Table of Contents

** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **
| **(Mark One)**                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                          |   |
| **x**                                                                                                                                                                         | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                                                                                                                                                    | ** ** |
| **For the quarterly  period ended June 30, 2008, or**                                                                                                                    |
| ** **                                                                                                                                                                    | ** ** |
| **o**                                                                                                                                                                         | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
| ** **                                                                                                                                                                    | ** ** |
| **For the transition  period from              to            ** |
|                                                                                                                                                                               |  |  |

** **

**Commission file number 0-25366**

** **

**Western Sizzlin Corporation**

(Exact Name 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, Roanoke, Virginia** | ** ** | **24011**                             |
| (Address of  Principal Executive Offices)                          |       | (Zip Code)                            |

 

**(540)345-3195**

(Registrant’sTelephone Number Including Area Code)

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer x                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

As of August 14,2008, there were 2,831,884 shares of common stock outstanding.

 

 

 

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Table of Contents

 

**Western SizzlinCorporation**

** **

**Form 10-QSix Months Ended June 30, 2008Table of Contents**

 
| ** **                                                                                                  | **Page**   |
|-------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** |
| **PART I. FINANCIAL INFORMATION**                                                                      | ** ** |
| ** **                                                                                                  | ** ** |
| **Item  1. Financial Statements (Unaudited)**                                                               | ** ** |
|                                                                                                        |       |
| Consolidated  Balance Sheets — June 30, 2008 and December 31, 2007                           | 3          |
|                                                                                                        |       |
| Consolidated Statements of Operations — Three Months  and Six Months Ended June 30, 2008 and 2007 | 4          |
|                                                                                                        |       |
| Consolidated Statement of Changes in Stockholders’  Equity —Six Months Ended June 30, 2008   | 5          |
|                                                                                                        |       |
| Consolidated Statements of Cash Flows — Six Months  Ended June 30, 2008 and 2007                  | 6          |
|                                                                                                        |       |
| Notes to Consolidated Financial Statements                                                                  | 7-16       |
| ** **                                                                                                  | ** ** |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations**     | 16-24      |
| ** **                                                                                                  | ** ** |
| **Item 3. Quantitative and Qualitative Disclosure about  Market Risk**                                      | 24-25      |
| ** **                                                                                                  | ** ** |
| **Item 4T. Controls and Procedures**                                                                        | 25         |
| ** **                                                                                                  | ** ** |
| **PART II.  OTHER INFORMATION**                                                                        | ** ** |
| ** **                                                                                                  | ** ** |
| **Item  1. Legal Proceedings**                                                                              | 26         |
| ** **                                                                                                  | ** ** |
| **Item  1.A. Risk Factors**                                                                                 | 26         |
| ** **                                                                                                  | ** ** |
| **Item 4. Submission of Matters to a Vote of Security  Holders**                                            | 26         |
| ** **                                                                                                  | ** ** |
| **Item 6.  Exhibits**                                                                                       | 26         |
| ** **                                                                                                  | ** ** |
| **Signatures**                                                                                              | 27         |
| ** **                                                                                                  | ** ** |
| **Exhibit Index**                                                                                      | 28         |

 

2

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Table ofContents

 

**PART I. FINANCIAL INFORMATION**

**WESTERN SIZZLIN CORPORATION**

** **

**Consolidated Balance Sheets**

**June 30,2008 and December 31, 2007**

 
| ** **                                                                                                                                                          | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                     |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                           |       | $                       | 638,931    |                        | $          | 727,378 |   |
| Trade accounts receivable, net of allowance for doubtful accounts of  $254,990 in 2008 and $198,425 in 2007                                                         |       | 926,029                 |       | 994,085                     |       |
| Current installments of notes receivable, less allowance for impaired  notes of $62,926 in 2008 and $50,904 in 2007                                                 |       | 214,692                 |       | 219,501                     |       |
| Other receivables                                                                                                                                                   |       | 105,281                 |       | 132,283                     |       |
| Income taxes receivable                                                                                                                                             |       | 108,551                 |       | 90,161                      |       |
| Inventories                                                                                                                                                         |       | 87,948                  |       | 73,017                      |       |
| Prepaid expenses                                                                                                                                                    |       | 223,521                 |       | 228,396                     |       |
| Deferred income taxes                                                                                                                                               |       | 427,094                 |       | 404,334                     |       |
| Total current assets                                                                                                                                                |       | 2,732,047               |       | 2,869,155                   |       |
| Notes receivable, less allowance for impaired notes receivable of  $6,980 in 2008 and $15,501 in 2007, excluding current installments                               |       | 549,637                 |       | 625,231                     |       |
| Property and equipment, net                                                                                                                                         |       | 1,678,131               |       | 1,877,694                   |       |
| Investment in real estate                                                                                                                                           |       | 3,745,152               |       | 3,745,152                   |       |
| Investments in marketable securities                                                                                                                                |       | 11,196,845              |       | 15,896,865                  |       |
| Franchise royalty contracts, net of accumulated amortization of  $9,139,283 in 2008 and $8,824,135 in 2007                                                          |       | 315,148                 |       | 630,296                     |       |
| Goodwill                                                                                                                                                            |       | 4,310,200               |       | 4,310,200                   |       |
| Financing costs, net of accumulated amortization of $193,970 in 2008  and $192,832 in 2007                                                                          |       | 6,240                   |       | 7,378                       |       |
| Investment in unconsolidated joint venture                                                                                                                          |       | 332,322                 |       | 304,996                     |       |
| Deferred income taxes                                                                                                                                               |       | 363,728                 |       | 235,655                     |       |
| Other assets                                                                                                                                                        |       | 5,760                   |       | 6,450                       |       |
|                                                                                                                                                                |       | $                       | 25,235,210 |                        | $          | 30,509,072 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                |       |                    |       |                        |       |
| Note payable — line of credit                                                                                                                                  |       | $                       | —     |                        | $          | 2,000,000 |   |
| Due to broker                                                                                                                                                       |       | 368                     |       | 342,022                     |       |
| Current installments of long-term debt                                                                                                                              |       | 104,433                 |       | 118,783                     |       |
| Current installment of long-term debt, secured by land held for  investment                                                                                         |       | 264,122                 |       | —                      |       |
| Accounts payable                                                                                                                                                    |       | 739,901                 |       | 733,983                     |       |
| Accrued expenses and other                                                                                                                                          |       | 1,388,650               |       | 1,283,237                   |       |
| Total current liabilities                                                                                                                                           |       | 2,497,474               |       | 4,478,025                   |       |
|                                                                                                                                                                |       |                    |       |                        |       |
| Long-term debt, excluding current installments                                                                                                                      |       | 512,800                 |       | 566,272                     |       |
| Long-term debt, secured by land held for investment, excluding  current installments                                                                                |       | 2,377,098               |       | —                      |       |
| Other long-term liabilities                                                                                                                                         |       | 97,597                  |       | 89,039                      |       |
|                                                                                                                                                                |       | 5,484,969               |       | 5,133,336                   |       |
|                                                                                                                                                                |       |                    |       |                        |       |
| Minority interest                                                                                                                                                   |       | 1,462,920               |       | 1,873,748                   |       |
| Commitments and contingencies                                                                                                                                       |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                          |       |                    |       |                        |       |
| Convertible preferred stock, series A, $10 par value (involuntary  liquidation preference of $10 per share). Authorized 25,000 shares; none  issued and outstanding |       | —                  |       | —                      |       |
| Convertible preferred stock, series B, $1 par value (involuntary  liquidation preference of $1 per share). Authorized 875,000 shares; none  issued and outstanding  |       | —                  |       | —                      |       |
| Common stock, $0.01 par value.  Authorized 10,000,000 shares;  issued and outstanding 2,762,321 in 2008 and 2,696,625 in 2007                                  |       | 27,624                  |       | 26,967                      |       |
| Additional paid-in capital                                                                                                                                          |       | 21,274,929              |       | 20,415,785                  |       |
| Retained earnings (accumulated deficit)                                                                                                                             |       | (2,828,830              | )          | 2,978,189                   |       |
| Accumulated other comprehensive income (loss) — unrealized holding  gains (losses), net of taxes                                                               |       | (186,402                | )          | 81,047                      |       |
| Total stockholders’ equity                                                                                                                                     |       | 18,287,321              |       | 23,501,988                  |       |
|                                                                                                                                                                |       | $                       | 25,235,210 |                        | $          | 30,509,072 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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**WESTERN SIZZLINCORPORATION**

** **

**ConsolidatedStatements of Operations**

**Three Months and Six Months EndedJune 30, 2008 and 2007**

**(Unaudited)**

** **
| ** **                                                                                                                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Company-operated restaurants                                                                                                                          |       | $                                | 3,490,292  |                           | $          | 3,542,157 |   | $ | 6,616,402 |   | $ | 6,590,457 |   |
| Franchise operations                                                                                                                                  |       | 1,071,936                        |       | 1,148,414                      |       | 2,121,077 |   | 2,229,804 |   |
|                                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Total revenues                                                                                                                                        |       | 4,562,228                        |       | 4,690,571                      |       | 8,737,479 |   | 8,820,261 |   |
|                                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Costs and expenses — restaurant and franchise operations:                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Company-operated restaurants — food, beverage and labor costs                                                                                    |       | 2,491,597                        |       | 2,478,121                      |       | 4,802,485 |   | 4,741,780 |   |
| Restaurant occupancy and other                                                                                                                        |       | 573,873                          |       | 575,785                        |       | 1,133,811 |   | 1,178,751 |   |
| Franchise operations — direct support                                                                                                            |       | 309,386                          |       | 332,105                        |       | 613,921 |   | 606,555 |   |
| Subleased restaurant property expenses                                                                                                                |       | 37,188                           |       | 24,992                         |       | 64,491 |   | 44,636 |   |
| Corporate expenses                                                                                                                                    |       | 431,445                          |       | 580,244                        |       | 915,695 |   | 968,847 |   |
| Depreciation and amortization expense                                                                                                                 |       | 263,613                          |       | 265,674                        |       | 528,615 |   | 531,608 |   |
| Corporate litigation fees and expenses                                                                                                                |       | 20,980                           |       | 27,653                         |       | 158,764 |   | 42,112 |   |
| Total costs and expenses — restaurant and franchise operations                                                                                   |       | 4,128,082                        |       | 4,284,574                      |       | 8,217,782 |   | 8,114,289 |   |
|                                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Equity in income of joint venture                                                                                                                     |       | 61,335                           |       | 51,973                         |       | 107,327 |   | 65,675 |   |
| Income from restaurant and franchise operations                                                                                                       |       | 495,481                          |       | 457,970                        |       | 627,024 |   | 771,647 |   |
|                                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Net realized gain (loss) on sales of marketable securities                                                                                            |       | 754                              |       | —                         |       | (39,852 | ) | — |   |
| Net unrealized losses on marketable securities held by limited  partnership                                                                           |       | (2,280,461                       | )          | —                         |       | (6,443,124 | ) | — |   |
| Expenses of investment activities, including interest of $29,879 and  $53,686 for three and six month periods ended June 30, 2008,  respectively |       | (468,406                         | )          | (74,510                        | )          | (968,673 | ) | (136,407 | ) |
| Loss from investment activities                                                                                                                       |       | (2,748,113                       | )          | (74,510                        | )          | (7,451,649 | ) | (136,407 | ) |
|                                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Other income (expense):                                                                                                                               |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                                                                                                      |       | (15,748                          | )          | (19,727                        | )          | (54,195 | ) | (40,051 | ) |
| Interest income                                                                                                                                       |       | 11,503                           |       | 13,775                         |       | 32,367 |   | 30,353 |   |
| Other, net                                                                                                                                            |       | (410                             | )          | 501                            |       | 192 |   | 4,198 |   |
| Total other income (expense), net                                                                                                                     |       | (4,655                           | )          | (5,451                         | )          | (21,636 | ) | (5,500 | ) |
|                                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Income (loss) before income tax expense and minority interest                                                                                         |       | (2,257,287                       | )          | 378,009                        |       | (6,846,261 | ) | 629,740 |   |
|                                                                                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Income tax expense (benefit):                                                                                                                         |       |                             |       |                           |       |   |   |   |   |
| Current                                                                                                                                               |       | 18,815                           |       | 8,257                          |       | 14,621 |   | 18,184 |   |
| Deferred                                                                                                                                              |       | 39,436                           |       | 137,589                        |       | (103,035 | ) | 229,436 |   |
| Total income tax expense (benefit)                                                                                                                    |       | 58,351                           |       | 145,846                        |       | (88,418 | ) | 247,620 |   |
| Minority interest in net loss of limited partnership                                                                                                  |       | 359,614                          |       | —                         |       | 950,828 |   | — |   |
| Net income (loss)                                                                                                                                     |       | $                                | (1,956,024 | )                              | $          | 232,163 |   | $ | (5,807,019 | ) | $ | 382,120 |   |
| Earnings (loss) per share (basic and diluted):                                                                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                                                                                                                     |       | $                                | (.72       | )                              | $          | .13 |   | $ | (2.14 | ) | $ | .21 |   |

** **

**Seeaccompanying notes to consolidated financial statements.**

** **

**4**

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**Table of Contents**

** **

**WESTERN SIZZLINCORPORATION**

** **

**ConsolidatedStatement of Changes in Stockholders’ Equity**

**SixMonths Ended June 30, 2008(Unaudited)**

** **
| ** **                                                           | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **             | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------------------------------|------------|---------------------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | **Shares**            | ** ** | **Dollars**             | ** ** | **Capital**                          | ** ** | **Deficit)**                          | ** ** | **Income (Loss)** | ** ** | **Total** | ** ** |
| Balances, December 31, 2007                                     |       | 2,696,625             |       | $                       | 26,967     |                                 | $          | 20,415,785                            |       | $                      | 2,978,189  |   | $ | 81,047 |   | $ | 23,501,988 |   |
| Net loss                                                             |       |                  |       |                    |       |                                 |       | (5,807,019                            | )          |                   |       | (5,807,019 | ) |
| Change in unrealized holding gains (losses), net of taxes of $47,798 |       |                  |       |                    |       |                                 |       |                                  |       | (267,449               | )          | (267,449 | ) |
| Comprehensive loss                                                   |       |                  |       |                    |       |                                 |       |                                  |       |                   |       | (6,074,468 | ) |
|                                                                 |       |                  |       |                    |       |                                 |       |                                  |       |                   |       |   |   |
| Shares issued for ITEX Corporation common stock                      |       | 57,196                |       | 572                     |       | 800,172                              |       |                                  |       |                   |       | 800,744 |   |
| Stock options exercised                                              |       | 8,500                 |       | 85                      |       | 58,972                               |       |                                  |       |                   |       | 59,057 |   |
| Balances, June 30, 2008                                         |       | 2,762,321             |       | $                       | 27,624     |                                 | $          | 21,274,929                            |       | $                      | (2,828,830 | ) | $ | (186,402 | ) | $ | 18,287,321 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**WESTERN SIZZLIN CORPORATION**

 

**Consolidated Statements of Cash Flows**

**SixMonths Ended June 30, 2008 and 2007**

**(Unaudited)**

** **
| ** **                                                                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                          | ** ** | **June 30,**              | ** ** |
| ** **                                                                                          | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                               |       |                           |       |   |   |
|                                                                                                |       |                           |       |   |   |
| Net income (loss)                                                                                   |       | $                              | (5,807,019 | ) | $ | 382,120 |   |
|                                                                                                |       |                           |       |   |   |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities: |       |                           |       |   |   |
|                                                                                                |       |                           |       |   |   |
| Restaurant and franchise activities:                                                                |       |                           |       |   |   |
| Depreciation and amortization of property and equipment                                             |       | 211,637                        |       | 214,376 |   |
| Amortization of franchise royalty contracts and other assets                                        |       | 315,148                        |       | 315,149 |   |
| Amortization of finance costs                                                                       |       | 1,828                          |       | 2,083 |   |
| Provision for doubtful accounts                                                                     |       | 60,580                         |       | 60,000 |   |
| Equity in income of unconsolidated joint venture, net of  distributions                             |       | (27,326                        | )          | (65,676 | ) |
| Share-based compensation                                                                            |       | —                         |       | 5,920 |   |
| Provision for deferred income taxes (benefit)                                                       |       | (170,778                       | )          | 229,435 |   |
| (Increase) decrease in current assets and other assets                                              |       | 86,435                         |       | (96,629 | ) |
| Increase in current liabilities and other liabilities                                               |       | 217,387                        |       | 232,273 |   |
|                                                                                                |       | 694,911                        |       | 896,931 |   |
| Investment activities:                                                                              |       |                           |       |   |   |
| Realized losses on sales of marketable securities, net                                              |       | 39,852                         |       | — |   |
| Unrealized losses on marketable securities, net                                                     |       | 6,443,124                      |       | — |   |
| Minority interest in net loss of limited partnership                                                |       | (950,828                       | )          | — |   |
| Proceeds from sales of marketable securities                                                        |       | 91,979                         |       | — |   |
| Purchase of marketable securities                                                                   |       | (1,389,438                     | )          | (833,218 | ) |
| Decrease in due to broker                                                                           |       | (341,654                       | )          | — |   |
| Provision for deferred income taxes                                                                 |       | 67,743                         |       | — |   |
| Decrease in current liabilities                                                                     |       | (97,498                        | )          | — |   |
|                                                                                                |       | 3,863,280                      |       | (833,218 | ) |
|                                                                                                |       |                           |       |   |   |
| Net cash provided by (used in) operating activities                                                 |       | (1,248,828                     | )          | 445,833 |   |
|                                                                                                |       |                           |       |   |   |
| Cash flows used in investing activities:                                                            |       |                           |       |   |   |
| Additions to property and equipment                                                                 |       | (12,074                        | )          | (14,120 | ) |
| Net cash used in investing activities                                                               |       | (12,074                        | )          | (14,120 | ) |
|                                                                                                |       |                           |       |   |   |
| Cash flows from financing activities:                                                               |       |                           |       |   |   |
| Cash received from exercise of stock options                                                        |       | 59,057                         |       | 85,290 |   |
| Proceeds from issuance of long-term debt                                                            |       | 2,641,220                      |       | — |   |
| Payments on long-term debt                                                                          |       | (67,822                        | )          | (79,514 | ) |
| Payments on line of credit borrowings                                                               |       | (2,000,000                     | )          | — |   |
| Capital contributions from minority interests in limited partnership                                |       | 540,000                        |       | — |   |
|                                                                                                |       |                           |       |   |   |
| Net cash provided by financing activities                                                           |       | 1,172,455                      |       | 5,776 |   |
|                                                                                                |       |                           |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                                |       | (88,447                        | )          | 437,489 |   |
|                                                                                                |       |                           |       |   |   |
| Cash and cash equivalents at beginning of the period                                                |       | 727,378                        |       | 2,344,644 |   |
|                                                                                                |       |                           |       |   |   |
| Cash and cash equivalents at end of the period                                                      |       | $                              | 638,931    |   | $ | 2,782,133 |   |
|                                                                                                |       |                           |       |   |   |
| Supplemental disclosure of cash flow information:                                                   |       |                           |       |   |   |
| Cash payments for interest                                                                          |       | $                              | 108,448    |   | $ | 40,710 |   |
| Adoption of FIN-48 (non-cash)                                                                       |       | $                              | —     |   | $ | 118,375 |   |
| Income taxes paid, net of refunds                                                                   |       | $                              | 32,946     |   | $ | 2,485 |   |
|                                                                                                |       |                           |       |   |   |
| Non-cash investing activities:                                                                      |       |                           |       |   |   |
| Gross unrealized gains (losses) from marketable equity securities                                   |       | $                              | (315,247   | ) | $ | 1,600,612 |   |
| Issuance of common stock for marketable securities                                                  |       | $                              | 800,744    |   | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

 

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**WESTERNSIZZLIN CORPORATION**

** **

Notes to ConsolidatedFinancial Statements

Six Months Ended June, 2008and 2007

(Unaudited)

 

**(1)****                                ****Introduction and Basis ofPresentation**

 

**Western Sizzlin Corporation is aholding company which owns a number of subsidiaries, with its primary businessactivities conducted through Western Sizzlin Franchise Corporation and WesternSizzlin Stores, Inc., which franchise and operate restaurants. Financialdecisions are centralized at the holding company level, and management ofoperating businesses is decentralized at the business unit level. The Company’sprime objective centers on achieving above-average returns on capital inpursuit of maximizing the eventual net worth of its stockholders. While theCompany has historically been principally engaged, and intends at this time toremain principally engaged, in franchising and operating restaurants, it hasrecently made selective investments in other companies.  At June 30, 2008, the Company had 111franchised, 5 Company-operated and 1 joint venture restaurant operating in 19states.**

** **

**The consolidated financialstatements include the accounts of Western Sizzlin Corporation and itswholly-owned subsidiaries, Western Sizzlin Franchise Corporation, The WesternSizzlin Stores, Inc., Western Sizzlin Stores of Little Rock, Inc.,Austins of Omaha, Inc., Western Investments, Inc., Western Properties, Inc.,a majority-owned limited partnership, Western Acquisitions, L.P., and asolely-owned limited partnership, Western Real Estate, L.P. (collectively theCompany). All significant intercompany accounts and transactions have beeneliminated in consolidation**.

** **

Theaccompanying unaudited consolidated financial statements of Western SizzlinCorporation, (the “Company”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial reporting information and the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and notes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements.  In the opinion ofmanagement, all material reclassifications and adjustments, consisting ofnormal recurring accruals, considered necessary for a fair presentation of theresults of operations, financial position and cash flows for each period shownhave been included. The unaudited consolidated financial statements and notesare presented as permitted by Form 10-Q and do not contain certaininformation included in the Company’s annual consolidated financial statementsand notes.  For further information,refer to the consolidated financial statements and notes thereto included inthe Company’s annual report on Form 10-K for the year ended December 31,2007.

 

Certain reclassifications have been made to the 2007 consolidatedstatements of operations and cash flows to place them on a basis comparable with2008 information.  The reclassificationshave had no impact on net income or equity.

 

**(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. Options are no longer granted under the 1994Plan; however, 7,500 options granted to James C. Verney under the plan wereexercised in the second quarter ended June 30, 2008.  Under the 2005 and 2004 Plans, employees anddirectors may be granted options to purchase shares of common stock at the fairmarket value on the date of the grant.

 

Options granted under the 2005 and 2004 Plans vest at the date of thegrant.  The fair value of each optionaward is estimated on the date of grant using the Black-Scholes option-pricingmodel. Assumptions utilized in the model are evaluated and revised, asnecessary, to reflect market conditions and experience on the respective datesof grant. The risk-free interest rate for periods within the contractual lifeof the option is based on the U.S. Treasury yield curve in effect at the timeof the grant.  Expected volatilities arebased on the historical volatility of the Company’s stock for a period equal tothe expected term of the options.  Theexpected term of the options represents the period of time that options grantedare outstanding and is estimated using historical exercise and terminationexperience.

 

Prior to the adoption of SFAS No. 123R, the benefit of taxdeductions in excess of recognized stock compensation expense was reported as areduction of taxes paid within operating cash flows.  SFAS No. 123R requires that such

 

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benefits be recognized as a financing cash flow.  The benefits of tax deductions in excess ofrecognized stock compensation expense for the three and six months ended June 30,2008 and 2007 were immaterial.

 

Therewere 1,000 stock options granted during the six month period ended June 30,2007, all at an estimated fair value of $5.92. There were no stock options granted during the six month period ended June 30,2008.  The total value of shares vested(and related compensation expense) during the six month periods ended June 30,2008 and 2007 was $0 and $5,920, respectively.

 

The fair values of options granted during the six months ended June 30,2007 were estimated on the date of grant using the Black-Scholes option pricingmodel based on the following weighted average assumptions in the table below:

 

| Expected term (years)   |   | 5      |   |
|-------------------------|--------|--------|--------|
| Risk-free interest rate |   | 4.50   | %      |
| Volatility              |   | 78.83  | %      |
| Dividend yield          |   | — |   |

 

Thefollowing table summarizes stock options outstanding as of June 30, 2008,as well as activity during the six month period then ended:

 
| ** **                      | ** ** | **Options  Outstanding** | ** ** | **Exercise Price  Per Share  Weighted  Average** | ** ** | **Contractual  Term  Weighted  Average** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------|------------|--------------------------|------------|------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------|------------|
| Balance, December 31, 2007 |       | 36,000                   |       | $                                                          | 7.10       |                                     | 5.85       |                            | $          | 374,264 |   |
| Granted                         |       | —                   |       | —                                                     |       | —                                   |       | —                          |       |
| Exercised                       |       | 8,500                    |       | 6.95                                                       |       | —                                   |       | —                          |       |
| Expired/Forfeited               |       | —                   |       | —                                                     |       | —                                   |       | —                          |       |
| Balance, June 30, 2008     |       | 27,500                   |       | $                                                          | 7.15       |                                     | 5.15       |                            | $          | 211,418 |   |

 

Alloptions outstanding at June 30, 2008 are fully vested andexercisable.  At June 30, 2008,there were 40,000 shares available for future grants under the plans; however,on April 25, 2007, the Company’s Board of Directors elected to suspendfuture grants under all plans indefinitely.

 

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

 

All investment and capital allocation decisions are made by Mr. SardarBiglari, the Company’s Chairman and Chief Executive Officer, under limitedauthority delegated by the Board of Directors. The delegated authority includes the authority to borrow funds inconnection with making investments in marketable securities or derivativesecurities, subject to Board reporting requirements and variouslimitations.  As of the date of thisfiling, Mr. Biglari has authority to manage surplus cash up to $10million, and in addition, has authority to borrow a maximum of $5 million.  The Company has a margin securities accountwith a brokerage firm. The margin account bears interest at the Federal FundsTarget Rate quoted by the Wall Street Journal, plus .5%, or approximately 2.50%as of the date of this report, with the minimum and maximum amount of anyparticular loan to be determined by the brokerage firm, in its discretion, fromtime to time.  The collateral securingthe margin loans would be the Company’s holdings in marketable securities.  The minimum and maximum amount of anyparticular margin may be established by the brokerage firm, in its discretion,regardless of the amount of collateral delivered to the brokerage firm, and thebrokerage firm may change such minimum and maximum amounts from time to time.

 

Marketableequity securities held by Western Sizzlin Corporation are held for anindefinite 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,as a component of other comprehensive income.

 

TheCompany completed its exchange offer for shares of ITEX Corporation on May 13,2008.  A total of 864,487 shares of ITEXcommon stock were validly tendered.  TheCompany has issued 57,196 shares of common stock in exchange for ITEX sharestendered, based upon the exchange ratio of one share of ITEX common stock for..06623 shares of the Company’s common stock as set forth in the tender offer.After the completed exchange, the Company owns 1,565,201 shares of ITEX commonstock, which represents approximately 9% of ITEX’s total outstanding stock.

 

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Following is a summary of marketable equity securities held by WesternSizzlin Corporation as of June 30, 2008 and December 31, 2007:

 
| ** **               | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|--------------------------|------------|----------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| June 30, 2008:      |       | $        | 1,409,003  |                         | $          | —                        |       | $                   | 186,402    |   | $ | 1,222,601 |   |
|                     |       |     |       |                         |       |                          |       |                |       |
| December  31, 2007: |       | $        | 605,689    |                         | $          | 128,845                       |       | $                   | —     |   | $ | 734,534 |   |

 

There were no realized gains or losses from marketable equitysecurities held by Western Sizzlin Corporation for the three or six monthsended June 30, 2008 and 2007. Management has also evaluated unrealized losses on marketable equitysecurities held by Western Sizzlin Corporation to determine if such impairmentis other than temporary, and has concluded that they are temporary as of June 30,2008 and that the Company has the ability and the intent to hold suchsecurities until they recover their value. In the event management concludes in future periods that such losses areother than temporary, a charge will be taken in the statement of operations toreduce the cost of the securities to their fair value.

 

In April 2007, the Company formed Western Investments, Inc.,a Delaware corporation and wholly-owned subsidiary to serve as the generalpartner of Western Acquisitions, L.P., a Delaware limited partnership thatoperates as a private investment fund. Through Western Investments, Inc., Mr. Biglari operates as theportfolio manager to the fund.  Duringthe third quarter of 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.  During the third and fouth quarters of theyear ended December 31, 2007, cash contributions from outside investors of$2,225,000 were made to the limited partnership.  During the six months ended June 30,2008, cash contributions from outside investors of $540,000 were made to thelimited partnership.

 

As of June 30, 2008, Western Investments, Inc. owned 85.36%of Western Acquisitions, L.P.  As such,Western Acquisitions, L.P. has been consolidated into the accompanyingfinancial statements with the 14.64% ownership by minority limited partnerspresented as minority interest on the accompanying consolidated balance sheetas of June 30, 2008.   WesternAcquisitions, L.P. is, for GAAP purposes, an investment company under the AICPAAudit and Accounting Guide *Investment Companies*.  The Company has retained the specializedaccounting for Western Acquisitions, L.P. pursuant to EITF Issue No. 85-12,*Retention of Specialized Accounting for Investmentin Consolidation*.  As such,marketable equity securities held by Western Acquisitions, L.P. are recorded atfair value in Investments in Marketable Securities, with unrealized gains andlosses resulting from changes in fair value reflected in the ConsolidatedStatements of Operations.  Net unrealizedlosses in marketable securities held by the limited partnership totaled$6,443,124 and $-0- for the six month periods ended June 30, 2008 and2007, respectively.

 

Following is a summary of marketable equity securities held by WesternAcquisitions, L.P. as of June 30, 2008 and December 31, 2007, ofwhich all are in the United States:

 
| ** **                          | ** ** | **As of June 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | **Cost**                                    | ** ** | **Fair Value**                             | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| The Steak n Shake Co.               |       | $                                           | 19,159,412 |                                            | $          | 9,833,940 |   | $ | 17,902,714 |   | $ | 15,046,851 |   |
| Other                               |       | 136,999                                     |       | 140,304                                         |       | 138,660 |   | 115,480 |   |
|                                |       |                                        |       |                                            |       |   |   |   |   |
| Total marketable equity  securities |       | $                                           | 19,296,411 |                                            | $          | 9,974,244 |   | $ | 18,041,374 |   | $ | 15,162,331 |   |

 

Realized gains, net, and net change in unrealized losses frommarketable equity securities held by Western Acquisitions, L.P. were as follows:

 
| ** **                                                                  | ** ** | **Three Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2008** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Realized gains                                                              |       | $                                                     | 2,104      |                                                | $          | — |   |
| Realized losses                                                             |       | (1,350                                                | )          | (39,852                                             | )          |
| Net realized loss on sales of  marketable securities                        |       | $                                                     | 754        |                                                | $          | (39,852 | ) |
|                                                                        |       |                                                  |       |                                                |       |
| Net unrealized losses on marketable  securities held by limited partnership |       | $                                                     | (2,280,461 | )                                                   | $          | (6,443,124 | ) |

 

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**(4)****                                ****Investment in Real Estate**

 

On December 13, 2007, Western Real Estate, L.P., a newly-formedDelaware limited partnership, managed by Western Properties, Inc., anewly-formed Delaware corporation and wholly-owned subsidiary of the Company,purchased approximately 23 acres of real property located in Bexar County,Texas, from unaffiliated third parties.  Western Properties, Inc.serves as the general partner of Western Real Estate, L.P., which intends tooperate as a private real estate investment fund.  Land held for investment by Western RealEstate, L.P. at December 31, 2007 and June 30, 2008 of $3,745,152 isrecorded at cost. The land was originally purchased using available cash and a$2,000,000 draw on the Company’s existing line of credit.  On February 1, 2008, the purchase was refinancedthrough the issuance of a note payable of $2,641,220, secured by the land held for investment.   Interest accrues on the unpaid principalbalance at prime minus 0.5%, or 4.50% as of June 30, 2008 with one paymentof principal of $264,122 due on January 29, 2009, and all remainingprincipal and accrued interest due on January 30, 2010.

 

**(5)****                                ****Goodwill and Other IntangibleAssets**

 

TheCompany conforms to the provisions of Statement of Financial AccountingStandards No. 142 (“SFAS 142”), *Goodwill and OtherIntangible Assets*.  Under SFAS142, goodwill is reviewed for impairment and written down and charged toresults of operations when carrying amount exceeds estimated fair value. TheCompany is required to perform impairment tests each year, or between yearlytests in certain circumstances, for goodwill. There can be no assurance thatfuture impairment tests will not result in a charge to earnings.

 

There were no changes in the net carrying amount ofgoodwill for the three and six months ended June 30, 2008 and 2007.

 

*Amortizing Intangible 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 over their remaining life canbe recovered through undiscounted future operating cash flows of the acquiredoperation.  The amount of impairment, ifany, is measured based on projected discounted future operating cash flowsusing a discount rate reflecting the Company’s average cost of funds.  There were no impairments to amortizingintangible assets in the six month period ended June 30, 2008 and 2007,respectively.

 
| ** **                    | ** ** | **As of ****June 30, 2008** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|
| ** **                    | ** ** | **Gross  carrying  amount**                     | ** ** | **Weighted average  amortization  period** | ** ** | **Accumulated  amortization** | ** ** |
| Amortizing intangible assets: |       |                                            |       |   |   |   |   |
| Franchise royalty contracts   |       | $                                               | 9,454,431  |   | 15.0 yrs. |   | $ | 9,139,283 |   |
|                               |            |                                                 |            |  |  |  |  |  |  |

 

Aggregateamortization expense for amortizing intangible assets for the three and sixmonth periods ended June 30, 2008 was $157,574 and $315,148,respectively.  Aggregate amortizationexpense for amortizing intangible assets for the three and six month periodsended June 30, 2007 was $157,574 and $315,148, respectively. Estimatedamortization expense is $630,296 for the year ended December 31, 2008, atwhich time the franchise royalty contracts will be fully amortized.

 

**(6)****                                ****Stockholders’ Equity**

 

TheBoard of Directors approved a share repurchase program on June 24, 2008authorizing the Company to repurchase up to 500,000 shares of the Company’scommon stock commencing June 25, 2008 at prices set as the Company’smanagement deems appropriate.  Theprogram can be suspended or terminated at any time without prior notice, but inany event shall terminate no later than June 25, 2009.  No repurchases were consummated during theperiod covered by this report.

 

Duringthe quarter ended June 30, 2008, the Company issued 57,196 shares ofcommon stock in exchange for 864,487 shares of ITEX Corporation common stockrelated to the exchange offer.  The fairvalue of the Company’s common stock issued was recorded at the closing marketprice of $14.00 per share on May 13, 2008, the expiration date of thetender offer.

 

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**(7)****                                ****Income Taxes**

 

TheCompany adopted the provisions of FASB Interpretation No. 48*, Accounting for Uncertainty in Income Taxes*, anInterpretation of FASB Statement No. 109 (“FIN 48”), on January 1,2007.  As of June 30, 2008, the Company has a recorded liability of$16,829, including interest of $7,808, for such uncertain tax positions.  The recorded liability was reduced by $11,627during the six months ended June 30, 2008, as the Company continues tosettle its estimated obligations for lesser amounts.

 

Inassessing the realizability of deferred tax assets, management considerswhether it is more likely than not that some portion or all of the deferred taxassets will not be realized. The ultimate realization of deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible.

 

Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment. Basedupon the level of historical taxable income and projections for future taxableincome over the periods which the deferred tax assets are deductible,management believes it is more likely than not the Company will realize thebenefits of these deductible differences, net of a valuation allowance ofapproximately $2,256,000 and $0 at June 30, 2008 and 2007, respectively,related to the unrealized losses of marketable securities.  The provision for deferred income taxes forthe three and six month periods ended June 30, 2008 includes a provisionfor the valuation allowance of $752,000 and $2,065,000, which increased theCompany’s effective tax rate for the periods.

 

**(8)****                                ****Earnings (Loss) Per Share**

 

Basicearnings (loss) per share excludes dilution and is computed by dividing income(loss) available to common stockholders by the weighted-average number of commonshares 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.

 

Thefollowing is a reconciliation of the numerators and denominators of the basicand diluted earnings (loss) per share computations for the periods indicated:

 
| ** **                                 | ** ** | **Income (Loss)  (Numerator)** | ** ** | **Weighted  Average  Shares  (Denominator)** | ** ** | **Earnings  (Loss)  Per Share  Amount** | ** ** |
|--------------------------------------------|------------|-------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| **Three months ended June 30, 2008**  | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net loss — basic                      |       | $                                   | (1,956,024 | )                                            | 2,730,236  |                                         | $          | (.72 | ) |
| Net loss — diluted                    |       | $                                   | (1,956,024 | )                                            | 2,730,236  |                                         | $          | (.72 | ) |
|                                       |       |                                |       |                                         |       |                                         |       |
| **Three months ended  June 30, 2007** | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net income — basic                    |       | $                                   | 232,163    |                                         | 1,792,574  |                                         | $          | .13 |   |
| Net income — diluted                  |       | $                                   | 232,163    |                                         | 1,801,502  |                                         | $          | .13 |   |

 
| ** **                               | ** ** | **Income (Loss)  (Numerator)** | ** ** | **Weighted  Average  Shares  (Denominator)** | ** ** | **Earnings  (Loss)  Per Share  Amount** | ** ** |
|------------------------------------------|------------|-------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| **Six months ended June 30, 2008**  | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net loss — basic                    |       | $                                   | (5,807,019 | )                                            | 2,713,431  |                                         | $          | (2.14 | ) |
| Net loss — diluted                  |       | $                                   | (5,807,019 | )                                            | 2,713,431  |                                         | $          | (2.14 | ) |
|                                     |       |                                |       |                                         |       |                                         |       |
| **Six months ended  June 30, 2007** | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net income — basic                  |       | $                                   | 382,120    |                                         | 1,790,319  |                                         | $          | .21 |   |
| Net income — diluted                |       | $                                   | 382,120    |                                         | 1,796,855  |                                         | $          | .21 |   |

 

Forthe three and six month periods ended June 30, 2008, the Company excludedfrom the loss per share calculation all common stock equivalents because theeffect on loss per share was anti-dilutive.

 

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**(9)****                                ****Reportable Segments**

 

The Company has organized segmentreporting with additional information to reflect how the Company views itsbusiness activities.  The Company-operatedRestaurant segment consists of the operations of all Company-operatedrestaurants and derives its revenues from restaurant operations.  The Franchising segment consists primarily offranchise sales and support activities and derives its revenues from sales offranchise and development rights and collection of royalties from franchisees.The Investment Activity segment consists of investment activities and certaindirect expenses associated with investment-related legal matters. The Company doesnot allocate certain expenses to any business segment.  These costs include expenses of the followingfunctions: legal, accounting, stockholder relations, personnel not directlyrelated to a segment, information systems and other headquarter activities.  These unallocated expenses are designated asunallocated corporate expenses. Certain other expenses (such as subleaseproperty expense, impairment and other charges, gains on settlement ofinsurance claims, and corporate litigation fees and expenses) are also notallocated to any reportable segment.

 

Thefollowing table summarizes reportable segment information:

 
| ** **                                                                  | ** ** | **Three Months**       | ** ** | **Six Months**         | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                  | ** ** | **Ended June 30** | ** ** | **Ended June 30** | ** ** |
| ** **                                                                  | ** ** | **2008**                    | ** ** | **2007**                    | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues from reportable  segments:                                         |       |                        |       |                        |       |   |   |   |   |
| Restaurants                                                                 |       | $                           | 3,490,292  |                        | $          | 3,542,157 |   | $ | 6,616,402 |   | $ | 6,590,457 |   |
| Franchising                                                                 |       | 1,071,936                   |       | 1,148,414                   |       | 2,121,077 |   | 2,229,804 |   |
| Total revenues                                                              |       | $                           | 4,562,228  |                        | $          | 4,690,571 |   | $ | 8,737,479 |   | $ | 8,820,261 |   |
| Depreciation and amortization:                                              |       |                        |       |                        |       |   |   |   |   |
| Restaurants                                                                 |       | $                           | 97,750     |                        | $          | 100,304 |   | $ | 197,107 |   | $ | 200,799 |   |
| Franchising                                                                 |       | 165,863                     |       | 165,370                     |       | 331,508 |   | 330,809 |   |
| Total depreciation and  amortization                                        |       | $                           | 263,613    |                        | $          | 265,674 |   | $ | 528,615 |   | $ | 531,608 |   |
|                                                                        |       |                        |       |                        |       |   |   |   |   |
| Income (loss) from restaurant  and franchise operations:                    |       |                        |       |                        |       |   |   |   |   |
| Restaurants and equity in joint  venture                                    |       | $                           | 388,407    |                        | $          | 439,920 |   | $ | 590,326 |   | $ | 534,802 |   |
| Franchising                                                                 |       | 596,687                     |       | 623,286                     |       | 1,175,648 |   | 1,250,328 |   |
| Subleased properties and other  unallocated expenses                        |       | (58,168                     | )          | (24,992                     | )          | (223,255 | ) | (44,636 | ) |
| Corporate                                                                   |       | (431,445                    | )          | (580,244                    | )          | (915,695 | ) | (968,847 | ) |
| Total income from restaurant  and franchise operations:                     |       | $                           | 495,481    |                        | $          | 457,970 |   | $ | 627,024 |   | $ | 771,647 |   |
|                                                                        |       |                        |       |                        |       |   |   |   |   |
| Loss from investment  activities:                                           |       |                        |       |                        |       |   |   |   |   |
| Net realized gains (losses) on  sales of marketable securities              |       | $                           | 754        |                        | $          | — |   | $ | (39,852 | ) | $ | — |   |
| Net unrealized losses on  marketable securities held by limited partnership |       | (2,280,461                  | )          | —                      |       | (6,443,124 | ) | — |   |
| Expenses of investment  activities                                          |       | (468,406                    | )          | (74,510                     | )          | (968,673 | ) | (136,407 | ) |
| Total income (loss) from  investment activities                             |       | $                           | (2,748,113 | )                           | $          | (74,510 | ) | $ | (7,451,649 | ) | $ | (136,407 | ) |
|                                                                        |       |                        |       |                        |       |   |   |   |   |
| Interest Expense:                                                           |       |                        |       |                        |       |   |   |   |   |
| Restaurants                                                                 |       | $                           | 15,748     |                        | $          | 19,727 |   | $ | 54,195 |   | $ | 40,051 |   |
| Total interest expense                                                      |       | $                           | 15,748     |                        | $          | 19,727 |   | $ | 54,195 |   | $ | 40,051 |   |
| Interest Income:                                                            |       |                        |       |                        |       |   |   |   |   |
| Corporate                                                                   |       | $                           | 11,503     |                        | $          | 13,775 |   | $ | 32,367 |   | $ | 30,353 |   |
| Total interest income                                                       |       | $                           | 11,503     |                        | $          | 13,775 |   | $ | 32,367 |   | $ | 30,353 |   |

 
| ** **            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|-------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Total assets:         |       |              |       |                  |       |
| Restaurants           |       | $                 | 5,936,974  |                  | $          | 6,032,635 |   |
| Franchising           |       | 2,291,983         |       | 2,803,432             |       |
| Corporate             |       | 1,309,864         |       | 2,030,988             |       |
| Investment activities |       | 15,696,389        |       | 19,642,017            |       |
| Total assets          |       | $                 | 25,235,210 |                  | $          | 30,509,072 |   |

 
| ** **      | ** ** | **June 30** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2008**         | ** ** | **2007**              | ** ** |
| Total goodwill: |       |             |       |                  |       |
| Restaurants     |       | $                | 3,540,200  |                  | $          | 3,540,200 |   |
| Franchising     |       | 770,000          |       | 770,000               |       |
| Total goodwill  |       | $                | 4,310,200  |                  | $          | 4,310,200 |   |

 

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**(10)        Fair Value Measurement**

 

EffectiveJanuary 1, 2008, the Company adopted Statement of Financial AccountingStandards No. 159 (“SFAS 159”), *The Fair Value Option forFinancial Assets and Financial Liabilities*.  SFAS 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value. Wedid not elect the fair value reporting option for any assets and liabilitiesnot previously recorded at fair value.

 

EffectiveJanuary 1, 2008, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 157 (“SFAS 157”), *Fair Value Measures,*applicable to allfinancial assets and liabilities and for nonfinancial assets and liabilitiesrecognized or disclosed at fair value in the consolidated financial statementson a recurring basis (at least annually). SFAS 157 defines fair value asthe exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. The standard also establishes a fair value hierarchy whichrequires an entity to maximize the use of observable inputs and minimize theuse of unobservable inputs when measuring fair value. SFAS 157 describesthree levels of inputs that may be used to measure fair value:

 
| **Level 1** |   | Quoted  market prices in active markets for identical assets or liabilities.                  |
|-------------|--------|-----------------------------------------------------------------------------------------------|
|        |   |                                                                                          |
| **Level 2** |   | Observable  market-based inputs or unobservable inputs that are corroborated by market  data. |
|        |   |                                                                                          |
| **Level 3** |   | Unobservable  inputs that are not corroborated by market data.                                |

 

AtJune 30, 2008, the Company’s investments in marketable securities arecarried at fair value, based on quoted market prices, in the consolidatedbalance sheets and are classified within Level 1 of the fair value hierarchy.

 

Therehave been no other material changes to the Company’s significant accountingpolicies and estimates from the information provided in Form 10-K, as amended,for the fiscal year ended December 31, 2007.

 

**(11)****                         ****Commitments and Contingencies**

 

**Commitments**

 

Western Investments, Inc. is the general partner of WesternAcquisitions, L.P.  Limited partnershipinterests in Western Acquisitions, L.P. 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 heldfor five years.  Additionally, WesternInvestments, Inc., will, at the end of the five year period, reimburse theholders of Class B interests for the first 30% of any cumulative netlosses they may suffer.  As of June 30,2008, Western Acquisitions, L.P., did not have any limited partners holding Class Binterests.  As of June 30, 2008 and December 31,2007, minority limited partners holding Class A interests held 14.64% and12.43% ownership, respectively.

 

**Contingencies**

 

The Company accrues an obligation forcontingencies, including estimated legal costs, when a loss is probable and theamount is reasonably estimable.  As factsconcerning contingencies become known to the Company, the Company reassessesits position with respect to accrued liabilities and other expenses.  These estimates are subject to change asevents evolve and as additional information becomes available during thelitigation process.

 

Little Rock, Arkansas Lease

 

InSeptember 2006, the Company was served with a lawsuit filed in the CircuitCourt of Pulaski County, Arkansas, captioned *Parks LandCompany, LLLP, et al. v. Western Sizzlin Corporation, et al.* Theplaintiffs are owners/landlords of four restaurant premises located in theLittle Rock, Arkansas metropolitan area which had been

 

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leasedpursuant to a single ten year lease agreement.  The Company occupiedthese locations for a period of time, but before the end of the lease,subleased each of these premises to various operators.  The ten year lease agreement expired on June 30,2006.   In the lawsuit the plaintiffssought recovery of alleged damages 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.  On February 12, 2008,this case came before the Court for trial. On February 20, 2008, a 12member jury returned a plaintiffs’ verdict in the amount of $689,526.  On February 29, 2008, the Circuit Courtof Pulaski County, Arkansas entered judgment on the jury’s verdict in the caseagainst the Company in the amount of $689,666 plus plaintiff’s legalcosts.  The Company has appealed theverdict and the judgment issued on it.   If the verdict is affirmed,the judgment will include interest accrued while the case is onappeal.  The appeal should be decided by the appropriateappellate court in Arkansas sometime in late 2008 or early 2009.  There has been no change in the Company’s loss contingency accrual of $900,000since December 31, 2007.

 

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.

 

**(12)****                         ****Investment in UnconsolidatedJoint Venture**

 

The Company is a partner in a 50/50 joint venture with a franchisee fora new restaurant in Harrisonburg, Virginia. During October 2005, the joint venture entered into a loanagreement for $3.05 million and the Company guaranteed 50% of the loanobligation.  The estimated fair value ofthe guarantee of approximately $30,000 is recorded in other long-termliabilities and in investments in unconsolidated joint venture on theaccompanying consolidated balance sheets at June 30, 2008 and December 31,2007.  The term of the guarantee extendsthrough July 1, 2026 and the Company would be required to perform underthe guarantee 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 of the jointventure is reported in the accompanying statements of operations as equity inearnings of unconsolidated joint venture.

 

**Financial Data**

 

Thefollowing is selected financial information for the joint venture as of and forthe three and six month periods ended June 30, 2008 and 2007,respectively:

 
| ** **                                       | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(unaudited)**                                 | ** ** | **(unaudited)**                               | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Statement of Operations Data:** | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                   |       | $                                               | 1,218,393  |                                          | $          | 1,257,868 |   | $ | 2,423,335 |   | $ | 2,586,993 |   |
| Cost of food                                     |       | 496,971                                         |       | 530,927                                       |       | 986,474 |   | 1,126,420 |   |
| Payroll expense                                  |       | 347,202                                         |       | 372,578                                       |       | 700,542 |   | 793,397 |   |
| Gross profit                                     |       | 374,220                                         |       | 354,363                                       |       | 763,319 |   | 667,176 |   |
| Marketing and operating expense                  |       | 43,283                                          |       | 54,524                                        |       | 91,051 |   | 102,292 |   |
| General and administrative                       |       | 112,424                                         |       | 121,805                                       |       | 224,092 |   | 293,533 |   |
| Depreciation and amortization                    |       | 50,549                                          |       | 50,622                                        |       | 100,919 |   | 100,321 |   |
| Interest                                         |       | 53,282                                          |       | 56,376                                        |       | 107,364 |   | 111,872 |   |
| Net income                                       |       | 122,667                                         |       | 103,946                                       |       | 214,653 |   | 131,349 |   |
|                                             |       |                                            |       |                                          |       |   |   |   |   |
| ** **                                       | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| **Balance Sheet Data:**                          |       |                                            |       |                                          |       | ** ** |   | ** ** |   |
| Cash                                             |       |                                            |       |                                          |       | $ |  193,635 |   | $ |  188,352 |   |
| Prepaid expenses                                 |       |                                            |       |                                          |       | 16,854 |   | 16,906 |   |
| Inventory                                        |       |                                            |       |                                          |       | 20,421 |   | 20,838 |   |
| Land, equipment and building improvements,  net  |       |                                            |       |                                          |       | 3,657,761 |   | 3,847,166 |   |
| Loan costs, net                                  |       |                                            |       |                                          |       | 11,183 |   | 12,708 |   |
| Total assets                                     |       |                                            |       |                                          |       | 3,900,776 |   | 4,088,978 |   |
| Loan payable                                     |       |                                            |       |                                          |       | 3,046,061 |   | 3,226,761 |   |
| Accounts payable and accrued expenses            |       |                                            |       |                                          |       | 204,745 |   | 267,172 |   |
| Members’ equity                             |       |                                            |       |                                          |       | 604,644 |   | 366,308 |   |
|                                                  |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

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

 

InSeptember 2006, the FASB issued Statement of Financial AccountingStandards No. 157 (“SFAS 157”), *Fair Value Measures*.SFAS 157 defines fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements. SFAS 157 applies underother accounting pronouncements that require or permit fair value measurements,the FASB having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Accordingly, SFAS 157 does notrequire any new fair value measurements. Effective January 1, 2008, the Company adopted the provisions ofSFAS 157 for financial assets and liabilities. The Company applied theprovisions of FSP FAS 157-2, *Effective Date of FASBStatement 157*, which defers the provisions of SFAS 157 fornonfinancial assets and liabilities to the first fiscal period beginning after November 28,2008.  The nonfinancial assets for whichwe have deferred adoption include goodwill and long-lived assets.  The Company is required to adopt SFAS 157 fornonfinancial assets and liabilities that are not measured at fair value on arecurring basis in the first quarter of 2009 and is still evaluating the impacton the Consolidated Financial Statements.

 

In May 2007,the FASB issued FASB Staff Position No. FIN 46(R)-7, *Applicationof FASB Interpretation No. 46(R) to Investment Companies* (“FSPFIN 46(R)-7”) which provides clarification on the applicability of FIN 46(R),as revised, to the accounting for investments by entities that apply theaccounting guidance in the AICPA Audit and Accounting Guide, *Investment Companies*. FSP FIN 46(R)-7 amends FIN 46(R), as revised, to make permanent thetemporary deferral of the application of FIN 46(R), as revised, to entitieswithin the scope of the guide under Statement of Position (“SOP”) No. 07-1,*Clarification of the Scope of the Audit andAccounting Guide*Investment Companies *andAccounting by Parent Companies and Equity Method Investors for Investments inInvestment Companies* (“SOP 07-1”). FSP FIN 46(R)-7 is effective upon adoption of SOP 07-1.  The adoption of FSP FIN 46(R)-7 is notexpected to have a material impact on the Company.

 

SOP07-1, issued in June 2007, addresses whether the accounting principles ofthe AICPA Audit and Accounting Guide *Investment Companies*may be applied to an entity by clarifying the definition of an investmentcompany and whether those accounting principles may be retained by a parentcompany in consolidation or by an investor in the application of the equitymethod of accounting.  SOP 07-1, asoriginally issued, was to be effective for fiscal years beginning on or after December 15, 2007with earlier adoption encouraged.  In February 2008,the FASB issued FSP SOP 07-1-1, *Effective Date of AICPAStatement of Position 07-01*, to indefinitely defer the effectivedate of SOP 07-01.   The Company’smajority-owned subsidiary, Western Acquisitions, L.P., is an investment companyas currently defined in the AICPA Audit and Accounting Guide, *Investment Companies*. The Company has retained the specialized accounting for WesternAcquisitions, L.P. pursuant to EITF 85-12, *Retention of SpecializedAccounting for Investments in Consolidation*.  As such, marketable equity securities held byWestern Acquisitions, L.P. are recorded at fair value in Investments inMarketable Securities in the consolidated financial statements, with unrealizedgains and losses resulting from the change in fair value reflected in theConsolidated Statement of Operations. The Company intends to monitor futuredevelopments associated with this Statement in order to assess the impact, ifany, which may result.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(R), *Business Combinations*(“SFAS 141R”), and Statement ofFinancial Accounting Standard No. 160, *Noncontrolling Interest inConsolidated Financial Statements, an amendment of  ARB**No. 51*(“SFAS 160”).  These new standards willsignificantly change the accounting for and reporting for business combinationsand noncontrolling (minority) interests in consolidated financial statements.  SFAS 141(R) and SFAS 160 are required tobe adopted simultaneously and are effective for the first annual reportingperiod beginning on or after December 15, 2008.  These standards will impact the Company if itcompletes an acquisition or obtains additional minority interests after theeffective date.  SFAS 160 amends ARB 51to establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. It clarifies thata noncontrolling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as equity in consolidated financial statements. Amongother requirements, this statement requires that the consolidated net incomeattributable to the parent and the noncontrolling interest be clearlyidentified and presented on the face of the consolidated income statement. SFAS160 is effective for the first fiscal period beginning on or after December 15,2008.  The Company is required to adopt SFAS 160 in the first quarter of2009 and is currently evaluating the impact of adopting SFAS 160 on itsConsolidated Financial Statements.

 

In March 2008, theFASB issued Statement of Financial Accounting Standards SFAS No. 161 (“SFAS161”), *Disclosures about DerivativeInstruments and Hedging Activities—An Amendment of FASB Statement No. 133*.

 

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SFAS applies to all derivativeinstruments and related hedged items accounted for under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*. It requires entities to provide greater transparencyabout (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for underSFAS 133 and its related interpretations, and (c) how derivativeinstruments and related hedged items affect an entity’s financial position,results of operations, and cash flows. SFAS 161 is effective for fiscalyears and interim periods beginning after November 15, 2008. This standardis not expected to have a material impact on the Company’s consolidatedfinancial statements.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3*, Determination**of the Useful Life ofIntangible Assets* (“FSP 142-3”).  FSP 142-3 amends the factorsthat should be considered in developing renewal or extension assumptions usedto determine the useful life of a recognized intangible asset under FASBStatement No. 142, *Goodwill and OtherIntangible Assets* and requires enhanced related disclosures. FSP 142-3 must be applied prospectively to all intangible assets acquiredsubsequent to fiscal years beginning after December 15, 2008.  TheCompany is currently evaluating the impact that FSP 142-3 will have on itsconsolidated financial statements.

 

On August 11, 2008, the Company opened up a new Company-operatedrestaurant in Tupelo, Mississippi under the newly developed concept, WesternSizzlin Express. Western Sizzlin Express is a smaller, full service restaurantwith high quality, simpler menu created to turn tables faster in an efficientand pleasing environment. The Company is marketing this concept as a lower costinvestment to prospective franchises.

 

**(14)****                        ****SubsequentEvents**

 

On July 9, 2008, the Company issued commonstock to complete an acquisition of a controlling interest in Mustang CapitalAdvisors, LP and its general partner, Mustang Capital Management, LLC, throughthe Company’s newly-formed wholly-owned subsidiary, Western Mustang Holdings,LLC.  The aggregate purchase price was$1,050,241, which consisted of $300,000 in cash, and 54,563 shares of commonstock issued at a per share price of $13.75.

 

On July 23, 2008, the Company entered into a severance and releaseagreement with an employee who held the position of President and ChiefExecutive Officer of Western Sizzlin Franchise Corporation and Western SizzlinStores, Inc.  Under the agreement,the Company agreed to pay severance equal to the employee’s base pay, $210,000,in bi-weekly installments through August 19, 2009.  In addition, the Company will reimbursemonthly health coverage premium payments through August 2009.

 

On August 11, 2008, the Company opened up a new Company-operatedrestaurant in Tupelo, Mississippi under the newly developed concept, WesternSizzlin Express. Western Sizzlin Express is a smaller, full service restaurantwith a high quality, simpler menu created to turn tables faster in an efficientand pleasing environment. The Company is marketing this concept as a lower costinvestment to prospective franchisees.

 

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

 

**Overview**

 

The following discussionmay include forward-looking statements including anticipated financialperformance, business prospects, the future opening of Company-operated andfranchised restaurants, anticipated capital expenditures, and othermatters.  All statements other thanstatements of historical fact are forward-looking statements.  Section 27A of the Securities Act of1933 (as amended) and Section 21E of the Securities Exchange Act of 1934(as amended) provide safe harbors for forward-looking statements.  In order to comply with the terms of these safeharbors, the Company notes that a variety of factors, individually or in theaggregate, could cause the Company’s actual results and experience to differmaterially from the anticipated results or other expectations expressed in theCompany’s forward-looking statements including, without limitation, thefollowing: the ability of the Company or its franchises to obtain suitablelocations for restaurant development; consumer spending trends and habits;competition in the restaurant segment with respect to price, service, location,food quality and personnel resources; weather conditions in the Company’soperating regions; laws and government regulations; general business andeconomic conditions; availability of capital; success of operating initiativesand marketing and promotional efforts; and changes in accounting policies.  In addition, the Company disclaims any intentor obligation to update those forward-looking statements.

 

Western SizzlinCorporation is a holding company owning subsidiaries engaged in a number ofdiverse business activities.  The Company’sprimary business activities are conducted through Western Sizzlin FranchiseCorporation and Western Sizzlin Stores, Inc., which franchise and operate117 restaurants in 19 states, including five Company-owned, 111 franchiserestaurants, and one joint venture restaurant. The Company currently operates and/or franchises the followingconcepts:  Western Sizzlin, Western SizzlinWood Grill, Western Sizzlin Express, Great American Steak & Buffet,and Quincy Steakhouses.

 

The consolidatedfinancial statements include the accounts of Western Sizzlin Corporation andits wholly-owned subsidiaries, Western Sizzlin Franchise Corporation, WesternSizzlin Stores, Inc., Western Sizzlin Stores of Little Rock, Inc.,Austins of Omaha, Inc., Western Investments, Inc., Western Properties, Inc.,a majority-owned limited partnership, Western Acquisitions, L.P., and asolely-owned limited partnership, Western Real Estate, L.P.  Unless otherwise noted, all entities are referredto collectively as the “Company”.

 

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In 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.  Western Acquisitions, L.P. is, for generallyaccepted accounting principles (GAAP) purposes, an investment company under theAmerican Institute of Certified Public Accountants (AICPA) Audit and AccountingGuide *Investment Companies*.  The Company has retained the specializedaccounting for Western Acquisitions, L.P. pursuant to FITF Issue No. 85-12,*Retention of Specialized Accounting for Investmentsin Consolidation*.  As such,marketable equity securities held by Western Acquisitions, L.P. are recorded atfair value in Investments in Marketable Securities, with unrealized gains andlosses resulting from the change in fair value reflected in the Statement ofOperations.

 

The Company seeks toinvest, at the holding company and through subsidiaries, including WesternAcquisitions, L.P., in stocks of businesses at prices below their intrinsicbusiness value.  The Company’s preferredstrategy is to allocate a meaningful amount of capital in each investee,resulting in concentration.  The carryingvalues of these investments are exposed to market price fluctuations, which maybe accentuated by a concentrated equity portfolio.  A significant decline in the price of majorinvestments may produce a large decrease in the Company’s net earnings and itsstockholders’ equity (See Note 3 to the consolidated financial statements).

 

Financialdecisions are centralized at the holding company level, and management ofoperating businesses is decentralized at the business unit level.  Investment and all other capital allocationdecisions are made for the Company and its subsidiaries by Mr. SardarBiglari, Chairman and Chief Executive Officer. The Company’s primary objective centers on achieving above averagereturns on capital in pursuit of maximizing the eventual net worth of itsstockholders.

 

While the Company hashistorically been principally engaged, and intends at this time to remainprincipally engaged, in franchising and operating restaurants, its recentinvestment activities could bring it within the definition of an “investmentcompany” and require it to register as an investment company under the InvestmentCompany Act of 1940.  The Board ofDirectors has adopted a policy requiring management to restrict the Company’soperations and investment activities to avoid becoming an investment company,until and unless the Board approves otherwise.

 

Although the Company doesnot presently intend to change its principal business, and the Board has notapproved any such change, the Company has expanded its investment activities,and may decide in the future to register as an investment company under theInvestment Company Act.  Under certaincircumstances, if it is successful in investment activities, then the Companymay inadvertently fall within the definition of an investment company, in whichevent it may be required to register as an investment company.  If the Company decides or is required toregister as an investment company, then it would become subject to variousprovisions of the Investment Company Act and the regulations adopted under suchAct, which are very extensive and could adversely affect its operations.

 

The Company completed itsexchange offer for shares of ITEX Corporation on May 13, 2008.  A total of 864,487 shares of ITEX commonstock were validly tendered.  The Companyhas issued 57,196 shares of common stock in exchange for ITEX shares tendered,based upon the exchange ratio of one share of ITEX common stock for .06623shares of the Company’s common stock as set forth in the tender offer. Afterthe completed exchange, the Company owns 1,565,201 shares of ITEX common stock,which represents approximately 9% of ITEX’s total outstanding stock.

 

On July 9, 2008, the Company completed an acquisition ofcontrolling interest in Mustang Capital Advisors, LP and its general partner,Mustang Capital Management, LLC, through the Company’s newly-formed wholly-ownedsubsidiary, Western Mustang Holdings, LLC. The aggregate purchase price was $1,050,241, which consisted of $300,000in cash, and 54,563 shares of common stock issued at a per price share of$13.75. Mustang Capital Advisors currently manages approximately $55 million inassets through its funds and managed accounts. The acquisition will beaccounted for as a purchase under GAAP and as a result, Mustang CapitalAdvisors will be consolidated into the Company’s financial statements.

 

On August 11, 2008, the Company opened up a new Company-operatedrestaurant in Tupelo, Mississippi under the newly developed concept, WesternSizzlin Express. Western Sizzlin Express is a smaller, full service restaurantwith a high quality, simpler menu created to turn tables faster in an efficientand pleasing environment. The Company is marketing this concept as a lower costinvestment to prospective franchisees.

 

**Resultsof Operations**

 

Net loss for the three and six months ended June 30,2008 was ($1,956,024) and ($5,807,019) compared to net income of $232,163 and$382,120 for the three and six months ended June 30, 2007.

 

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The following table setsforth for the periods presented the percentage relationship to total revenuesof certain items included in the consolidated statements of income and certainrestaurant data for the periods presented:

 
| ** **                                                                  | ** ** | **Three Months**        | ** ** | **Six Months**           | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                                                  | ** ** | **Ended June 30,** | ** ** | **Ended June 30,,** | ** ** |
| ** **                                                                  | ** ** | **2008**                     | ** ** | **2007**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                   |       |                         |       |                          |       |   |   |   |   |
| Company-operated restaurants                                                |       | 76.5                         | %          | 75.5                          | %          | 75.7 | % | 74.7 | % |
| Franchise operations                                                        |       | 23.5                         |       | 24.5                          |       | 24.3 |   | 25.3 |   |
| Total revenues                                                              |       | 100.0                        |       | 100.0                         |       | 100.0 |   | 100.0 |   |
|                                                                        |       |                         |       |                          |       |   |   |   |   |
| Costs and expenses — restaurant and franchise operations:              |       |                         |       |                          |       |   |   |   |   |
| Company-operated restaurants — food, beverage and labor costs          |       | 54.6                         |       | 52.8                          |       | 55.0 |   | 53.8 |   |
| Restaurant occupancy and other                                              |       | 12.6                         |       | 12.3                          |       | 13.0 |   | 13.4 |   |
| Franchise operations — direct support                                  |       | 6.8                          |       | 7.1                           |       | 7.0 |   | 6.9 |   |
| Subleased restaurant property expenses                                      |       | .8                           |       | .5                            |       | .7 |   | .5 |   |
| Corporate expenses                                                          |       | 9.4                          |       | 12.4                          |       | 10.5 |   | 11.0 |   |
| Depreciation and amortization expense                                       |       | 5.8                          |       | 5.7                           |       | 6.1 |   | 6.0 |   |
| Corporate litigation fees and expenses                                      |       | .5                           |       | .5                            |       | 1.8 |   | .4 |   |
| Total costs and expenses — restaurant and franchise operations         |       | 90.5                         |       | 91.3                          |       | 94.1 |   | 92.0 |   |
|                                                                        |       |                         |       |                          |       |   |   |   |   |
| Equity in income of joint venture                                           |       | 1.3                          |       | 1.1                           |       | 1.2 |   | .7 |   |
| Income from restaurant and franchise operations                             |       | 10.8                         |       | 9.8                           |       | 7.1 |   | 8.7 |   |
| Net unrealized losses on marketable securities held by limited  partnership |       | (50.0                        | )          | —                        |       | (73.7 | ) | — |   |
| Net realized gain (loss) on sales of marketable securities                  |       | —                       |       | —                        |       | (.5 | ) | — |   |
| Expense of investment activities                                            |       | (10.3                        | )          | (1.6                          | )          | (11.1 | ) | (1.5 | ) |
| Loss from investment activities                                             |       | (60.3                        | )          | (1.6                          | )          | (85.3 | ) | (1.5 | ) |
| Other income (expense):                                                     |       |                         |       |                          |       |   |   |   |   |
| Interest expense                                                            |       | (.3                          | )          | (.5                           | )          | (.6 | ) | (.5 | ) |
| Interest income                                                             |       | .3                           |       | .4                            |       | .4 |   | .3 |   |
| Other, net                                                                  |       | —                       |       | —                        |       | — |   | (.1 | ) |
| Total other income (expense), net                                           |       | —                       |       | (.1                           | )          | (.2 | ) | (.1 | ) |
|                                                                        |       |                         |       |                          |       |   |   |   |   |
| Income (loss) before income tax expense and minority interest               |       | (49.5                        | )          | 8.1                           |       | (78.4 | ) | 7.1 |   |
| Income tax expense (benefit)                                                |       |                         |       |                          |       |   |   |   |   |
| Current                                                                     |       | .4                           |       | .2                            |       | .2 |   | .2 |   |
| Deferred                                                                    |       | .9                           |       | 2.9                           |       | (1.2 | ) | 2.6 |   |
| Total income tax expense (benefit)                                          |       | 1.3                          |       | 3.1                           |       | (1.0 | ) | 2.8 |   |
| Minority interest in net loss of limited partnership                        |       | 7.9                          |       | —                        |       | 10.9 |   | — |   |
| Net income (loss)                                                           |       | (42.9                        | )%         | 5.0                           | %          | (66.5 | )% | 4.3 | % |

 
| ** **                              | ** ** | **Three Months**        | ** ** | **Six Months**          | ** ** |
|-----------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Ended June 30,** | ** ** | **Ended June 30,** | ** ** |
| ** **                              | ** ** | **2008**                     | ** ** | **2007**                     | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Restaurant Data**                     | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of Company-Operated Restaurants: |       |                         |       |                         |       |   |   |   |   |
| Beginning of period                     |       | 5                            |       | 5                            |       | 5 |   | 5 |   |
| Opened                                  |       | —                       |       | —                       |       | — |   | — |   |
| Closed                                  |       | —                       |       | —                       |       | — |   | — |   |
| Franchised                              |       | —                       |       | —                       |       | — |   | — |   |
| End of period                           |       | 5                            |       | 5                            |       | 5 |   | 5 |   |
| Number of U.S. Franchised Restaurants:  |       |                         |       |                         |       |   |   |   |   |
| Beginning of period                     |       | 115                          |       | 121                          |       | 116 |   | 123 |   |
| Opened                                  |       | —                       |       | —                       |       | — |   | — |   |
| Closed                                  |       | (4                           | )          | (2                           | )          | (5 | ) | (4 | ) |
| End of period                           |       | 111                          |       | 119                          |       | 111 |   | 119 |   |
| Number of Joint Venture Restaurants:    |       |                         |       |                         |       |   |   |   |   |
| Beginning of period                     |       | 1                            |       | 1                            |       | 1 |   | 1 |   |
| Opened                                  |       | —                       |       | —                       |       | — |   | — |   |
| Closed                                  |       | —                       |       | —                       |       | — |   | — |   |
| End of period                           |       | 1                            |       | 1                            |       | 1 |   | 1 |   |

 

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**Revenues**

** **

Total revenues decreased 2.7% to $4.56 million for thethree months ended June 30, 2008 from $4.69 million for the comparablethree months ended June 30, 2007. Total revenues decreased 0.9% to $8.74million for the six months ended June 30, 2008 from $8.82 million for thecomparable six months ended June 30, 2007. Company-operated restaurantrevenues decreased 1.5% to $3.49 million for the three months ended June 30,2008 as compared to $3.54 million for the comparable three months ended June 30,2007. Company-operated restaurant revenues increased 0.4% to $6.62 million forthe six months ended June 30, 2008 as compared to $6.59 million for thecomparable six months ended June 30, 2007. Same store sales for company restaurants experienced a decrease of 1.5%for the three months ended June 30, 2008 and a slight increase of 0.4% forthe six months ended June 30, 2008. Franchise revenues decreased 6.7% to$1.07 million for the three months ended June 30, 2008 as compared to$1.15 million for the comparable three months ended June 30, 2007.Franchise revenues decreased 4.9% to $2.12 million for the six months ended June 30,2008 as compared to $2.23 million for the comparable six months ended June 30,2007.  The overall decrease in franchiserevenues is attributable to fewer franchised units in the system at June 30,2008 as compared to June 30, 2007. Same store sales at franchise operations for the three and six monthsended June 30, 2008, experienced an overall decrease of 2.14% and 1.68%,respectively.

 

**Costsand Expenses —company-operated restaurants and franchise operations**

** **

Costs of Company-operated restaurants, consistingprimarily of food, beverage, and labor costs increased $13,500 (0.5%) to $2.49million for the three months ended June 30, 2008 from $2.48 million forthe three months ended June 30, 2007.  These costs for the three month period as a percentage ofCompany-operated restaurants revenue were 71.4% and 70.0% for the three monthsended June 30, 2008 and 2007, respectively.  Costs of Company-operated restaurantsincreased $60,700 (1.3%) to $4.80 million for the six months ended June 30,2008 from $4.74 million for the six months ended June 30, 2007.   These costs for the six month period as apercentage of Company-operated restaurants revenue were 72.6% and 71.9% for thesix months ended June 30, 2008 and 2007, respectively.  These costs have increased due to the risingcosts of commodities.

 

Restaurant occupancy and other, which includeutilities, insurance, maintenance, rent and other such costs of theCompany-operated restaurants, decreased slightly by $2,000 (0.3%) for the threemonths ended June 30, 2008 versus the prior year’s comparable period.These costs for the three month period increased as a percentage ofCompany-operated restaurant revenues from 16.3% in 2007 to 16.4% in 2008.  Restaurant occupancy and other decreased by$45,000 (3.8%) for the six months ended June 30, 2008 versus the prioryear’s comparable period.  These costsfor the six month period decreased as a percentage of Company-operatedrestaurant revenues from 17.9% in 2007 to 17.1% in 2008.

 

Cost of franchise operations direct support expensedecreased by $23,000 and increased by $7,400 for the three and six months endedJune 30, 2008 versus the prior years’ comparable periods.  The increase for the six months ended June 30,2008 was largely attributable to increased spending in franchise developmentfor franchise sales, development of a new concept, and scheduled new openingsin 2008.

 

Subleased properties include net costs associated withsubleasing former Company-operated restaurants and maintenance of vacantpremises.  These expenses increased by$12,000 and $20,000 for the three and six months ended June 30, 2008versus the prior year’s comparable period. The increase was largely attributable to inflationary increases in costsassociated with vacant properties as well as the cost of maintaining theproperties. Current subleasing arrangements are scheduled to expire by the endof 2008.

 

Unallocated corporate expenses consist of certainexpenses not allocated to any business segment. These expenses include legal, accounting, stockholder relations,personnel not directly related to a segment, information systems, and otherheadquarter’s activities.  These expensesdecreased by $149,000 and $53,000 for the three and six month periods ended June 30,2008 versus the prior year’s comparable periods.  The decreases are a result of managingexpenses at the corporate level and making adjustments where needed, offset byadditional spending in 2008 in accounting and legal associated with financialreporting assistance and fees associated with listing on the NASDAQ capitalmarket.

 

Depreciation and amortization expense for 2008 werecomparable to 2007.

 

Corporate litigation fees decreased by $7,000 for thethree months ended June 30, 2008 versus the prior year’s comparable periodand increased $117,000 for the six months ended June 30, 2008 versus theprior year’s comparable period.  The sixmonths ended June 30, 2008 increase is due to increased legal fees associatedwith the 

 

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trial and appeal of the Company’s lawsuit in LittleRock, Arkansas.  (See Note 11 to the ConsolidatedFinancial Statements).

 

**Equity in income of Joint Venture**

 

Equity in income of joint venture increased $9,000 and$42,000 for the three and six months ended June 30, 2008 versus the prioryear’s comparable periods, due to better operating performance of therestaurant during 2008.  (See Note 12 tothe Consolidated Financial Statements)

 

**Income (Loss) from Investment Activities**

 

Investment activities include net realized gains (losses) on sales ofmarketable securities of $800 and ($40,000) for the three and six months ended June 30,2008, respectively and net unrealized losses on marketable securities held bythe limited partnership, Western Acquisitions, L.P., of $2.3 million and $6.4million for the three and six months ended June 30, 2008, respectively.  Expenses associated with investmentactivities were $350,000 and $75,000 for the three months ended June 30,2008 and 2007, respectively, and $850,000 and $136,000 for the six months endedJune 30, 2008 and 2007, respectively. The increase in expenses for 2008 versus the prior year’s comparableperiods are attributable to expenses associated with the Steak n Shake proxycontest during the fourth quarter of 2007 and first quarter of 2008, the ITEXtender offer, and other investment related activities.  Subsequent to the period covered by thisreport, on August 8, 2008, Steak n Shake reimbursed the Company $332,750for certain expenses associated with the proxy contest.  There were no management fees charged orcollected by the limited partnership from outside investors in 2008 or2007.  Future management fees will dependon portfolio performance.

 

OnJune 19, 2008, the Board of Directors of The Steak n Shake Companyappointed Sardar Biglari as Executive Chairman of the Board, effectivelyimmediately.  Subsequent to the periodcovered by this report, on August 5, 2008, Mr. Biglari was appointedChief Executive Officer of The Steak n Shake Company. As a result of Mr. Biglari’s recentappointment to the position of Chief Executive Officer as well as his and Dr. Cooley’smembership on the Steak n Shake Board of Directors, management believes thatthe recently announced restructuring efforts underway at Steak n Shake arepositive steps toward rebuilding value for all of its stockholders.

 

**OtherIncome (Expense)**

 

Interest expensedecreased $4,000 and increased $14,000 for the three and six months ended June 30,2008 over the comparable period in 2007. The increase in the six months ended June 30, 2008 is due tointerest associated with the line of credit and land purchase.  Interest income fluctuates according to thelevels of available cash balances.

 

Other income decreased by$900 and $4,000 for the three and six months ended June 30, 2008 over thecomparable periods in 2007.

 

**Income TaxExpense**

 

Incometax expense is directly affected by the levels of pretax income and thevaluation allowance established on deferred tax assets. The Company’s effectivetax rate was 2.6%  and 38.6%  for the three months ended June 30, 2008and 2007, respectively and (1.3)% and 39.3% for the six months ended June 30,2008 and 2007, respectively.  Theprovisions for deferred income taxes for the three and six month periods ended June 30,2008 includes provisions for the valuation allowance of $752,000 and$2,065,000, respectively, which increased the Company’s effective tax rate forthe periods.

 

**Cash andCash Equivalents**

 

As of June 30, 2008,the Company had $639,000 of cash and cash equivalents which is comparable to$727,000 as of December 31, 2007.

 

**Investmentof Available Capital**

 

The Company’s cash flowsfrom restaurant and franchise activities have exceeded its working capital,financing and capital investment needs of its restaurant and franchiseoperations, and management expects that the Company’s cash flows will continueto exceed its operating cash needs for the foreseeable future.  The Company regularly evaluates how best touse 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 

 

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obtained.  Further, the Company may determine under certainmarket conditions that available capital is best utilized to fund investmentsthat it believes offers the Company attractive return opportunities, whether ornot related to its ongoing business activities.

 

The Company’s Board ofDirectors has delegated authority to direct investment of the Company’s surpluscash to its Chairman, Sardar Biglari, subject to Board reporting requirementsand various limitations that have been or may be from time to time adopted bythe Board of Directors.  These investmentsmay include significant and highly concentrated direct investments with respectto the equity securities of public companies. Any such investments will involve risks, and stockholders shouldrecognize that the Company’s balance sheet may change depending on theperformance of investments.  Furthermore,such investments could be subject to volatility that may affect both therecorded value of the investments as well as the Company’s periodic earnings.

 

**Operating Activities and Cash Flows**

 

TheCompany used approximately $1.2 million and provided for $446,000 in operatingcash flows for the six months ended June 30, 2008 and 2007, respectively,including the purchase of marketable securities of $1.4 and $833,000 in the sixmonths ended June 30, 2008 and 2007, respectively.  Net unrealized losses on marketablesecurities were $6.4 million and $0 for the six months ended June 30, 2008and 2007, respectively. The Company’s primary source of operating cash flows isthe operating profits generated from Company’s restaurant and franchiseoperations.  Adjustments to reconcile netincome (loss) to net cash provided by restaurant and franchise activities wereapproximately $695,000 and $897,000 for the six months ended June 30, 2008and 2007, respectively.  Adjustments toreconcile net income (loss) to net cash used in investment activities wereapproximately $3.9 million and ($833,000) for the six months ended June 30,2008 and 2007, respectively.

 

**Investing Activities**

 

TheCompany’s investing activities on its statements of cash flows are related toimprovements to its operating properties. Prior to 2007, the Company considered purchases and sales of marketablesecurities to be investing activities; however, during the fourth quarter of2007 with the expanded investment activities of the Company, and morespecifically the organization of Western Acquisitions, L.P. and the investmentof minority limited partner interests, the Company began to consider suchactivities to be operating activities of the Company.  This presentation is consistent with theguidance in the AICPA’s Audit and Accounting Guide, *InvestmentCompanies*.

 

Duringthe six months ended June 30, 2008 and 2007, the Company spent $12,000 and$14,000 on capital expenditures on Company restaurants.

 

**Financing Activities**

 

TheCompany made scheduled payments on long-term debt of $68,000 and $80,000 forthe six months ended June 30, 2008 and 2007, respectively.  Also during 2008, $59,000 was received fromthe exercise of stock options, proceeds of $2.6 million were received from theissuance of a note payable, capital contributions of $540,000 were receivedfrom minority interests in the limited partnership, and payment of $2 millionwas made on the line of credit.  During2007, $85,000 was received from the exercise of stock options.

 

Certainnotes payable require pre-payment premiums in certain circumstances.  In addition, certain notes payable containcertain restrictive covenants including debt coverage ratios, periodicreporting requirements and maintenance of operations at certainCompany-operated restaurants that collateralize the notes payable. At June 30,2008, the Company was in compliance with all covenants on the notes payable.

 

**Liquidity**

 

The Company’s primarysources of liquidity are cash generated from operations and, if needed,borrowings under its existing line of credit. The Company continually reviewsavailable financing alternatives.  Inaddition, the Company may consider, on an opportunistic basis, strategicdecisions to create value and improve operational performance.

** **

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** **

**CONTRACTUALOBLIGATIONS**

** **

The table belowsets forth a summary of contractual obligations that will impact futureliquidity as of June 30, 2008:

 
| ** **                                      | ** ** | **Payment due by period** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**                | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Totals** | ** ** |
| Long-term debt                                  |       | $                                        | 50,908     |   | $ | 109,803 |   | $ | 121,385 |   | $ | 134,189 |   | $ | 148,342 |   | $ | 52,606 |   | $ | 617,233 |   |
| Promissory note — land held for investment |       | —                                   |       | 264,122 |   | 2,377,098 |   | — |   | — |   | — |   | 2,641,220 |   |
| Operating leases, net (1)                       |       | 350,513                                  |       | 634,425 |   | 623,880 |   | 357,611 |   | 399,171 |   | 1,171,994 |   | 3,537,594 |   |
| Interest expense (2)                            |       | 30,014                                   |       | 97,041 |   | 40,459 |   | 27,655 |   | 13,501 |   | 1,101 |   | 209,771 |   |
| Tax obligations (3)                             |       | 16,829                                   |       | — |   | — |   | — |   | — |   | — |   | 16,829 |   |
| Totals                                          |       | $                                        | 448,264    |   | $ | 1,105,391 |   | $ | 3,162,822 |   | $ | 519,455 |   | $ | 561,014 |   | $ | 1,225,701 |   | $ | 7,022,647 |   |

 

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(1)             Operating lease commitments are presentednet of sublease rentals.  Gross operatinglease commitments for the periods above aggregate to approximately $3.8million, offset by sublease rentals for the same periods of approximately$27,000.

 

(2)             Reflects future interest payments throughscheduled maturity dates based upon average borrowing rates, outstanding debtbalances and scheduled principal payments on long-term debt.  Interest on the Company’s variable rate debtis based on the interest rate in effect at June 30, 2008.

 

(3)             Reflect recognized liabilities foruncertain tax positions under the provision FIN 48.  (See Note 7 to the consolidated financialstatements).

 

**CRITICAL ACCOUNTING POLICIES**

** **

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

 

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

 

For additionalinformation regarding the impact of recently issued accounting standards, seeNote 13 of Notes to the Consolidated Financial Statements in Part I,Item 1 of this Form 10-Q.

 

*TradeAccounts and Notes Receivable and the Allowance for Doubtful Accounts*

 

The Companycollects royalties, and in some cases rent, from franchisees.  The Company views trade accounts and notesreceivable and the related allowance for doubtful accounts as a criticalaccounting estimate since the allowance for doubtful accounts is based onjudgments and estimates concerning the likelihood that individual franchiseeswill pay the amounts included as receivables from them.  In determining the amount of allowance fordoubtful accounts to be recorded for individual franchisees, the Companyconsiders the age of the receivable, the financial stability of the franchisee,discussions that may have occurred with the franchisee and a judgment as to theoverall collectibility of the receivable from the franchisee.  In addition, the Company establishes anallowance for all other receivables for which no specific allowances are deemednecessary.  If average sales or thefinancial health of franchisees were to deteriorate, the Company might have toincrease the allowance for doubtful accounts.

 

*Investments*

 

Marketableequity securities held by Western Sizzlin Corporation are held for anindefinite 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. Fair value is determined through the use of quoted market values onnational exchanges.  Management has alsoevaluated unrealized losses on marketable equity securities held by WesternSizzlin Corporation to determine if such impairment is other than temporary,and has concluded that they are temporary as of June 30, 2008 and that theCompany has the ability and the intent to 

 

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holdsuch securities until they recover their value. In the event management concludes in future periods that such losses areother than temporary, a charge will be taken in the statement of operations toreduce the cost of the securities to their fair value.

 

WesternAcquisitions, L.P. is, for GAAP purposes, an investment company under the AICPAAudit and Accounting Guide *Investment Companies*. The Company has retained the specializedaccounting for Western Acquisitions, L.P. pursuant to EITF Issue No. 85-12,*Retention of Specialized Accounting for Investmentsin Consolidation.*  As such,marketable equity securities held by Western Acquisitions, L.P. are recorded atfair value in Investments in Marketable Securities, with unrealized gains andlosses resulting from the change in fair value reflected in the Statement ofOperations.  Fair value is determined throughthe use of quoted market values on national exchanges.

 

*Long-lived Assets, FranchiseRoyalty Contracts and Goodwill*

 

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

 

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

 

The Company must also consider whether long-lived assets (includingproperty and equipment and intangible assets) have been impaired to the extentthat it must recognize a loss on such impairment, including goodwillimpairment. The Company evaluates long-lived assets for impairment at therestaurant and franchise levels on an annual basis or whenever changes orevents indicate that the carrying value may not be recoverable. The Companyassesses impairment of each level of assets based on the operating cash flowsof the restaurant and franchise operations and the plans for each restaurantunit or franchisee contract. Generally, all units with negative cash flows fromoperations for the most recent twelve months at each quarter end are includedin our assessment. In performing the assessment, the Company must makeassumptions regarding estimated future cash flows, including estimated proceedsfrom similar asset sales, and other factors to determine both therecoverability and the estimated fair value of the respective assets. If thelong-lived assets of a restaurant are not recoverable based upon estimatedfuture, undiscounted cash flows, the Company writes the assets down to theirfair value. If these estimates or their related assumptions change in thefuture, the Company may be required to record additional impairmentcharges.  There were no impairmentchanges for the quarters ended June 30, 2008 and 2007, respectively.

 

The Company evaluates goodwill for impairment on an annual basis duringthe fourth quarter of each year, or more frequently if an event occurs thattriggers an interim impairment test.  TheCompany determines the fair values of its reporting units using the discountedcash flow method.  This method uses projectionsof cash flows from each of the reporting units. Several of the key assumptions in estimating future cash flows includeperiods of operations, projections of operating profits, and weighted averagecost of capital.  These assumptions arederived from internal budgets and consideration of available market data.  The factors which contribute the greatestvariability in the Company’s estimates of fair values are the weighted averagecost of capital and estimates of future operating profits.  The Company currently has goodwill of$770,000 related to the franchising reporting unit and $3.5 million allocatedto the restaurant reporting unit.

 

*Commitmentsand Contingencies*

 

The Company viewsaccounting for contingencies as a critical accounting estimate since losscontingencies arising from claims, assessments, litigation, fines and penaltiesand other sources require judgment as to any probable liabilitiesincurred.  Actual results could differfrom the expected results determined based on such estimates.

 

*Income Taxes*

 

The Company recordsvaluation allowances against its deferred tax assets, when necessary, inaccordance with SFAS No. 109, “Accounting for Income Taxes.” Realizationof deferred tax assets is dependent on future taxable earnings and is thereforeuncertain. The Company assesses the likelihood that its deferred tax assets ineach of the jurisdictions in which the Company operates will be recovered fromfuture taxable income. Deferred tax assets do not include future tax benefitsthat the Company deems likely not to be realized.

 

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

 

Foradditional information regarding the adoption of FIN 48, see Note 7 of Notes toConsolidated Financial Statements in Part I, Item 1 of this Form 10-Q.

 

**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 Disclosure aboutMarket Risk**

 

As of June 30, 2008,the Company’s financial instruments are not exposed to significant market riskdue to foreign currency exchange risk. However, the Company is exposed to market risk related to changes inmarket prices of marketable securities, interest rates related to certain debtobligations, and commodity risks.

 

**MarketPrice Risk**

 

The Company’s marketablesecurities are currently concentrated in a few investments. A change in marketprices exposes the Company to market risk related to the investments inmarketable securities.  As of June 30,2008, the Company held $21 million in available-for-sale marketable securities.A hypothetical 10% decline in the market value of those securities would resultin a $2.1 million unrealized losses and a corresponding decline in their fairvalues at June 30, 2008.  Thishypothetical decline would not affect the Company’s cash flows unless thesecurities were disposed of.

 

**InterestRate Risk**

 

The Company has exposureto interest rate risk related to certain instruments entered into for otherthan trading purposes. Specifically, borrowings under the loan associated withthe Texas land purchase and revolving credit facility bear interest at variablerates based on the prime rate minus .5%. The nature and amount of borrowings under the credit facility may varyas a result of future business requirements, market conditions and otherfactors.

 

**CommodityPrice Risk**

 

The Company purchasescertain food products such as beef, poultry, pork, eggs and coffee, andutilities such as gas and electricity, which are affected by commodity pricingand are, therefore, subject to price volatility caused by weather, productionproblems, delivery difficulties and other factors that are outside of theCompany’s control and which are generally unpredictable. Changes in commodityprices affect the Company and competitors generally and often simultaneously.In general, the Company purchases food products and utilities based upon marketprices established with vendors. Although many of the items purchased aresubject to changes in commodity prices, the majority of our purchasingarrangements are structured to contain features that minimize price volatilityby establishing fixed pricing and/or price ceilings and floors. The Companyuses these types of purchase arrangements to control costs as an alternative tousing financial instruments to hedge commodity prices. The Company hasdetermined that our purchasing agreements do not qualify as derivativefinancial instruments or contain embedded derivative instruments. In many cases,the Company believes it will be able to address commodity cost increases 

 

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which are significant andappear to be long-term in nature by adjusting our menu pricing or changing ourproduct delivery strategy. However, competitive circumstances could limit suchactions and, in those circumstances, increases in commodity prices could lowerits margins. Because of the often short-term nature of commodity pricingaberrations and our ability to change menu pricing or product deliverystrategies in response to commodity price increases, the Company believes thatthe impact of commodity price risk is not significant.

 

The Company hasestablished a policy to identify, control and manage market risks which mayarise from changes in interest rates, commodity prices and other relevant ratesand prices.

 

The table below providesinformation about debt obligations that are sensitive to changes in interestrates.  The table presents principal cashflows and related weighted average interest rates by expected maturity dates. Debt obligations held for other thantrading purposes at June 30, 2008 (dollars in thousands):

 

EXPECTED MATURITY DATE

 
| ** **                      | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated   Fair Value** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------------|------------|
| Long-term debt:                 |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                                 |       |
| Fixed Rate                      |       | $        | 51         |     | $          | 110      |       | $        | 121        |     | $          | 134            |       | $         | 148        |                                 | 53         |   | $ | 617 |   | $ | 690 |   |
| Average Interest Rate           |       | 10.07    | %          | 10.07    | %          | 10.07    | %          | 10.07    | %          | 10.07    | %          | 10.07          | %          | 10.07     | %          |                                 |       |
| Variable Rate   Prime minus .5% |       | 0        |       | 264      |       | 2,377    |       | 0        |       | 0        |       | 0              |       | 2,641     |       | $                                    | 2,641      |   |
|                                 |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                                      |            |  |  |  |  |  |  |  |

 

Interest on the Company’s variable rate debt is basedon the interest rate in effect at June 30, 2008.

 

**Item4T.  Controls and Procedures**

 

The Company’s seniormanagement, including the Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended) as of June 30, 2008. Based on itsevaluation as of December 31, 2007, 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 tothe material weaknesses discussed below. These weaknesses have been addressedas of June 30, 2008 and the effectiveness of the disclosure controls andprocedures is considered effective.

 

A material weakness is acontrol deficiency (as defined by the PCAOB), or a combination of controldeficiencies, that results in there being more than a remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected.  The following isa description of the material weakness that the Company noted as of December 31,2007 and March 31, 2008, as well as a discussion of the relatedremediation efforts:

 

The Company’s independent registered public accounting firm recommendedto management to change the presentation and reporting of marketable securitiesheld by a limited partnership. Using the guidance in AICPA Audit and AccountingGuide, Investment Companies, and pursuant to EITF 85-12, Retention ofSpecialized Accounting for Investments in Consolidation, the Companyconcluded that it should retain this same accounting when preparing itsconsolidated financial statements. Adjustments were made in the process of preparing the 2007 consolidatedfinancial statements to present this subsidiary’s financial statements inaccordance with the provisions of EITF 85-12. Solely as a result of this material weakness in internal controls theCompany identified in accounting for the consolidation of the investmentpartnership, the Company concluded that it did not maintain effective internalcontrol over financial reporting as of December 31, 2007 or at March 31,2008 based on criteria established in *Internal Control —Integrated Framework*issued by COSO*.*

 

Subsequent to year end, the Company implemented several importantchanges in its internal controls, including additional procedures over theidentification of accounting issues, consultation with outside accountants, andreview and evaluation of the accounting for significant transactions.  As a result of the changes, management hasconcluded the control deficiencies have been remediated and that controls areeffective as of June 30, 2008.

 

There were no otherchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls since the evaluation process wascompleted as of June 30, 2008.

 

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**PART II.OTHER INFORMATION**

 

Item1.    Legal Proceedings

 

In addition to thoseproceedings discussed in Note 11 in the Company’s Consolidated FinancialStatements, the Company is involved in various other claims and legal actionswhich are routine litigation matters incidental to the business.  In the opinion of the management, theultimate disposition of these other matters will not have a material adverseeffect on the Company’s financial condition, results of operations orliquidity.

 

Item1A. Risk Factors

 

An investment in thecommon stock of any company involves a degree of risk.  Investors should consider carefully the risksand uncertainties described in the Company’s Annual Report on Form 10-K,as amended, 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 to us or that we currently deem 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.

 

Item4.  Submission of Matters to a Vote ofSecurity Holders

 

On June 1,2008, Messers. Biglari and Dash, who together owned a total of 1,567,748 sharesor approximately 56% of the Company’s total issued and outstanding commonstock, submitted their consents to a resolutionto amend and restate Article IV of the Company’sRestated Certificate of Incorporation, as previously amended.  As amended and restated, the number ofauthorized shares of common stock will increase from 4,000,000 shares, par value $0.01, to 10,000,000 shares,par value $0.01.

 

Item6.    Exhibits:

 

See Exhibit Indexon page 28.

 

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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: August 14,  2008 |                            |   |

 

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**EXHIBITINDEX**

 
| 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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