** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

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

 

**Commissionfile number 0-25366**

**WesternSizzlin Corporation**

(Exact Name ofRegistrant as Specified in Its Charter)

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

** **

**(540) 345-3195**

(Registrant’s TelephoneNumber Including Area Code)

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

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

o Yes xNo

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

 

 

----

 

**Western Sizzlin Corporation**

** **

**Form 10-Q**

**Nine Months Ended September 30,2007**

**Table of Contents**

** **
|                                                                                                        | **Page**   |
|-------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                        |       |
| **PART I. FINANCIAL INFORMATION**                                                                           | ** ** |
|                                                                                                        |       |
| **Item 1. Financial Statements (Unaudited)**                                                                | ** ** |
|                                                                                                        |       |
| Consolidated Balance Sheets  —September 30, 2007 and December 31, 2006                                 | 3          |
|                                                                                                        |       |
| Consolidated Statements of  Income — Three Months and Nine Months Ended September 30, 2007 and 2006    | 4          |
|                                                                                                        |       |
| Consolidated Statement of  Changes in Stockholders’ Equity — Nine Months Ended September 30, 2007 | 5          |
|                                                                                                        |       |
| Consolidated Statements of  Cash Flows — Nine Months Ended September 30, 2007 and 2006                 | 6          |
|                                                                                                        |       |
| Notes to  Consolidated Financial Statements                                                                 | 7-15       |
|                                                                                                        |       |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**    | 15-22      |
|                                                                                                        |       |
| **Item 3.  Quantitative and Qualitative Disclosure about Market Risk**                                      | 22         |
| ** **                                                                                                  |       |
| **Item 4. Controls  and Procedures**                                                                        | 22-23      |
| ** **                                                                                                  |       |
| **PART II. OTHER  INFORMATION**                                                                             |       |
| ** **                                                                                                  |       |
| **Item 1. Legal  Proceedings**                                                                              | 24         |
| ** **                                                                                                  |       |
| **Item 1.A. Risk Factors**                                                                                  | 24-25      |
| ** **                                                                                                  |       |
| **Item  6. Exhibits**                                                                                       | 25         |
| ** **                                                                                                  |       |
| **Signatures**                                                                                              | 26         |
| ** **                                                                                                  |       |
| **Exhibit  Index**                                                                                          | 27         |

 

2

----

 

**PART I.FINANCIAL INFORMATION**

**WESTERN SIZZLIN CORPORATION**

 

ConsolidatedBalance Sheets

September 30, 2007 andDecember 31, 2006

 
| ** **                                                                                                                                                                           | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                           | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| **Assets**                                                                                                                                                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                      |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                           |       | $                            | 606,335    |                        | $          | 2,344,644 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $213,003 in 2007 and  $470,758 in 2006                                                                         |       | 866,794                      |       | 866,565                     |       |
| Current  installments of notes receivable, less allowance for impaired notes of  $31,402in 2007 and $17,409 in 2006                                                                  |       | 264,147                      |       | 205,624                     |       |
| Other  receivables                                                                                                                                                                   |       | 183,105                      |       | 239,531                     |       |
| Income taxes  receivable                                                                                                                                                             |       | —                       |       | 248,559                     |       |
| Inventories                                                                                                                                                                          |       | 60,540                       |       | 55,207                      |       |
| Prepaid expenses                                                                                                                                                                     |       | 269,564                      |       | 253,556                     |       |
| Deferred income  taxes                                                                                                                                                               |       | 179,091                      |       | 296,671                     |       |
| Total current  assets                                                                                                                                                                |       | 2,429,576                    |       | 4,510,357                   |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Notes  receivable, less allowance for impaired notes receivable of $47,806 in 2007  and $164,396 in 2006, excluding current installments                                             |       | 635,114                      |       | 800,841                     |       |
| Property and  equipment, net                                                                                                                                                         |       | 1,982,430                    |       | 2,270,300                   |       |
| Investments in  marketable securities (Note 3)                                                                                                                                       |       | 9,149,740                    |       | 6,508,645                   |       |
| Money market  investments held by broker (Note 3)                                                                                                                                    |       | 3,124,831                    |       | —                      |       |
| Franchise  royalty contracts, net of accumulated amortization of $8,666,562 in 2007 and  $8,193,840 in 2006                                                                          |       | 787,869                      |       | 1,260,592                   |       |
| Goodwill                                                                                                                                                                             |       | 4,310,200                    |       | 4,310,200                   |       |
| Financing costs,  net of accumulated amortization of $191,793 in 2007 and $188,670 in 2006                                                                                           |       | 8,418                        |       | 11,540                      |       |
| Investment in  unconsolidated joint venture                                                                                                                                          |       | 265,904                      |       | 147,479                     |       |
|                                                                                                                                                                                 |       | $                            | 22,694,082 |                        | $          | 19,819,954 |   |
| **Liabilities, Minority Interest and Stockholders’  Equity**                                                                                                                    | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                |       |                         |       |                        |       |
| Current  installments of long-term debt                                                                                                                                              |       | $                            | 135,311    |                        | $          | 163,089 |   |
| Accounts payable                                                                                                                                                                     |       | 526,822                      |       | 555,110                     |       |
| Accrued expenses  and other                                                                                                                                                          |       | 614,651                      |       | 554,443                     |       |
| Income taxes  payable                                                                                                                                                                |       | 606,906                      |       | —                      |       |
| Total current  liabilities                                                                                                                                                           |       | 1,883,690                    |       | 1,272,642                   |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Long-term debt,  excluding current installments                                                                                                                                      |       | 592,039                      |       | 685,036                     |       |
| Other long-term  liabilities                                                                                                                                                         |       | 84,760                       |       | 69,370                      |       |
| Deferred income  taxes                                                                                                                                                               |       | 562,410                      |       | 394,885                     |       |
| Total liabilities                                                                                                                                                                    |       | 3,122,899                    |       | 2,421,933                   |       |
|                                                                                                                                                                                 |       |                         |       |                        |       |
| Minority  interest                                                                                                                                                                   |       | 1,459,283                    |       | —                      |       |
| Commitments and  contingencies (Note 8)                                                                                                                                              |       |                         |       |                        |       |
| Stockholders’  equity:                                                                                                                                                          |       |                         |       |                        |       |
| Common stock,  $.01 par value. Authorized 4,000,000 shares (2,000,000 shares at December 31,  2006); 1,797,750 issued and outstanding shares in 2007 and 1,787,750 in 2006  (Note 2) |       | 17,978                       |       | 17,878                      |       |
| Additional  paid-in capital                                                                                                                                                          |       | 12,881,791                   |       | 12,790,681                  |       |
| Retained  earnings                                                                                                                                                                   |       | 6,076,053                    |       | 3,340,193                   |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                       |       | (863,922                     | )          | 1,249,269                   |       |
| Total  stockholders’ equity                                                                                                                                                     |       | 18,111,900                   |       | 17,398,021                  |       |
| Total  liabilities, minority interest and stockholders’ equity                                                                                                                  |       | $                            | 22,694,082 |                        | $          | 19,819,954 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

----

 

**WESTERN SIZZLIN CORPORATION**

 

ConsolidatedStatements of Income

Three Months and NineMonths Ended September 30, 2007 and 2006

(Unaudited)

** **
| ** **                                                         | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                         | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Company-operated  restaurants                                      |       | $                                                    | 3,443,464  |                                                | $          | 3,393,679 |   | $ | 10,033,921 |   | $ | 9,971,290 |   |
| Franchise  operations                                              |       | 1,078,551                                            |       | 1,092,221                                           |       | 3,308,355 |   | 3,376,985 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Total revenues                                                     |       | 4,522,015                                            |       | 4,485,900                                           |       | 13,342,276 |   | 13,348,275 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Costs and  expenses:                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Company-operated  restaurants —food, beverage and labor costs |       | 2,451,091                                            |       | 2,365,806                                           |       | 7,157,226 |   | 7,098,664 |   |
| Restaurant  occupancy and other                                    |       | 596,834                                              |       | 704,991                                             |       | 1,775,585 |   | 1,877,279 |   |
| Subleased properties                                               |       | 64,265                                               |       | 106,508                                             |       | 151,013 |   | 251,158 |   |
| Franchise  operations — direct support                        |       | 291,871                                              |       | 262,694                                             |       | 796,065 |   | 887,340 |   |
| Corporate  expenses                                                |       | 577,862                                              |       | 578,986                                             |       | 1,821,122 |   | 1,843,139 |   |
| Depreciation and  amortization                                     |       | 265,527                                              |       | 267,838                                             |       | 797,135 |   | 791,819 |   |
| Total costs and  expenses                                          |       | 4,247,450                                            |       | 4,286,823                                           |       | 12,498,146 |   | 12,749,399 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Income from  operations                                            |       | 274,565                                              |       | 199,077                                             |       | 844,130 |   | 598,876 |   |
|                                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Other income  (expense):                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense                                                   |       | (31,741                                              | )          | (30,057                                             | )          | (71,792 | ) | (108,404 | ) |
| Loss on early  extinguishment of long term debt                    |       | —                                               |       | —                                              |       | — |   | (92,535 | ) |
| Gain on sales of  marketable securities (Note 3)                   |       | 3,557,399                                            |       | —                                              |       | 3,562,012 |   | — |   |
| Interest income                                                    |       | 34,866                                               |       | 16,343                                              |       | 65,219 |   | 53,443 |   |
| Equity in  profit(loss) of joint venture                           |       | 52,749                                               |       | (29,629                                             | )          | 118,424 |   | (67,857 | ) |
| Other                                                              |       | 6,779                                                |       | (6,483                                              | )          | 6,364 |   | 13,101 |   |
| Income before  income tax expense and minority interest            |       | 3,894,617                                            |       | 149,251                                             |       | 4,524,357 |   | 396,624 |   |
| Income tax  expense:                                               |       |                                                 |       |                                                |       |   |   |   |   |
| Current                                                            |       | 652,177                                              |       | —                                              |       | 670,361 |   | — |   |
| Deferred                                                           |       | 769,817                                              |       | 64,600                                              |       | 999,253 |   | 162,569 |   |
| Total income tax  expense                                          |       | 1,421,994                                            |       | 64,600                                              |       | 1,669,614 |   | 162,569 |   |
| Income before  minority interest                                   |       | 2,472,623                                            |       | 84,651                                              |       | 2,854,743 |   | 234,055 |   |
| Minority  interest in net profit of limited partnership            |       | (508                                                 | )          | —                                              |       | (508 | ) | — |   |
| Net income                                                         |       | $                                                    | 2,472,115  |                                                | $          | 84,651 |   | $ | 2,854,235 |   | $ | 234,055 |   |
| Earnings per  share (Note 6):                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                              |       | $                                                    | 1.38       |                                                | $          | .07 |   | $ | 1.59 |   | $ | .20 |   |
| Diluted                                                            |       | $                                                    | 1.37       |                                                | $          | .07 |   | $ | 1.58 |   | $ | .20 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

**WESTERN SIZZLIN CORPORATION**

** **

ConsolidatedStatement of Changes in Stockholders’ Equity

Nine Months EndedSeptember 30, 2007

(Unaudited)

 
| ** **                                                                 | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|-------------------|------------|
| ** **                                                                 | ** ** | **Shares**            | ** ** | **Dollars**             | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income (Loss)** | ** ** | **Total** | ** ** |
| Balances,  December 31, 2006                                               |       | 1,787,750             |       | $                       | 17,878     |         | $          | 12,790,681                            |       | $                 | 3,340,193  |   | $ | 1,249,269 |   | $ | 17,398,021 |   |
| Net income                                                                 |       | —                |       | —                  |       | —       |       | 2,854,235                             |       | —            |       | 2,854,235 |   |
| Change in  unrealized holding gains (losses)                               |       | —                |       | —                  |       | —       |       | —                                |       | 95,256            |       | 95,256 |   |
| Less:  Reclassification of unrealized gains on securities sold during 2007 |       |                  |       |                    |       |         |       |                                  |       | (2,208,447        | )          | (2,208,447 | ) |
| Comprehensive  income                                                      |       |                  |       |                    |       |         |       |                                  |       |              |       | 741,044 |   |
| Share based  compensation                                                  |       | —                |       | —                  |       | 5,920        |       | —                                |       | —            |       | 5,920 |   |
| Cumulative  effect of adopting FIN 48 (Note 5)                             |       | —                |       | —                  |       | —       |       | (118,375                              | )          | —            |       | (118,375 | ) |
| Stock options  exercised                                                   |       | 10,000                |       | 100                     |       | 85,190       |       | —                                |       | —            |       | 85,290 |   |
| Balances,  September 30, 2007                                              |       | 1,797,750             |       | $                       | 17,978     |         | $          | 12,881,791                            |       | $                 | 6,076,053  |   | $ | (863,922 | ) | $ | 18,111,900 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**WESTERN SIZZLIN CORPORATION**

 

ConsolidatedStatements of Cash Flows

Nine Months EndedSeptember 30, 2007 and 2006

(Unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                                    |       |   |   |
| Net income                                                                         |       | $                                                       | 2,854,235  |   | $ | 234,055 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization of property and equipment                           |       | 321,289                                                 |       | 319,098 |   |
| Amortization of  franchise royalty contracts                                       |       | 472,723                                                 |       | 472,722 |   |
| Amortization of  financing costs                                                   |       | 3,122                                                   |       | 16,676 |   |
| Loss on  sale/disposal of property and equipment                                   |       | —                                                  |       | 57,717 |   |
| Gain on sales of  marketable securities                                            |       | (3,562,012                                              | )          | — |   |
| Write off of  financing costs related to early extinguishment of long term debt    |       | —                                                  |       | 29,699 |   |
| Provision for  doubtful accounts                                                   |       | 90,000                                                  |       | 80,000 |   |
| Share-based  compensation                                                          |       | 5,920                                                   |       | 39,100 |   |
| Equity in  (income) loss of unconsolidated joint venture                           |       | (118,424                                                | )          | 67,857 |   |
| Provision for  deferred income taxes                                               |       | 999,253                                                 |       | 162,570 |   |
| Minority  interest in net profit of limited partnership                            |       | 508                                                     |       | — |   |
| (Increase)  decrease in:                                                           |       |                                                    |       |   |   |
| Trade accounts  receivable and notes receivable                                    |       | 16,975                                                  |       | 97,724 |   |
| Other  receivables                                                                 |       | 56,426                                                  |       | 63,275 |   |
| Income taxes  receivable                                                           |       | 248,559                                                 |       | (228,895 | ) |
| Insurance  receivable — business interruption                                 |       | —                                                  |       | 244,961 |   |
| Inventories                                                                        |       | (5,333                                                  | )          | (2,748 | ) |
| Prepaid expenses                                                                   |       | (16,008                                                 | )          | 54,153 |   |
| Other assets                                                                       |       | —                                                  |       | (59,987 | ) |
| Increase  (decrease) in:                                                           |       |                                                    |       |   |   |
| Accounts payable                                                                   |       | (28,288                                                 | )          | 193,023 |   |
| Accrued expenses                                                                   |       | 60,208                                                  |       | (498,967 | ) |
| Income taxes  payable                                                              |       | 540,240                                                 |       | — |   |
| Other long-term  liabilities                                                       |       | 15,390                                                  |       | 20,979 |   |
| Net cash  provided by operating activities                                         |       | 1,954,783                                               |       | 1,363,012 |   |
|                                                                               |       |                                                    |       |   |   |
| Cash flows from  investing activities:                                             |       |                                                    |       |   |   |
| Change in  short-term investments                                                  |       | —                                                  |       | 260,069 |   |
| Additions to  property and equipment                                               |       | (33,420                                                 | )          | (479,892 | ) |
| Proceeds from  sale of property                                                    |       | —                                                  |       | 2,800 |   |
| Purchases of  marketable securities                                                |       | (14,089,140                                             | )          | (2,100,000 | ) |
| Increase in  money market investments held by broker                               |       | (3,124,831                                              | )          | — |   |
| Proceeds from  fire casualties                                                     |       | —                                                  |       | 784,992 |   |
| Proceeds from  sale of marketable securities                                       |       | 12,089,784                                              |       | — |   |
| Net cash used in  investing activities                                             |       | (5,157,607                                              | )          | (1,532,031 | ) |
|                                                                               |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                             |       |                                                    |       |   |   |
| Cash received  from exercise of stock options                                      |       | 85,290                                                  |       | 27,600 |   |
| Payments on  long-term debt                                                        |       | (120,775                                                | )          | (1,399,068 | ) |
| Capital contributions  from minority interests in limited partnership              |       | 1,500,000                                               |       | — |   |
| Net cash  provided by (used in) financing activities                               |       | 1,464,515                                               |       | (1,371,468 | ) |
| Net decrease in  cash and cash equivalents                                         |       | (1,738,309                                              | )          | (1,540,487 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 2,344,644                                               |       | 1,664,848 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                       | 606,335    |   | $ | 124,361 |   |
| Supplemental  disclosure of cash flow information:                                 |       |                                                    |       |   |   |
| Cash payments  for interest                                                        |       | $                                                       | 72,794     |   | $ | 41,266 |   |
| Income taxes  paid                                                                 |       | $                                                       | 41,681     |   | $ | 398,880 |   |
| Adoption of FIN  48 (non-cash)                                                     |       | $                                                       | 118,375    |   | $ | — |   |
| Non-cash  investing activities:                                                    |       |                                                    |       |   |   |
| Reclassification  of deposits from other assets to property and equipment          |       | $                                                       | —     |   | $ | 378,455 |   |
| Purchase of  investments on margin                                                 |       | $                                                       | —     |   | $ | 1,693,084 |   |
| Unrealized (losses)  gains from marketable equity securities                       |       | $                                                       | (863,922   | ) | $ | 735,575 |   |

 

See accompanying notes toconsolidated financial statements.

 

6

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**WESTERNSIZZLIN CORPORATION,**

Notes toConsolidated Financial Statements

Nine Months Ended September 30, 2007 and 2006(Unaudited)

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

The accompanying unaudited consolidated financial statements of WesternSizzlin Corporation, (the “Company”) have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial reporting information and the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and notesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all material reclassifications and adjustments,consisting of normal recurring accruals, considered necessary for a fairpresentation of the results of operations, financial position and cash flowsfor each period shown have been included. The unaudited consolidated financialstatements and notes are presented as permitted by Form 10-Q and do not containcertain information included in the Company’s annual consolidated financialstatements and notes.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in the Company’s annual report on Form 10-K for the year endedDecember 31, 2006.

**(2)****                                ****Stock Options**

The Company has three stock option plans: the 2005 Stock Option Plan,the 2004 Non-Employee Directors’ Stock Option Plan, and the 1994 Incentive andNon-qualified Stock Option Plan. The 1994 Plan has expired for purposes ofgranting options and only 7,500 options granted to James C. Verney remainoutstanding under that plan.  Under the2005 and 2004 Plans, employees and directors may be granted options to purchaseshares of common stock at the fair market value on the date of the grant.  Under the provisions of the plans, thecontract terms of stock options for resigning directors were reduced and havebeen reflected in the computations of the weighted average contractual term ofthe outstanding options.  In February2007, Mr. Biglari informed the Board that he did not wish to receive futuregrants of stock options and that he relinquished all stock options previouslygranted to him.  Since thesemodifications did not increase the value of the awards, the modification had noimpact on compensation expense.

Effective January 1, 2006, the Company began recording compensationexpense associated with the stock options in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment” asinterpreted by SEC Staff Accounting Bulletin No. 107.  The Company adopted the modified prospectivetransition method provided for under SFAS No. 123R.

The Company recorded $0 and $5,920 compensation expense for stockoptions for the three and nine months ended September 30, 2007, respectively.

Options granted under the 2005 and 2004 Plans vest at the date of thegrant, with the exception of options granted to James C. Verney, which vestedaccording to a schedule in his Employment Agreement and are currently allvested.  The fair value of each optionaward was estimated on the date of grant using the Black-Scholes option-pricingmodel. Assumptions utilized in the model were evaluated and revised, asnecessary, 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 the Company’sstock 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 nine months endedSeptember 30, 2007 and 2006 were estimated on the date of grant using theBlack-Scholes option pricing model based on the following weighted averageassumptions in the table below:

 

7

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

 

There were -0- and 1,000 stock options granted during the three andnine month periods ended September 30, 2007, respectively, all at an estimatedfair value of $5.92.  There were -0- and6,000 stock options granted during the three and nine month periods endedSeptember 30, 2006, respectively, which had an estimated fair value at the dateof grant of $5.10 for the 1,000 granted during the first quarter of 2006 and$6.80 for the 5,000 stock options granted during the second quarter of 2006.The estimated weighted average fair value of the stock options granted duringthe nine months ended September 30, 2006 was $6.50.

The following table summarizes stock options outstanding as ofSeptember 30, 2007, as well as activity during the nine month period thenended:
| ** **                  | ** ** | **Options  Outstanding** | ** ** | **Exercise Price  Per Share  Weighted  Average** | ** ** | **Contractual  Term  Weighted  Average** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------|------------|--------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|
| Balance, December 31, 2006  |       | 58,000                   |       | $                                                          | 9.00       |                                     | —     |                            | —     |   |
| Granted                     |       | 1,000                    |       | 9.15                                                       |       | —                                   |       | —                          |       |
| Exercised                   |       | (10,000                  | )          | 8.53                                                       |       | —                                   |       | —                          |       |
| Expired/Forfeited           |       | (13,000                  | )          | 8.75                                                       |       | —                                   |       | —                          |       |
| Balance, September 30, 2007 |       | 36,000                   |       | $                                                          | 8.42       |                                     | 6.10       |                            | $          | 326,995 |   |
|                             |            |                          |            |                                                            |            |                                          |            |                                 |            |  |  |

 

All options outstanding at September 30, 2007 are exercisable.  At September 30, 2007, there were 36,000shares available for future grants under the plans; however, on April 25, 2007,the Company’s Board of Directors elected to suspend future grants under allplans indefinitely.

**(3)****                                ****Investments in MarketableSecurities**

All investments and other capital allocation decisions are made by Mr.Biglari, the Company’s Chairman, under limited authority delegated by the Boardof Directors.  The delegated authorityincludes the authority to borrow funds in connection with making investments inmarketable securities or derivative securities, subject to Board reportingrequirements and various limitations.  Asof the date of this filing, Mr. Biglari has authority to manage surplus cash upto $10 million, and in addition, has authority to borrow a maximum of $5million.  The Company has a marginsecurities account with Jefferies & Company, Inc. (Jefferies). The marginaccount bears interest at the Federal Funds Target Rate quoted by the WallStreet Journal, plus .5%, or approximately 5.0% as of the date of this report,with the minimum and maximum amount of any particular loan to be determined byJefferies, in its discretion, from time to time.  The collateral securing the margin loanswould be the Company’s holdings in marketable securities.  The minimum and maximum amount of anyparticular margin may be established by Jefferies, in its discretion, regardlessof the amount of collateral delivered to Jefferies, and Jefferies may changesuch minimum and maximum amounts from time to time.  The Company’s balance of margin debt was $0as of September 30, 2007.  As ofSeptember 30, 2007, the Company had money market investments of $3,124,831 heldby a broker.  These funds are designatedby the Company for long-term investments which will be purchased once they areidentified.

The Company’s investments in marketable equity securities are held foran indefinite period and thus are classified as available-for-sale.Available-for-sale securities are recorded at fair value in Investments inMarketable Securities on the consolidated 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 those derivativeinstruments included in the statement of income.  The Company realized a gain on sale ofmarketable securities of $3.6 million during the nine months ended September30, 2007, largely from the sale of the investment in Friendly Ice Cream 

 

8

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Corporation.  The Companydetermines cost of marketable securities sold based on the specificidentification method.

In April 2007 the Companyformed Western Investments, Inc., a Delaware corporation and wholly-ownedsubsidiary to serve as the general partner of Western Acquisitions, L.P., aDelaware limited partnership that operates as a private investment fund.  Through Western Investments, Mr. Biglari willoperate as the portfolio manager to the fund. During the third quarter ended September 30, 2007, the Companycontributed cash along with its holdings in the common stock of The Steak nShake Company to Western Investments, Inc., which in turn contributed theseassets to Western Acquisitions, L.P. Also during the third quarter ended September 30, 2007, cashcontributions from outside investors were made to the limited partnership.

 

As of September 30, 2007, Western Investments, Inc. owned 84.33% ofWestern Acquisitions, L.P.  As such,Western Acquisitions, L.P. has been consolidated into the accompanyingfinancial statements with the 15.67% ownership by minority limited partnerspresented as minority interest on the accompanying consolidated balancesheet.  Following is a summary ofmarketable securities as of September 30, 2007 and December 31, 2006:
| ** **                  | ** ** | **Cost**  | ** ** | **Gross Unrealized Gains** | ** ** | **Gross Unrealized Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------|------------|-----------|------------|----------------------------|------------|-----------------------------|------------|----------------|------------|
| September 30, 2007:         |       |      |       |                       |       |                        |       |           |       |
| Unrealized Gain Securities  |       | $         | 507,769    |                       | $          | 16,078                      |       | —         |       | $ | 523,847 |   |
| Unrealized Loss Securities  |       | 9,547,296 |       | —                     |       | (921,403                    | )          | 8,625,893      |       |
| Total Marketable Securities |       | $         | 10,055,065 |                       | $          | 16,078                      |       | $              | (921,403   | ) | $ | 9,149,740 |   |
|                        |       |      |       |                       |       |                        |       |           |       |
|                        |       |      |       |                       |       |                        |       |           |       |
| December 31, 2006:          |       | $         | 4,543,768  |                       | $          | 1,964,877                   |       | $              | —     |   | $ | 6,508,645 |   |

 

At December 31, 2006, investments in marketable securities consistedentirely of common stock of Friendly Ice Cream Corporation, which wassubsequently sold in 2007.  At September30, 2007, investments in marketable securities consisted of several marketablesecurities with the majority in The Steak n Shake Company.  All unrealized losses have been continuouslosses for less than a year as of September 30, 2007.

**(4)****                                ****Goodwill and Other IntangibleAssets**

The Company conforms to the provisions of Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets.”  Under SFAS No. 142, goodwill and intangibleassets deemed to have indefinite lives are reviewed for impairment and writtendown and charged to results of operations when their carrying amount exceedstheir estimated fair value. The Company is required to perform impairment testseach year, or between yearly tests in certain circumstances, for goodwill.There can be no assurance that future impairment tests will not result in acharge to earnings.

There were no changes in the net carrying amount ofgoodwill for the three and nine month periods ended September 30, 2007 and2006.

*AmortizingIntangible Assets*

Franchise royalty contracts are amortized on astraight-line basis over fifteen years, the estimated average life of thefranchise agreements.  The Companyassesses the recoverability of this intangible asset by determining whether theamortization of the franchise royalty contracts balance over their remaininglife can be recovered through undiscounted future operating cash flows of theacquired operation.  The amount ofimpairment, if any, is measured based on projected discounted future operatingcash flows using a discount rate reflecting the Company’s average cost offunds.

 

9

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| ** **                     | ** ** | **As of September**** 30, 2007** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **Gross  carrying  amount**                          | ** ** | **Weighted average  amortization  period** | ** ** | **Accumulated  amortization** | ** ** |
| ** **                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortizing  intangible assets: |       |                                                 |       |   |   |   |   |
| Franchise Royalty Contracts    |       | $                                                    | 9,454,431  |   | 15.0  yrs. |   | $ | 8,666,562 |   |
|                                |            |                                                      |            |  |  |  |  |  |  |

 

Aggregate amortization expense for amortizing intangible assets for thethree and nine month periods ended September 30, 2007 was $157,574 and$472,722, respectively. Estimated amortization expense is $630,300 per yearthrough December 31, 2008.

 

**(5)****                                ****Income Taxes**

The Company adopted the provisions of FASB Interpretation No. 48 (asdescribed in Note 10), “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 September 30,2007, the Company has a recorded liability of $140,412, including interest of$31,062, for such uncertain tax positions.

The Company recognizes interest and penalties related to uncertain taxpositions in income tax expense.   For the three and nine monthperiods ended September 30, 2007, the Company recognized approximately $278 and$5,467, respectively, of accrued interest associated with uncertain taxpositions.

The Company anticipates that the accrued liability for uncertain taxpositions will significantly decrease by the end of the year as the Companyfiles tax returns and remits any taxes due. As of September 30, 2007, the earliest tax year open to examination by amajor taxing jurisdiction is 2003.

At September 30, 2007, the Company recorded a deferred income tax assetof $314,640 associated with the unrecognized loss on its marketablesecurities.  Management has determinedthat it is more likely than not that the deferred income tax asset will not berealized and has established a valuation allowance of $314,640.

**(6)****                                ****Earnings Per Share**

Basic earnings per share excludes dilution and is computed by dividingincome available to common stockholders by the weighted-average number ofcommon shares outstanding for the period. Diluted earnings per share reflects the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock or resulted in the issuance of common stock thatthen shared in the earnings of the Company. Stock options for 0 and 6,000 shares of common stock were not includedin computing diluted earnings for the three and nine months ended September 30,2006 because the effects of these options were anti-dilutive.

The following is a reconciliation of the numerators and denominators ofthe basic and diluted earnings per share computations for the periodsindicated:

 

10

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| ** **                                 | ** ** | **Income  (Numerator)** | ** ** | **Weighted  Average  Shares  (Denominator)** | ** ** | **Earnings  Per Share  Amount** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| **Three  months ended September 30, 2007** | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic                    |       | $                       | 2,472,115  |                                         | 1,797,750  |                                 | $          | 1.38 |   |
| Net income — diluted                  |       | $                       | 2,472,115  |                                         | 1,808,755  |                                 | $          | 1.37 |   |
|                                       |       |                    |       |                                         |       |                                 |       |
| **Three months ended September 30, 2006**  | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic                    |       | $                       | 84,651     |                                         | 1,191,133  |                                 | $          | .07 |   |
| Net income — diluted                  |       | $                       | 84,651     |                                         | 1,197,802  |                                 | $          | .07 |   |
| ** **                                 | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| **Nine  months ended September 30, 2007**  | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic                    |       | $                       | 2,854,235  |                                         | 1,792,823  |                                 | $          | 1.59 |   |
| Net income — diluted                  |       | $                       | 2,854,235  |                                         | 1,800,848  |                                 | $          | 1.58 |   |
|                                       |       |                    |       |                                         |       |                                 |       |
| **Nine months ended September, 2006**      | ** ** | ** **              | ** ** | ** **                                   | ** ** | ** **                           | ** ** |
| Net income — basic                    |       | $                       | 234,055    |                                         | 1,189,656  |                                 | $          | .20 |   |
| Net income — diluted                  |       | $                       | 234,055    |                                         | 1,198,462  |                                 | $          | .20 |   |

 

The Company has registered with the SEC 898,875 shares of its commonstock and 1,797,750 rights to purchase these shares in connection with a rightsoffering to its shareholders of record as of October 17, 2007.  The rights will expire on November 16, 2007,unless the Company extends the offering for up to 15 days.

**(7)****                                ****Reportable Segments**

The Company has organized segment reporting to reflect howthe Company views its business activities. During the third quarter of 2006, the Company identified operatingsegments based on separate financial information that is evaluated regularly indeciding how to allocate resources and in assessing performance. TheCompany-operated Restaurant segment consists of the operations of allCompany-operated restaurants and derives its revenues from restaurantoperations.  This segment also includesnet costs incurred from subleases of previously operated locations, which ispresented separately. The Franchising segment consists primarily of franchisesales and support activities and derives its revenues from sales of franchiseand development rights and collection of royalties from franchisees. TheCompany incurs certain costs which include expenses of the following functions:legal, accounting, personnel not directly related to a segment and otherheadquarter activities.  These expensesare designated as corporate expenses.

The following table summarizes reportable segmentinformation:

 

11

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| ** **                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                        | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues from reportable segments:        |       |                                            |       |                                                |       |   |   |   |   |
| Restaurants                               |       | $                                               | 3,443,464  |                                                | $          | 3,393,679 |   | $ | 10,033,921 |   | $ | 9,971,290 |   |
| Franchising                               |       | 1,078,551                                       |       | 1,092,221                                           |       | 3,308,355 |   | 3,376,985 |   |
| Total revenues                            |       | $                                               | 4,522,015  |                                                | $          | 4,485,900 |   | $ | 13,342,276 |   | $ | 13,348,275 |   |
| Depreciation and amortization:            |       |                                            |       |                                                |       |   |   |   |   |
| Restaurants                               |       | $                                               | 100,252    |                                                | $          | 107,377 |   | $ | 301,051 |   | $ | 313,537 |   |
| Franchising                               |       | 165,275                                         |       | 160,461                                             |       | 496,084 |   | 478,282 |   |
| Total depreciation and amortization       |       | $                                               | 265,527    |                                                | $          | 267,838 |   | $ | 797,135 |   | $ | 791,819 |   |
| Interest Expense:                         |       |                                            |       |                                                |       |   |   |   |   |
| Restaurants                               |       | $                                               | 19,631     |                                                | $          | 30,057 |   | $ | 59,140 |   | $ | 108,334 |   |
| Corporate                                 |       | 12,110                                          |       | —                                              |       | 12,652 |   | 70 |   |
| Total interest expense                    |       | $                                               | 31,741     |                                                | $          | 30,057 |   | $ | 71,792 |   | $ | 108,404 |   |
| Interest Income:                          |       |                                            |       |                                                |       |   |   |   |   |
| Corporate                                 |       | $                                               | 34,866     |                                                | $          | 16,343 |   | $ | 65,219 |   | $ | 53,443 |   |
| Total interest income                     |       | $                                               | 34,866     |                                                | $          | 16,343 |   | $ | 65,219 |   | $ | 53,443 |   |
|                                      |       |                                            |       |                                                |       |   |   |   |   |
| Equity in profit (loss) of joint venture: |       | $                                               | 52,749     |                                                | $          | (29,629 | ) | $ | 118,424 |   | $ | (67,857 | ) |
| Total equity in joint venture             |       | $                                               | 52,749     |                                                | $          | (29,629 | ) | $ | 118,424 |   | $ | (67,857 | ) |
|                                      |       |                                            |       |                                                |       |   |   |   |   |
| Income (loss) from operations:            |       |                                            |       |                                                |       |   |   |   |   |
| Restaurants                               |       | $                                               | 295,287    |                                                | $          | 281,517 |   | $ | 800,059 |   | $ | 747,822 |   |
| Subleased properties                      |       | (64,338                                         | )          | (106,508                                            | )          | (151,086 | ) | (254,667 | ) |
| Franchising                               |       | 621,405                                         |       | 671,953                                             |       | 2,016,206 |   | 2,016,923 |   |
| Corporate                                 |       | (577,789                                        | )          | (647,885                                            | )          | (1,821,049 | ) | (1,911,202 | ) |
| Total income from operations:             |       | $                                               | 274,565    |                                                | $          | 199,077 |   | $ | 844,130 |   | $ | 598,876 |   |

 

| ** **                           | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Total assets:                        |       |                         |       |                        |       |
| Restaurants                          |       | $                            | 7,469,371  |                        | $          | 6,615,074 |   |
| Franchising                          |       | 2,094,760                    |       | 5,605,981                   |       |
| Corporate                            |       | 855,380                      |       | 1,090,254                   |       |
| Investments in marketable securities |       | 12,274,571                   |       | 6,508,645                   |       |
| Total assets                         |       | $                            | 22,694,082 |                        | $          | 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, theCompany was served with a lawsuit filed in the Circuit Court of Pulaski County,Arkansas, captioned *Parks Land Company,LLLP, et al. v. Western Sizzlin Corporation, et al.* The plaintiffsare owners/landlords of four restaurant premises located in the Little Rock,Arkansas metropolitan area which had been leased pursuant to a single leaseagreement and previously occupied by the Company.  Each of these premiseshad been subleased to various operators.  The lease agreement expiredpursuant to its terms on June 30, 2006.  The plaintiffs have claimed intheir lawsuit unspecified damages allegedly owing for certain repair andmaintenance expenses on the premises, for the replacement of certain equipment,for diminution of property value, and for loss of rental income, as well asinterest and costs.  They have recently demanded approximately$1,000,000.  The

 

12

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Company believes thatplaintiff’s claims and the evidence supporting them do not justify theplaintiff’s demands.  The prospects for an adverse outcome or financialloss for the company at the trial of the matter cannot begauged with certainty at this juncture. However, the Companywill continue to contest vigorously the plaintiff’s claimsand pursue appropriate strategies for defeating or otherwise disposing ofthe plaintiff’s claims in a manner consistent with the evidencedeveloped in the case.  The parties met for mediation on November 6,2007, but were unsuccessful in settling the dispute.  The case ispresently set for trial in February 2008 in Little Rock, Arkansas.

 

**FFCA**

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

In 2001 and 2002, several Former Quincy’s Units were properly turnedback to FFCA.  Certain franchisees whocontinued to operate Former Quincy’s Units owned by FFCA remitted all rentalpayments directly to FFCA, and 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 and legal actionsarising in the ordinary course of business. In the opinion of the management, the ultimate disposition of thesematters will not have a material adverse effect on the Company’s financialcondition, results of operations or liquidity.

**(9)****                                ****Investment in UnconsolidatedJoint Venture**

The Company is apartner in a 50/50 joint venture with a franchisee for a new restaurant inHarrisonburg, Virginia.  During October2005, the joint venture entered into a loan agreement and the Companyguaranteed 50% of the loan obligation. The estimated fair value of the guarantee of approximately $30,000 isrecorded in other long-term liabilities and in investments in unconsolidatedjoint venture on the accompanying consolidated balance sheet at September 30,2007.  The term of the guarantee extendsthrough July 1, 2026 and the Company would be required to perform under theguarantee should the joint venture not to be able to meet its scheduledprincipal and interest payments. Pursuant to the joint venture agreement, a cash contribution of $300,000from each 50/50 partner was also made at the closing of this financing.  The Company is accounting for the investmentusing the equity method and the Company’s share of the net income (loss) of thejoint venture of $52,749 and $118,424 for the three and nine month periodsended September 30, 2007 and ($29,629) and ($67,857) for the three and ninemonths ended September 30, 2006, is included in equity in joint venture.  At September 30, 2007, the Company has areceivable due from the joint venture of $69,418 for start-up costs paid by theCompany on behalf of the joint venture.  The balance due from the joint venture was $139,418 at December 31,2006.  The restaurant opened for businesson December 14, 2006.

**FinancialData**

The following is selected financial information for the joint ventureat September 30, 2007:

 

13

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| ** **                                                       | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                       | ** ** | **(unaudited)**                                       | ** ** | **(unaudited)**                                           | ** ** |
| **Statement of Operations Data:**                                | ** ** | ** **                                            | ** ** | ** **                                                | ** ** |
| Total revenues                                                   |       | $                                                     | 1,218,248  |                                                      | $          | 3,805,241 |   |
| Cost of food                                                     |       | 508,431                                               |       | 1,634,851                                                 |       |
| Payroll expense                                                  |       | 351,358                                               |       | 1,144,755                                                 |       |
| Marketing and smallware expense                                  |       | 11,297                                                |       | 28,851                                                    |       |
| General and administrative                                       |       | 129,222                                               |       | 422,755                                                   |       |
| Interest                                                         |       | 56,238                                                |       | 168,110                                                   |       |
| Depreciation and amortization                                    |       | 50,229                                                |       | 150,550                                                   |       |
| Net income                                                       |       | 105,500                                               |       | 236,849                                                   |       |
| **Balance Sheet Data:**                                          | ** ** | ** **                                            | ** ** | ** **                                                | ** ** |
| Cash                                                             |       |                                                  |       | $                                                         | 272,087    |   |
| Prepaid insurance                                                |       |                                                  |       | 8,086                                                     |       |
| Inventory                                                        |       |                                                  |       | 9,437                                                     |       |
| Land, leasehold improvements (net), and construction in progress |       |                                                  |       | 3,799,988                                                 |       |
| Loan costs, net                                                  |       |                                                  |       | 12,327                                                    |       |
| Total assets                                                     |       |                                                  |       | 4,118,032                                                 |       |
| Loan payable                                                     |       |                                                  |       | 3,183,059                                                 |       |
| Accounts payable and accrued expenses                            |       |                                                  |       | 243,930                                                   |       |
| Members’ equity                                             |       |                                                  |       | 471,808                                                   |       |
|                                                                  |            |                                                       |            |                                                           |            |  |  |

 

 

**(10)****                         ****Impact of Recently IssuedAccounting Standards**

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. Refer to Note 5 for further discussion.

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157, *Fair Value Measurements*(“SFAS No. 157”). SFAS No. 157 clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing an asset or liability and establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. SFASNo. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears, with early adoption permitted. The Company has not yet determined theimpact, if any, that the implementation of SFAS No. 157 will have on ourresults of operations or financial condition.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and FinancialLiabilities-Including an amendment of FASB Statement No. 115, (*“SFAS159”), which is effective January 1, 2008. This Standard permits entities to choose to measure many financialinstruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the useof fair value measurement, which 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 Emerging Issues Task Forceissued Issue 06-3 (“EITF 06-3”), *How Sales Taxes CollectedFrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement. *Thisstandard requires that a company disclose its accounting policy (i.e., gross ornet presentation) regarding presentation of taxes within the scope of EITF06-3.  If taxes are significant andreported on a gross basis, a 

 

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

**(11)****                         ****Recent Developments andSubsequent Events**

The Company has registered with the SEC 898,875 shares of its commonstock and 1,797,750 rights to purchase these shares in connection with a rightsoffering to its shareholders of record as of October 17, 2007.  The rights will expire on November 16, 2007,unless the Company extends the offering for up to 15 days.

 

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

The following discussion may include forward-looking statementsincluding anticipated financial performance, business prospects, the futureopening of Company-operated and franchised restaurants, anticipated capitalexpenditures, and other matters.  Allstatements other than statements of historical fact are forward-lookingstatements.  Section 27A of theSecurities Act of 1933 (as amended) and Section 21E of the Securities ExchangeAct 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.

**Overview**

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

In April 2007 the Company formed Western Investments, Inc., a Delawarecorporation and wholly-owned subsidiary to serve as the general partner ofWestern Acquisitions, L.P., a Delaware limited partnership that operates as aprivate investment fund.  Through WesternInvestments, Mr. Biglari operates as the portfolio manager to the fund.

Western Investments’ roleas the general partner carries with it the obligation to manage the operations ofthe fund, and in this regard it will be assisted by a professional fundadministrator.  For serving as the fund’sgeneral partner, Western Investments may receive a monthly management fee equalto one-twelfth of 1% of the value of the capital account of each limitedpartner.  It also may receive an annualincentive allocation equal to 20% of the portion of each limited partner’s prorata share of the fund’s net profits for each fiscal year in excess of netlosses allocated to each limited partner and carried forward from prioryears.  All or part of these fees may bewaived by Western Investments.  Limitedpartnership interests in the fund are either Class A or Class B.  The classes are identical except that Class Ainterests must be held for two years, whereas Class B interests are locked-upfor five years.  Additionally, WesternInvestments will at the end of the five year period reimburse the holders ofClass B interests for the first 30% of any cumulative net losses they maysuffer.  This commitment carriessignificant risk.  See “Risk Factors” onpages 24 and 25.  As of September 30,2007, Western Acquisitions, LP, did not have any limited partners holding ClassB interests.

 

The Company is themajority investor in the fund at September 30, 2007. During the third quarterended September 30, 2007, the Company contributed cash along with its holdingsin the common stock of The Steak n Shake Company to Western Investments, Inc.,which in turn contributed these assets to Western Acquisitions, L.P.

 

While the Company has historically been principally engaged, andintends at this time to remain principally engaged, in franchising andoperating restaurants, the recent investment activities could bring the Companywithin 

 

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the definition of an “investment company” and require the Company toregister as an investment company under the Investment Company Act of1940.  The Company’s Board of Directorshad adopted a policy requiring management to restrict the Company’s operationsand investment activities to avoid becoming an investment company, until andunless the Board approves otherwise. Although the Company does not presently intend to change its principalbusiness, and the Board has not approved any such change, the Company hasexpanded its investment activities, and may decide in the future to register asan investment company under the Investment Company Act.  Under certain circumstances, if the Companyis successful in investment activities, then the Company may inadvertently fallwithin the definition of an investment company, in which event it may berequired to register as an investment company. If the Company decides or is required to register as an investment company,then the Company would become subject to various provisions of the InvestmentCompany Act and the regulations adopted under such Act, which are veryextensive and could adversely affect the Company’s operations.

The Company operated and franchised a total of 122 restaurants locatedin 19 states, including 5 Company-owned, 116 franchise restaurants and onejoint venture as of September 30, 2007. The restaurants include a family steakhouse concept and a buffetconcept.

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 five Company-operatedrestaurants.

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). Investment and all other capital allocation decisions are made for theCompany by Mr. Biglari.

**Results of Operations**

Net income for the three and nine months endedSeptember 30, 2007 was $2,472,115 and $2,854,235 compared to net income of$84,651 and $234,055 for the three and nine months ended September 30,2006.  The primary reason for the yearover year change in earnings is the gain on the sale of Friendly Ice CreamCorporation of $3.6 million.

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:

 

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| ** **                                                   | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Revenues:                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Company-operated restaurants                                 |       | 76.1                                                 | %          | 75.7                                                | %          | 75.2 | % | 74.8 | % |
| Franchise operations                                         |       | 23.9                                                 |       | 24.3                                                |       | 24.8 |   | 25.2 |   |
| Total revenues                                               |       | 100.0                                                |       | 100.0                                               |       | 100.0 |   | 100.0 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Company-operated restaurants — food, beverage and labor |       | 54.1                                                 |       | 52.7                                                |       | 53.6 |   | 53.2 |   |
| Restaurant occupancy and other                               |       | 13.2                                                 |       | 15.7                                                |       | 13.3 |   | 14.1 |   |
| Subleased properties                                         |       | 1.4                                                  |       | 2.4                                                 |       | 1.1 |   | 1.9 |   |
| Franchise operations — direct support                   |       | 6.5                                                  |       | 5.9                                                 |       | 6.0 |   | 6.6 |   |
| Corporate expenses                                           |       | 12.8                                                 |       | 12.9                                                |       | 13.6 |   | 13.8 |   |
| Depreciation and amortization                                |       | 5.9                                                  |       | 6.0                                                 |       | 6.0 |   | 5.9 |   |
| Total costs and expenses                                     |       | 93.9                                                 |       | 95.6                                                |       | 93.6 |   | 95.5 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income from operations                                       |       | 6.1                                                  |       | 4.4                                                 |       | 6.4 |   | 4.5 |   |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Other income (expense)                                       |       | 80.0                                                 |       | (1.1                                                | )          | 27.5 |   | (1.5 | ) |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Income before income tax expense and minority interest       |       | 86.1                                                 |       | 3.3                                                 |       | 33.9 |   | 3.0 |   |
| Income tax expense                                           |       | 31.4                                                 |       | 1.4                                                 |       | 12.5 |   | 1.2 |   |
| Income before minority interest                              |       | 54.7                                                 |       | 1.9                                                 |       | 21.4 |   | 1.8 |   |
| Minority interest                                            |       | 0.0                                                  |       | —                                              |       | 0.0 |   | — |   |
| Net income                                                   |       | 54.7                                                 | %          | 1.9                                                 | %          | 21.4 | % | 1.8 | % |

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

 
| ** **                             | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Number of U.S. Franchised Restaurants: |       |                                                 |       |                                                |       |   |   |   |   |
| Beginning of period                    |       | 119                                                  |       | 130                                                 |       | 123 |   | 135 |   |
| Opened                                 |       | —                                               |       | —                                              |       | — |   | — |   |
| Closed                                 |       | 3                                                    |       | 6                                                   |       | 7 |   | 11 |   |
| End of period                          |       | 116                                                  |       | 124                                                 |       | 116 |   | 124 |   |

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

 

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** **

**Revenues**

Total revenues increased 0.8% to $4.52 million for thethree months ended September 30, 2007 from $4.49 million for the comparablethree months ended September 30, 2006. Total revenues decreased 0.05% to $13.34million for the nine months ended September 30, 2007 from $13.35 million forthe comparable nine months ended September 30, 2006. Company-operatedrestaurant revenues increased 1.5% to $3.44 million for the three months endedSeptember 30, 2007 as compared to $3.39 million for the comparable three monthsended September 30, 2006. Company-operated restaurant revenues increased 0.63%to $10.03 million for the nine months ended September 30, 2007 as compared to$9.97 million for the comparable nine months ended September 30, 2006. Theincrease for the nine months ended September 30, 2007 is largely attributableto the temporary closings of two Company-operated locations for remodelingduring 2006, which resulted in lost revenues of approximately $220,000 in thefirst nine months of 2006.  Same storesales at Company-operated restaurants for the three and nine months endedSeptember 30, 2007, taking the closed days for remodels out of the comparison,experienced an overall decrease of 1.45% and 1.17%, respectively.   Franchise revenues decreased 1.25% to $1.08million for the three months ended September 30, 2007 as compared to $1.09million for the comparable three months ended September 30, 2006. Franchiserevenues decreased 2.03% to $3.31 million for the nine months ended September30, 2007 as compared to $3.38 million for the comparable nine months endedSeptember 30, 2006. The decrease in franchise revenues for the three and ninemonths ended September 30, 2007 is attributable to fewer franchised units inthe system at September 30, 2007 as compared to September 30, 2006.  Same store sales at franchise operations forthe three and nine months ended September 30, 2007, experienced an overalldecrease of 0.35% and decrease of 0.51%, respectively.

**Costsand Expenses**

Cost of Company-operated restaurants, consistingprimarily of food, beverage, and labor costs increased $85,000 (3.6%) to $2.45million for the three months ended September 30, 2007 from $2.37 million forthe three months ended September 30, 2006.  These costs for the three month period as a percentage ofCompany-operated restaurants revenue were 71.2% and 69.7% for the three monthsended September 30, 2007 and 2006, respectively.   Cost of Company-operated restaurantsincreased $59,000 (0.8%) to $7.16 million for the nine months ended September30, 2007 from $7.10 million for the nine months ended September 30, 2006.   These costs for the nine month period as apercentage of Company-operated restaurants revenue were 71.3% and 71.2% for thenine months ended September 30, 2007 and 2006, respectively.  The increase in the costs for the nine monthsended September 30, 2007 was largely attributable to rising costs ofcommodities in 2007.

Restaurant occupancy and other, which includeutilities, insurance, maintenance, rent and other such costs of theCompany-operated restaurants, decreased by $108,000 (15.3%) for the threemonths ended September 30, 2007 versus the prior year’s comparable period.These costs for the three month period decreased as a percentage ofCompany-operated restaurant revenues from 20.8% in 2006 to 17.3% in 2007.  Restaurant occupancy and other decreased by$102,000 (5.4%) for the nine months ended September 30, 2007 versus the prioryear’s comparable period. These costs for the nine month period decreased as apercentage of Company-operated restaurant revenues from 18.8% in 2006 to 17.7%in 2007.The decreases are attributable to a one time write-off of expenses for$66,000 in 2006 from costs associated with a lease in Chantilly, Virginia and$36,000 less advertising costs in 2007 over 2006.

Subleased properties include net costs associated withsubleasing former Company operations and maintenance of vacant premises.  These expenses decreased by $42,000 and$100,000 for the three and nine months ended September 30, 2007 versus theprior years’ comparable periods.  Thedecreases were largely attributable to termination of certain leased propertyarrangements during 2006.

Cost of franchise operations direct support expenseincreased by $29,000 and decreased $91,000 for the three and nine months endedSeptember 30, 2007 versus the prior years’ comparable periods.  The increase in the third quarter of 2007 isattributable to increased expenses in franchise development. The decrease forthe nine months ended September 30, 2007 is largely attributable to personnelreductions and targeted expense reductions during the third and fourth quartersof 2006.

Corporate expenses consist of certain expenses notdirectly associated with any business segment. These expenses include legal, accounting, stockholder relations,personnel not directly related to a segment, information systems, and otherheadquarters activities.  These expensesdecreased by $1,000 and $20,000 for the three and nine months 

 

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ended September 30, 2007. These expenses havedecreased for 2007 due to personnel reductions and targeted expense reductionsduring the third and fourth quarters of 2006, but were offset by an increase inlegal expenses associated with the Friendly Ice Cream Corp investment beginningin the third quarter of 2006.

Depreciation and amortization expense decreased by$2,000 and increased by $5,000 for the three and nine months ended September30, 2007 versus the prior years’ comparable periods. The increases wereattributable to an increase in capital expenditures placed in service due toremodels of two Company-operated locations during 2006, offset by some itemsbecoming fully depreciated.

**Other Income (Expense)**

Interest expense was comparable for the three months ended September30, 2007 over prior period and decreased $37,000 for the nine months endedSeptember 30, 2007 versus the prior years’ comparable periods due to a loweraverage principal outstanding balance. Interest income fluctuates according to the levels of available cashbalances.  The Company employs a cashmanagement system whereby available balances are invested on an overnightbasis.

Other income increased $13,000 and $7,000 for the three and nine monthsended September 30, 2007 versus the prior years’ comparable periods.

**Income Tax Expense**

Income tax expense is directly affected by the levels of pretax income.The Company’s effective tax rate was 36.5%     and 43.3% for the three months ended September 30, 2007 and 2006,respectively, and 36.9% and 41.0% for the nine months ended September 30, 2007and 2006, respectively.

**Cash and Cash Equivalents**

As of September 30, 2007, the Company had $606,000 of cash and cashequivalents as compared to $2.34 million as of December 31, 2006.  The decrease is largely attributable topurchases of marketable securities.

**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 $1.9 million and $1.4 million inoperating cash flows for the nine months ended September 30, 2007 and 2006,respectively.  The Company’s primarysource of operating cash flows is the operating profits generated from Companyoperations and franchise operations.

**Investing Activities**

During the nine months ended September 30, 2007, the Company spent$33,000 on capital expenditures compared to $480,000 spent during theequivalent period in the prior year. Capital expenditures for 2006 included amounts attributable to theremodel of the Company-operated store in Northern Virginia.  The balance of the capital expenditures wasfor necessary replacement of equipment and leasehold improvements in the otherCompany-operated locations. Also included in investing activities for 2007 is a$14.1 million investment in marketable securities, cash and cash equivalentsheld by broker of $3.1 million offset by $12.1 million from proceeds from saleof marketable securities.

 

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**Financing Activities**

The Company made payments of long-term debt of $121,000 and $1.4million for the nine months ended September 30, 2007 and 2006,respectively.  Also, during the ninemonths ended September 30, 2007, the Company received $85,000 from the exerciseof stock options and $1.5 million in capital contributions from minorityinterest holders in  WesternAcquisitions, L.P.

**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 improve operationalperformance.  The Company’s debtagreements contain certain minimum financial covenant requirements.  As of September 30, 2007, the Company was incompliance with all debt covenants.

**CONTRACTUALOBLIGATIONS**

The table belowsets forth a summary of contractual obligations that will impact futureliquidity as of September 30, 2007:
| ** **                       | ** ** | **Payment due by period** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **2007**                                 | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Totals** | ** ** |
| Long-term debt                   |       | $                                        | 42,315     |   | 118,783 |   | 109,803 |   | 121,385 |   | 134,189 |   | 200,875 |   | 727,350 |   |
| Operating  leases, net (1)       |       | 196,648                                  |       | 705,339 |   | 634,425 |   | 623,880 |   | 367,611 |   | 1,571,165 |   | 4,099,068 |   |
| Interest expense  (2)            |       | 17,933                                   |       | 62,834 |   | 52,041 |   | 40,459 |   | 27,655 |   | 14,603 |   | 215,525 |   |
| Tax obligations  (3)             |       | 140,412                                  |       | — |   | — |   | — |   | — |   | — |   | 140,412 |   |
| Totals                           |       | $                                        | 397,308    |   | 886,956 |   | 796,269 |   | 785,724 |   | 529,455 |   | 1,786,643 |   | 5,182,355 |   |

 

(1)             Operatinglease commitments are presented net of sublease rentals.  Gross operating lease commitments for theperiods above aggregate to approximately $4.6 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 andaccompanying notes that have been prepared in accordance with United Statesgenerally accepted accounting principles. The preparation of these consolidated financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

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.

 

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*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.

*Investments*

The Company classifies our marketable equity securitiesas 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-livedAssets, Franchise Royalty Contracts and Goodwill*

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.

 

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**OTHER**

**Impactof Inflation**

The impact of inflation on the costs of food andbeverage products, labor and real estate can affect the Company’soperations.  Management believes theCompany has historically been able to pass on increased costs through certainselected menu price increases and has offset increased costs by increasedproductivity and purchasing efficiencies, but there can be no assurance thatthe Company will be able to do so in the future.  Management anticipates that the average costof restaurant real estate leases and construction cost could increase in thefuture which could affect the Company’s ability to expand.  In addition, mandated health care oradditional increases in the federal or state minimum wages could significantlyincrease the Company’s costs of doing business.

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

As of September 30, 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 fewinvestments. A change in market prices also exposes the Company to market riskrelated to the investments in marketable securities.  As of September 30, 2007, the Company held$9,149,740 million in available-for-sale marketable securities. A hypothetical10% decline in the market value would result in $915,000 of unrealized lossesand would not affect cash flows unless the security was disposed.

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 at September 30, 2007 (dollars in thousands):

EXPECTED MATURITY DATE
| ** **                 | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------|------------|
| Long-term debt  maturities |       | $        | 42         |     | 119        |     | 110        |     | 121        |     | 134        |           | 201        |      | 727        |                           | 770        |   |
| 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 September 30, 2007. Based onits 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 have been remediated asof September 30, 2007 and accordingly, based on this evaluation process,the Chief Executive Officer and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed in reports filed and submitted under theSecurities Exchange Act of 1934 (as amended) is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms.Additionally, there have been no changes in the Company’s internal control overfinancial reporting that occurred during the last fiscal quarter that havematerially affected, or are reasonable likely to materially affect, the Company’sinternal control over financial reporting, except as discussed herein withrespect to the remediation of certain controls.

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.

 

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The following is a description of the material weaknesses that theCompany noted as of December 31, 2006, as well as a discussion of the relatedremediation efforts:

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 had access to the journal entry module within theCompany’s accounting system, leading to a segregation of duties issue.  The Company has restricted access to thatparticular module from the Chief Financial Officer, and implemented additionalaccess controls, review controls, and documentation procedures necessary toremediate the material weakness.

In addition, in connection with the audit of the Company’s 2006 financialstatements, Grant Thornton LLP, (independent registered public accountingfirm), detected an error related to expenses associated with the rightsoffering that expired December 8, 2006. A correcting adjustment was made priorto finalization of the 2006 financial statements, with the direct costs of$123,280 associated with the rights offering properly recorded as a reductionof equity instead of an expense. The Company has implemented additional reviewcontrols as of September 30, 2007.

There were no changes in the Company’s internal controls or in otherfactors that could significantly affect these controls since the evaluationprocess was completed as of September 30, 2007.

 

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**PART II. OTHER INFORMATION**

**Item 1.    LegalProceedings**

In addition to those proceedings discussed in the Company’sconsolidated financial statements included in Item 1, Part 1, the Company isinvolved in various other claims and legal actions which are routine litigationmatters incidental to the business.  Inthe opinion of management, the ultimate disposition of these other matters willnot have a material adverse effect on the Company’s financial condition,results of operations or liquidity.

**Item 1A. Risk Factors**

An investment in the common stock of any company involves a degree ofrisk.  Investors should considercarefully the risks and uncertainties described in the Company’s Annual Reporton Form 10-K filed with the SEC, and those other risks described elsewhere inthis report, before deciding whether to purchase our common stock.  Additional risks and uncertainties notcurrently known or that the Company currently deems immaterial may also becomeimportant factors that may harm the Company’s business, financial condition,and results of operations.  Theoccurrence of risk factors could harm the Company’s business, financialcondition, and results of operations for company operations, as well asfranchised operations.  The trading priceof the Company’s common stock could decline due to any of these risks anduncertainties, and stockholders may lose part or all of their investment.

The following risk factors update those set forth in the Company’s  2006 Annual Report on Form 10-K:

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

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

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

While we have historically been principally engaged in franchising andoperating restaurants, our recent investment activities could bring us withinthe definition of an “investment company” and require us to register as aninvestment company under the Investment Company Act of 1940.  Our Board of Directors has adopted a policyrequiring management to restrict our operations and investment activities toavoid becoming an investment company, until and unless the Board approvesotherwise.  Although we do not presentlyintend to change our principal business, and the Board has not approved anysuch change, we have expanded our investment activities, and we may decide inthe future to register as an investment company under the Investment CompanyAct.  Also, under certain circumstances,if we are successful in our investment activities, then we may inadvertentlyfall within the definition of an investment company, in which event we may berequired to register as an investment company.

Notwithstanding our Board policy, if our investment activitiesinadvertently result in our being determined to be an investment company and wefail to register as an investment company, we might be unable to enforcecontracts with third parties, and third parties could seek rescission oftransactions with us undertaken during the period that we were an unregisteredinvestment company, subject to equitable considerations set forth in theInvestment Company Act.  In addition, wemight be subject to monetary penalties or injunctive relief, or both, in anaction brought against us by the SEC.

 

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If wedecide to register as an investment company, then we would become subject tovarious provisions of the Investment Company Act and the regulations adoptedunder such Act, which are very extensive and could adversely affect ouroperations.  For example, we might beprohibited from entering into or continuing transactions with certainaffiliates.

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

Our corporate strategy is dependent upon factors, some which are out ofour control, including availability of appropriate financing and generaleconomic conditions.  The success of ourstrategy is also dependent upon our ability to execute that strategy as itrelates to both our restaurant franchising business and our investments.  We may not be successful in any or all of theendeavors that underlie our corporate strategy, whether or not the factorsaffecting the outcome were within our control.

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

In April 2007, we formed Western Investments, Inc., a Delawarecorporation, as a wholly-owned subsidiary. Western Investments is the general partner of Western Acquisitions,L.P., a Delaware limited partnership also formed in April 2007.  The purpose of Western Acquisitions is toinvest primarily in equity securities of U.S. publicly traded companies.  Sardar Biglari, our Chairman, Chief ExecutiveOfficer and President, will manage the portfolio.  Western Investments will bear the first 30%of any cumulative net losses otherwise allocable to the capital accounts oflimited partners holding Class B interests. In the event that Western Investments has insufficient resources to fundthis commitment, it may be necessary for us to make a capital contribution tokeep that company from defaulting on its obligation.  Such an event could potentially have a materialadverse effect on our financial position and prevent us from using the fundsprovided to Western Investments in other areas. See page 15 for further details.

**We are involved in a joint effort to obtain two seatson the Board of Directors of The Steak n Shake Company which could result in apotentially contentious and expensive proxy contest.**

We haverecently become involved in a joint effort with Western Acquisitions, L.P.,Western Investments, Inc., and The Lion Fund, LP, the private investment fundoperated by Mr. Biglari, to nominate two individuals, Mr. Biglari and Dr.Cooley, as nominees for the Board of Directors of The Steak n ShakeCompany.  Our Board has determined thatseeking these seats is in the best interest of our stockholders given oursubstantial investment in Steak n Shake. If necessary, we intend to engage in a proxy solicitation to get ournominees elected to Steak n Shake’s Board of Directors and have agreed to sharethe expenses of this effort pro rata with Western Acquisitions and The LionFund, LP.  There is no guarantee that ourefforts will be successful, and the costs associated with this effort couldprove to be substantial regardless of the outcome and could materially impactour financial position.

 

 

**Item 6.    Exhibits:**

See Exhibit Index on page 27.

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned hereunto duly authorized.
|                    |   | **Western Sizzlin Corporation** |   |                                       |
|-------------------------|--------|---------------------------------|--------|--------------------------------------------|
|                    |   |                            |   |                                       |   |   |
|                    |   | By:                             |   | */s/ Sardar Biglari*                       |   |   |
|                    |   |                            |   | Sardar Biglari                             |   |   |
|                    |   |                            |   | President and Chief Executive Officer      |   |   |
|                    |   |                            |   |                                       |   |   |
|                    |   | By:                             |   | */s/ Robyn B. Mabe*                        |   |   |
|                    |   |                            |   | Robyn B. Mabe                              |   |   |
|                    |   |                            |   | Vice President and Chief Financial Officer |   |   |
|                    |   |                            |   |                                       |   |   |
| Date: November 14, 2007 |   |                            |   |                                       |   |   |

 

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**EXHIBIT INDEX**
| 10.1   |   | Employment Agreement with Robyn B. Mabe                                       |
|--------|--------|-------------------------------------------------------------------------------|
|   |   |                                                                          |
| 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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