**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**(Mark One)**

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

**For the quarterly periodended March 31, 2007, or**

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

** **

**Forthe transition period from                        to**

**Commissionfile number 0-25366**

**Western Sizzlin Corporation**

(Exact Name ofRegistrant as Specified in Its Charter)

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

 

**(540) 345-3195**(Registrant’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 such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer.  (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 checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes xNo

As of May 15, 2007, there were 1,789,750 shares of common stockoutstanding.

 

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**Western SizzlinCorporation**

**Form 10-QThree Months Ended March 31, 2007Table of Contents**
|                                                                                                          | ** ** | **Page**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **PART I.  FINANCIAL INFORMATION**                                                                       | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Item 1. Financial Statements  (Unaudited)**                                                            | ** ** | ** ** | ** ** |
|                                                                                                     |       |       |       |
| Consolidated Balance Sheets — March 31, 2007 and  December 31, 2006                                 |       | 3          |       |
|                                                                                                     |       |       |       |
| Consolidated Statements of Operations — Three Months  Ended March 31, 2007 and 2006                 |       | 4          |       |
|                                                                                                     |       |       |       |
| Consolidated Statement of Changes in Stockholders’  Equity — Three Months Ended March 31, 2007 |       | 5          |       |
|                                                                                                     |       |       |       |
| Consolidated Statements of Cash Flows — Three Months  Ended March 31, 2007 and 2006                 |       | 6          |       |
|                                                                                                     |       |       |       |
| Notes to Consolidated Financial Statements                                                               |       | 7-13       |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations**  |       | 13-18      |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Item 3. Quantitative and Qualitative Disclosure about  Market Risk**                                   |       | 19         |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Item 4. Controls and Procedures**                                                                      |       | 19         |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **PART  II. OTHER INFORMATION**                                                                          | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Item  1. Legal Proceedings**                                                                           |       | 20         |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Item  1.A. Risk Factors**                                                                              |       | 20         |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Item 6.  Exhibits**                                                                                    |       | 20         |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Signatures**                                                                                           |       | 21         |       |
| ** **                                                                                               | ** ** | ** ** | ** ** |
| **Exhibit Index**                                                                                        |       | 22         |       |

 

 

2

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**PART I. FINANCIALINFORMATIONWESTERN SIZZLIN CORPORATION**

**Consolidated Balance SheetsMarch 31, 2007 and December 31, 2006**
| ** **                                                                                                                                  | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                  | ** ** | ** **               | ** ** |
| **Assets**                                                                                                                                  |       |                     |       |                        |       |
| Current assets:                                                                                                                             |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                  |       | $                        | 2,279,320  |                        | $          | 2,344,644 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $500,758 in 2007 and  $470,758 in 2006                                |       | 915,986                  |       | 866,565                     |       |
| Current  installments of notes receivable, less allowance for impaired notes of  $18,365in 2007 and $17,409 in 2006                         |       | 234,672                  |       | 205,624                     |       |
| Other  receivables                                                                                                                          |       | 256,355                  |       | 239,531                     |       |
| Income taxes  receivable                                                                                                                    |       | 194,472                  |       | 248,559                     |       |
| Inventories                                                                                                                                 |       | 76,317                   |       | 55,207                      |       |
| Prepaid expenses                                                                                                                            |       | 256,772                  |       | 253,556                     |       |
| Deferred income  taxes                                                                                                                      |       | 312,751                  |       | 296,671                     |       |
| Total current  assets                                                                                                                       |       | 4,526,645                |       | 4,510,357                   |       |
|                                                                                                                                        |       |                     |       |                        |       |
| Notes receivable, less  allowance for impaired notes receivable of $163,440 and $164,396 in 2006,  excluding current installments           |       | 737,087                  |       | 800,841                     |       |
| Property and equipment,  net                                                                                                                |       | 2,164,416                |       | 2,270,300                   |       |
| Investments in  marketable securities (Note 3)                                                                                              |       | 8,285,486                |       | 6,508,645                   |       |
| Cash held by broker                                                                                                                         |       | 107,935                  |       | —                      |       |
| Franchise royalty  contracts, net of accumulated amortization of $8,351,414 in 2007 and  $8,193,840 in 2006                                 |       | 1,103,017                |       | 1,260,592                   |       |
| Goodwill                                                                                                                                    |       | 4,310,200                |       | 4,310,200                   |       |
| Financing costs, net of  accumulated amortization of $189,711 in 2007 and $188,670 in 2006                                                  |       | 10,499                   |       | 11,540                      |       |
| Investment in  unconsolidated joint venture                                                                                                 |       | 161,181                  |       | 147,479                     |       |
|                                                                                                                                        |       | $                        | 21,406,466 |                        | $          | 19,819,954 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                              |       |                     |       |                        |       |
| Current liabilities:                                                                                                                        |       |                     |       |                        |       |
| Current  installments of long-term debt                                                                                                     |       | $                        | 123,826    |                        | $          | 163,089 |   |
| Accounts payable                                                                                                                            |       | 576,364                  |       | 555,110                     |       |
| Accrued expenses  and other                                                                                                                 |       | 526,658                  |       | 554,443                     |       |
| Income taxes  payable                                                                                                                       |       | 71,740                   |       | —                      |       |
| Total current  liabilities                                                                                                                  |       | 1,298,588                |       | 1,272,642                   |       |
|                                                                                                                                        |       |                     |       |                        |       |
| Long-term debt,  excluding current installments                                                                                             |       | 685,035                  |       | 685,036                     |       |
| Other long-term  liabilities                                                                                                                |       | 74,925                   |       | 69,370                      |       |
| Deferred income taxes                                                                                                                       |       | 1,011,672                |       | 394,885                     |       |
|                                                                                                                                        |       | 3,070,220                |       | 2,421,933                   |       |
|                                                                                                                                        |       |                     |       |                        |       |
| Commitments and  contingencies (Note 8)                                                                                                     |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                  |       |                     |       |                        |       |
| Common stock,  $.01 par value. Authorized 2,000,000 shares; 1,789,750 issued and outstanding  shares in 2007 and 1,787,750 in 2006 (Note 2) |       | 17,898                   |       | 17,878                      |       |
| Additional  paid-in capital                                                                                                                 |       | 12,813,581               |       | 12,790,681                  |       |
| Retained  earnings                                                                                                                          |       | 3,371,775                |       | 3,340,193                   |       |
| Accumulated  other comprehensive income — unrealized holding gains, net of taxes                                                       |       | 2,132,992                |       | 1,249,269                   |       |
| Total  stockholders’ equity                                                                                                            |       | 18,336,246               |       | 17,398,021                  |       |
|                                                                                                                                        |       | $                        | 21,406,466 |                        | $          | 19,819,954 |   |

 

See accompanying notes to consolidated financialstatements.

 

3

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**WESTERN SIZZLINCORPORATION**

**Consolidated Statements of IncomeThree Months Ended March 31, 2007 and 2006(Unaudited)**
| ** **                                                         | ** ** | **Three Months  Ended March 31** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Revenues:                                                          |       |                                            |       |   |   |
| Company-operated  restaurants                                      |       | $                                               | 3,048,300  |   | $ | 2,997,673 |   |
| Franchise operations                                               |       | 1,081,390                                       |       | 1,147,977 |   |
|                                                               |       |                                            |       |   |   |
| Total revenues                                                     |       | 4,129,690                                       |       | 4,145,650 |   |
|                                                               |       |                                            |       |   |   |
| Costs and expenses:                                                |       |                                            |       |   |   |
| Company-operated  restaurants —food, beverage and labor costs |       | 2,245,986                                       |       | 2,283,199 |   |
| Restaurant  occupancy and other                                    |       | 602,966                                         |       | 585,914 |   |
| Subleased properties                                               |       | 34,103                                          |       | (40,562 | ) |
| Franchise  operations — direct support                        |       | 228,948                                         |       | 304,289 |   |
| Corporate  expenses                                                |       | 513,675                                         |       | 625,327 |   |
| Depreciation and  amortization                                     |       | 265,934                                         |       | 260,041 |   |
|                                                               |       |                                            |       |   |   |
| Total costs and  expenses                                          |       | 3,891,612                                       |       | 4,018,208 |   |
|                                                               |       |                                            |       |   |   |
| Income from  operations                                            |       | 238,078                                         |       | 127,442 |   |
|                                                               |       |                                            |       |   |   |
| Other income (expense):                                            |       |                                            |       |   |   |
| Interest expense                                                   |       | (20,324                                         | )          | (46,092 | ) |
| Loss on early  extinguishment of long term debt                    |       | —                                          |       | (92,535 | ) |
| Interest income                                                    |       | 16,578                                          |       | 20,566 |   |
| Equity in joint  venture                                           |       | 13,702                                          |       | (4,034 | ) |
| Other                                                              |       | 3,697                                           |       | 7,790 |   |
|                                                               |       |                                            |       |   |   |
|                                                               |       | 13,653                                          |       | (114,305 | ) |
| Income before  income tax expense                                  |       | 251,731                                         |       | 13,137 |   |
| ** **                                                         |       |                                            |       |   |   |
| Income tax expense:                                                |       |                                            |       |   |   |
| Current                                                            |       | 9,927                                           |       | — |   |
| Deferred                                                           |       | 91,847                                          |       | 6,839 |   |
| Total income tax  expense                                          |       | 101,774                                         |       | 6,839 |   |
| Net income                                                         |       | $                                               | 149,957    |   | $ | 6,298 |   |
|                                                               |       |                                            |       |   |   |
| Earnings per share  (Note 4):                                      |       | $                                               | .08        |   | $ | .01 |   |
| Basic                                                              |       | $                                               | .08        |   | $ | .01 |   |
| Diluted                                                            |       |                                            |       |   |   |

 

See accompanying notes to consolidated financialstatements.

4

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**WESTERN SIZZLINCORPORATION**

**Consolidated Statement of Changes in Stockholders’EquityThree Months Ended March 31, 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                                        |       | —                |       | —                  |       | —       |       | 149,957                               |       | —     |       | 149,957 |   |
| Change in unrealized  holding gains, net of taxes |       | —                |       | —                  |       | —       |       | —                                |       | 883,723    |       | 883,723 |   |
| Comprehensive income                              |       | —                |       | —                  |       | —       |       | —                                |       | —     |       | 1,033,680 |   |
| Share based  compensation                         |       | —                |       | —                  |       | 5,920        |       | —                                |       | —     |       | 5,920 |   |
| Cumulative effect of  adopting FIN 48             |       | —                |       | —                  |       | —       |       | (118,375                              | )          | —     |       | (118,375 | ) |
| Stock options exercised                           |       | 2,000                 |       | 20                      |       | 16,980       |       | —                                |       | —     |       | 17,000 |   |
| Balances, March 31, 2007                          |       | 1,789,750             |       | $                       | 17,898     |         | $          | 12,813,581                            |       | $          | 3,371,775  |   | $ | 2,132,992 |   | $ | 18,336,246 |   |

 

See accompanying notes to consolidated financialstatements.

5

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**WESTERNSIZZLIN CORPORATION**

**Consolidated Statements of Cash FlowsThree Months Ended March 31, 2007 and 2006(Unaudited)**
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 149,957    |   | $ | 6,298 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization of property and equipment                           |       | 107,317                                          |       | 102,467 |   |
| Amortization of  franchise royalty contracts                                       |       | 157,574                                          |       | 157,574 |   |
| Amortization of  financing costs                                                   |       | 1,041                                            |       | 4,977 |   |
| Write off of  financing costs related to early extinguishment of long term debt    |       | —                                           |       | 29,699 |   |
| Provision for  doubtful accounts                                                   |       | 30,000                                           |       | 30,000 |   |
| Share-based  compensation                                                          |       | 5,920                                            |       | 5,100 |   |
| Equity in  (income) loss of unconsolidated joint venture                           |       | (13,702                                          | )          | 4,034 |   |
| Provision for  deferred income taxes                                               |       | 91,847                                           |       | 6,838 |   |
| (Increase)  decrease in:                                                           |       |                                             |       |   |   |
| Trade accounts  receivable                                                         |       | (79,421                                          | )          | (7,850 | ) |
| Notes receivable                                                                   |       | 34,706                                           |       | 40,924 |   |
| Other  receivables                                                                 |       | (42,224                                          | )          | 87,704 |   |
| Income taxes  receivable                                                           |       | —                                           |       | (6,310 | ) |
| Insurance  receivable — business interruption                                 |       | —                                           |       | 244,961 |   |
| Inventories                                                                        |       | (21,110                                          | )          | (12,167 | ) |
| Prepaid expenses                                                                   |       | (3,216                                           | )          | (30,911 | ) |
| Other assets                                                                       |       | —                                           |       | (17,812 | ) |
| Cash held by  broker                                                               |       | (107,935                                         | )          | — |   |
| Increase  (decrease) in:                                                           |       |                                             |       |   |   |
| Accounts payable                                                                   |       | 21,255                                           |       | 67,327 |   |
| Accrued expenses                                                                   |       | (27,785                                          | )          | (245,375 | ) |
| Income taxes  payable                                                              |       | 7,437                                            |       | — |   |
| Other long-term  liabilities                                                       |       | 5,555                                            |       | 7,543 |   |
| Net cash  provided by operating activities                                         |       | 317,216                                          |       | 475,021 |   |
|                                                                               |       |                                             |       |   |   |
| Cash flows from  investing activities:                                             |       |                                             |       |   |   |
| Change in  short-term investments                                                  |       | —                                           |       | 260,069 |   |
| Payments on  advances to joint venture                                             |       | 25,400                                           |       | — |   |
| Additions to  property and equipment                                               |       | (1,433                                           | )          | (295,177 | ) |
| Purchases of  marketable securities                                                |       | (384,244                                         | )          | — |   |
| Proceeds from  fire casualties                                                     |       | —                                           |       | 784,993 |   |
|                                                                               |       |                                             |       |   |   |
| Net cash (used  in) provided by investing activities                               |       | (360,277                                         | )          | 749,885 |   |
|                                                                               |       |                                             |       |   |   |
| Cash flows from  financing activities:                                             |       |                                             |       |   |   |
| Cash received  from exercise of stock options                                      |       | 17,000                                           |       | — |   |
| Payments on  long-term debt                                                        |       | (39,264                                          | )          | (1,227,469 | ) |
|                                                                               |       |                                             |       |   |   |
| Net cash used in  financing activities                                             |       | (22,264                                          | )          | (1,227,469 | ) |
|                                                                               |       |                                             |       |   |   |
| Net decrease in  cash and cash equivalents                                         |       | (65,325                                          | )          | (2,563 | ) |
|                                                                               |       |                                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                  |       | 2,344,644                                        |       | 1,664,848 |   |
|                                                                               |       |                                             |       |   |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                | 2,279,320  |   | $ | 1,662,285 |   |
|                                                                               |       |                                             |       |   |   |
| Supplemental disclosure  of cash flow information:                                 |       |                                             |       |   |   |
| Cash payments  for interest                                                        |       | $                                                | 20,651     |   | $ | 114,233 |   |
| Income taxes  paid                                                                 |       | $                                                | 2,485      |   | $ | 16,341 |   |
| Adoption of FIN  48 (non-cash)                                                     |       | $                                                | 118,375    |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

6

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**WESTERNSIZZLIN CORPORATION**

Notes to Consolidated Financial StatementsThree Months Ended March 31, 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 theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements.  In the opinion of management, all materialreclassifications and adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of operations,financial position and cash flows for each period shown have 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. Options are no longergranted under the 1994 Plan and only 7,500 options granted to James C. Verneyremain 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 three monthsended March 31, 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 $5,920 and $5,100 of compensationexpense for stock options for the three months ended March 31, 2007 and 2006,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 threemonths ended March 31, 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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|                          | ** ** | **Three Months  Ended March 31,** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                     |       |                                             |       |   |   |
| Expected term  (years)   |       | 5                                                |       | 5 |   |
| Risk-free  interest rate |       | 4.50                                             | %          | 4.82 | % |
| Volatility               |       | 78.83                                            | %          | 35.87 | % |
| Dividend yield           |       | —                                           |       | — |   |

 

There were 1,000 stock options granted during thethree month period ended March 31, 2007, all at an estimated fair value of $5.92.  There were 1,000 stock options granted duringthe three month period ended March 31, 2006, all at an estimated fair value of$5.10.

The following table summarizes stock optionsoutstanding as of March 31, 2007, as well as activity during the three monthperiod then ended:

|                            | ** ** | ** **      | ** ** | **Exercise Price  Per Share** | ** ** | **Contractual  Term** | ** ** | **Aggregate** | ** **                                                                                              |
|----------------------------|------------|-----------------|------------|-----------------------------------------|------------|-----------------------|------------|---------------|---------------------------------------------------------------------------------------------------------|
| ** **                 | ** ** | **Options**     | ** ** | **Weighted**                            | ** ** | **Weighted**          | ** ** | **Intrinsic** | ** **                                                                                              |
| ** **                 | ** ** | **Outstanding** | ** ** | **Average**                             | ** ** | **Average**           | ** ** | **Value**     | ** **                                                                                              |
| Balance, December 31, 2006 |       | 58,000          |       | $                                       | 9.00       |                  | —     |          |                  — |   |
| Granted                    |       | 1,000           |       | 9.15                                    |       | —                |       | —        |                                                                                                    |
| Exercised                  |       | (2,000          | )          | 8.50                                    |       | —                |       | —        |                                                                                                    |
| Expired/Forfeited          |       | (12,000         | )          | 8.71                                    |       | —                |       | —        |                                                                                                    |
| Balance,  March 31, 2007   |       | 45,000          |       | $                                       | 8.21       |                  | 5.7        |          | $                                                                                                       | 172,635 |   |
|                            |            |                 |            |                                         |            |                       |            |               |                                                                                                         |  |  |

 

All options outstanding at March 31, 2007 areexercisable.  At March 31, 2007, therewere 52,000 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 has purchased a significant percentage ofcommon stock of Friendly Ice Cream Corporation and insignificant amounts inother securities. All investments and other capital allocation decisions aremade by Mr. Biglari, the Company’s Chairman, under the limited authoritydelegated by the Board of Directors.  Thedelegated authority includes the authority to borrow funds in connection withmaking investments in marketable securities or derivative securities, subjectto Board reporting requirements and various limitations.  As of the date of this filing, Mr. Biglarihas authority to manage surplus cash up to $5.5 million, and in addition, hasauthority to borrow a maximum of $2 million. The Company has a margin securities account with Jefferies &Company, Inc. (Jefferies). The margin account bears interest at the FederalFunds Target Rate quoted by the Wall Street Journal, plus .5%, or approximately5.75% as of the date of this report, with the minimum and maximum amount of anyparticular loan to be determined by Jefferies, in its discretion, from time totime.  The collateral securing the marginloans are the 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 March 31, 2007.  As of March 31,2007, the Company had $107,935 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 Security on the balance sheet, with the change infair value during the period excluded from earnings and recorded net of tax asa component of other comprehensive income. Investments in derivative securities are classified as tradingsecurities, with both realized and unrealized gains and losses on thosederivative instruments included in the statement of income.  The Company realized a gain of $4,613 duringthe first quarter ended March 31, 2007 from expired put options previouslywritten by the Company.

8

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Following is a summary of marketable equity securitiesas of March 31, 2007 and December 31, 2006: 

|                         | ** ** | **March 31, 2007** | ** ** |
|-------------------------|------------|------------------------------|------------|
| ** **              | ** ** | **Cost**                     | ** ** | **Fair Value** | ** ** | **Gross Unrealized  Gains** | ** ** |
| Friendly Ice Cream Corp |       | $                            | 4,543,768  |   | $ | 7,900,699 |   | $ | 3,356,931 |   |
| Other Investments       |       | $                            | 384,244    |   | $ | 384,787 |   | $ | 544 |   |
|                    |       | $                            | 4,928,012  |   | $ | 8,285,486 |   | $ | 3,357,475 |   |

 

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

 

**(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 monthsended March 31, 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 March 31, 2007** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|
| ** **                     | ** ** | **Gross**                                    | ** ** | **Weighted average** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **carrying**                                 | ** ** | **amortization** | ** ** | **Accumulated** | ** ** |
| ** **                     | ** ** | **amount**                                   | ** ** | **period** | ** ** | **amortization** | ** ** |
| Amortizing  intangible assets: |       |                                         |       |   |   |   |   |
| Franchise  Royalty Contracts   |       | $                                            | 9,454,431  |   | 15.0 yrs. |   | $ | 8,351,414 |   |
|                                |            |                                              |            |  |  |  |  |  |  |

 

Aggregate amortization expense for amortizingintangible assets for the three month period ended March 31, 2007 was $157,574.Estimated amortization expense is $630,300 per 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 March 31,2007, the Company has a recorded liability of $128,307, including interest of$28,854, for such uncertain tax positions.

The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense.   During thequarter ended March 31, 2007, the Company recognized approximately $3,259 ofaccrued interest associated with uncertain tax 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 March 31, 2007, the earliest tax yearopen to examination by a major taxing jurisdiction is 2003.

9

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**(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 the potentialdilution that could occur if securities or other contracts to issue commonstock were exercised or converted into common stock or resulted in the issuanceof common stock that then shared in the earnings of the Company.  Stock options for 30,000 shares of commonstock were not included in computing diluted earnings for the three monthsended March 31, 2006 because the effects of these options were anti-dilutive.

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per share computations forthe periods indicated:

|                                        | ** ** | ** **      | ** ** | **Weighted**      | ** ** | ** **         | ** ** |
|----------------------------------------|------------|-----------------|------------|-------------------|------------|--------------------|------------|
| ** **                             | ** ** | ** **      | ** ** | **Average**       | ** ** | **Earnings**       | ** ** |
| ** **                             | ** ** | **Income**      | ** ** | **Shares**        | ** ** | **Per Share** | ** ** |
| ** **                             | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount**         | ** ** |
| **Three months ended March 31,  2007** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net  income — basic               |       | $               | 149,957    |              | 1,788,039  |               | $          | .08 |   |
| Net  income — diluted             |       | $               | 149,957    |              | 1,792,182  |               | $          | .08 |   |
|                                   |       |            |       |              |       |               |       |
| **Three  months ended March 31, 2006** | ** ** | ** **      | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net  income — basic               |       | $               | 6,298      |              | 1,188,857  |               | $          | .01 |   |
| Net  income — diluted             |       | $               | 6,298      |              | 1,203,507  |               | $          | .01 |   |

 

All share and earnings per share data for the period ended March 31,2006 have been adjusted to reflect the reverse stock split recorded in August2006.

**(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 reclassifications havebeen 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. TheCorporation does not allocate certain expenses to any business segment.  These costs include expenses of the followingfunctions: legal, accounting, stockholder relations, personnel not directlyrelated to a segment, information systems and other headquarteractivities.  These unallocated expensesare designated as unallocated corporate expenses.

10

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The following table summarizes reportable segmentinformation:

|                                     | ** ** | **Three Months**         | ** ** |
|-------------------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **Ended March 31,** | ** ** |
| ** **                          | ** ** | **2007**                      | ** ** | **2006** | ** ** |
|                                |       |                          |       |   |   |
| Revenues  from reportable segments: |       |                          |       |   |   |
| Restaurants                         |       | $                             | 3,048,300  |   | $ | 2,997,673 |   |
| Franchising                         |       | 1,081,390                     |       | 1,147,977 |   |
| Total revenues                      |       | $                             | 4,129,690  |   | $ | 4,145,650 |   |
| Depreciation  and amortization:     |       |                          |       |   |   |
| Restaurants                         |       | $                             | 100,495    |   | $ | 90,735 |   |
| Franchising                         |       | 165,439                       |       | 166,421 |   |
| Corporate                           |       | —                        |       | 2,885 |   |
| Total depreciation and amortization |       | $                             | 265,934    |   | $ | 260,041 |   |
| Interest  Expense:                  |       |                          |       |   |   |
| Restaurants                         |       | $                             | 20,324     |   | $ | 46,031 |   |
| Corporate                           |       | —                        |       | 61 |   |
| Total interest expense              |       | $                             | 20,324     |   | $ | 46,092 |   |
| Interest  Income:                   |       |                          |       |   |   |
| Corporate                           |       | $                             | 16,578     |   | $ | 20,566 |   |
| Total interest income               |       | $                             | 16,578     |   | $ | 20,566 |   |
| Equity  in joint venture:           |       |                          |       |   |   |
| Franchising                         |       | $                             | 13,702     |   | $ | (4,032 | ) |
| Total equity in joint venture       |       | $                             | 13,702     |   | $ | (4,032 | ) |
| Income  (loss) from operations:     |       |                          |       |   |   |
| Restaurants                         |       | $                             | 98,853     |   | $ | 37,825 |   |
| Subleased properties                |       | (34,103                       | )          | 40,562 |   |
| Franchising                         |       | 697,003                       |       | 674,382 |   |
| Corporate                           |       | (513,675                      | )          | (625,327 | ) |
| Total income from operations:       |       | $                             | 238,078    |   | $ | 127,442 |   |

 

|                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Total  assets:                       |       |               |       |                  |       |
| Restaurants                          |       | $                  | 6,914,653  |                  | $          | 6,615,074 |   |
| Franchising                          |       | 5,270,082          |       | 5,605,981             |       |
| Corporate                            |       | 940,858            |       | 1,090,254             |       |
| Investments in marketable securities |       | 8,285,486          |       | 6,508,645             |       |
| Total  assets                        |       | $                  | 21,411,079 |                  | $          | 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.

**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.  Most recently, each of these premises hasbeen subleased to various operators.  Thelease agreement expired pursuant to its terms on June 30, 2006.  The plaintiffs have claimed in their lawsuitunspecified damages allegedly owing for certain repair and maintenance expenseson the premises, for the replacement of certain equipment, for diminution ofproperty value, and for loss of rental income, as well as interest andcosts.  At this time the likelihood of anunfavorable court outcome, or any potential loss, cannot be made withcertainty.  However, the Company isprepared to vigorously contest the plaintiff’s claims and will pursueapplicable cross claims and counterclaims.

**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”) executed certainMaster Leases (“the Leases”) dated as of January 1, 2001, covering the FormerQuincy’s Units.  However, pursuant toParagraph 47 of the Leases, the Leases never became effective as FFCA did notexecute and/or deliver 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 

11

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FFCA accepted these payments.  Based on these developments, and the lack ofany binding Master Lease Agreement with FFCA, on May 15, 2003, the Company senta letter to the Lessor, providing notice of the Company’s termination of anytenancies at-will on any remaining Former Quincy’s units effective May 31,2003.  In accordance with the Company’sposition, the Company has returned to FFCA every invoice for rent expense, ortax statement, received after May 15, 2003, with a cover letter explaining thatthe Company is not responsible for any such amounts.  FFCA has not disputed the Company’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 for $3.05 million and theCompany guaranteed 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 March 31,2007.  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 $13,702 and ($4,034) for the three months ended March 31, 2007and 2006, respectively, is included in equity in earnings of unconsolidatedjoint venture.  The restaurant opened forbusiness on December 14, 2006.

**Financial Data**

The following is selected financial information forthe joint venture at March 31, 2007:

|                                                             | ** ** | **Three Months  Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **March 31, 2007** | ** ** |
| ** **                                                  | ** ** | **(unaudited)**              | ** ** |
| **Statement  of Operations Data:**                          | ** ** | ** **                   | ** ** |
| Total  revenues                                             |       | $                            | 1,329,125  |   |
| Cost  of food                                               |       | 595,493                      |       |
| Payroll  expense                                            |       | 420,819                      |       |
| Marketing  and smallware expense                            |       | 8,487                        |       |
| General  and administrative                                 |       | 171,728                      |       |
| Interest                                                    |       | 55,496                       |       |
| Depreciation  and amortization                              |       | 49,699                       |       |
| Net  income                                                 |       | 27,403                       |       |
| **Balance  Sheet Data:**                                    | ** ** | ** **                   | ** ** |
| Cash                                                        |       | $                            | 183,820    |   |
| Prepaid  insurance                                          |       | 14,663                       |       |
| Inventory                                                   |       | 21,331                       |       |
| Land,  leasehold improvements, and construction in progress |       | 3,897,437                    |       |
| Loan  costs, net                                            |       | 13,090                       |       |
| Total  assets                                               |       | 4,153,839                    |       |
| Loan  payable                                               |       | 3,270,327                    |       |
| Accounts  payable and accrued expenses                      |       | 342,313                      |       |
| Members’ equity                                        |       | 262,363                      |       |

 

**(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 

12

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attributes for thefinancial statement recognition and measurement of a tax position taken in atax return.  The Company must determinewhether it is “more-likely-than-not” that a tax position will be sustained uponexamination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position.  Once it is determined that a position meetsthe more-likely-than-not recognition threshold, the position is measured todetermine the amount of benefit to recognize in the financial statements.  FIN 48 applies to all tax positions relatedto income taxes subject to FASB Statement No. 109, *Accountingfor Income Taxes.*The requirements of FIN 48 were adopted during thefirst quarter of 2007.  Refer to Note 5for 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 liabilities differentlywithout 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 company should disclose the amount of such taxesfor 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.

**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.

13

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The Company operated and franchised a total of 127 restaurants locatedin 19 states, including 5 Company-owned and 121 franchise restaurants and onejoint venture as of March 31, 2007.  Therestaurants include a family steakhouse concept and a steak and buffet concept.

The Company’s objective is to maximize its intrinsic business value pershare over the long term.  In meetingthis objective, the Company will evaluate all investment alternatives toachieve above-average returns on capital. The Company will continue tofranchise restaurants and maximize operating results of the fiveCompany-operated restaurants.

The Company seeks to invest in stocks of businesses at prices belowtheir intrinsic business value. The Company’s preferred strategy is to allocatea meaningful amount of capital in each investee, resulting 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) Operating decisions for the Company are madeby management. As described above, investment and all other capital allocationdecisions are made for the Company by Mr. Biglari, Chairman of the Board ofDirectors.

**Results of Operations**

Net income for the three months ended March 31, 2007was $149,957 compared to net income of $6,298 for the three months ended March31, 2006.

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

|                                                                     | ** ** | **Three Months**         | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                          | ** ** | **Ended March 31,** | ** ** |
| ** **                                                          | ** ** | **2007**                      | ** ** | **2006** | ** ** |
| Revenues:                                                           |       |                          |       |   |   |
| Company-operated restaurants                                        |       | 73.8                          | %          | 72.3 | % |
| Franchise operations                                                |       | 26.2                          |       | 27.7 |   |
| Total revenues                                                      |       | 100.0                         |       | 100.0 |   |
|                                                                |       |                          |       |   |   |
| Company-operated restaurants —  food, beverage and labor costs |       | 54.4                          |       | 55.1 |   |
| Restaurant occupancy and other                                      |       | 14.6                          |       | 14.1 |   |
| Subleased properties                                                |       | 1.0                           |       | (1.0 | ) |
| Franchise operations — direct  support                         |       | 5.5                           |       | 7.3 |   |
| Corporate expenses                                                  |       | 12.4                          |       | 15.1 |   |
| Depreciation and amortization                                       |       | 6.4                           |       | 6.3 |   |
| Total costs and expenses                                            |       | 94.3                          |       | 96.9 |   |
|                                                                |       |                          |       |   |   |
| Income from operations                                              |       | 5.7                           |       | 3.1 |   |
|                                                                |       |                          |       |   |   |
| Other income (expense)                                              |       | .3                            |       | (2.8 | ) |
|                                                                |       |                          |       |   |   |
| Income before income tax  expense                                   |       | 6.0                           |       | 0.3 |   |
| Income tax expense                                                  |       | 2.4                           |       | 0.2 |   |
| Net income                                                          |       | 3.6                           | %          | 0.1 | % |

 

|                                         | ** ** | **Three Months**         | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Ended March 31,** | ** ** |
| ** **                              | ** ** | **2007**                      | ** ** | **2006** | ** ** |
|                                    |       |                          |       |   |   |
| **Restaurant Data**                     | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Number of Company-Operated Restaurants: |       |                          |       |   |   |
| Beginning of period                     |       | 5                             |       | 5 |   |
| Opened                                  |       | —                        |       | — |   |
| Closed                                  |       | —                        |       | — |   |
| Franchised                              |       | —                        |       | — |   |
| End of period                           |       | 5                             |       | 5 |   |
| Number of U.S. Franchised Restaurants:  |       |                          |       |   |   |
| Beginning of period                     |       | 123                           |       | 135 |   |
| Opened                                  |       | —                        |       | — |   |
| Closed                                  |       | (2                            | )          | (3 | ) |
| End of period                           |       | 121                           |       | 132 |   |
| Number of Joint Venture Restuarants:    |       |                          |       |   |   |
| Beginning of period                     |       | 1                             |       | — |   |
| Opened                                  |       | —                        |       | — |   |
| Closed                                  |       | —                        |       | — |   |
| End of period                           |       | 1                             |       | — |   |

 

14

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**Revenues**

Total revenues decreased 0.4% to $4.13 million for thethree months ended March 31, 2007 from $4.15 million for the comparable threemonths ended March 31, 2006. Company-operated restaurant revenues increased1.7% to $3.05 million for the three months ended March 31, 2007 as compared to$3.0 million for the comparable three months ended March 31, 2006.  The increase is largely attributable to thetemporary closing of a Company-operated location for remodeling during thefirst quarter of 2006.  Same store salesfor the three months ended March 31, 2007, experienced an overall decrease of3.2%, taking out the effect of the remodel.  Franchise revenues decreased 5.8% to $1.08 million for the three monthsended March 31, 2007 as compared to $1.15 million for the comparable threemonths ended March 31, 2006.  Thedecrease is attributable to fewer franchised units in the system at March 31,2007 as compared to March 31, 2006.  Samestore sales for the three months ended March 31, 2007, experienced an overalldecrease of 1.7%.

**Costsand Expenses**

Cost of Company-operated restaurants, consistingprimarily of food, beverage, and labor costs decreased $37,200 (1.6%) to $2.2million for the three months ended March 31, 2007 from $2.3 million for thethree months ended March 31, 2006.  These costs for the three month period as a percentage of Company-operatedrestaurants revenue were 73.7% and 76.2% for the three months ended March 31,2007 and 2006, respectively.  Thedecrease in the costs was largely attributable to the temporary closing of aCompany-operated location during the first quarter of 2006 for remodel.

Restaurant occupancy and other, which includeutilities, insurance, maintenance, rent and other such costs of theCompany-operated restaurants, increased by $17,100 (2.9%) for the three monthsended March 31, 2007 versus the prior year’s comparable period. These costs forthe three month period increased slightly as a percentage of Company-operatedrestaurant revenues from 19.5% in 2006 to 19.8% in 2007.  The increase for the three months ended March31, 2007 was largely attributable to a $45,000 settlement of a lease inChantilly, Virginia offset by a reduction in the cost structure during thefirst quarter of 2007.

Subleased properties include net costs associated withsubleasing former Company operations and maintenance of vacant premises.  These expenses increased by $75,000 (184.8%)for the three months ended March 31, 2007 versus the prior year’s comparableperiod.  The increase was largelyattributable to additional expenses incurred due to the termination of certainsubleased properties by subtenants and lack of sub rental income.

Cost of franchise operations direct support expensedecreased by $75,000 (24.8%) for the three months ended March 31, 2007 versusthe prior year’s comparable period.  Thedecrease was largely attributable to personnel reductions and targeted expensereduction during the third and fourth quarters of 2006.

Corporate expenses consist of certain expenses notallocated to any business segment.  Theseexpenses include legal, accounting, stockholder relations, personnel notdirectly related to a segment, information systems, and other headquarter’sactivities.  These expenses decreased by$112,000 (17.9%) for the three months ended March 31, 2007 versus the prioryear’s comparable period.  The decreasewas attributable to personnel reductions and targeted expense reductions duringthe third and fourth quarters of 2006.

Depreciation and amortization expense increased by $6,000 (2.3%) forthe three months ended March 31, 2007 versus the three months ended March 31,2006. The increase was attributable to an increase in capital expendituresplaced in service due to remodels of two Company-operated locations during2006.

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**Other Income (Expense)**

Interest expense decreased $26,000 for the three months ended March 31,2007 over the comparable period in 2006 due to a lower average principaloutstanding balance.  Interest incomefluctuates according to the levels of available cash balances.  The Company employs a cash management systemwhereby available balances are invested on an overnight basis.

Other income decreased $4,093 for the three months ended March 31, 2007over the comparable period in 2006. Other income for 2007 included a realized gain on investments in putoptions of $4,613 during the first quarter ended March 31, 2007.

Income tax expense is directly affected by the levels of pretax income.The Company’s effective tax rate was 40.4% and 52.1% for the three months endedMarch 31, 2007 and 2006, respectively.

**Cash and Cash Equivalents**

As of March 31, 2007, the Company had $2.28 million of cash and cashequivalents as compared to $2.34 million as of March 31, 2006.

**Investment of Available Capital**

The Company’s cash flows have exceeded its working capital, financingand capital investment needs, and management expects that the Company’s cashflows will continue to exceed its operating cash needs for the foreseeablefuture.  The Company regularly evaluateshow best to use available capital to increase stockholder value.  The Company may pursue investments in theform of acquisitions, joint ventures and partnerships where the Companybelieves attractive returns can be obtained. Further, the Company may determine under certain market conditions thatavailable capital is best utilized to fund investments that it believes offerthe Company attractive return opportunities, whether or not related to itsongoing business activities.

As previously discussed in Note 3 of Notes to the ConsolidatedFinancial Statements in Part I, Item 1 of this Form 10-Q, the Company’s Boardof Directors has delegated authority to direct investment of the Company’ssurplus cash to its Chairman, Sardar Biglari, subject to Board reportingrequirements and various limitations that have been or may be from time to timeadopted by the Board of Directors.  Theseinvestments may include significant and highly concentrated direct investmentswith 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 $317,000 in operating cash flowsfor the three months ended March 31, 2007 and $475,000 for the three monthsended March 31, 2006.  The Company’sprimary source of operating cash flows is the operating profits generated fromCompany operations and franchise operations.

**Investing Activities**

During the three months ended March 31, 2007, the Company spent $1,400on capital expenditures compared to $295,000 spent during the equivalent periodin the prior year.  Capital expendituresfor 2006 included amounts attributable to the remodel of the Company-operatedstore in Northern Virginia.  The balanceof the capital expenditures was for necessary replacement of equipment andleasehold improvements in the other Company-operated locations. Also includedin investing activities for 2007 is $384,000 investment in marketablesecurities, offset by payments made on advances to unconsolidated joint ventureof $25,400.

**Financing Activities**

The Company made payments of long-term debt of $39,000 and $1.2 millionfor the three months ended March 31, 2007 and 2006, respectively.  Also, during the three months ended March 31,2007, the Company received $17,000 from the exercise of stock options.

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**Liquidity**

The Company’s primary sources of liquidity are cash generated fromoperations and, if needed, borrowings under its existing line of credit. TheCompany continually reviews available financing alternatives.  In addition, the Company may consider, on anopportunistic basis, strategic decisions to create value and improveoperational performance.

**CONTRACTUALOBLIGATIONS**

The table belowsets forth a summary of contractual obligations that will impact futureliquidity as of March 31, 2007:
| ** **                       | ** ** | **Payment due by period** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Totals** | ** ** |
| Long-term debt                   |       | $                                        | 123,826    |   | $ | 118,783 |   | $ | 109,803 |   | $ | 121,385 |   | $ | 134,189 |   | $ | 200,875 |   | $ | 808,861 |   |
| Operating  leases, net (1)       |       | 565,930                                  |       | 657,776 |   | 615,467 |   | 623,880 |   | 367,611 |   | 1,571,165 |   | 4,401,829 |   |
| Interest expense  (2)            |       | 56,881                                   |       | 62,834 |   | 52,041 |   | 40,459 |   | 27,655 |   | 14,603 |   | 254,473 |   |
| Tax obligations  (3)             |       | 128,307                                  |       | 0 |   | 0 |   | 0 |   | 0 |   | 0 |   | 128,307 |   |
| Totals                           |       | $                                        | 874,944    |   | $ | 839,393 |   | $ | 777,311 |   | $ | 785,724 |   | $ | 529,455 |   | $ | 1,786,643 |   | $ | 5,593,470 |   |

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(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 and analysis of financial condition andresults of operations is based on the consolidated financial statements and accompanyingnotes that have been prepared in accordance with United States generallyaccepted accounting principles.  Thepreparation of these consolidated financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

Application of the critical accounting policiesdiscussed below requires significant judgments by management, often as a resultof the need to make estimates of matters that are inherently uncertain.  If actual results were to differ materiallyfrom the estimates made, the reported results could be materiallyaffected.  The Company is not currentlyaware of any reasonably likely events or circumstance that would result inmaterially different results. Senior management has reviewed the criticalaccounting policies and estimates and the Management’s Discussion and Analysisregarding them with the Audit Committee of the Board of Directors.

For additional information regarding the impact ofrecently issued accounting standards, see Note 10 of Notes to the ConsolidatedFinancial Statements in Part I, Item 1 of this Form 10-Q.

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

The Company collects royalties, and in some casesrent, from franchisees.  The Companyviews trade accounts and notes receivable and the related allowance fordoubtful accounts as a critical accounting estimate since the allowance fordoubtful accounts is based on judgments and estimates concerning the likelihoodthat individual franchisees will pay the amounts included as receivables fromthem.  In determining the amount ofallowance for doubtful accounts to be recorded for individual franchisees, theCompany considers the age of the receivable, the financial stability of thefranchisee, discussions that may have occurred with the franchisee and ajudgment as to the overall collectibility of the receivable from thefranchisee.  In addition, the Companyestablishes an allowance for all other receivables for which no specificallowances are deemed necessary.  Ifaverage sales or the financial health of franchisees were to deteriorate, theCompany might have to increase the allowance for doubtful accounts.

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*Investments*

The Company classifies our marketable equitysecurities as available-for-sale, which are reported at fair value.  Unrealized holding gains and losses, net ofthe related income tax effect, on available-for-sale securities are excludedfrom 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 the determination of the carryingvalue of long-lived assets, franchise royalty contracts and goodwill ascritical accounting estimates since it must evaluate the estimated economicuseful life in order to properly depreciate or amortize our long-lived assetsand franchise royalty contracts and because it must consider if the value ofany of our long-lived assets have been impaired, requiring adjustments to thecarrying value.  Goodwill is not subjectto amortization but is subject to at least an annual impairment test todetermine if the carrying amount exceeds its fair value.

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

*Commitments and Contingencies*

The Company views accounting for contingencies as acritical accounting estimate since loss contingencies arising from claims,assessments, litigation, fines and penalties and other sources require judgmentas to any probable liabilities incurred. Actual results could differ from the expected results determined basedon such estimates.

*Income Taxes*

In July 2006, the FASB issued FASB InterpretationNumber 48, *Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109,*(“FIN 48”).  FIN 48 prescribes a recognition threshold andmeasurement attributes for the financial statement recognition and measurementof a tax position taken in a tax return. The Company must determine whether it is “more-likely-than-not” that atax position will be sustained upon examination, including resolution of anyrelated appeals or litigation processes, based on the technical merits of theposition.  Once it is determined that aposition meets the more-likely-than-not recognition threshold, the position ismeasured 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 additional information regarding the adoption ofFIN 48, see Note 5 of Notes to Consolidated Financial Statements in Part I,Item 1 of this Form 10-Q.

**OTHER**

**Impactof Inflation**

The impact of inflation on the costs of food and beverage products,labor and real estate can affect the Company’s operations.  Management believes the Company hashistorically been able to pass on increased costs through certain selected menuprice increases and has offset increased costs by increased productivity andpurchasing efficiencies, but there can be no assurance that the Company will beable to do so in the future.  Managementanticipates that the average cost of restaurant real estate leases andconstruction cost could increase in the future which could affect the Company’sability to expand.  In addition, mandatedhealth care or additional increases in the federal or state minimum wages couldsignificantly increase the Company’s costs of doing business.

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

As of March 31, 2007, the Company’s financial instruments are notexposed to significant market risk due to foreign currency exchange risk orcommodity price risk.  However, theCompany is exposed to market risk related to changes in market prices ofmarketable securities and to interest rates related to debt obligations. TheCompany’s marketable securities are currently concentrated in a singleinvestment, common stock of Friendly Ice Cream Corporation. A change in marketprices also exposes the Company to market risk related to the investments inmarketable securities.  As of March 31,2007, the Company held $8.3 million in available-for-sale marketablesecurities. A hypothetical 10% decline in the market value would result in$830,000 of unrealized losses and a corresponding decline would not affect cashflows unless the security was disposed of.

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

Debt obligations held for other than trading purposes at March 31, 2007(dollars in thousands):

EXPECTED MATURITY DATE
| ** **            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------|------------|
| Long-term debt        |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                           |       |
| Fixed Rate            |       | $        | 124        |     | $          | 119      |       | $        | 110        |     | $          | 121            |       | $         | 134        |                           | $          | 201 |   | $ | 809 |   | $ | 848 |   |
| 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 Chief Executive Officerand Chief Financial Officer, evaluated the effectiveness of the disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of March 31, 2007. Basedon its evaluation as of December 31, 2006, the Company concluded that thedisclosure controls and procedures were ineffective in providing reasonableassurance that the information required to be disclosed in the Annual Report onForm 10-K was summarized and reported within the time periods specified inthe Securities and Exchange Commission’s rules and Form 10-K due to thematerial weaknesses discussed below. These weaknesses still exist as ofMarch 31, 2007.

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

Based on the evaluation as of December 31, 2006, the review of thesystem of controls surrounding the information technology system revealed thatthe Chief Financial Officer has access to the journal entry module within theCompany’s accounting system, leading to a segregation of duties issue.  The Company is currently evaluating how torestrict access to that particular module from the Chief Financial Officer, aswell as additional procedures necessary to fully remediate the materialweakness. The Company anticipates the steps necessary to remediate thisdeficiency will be implemented by June 30, 2007.

In addition, in connection with the audit of the Company’s 2006financial results, Grant Thornton LLP, (independent registered publicaccounting firm), detected an error related to expenses associated with therights offering that expired December 8, 2006. A correcting adjustment was madeprior to finalization of the 2006 financial statements, with the direct costsof $123,280 associated with the rights offering properly recorded as areduction of equity instead of an expense. The Company is evaluatinginitiatives needed to remediate this material weakness in internal controls,and thus lower the risk level to remote of other potential material errors oromissions.  The Company plans to expandthe use of independent reviews by outside financial reporting experts andimplement this review by June 30, 2007.

There were no other changes in the Company’s internal controls or inother factors that could significantly affect these controls since theevaluation process was completed as of March 31, 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 the management, the ultimate disposition of theseother matters will not have a material adverse effect on the Company’sfinancial condition, 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 to us or that we currently deem immaterialmay also become important factors that may harm the Company’s business, financialcondition, and results of operations. The occurrence of risk factors could harm the Company’s business,financial condition, and results of operations for company operations, as wellas franchised operations.  The tradingprice of the Company’s common stock could decline due to any of these risks anduncertainties, and stockholders may lose part or all of their investment.

Item 6.    Exhibits :

See Exhibit Index on page22.

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.
|                    | ** ** | **Western Sizzlin Corporation** |       |                                       |
|--------------------|------------|---------------------------------|------------|--------------------------------------------|
| ** **         | ** ** | ** **                      | ** ** | ** **                                 | ** ** | ** ** |
| * *           |       | By:                             | * *   | */s/ James C. Verney*                      |   |   |
| * *           |       |                            |       | James C. Verney                            |   |   |
|               |       |                            |       | President and Chief Executive Officer      |   |   |
|               |       |                            |       |                                       |   |   |
| * *           |       | By:                             | * *   | */s/ Robyn B. Mabe*                        |   |   |
|               |       |                            |       | Robyn B. Mabe                              |   |   |
|               |       |                            |       | Vice President and Chief Financial Officer |   |   |
|               |       |                            |       |                                       |   |   |
| Date: May 15, 2007 |       |                            |       |                                       |   |   |

 

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

 

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