notes that have beenprepared in accordance with United States generally accepted accountingprinciples.  The preparation of theseconsolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

Application of thecritical accounting policies discussed below requires significant judgments bymanagement, often as a result of the need to make estimates of matters that areinherently uncertain.  If actual resultswere to differ materially from the estimates made, the reported results couldbe materially affected.  The Company isnot currently aware of any reasonably likely events or circumstance that wouldresult in materially different results. Senior management has reviewed thecritical accounting policies and estimates and the Management’s Discussion andAnalysis regarding them with the Audit Committee of the Board of Directors.

For additionalinformation regarding the impact of recently issued accounting standards, seeNote 10 of Notes to the Consolidated Financial Statements in Part I,Item 1 of this Form 10-Q.

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*Trade Accounts and NotesReceivable and the Allowance for Doubtful Accounts*

The Company collectsroyalties, and in some cases rent, from franchisees.  The Company views trade accounts and notesreceivable and the related allowance for doubtful accounts as a criticalaccounting estimate since the allowance for doubtful accounts is based on judgmentsand estimates concerning the likelihood that individual franchisees will paythe amounts included as receivables from them. In determining the amount of allowance for doubtful accounts to berecorded for individual franchisees, the Company considers the age of thereceivable, the financial stability of the franchisee, discussions that mayhave occurred with the franchisee and a judgment as to the overallcollectibility of the receivable from the franchisee.  In addition, the Company establishes anallowance for all other receivables for which no specific allowances are deemednecessary.  If average sales or thefinancial health of franchisees were to deteriorate, the Company might have toincrease the allowance for doubtful accounts.

*Investments*

The Company classifiesour marketable equity securities as available-for-sale, which are reported atfair value.  Unrealized holding gains andlosses, net of the related income tax effect, on available-for-sale securitiesare excluded from income and are reported as other comprehensive income in stockholders’equity.  Realized gains and losses fromsecurities classified as available-for-sale are included in income and aredetermined using the specific identification method for ascertaining the costof securities sold.  All investments aremarked-to-market based on quoted market prices and recorded at their fairvalue.  Investments in derivativesecurities are classified as trading securities, with both realized andunrealized gains and losses on those derivative instruments included in thestatement of income.

*Long-lived Assets, Franchise Royalty Contracts andGoodwill*

The Company views thedetermination of the carrying value of long-lived assets, franchise royaltycontracts and goodwill as critical accounting estimates since it must evaluatethe estimated economic useful life in order to properly depreciate or amortizeour long-lived assets and franchise royalty contracts and because it mustconsider if the value of any of our long-lived assets have been impaired,requiring adjustments to the carrying value. Goodwill is not subject to amortization but is subject to at least anannual impairment test to determine if the carrying amount exceeds its fairvalue.

Economic useful life isthe duration of time the asset is expected to be productively employed, whichmay be less than its physical life.  Theestimated economic useful life of an asset is monitored to determine if itcontinues to be appropriate in light of changes in business circumstances.

*Commitments and Contingencies*

The Company views accountingfor contingencies as a critical accounting estimate since loss contingenciesarising from claims, assessments, litigation, fines and penalties and othersources require judgment as to any probable liabilities incurred.  Actual results could differ from the expectedresults determined based on such estimates.

*Income Taxes*

In July 2006, the FASBissued FASB Interpretation Number 48, *Accounting for Uncertaintyin Income Taxes, an Interpretation of FASB Statement No. 109,*(“FIN48”).  FIN 48 prescribes a recognitionthreshold and measurement attributes for the financial statement recognitionand measurement of a tax position taken in a tax return.  The Company must determine whether it is “more-likely-than-not”that a tax position will be sustained upon examination, including resolution ofany related appeals or litigation processes, based on the technical merits ofthe position.  Once it is determined thata position meets the more-likely-than-not recognition threshold, the positionis measured to determine the amount of benefit to recognize in the financialstatements.  FIN 48 applies to all taxpositions related to income taxes subject to FASB Statement No. 109, *Accounting for Income Taxes.*The requirements of FIN 48 wereadopted during the first quarter of 2007.

For additionalinformation regarding the adoption of FIN 48, see Note 5 of Notes toConsolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

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**OTHER**

**Impactof 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 has historically been able to pass onincreased costs through certain selected menu price increases and has offsetincreased costs by increased productivity and purchasing efficiencies, butthere can be no assurance that the Company will be able to do so in thefuture.  Management anticipates that theaverage cost of restaurant real estate leases and construction cost couldincrease in the future which could affect the Company’s ability to expand.  In addition, mandated health care oradditional increases in the federal or state minimum wages could significantlyincrease the Company’s costs of doing business.

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

As of June 30, 2007, the Company’s financialinstruments are not exposed to significant market risk due to foreign currencyexchange risk or commodity price risk. However, the Company is exposed to market risk related to changes inmarket prices of marketable securities and to interest rates related to debtobligations. The Company’s marketable securities are currently concentrated ina few single investments, with the common stock of Friendly Ice CreamCorporation being the majority. A change in market prices also exposes theCompany to market risk related to the investments in marketablesecurities.  As of June 30, 2007, theCompany held $8.9 million in available-for-sale marketable securities. Ahypothetical 10% decline in the market value would result in $890,000 ofunrealized losses and would not affect cash flows unless the security wasdisposed.

The table below provides information about debtobligations that are sensitive to changes in interest rates.  The table presents principal cash flows andrelated weighted average interest rates by expected maturity dates.

Debt obligations at June 30, 2007 (dollars inthousands):

EXPECTED MATURITY DATE
| ** **                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------|------------|
| Long-term debt  maturities |       | $        | 84         |     | 119        |     | 110        |     | 121        |     | 134        |           | 201        |      | 769        |                           | 805        |   |
| Average Interest Rate      |       | 9.96     | %          | 10.03    | %          | 10.07    | %          | 10.07    | %          | 10.07    | %          | 10.07          | %          | 10.00     | %          |                           |       |
|                            |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                                |            |  |

 

**Item 4.  Controlsand Procedures**

The Company’s senior management, including the ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30,2007. Based on its evaluation as of December 31, 2006, the Companyconcluded that the disclosure controls and procedures were ineffective inproviding reasonable assurance that the information required to be disclosed inthe Annual Report on Form 10-K was summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and Form10-K due to the material weaknesses discussed below. These weaknesses have beenremediated as of June 30, 2007 and accordingly, based on this evaluationprocess, the Chief Executive Officer and Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed in reports filed and submitted underthe Securities Exchange Act of 1934 (as amended) is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms. Additionally, there have been no changes in the Company’s internalcontrol over financial reporting that occurred during the last fiscal quarterthat have materially affected, or are reasonable likely to materially affect,the Company’s internal control over financial reporting, except as discussedherein with respect to the remediation of certain controls.

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

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The following is a description of the materialweaknesses that the Company noted as of December 31, 2006, as well as adiscussion of the related remediation efforts:

Based on the evaluation as of December 31, 2006, thereview of the system of controls surrounding the information technology systemrevealed that the Chief Financial Officer had access to the journal entrymodule within the Company’s accounting system, leading to a segregation ofduties issue.  The Company has restrictedaccess to that particular module from the Chief Financial Officer, andimplemented additional access controls, review controls, and documentationprocedures necessary to remediate the material weakness.

In addition, in connection with the audit of theCompany’s 2006 financial statements, Grant Thornton LLP, (independentregistered public accounting firm), detected an error related to expensesassociated with the rights offering that expired December 8, 2006. A correctingadjustment was made prior to finalization of the 2006 financial statements,with the direct costs of $123,280 associated with the rights offering properlyrecorded as a reduction of equity instead of an expense. The Company hasimplemented additional review controls as of June 30, 2007.

There were no other changes in the Company’s internalcontrols or in other factors that could significantly affect these controlssince the evaluation process was completed as of June 30, 2007.

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**PART II. OTHER INFORMATION**

**Item 1.    Legal Proceedings**

In addition to those proceedings discussed in theCompany’s consolidated financial statements included in Item 1, Part 1, theCompany is involved in various other claims and legal actions which are routinelitigation matters incidental to the business. In the opinion of management, the ultimate disposition of these othermatters will not have a material adverse effect on the Company’s financialcondition, results of operations or liquidity.

**Item 1A. Risk Factors**

An investment in the common stock of any companyinvolves a degree of risk.  Investorsshould consider carefully the risks and uncertainties described in the Company’sAnnual Report on Form 10-K filed with the SEC, and those other risks describedelsewhere in this report, before deciding whether to purchase our commonstock.  Additional risks anduncertainties not currently known or that the Company currently deemsimmaterial may also become important factors that may harm the Company’sbusiness, financial condition, and results of operations.  The occurrence of risk factors could harm theCompany’s business, financial condition, and results of operations for companyoperations, as well as franchised operations. The trading price of the Company’s common stock could decline due to anyof these risks and uncertainties, and stockholders may lose part or all oftheir investment.

The following risk factors update those set forth inthe Company’s  2006 Annual Report on Form10-K:

**We are dependent on one key person for investmentand capital allocation decisions.**

Investment decisions and all major capital allocationdecisions are made for our business by Sardar Biglari, Chairman of the Board ofDirectors, Chief Executive Officer and President.  Although there are limitations on Mr. Biglari’sauthority and the Board monitors his investment and capital allocationdecisions (see “Recent Developments in Our Business”), there is risk in havingconcentrated decision-making authority. Mr. Biglari’s decisions could either independently or in the aggregateinvolve amounts that are material to our business.  Additionally, if for any reason the servicesof Mr. Biglari were to become unavailable, there could be a material adverseeffect on our business, since he is singularly responsible for these decisions.

**Our investment activities could requireregistration as an Investment Company.**

While we have historically been principally engaged infranchising and operating restaurants, our recent investment activities couldbring us within the definition of an “investment company” and require us toregister as an investment company under the Investment Company Act of1940.  Our Board of Directors has adopteda policy requiring management to restrict our operations and investmentactivities to avoid becoming an investment company, until and unless the Boardapproves otherwise.  Although we do notpresently intend to change our principal business, and the Board has notapproved any such change, we have expanded our investment activities, and wemay decide in the future to register as an investment company under theInvestment Company Act.  Also, undercertain circumstances, if we are successful in our investment activities, thenwe may inadvertently fall within the definition of an investment company, inwhich event we may be required to register as an investment company.

Notwithstanding our Board policy, if our investmentactivities inadvertently result in our being determined to be an investmentcompany and we fail to register as an investment company, we might be unable toenforce contracts with third parties, and third parties could seek rescissionof transactions with us undertaken during the period that we were anunregistered investment company, subject to equitable considerations set forthin the Investment Company Act.  Inaddition, we might be subject to monetary penalties or injunctive relief, orboth, in an action brought against us by the SEC.

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If we decide to register as an investment company,then we would become subject to various provisions of the Investment CompanyAct and the regulations adopted under such Act, which are very extensive andcould adversely affect our operations. For example, we might be prohibited from entering into or continuingtransactions with certain affiliates.

**We cannot assure the success of our corporatestrategy.**

Our corporate strategy is dependent upon factors, somewhich are out of our control, including availability of appropriate financingand general economic conditions.  Thesuccess of our strategy is also dependent upon our ability to execute thatstrategy as it relates to both our restaurant franchising business and ourinvestments.  We may not be successful inany or all of the endeavors that underlie our corporate strategy, whether ornot the factors affecting the outcome were within our control.

**We recently formed a new wholly-owned subsidiary,Western Investments, Inc., to serve as the general partner of a privateinvestment limited partnership, Western Acquisitions, L.P., in which capacityour subsidiary will bear the first 30% of any cumulative net losses otherwiseallocable to the capital accounts of certain limited partners.**

In April 2007, we formed Western Investments, Inc., aDelaware corporation, as a wholly-owned subsidiary.  Western Investments is the general partner ofWestern Acquisitions, L.P., a Delaware limited partnership also formed in April2007.  The purpose of WesternAcquisitions is to invest primarily in equity securities of U.S. publiclytraded companies.  Sardar Biglari, ourChairman, Chief Executive Officer and President, will manage theportfolio.  Western Investments will bearthe first 30% of any cumulative net losses otherwise allocable to the capitalaccounts of limited partners holding Class B units.  In the event that Western Investments has insufficientresources to fund this commitment, it may be necessary for us to make a capitalcontribution to keep that company from defaulting on its obligation.  Such an event could potentially have amaterial adverse effect on our financial position and prevent us from using thefunds provided to Western Investments in other areas.  See page 15 for further details.

**The publicly announced agreement for the purchaseof Friendly Ice Cream Corporation by an affiliate of Sun Capital Corp. may notclose as expected and therefore our involvement in a proxy contest for twoseats on the Board of Directors of Friendly Ice Cream Corporation may not beconcluded.**

We have recently been involved in a joint effort withThe Lion Fund, LP, the private investment fund operated by Mr. Biglari, tonominate two individuals, Mr. Biglari and Dr. Cooley, as nominees for the Boardof Directors of Friendly Ice Cream Corporation. Our Board determined that seeking these seats was in the best interestof our stockholders given our substantial investment in Friendly.  We were prepared to engage in a proxysolicitation to get our nominees elected to Friendly’s Board of Directors, andagreed to share the expenses of this effort with The Lion Fund, LP, on apro-rata basis.  In connection with theannouncement by Friendly that it had entered into an agreement to be acquiredby an affiliate of Sun Capital Corp., on June 17, 2007, we along with The LionFund, LP, Biglari Capital Corp., Sardar Biglari and Philip L. Cooley, enteredinto a Stockholders Agreement with an affiliate of Sun Capital Corp., pursuantto which we agreed to vote our shares of Friendly in favor of a mergeragreement that will result in the acquisition of Friendly by an affiliate ofSun for $15.50 per share in cash subject to stockholder approval and otherconditions.  The Stockholders Agreementwas filed with the SEC as an exhibit to our Schedule 13D (as amended).  We believe that the stockholders of Friendlywill approve of the transaction later this year and as a result our ownershipof Friendly will be liquidated.  However,there is no guarantee that this will take place and we may find it necessary torenew our efforts to seek the seats on the Friendly Board.  Should this occur, there is no guarantee thatour effort will be successful, and the costs associated with this effort couldprove to be substantial regardless of the outcome and could materially impactour financial position.

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**Item 4.    Submissionof Matters to a Vote of Security Holders**

 At the AnnualMeeting of the Stockholders held June 18, 2007 the following persons wereelected to the Board of Directors for a one-year term, until the 2008 AnnualMeeting of Stockholders, or until their successors are elected and qualified:

| Nominees          | ** ** | **Shares  voted for** | ** ** | **Shares  withheld** | ** ** |
|-------------------|------------|-----------------------|------------|----------------------|------------|
|              |       |                  |       |                 |       |
| Sardar Biglari    |       | 1,190,741             |       | 1,484                |       |
| Philip L. Cooley  |       | 1,190,741             |       | 1,485                |       |
| Titus W. Greene   |       | 1,189,741             |       | 2,485                |       |
| Kenneth R. Cooper |       | 1,187,590             |       | 4,636                |       |
| Jonathan Dash     |       | 1,190,741             |       | 1,485                |       |

 

Also at the Annual Meeting, an amendment to theCompany’s Restated Certificate of Incorporation to increase the number ofauthorized shares of common stock to 4 million shares received the affirmativevotes of a majority of the shares outstanding and was declared as approved andadopted.  The votes were as follows:

|        | Shares for       |   | 1,153,386 |   |   |
|--------|------------------|--------|-----------|--------|--------|
|   | Shares against   |   | 38,555    |   |   |
|   | Shares abstained |   | 285       |   |   |

 

**Item 6.    Exhibits:**

See Exhibit Index on page27.

 

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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/ Sardar Biglari*                       |   |   |
| * *              |       |                            |       | Sardar Biglari                             |   |   |
|                  |       |                            |       | President and Chief Executive Officer      |   |   |
|                  |       |                            |       |                                       |   |   |
| * *              |       | By:                             | * *   | */s/ Robyn B. Mabe*                        |   |   |
|                  |       |                            |       | Robyn B. Mabe                              |   |   |
|                  |       |                            |       | Vice President and Chief Financial Officer |   |   |
|                  |       |                            |       |                                       |   |   |
| Date: August 14, 2007 |       |                            |       |                                       |   |   |

 

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**EXHIBIT INDEX**
| 3.1.1  |   | Restated Certificate of Incorporation dated December  1, 1995.                          |
|--------|--------|-----------------------------------------------------------------------------------------|
|   |   |                                                                                    |
| 3.1.2  |   | Certificate of Amendment to Certificate of  Incorporation dated September 30, 2003.     |
|   |   |                                                                                    |
| 3.1.3  |   | Amendment to Certificate of Incorporation dated June  22, 1999.                         |
|   |   |                                                                                    |
| 3.1.4  |   | Certificate of Amendment to Restated Certificate of  Incorporation dated July 31, 2006. |
|   |   |                                                                                    |
| 3.1.5  |   | Certificate of Amendment to Restated Certificate of  Incorporation dated July 2, 2007.  |
|   |   |                                                                                    |
| 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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