Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2001

For the transition period from                              to                             

Commission file number 0-25366

AUSTINS STEAKS & SALOON, INC.
(Name of small business issuer in its charter)

317 Kimball Avenue, N.E.
Roanoke, Virginia 24016
(Address of principal executive offices)(Zip Code)

(540) 345-3195
(Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value

        Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K is contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        As of March 31, 2002, the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked price of such stock, was $3,928,500.

        As of March 31, 2002 there were 12,178,800 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        The Company's definitive proxy statement expected to be filed on or before April 30, 2002 is hereby incorporated by reference to information required by Part III, Items 10-13.

REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

Austins Steaks & Saloon, Inc.
FORM 10-K
For the Fiscal Year Ended December 31, 2001

TABLE OF CONTENTS

Part I

Item 1.    Description of Business

        The discussion in this document contains trend analysis and other forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements throughout this document as a result of the risk factors discussed below and elsewhere in this document.

General

        As the Austins Steaks & Saloon, Inc., we operate and/or franchise the Austins Steaks & Saloon, WesterN SizzliN, WesterN SizzliN Wood Grill, Great American Steak & Buffet, Quincy Steakhouses and Market Street Buffet and Bakery concepts. As of December 31, 2001, we operate:

•

3        WesterN SizzliN restaurants;



•

4        Austins Steaks & Saloon restaurants;



•

10    Great American Steak & Buffet restaurants;

        In addition, approximately 132 franchisees operated 215 WesterN SizzliN, Wood Grill, Market Street Buffet and Bakery, Great American Steak and Buffet and Quincy restaurants.

        During June 2000, we negotiated a short-term lease agreement with Franchise Finance Corporation of America (FFCA). The lease agreement with FFCA was entered into by Western Sizzlin Stores of Virginia (WSSVA), an entity which was formed for the sole purpose of entering into this agreement. Under the short-term lease agreement, we leased and operated 97 Quincy Steakhouses, owned by FFCA. The restaurants' operating results, including all revenues and expenses, were included in our consolidated financial statements for the year ended December 31, 2000. In December 2000, we closed 44 of the restaurants. Of the 53 restaurants which remained open at December 31, 2000, 43 restaurants were franchised in 2001 and the remaining 10 restaurants were closed during the first quarter of 2001.

        Our restaurants are currently located in the states of Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nebraska, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and West Virginia.

        We are actively engaged in expansion and are looking to expand the franchise system in 2002 and beyond.

Operating Strategy

        We have always set guest satisfaction as our first priority. Currently, we operate under the following trade name concepts:

•

WesterN SizzliN Steak & More



•

WesterN SizzliN Wood Grill



•

Market Street Buffet and Bakery



•

Great American Steak and Buffet Company



•

Austins Steaks & Saloon



•

Quincy Steakhouses

1

        We believe that great food and excellent service are the key ingredients for providing the very best in guest service. Consistently providing high quality, flavorful food products with both a full line of entree offerings and an enhanced buffet bar offering can be a challenge. Our goal is not only to meet this challenge, but to exceed the guest expectation of both quality and service, and to offer a price point that the guest will perceive as an exceptional value.

        There are several factors necessary for achieving our goal:

•

Food Quality:



•

Our restaurants use high quality ingredients in all menu offerings. Additionally, all food preparation is done on premises, by either small batch or large batch cooking procedures. Guest flow determines which type will be used.



•

We strive to ensure that each recipe is prepared and served promptly to guarantee maximum freshness, appeal and that proper serving temperatures are maintained. We believe that our food preparation and delivery system enables us to produce higher quality and more flavorful food than is possible in other steak and buffet or cafeteria style restaurants.




•

Menu Selection:

        Our restaurants emphasize two traditional American style offerings:

•

The first is the traditional family style steakhouse, which became popular during the 1960's. Since that time, the primary red meat offering has grown extensively and now includes a vast array of chicken, pork, seafood and many other protein dishes.



•

The second is a full line of both hot & cold food buffet, which has become a very appealing option for our guests. Our rotating daily menu offerings, displayed on one of our many scatter bars in the buffet area, clearly demonstrate our home cooking flavor profile.

        We believe that our extensive food offering provides the guest with delicious variety and a flavorful dining experience that will encourage them to visit our restaurants time after time.

•

Price/Value Relationship:

        We are committed to providing our guests with excellent price to value alternatives in the full-service casual dining restaurant sector and traditional steak and buffet restaurants. At our restaurants, the guests are provided with a choice of many different entree offerings and they can also choose to enjoy our "all-you-care-to-eat" unlimited food or buffet bar offerings. We believe the perceived price value is excellent, with lunch ranging between $5.00 and $9.75 and dinner ranging between $7.00 and $15.50. Additionally, our restaurants normally offer special reduced prices for senior citizens and children under 12 and under and other special promotions from time to time.

•

Atmosphere:

        Our restaurants strive to provide a relaxing, enjoyable dining experience in a friendly family oriented local atmosphere. This comfortable ambiance is reinforced by providing a very pleasing and pleasant decor, which features a variety of decorations, plants and attractive furniture packages. Our restaurants strive to provide a higher level of service than other casual dining, steak and buffet style restaurants. Our co-worker training programs place significant emphasis on developing friendly and helpful restaurant personnel.

•

Efficient Food Service and Delivery System:

        The scatter bar format, food preparation methods and restaurant layout are all designed to efficiently serve a large number of guests, while enhancing the overall quality of the dining experience.

2

In addition, preparing food in the proper amounts, serving it in several easily accessible areas (scatter bars) and closely monitoring consumption will shorten guest lines, increase frequency of table turns, improve over-all quality and reduce waste; thereby increasing guest satisfaction and restaurant level profitability. Our restaurants range in size from approximately 5,200 square feet to 10,000 square feet. A description of these properties is provided in Item 2.

Restaurant Food Delivery

        At our restaurants we have three different methods to deliver food to customers:

•

Full Service: the guest is seated by a host and presented with a menu. (A typical full-service dining experience).



•

Modified Line: the guest enters the restaurant, joins a que line and places an order prior to being seated. After their order is placed, the guest is seated by a host and the server then takes over and the experience is full-service from that point forward.



•

Traditional Line Service: although our preferred method is full-service, several markets have found the modified-line or line formats to be more appropriate.

        Typically, the restaurant food service area has four to six scatter bars (buffets) positioned throughout a central area of the restaurant. These buffets consist of two to four hot bars, one to two cold bars, dessert bar, including ice cream machine, and a bakery bar. Beverages are served by the servers.

        The food service area is designed to be easily accessible from all seats. Considerable attention is devoted to lighting and acoustics to allow for a comfortable atmosphere even when the restaurant is at maximum capacity. In addition to the basic dining room layout, most restaurants are set up to accommodate banquet business, either by design or by collapsing curtains which may be opened or closed. In addition to the public areas, each restaurant has a food preparation and storage area, including a fully equipped kitchen. Our Austins restaurants have a bar area located adjacent to the reception area to accommodate customers waiting for tables. Beer, wine and liquor sales approximate 10% to 15% of the sales revenue in the Austins stores.

Site Selection and Construction

        In selecting new restaurant locations, we consider target population density, local competition, household income levels and trade area demographics, as well as specific characteristics, including visibility, accessibility, parking capacity and traffic volume. An important factor in site selection is the convenience of the potential location to both lunch and dinner guests and the occupancy cost of the proposed site. We also take into account the success of other chain restaurants operating in the area.

        Potential site locations are identified by a potential franchisee and/or corporate personnel, consultants and independent real estate brokers. Our executive management will visit and approve or disapprove any proposed restaurant site. The majority of restaurants are free standing even though some restaurants are developed in other types of strip centers. We project that most restaurants will continue to be free standing.

        When a restaurant has been built in an existing facility, renovation and construction has taken approximately 60 to 120 days after the required construction permits have been obtained. New construction of free-standing restaurants requires a longer period of time and can range from 120 to 180 days. Also, when obtaining a construction permit, we have generally experienced a waiting period ranging from approximately 20 to 90 days.

3

        Restaurants are constructed by outside general contractors. We expect to continue this practice for the foreseeable future. The Company occasionally serves as its own general contractor and expects to do so in the future when appropriate.

Restaurant Management and Employees

        The management staff of a typical restaurant consists of one General Manager, one Assistant General Manager and one or two Associate Managers. Individual restaurants typically employ between 40 and 80 non-management hourly employees (a mix of both part-time and full-time workers), depending on restaurant size and traffic.

        The General Manager of a restaurant has responsibility for the day-to-day operation of a restaurant and acts independently to maximize restaurant performance, and follows company-established management policies. The General Manager makes personnel decisions and determines orders for produce and dairy products, as well as, centrally contracted food items and other supplies. Our management compensation program includes "bonuses" based on restaurant sales growth and operational profit performance.

Recruiting

        We attempt to attract and train high quality employees at all levels of restaurant operations. Generally, restaurant management is either recruited from outside the Company and has had significant prior restaurant experience or has been promoted through the system as experience levels increased. As we continue to grow, our management will continue to recruit restaurant management personnel from among non-management employees within our system and supplement these resources through outside hiring.

Management Training

        We have implemented strict operating standards. We maintain a strong standardized training process which plays a critical role in maintaining operational propriety. All management employees, including Assistant Managers, regardless of former experience, participate in a six to eight week formal course of training at one of our regional training centers. Periodically, additional training is provided during each calendar year through a series of two to three day seminars, to provide the most current information on a variety of topics including sales building techniques, labor controls and food cost management. Non-management employees are generally trained at the local restaurant site.

Purchasing

        We contract on behalf of the entire system one to twelve month agreements with primary vendors and manufacturers. This allows us to maximize our buying leverage based on volume and also works towards our goals of system-wide consistency. We utilize velocity reports supplied by our various distributors to look for opportunities to consolidate our purchases resulting in cost of food savings. Our stores are broken into areas based on geographical location. While each store places their own orders with the various distributors, the most successful stores are the ones who support the areas and use the volume of the combined buying power to be as economically efficient as possible. Our present goal is to put together a national program with a broadline distributor based on agreed upon category margins that most stores could take advantage of if they chose.

Reporting and Financial Controls

        We maintain financial and accounting controls for each of our company-owned restaurants. We are in the process of upgrading centralized accounting functions through the use of integrated Point of Sale systems. Several locations have implemented the system allowing restaurant management to efficiently

4

manage labor, food costs, and other direct operating expenses that provides us rapid access to financial data. Each restaurant prepares a mid-month profit and loss statement, and at the end of the month, operating statements are prepared for each location by the accounting department. The mid-month and monthly operating statements are reviewed at both our corporate level and the restaurant level for variances from expected results to allow for any necessary corrective actions to be taken as quickly as possible.

Hours of Operation

        Our restaurants in the system are open seven days a week, typically from 11:00 a.m. to 10:00 p.m.

Franchise Operations

        In addition to operating company-owned restaurants, the Company currently franchises others to operate restaurants. The Company currently has approximately 132 franchisees operating 215 WesterN SizzliN, WesterN SizzliN Wood Grill, Market Street Buffet and Bakery and Great American Steak & Buffet restaurants in 24 states.

        Our standard franchise agreement has a 20-year term, with one ten-year renewal option. It generally provides for a one-time payment to us of an initial franchise fee and a continuing royalty fee of 2% of gross sales. We collect weekly and monthly sales reports from our franchisees as well as periodic and annual financial statements.

        Each franchisee is responsible for selecting the location for its restaurant, subject to our approval. We consider such factors as demographics, competition, traffic volume and patterns, parking, site layout, size and other physical characteristics in approving proposed sites. In addition, all site and building plans and specifications must be approved by us.

        Franchisees must operate their restaurants in compliance with our operating and recipe manuals. Franchisees are not required to purchase food products or other supplies through our suppliers, but are required to purchase proprietary products from us. Each franchised restaurant must have a designated Manager and Assistant Manager who have completed our six-week manager training program or who have been otherwise approved by us. For the opening of a restaurant, we provide consultation and make our personnel generally available to a franchisee. In addition, we send a team of personnel to the restaurant for up to two weeks to assist the franchisee and its managers in the opening, the initial marketing and training effort, as well as the overall operation of the restaurant.

        We may terminate a franchise agreement for a number of reasons, including a franchisee's failure to pay royalty fees when due, failure to comply with applicable laws, or repeated failure to comply with one or more requirements of the franchise agreement. Many state franchise laws limit our ability to terminate or refuse to renew a franchise. A franchisee may terminate a franchise agreement and continue to operate the restaurant by paying liquidated damages to us. We do not anticipate that the termination of any single franchise agreement would have a materially adverse effect on our operations. Termination by a multiple-unit franchisee of several franchise agreements for various locations could, however, have a materially adverse effect on our operations.

        Our franchise agreement contains provisions that prohibit franchisees from disclosing proprietary information about our restaurant operating system. Our standard franchise agreement also contains non-competition provisions that, for the duration of the agreement and for two years following termination, prohibit a franchisee from directly or indirectly competing with us or soliciting employees to leave us. There is no assurance that these contractual provisions will effectively prevent the appropriation by franchisees of business opportunities and proprietary information. More discussion is contained in the caption "Government Regulation."

5

Marketing and Promotion

        Marketing and operations work hand-in-hand for all of our company concepts where a shared mutual vision provides value to the guest through hard work, quality and high standards. We know that communication plays a strong role in the fulfillment of our goals.

        The Advertising Development and Research Fund (ADRF) financed through vendor support, member contributions and franchise dues is our franchisee controlled graphic art design/marketing agency.

        ADRF creates, designs and produces each marketing campaign for the Company and our franchisees. Production includes four major marketing campaigns annually in addition to menus, table tents, posters, indoor and outdoor signage, gift certificates and other marketing tools.

        The marketing effort is communicated through a vast system of printed materials such as a corporate newsletter, Internet webpages, training manuals, tapes and videos.

        The marketing department is primarily self-sufficient in production capabilities with some of the most sophisticated computer and graphic equipment available. ADRF is staffed by professionals experienced in all phases of marketing, graphics / design, and communications. Their efforts have produced and coordinated promotions that include national sweepstakes campaigns, television commercials, national convention materials and training videos.

        The coordinated efforts of ADRF, area field consultants, training instructors, corporate personnel, franchise owners, managers and the entire system of operators share in the ongoing success of marketing programs. Our programs utilize virtually all types of media from billboards and newspapers to television and radio.

Restaurant Industry and Competition

        The restaurant industry is extremely competitive. We compete on the basis of the quality and value of food products offered, price, service, ambiance and overall dining experience. Our competitors include a large and diverse group of restaurant chains and individually owned restaurants. The number of restaurants with operations generally similar to ours has grown considerably in the last several years. Because the discretionary food spending of the American consumer has not grown in recent years, restaurants such as ours must continually spend money on increased advertising, food quality and menu upgrading. These factors coupled with the proliferation of additional competitors may reduce our gross revenues and adversely affect our profitability. We believe competition among this style of restaurant is increasing.

        In addition, our business is affected by changes in consumer tastes, national, regional and local economic conditions and market trends. The performance of individual restaurants may be affected by factors such as traffic patterns, demographic considerations and the type, number and location of competing restaurants. Our significant investment in and long-term commitment to each of our restaurant sites limits our ability to respond quickly or effectively to changes in local competitive conditions or other changes that could affect our operations. Our continued success is dependent to a substantial extent on our reputation for providing high quality and value and this reputation may be affected not only by the performance of company-owned restaurants but also by the performance of franchisee-owned restaurants over which we have limited control.

Government Regulation

        Our business is subject to and affected by various federal, state and local laws. Each restaurant must comply with state, county and municipal licensing and regulation requirements relating to health, safety, sanitation, building construction and fire prevention. Difficulties in obtaining or failure to obtain

6

required licenses or approvals could delay or prevent the development of additional restaurants. We have not experienced significant difficulties in obtaining such licenses and approvals to date.

        We are subject to Federal Trade Commission (FTC) regulation and various state laws that regulate the offer and sale of franchises. The FTC requires us to provide prospective franchisees with a franchise offering circular containing prescribed information about us and our franchise operations. Some states in which we have existing franchises and a number of states in which we might consider franchising regulate the sale of franchises. Several states require the registration of franchise offering circulars. Beyond state registration requirements, several states regulate the substance of the franchisor-franchisee relationship and, from time to time, bills are introduced in Congress aimed at imposing federal registration on franchisors. Many of the state franchise laws limit, among other things, the duration and scope of noncompetition and termination provisions of franchise agreements.

        Our restaurants are subject to federal and state laws governing wages, working conditions, citizenship requirements and overtime. From time-to-time, federal and state legislatures increase minimum wages or mandate other work-place changes that involve additional costs for our restaurants. There is no assurance that we will be able to pass such increased costs on to our guests or that, if we were able to do so, we could do so in a short period of time.

        The Company is subject in certain states to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served acoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. Nebraska operations, in which the Company has liquor licenses, has no such statute presently. The Company has never been named as a defendant in a lawsuit involving "dram-shop" statutes.

Trademarks

        We believe our rights in our trademarks and service marks are important to our marketing efforts and a valuable part of our business. Following are marks that are registered for restaurant services on the Principal Register of the U.S. Patent and Trademark Office: "WesterN SizzliN", "WesterN SizzliN Steak House", "WesterN", "SizzliN", "WesterN SizzliN Cow", "WesterN SizzliN Steak & More", "WesterN SizzliN County Fair Buffet and Bakery", "Flamekist", "Marshall", "Gun Smoke", "Six Shooter", "Big Tex", "Dude", "Trailblazer", "Ranger", "Cheyenne", "Colt 45", "Cookin' What America Loves Best", "Great American Steak and Buffet Company", "WesterN SizzliN Wood Grill and Buffet" and "WesterN SizzliN Wood Grill".

        The Company believes that it has substantial rights in its Austins Steaks & Saloon design and trademark, including such territories as the Central Midwest, South-Central Midwest, and Southwest regions of the United States, based upon the Company's actual usage and constructive usage derived from its registered U. S. trademark, and intends to aggressively protect its marks from infringement and competing chains. The Company is aware of names and marks similar to the mark of the Company used by persons in certain geographical areas, including, specifically, two other restaurant service corporations located on the east coast which utilize the "AUSTINS" name in their trademark and design.

Employees

        As of December 31, 2001, the Company employed approximately 840 persons, of whom approximately 750 were restaurant employees, 60 were restaurant management and supervisory personnel, and 30 were corporate personnel. Restaurant employees include both full-time and part-time workers and all are paid on an hourly basis. None of the Company's employees is covered by a collective bargaining agreement and the company considers its employee relations to be good. The

7

decrease, from December 31, 2000, in restaurant hourly and management employees is due to the inclusion of the 53 Quincy units still operated by the Company at December 31, 2000.

Item 2.    Description of Properties

        At December 31, 2001, seventeen (17) of the Company's current restaurants were located in leased space ranging from 5,200 square feet to 10,000 square feet. Leases are negotiated with initial terms of five to twenty years, with multiple renewal options. All of the Company's leases provide for a minimum annual rent, with certain locations subject to additional rent based on sales volume at the particular locations over specified minimum levels. Generally, the leases are net leases which require the company to pay the costs of insurance, taxes, and a pro rata portion of lessors' common area costs.

        During 2001, the Company entered into a master lease agreement with Franchise Finance Corporation of America (FFCA) for the lease of 26 Quincy Steakhouses and in turn subleased these properties under subleases to Franchisees as franchised operations. The master subleases are all net leases to the sublessees, with no cost to the Company.

        The Company currently owns one restaurant located in Lawrenceville, GA, which has been leased as of October 1, 2001 to a franchisee.

        The Company currently leases its executive office, approximately 10,550 square feet, which is located at 317 Kimball Avenue, NE, Roanoke, Virginia, 24016. The company believes that there is sufficient office space available at favorable leasing terms in the Roanoke, Virginia area to satisfy the additional needs of the Company that may result from any future expansion.

Item 3.    Legal Proceedings

        The Company is involved from time to time in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the financial condition or results of operations of the Company.

Item 4.    Submission of Matters to a Vote of Security Holders

        Not applicable.

8

Part II

Item 5.    Market for Common Equity and Related Stockholder Matters

        The Common Stock of the Company is traded on the Bulletin Board Section of NASDAQ under the symbol "STAK." The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported on the Bulletin Board Section of NASDAQ:

        As of March 31, 2002 there were approximately 150 stockholders of record.

        The Board of Directors declared a cash dividend of $0.015 per share. The payment date was January 15, 2002.

Item 6.    Selected Financial Data

        Effective July 1, 1999, Austins Steaks & Saloon, Inc. ("Austins"), a Delaware corporation, merged with The WesterN SizzliN Corporation ("WesterN SizzliN"), a Tennessee corporation, located in Roanoke, Virginia. The assets and business of WesterN SizzliN are now owned by a wholly owned subsidiary of Austins, The WesterN SizzliN Corporation, a Delaware corporation.

        Effective June 30, 1999, each of the outstanding 2,700,406 shares of Austins common stock were split 1 for 3.135, leaving a total number of 861,374 Austins shares outstanding prior to the merger. Upon completion of the merger, the Austins shareholders owned approximately 7 percent of the outstanding equity and the WesterN SizzliN shareholders owned approximately 93 percent of the outstanding equity of the combined company.

        Pursuant to the merger, each share of WesterN SizzliN common and Series B convertible preferred stock (4,339,000 and 874,375 shares, respectively) were converted into two shares of Austins' common stock. Also effective with the merger, each WesterN SizzliN common stock warrant (371,250 warrants) was converted into two shares of Austins' common stock.

        The business combination has been accounted for as a reverse acquisition using the purchase method of accounting. In the acquisition, the shareholders of the acquired company, WesterN SizzliN, received the majority of the voting interests in the surviving consolidated company. Therefore, WesterN SizzliN was deemed to be the acquiring company for financial reporting purposes and accordingly, all of the assets and liabilities of Austins have been recorded at fair value and the operations of Austins have been reflected in the operations of the combined company from July 1, 1999, the date of inception.

9

        The following selected historical consolidated financial information for each of the years ended December 31, 1997 through 2001 has been derived from the Company's consolidated financial statements, and represent the historical consolidated financial information of the WesterN SizzliN Corporation prior to the date of the merger and the combined company subsequent to the July 1, 1999 merger date. For additional information see "Management's Discussion and Analysis of Financial Condition and Results of Operations" relating to the Company, included elsewhere herein. The information set forth below is qualified by reference to and should be read in conjunction with the consolidated financial statements and related notes included herein.

(1)

The Board of Directors declared a cash dividend of $0.015 per share. The payment date was January 15, 2002.

(2)

On March 31, 1998, WesterN SizzliN completed financing agreements to replace certain notes payable to stockholders, term notes, promissory notes, and notes payable to banks. The refinancing resulted in a loss of $83,140 before income tax benefit, which included write-offs of $74,476 of unamortized discounts and $8,664 in deferred financing costs.

(3)

Effective July 1, 1999 the Company acquired six (6) stores through a reverse merger acquisition. The transaction was accounted for using the purchase method of accounting. Accordingly, the selected historical consolidated financial information includes the net assets and results of the operations from these six (6) stores from the date of acquisition.

(4)

Effective June 8, 2000, the Company entered into a lease agreement with a financing company to operate 97 Quincy Steakhouses. The 2000 selected historical consolidated financial information includes the results of operations of these restaurants from the date of the lease agreement.

10

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations may be deemed to include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risk and uncertainty. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. The important factors that could cause actual results to differ materially from those in the forward-looking statements below ("Cautionary Statements") include the Company's degree of financial leverage, the risk factors set forth below in this document as well as other risk referenced from time to time in the Company's filings with the SEC. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company does not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Austins Steaks & Saloon, Inc.
Management's Discussion and Analysis of Financial
Condition and Results of Operations

RESULTS OF OPERATIONS

        The following tables set forth the percentage relationship to total revenues, unless otherwise indicated, of certain income statement data, and certain restaurant data for the years indicated:

11

Overview

        Austins Steaks & Saloon, Inc. (the Company) underwent a reverse merger acquisition, effective July 1, 1999, with the WesterN SizzliN Corporation (WSC). A further description of the transaction is provided in note 2 to the consolidated financial statements included elsewhere in this report.

        The Company operates and franchises a total of 232 restaurants located in 24 states, including 17 company-owned and 215 franchise restaurants as of December 31, 2001. The restaurants include a family steakhouse concept, a steak and buffet concept, and the casual dining steakhouse concept.

        During June 2000, the Company negotiated a short-term lease agreement with Franchise Finance Corporation of America (FFCA). The lease agreement with FFCA was entered into by Western Sizzlin Stores of Virginia (WSSVA), an entity which was formed for the sole purpose of entering into this agreement. Under the short-term lease agreement, the Company leased and operated 97 Quincy Steakhouses, owned by FFCA. The restaurants' operating results, including all revenues and expenses, are included in the Company's consolidated financial statements for the year ended December 31, 2000. In December of 2000, the Company closed 44 of the restaurants. Of the 53 restaurants which remained open at December 31, 2000, 43 restaurants were franchised and the remaining 10 restaurants were closed during the first quarter of 2001.

        Net income for the year ended December 31, 2001 was $225,983 compared to net loss of $1,426,494 and net income of $152,989 for the years ended December 31, 2000 and 1999, respectively. The 2000 results were significantly effected by the losses of the Quincys operations. The Quincy operations had a net loss of approximately $1.2 million during 2000 compared to a net loss of approximately $165,000 for 2001.

12

2001 COMPARED TO 2000

Revenues

        Total revenues decreased 55% to $39.4 million in 2001, from $87.9 million in 2000. Company-operated restaurant sales decreased 59% to $33.2 million in 2001, from $81.7 million in 2000. This decrease was primarily due to the closure or franchising of the Quincy operations during December 2000 and the first quarter of 2001. The Quincy operations had sales of $1.5 million in 2001 compared to $43.5 million in 2000. The remaining decrease in revenues for 2001 was due to the closure or franchising of six other company-operated stores.

        Franchise operation revenues increased 2.4% to $5.7 million in 2001, from $5.6 million in 2000. This increase was primarily due to the franchise fees in association with franchising 43 Quincy units during the first quarter of 2001, offset by the closure of 33 franchised restaurants during 2001.

Costs and Expenses

        Cost of company-operated stores, consisting of food, beverage, and employee costs decreased from $63.5 million in 2000 to $23.2 million in 2001 and as a percentage of total revenues from 72.3% in 2000, to 58.7% in 2001. The majority of the decrease, $35.4 million, is related to the Quincy operation. The remaining decrease is due to closure or franchising of six other company-operated stores. The primary reason for the decrease of this cost as a percentage of total revenues is the costs of the Quincy stores, whose operating margins were significantly less than the Company's other operated restaurants.

        Cost of franchise operations and other cost of operations for 2001 were comparable to 2000. These costs as a percentage of total revenues increased from 2.7% in 2000 to 6.0% in 2001 due to the decrease in revenue from the Quincy stores in 2001 compared to 2000. The addition of the Quincy units did not affect these costs.

        Restaurant operating expenses which includes utilities, insurance, maintenance, rent and other such costs of the company-operated stores decreased $7.4 from $15.3 million in 2000 to $7.9 million in 2001. The majority of this decrease, $5.8 million, is due to the Quincy stores. The remaining decrease of $1.6 million is due to the closure or franchising of six other Company operated stores.

        General and administrative expenses decreased $2.7 million comparing 2001 to 2000. The majority of the decrease, $2.5 million, is due to the operation of the Quincy stores in 2000.

        Depreciation and amortization decreased from $3.0 million in 2000 to $2.3 million in 2001 primarily due to the closings or franchising of under performing company-operated restaurants and retirement of their related long-lived assets.

        Other expense decreased from $593,000 in 2000 to $559,000 in 2001. The decrease is a result of less interest costs incurred in 2001, due to lower levels of debt outstanding during 2001.

Income Tax Expense

        The Company's effective tax rate was 57% in 2001 and 36% in 2000. The increase in the effective rate is attributable to the relationship of the income (loss) levels between the years and non-deductible items.

13

2000 COMPARED TO 1999

Revenues

        Total revenues increased 107% to $87.9 million in 2000, from $42.5 million in 1999. Company-operated restaurant sales increased 125% to $81.7 million in 2000, from $36.3 million in 1999. This increase was primarily due to the addition of the Quincy operations during 2000 that had revenues of $43.5 million or 96% of the 2000 increase in total revenues.

        Franchise operation revenues decreased 2.1% to $5.6 million in 2000, from $5.7 million in 1999. This decrease was primarily due to a decrease in the number of franchised units.

Costs and Expenses

        Cost of company-operated stores, consisting of food, beverage, and employee costs increased from $25.4 million in 1999 to $63.5 million in 2000 and as a percentage of total revenues from 59.7% in 1999, to 72.3% in 2000. The majority of the increase, $36.8 million, is related to the Quincy operation. The primary reason for the increase in the percentage of total revenue is attributable to the related costs of the Quincy stores, whose operating margins were significantly less than the Company's other operated restaurants.

        Cost of franchise operations and other cost of operations 2000 dollar amounts were comparable to 1999 dollar amounts. These costs as a percentage of total revenues decreased in 2000 due to the increased revenue from the Quincy stores. The addition of the Quincy units did not effect these costs.

        Restaurant operating expenses which includes utilities, insurance, maintenance, rent and other such costs of the company-operated stores increased $8.5 million in 2000. The majority of this increase, $6.2 million is due to the addition of the Quincy stores. These expenses as a percentage of total revenues increased to 17.4% in 2000 compared to 16.0% in 1999 as the operating costs for the Quincy units were higher as a percentage of total revenue than the Company's other operated restaurants.

        General and administrative expenses increased from $3.4 million in 1999 to $5.3 million in 2000. This increase is primarily due to the addition of the Quincy stores in 2000. These expenses decreased as a percentage of total revenues from 8.1% in 1999 to 6.0% in 2000. This percentage decrease was due to the Company's in-place resources being able to absorb the operational activities of Quincys.

        Depreciation and amortization increased from $2.4 million in 1999 to $3.0 million in 2000 primarily due to the property and equipment and intangible asset additions from the business combination in July 1999.

        The largest factor in the change in other income (expense) is the lawsuit settlement for $1,000,000 in 1999. Excluding this item, other income (expense) is comparable from 2000 to 1999.

Income Tax Expense

        The Company's effective tax rate was 36% in 2000 and 51% in 1999. The decrease in the effective rate is attributable to the relationship of the income (loss) levels between the years and nondeductible items.

LIQUIDITY AND CAPITAL RESOURCES

        The Company requires capital primarily for the development and acquisition of restaurants. Capital expenditures of $596,000, $613,000 and $1.1 million for 2001, 2000 and 1999, respectively, were primarily funded by cash flow from operations. Cash flows generated by operating activities were approximately $322,000, $3.8 million, and $2.6 million in 2001, 2000, and 1999, respectively. The decrease in cash flows from operating activities during 2001 was primarily a result of a decrease of

14

$4.0 million in accounts payable and accrued expense. Cash flows from operations were the primary source of capital expenditures and debt repayments during all three years. During 1999, the Company obtained approximately $3.2 million in cash from the private placement of common stock and the exercise of stock options, as well as approximately $1.8 million in proceeds from borrowings. The majority of these funds were used to repurchase stock of the Company's former president and settle the related lawsuit.

        Total capital expenditures for 2002 are presently expected to be approximately $250,000 to $500,000, primarily for the upgrading of restaurants and may increase depending upon availability of capital resources.

        Capital resources available at December 31, 2001 include $449,000 of cash and cash equivalents, and $111,000 available under an existing $500,000 line of credit. As is customary in the restaurant industry, the Company has operated with negative working capital and has not required large amounts of working capital. Historically, the Company has leased the majority of its restaurants and through a strategy of controlled growth has financed expansions from operating cash flow, proceeds from the sale of common stock, the utilization of the Company's line of credit and long-term debt provided by various lenders. The Company has a working capital deficit of $2.2 million at December 31, 2001.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

        The table below sets forth a summary of our contractual obligations and commitments that will impact our future liquidity:

Bank Line of Credit

        The Company has a $500,000 secured line of credit from a commercial bank payable on demand, subject to annual renewal by the bank, and collateralized by accounts receivable and the assignment of franchise royalty contracts.

Operating Leases

        Operating lease commitments are presented net of sublease rentals. Gross operating lease commitments for the periods above aggregate to approximately $29.0 million, offset by sublease rentals for the same periods of approximately $23.9 million.

CRITICAL ACCOUNTING POLICIES

Franchise Revenue

        Initial franchise fees are recognized when all material services have been substantially performed by the Company and the restaurant has opened for business. Franchise royalties, which are based on a percentage of monthly sales, are recognized as income on the accrual basis. Costs associated with franchise operations are recognized on the accrual basis.

15

Accounts and Notes Receivable and Allowance for Doubtful Accounts

        In connection with franchise fees charged to our franchisees, we have accounts and notes receivable outstanding from our franchisees at any given time. We review outstanding accounts and notes receivable monthly and record allowances for doubtful accounts as deemed appropriate for certain individual franchisees. In determining the amount of allowance for doubtful accounts to be recorded, we consider the age of the receivable, the financial stability of the franchisee, discussions that may have been had with the franchisee and our judgement as to the overall collectibility of the receivable from that franchisee.

Franchise Royalty Contracts

        Franchise royalty contracts are amortized on a straight-line basis over fifteen years, the estimated average life of the franchise agreements. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the franchise royalty contracts balance over their remaining life can be recovered though undiscounted future operating cash flows of the acquired operation. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds.

Goodwill

        Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over fifteen years, the expected period to be benefited. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measure based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved.

IMPACT OF INFLATION

        As inflation has remained at relatively low levels in recent years, we do not believe inflation has materially affected earnings during the past three years. Substantial increases in costs, particularly labor, employee benefits or food costs, could have a significant impact on the Company.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

        In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (Statement) No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement No. 144, Accounting for the Impairment or disposal of Long-Lived Assets.

        The Company adopted the provisions of Statement 141 effective July 1, 2001 and Statement 142 effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized prior to the adoption of Statement 142.

        Upon adoption of Statement 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary

16

reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

        In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's statement of operations.

        As of January 1, 2002, the date of adoption of Statement 142, the Company has unamortized goodwill in the amount of approximately $4.3 million and unamortized identifiable intangible assets in the amount of approximately $4.8 million, all of which will be subject to the transition provisions of Statements 141 and 142. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.

        In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of; however, it retains many of the fundamental provisions of that Statement. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 also requires companies to separately report discontinued operations and extends the reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company is required to adopt SFAS No. 144 on January 1, 2002.

FORWARD LOOKING STATEMENTS

        Certain information contained in this analysis, particularly information regarding future financial performance and plans and objectives of management, is forward looking. Certain factors could cause actual results to differ materially from those expressed in forward looking statements. These factors include, but are not limited to, our ability and the ability of our franchisees to obtain suitable locations and financing for new restaurant development; the hiring, training, and retention of management and other personnel; competition in the industry with respect to price, service, location, and food quality; an increase in food cost due to seasonal fluctuations, weather, and demand; changes in consumer tastes and demographic trends; and changes in federal and state laws, such as increases in minimum wage.

17

Item 7a.    Quantitative and Qualitative Disclosure about Market Risk

        The Company does not engage in derivative financial instruments or derivative commodity instruments. As of December 31, 2001, the Company's financial instruments are not exposed to significant market risk due to foreign currency exchange risk or commodity price risk. However, the Company is exposed to market risk related to interest rates.

        The table below provides information about the Company's debt obligations that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

        Debt obligations held for other than trading purposes at December 31, 2001 (dollars in thousands):

EXPECTED MATURITY DATE

Item 8.    Consolidated Financial Statements

        The information required by this item is set forth on pages F-1 through F-23 included herein.

Item 9.    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

        None

Part III

Item 10.    Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act

        The information required by this item is incorporated herein by reference to the Company's definitive proxy statement under the caption "Directors/Executive Officers, Compliance with Section 16(a) of the Exchange Act" expected to be filed on or before April 30, 2002.

Item 11.    Executive Compensation

        The information required by this item is incorporated herein by reference to the Company's definitive proxy statement under the caption "Executive Compensation," expected to be filed on or before April 30, 2002.

Item 12.    Security Ownership of Certain Beneficial Owners and Management

        The information required to be filed under this item is incorporated herein by reference to the Company's definitive proxy statement under the caption "Security Ownership of Certain Beneficial Owners and Management" expected to be filed on or before April 30, 2002.

18

Item 13.    Certain Relationships and Related Transactions

        The information required to be filed under this item is incorporated herein by reference to the Company's definitive proxy statement under the caption "Certain Relationship and Related Transactions" expected to be filed on or before April 30, 2002.

Part IV

Item 14.    Exhibits and Reports on Form 8-K

(a)

Exhibits:

*

Incorporated by reference to the specific exhibit to the Form SB-2 Registration Statement, as filed with the Securities and Exchange Commission on January 23, 1995, Registration No. 33-84440-D.

**

Incorporated by reference to the specific exhibit to the Form S-4 Registration Statement, as filed with the Securities and Exchange Commission on May 12, 2000, Registration No. 333-78375.

***

Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000

****

Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2001.

(b)

Reports on Form 8-K:

        No reports on Form 8-K were filed during the fourth quarter of 2001.

19

SIGNATURES

        In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

        In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

20

Independent Auditors' Report

The Board of Directors and Stockholders
Austins Steaks & Saloon, Inc.:

        We have audited the accompanying consolidated balance sheets of Austins Steaks & Saloon, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Austins Steaks & Saloon, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

Roanoke, Virginia
March 8, 2002, except as to note 5,
        which is as of March 22, 2002

F-1

AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2001 and 2000

F-2

See accompanying notes to consolidated financial statements.

F-3

AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES

Consolidated Statements of Income (Loss)

Years ended December 31, 2001, 2000, and 1999

See accompanying notes to consolidated financial statements.

F-4

AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

Years ended December 31, 2001, 2000, and 1999

See accompanying notes to consolidated financial statements.

F-5

AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31, 2001, 2000, and 1999

(Continued)

F-6