Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **x**                                                                                                                                                                          | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                     | ** **                                                                                               |
| **For the quarterly  period ended September 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 of Registrant 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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of 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) |   |                              |

 

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

 

Asof November 15, 2008, there were 2,831,884 sharesof common stock outstanding.

 

 

 

----

Table of Contents

 

**Western SizzlinCorporation**

 

**Form 10-QNine Months Ended September 30, 2008Table of Contents**

 
| ** **                                                                                                         | **Page**   |
|--------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                         | ** ** |
| **PART I. FINANCIAL INFORMATION**                                                                             | ** ** |
| ** **                                                                                                         | ** ** |
| **Item 1. Financial Statements  (Unaudited)**                                                                      | ** ** |
|                                                                                                               |       |
| Consolidated Balance Sheets — September 30,  2008 and December 31, 2007                             | 3          |
|                                                                                                               |       |
| Consolidated Statements of  Operations — Three Months and Nine Months Ended September 30, 2008 and  2007 | 4          |
|                                                                                                               |       |
| Consolidated Statement of  Changes in Stockholders’ Equity —Nine Months Ended September 30, 2008    | 5          |
|                                                                                                               |       |
| Consolidated Statements of  Cash Flows — Nine Months Ended September 30, 2008 and 2007                   | 6          |
|                                                                                                               |       |
| Notes to Consolidated  Financial Statements                                                                        | 7          |
| ** **                                                                                                         | ** ** |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations**            | 20         |
| ** **                                                                                                         | ** ** |
| **Item 3.  Quantitative and Qualitative Disclosure about Market Risk**                                             | 28         |
| ** **                                                                                                         | ** ** |
| **Item 4T. Controls and Procedures**                                                                               | 29         |
| ** **                                                                                                         | ** ** |
| **PART II. OTHER  INFORMATION**                                                                               | ** ** |
| ** **                                                                                                         | ** ** |
| **Item  1. Legal Proceedings**                                                                                     | 30         |
| ** **                                                                                                         | ** ** |
| **Item  1.A. Risk Factors**                                                                                        | 30         |
| ** **                                                                                                         | ** ** |
| **Item 4.   Submission of Matters to a Vote of Security Holders**                                             | 31         |
| ** **                                                                                                         | ** ** |
| **Item 6.  Exhibits**                                                                                              | 31         |
| ** **                                                                                                         | ** ** |
| **Signatures**                                                                                                     | 32         |
| ** **                                                                                                         | ** ** |
| **Exhibit Index**                                                                                             | 33         |

 

2

----

Table of Contents

 

**PART I. FINANCIALINFORMATION**

**WESTERN SIZZLIN CORPORATION**

 

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                          | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                          | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                     |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                           |       | $                            | 745,414    |                        | $          | 727,378 |   |
| Money market investments                                                                                                                                            |       | 3,758,124                    |       | —                      |       |
| Trade accounts receivable, net of allowance  for doubtful accounts of $284,990 in 2008 and $198,425 in 2007                                                         |       | 956,128                      |       | 994,085                     |       |
| Current installments of notes receivable,  less allowance for impaired notes of $62,926 in 2008 and $50,904 in 2007                                                 |       | 175,523                      |       | 219,501                     |       |
| Other receivables                                                                                                                                                   |       | 69,809                       |       | 132,283                     |       |
| Income taxes receivable                                                                                                                                             |       | 131,713                      |       | 90,161                      |       |
| Inventories                                                                                                                                                         |       | 87,845                       |       | 73,017                      |       |
| Prepaid expenses                                                                                                                                                    |       | 221,859                      |       | 228,396                     |       |
| Deferred income taxes                                                                                                                                               |       | 512,404                      |       | 404,334                     |       |
| Total current assets                                                                                                                                                |       | 6,658,819                    |       | 2,869,155                   |       |
| Notes receivable, less allowance for  impaired notes receivable of $6,980 in 2008 and $15,501 in 2007, excluding  current installments                              |       | 483,701                      |       | 625,231                     |       |
| Property and equipment, net                                                                                                                                         |       | 1,588,752                    |       | 1,877,694                   |       |
| Investment in real estate                                                                                                                                           |       | 3,745,152                    |       | 3,745,152                   |       |
| Investments in marketable securities                                                                                                                                |       | 20,663,013                   |       | 15,896,865                  |       |
| Franchise royalty contracts, net of  accumulated amortization of $9,296,857 in 2008 and $8,824,135 in 2007                                                          |       | 157,574                      |       | 630,296                     |       |
| Goodwill                                                                                                                                                            |       | 6,415,262                    |       | 4,310,200                   |       |
| Financing costs, net of accumulated  amortization of $194,304 in 2008 and $192,832 in 2007                                                                          |       | 5,906                        |       | 7,378                       |       |
| Investment in unconsolidated joint venture                                                                                                                          |       | 305,581                      |       | 304,996                     |       |
| Deferred income taxes                                                                                                                                               |       | 336,388                      |       | 235,655                     |       |
| Other assets                                                                                                                                                        |       | 12,516                       |       | 6,450                       |       |
|                                                                                                                                                                |       | $                            | 40,372,664 |                        | $          | 30,509,072 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                |       |                         |       |                        |       |
| Note payable — line of credit                                                                                                                                  |       | $                            | —     |                        | $          | 2,000,000 |   |
| Due to broker                                                                                                                                                       |       | 51,611                       |       | 342,022                     |       |
| Current installments of long-term debt                                                                                                                              |       | 107,084                      |       | 118,783                     |       |
| Current installment of long-term debt,  secured by land held for investment                                                                                         |       | 264,122                      |       | —                      |       |
| Accounts payable                                                                                                                                                    |       | 646,099                      |       | 733,983                     |       |
| Accrued expenses and other                                                                                                                                          |       | 1,762,477                    |       | 1,283,237                   |       |
| Total current liabilities                                                                                                                                           |       | 2,831,393                    |       | 4,478,025                   |       |
|                                                                                                                                                                |       |                         |       |                        |       |
| Long-term debt, excluding current  installments                                                                                                                     |       | 485,017                      |       | 566,272                     |       |
| Long-term debt, secured by land held for  investment, excluding current installments                                                                                |       | 2,377,098                    |       | —                      |       |
| Other long-term liabilities                                                                                                                                         |       | 1,294,855                    |       | 89,039                      |       |
|                                                                                                                                                                |       | 6,988,363                    |       | 5,133,336                   |       |
|                                                                                                                                                                |       |                         |       |                        |       |
| Minority interests                                                                                                                                                  |       | 11,418,506                   |       | 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 2,831,884 in 2008 and  2,696,625 in 2007                                 |       | 28,320                       |       | 26,967                      |       |
| Additional paid-in capital                                                                                                                                          |       | 22,235,872                   |       | 20,415,785                  |       |
| Retained earnings                                                                                                                                                   |       | 110,887                      |       | 2,978,189                   |       |
| Accumulated other comprehensive income  (loss) — unrealized holding gains (losses), net of taxes                                                               |       | (409,284                     | )          | 81,047                      |       |
| Total stockholders’ equity                                                                                                                                     |       | 21,965,795                   |       | 23,501,988                  |       |
|                                                                                                                                                                |       | $                            | 40,372,664 |                        | $          | 30,509,072 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

----

Table of Contents

 

**WESTERN SIZZLINCORPORATION**

 

**Consolidated Statements of Operations**

**ThreeMonths and Nine Months Ended September 30, 2008 and 2007**

**(Unaudited)**

** **
| ** **                                                                                                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                                   | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                                                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Company-operated restaurants                                                                                                                                                 |       | $                                | 3,434,035  |                            | $          | 3,443,464 |   | $ | 10,050,437 |   | $ | 10,033,921 |   |
| Franchise operations                                                                                                                                                         |       | 1,001,102                        |       | 1,078,551                       |       | 3,122,179 |   | 3,308,355 |   |
|                                                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Total revenues                                                                                                                                                               |       | 4,435,137                        |       | 4,522,015                       |       | 13,172,616 |   | 13,342,276 |   |
|                                                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Costs and expenses — restaurant and  franchise operations:                                                                                                              |       |                             |       |                            |       |   |   |   |   |
| Company-operated restaurants — food,  beverage and labor costs                                                                                                          |       | 2,607,642                        |       | 2,488,441                       |       | 7,410,127 |   | 7,230,221 |   |
| Restaurant occupancy and other                                                                                                                                               |       | 629,125                          |       | 596,834                         |       | 1,762,936 |   | 1,775,585 |   |
| Franchise operations — direct support                                                                                                                                   |       | 309,570                          |       | 327,072                         |       | 923,491 |   | 933,627 |   |
| Subleased restaurant property expenses                                                                                                                                       |       | 362,766                          |       | 27,890                          |       | 427,257 |   | 72,526 |   |
| Corporate expenses                                                                                                                                                           |       | 725,693                          |       | 435,751                         |       | 1,641,389 |   | 1,404,599 |   |
| Depreciation and amortization expense                                                                                                                                        |       | 258,062                          |       | 265,527                         |       | 786,676 |   | 797,134 |   |
| Corporate litigation fees and expenses                                                                                                                                       |       | 4,056                            |       | 36,375                          |       | 162,820 |   | 78,487 |   |
| Total costs and expenses — restaurant and  franchise operations                                                                                                         |       | 4,896,914                        |       | 4,177,890                       |       | 13,114,696 |   | 12,292,179 |   |
|                                                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Equity in income of joint venture                                                                                                                                            |       | 43,258                           |       | 52,749                          |       | 150,585 |   | 118,424 |   |
| Income (loss) from restaurant and franchise  operations                                                                                                                      |       | (418,519                         | )          | 396,874                         |       | 208,505 |   | 1,168,521 |   |
|                                                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Investment advisory fee income                                                                                                                                               |       | 124,024                          |       | —                          |       | 124,024 |   | — |   |
| Net realized gain (loss) on sales of  marketable securities                                                                                                                  |       | 24,122                           |       | 3,562,012                       |       | (15,730 | ) | 3,562,012 |   |
| Net unrealized gains (losses) on marketable  securities held by limited partnerships                                                                                         |       | 3,255,469                        |       | —                          |       | (3,187,655 | ) | — |   |
| Reimbursements (expenses) of investment  activities, including interest of $30,374 and $84,060 for three and nine  month periods ended September 30, 2008, respectively |       | 174,318                          |       | (69,560                         | )          | (794,355 | ) | (205,967 | ) |
| Income (loss) from investment activities                                                                                                                                     |       | 3,577,933                        |       | 3,492,452                       |       | (3,873,716 | ) | 3,356,045 |   |
|                                                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Other income (expense):                                                                                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Interest expense                                                                                                                                                             |       | (15,827                          | )          | (31,741                         | )          | (70,022 | ) | (71,792 | ) |
| Interest income                                                                                                                                                              |       | 69,801                           |       | 34,866                          |       | 102,168 |   | 65,219 |   |
| Other, net                                                                                                                                                                   |       | (74                              | )          | 2,166                           |       | 118 |   | 6,364 |   |
| Total other income (expense), net                                                                                                                                            |       | 53,900                           |       | 5,291                           |       | 32,264 |   | (209 | ) |
|                                                                                                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Income (loss) before income tax expense and  minority interest                                                                                                               |       | 3,213,314                        |       | 3,894,617                       |       | (3,632,947 | ) | 4,524,357 |   |
| Income tax expense (benefit):                                                                                                                                                |       |                             |       |                            |       |   |   |   |   |
| Current                                                                                                                                                                      |       | (19,877                          | )          | 652,177                         |       | (5,256 | ) | 670,361 |   |
| Deferred                                                                                                                                                                     |       | (57,966                          | )          | 769,817                         |       | (161,005 | ) | 999,253 |   |
| Total income tax expense (benefit)                                                                                                                                           |       | (77,843                          | )          | 1,421,994                       |       | (166,261 | ) | 1,669,614 |   |
| Minority interests                                                                                                                                                           |       | (351,444                         | )          | (508                            | )          | 599,384 |   | (508 | ) |
| Net income (loss)                                                                                                                                                            |       | $                                | 2,939,713  |                            | $          | 2,472,115 |   | $ | (2,867,302 | ) | $ | 2,854,235 |   |
| Earnings (loss) per share:                                                                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net income (loss) basic                                                                                                                                                      |       | $                                | 1.04       |                            | $          | 1.38 |   | $ | (1.04 | ) | $ | 1.59 |   |
| Net income (loss) diluted                                                                                                                                                    |       | $                                | 1.04       |                            | $          | 1.37 |   | $ | (1.04 | ) | $ | 1.58 |   |

 

**Seeaccompanying notes to consolidated financial statements.**

 

4

----

Table of Contents

 

**WESTERN SIZZLINCORPORATION**

 

**ConsolidatedStatement of Changes in Stockholders’ Equity**

**NineMonths Ended September 30, 2008(Unaudited)**

** **
| ** **                                                    | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** **             | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **Shares**            | ** ** | **Dollars**             | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **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                                                      |       | —                |       | —                  |       | —       |       | (2,867,302                            | )          | —                 |       | (2,867,302 | ) |
| Change in unrealized holding losses, net of  taxes of $47,798 |       | —                |       | —                  |       | —       |       | —                                |       | (490,331               | )          | (490,331 | ) |
| Comprehensive loss                                            |       | —                |       | —                  |       | —       |       | —                                |       |                   |       | (3,357,633 | ) |
| Shares issued for Mustang Capital Advisors,  LP acquisition   |       | 54,563                |       | 546                     |       | 855,002      |       | —                                |       | —                 |       | 855,548 |   |
| Shares issued for ITEX Corporation common  stock              |       | 57,196                |       | 572                     |       | 800,172      |       | —                                |       | —                 |       | 800,744 |   |
| Stock options exercised                                       |       | 23,500                |       | 235                     |       | 164,913      |       | —                                |       | —                 |       | 165,148 |   |
| Balances September 30, 2008                              |       | 2,831,884             |       | $                       | 28,320     |         | $          | 22,235,872                            |       | $                      | 110,887    |   | $ | (409,284 | ) | $ | 21,965,795 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

5

----

Table of Contents

 

**WESTERN SIZZLIN CORPORATION**

 

**Consolidated Statements of Cash Flows**

**NineMonths Ended September 30, 2008 and 2007**

**(Unaudited)**

** **
| ** **                                                                            | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **September 30,**          | ** ** |
| ** **                                                                            | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                 |       |                            |       |   |   |
|                                                                                  |       |                            |       |   |   |
| Net income (loss)                                                                     |       | $                               | (2,867,302 | ) | $ | 2,854,235 |   |
|                                                                                  |       |                            |       |   |   |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                            |       |   |   |
|                                                                                  |       |                            |       |   |   |
| Restaurant and franchise activities:                                                  |       |                            |       |   |   |
| Depreciation and amortization of property  and equipment                              |       | 311,447                         |       | 321,289 |   |
| Amortization of franchise royalty contracts  and other assets                         |       | 472,722                         |       | 472,723 |   |
| Amortization of finance costs                                                         |       | 2,507                           |       | 3,122 |   |
| Provision for doubtful accounts                                                       |       | 90,580                          |       | 90,000 |   |
| Equity in income of unconsolidated joint  venture                                     |       | (150,585                        | )          | (118,424 | ) |
| Share-based compensation                                                              |       | —                          |       | 5,920 |   |
| Provision for deferred income taxes  (benefit)                                        |       | (206,303                        | )          | 999,253 |   |
| (Increase) decrease in current assets and  other assets                               |       | 138,866                         |       | 300,619 |   |
| Increase (decrease) in current liabilities  and other liabilities                     |       | 495,847                         |       | 587,550 |   |
|                                                                                  |       | 1,155,081                       |       | 2,662,052 |   |
| Investment activities:                                                                |       |                            |       |   |   |
| Decrease in money market investments                                                  |       | 970,521                         |       | — |   |
| Realized (gains) losses on sales of  marketable securities, net                       |       | 15,730                          |       | (3,562,012 | ) |
| Unrealized losses on marketable securities,  net                                      |       | 3,187,655                       |       | — |   |
| Minority interest in net loss of  subsidiaries                                        |       | (599,384                        | )          | 508 |   |
| Proceeds from sales of marketable  securities                                         |       | 4,293,837                       |       | 12,089,784 |   |
| Purchase of marketable securities                                                     |       | (6,746,944                      | )          | (14,089,140 | ) |
| Purchase obligation – Mustang Capital  Advisors, LP                              |       | (18,275                         | )          | — |   |
| Increase (decrease) in due from broker                                                |       | —                          |       | (3,124,831 | ) |
| Decrease in due to broker                                                             |       | (290,411                        | )          | — |   |
| Decrease in current liabilities                                                       |       | (128,807                        | )          | — |   |
| Provision for deferred income taxes                                                   |       | 45,298                          |       | — |   |
|                                                                                  |       | 729,220                         |       | (8,685,691 | ) |
|                                                                                  |       |                            |       |   |   |
| Net cash used in operating activities                                                 |       | (983,001                        | )          | (3,169,404 | ) |
|                                                                                  |       |                            |       |   |   |
| Cash flows used in investing activities:                                              |       |                            |       |   |   |
| Additions to property and equipment                                                   |       | (22,505                         | )          | (33,420 | ) |
| Distribution from unconsolidated joint  venture                                       |       | 150,000                         |       | — |   |
| Purchase of Mustang Capital Advisors, LP,  net of cash acquired of $10,219            |       | (379,872                        | )          | — |   |
|                                                                                  |       |                            |       |   |   |
| Net cash used in investing activities                                                 |       | (252,377                        | )          | (33,420 | ) |
|                                                                                  |       |                            |       |   |   |
| Cash flows from financing activities:                                                 |       |                            |       |   |   |
| Cash received from exercise of stock options                                          |       | 165,148                         |       | 85,290 |   |
| Proceeds from issuance of long-term debt                                              |       | 2,641,220                       |       | — |   |
| Payments on long-term debt                                                            |       | (92,954                         | )          | (120,775 | ) |
| Payments on line of credit borrowings                                                 |       | (2,000,000                      | )          | — |   |
| Capital contributions from minority  interests in limited partnership                 |       | 540,000                         |       | 1,500,000 |   |
|                                                                                  |       |                            |       |   |   |
| Net cash provided by financing activities                                             |       | 1,253,414                       |       | 1,464,515 |   |
|                                                                                  |       |                            |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                 |       | 18,036                          |       | (1,738,309 | ) |
|                                                                                  |       |                            |       |   |   |
| Cash and cash equivalents at beginning of  the period                                 |       | 727,378                         |       | 2,344,644 |   |
|                                                                                  |       |                            |       |   |   |
| Cash and cash equivalents at end of the  period                                       |       | $                               | 745,414    |   | $ | 606,335 |   |
| Supplemental disclosure of cash flow  information:                                    |       |                            |       |   |   |
| Cash payments for interest                                                            |       | $                               | 154,848    |   | $ | 72,794 |   |
| Adoption of FIN-48 (non-cash)                                                         |       | $                               | —     |   | $ | 118,375 |   |
| Income taxes paid, net of refunds                                                     |       | $                               | 27,508     |   | $ | 41,681 |   |
| Non-cash investing and financing  activities:                                         |       |                            |       |   |   |
|                                                                                  |       |                            |       |   |   |
| Unrealized losses from marketable equity  securities                                  |       | $                               | —     |   | $ | (863,922 | ) |
| Issuance of common stock for marketable  securities                                   |       | $                               | 800,744    |   | $ | — |   |
| Issuance of common stock for ownership  interest in Mustang Capital Advisors, LP      |       | $                               | 855,548    |   | $ | — |   |

 

See accompanying notes toconsolidated financial statements.

 

6

----

Table of Contents

 

**WESTERNSIZZLIN CORPORATION**

 

Notes to ConsolidatedFinancial Statements

Nine Months Ended September,2008 and 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 September 30, 2008, the Company had106 franchised, 6 Company-operated and 1 joint venture restaurant operating in19 states.**

** **

**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, a solely-ownedlimited partnership, Western Real Estate, LP and Western Mustang Holdings, LLC(collectively the Company). All significant intercompany accounts andtransactions have been eliminated 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 comparablewith 2008 information.  Thereclassifications have had no impact on net income or equity.

 

**(2)****           Acquisition ofControlling Interests**

 

On July 9, 2008, the Company completed an acquisition of  a 50.5% controlling interest in MustangCapital Advisors, LP and a 51% controlling interest in its general partner,Mustang Capital Management, LLC, through the Company’s newly-formedwholly-owned subsidiary, Western Mustang Holdings, LLC.  Mustang Capital Advisors, LP, a Texas limitedpartnership, is a registered investment advisor, and is the investment advisorto, and the general partner of Mustang Capital Partners I, LP and MustangCapital Partners II, LP (the “Funds”). The Funds are private investment funds organized for the purpose oftrading and investing in securities.  Theaggregate purchase price was $1,245,640, which consisted of $300,000 in cash,$90,092 in transaction costs, and 54,563 shares of common stock issued at a pershare price of $15.68. Mustang Capital Advisors, LP managed approximately $50 millionin assets through its funds and managed accounts as of September 30, 2008. Thevalue of the 54,563 common shares issued was determined based on the averagemarket price of the Company’s common shares over the 3-day period before andafter the terms of the acquisition were agreed to and announced.  The acquisition is accounted for as apurchase under GAAP (Generally Accepted Accounting Principles) and as a result,Mustang Capital Advisors, LP and Mustang Capital Management, LLC isconsolidated into the Company’s financial statements.  As a result of the acquisition, the Companyexpects to diversify its holdings in marketable securities and increase thecash flow stream into the Company.

 

7

----

Table of Contents

 

The following table summarizes the estimatedfair value of the assets acquired and liabilities assumed at the date ofacquisition.  The Company is in theprocess of valuing certain purchase related intangibles regarding clientrelationships; thus the allocation of the purchase price is subject torefinement.

 
| ** **                                               | ** ** | **At July 9, 2008** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|
| Cash                                                     |       | $                                  | 10,219     |   |
| Money market investments of investment  advisory segment |       | 4,728,645                          |       |
| Investments in marketable securities                     |       | 5,253,811                          |       |
| Other assets                                             |       | 451                                |       |
| Goodwill                                                 |       | 2,105,062                          |       |
| Total assets acquired                                    |       | 12,098,188                         |       |
|                                                     |       |                               |       |
| Accrued expenses                                         |       | 35,839                             |       |
| Purchase obligation                                      |       | 1,155,879                          |       |
| Total liabilities assumed                                |       | 1,191,718                          |       |
|                                                     |       |                               |       |
| Minority interests                                       |       | 9,660,830                          |       |
|                                                     |       |                               |       |
| Net assets acquired                                      |       | $                                  | 1,245,640  |   |

 

In the event of the death,disability, or removal of the minority interest holder of Mustang CapitalAdvisors, LP  (the “Partnership”) and ofMustang Capital Management, LLC, or at any time after the Company has receivedaggregate distributions from the Partnership and/or Mustang Capital Management,LLC equal to $1,050,241, any of such events being a “Put Event”, the Companyhas the obligation to purchase from the minority interest holder or his legalrepresentative all of the minority interest holder’s ownership percentages, ata price and on terms contractually stipulated (the “Purchase Obligation”). Uponthe occurrence of any Put Event, the Purchase Obligation shall equal the sum ofthe Applicable Amount and the Hypothetical Amount, as defined below.

 

The Applicable Amount meansa dollar amount equal to the aggregate amount of assets under management by thePartnership at the date of the Put Event, multiplied by 5.074%, with suchresult multiplied by the minority interest holder’s ownership percentage at thedate of the Put Event.  The HypotheticalLiquidation Amount means the amount expressed in dollars that the minorityinterest holder would receive if, on the date of the particular Put Event, thePartnership sold all of its tangible assets at their fair market values forcash, paid its liabilities and distributed the remaining amount to thepartners.

 

At the date of settlement ofthe Purchase Obligation, the Applicable Amount shall be settled by payment of28.56% in cash and 71.44% in common stock of Western Sizzlin Corporation, andthe Hypothetical Liquidation amount shall be settled by payment of cash.

 

The calculated PurchaseObligation at September 30, 2008 (as if a Put Event has occurred) totals$1,194,293 and is reported in accordance with the provisions of Statement ofFinancial Accounting Standards No. 150,*Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity*in the accompanying consolidated balance sheet as of September 30, 2008 inother long-term liabilities.

 

If the Purchase Obligationas of September 30, 2008 were settled on that date, the Company would berequired to pay $486,406 in cash and issue 49,159 shares of its common stock(based on a closing market value per share of $14.40).  Any change in the market value per share ofthe Company’s common stock will increase or decrease the number of sharesrequired to settle the Purchase Obligation, but will not change the amount ofthe Purchase Obligation.

 

**The accompanying consolidatedfinancial statements include the results of operations and cash flows ofMustang Capital Advisors, LP and Mustang Capital Management, LLC from July 9,2008 (date of acquisition) through September 30, 2008.**  The following proforma financial information is presented for illustrative purposes only and isnot necessarily indicative of (i) the results of operations and financialposition that would have been achieved had the transaction taken place on January 1,2007 or (ii) the future operations of the Company following thetransaction.  The following informationshould be relied on only for the limited purpose of presenting what the resultsof operations and financial position of the Company might have looked like hadthe transaction taken place at an earlier date:

 

8

----

Table of Contents

 

Proforma Results of Operations:

 
| ** **         | ** ** | **Three Months  Ended  September 30,****2008** | ** ** | **Nine Months  Ended****September 30,  2008** | ** ** | **Three Months  Ended  September 30,****2007** | ** ** | **Nine Months  Ended  September 30,****2007** | ** ** |
|--------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Net income (loss): |       | $                                                        | 2,934,000  |                                                    | $          | (2,123,000                                               | )          | $                                                       | 2,520,000  |   | $ | 3,025,000 |   |
|                    |            |                                                          |            |                                                         |            |                                                          |            |                                                         |            |  |  |  |  |

 

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

 

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 for Western Sizzlin Corporation,and the management of Western Acquisitions, LP. 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 this filing,Mr. Biglari has authority to manage surplus cash up to $10 million, and inaddition, 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 1.50%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 margin loan balance at September 30, 2008 and 2007 was$0.  The collateral securing the marginloans 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.

 

The minority interest holder in the recently acquired controllinginterest in Mustang Capital Advisors, LP and Mustang Capital Management, LLC,has authority to manage the investments in these particular Funds.

 

In the normalcourse of business, substantially all of the Company’s securities transactions,money balances and security positions are transacted with a broker.  The Company is subject to credit risk to theextent any broker with whom they conduct business is unable to fulfillcontractual obligations on their behalf. The Company monitors the financial conditions of such brokers and doesnot anticipate any losses from these counterparties.

 

·      ***Marketable Securities heldby Western Sizzlin Corporation (the holding Company)***

 

Marketableequity securities held by Western Sizzlin Corporation (the holding company) areheld for an indefinite period and thus are classified as available-for-sale.Available-for-sale securities are recorded at fair value in Investments inMarketable Securities on the consolidated balance sheet, with the change infair value during the period excluded from earnings and recorded, net of tax,as a component of other comprehensive income (loss).

 

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 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.

 

Following is a summary of marketable equity securities held by WesternSizzlin Corporation (the holding company) as of September 30, 2008 and December 31,2007:

 
| ** **               | ** ** | **Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|--------------------------|------------|----------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| September 30, 2008: |       | $        | 1,409,003  |                         | $          | —                        |       | $                   | (409,284   | ) | $ | 999,719 |   |
|                     |       |     |       |                         |       |                          |       |                |       |
| December  31, 2007: |       | $        | 605,689    |                         | $          | 128,845                       |       | $                   | —     |   | $ | 734,534 |   |

 

9

----

Table of Contents

 

There were no realized gains or losses from marketable equitysecurities held by Western Sizzlin Corporation (the holding company) for thethree or nine months ended September 30, 2008 and 2007.  Management has also evaluated unrealizedlosses on marketable equity securities held by Western Sizzlin Corporation (theholding Company) to determine if such impairment is other than temporary, andhas concluded that they are temporary as of September 30, 2008 and thatthe Company has the ability and the intent to hold such securities until theyrecover their value.  In the eventmanagement concludes in future periods that such losses are other thantemporary, a charge will be taken in the statement of operations to reduce thecost of the securities to their fair value.

 

·      ***MarketableSecurities held by Western Acquisitions, LP***

 

In April 2007, the Company formed Western Investments, Inc.,a Delaware corporation and wholly-owned subsidiary, to serve as the generalpartner of Western Acquisitions, LP; 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, LP.  During the nine months ended September 30,2007, cash contributions from outside investors of $1,500,000 were made to thelimited partnership.  During the ninemonths ended September 30, 2008, cash contributions from outside investorsof $540,000 were made to the limited partnership.

 

As of September 30, 2008, Western Investments, Inc. owned85.13% of Western Acquisitions, LP.  Assuch, Western Acquisitions, LP has been consolidated into the accompanyingfinancial statements with the 14.87% ownership by minority limited partnerspresented as minority interest on the accompanying consolidated balance sheetas of September 30, 2008.   WesternAcquisitions, LP is, for GAAP purposes, an investment company under the AICPAAudit and Accounting Guide *Investment Companies*.  The Company has retained the specializedaccounting for Western Acquisitions, LP pursuant to EITF Issue No. 85-12, *Retention of Specialized Accounting for Investment in Consolidation*.  As such, marketable equity securities held byWestern Acquisitions, LP are recorded at fair value in Investments inMarketable Securities, with unrealized gains and losses resulting from changesin fair value reflected in the Consolidated Statements of Operations.

 

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

 
| ** **                          | ** ** | **As of September 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | **Cost**                                         | ** ** | **Fair Value**                             | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| The Steak n Shake Co.               |       | $                                                | 19,159,412 |                                            | $          | 13,484,771 |   | $ | 17,902,714 |   | $ | 15,046,851 |   |
| Other                               |       | 222,057                                          |       | 171,727                                         |       | 138,660 |   | 115,480 |   |
|                                |       |                                             |       |                                            |       |   |   |   |   |
| Total marketable equity  securities |       | $                                                | 19,381,468 |                                            | $          | 13,656,498 |   | $ | 18,041,374 |   | $ | 15,162,331 |   |

 

Net realized gains (losses) and net change in unrealized gains (losses)from marketable equity securities held by Western Acquisitions, LP were asfollows:

 
| ** **                                                                            | ** ** | **Three Months  Ended  September 30,****2008** | ** ** | **Nine Months  Ended  September 30,****2008** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Realized gains                                                                        |       | $                                                        | —     |                                                    | $          | — |   |
| Realized losses                                                                       |       | —                                                   |       | (39,852                                                 | )          |
| Net realized loss on sales of  marketable securities                                  |       | $                                                        | —     |                                                    | $          | (39,852 | ) |
|                                                                                  |       |                                                     |       |                                                    |       |
| Net unrealized gains (losses)  on marketable securities held Western Acquisitions, LP |       | $                                                        | 3,597,201  |                                                    | $          | (2,845,923 | ) |

 

·      ***Marketable Securities held by Mustang Capital Advisors, LP***

 

On July 9, 2008, the Company completedan acquisition of controlling interests in Mustang Capital Advisors, LP and itsgeneral partner, Mustang Capital Management, LLC, through the Company’snewly-formed wholly-owned subsidiary, Western Mustang Holdings, LLC.   The acquisition is accounted for as apurchase under GAAP and as a 

 

10

----

Table of Contents

 

result, Mustang Capital Advisors, LP andMustang Capital Management, LLC are consolidated into the Company’s financialstatements.

 

Western Mustang Holdings, LLC is, for GAAP purposes, an investmentcompany under the AICPA Audit and Accounting Guide *InvestmentCompanies*.  The Company hasretained the specialized accounting for Mustang Capital Advisors, LP pursuantto EITF Issue No. 85-12, *Retention of SpecializedAccounting for Investment in Consolidation*.  As such, marketable equity securities held byMustang Capital Advisors, LP are recorded at fair value in Investments inMarketable Securities, with unrealized gains and losses resulting from changesin fair value reflected in the Consolidated Statements of Operations.

 

Following is a summary of marketable equity securities held by WesternMustang Holdings, LLC as of September 30, 2008 and July 9, 2008 (dateof acquisition), of which all are in the United States:

 
| ** **                         | ** ** | **As of September 30, 2008** | ** ** | **As of July 9, 2008** | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                         | ** ** | **Cost**                                         | ** ** | **Fair Value**                        | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Total marketable equity securities |       | $                                                | 6,348,528  |                                       | $          | 6,006,796 |   | $ | 5,253,811 |   | $ | 5,253,811 |   |
|                                    |            |                                                  |            |                                            |            |  |  |  |  |  |  |  |  |

 

Net realized gains (losses) and net change in unrealized gains (losses)from marketable equity securities held by Mustang Capital Advisors, LP from July 9,2008 (date of acquisition) through September 30, 2008, were as follows:

 
| Realized gains                                                                       |   | $       | 52,210   |   |
|--------------------------------------------------------------------------------------|--------|---------|----------|--------|
| Realized losses                                                                      |   | (28,088 | )        |
| Net realized gains on sales of  marketable securities                                |   | $       | 24,122   |   |
|                                                                                 |   |    |     |
| Net unrealized losses on  marketable securities held by Mustang Capital Advisors, LP |   | $       | (341,732 | )      |

 

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

 

On December 13, 2007, Western Real Estate, LP, 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, LP, which intends tooperate as a private real estate investment fund.  Land held for investment by Western RealEstate, LP at December 31, 2007 and September 30, 2008 of $3,745,152is recorded at cost. The land was originally purchased using available cash anda $2,000,000 draw on the Company’s existing line of credit.  On February 1, 2008, the purchase wasrefinanced through the issuance of a note payable of  $2,641,220, secured by the land held forinvestment.   Interest accrues on theunpaid principal balance at prime minus 0.5%, or 4.5% as of September 30,2008 with one payment of principal of $264,122 due on January 29, 2009,and all remaining principal and accrued interest due on January 30, 2010.

 

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

 

*Goodwill*

 

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.

 

On July 9, 2008, the Company completedan acquisition of controlling interests in Mustang Capital Advisors, LP and itsgeneral partner, Mustang Capital Management, LLC, through the Company’snewly-formed wholly-owned subsidiary, Western Mustang Holdings, LLC.  Goodwill in the amount of $2,105,062 has initiallybeen recorded in the Investment Activity Segment in the three-month periodended September 30, 2008 in connection with this acquisition, however; theCompany is in the process of valuing certain related intangibles regardingclient relationships; thus the allocation of the purchase price is subject torefinement.

 

11

----

Table of Contents

 

There were no changes in the net carrying amount ofgoodwill for the three and nine months ended September 30, 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 nine month period ended September 30, 2008 and2007, respectively.

 
| ** **                    | ** ** | **As of ****September 30, 2008** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **Gross  carrying  amount**                          | ** ** | **Weighted average  amortization  period** | ** ** | **Accumulated  amortization** | ** ** |
| Amortizing intangible assets: |       |                                                 |       |   |   |   |   |
| Franchise royalty contracts   |       | $                                                    | 9,454,431  |   | 15.0 yrs. |   | $ | 9,296,857 |   |
|                               |            |                                                      |            |  |  |  |  |  |  |

 

Aggregateamortization expense for amortizing intangible assets for the three and ninemonth periods ended September 30, 2007 was $157,574 and $472,722,respectively. Estimated amortization expense is $630,296 for the year ended December 31,2008, at which time the franchise royalty contracts will be fully amortized.

 

**(6)****          ****Stock Options**

 

As of September 30, 2008, the Company has two stock option plans:the 2005 Stock Option Plan and the 2004 Non-Employee Directors’ Stock OptionPlan.  The 1994 Incentive andNon-qualified Stock Option Plan was terminated in 2008 with the exercise of alloutstanding options under this plan during the nine months ended September 30,2008.  Under the 2005 and 2004 Plans,employees and directors may be granted options to purchase shares of commonstock at the fair market 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 suchbenefits be recognized as a financing cash flow.  The benefits of tax deductions in excess ofrecognized stock compensation expense for the three and nine months ended September 30,2008 and 2007 were immaterial.

 

Therewere no stock options granted during the nine month period ended September 30,2008. There were -0- and 1,000 stock options granted during the three and ninemonth periods ended September 30, 2007, respectively, all at an estimatedvalue of $5.92.  Accordingly, the Companyrecorded $0 and $5,920 of compensation expense for stock options for the threeand nine month periods ended September 30, 2007, respectively.

 

The fair values of options granted during the nine months ended September 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 |   | 4.5    | %      |
| Volatility              |   | 78.83  | %      |
| Dividend yield          |   | — |   |

 

12

----

Table of Contents

 

Thefollowing table summarizes stock options outstanding as of September 30,2008, as well as activity during the nine 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                         |       | 23,500                   |       | 7.03                                                       |       | —                                   |       | —                          |       |
| Expired/Forfeited                 |       | —                   |       | —                                                     |       | —                                   |       | —                          |       |
| Balance, September 30,  2008 |       | 12,500                   |       | $                                                          | 7.25       |                                     | 2.08       |                            | $          | 89,409 |   |

 

Alloptions outstanding at September 30, 2008 are fully vested andexercisable.  At September 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.

 

**(7)****          ****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.  Managementexpects to make, on an opportunistic basis, repurchases of the Company’s commonstock to the extent permitted by applicable regulatory requirements.  The program can be suspended or terminated atany time without prior notice, but in any event shall terminate no later than June 25,2009.  No repurchases were consummatedduring the periods 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.

 

On July 9, 2008, the Company completedan acquisition of controlling interests in Mustang Capital Advisors, LP and itsgeneral partner, Mustang Capital Management, LLC, through the Company’snewly-formed wholly-owned subsidiary, Western Mustang Holdings, LLC.  The aggregate purchase price included theissuance of 54,563 shares of common stock issued at a per price share of $15.68(See Note 2).

 

**(8)****          ****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 September 30, 2008, the Company has a recorded liabilityof $7,552, including interest of $2,236, for such uncertain tax positions.  The recorded liability was reduced by $20,904during the nine months ended September 30, 2008, as the Company continuesto settle 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 $1,260,000 and $120,000 at September 30, 2008 and December 31,2007, respectively, related to the unrealized losses of marketablesecurities.  The provision for deferredincome taxes for the three and nine month periods ended September 30, 2008includes a provision for the valuation allowance of $(1,074,000) and $993,000,which impacted the Company’s effective tax rate for the periods.

 

13

----

Table of Contents

 

**(9)****          ****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 ofcommon shares outstanding for the period. Diluted earnings per share reflects the potential dilution that couldoccur if securities or other contracts to issue common stock were exercised orconverted into common stock or resulted in the issuance of common stock thatthen shared in the earnings of the Company.

 

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 September 30, 2008**  | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net income — basic                         |       | $                                   | 2,939,713  |                                         | 2,822,637  |                                         | $          | 1.04 |   |
| Net income — diluted                       |       | $                                   | 2,939,713  |                                         | 2,826,513  |                                         | $          | 1.04 |   |
|                                            |       |                                |       |                                         |       |                                         |       |
| **Three months ended  September 30, 2007** | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net income — basic                         |       | $                                   | 2,472,115  |                                         | 1,797,750  |                                         | $          | 1.38 |   |
| Net income — diluted                       |       | $                                   | 2,742,115  |                                         | 1,808,755  |                                         | $          | 1.37 |   |

 
| ** **                                     | ** ** | **Income (Loss)  (Numerator)** | ** ** | **Weighted  Average  Shares  (Denominator)** | ** ** | **Earnings  (Loss)  Per Share  Amount** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| **Nine months ended September 30, 2008**  | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net loss — basic                          |       | $                                   | (2,867,302 | )                                            | 2,750,132  |                                         | $          | (1.04 | ) |
| Net loss — diluted                        |       | $                                   | (2,867,302 | )                                            | 2,750,132  |                                         | $          | (1.04 | ) |
|                                           |       |                                |       |                                         |       |                                         |       |
| **Nine months ended  September 30, 2007** | ** ** | ** **                          | ** ** | ** **                                   | ** ** | ** **                                   | ** ** |
| Net income — basic                        |       | $                                   | 2,854,235  |                                         | 1,792,823  |                                         | $          | 1.59 |   |
| Net income — diluted                      |       | $                                   | 2,854,235  |                                         | 1,800,848  |                                         | $          | 1.58 |   |

 

Forthe nine month period ended September 30, 2008, the Company excluded fromthe loss per share calculation all potential common stock because the effect onloss per share was anti-dilutive.

 

**(10)****        ****Reportable Segments**

 

The Company has organized segmentreporting with additional information to reflect how the Company views itsbusiness activities.  TheCompany-operated Restaurant segment consists of the operations of allCompany-operated restaurants and derives its revenues from restaurantoperations.  The Franchising segmentconsists primarily of franchise sales and support activities and derives itsrevenues from sales of franchise and development rights and collection ofroyalties from franchisees. The Investment Activity segment consists ofinvestment activities and certain direct expenses associated withinvestment-related legal matters. The Company does not allocate certainexpenses to any business segment.  Thesecosts include expenses of the following functions: legal, accounting,stockholder relations, personnel not directly related to a segment, informationsystems and other headquarter activities. These unallocated expenses are designated as unallocated corporateexpenses. Certain other expenses (such as sublease property expense, impairmentand other charges, gains on settlement of insurance claims, and corporatelitigation fees and expenses) are also not allocated to any reportable segment.

 

Thefollowing table summarizes reportable segment information:

 

14

----

Table of Contents

 
| ** **                                                                           | ** ** | **Three Months**            | ** ** | **Nine Months**             | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                           | ** ** | **Ended September 30** | ** ** | **Ended September 30** | ** ** |
| ** **                                                                           | ** ** | **2008**                         | ** ** | **2007**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues from reportable  segments:                                                  |       |                             |       |                             |       |   |   |   |   |
| Restaurants                                                                          |       | $                                | 3,434,035  |                             | $          | 3,443,464 |   | $ | 10,050,437 |   | $ | 10,033,921 |   |
| Franchising                                                                          |       | 1,001,102                        |       | 1,078,551                        |       | 3,122,179 |   | 3,308,355 |   |
| Total revenues                                                                       |       | $                                | 4,435,137  |                             | $          | 4,522,015 |   | $ | 13,172,616 |   | $ | 13,342,276 |   |
| Depreciation and amortization:                                                       |       |                             |       |                             |       |   |   |   |   |
| Restaurants                                                                          |       | $                                | 92,420     |                             | $          | 100,252 |   | $ | 289,526 |   | $ | 301,050 |   |
| Franchising                                                                          |       | 165,642                          |       | 165,275                          |       | 497,150 |   | 496,084 |   |
| Total depreciation and  amortization                                                 |       | $                                | 258,062    |                             | $          | 265,527 |   | $ | 786,676 |   | $ | 797,134 |   |
|                                                                                 |       |                             |       |                             |       |   |   |   |   |
| Income (loss) from restaurant  and franchise operations:                             |       |                             |       |                             |       |   |   |   |   |
| Restaurants and equity in joint  venture                                             |       | $                                | 148,106    |                             | $          | 310,686 |   | $ | 738,432 |   | $ | 845,488 |   |
| Franchising                                                                          |       | 525,890                          |       | 586,204                          |       | 1,701,538 |   | 1,878,644 |   |
| Subleased properties and other  unallocated expenses                                 |       | (366,822                         | )          | (64,265                          | )          | (590,077 | ) | (151,013 | ) |
| Corporate                                                                            |       | (725,693                         | )          | (435,751                         | )          | (1,641,388 | ) | (1,404,598 | ) |
| Total income (loss) from  restaurant and franchise operations:                       |       | $                                | (418,519   | )                                | $          | 396,874 |   | $ | 208,505 |   | $ | 1,168,521 |   |
|                                                                                 |       |                             |       |                             |       |   |   |   |   |
| Income (loss) from investment  activities:                                           |       |                             |       |                             |       |   |   |   |   |
| Management fee income                                                                |       | $                                | 124,024    |                             | $          | — |   | $ | 124,024 |   | $ | — |   |
| Net realized gains (losses) on  sales of marketable securities                       |       | 24,122                           |       | 3,562,012                        |       | (15,730 | ) | 3,562,012 |   |
| Net unrealized gains (losses)  on marketable securities held by limited partnerships |       | 3,255,469                        |       | —                           |       | (3,187,655 | ) | — |   |
| Expenses of investment  activities                                                   |       | 174,318                          |       | (69,560                          | )          | (794,355 | ) | (205,967 | ) |
| Total income (loss) from  investment activities                                      |       | $                                | 3,577,933  |                             | $          | 3,492,452 |   | $ | (3,873,716 | ) | $ | 3,356,045 |   |
|                                                                                 |       |                             |       |                             |       |   |   |   |   |
| Interest expense:                                                                    |       |                             |       |                             |       |   |   |   |   |
| Restaurants                                                                          |       | $                                | 15,827     |                             | $          | 31,741 |   | $ | 70,022 |   | $ | 71,792 |   |
| Total interest expense                                                               |       | $                                | 15,827     |                             | $          | 31,741 |   | $ | 70,022 |   | $ | 71,792 |   |
| Interest income:                                                                     |       |                             |       |                             |       |   |   |   |   |
| Corporate                                                                            |       | $                                | 69,801     |                             | $          | 34,866 |   | $ | 102,168 |   | $ | 65,219 |   |
| Total interest income                                                                |       | $                                | 69,801     |                             | $          | 34,866 |   | $ | 102,168 |   | $ | 65,219 |   |

** **
| ** **            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Total assets:         |       |                   |       |                  |       |
| Restaurants           |       | $                      | 6,636,403  |                  | $          | 6,032,635 |   |
| Franchising           |       | 1,976,831              |       | 2,803,432             |       |
| Corporate             |       | 1,796,303              |       | 2,030,988             |       |
| Investment activities |       | 29,963,127             |       | 19,642,017            |       |
| Total assets          |       | $                      | 40,372,664 |                  | $          | 30,509,072 |   |

 
| ** **            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **            | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Total goodwill:       |       |                   |       |                  |       |
| Restaurants           |       | $                      | 3,540,200  |                  | $          | 3,540,200 |   |
| Franchising           |       | 770,000                |       | 770,000               |       |
| Investment activities |       | 2,105,062              |       | —                |       |
| Total goodwill        |       | $                      | 6,415,262  |                  | $          | 4,310,200 |   |

 

**(11)****        ****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.

 

15

----

Table of Contents

 

EffectiveJanuary 1, 2008, the Company adopted the provisions of Statement ofFinancial Accounting Standards No. 157 (“SFAS 157”), *Fair Value Measurements,*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.                                |

 

At September 30,2008, the Company’s investments in marketable securities are carried at fairvalue, based on quoted market prices, in the consolidated balance sheets andare classified within Level 1 of the fair value hierarchy, with the exceptionof $1.3 million that have been valued, in the absence of observable marketprices, by Mustang Capital Advisors, LP. The Funds value investments in Level 1 securities are freely tradableand are listed on a national securities exchange or reported on the NASDAQnational market at their last sales price as of the last business day of theperiod.

 

Approximately$1.3 million of the investments held by Mustang Capital Advisors, LP have beenclassified within Level 2 of the fair value hierarchy and have been valued, inthe absence of observable market prices, by the management of Mustang CapitalAdvisors, LP.  Fair value is determinedusing valuation methodologies after giving consideration to a range ofobservable factors including last known sales price; any current bids or offerson the stock; comparisons to publicly traded stocks with appropriate discountsfor liquidity; size of position; control data research; and current marketconditions. Those estimated values do not necessarily represent the amountsthat may be ultimately realized due to the occurrence of future circumstancesthat can not be reasonably determined. Because of the inherent uncertainty ofvaluation, those estimated values may be materially higher or lower than thevalues that would have been used had a ready market for the securities existed.

 

**(12)****        ****Commitments and Contingencies**

 

**Commitments**

 

Western Investments, Inc. is the general partner of WesternAcquisitions, LP.  Limited partnershipinterests in Western Acquisitions, LP 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 September 30,2008, Western Acquisitions, LP, did not have any limited partners holding Class Binterests.  As of September 30, 2008and December 31, 2007, minority limited partners holding Class Ainterests held 14.87% and 12.43% ownership, respectively.

 

On July 23, 2008, the Company enteredinto a severance and release agreement with an employee who held the positionof President and Chief Executive Officer of Western Sizzlin FranchiseCorporation and The Western Sizzlin Stores, Inc.  Under the agreement, the Company agreed topay severance equal to the employee’s base pay, $210,000, in bi-weeklyinstallments through August 19, 2009. In addition, the Company will reimburse monthly health coverage premiumpayments through August 2009.  TheCompany accrued the entire severance commitment in July 2008 of $250,000.

 

**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 

 

16

----

Table of Contents

 

Company reassesses its position with respect to accrued liabilities andother expenses.  These estimates aresubject to change as events evolve and as additional information becomesavailable during the litigation process.

 

Little Rock, Arkansas Lease

 

In September 2006, the Company wasserved with a lawsuit filed in the Circuit Court of Pulaski County, Arkansas,captioned *Parks Land Company, LLP, et al. v. Western SizzlinCorporation, et al.* The plaintiffs are owners/landlords of fourrestaurant premises located in the Little Rock, Arkansas metropolitan areawhich had been leased pursuant to a single ten year lease agreement. The Company occupied these locations for a period of time, but beforethe end of the lease, subleased each of these premises to variousoperators.  The ten year lease agreementexpired on June 30, 2006.   Inthe lawsuit the plaintiffs sought recovery of allegeddamages for certain repair and maintenance expenses on the premises, forthe replacement of certain equipment, for diminution of property value, and forloss of rental income, as well as interest and costs.  On February 12, 2008, this casecame before the Court for trial. On February 20, 2008, a 12 member juryreturned 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 appellate courtaffirms the judgment against the Company, the amount due the plaintiffs wouldinclude interest accrued on the judgment from February 29, 2008, throughthe period of the appeal.  This additionalamount is not expected to exceed $50,000. The appellate record was filed on October 13, 2008, and the Company’sbrief will be due approximately 40 days from that date.  The Company’s appeal should be decided by theappropriate appellate court in Arkansas sometime in the first quarter of2009.   There has been no change in the Company’s loss contingencyaccrual of $900,000 since 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.

 

**(13)****        ****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 September 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. During the three month period ended September 30, 2008, the Companyreceived a cash distribution from the joint venture of $150,000.

 

**Financial Data**

 

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

 

17

----

Table of Contents

 
| ** **                                       | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(unaudited)**                                      | ** ** | **(unaudited)**                                     | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **Statement of Operations Data:** | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                   |       | $                                                    | 1,216,010  |                                                | $          | 1,218,248 |   | $ | 3,639,345 |   | $ | 3,805,241 |   |
| Cost of food                                     |       | 508,049                                              |       | 508,431                                             |       | 1,494,523 |   | 1,634,851 |   |
| Payroll expense                                  |       | 353,545                                              |       | 351,358                                             |       | 1,054,087 |   | 1,144,755 |   |
| Gross profit                                     |       | 327,416                                              |       | 358,459                                             |       | 1,090,735 |   | 1,025,635 |   |
| Marketing and operating expense                  |       | 49,128                                               |       | 11,297                                              |       | 140,179 |   | 28,851 |   |
| General and administrative                       |       | 119,424                                              |       | 129,222                                             |       | 343,516 |   | 422,755 |   |
| Depreciation and amortization                    |       | 51,212                                               |       | 50,229                                              |       | 152,131 |   | 150,550 |   |
| Interest                                         |       | 53,057                                               |       | 56,238                                              |       | 160,421 |   | 168,110 |   |
| Net income                                       |       | 86,518                                               |       | 105,500                                             |       | 301,171 |   | 236,849 |   |
|                                                  |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 
| ** **                                      | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**              | ** ** | **(unaudited)**             | ** ** |
| **Balance Sheet Data:**                         |       |                         |       |                        |       |
| Cash                                            |       | $                            | 112,464    |                        | $          | 332,740 |   |
| Prepaid expenses                                |       | 11,934                       |       | 3,171                       |       |
| Inventory                                       |       | 16,620                       |       | 16,384                      |       |
| Land, equipment and building  improvements, net |       | 3,616,910                    |       | 3,750,051                   |       |
| Loan costs, net                                 |       | 10,820                       |       | 11,946                      |       |
| Total assets                                    |       | 3,775,765                    |       | 4,112,050                   |       |
| Loan payable                                    |       | 2,999,177                    |       | 3,138,580                   |       |
| Accounts payable and accrued  expenses          |       | 225,426                      |       | 433,479                     |       |
| Members’ equity                            |       | 551,161                      |       | 549,991                     |       |
|                                                 |            |                              |            |                             |            |  |  |

 

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

 

In September 2006, the FASB issued Statement of FinancialAccounting Standards No. 157 (“SFAS 157”), *Fair Value Measurments*.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 thatfair value is the relevant measurement attribute. Accordingly, SFAS 157 doesnot require 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 *and Accountingby Parent Companies and Equity Method Investors for Investments in InvestmentCompanies* (“SOP 07-1”).  FSPFIN 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.

 

SOP 07-1, issued in June 2007, addresses whether the accountingprinciples of the AICPA Audit and Accounting Guide *InvestmentCompanies* may be applied to an entity by clarifying the definitionof an investment company and whether those accounting principles may beretained by a parent company in consolidation or by an investor in theapplication of the equity method of accounting. SOP 07-1, as originally issued, was to be effective for fiscal yearsbeginning on or after December 15, 2007 with earlier adoptionencouraged.  In February 2008, theFASB issued FSP SOP 07-1-1, *Effective Date of AICPAStatement of Position 07-01*, to indefinitely defer the effectivedate of SOP 07-01. 

 

18

----

Table of Contents

 

The Company’s majority-owned subsidiaries, Western Acquisitions, LP andMustang Capital Advisors, LP, are investment companies as currently defined inthe AICPA Audit and Accounting Guide, *Investment Companies*.  The Company has retained the specializedaccounting for Western Acquisitions, LP and Mustang Capital Advisors, LPpursuant to EITF 85-12, *Retention of SpecializedAccounting for Investments in Consolidation*.  As such, marketable equity securities held byWestern Acquisitions, LP and Mustang Capital Advisors, LP are recorded at fairvalue in Investments in Marketable Securities in the consolidated financialstatements, with unrealized gains and losses resulting from the change in fairvalue reflected in the Consolidated Statement of Operations. The Companyintends to monitor future developments associated with this Statement in orderto assess the impact, if any, 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 financialstatements.  SFAS 141(R) and SFAS160 are required to be adopted simultaneously and are effective for the firstannual reporting period 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.

 

InMarch 2008, the FASB issued Statement of Financial Accounting StandardsSFAS No. 161 (“SFAS 161”), *Disclosuresabout Derivative Instruments and Hedging Activities—An Amendment of FASBStatement No. 133*. SFAS applies to all derivative instrumentsand related hedged items accounted for under SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*. It requires entities to provide greater transparency about(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 FASBStaff Position No. 142-3*, Determination**of the Useful Life of Intangible Assets*(“FSP 142-3”).  FSP 142-3 amends the factors that should be considered indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under FASB Statement No. 142, *Goodwill and Other Intangible Assets* and requires enhancedrelated disclosures.  FSP 142-3 must be applied prospectively to allintangible assets acquired subsequent to fiscal years beginning after December 15,2008.  The Company is currently evaluating the impact that FSP 142-3 willhave on its consolidated financial statements.

 

In May 2008, the FASB issued Statement of Financial AccountingStandards No. 162 (“SFAS 162”), “The Hierarchy of Generally AcceptedAccounting Principles.” SFAS 162 identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy). This Statement is effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardamendments to AICPA Codification of Auditing Standards, AU Section 411, “TheMeaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples.” The Company does not currently believe that adopting SFAS162 will have a material impact on its consolidated financialstatements.

 

In October 2008, the FASB issued FSP FAS No. 157-3, “*Determining the Fair Value of a Financial Asset When the Market forThat Asset Is Not Active*” (FSP 157-3).  The FSP clarifies the application of FAS No.157, *Fair Value Measurements*,**when the market for a financial asset is not active.  The FSP was effective upon issuance,including reporting for prior periods for which financial statements have notbeen issued.  The adoption of the FSP forreporting as of September 30, 2008, was given consideration when makingestimates of Level 2 fair value estimates, as disclosed in Note 2.

 

**(15)****         Subsequent Event**

 

On October 3, 2008, the Companyannounced its intention to commence an exchange offer for up to 680,500 shares ofcommon stock of Jack in the Box, Inc. The exchange ratio would be 1.607 shares of the Company’s common stockfor one share of Jack in the Box, Inc. common stock.  On October 15, 2008, the Company filed aregistration statement on Form S-4 related to the proposed exchange offer.  The exchange offer is conditioned on the 

 

19

----

Table of Contents

 

effectiveness of the registration statement,as the Company currently anticipates that the registration statement will bedeclared effective in the fourth quarter of 2008.

 

**Item 2.**** ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Overview**

 

Thefollowing discussion may include forward-looking statements includinganticipated financial performance, business prospects, the future opening ofCompany-operated and franchised restaurants, anticipated capital expenditures,and other matters.  All statements otherthan statements 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 thesesafe harbors, the Company notes that a variety of factors, individually or inthe aggregate, could cause the Company’s actual results and experience todiffer materially from the anticipated results or other expectations expressedin the Company’s forward-looking statements including, without limitation,  those factors discussed in the sectionentitled “Item 1A. Risk Factors” in the Company’s Form 10-K for the yearended December 31, 2007 and the following: the ability of the Company orits franchises to obtain suitable locations for restaurant development;consumer spending trends and habits; competition in the restaurant segment withrespect to price, service, location, food quality and personnel resources;weather conditions in the Company’s operating regions; laws and governmentregulations; general business and economic conditions; availability of capital;success of operating initiatives and marketing and promotional efforts; andchanges in accounting policies.  Inaddition, the Company disclaims any intent or obligation to update thoseforward-looking statements.

 

WesternSizzlin Corporation is a holding company owning subsidiaries engaged in anumber of diverse business activities. The Company’s primary business activities are conducted through WesternSizzlin Franchise Corporation and Western Sizzlin Stores, Inc., whichfranchise and operate 113 restaurants in 19 states, including sixCompany-owned, 106 franchise restaurants, and one joint venturerestaurant.  The Company currentlyoperates and/or franchises the following concepts:  Western Sizzlin, Western Sizzlin Wood Grill,Western Sizzlin Express, Great American Steak & Buffet, and QuincySteakhouses.

 

Theconsolidated financial statements include the accounts of Western SizzlinCorporation and its wholly-owned subsidiaries, Western Sizzlin FranchiseCorporation, The Western Sizzlin Stores, Inc., Western Sizzlin Stores ofLittle Rock, Inc., Austins of Omaha, Inc., Western Investments, Inc.,Western Properties, Inc., a majority-owned limited partnership, WesternAcquisitions, LP, a solely-owned limited partnership, Western Real Estate, LP,and Western Mustang Holdings, LLC.  Unless otherwise noted, all entities are referred to collectively as the“Company”.

 

In2007, the Company formed Western Investments, Inc., a Delaware corporationand wholly-owned subsidiary to serve as the general partner of WesternAcquisitions, LP; a Delaware limited partnership that operates as a privateinvestment fund.  Western Acquisitions,LP is, for generally accepted accounting principles (GAAP) purposes, aninvestment company under the American Institute of Certified Public Accountants(AICPA) Audit and Accounting Guide *Investment Companies*.  The Company has retained the specializedaccounting for Western Acquisitions, LP pursuant to FITF Issue No. 85-12, *Retention of Specialized Accounting for Investments in Consolidation*.  As such, marketable equity securities held byWestern Acquisitions, LP are recorded at fair value in Investments inMarketable Securities, with unrealized gains and losses resulting from thechange in fair value reflected in the Statement of Operations.

 

TheCompany seeks to invest, at the holding company and through subsidiaries,including Western Acquisitions, LP, in stocks of businesses at prices belowtheir intrinsic business value.  TheCompany’s preferred strategy is to allocate a meaningful amount of capital ineach investee, resulting in concentration. The carrying values of these investments are exposed to market pricefluctuations, which may be 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 minority interest holder in one recently acquired controllinginterest in Mustang Capital Advisors, LP and Mustang Capital Management, LLC,has authority to manage the investments in these particular Funds.  The Company’s primary objective centers onachieving above average returns on capital in pursuit of maximizing theeventual net worth of its stockholders.

 

20

----

Table of Contents

 

Whilethe Company has historically been principally engaged, and intends at this timeto remain principally engaged, in franchising and operating restaurants, itsrecent investment activities could bring it within the definition of an “investmentcompany” and require it to register as an investment company under theInvestment Company Act of 1940.  TheBoard of Directors has adopted a policy requiring management to restrict theCompany’s operations and investment activities to avoid becoming an investmentcompany, until and unless the Board approves otherwise.

 

Althoughthe Company does not presently intend to change its principal business, and theBoard has not approved any such change, the Company has expanded its investmentactivities, and may decide in the future to register as an investment companyunder the Investment Company Act.  Undercertain circumstances, if it is successful in investment activities, then theCompany may inadvertently fall within the definition of an investment company,in which event 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.

 

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.

 

On July 9, 2008, the Company completedan acquisition of controlling interests in Mustang Capital Advisors, LP and itsgeneral partner, Mustang Capital Management, LLC, through the Company’snewly-formed wholly-owned subsidiary, Western Mustang Holdings, LLC.  The aggregate purchase price was $1,245,640,which consisted of $300,000 in cash, $90,092 in transaction costs and 54,563shares of common stock issued at a per price share of $15.68. Mustang CapitalAdvisors LP currently manages approximately $46 million in assets through itsfunds and managed accounts. The acquisition is accounted for as a purchaseunder GAAP (generally accepted accounting principles) and as a result, MustangCapital Advisors LP is consolidated into the Company’s financialstatements.  As a result of theacquisition, the Company expects to diversify its holdings in marketablesecurities and increase the cash flow stream into the Company.

 

On August 11, 2008, the Company openedup a new Company-operated restaurant in Tupelo, Mississippi under the newlydeveloped concept, Western Sizzlin Express. Western Sizzlin Express is asmaller, full service restaurant with a high quality, simpler menu created toturn tables faster in an efficient and pleasing environment. The Company ismarketing this concept as a lower cost investment to prospective franchisees.

 

The Company opened two new Wood Grill Buffet franchised locations inCalifornia on October 22, 2008 and November 6, 2008.  The Company is pleased by the performance andprospects of the Wood Grill Buffet concept.

 

**Results of Operations**

 

Net income (loss) for the three and nine months ended September 30,2008 was $2,939,713 and ($2,867,302) compared to net income of $2,472,115 and$2,854,235 for the three and nine months ended September 30, 2007.

 

Thefollowing table sets forth for the periods presented the percentage relationshipto total revenues of certain items included in the consolidated statements ofincome and certain restaurant data for the periods presented:

 
| ** **                                                           | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                                                           | ** ** | **2008**                          | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                            |       |                              |       |                              |       |   |   |   |   |
| Company-operated restaurants                                         |       | 77.4                              | %          | 76.1                              | %          | 76.3 | % | 75.2 | % |
| Franchise operations                                                 |       | 22.6                              |       | 23.9                              |       | 23.7 |   | 24.8 |   |
| 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  |       | 58.7                              |       | 55.0                              |       | 56.3 |   | 54.2 |   |
| Restaurant occupancy and other                                       |       | 14.2                              |       | 13.2                              |       | 13.4 |   | 13.3 |   |
| Franchise operations — direct support                           |       | 7.0                               |       | 7.2                               |       | 7.0 |   | 7.0 |   |
| Subleased restaurant property expenses                               |       | 8.2                               |       | .6                                |       | 3.2 |   | .5 |   |
| Corporate expenses                                                   |       | 16.4                              |       | 9.6                               |       | 12.5 |   | 10.5 |   |
| Depreciation and amortization expense                                |       | 5.8                               |       | 5.9                               |       | 6.0 |   | 6.0 |   |
| Corporate litigation fees and expenses                               |       | .1                                |       | .8                                |       | 1.2 |   | .6 |   |
| Total costs and expenses — restaurant and  franchise operations |       | 110.4                             |       | 92.3                              |       | 99.6 |   | 92.1 |   |

 

21

----

Table of Contents

 
| Equity in income of joint venture                                           |   | 1.0    |   | 1.1    |   | 1.2    |   | .9     |   |
|-----------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Income (loss) from restaurant and franchise  operations                     |   | (9.4   | )      | 8.8    |   | 1.6    |   | 8.8    |   |
|                                                                        |   |   |   |   |   |   |   |   |   |
| Investment advisory fee income                                              |   | 2.8    |   | — |   | .9     |   | — |   |
| Net realized gain (loss) on sales of  marketable securities                 |   | .6     |   | 78.8   |   | (.1    | )      | 26.7   |   |
| Net unrealized losses on marketable  securities held by limited partnership |   | 73.8   |   | — |   | (24.1  | )      | — |   |
| Expense of investment activities                                            |   | 3.9    |   | (1.5   | )      | (6.0   | )      | (1.5   | )      |
| Loss from investment activities                                             |   | 81.1   |   | 77.3   |   | (29.3  | )      | 25.2   |   |
| Other income (expense):                                                     |   |   |   |   |   |   |   |   |   |
| Interest expense                                                            |   | (.4    | )      | (.7    | )      | (.5    | )      | (.5    | )      |
| Interest income                                                             |   | 1.1    |   | .8     |   | .6     |   | .5     |   |
| Other, net                                                                  |   | — |   | — |   | — |   | — |   |
| Total other income (expense), net                                           |   | .7     |   | .1     |   | .1     |   | — |   |
|                                                                        |   |   |   |   |   |   |   |   |   |
| Income (loss) before income tax expense and  minority interest              |   | 72.4   |   | 86.1   |   | (27.6  | )      | 34.0   |   |
| Income tax expense (benefit):                                               |   |   |   |   |   |   |   |   |   |
| Current                                                                     |   | — |   | 14.4   |   | — |   | 5.0    |   |
| Deferred                                                                    |   | (1.8   | )      | 17.0   |   | (1.3   | )      | 7.5    |   |
| Total income tax expense (benefit)                                          |   | (1.8   | )      | 31.4   |   | (1.3   | )      | 12.5   |   |
| Minority interests                                                          |   | (7.9   | )      | — |   | 4.6    |   | — |   |
| Net income (loss)                                                           |   | 66.28  | %      | 54.7   | %      | (21.8  | )%     | 21.4   | %      |

 
| ** **                               | ** ** | **Three Months**             | ** ** | **Nine Months**              | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                               | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| ** **                               | ** ** | **2008**                          | ** ** | **2007**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Restaurant Data**                      | ** ** | ** **                        | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of Company-Operated  Restaurants: |       |                              |       |                              |       |   |   |   |   |
| Beginning of period                      |       | 5                                 |       | 5                                 |       | 5 |   | 5 |   |
| Opened                                   |       | 1                                 |       | —                            |       | 1 |   | — |   |
| Closed                                   |       | —                            |       | —                            |       | — |   | — |   |
| Franchised                               |       | —                            |       | —                            |       | — |   | — |   |
| End of period                            |       | 6                                 |       | 5                                 |       | 6 |   | 5 |   |
| Number of U.S. Franchised  Restaurants:  |       |                              |       |                              |       |   |   |   |   |
| Beginning of period                      |       | 111                               |       | 119                               |       | 116 |   | 123 |   |
| Opened                                   |       | —                            |       | —                            |       | — |   | — |   |
| Closed                                   |       | (5                                | )          | (3                                | )          | (10 | ) | (7 | ) |
| End of period                            |       | 106                               |       | 116                               |       | 106 |   | 116 |   |
| Number of Joint Venture  Restaurants:    |       |                              |       |                              |       |   |   |   |   |
| Beginning of period                      |       | 1                                 |       | 1                                 |       | 1 |   | 1 |   |
| Opened                                   |       | —                            |       | —                            |       | — |   | — |   |
| Closed                                   |       | —                            |       | —                            |       | — |   | — |   |
| End of period                            |       | 1                                 |       | 1                                 |       | 1 |   | 1 |   |

 

**Revenues**

 

Total revenues decreased 1.9% to $4.44 million for thethree months ended September 30, 2008 from $4.52 million for thecomparable three months ended September 30, 2007. Total revenues decreased1.3% to $13.17 million for the nine months ended September 30, 2008 from$13.34 million for the comparable nine months ended September 30, 2007.Company-operated restaurant revenues decreased 0.3% to $3.43 million for thethree months ended September 30, 2008 as compared to $3.44 million for thecomparable three months ended September 30, 2007. Company-operated restaurantrevenues increased .02% to $10.05 million for the nine months ended September 30,2008 as compared to $10.03 million for the comparable nine months ended September 30,2007.  The Company opened up anadditional Company-operated restaurant in August 2008, with sales of$80,000 through September 30, 2008. Same store sales for Company-operatedrestaurants and the Company’s single joint venture restaurant experienced adecrease of 1.96% for the three months ended September 30, 2008 and a decreaseof 0.48% for the nine months ended September 30, 2008. Franchise revenuesdecreased 7.2% to $1.00 million for the three months ended September 30,2008 as compared to $1.08 million for the comparable three months ended 

 

22

----

Table of Contents

 

September 30, 2007. Franchise revenues decreased5.6% to $3.12 million for the nine months ended September 30, 2008 ascompared to $3.31 million for the comparable nine months ended September 30,2007.  The overall decrease in franchiserevenues is partially attributable to fewer franchised units in the system at September 30,2008 as compared to September 30, 2007. Same store sales at franchise operations for the three and nine monthsended September 30, 2008, experienced overall decreases of 4.97% and2.71%, respectively.

 

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

** **

Costs of Company-operated restaurants, consistingprimarily of food, beverage, and labor costs increased $119,000    (4.8%) to $2.61 million for the threemonths ended September 30, 2008 from $2.49 million for the three monthsended September 30, 2007.   Thesecosts for the three month period as a percentage of Company-operatedrestaurants revenue were 75.9% and 72.3% for the three months ended September 30,2008 and 2007, respectively.  Costs ofCompany-operated restaurants increased $180,000 (2.5%) to $7.41 million for thenine months ended September 30, 2008 from $7.23 million for the ninemonths ended September 30, 2007.  These costs for the nine month period as a percentage ofCompany-operated restaurants revenue were 73.7% and 72.1% for the nine monthsended September 30, 2008 and 2007, respectively.  These costs have increased due to the risingcosts of commodities and the addition of a Company-operated restaurant inTupelo, Mississippi in August 2008.

 

Restaurant occupancy and other, which includeutilities, insurance, maintenance, rent and other such costs of theCompany-operated restaurants, increased by $32,000 (5.4 %) for the three monthsended September 30, 2008 versus the prior year’s comparable period. Thesecosts for the three month period increased as a percentage of Company-operatedrestaurant revenues from 17.3% in 2007 to 18.3% in 2008.  Restaurant occupancy and other decreased by$13,000 (0.7%) for the nine months ended September 30, 2008 versus theprior year’s comparable period.  Thesecosts for the nine month period decreased as a percentage of Company-operatedrestaurant revenues from 17.7% in 2007 to 17.5% in 2008.

 

Cost of franchise operations direct support expensedecreased by $17,500 and $10,000 for the three and nine months ended September 30,2008 versus the prior years’ comparable periods.  The decreases for the three and nine monthsended September 30, 2008 are primarily attributable to the Company’son-going cost control efforts.

 

Subleased properties include net costs associated withsubleasing former Company-operated restaurants and maintenance of vacantpremises.  These expenses increased by$335,000 and $355,000 for the three and nine months ended September 30,2008 versus the prior year’s comparable periods.  The increases were largely attributable torepairs and maintenance to subleased properties undertaken by the Company inanticipation of surrendering possession to the landlord in October and November of2008. Inflationary increases in costs associated with vacant properties alsocontributed to the increases in subleased properties expense. Currentsubleasing arrangements, and the related master lease, are scheduled to expireby the end of 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 expensesincreased by $290,000 and $238,000 for the three and nine month periods ended September 30,2008 versus the prior year’s comparable periods.  The increases are a result of accruing$250,000 payable under the Company’s severance agreement with its formerPresident in July 2008 and hiring of a new President in June 2008 forthe subsidiary operations of Western Sizzlin Franchise Corporation and TheWestern Sizzlin Stores, Inc.

 

Depreciation and amortization expense for 2008 werecomparable to 2007.

 

Corporate litigation fees are comparable for the threemonths ended September 30, 2008 versus the prior year’s comparable periodand increased $84,000 for the nine months ended September 30, 2008 versusthe prior year’s comparable period.  Thenine months ended September 30, 2008 increase is due to increased legalfees associated with the trial and appeal of the Company’s lawsuit in LittleRock, Arkansas.  (See Note 12 to theConsolidated Financial Statements).

 

**Equity in income of Joint Venture**

 

Equity in income of joint venture decreased $9,000 andincreased $32,000 for the three and nine months ended September 30, 2008,respectively,  versus the prior year’scomparable periods, due to better operating performance of the restaurantoverall during 2008.  (See Note 13 to theConsolidated Financial Statements)

 

23

----

Table of Contents

 

**Income (Loss) from Investment Activities**

 

Investment advisory fee income of $124,024 resulted from theacquisition of Mustang Capital Advisors, LP as of July 9, 2008.  Investment activities include net realizedgains (losses) on sales of marketable securities of $24,000 and ($16,000) forthe three and nine months ended September 30, 2008, respectively, comparedto $3.56 million for the three and nine months ended September 30, 2007.The realized gain on sale of marketable securities of $3.56 million in 2007,was largely from the sale of the investment in Friendly Ice CreamCorporation.  Net unrealized gains(losses) on marketable securities held by the limited partnerships, WesternAcquisitions, LP and Mustang Capital Advisors, LP, were $3.3 million and ($3.2)million for the three and nine months ended September 30, 2008,respectively.  Expenses associated withinvestment activities were $507,000 and $70,000 for the three months ended September 30,2008 and 2007, respectively, and $1.1 million and $206,000 for the nine monthsended September 30, 2008 and 2007, respectively.  However, during the quarter ended September 30,2008, The Steak n Shake Company reimbursed the Company $332,750 for certainexpenses associated with the proxy contest conducted by the Company during thefourth quarter of 2007 and first quarter of 2008.  The increase in expenses for 2008 versus theprior year’s comparable periods are attributable to expenses associated withthe Steak n Shake proxy contest,  theITEX tender offer, proposed exchange offer for shares of Jack in the Box, Inc.,and other investment-related activities. There were no management fees chargedor collected by Western Acquisitions, LP from outside investors in 2008 or2007.  Future management fees will dependon portfolio performance.

 

On June 19, 2008, the Board of Directors of The Steak n ShakeCompany appointed Sardar Biglari as Executive Chairman of the Board,effectively immediately.  On August 5,2008, Mr. Biglari was appointed Chief Executive Officer of The Steak nShake Company. Management believes that the recently announcedrestructuring efforts underway at Steak n Shake are positive steps towardrebuilding value for all of its stockholders.

 

**Other Income (Expense)**

 

Interestexpense decreased $16,000 and $2,000 for the three and nine months ended September 30,2008 over the comparable periods in 2007.  Interest income fluctuates according to the levels of available cashbalances.

 

Otherincome for 2008 was comparable to 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 (2.4)%  and 36.5%  for the three months ended September 30,2008 and 2007, respectively and (4.6)% and 36.9% for the nine months ended September 30,2008 and 2007, respectively.  Theprovisions for deferred income taxes for the three and nine month periods endedSeptember 30, 2008 includes provisions for the valuation allowance on itsdeferred tax assets of $(1,116,000) and $1,140,000, respectively, which impactedthe Company’s effective tax rate for the periods. The changes in the valuationallowance for deferred tax assets were primarily related to the changes inunrealized losses on investment securities, which management has concluded aremore likely than not to not be realized as deductions or capital losses on theCompany’s tax returns.

 

**Cash and Cash Equivalents**

 

Asof September 30, 2008, the Company had $745,000 of cash and cashequivalents which is comparable to $727,000 as of December 31, 2007. 

 

**Investment of Available Capital**

 

TheCompany’s cash flows from restaurant and franchise activities have exceeded theworking capital, financing and capital investment needs of its restaurant andfranchise operations, and management expects that the Company’s cash flows willcontinue to 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 obtained. Further, the Company may determine under certain market conditions thatavailable capital is best utilized to fund investments that it believes offersthe Company attractive return opportunities, whether or not related to itsongoing business activities.

 

24

----

Table of Contents

 

TheCompany’s Board of Directors has delegated authority to direct investment ofthe Company’s surplus cash to its Chairman, Sardar Biglari, subject to Boardreporting requirements and various limitations that have been or may be fromtime to time adopted by the Board of Directors. These investments may include significant and highly concentrated directinvestments with respect to the equity securities of public companies.  Any such investments will involve risks, andstockholders should recognize that the Company’s balance sheet may changedepending on the performance of investments. Furthermore, such investments could be subject to volatility that mayaffect both the recorded value of the investments as well as the Company’speriodic earnings.

 

**Operating Activities and Cash Flows**

 

The Company used approximately $983,000 and $3.2 million in operatingcash flows for the nine months ended September 30, 2008 and 2007,respectively, including the purchase of marketable securities of $6.7 millionand $14.1 million in the nine months ended September 30, 2008 and 2007,respectively.  Net unrealized losses onmarketable securities were $3.2 million and $0 for the nine months ended September 30,2008 and 2007, respectively. The Company’s primary source of operating cashflows is the operating profits generated from Company’s restaurant andfranchise operations.  Adjustments toreconcile net income (loss) to net cash provided by restaurant and franchiseactivities were approximately $1.2 million and $2.7 million for the nine monthsended September 30, 2008 and 2007, respectively.  Adjustments to reconcile net income (loss) tonet cash used in investment activities were approximately $729,000 and ($8.7million) for the nine months ended September 30, 2008 and 2007,respectively.

 

**Investing Activities**

 

The Company’s investing activities on its statements of cash flows arerelated to improvements to its operating properties as well as distributionsfrom unconsolidated joint venture and purchase of Mustang Capital Advisorsduring 2008.  Prior to 2007, the Companyconsidered purchases and sales of marketable securities to be investingactivities; however, during the fourth quarter of 2007 with the expandedinvestment activities of the Company, and more specifically the organization ofWestern Acquisitions, LP and the investment of minority limited partnerinterests, the Company began to consider such activities to be operatingactivities of the Company.  Thispresentation is consistent with the guidance in the AICPA’s Audit andAccounting Guide, *Investment Companies*.

 

During the nine months ended September 30, 2008 and 2007, theCompany spent $23,000 and $33,000 on capital expenditures on Companyrestaurants.

 

On July 9, 2008, in connection with its acquisition of controllinginterests in Mustang Capital Advisors, LP and Mustang Capital Management, LLC,the Company paid $390,000 in purchase price and related transaction costs andacquired $10,000 in cash.

 

**Financing Activities**

 

The Company made scheduled payments on long-term debt of $93,000 and$121,000 for the nine months ended September 30, 2008 and 2007,respectively.  Also during 2008 and 2007,respectively, $165,000 and $85,000 were received from the exercise of stockoptions, proceeds of $2.6 million in 2008 were received from the issuance of anote payable, capital contributions of $540,000 and $1.5 million in 2008 and2007, respectively, were received from minority interests in the limitedpartnership, and payment of $2 million in 2008 was made on the line of credit.

 

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 September 30,2008, the Company was in compliance with all covenants on the notes payable.

 

**Liquidity**

 

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

 

25

----

Tableof Contents

 

**CONTRACTUALOBLIGATIONS**

 

The table below sets forth a summary of contractual obligations thatwill impact future liquidity as of September 30, 2008:

 
| ** **                                      | ** ** | **Payment due by period** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| **Contractual Obligations**                | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Totals** | ** ** |
| Long-term debt                                  |       | $                                        | 25,776     |   | $ | 109,803 |   | $ | 121,385 |   | $ | 134,189 |   | $ | 148,342 |   | $ | 52,606 |   | $ | 592,101 |   |
| Promissory note — land held for investment |       | —                                   |       | 264,122 |   | 2,377,098 |   | — |   | — |   | — |   | 2,641,220 |   |
| Operating leases, net (1)                       |       | 165,647                                  |       | 634,425 |   | 623,880 |   | 367,611 |   | 399,171 |   | 1,171,994 |   | 3,362,728 |   |
| Interest expense (2)                            |       | 14,688                                   |       | 97,041 |   | 40,459 |   | 27,655 |   | 13,501 |   | 1,101 |   | 209,771 |   |
| Tax obligations (3)                             |       | 16,829                                   |       | — |   | — |   | — |   | — |   | — |   | 16,829 |   |
| Other long-term liabilities (4)                 |       | —                                   |       | — |   | — |   | — |   | — |   | 486,406 |   | 486,406 |   |
| Totals                                          |       | $                                        | 448,264    |   | $ | 1,105,391 |   | $ | 3,162,822 |   | $ | 519,455 |   | $ | 561,014 |   | $ | 1,712,107 |   | $ | 7,509,053 |   |

 

----

| (1)    |   | Operating lease  commitments are presented net of sublease rentals. Gross operating lease  commitments for the periods above aggregate to approximately $3.4 million.                                                                                                                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (2)    |   | Reflects future  interest payments through scheduled maturity dates based upon average  borrowing rates, outstanding debt balances and scheduled principal payments  on long-term debt. Interest on the Company’s variable rate debt is based on  the interest rate in effect at September 30, 2008.               |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (3)    |   | Reflect recognized  liabilities for uncertain tax positions under the provision FIN 48. (See Note  8 to the consolidated financial statements).                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                         |
| (4)    |   | Reflects the cash  portion of the Company’s obligation to purchase the ownership percentage of  the minority interest holder of Mustang Capital Advisors, LP (see Note 2 to  the consolidated financial statements). The timing of the settlement of the  obligation is not determinable as of September 30, 2008. |

 

**CRITICAL ACCOUNTING POLICIES**

 

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

 

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

 

For additional information regarding the impact of recently issuedaccounting standards, see Note 13 of Notes to the Consolidated FinancialStatements in Part I, Item 1 of this Form 10-Q.

 

*Trade Accounts and Notes Receivable and the Allowance for DoubtfulAccounts*

 

The Company collects royalties, and in some cases rent, fromfranchisees.  The Company views tradeaccounts and notes receivable and the related allowance for doubtful accountsas a critical accounting estimate since the allowance for doubtful accounts isbased on judgments 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 the

 

26

----

Table of Contents

 

overall collectability 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*

 

Marketable equity securities held by Western Sizzlin Corporation areheld for an indefinite period and thus are classified as available-for-sale.Available-for-sale securities are recorded at fair value in Investments inMarketable Securities on the consolidated balance sheet, with the change infair value during the period excluded from earnings and recorded net of tax asa component of other comprehensive income (loss).  Fair value is determined through the use ofquoted market values on national exchanges. Management has also evaluated unrealized losses on marketable equitysecurities held by Western Sizzlin Corporation (the holding company) todetermine if such impairment is other than temporary, and has concluded thatthey are temporary as of September 30, 2008 and that the Company has theability and the intent to hold such securities until they recover theirvalue.  In the event management concludesin future periods that such losses are other than temporary, a charge will betaken in the statement of operations to reduce the cost of the securities totheir fair value.

 

WesternAcquisitions, LP and Mustang Capital Advisors, LP are, for GAAP purposes,investment companies under the AICPA Audit and Accounting Guide *Investment Companies*. The Company has retained the specialized accounting for WesternAcquisitions, LP and Mustang Capital Advisors, LP pursuant to EITF Issue No. 85-12,*Retention of Specialized Accounting for Investmentsin Consolidation.*  As such,marketable equity securities held by Western Acquisitions, LP and MustangCapital Advisors, LP are recorded at fair value in Investments in MarketableSecurities, with unrealized gains and losses resulting from the change in fairvalue reflected in the Statement of Operations. Fair value is primarily determined through the use of quoted marketvalues on national exchanges.  (See Note11 to the consolidated financial statements for related disclosures)

 

*Long-lived Assets, Franchise Royalty Contracts and Goodwill*

 

The Company views the determination of the carrying value of long-livedassets, franchise royalty contracts and goodwill as critical accountingestimates since it must evaluate the estimated economic useful life in order toproperly depreciate or amortize its long-lived assets and franchise royaltycontracts and because it must consider if the value of any of our long-livedassets have been impaired, requiring adjustments to the carrying value.  Goodwill is not subject to amortization butis subject to at least an annual impairment test to determine if the carryingamount exceeds its fair value.

 

Economic useful life is the duration of time the asset is expected tobe productively employed, which may be less than its physical life.  The estimated economic useful life of anasset is monitored to determine if it continues to be appropriate in light ofchanges in business circumstances.

 

The Company must also consider whetherlong-lived assets (including property and equipment and intangible assets) havebeen impaired to the extent that it must recognize a loss on such impairment,including goodwill impairment. The Company evaluates long-lived assets forimpairment at the restaurant and franchise levels on an annual basis orwhenever changes or events indicate that the carrying value may not berecoverable. The Company assesses impairment of each level of assets based onthe operating cash flows of the restaurant and franchise operations and theplans for each restaurant unit or franchisee contract. Generally, all unitswith negative cash flows from operations for the most recent twelve months ateach quarter end are included in our assessment. In performing the assessment,the Company must make assumptions regarding estimated future cash flows,including estimated proceeds from similar asset sales, and other factors todetermine both the recoverability and the estimated fair value of therespective assets. If the long-lived assets of a restaurant are not recoverablebased upon estimated future, undiscounted cash flows, the Company writes theassets down to their fair value. If these estimates or their relatedassumptions change in the future, the Company may be required to recordadditional impairment charges.  Therewere no impairment changes for the periods ended September 30, 2008 and2007, respectively.

 

The Company evaluates goodwill for impairmenton an annual basis during the fourth quarter of each year, or more frequentlyif an event occurs that triggers an interim impairment test.  The Company determines the fair values of itsreporting units using the discounted cash flow method.  This method uses projections of cash flowsfrom 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.

 

27

----

Tableof Contents

 

The Company currently has goodwill of$770,000 related to the franchising reporting unit and $3.5 million allocatedto the restaurant reporting unit, and $2.1 million allocated to investmentactivities.

 

*Purchase Obligation*

 

As stated in Note 2 of theNotes to the Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q,the Company, in connection with its acquisition of a controlling interest inMustang Capital Advisors, LP and Mustang Capital Management, LLC, is obligatedto purchase the minority interest holders ownership percentage upon theoccurrence of certain events.  Thepurchase obligation will ultimately be settled in cash and shares of theCompany’s common stock.  The Company isaccounting for this purchase obligation pursuant to Statement of FinancialAccounting Standards No. 150 (As Amended) - *Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity.*

 

*Commitments and Contingencies*

 

The Company views accounting for contingencies as a critical accountingestimate since loss contingencies arising from claims, assessments, litigation,fines and penalties and other sources require judgment as to any probableliabilities incurred.  Actual resultscould differ from the expected results determined based on such estimates.

 

*Income Taxes*

 

The Company records valuation allowancesagainst its deferred tax assets, when necessary, in accordance with SFAS No. 109,“Accounting for Income Taxes.” Realization of deferred tax assets is dependenton future taxable earnings and is therefore uncertain. The Company assesses thelikelihood that its deferred tax assets in each of the jurisdictions in whichthe Company operates will be recovered from future taxable income. Deferred taxassets do not include future tax benefits that the Company deems likely not tobe realized.

 

In July 2006, the FASB issued FASB Interpretation Number 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109,*(“FIN 48”). FIN 48 prescribes a recognition threshold and measurement attributes forthe financial statement recognition and measurement of a tax position taken ina tax return.  The Company must determinewhether it is “more-likely-than-not” that a tax position will be sustained uponexamination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position.  Once it is determined that a position meetsthe more-likely-than-not recognition threshold, the position is measured todetermine the amount of benefit to recognize in the financial statements.  FIN 48 applies to all tax positions relatedto income taxes subject to FASB Statement No. 109, *Accountingfor Income Taxes.*

 

Foradditional information regarding the adoption of FIN 48, see Note 8 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 about Market Risk**

 

Asof September 30, 2008, the Company’s financial instruments are not exposedto significant market risk due to foreign currency exchange risk.  However, the Company is exposed to marketrisk related to changes in market prices of marketable securities, interestrates related to certain debt obligations, and commodity risks.

 

28

----

Tableof Contents

 

**Market Price Risk**

 

TheCompany’s marketable securities are currently concentrated in a few investments.A change in market prices exposes the Company to market risk related to theinvestments in marketable securities.  Asof September 30, 2008, the Company held $21 million in marketablesecurities. A hypothetical 10% decline in the market value of those securitieswould result in a $2.1 million unrealized losses and a corresponding decline intheir fair values at September 30, 2008. This hypothetical decline would not affect the Company’s cash flowsunless the securities were disposed of.

 

**Interest Rate Risk**

 

TheCompany has exposure to interest rate risk related to certain instrumentsentered into for other than trading purposes. Specifically, borrowings underthe loan associated with the Texas land purchase and revolving credit facilitybear interest at variable rates based on the prime rate minus .5%.  The nature and amount of borrowings under thecredit facility may vary as a result of future business requirements, marketconditions and other factors.

 

**Commodity Price Risk**

 

TheCompany purchases certain food products such as beef, poultry, pork, eggs andcoffee, and utilities such as gas and electricity, which are affected bycommodity pricing and are, therefore, subject to price volatility caused byweather, production problems, delivery difficulties and other factors that areoutside of the Company’s control and which are generally unpredictable. Changesin commodity prices affect the Company and competitors generally and oftensimultaneously. In general, the Company purchases food products and utilitiesbased upon market prices established with vendors. Although many of the itemspurchased are subject to changes in commodity prices, the majority of ourpurchasing arrangements are structured to contain features that minimize pricevolatility by establishing fixed pricing and/or price ceilings and floors. TheCompany uses these types of purchase arrangements to control costs as analternative to using financial instruments to hedge commodity prices. TheCompany has determined that our purchasing agreements do not qualify asderivative financial instruments or contain embedded derivative instruments. Inmany cases, the Company believes it will be able to address commodity costincreases which are significant and appear to be long-term in nature by adjustingour menu pricing or changing our product delivery strategy. However,competitive circumstances could limit such actions and, in those circumstances,increases in commodity prices could lower its margins. Because of the oftenshort-term nature of commodity pricing aberrations and our ability to changemenu pricing or product delivery strategies in response to commodity priceincreases, the Company believes that the impact of commodity price risk is notsignificant.

 

TheCompany has established a policy to identify, control and manage market riskswhich may arise from changes in interest rates, commodity prices and otherrelevant rates and prices.

 

Thetable below provides information about debt obligations that are sensitive tochanges in interest rates.  The tablepresents principal cash flows and related weighted average interest rates byexpected maturity dates. Debtobligations held for other than trading purposes at September 30, 2008(dollars in thousands):

 

EXPECTEDMATURITY DATE

 
| ** **                    | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Estimated  Fair Value** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|--------------------------------|------------|
| Long-term debt:               |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |                           |       |
| Fixed Rate                    |       | $        | 26         |     | $          | 110      |       | $        | 121        |     | $          | 134            |       | $         | 148        |                           | 53         |   | $ | 592 |   | $ | 673 |   |
| 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      |   |
|                               |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |                                |            |  |  |  |  |  |  |  |

 

Intereston the Company’s variable rate debt is based on the interest rate in effect at September 30,2008.

 

**Item 4T.    Controls andProcedures**

 

TheCompany’s senior management, including the Chief Executive Officer and ChiefFinancial Officer, evaluated the effectiveness of the disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe

 

29

----

Table of Contents

 

SecuritiesExchange Act of 1934, as amended) as of September 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 remediated asof September 30, 2008 and the effectiveness of the disclosure controls andprocedures is considered effective.

 

Amaterial weakness is a control deficiency (as defined by the PCAOB), or acombination of control deficiencies, that results in there being more than aremote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected.  The following is a description of thematerial weakness that the Company noted as of December 31, 2007 and March 31,2008, as well as a discussion of the related remediation efforts:

 

The Company’s independent registered publicaccounting firm recommended to management to change the presentation andreporting of marketable securities held by a limited partnership. Using theguidance in AICPA Audit and Accounting Guide, Investment Companies, andpursuant to EITF 85-12, Retention of Specialized Accounting for Investmentsin Consolidation, the Company concluded that it should retain this sameaccounting when preparing its consolidated financial statements.  Adjustments were made in the process ofpreparing the 2007 consolidated financial statements to present this subsidiary’sfinancial statements in accordance with the provisions of EITF 85-12.  Solely as a result of this material weaknessin internal controls the Company identified in accounting for the consolidationof the investment partnership, the Company concluded that it did not maintaineffective internal control 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 December 31, 2007, the Companyimplemented several important changes in its internal controls, includingadditional procedures over the identification of accounting issues,consultation with outside accountants, and review and evaluation of theaccounting for significant transactions. As a result of the changes, management has concluded the controldeficiencies have been remediated and that controls are effective as of September 30,2008.

 

The Company acquired Mustang Capital Advisors, LP on July 9, 2008.  As permitted by guidance issued by the staffof the U.S. Securities and Exchange Commission, Mustang Capital Advisors, LPhas been excluded from the scope of the Company’s quarterly discussion ofmaterial changes in internal control over financial reporting below.  The Company has performed additionalprocedures to review accounting records and substantiate the financialinformation of Mustang Capital Advisors, LP included in this report.  Mustang Capital Advisors, LP was included inthe Company’s results of operations subsequent to its acquisition on July 9,2008.

 

Therewere no other changes in the Company’s internal controls or in other factorsthat could materially affect internal controls over financial reporting duringthe quarter ended September 30, 2008.

 

**PART II. OTHER INFORMATION**

 

Item1.    LegalProceedings

 

Inaddition to those proceedings discussed in Note 12 in the Company’sConsolidated Financial Statements, the Company is involved in various otherclaims and legal actions which are routine litigation matters incidental to thebusiness.  In the opinion of themanagement, the ultimate disposition of these other matters will not have amaterial adverse effect on the Company’s financial condition, results ofoperations or liquidity.

 

Item1A. Risk Factors

 

Aninvestment in the common stock of any company involves a degree of risk.  Investors should consider carefully the risksand uncertainties described in the section entitled “Item 1A. Risk Factors” inthe Company’s Annual Report on Form 10-K, as amended, filed with the SEC,and those other risks described elsewhere in this report, before decidingwhether to purchase our common stock. Additional risks and uncertainties not currently known to us or that wecurrently deem immaterial may also become important factors that may harm theCompany’s business, financial condition, and results of operations.  The occurrence of risk factors could harm theCompany’s business, financial condition, and results of operations for companyoperations, as well as franchised operations. The trading price of the Company’s common stock could decline due to anyof these risks and uncertainties, and stockholders may lose part or all oftheir investment.

 

The risks described below update the section entitled “Item 1A.  Risk Factors” in the Company’s Annual Reporton Form 10-K, as amended, for the year ended December 31, 2007.

 

30

----

Tableof Contents

 

**Current levels of market volatility areunprecedented.**

 

There has been substantial uncertainty and disruption in the capitaland credit markets over the past twelve months, and in recent weeks theuncertainty and disruption have reached unprecedented levels.  This uncertainty could cause fluctuation inthe Company’s stock price and could negatively impact the Company’s access tofinancing if needed.  Additionally, theseconditions could have an adverse effect on the Company’s business, includingthe future operating results of the Company’s restaurants and the value of theCompany’s investments.

 

**The Company is vulnerable to changes ineconomic conditions and consumer spending patterns that could harm itsbusiness, financial condition, results of operations and cash flow.**

 

The restaurant industry is sensitive to changes in general economicconditions, both nationally and locally. Recessionary economic cycles, higher interest rates, higher fuel andother energy costs, inflation, increases in commodity prices, higher levels ofunemployment, higher consumer debt levels, higher tax rates and other economicfactors could adversely affect the demand for the Company’s products.  In addition, the recent turmoil in thefinancial markets may have an adverse effect on the U.S. and world economies,which could negatively impact consumer spending patterns.  There can be no assurances that governmentresponses to the disruptions in the financial markets will restore consumerconfidence.  Furthermore, the Companycould experience reduced customer traffic or limitations on the prices it cancharge for its products, either of which could reduce the Company’s sales andprofit margins and have a material adverse effect on the Company’s financialcondition and results of operations. Also, economic factors such as those listed above and increasedtransportation costs, inflation, higher costs of labor, insurance andhealthcare and changes in other laws and regulations may increase the Company’scosts of sales and otherwise adversely affect the financial condition and resultsof operations of the Company.

 

Item 4.    Submissionof Matters to a Vote of Security Holders

 

At the Annual Meeting of the Stockholders held July 9, 2008, thefollowing persons were elected to the Board of Directors for a one-year term,until the 2009 Annual Meeting of Stockholders, or until their successors areelected and qualified:

 
| **Nominees**      | ** ** | **Shares  voted for** | ** ** | **Shares  withheld** | ** ** |
|-------------------|------------|----------------------------|------------|----------------------|------------|
|              |       |                       |       |                 |       |
| Sardar Biglari    |       | 2,398,382                  |       | 33,250               |       |
| Philip L. Cooley  |       | 2,403,428                  |       | 28,474               |       |
| Titus W. Greene   |       | 2,403,428                  |       | 28,474               |       |
| Kenneth R. Cooper |       | 2,398,481                  |       | 33,421               |       |
| Jonathan Dash     |       | 2,403,428                  |       | 28,474               |       |
| Martin S. Fridson |       | 2,398,481                  |       | 33,421               |       |

 

Item 6.    Exhibits:

 

See Exhibit Index on page 33.

 

31

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned hereunto duly authorized.

 
| ** **                    | **Western  Sizzlin Corporation** |
|-------------------------------|----------------------------------|
|                          |                             |   |
|                          | By:                              | /s/  Sardar Biglari |
|                          |                             | Sardar  Biglari |
|                          |                             | President  and Chief Executive Officer |
|                          |                             |   |
|                          | By:                              | /s/  Robyn B. Mabe |
|                          |                             | Robyn  B. Mabe |
|                          |                             | Vice  President and Chief Financial Officer |
|                          |                             |   |
| Date:  November 14, 2008 |                             |   |

 

32

----

Table ofContents

 

**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. |

 

33

----