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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-25366
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AUSTINS STEAKS & SALOON, INC.
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(Name of small business issuer in its charter)
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DELAWARE 86-0723400
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
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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 X No
-- --
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not 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-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for the year ended December 31, 1999. $42,525,764.
As of March 12, 2000, 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 $9,440,983.
As of March 12, 2000 there were 12,103,824 shares of Common Stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement expected to be filed on or before April
20, 2000 is hereby incorporated by reference to information required by Part
III, Items 9-12.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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AUSTINS STEAKS & SALOON, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I
Item 1. Description of Business................................................... 1
Item 2. Description of Properties................................................. 10
Item 3. Legal Proceedings......................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders....................... 12
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.................. 12
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 13
Item 7. Financial Statements...................................................... 17
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...................................................... 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act......................... 17
Item 10 Executive Compensation.................................................... 18
Item 11 Security Ownership of Certain Beneficial Owners and Management............ 18
Item 12 Certain Relationships and Related Transactions............................ 18
Item 13 Exhibits and Reports on From 8-K.......................................... 19
SIGNATURES.............................................................................. 21
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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 and Market Street Buffet and Bakery concepts. As of
December 31, 1999, we operate:
- 8 WesterN SizzliN restaurants;
- 6 Austins Steaks & Saloon restaurants;
- 12 Great American Steak & Buffet restaurants;
In addition, approximately 136 franchisees operated 209 WesterN
SizzliN, Wood Grill and Market Street Buffet & Bakery restaurants.
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.
Our restaurants feature cooked specialty prime rib dishes, steak,
chicken and seafood dishes in both cafeteria-style line and full service formats
and offer lunch and dinner. They also may feature a buffet that can be ordered
as a meal or in addition to a meal. Market Street Buffet & Bakery restaurants
feature traditional American food and offer lunch and dinner at a fixed price
with unlimited servings of all buffet items and beverages. All of the restaurant
concepts are able to offer buffets and most have scatter bar buffets providing
efficiencies and an easy-to-use format for guests.
We are actively engaged in expansion and are looking to expand the
franchise system in 2000 and beyond.
OPERATING STRATEGY
We have always set guest satisfaction as our first priority. Currently,
we operate under the following trade name concepts:
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- WesterN SizzliN-Steak & More
- WesterN SizzliN Wood Grill
- Market Street Buffet and Bakery
- Great American Steak and Buffet Company
- Austins Steaks & Saloon
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-two restaurants in-one:
- 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-
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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. 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
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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.
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 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.
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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 six or twelve month agreements for certain items with
vendors and manufacturers for both corporate restaurants and our franchisee
community in order to assure compliance and consistency from restaurant to
restaurant. We scrutinize velocity reports provided by our distributors looking
for opportunities to contract with manufacturers combining our purchasing power
nationwide and secure the lowest cost of goods. Individual restaurants decide
the amount of food inventory they require and place specific orders several
times per week with their distributor of choice. Individual stores arrange for
dairy, bread and produce from local vendors to be delivered on an "as needed"
basis. We are in the process of setting up a closed distribution program with a
national systems distributor to lower our product distribution cost. When we
accomplish these objectives, we anticipate lowering our food cost even further.
This will be achieved through economies of scale, reduction in distribution
expenses and our mutual purchasing power.
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 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.
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FRANCHISE OPERATIONS
In addition to operating company-owned restaurants, the Company
currently franchises others to operate WesterN SizzliN, WesterN SizzliN Wood
Grill and Great American Steak & Buffet restaurants. The Company currently has
136 franchisees operating 209 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
affect 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."
MARKETING AND PROMOTION
Marketing and operations work hand-in-hand for all of our company
concepts where a shared
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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, corporate 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 affiliates. 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 ADRF's 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 the ADRF department, area field consultants,
training instructors, corporate personnel, franchise owners, managers and the
entire system of operators share in the ongoing success of its 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.
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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 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 franchise. 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 acholic beverages to the
intoxicated person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance. The Company currently
operates in New Mexico, which has a "dram-shop" statute. Nebraska and Arizona,
the other states in which the Company has liquor licenses, have 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" and "Great American
Steak and Buffet Company". The WesterN SizzliN Corporation has applied for
registration of the following marks: "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
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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, 1999, the Company employed approximately 1,400
persons, of whom approximately 1,260 were restaurant employees, 110 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.
AUSTINS STEAKS & SALOON, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
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 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.
The following selected historical consolidated financial information
for each of the years ended December 31, 1995 through 1999 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.
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YEARS ENDED DECEMBER 31
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1999(4) 1998 1997 1996(3) 1995
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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STATEMENT OF OPERATIONS DATA:
Total revenues................................................... $ 42,526 $ 37,094 $ 33,524 $ 29,724 $ 8,943
Operating income................................................. 2,105 2,487 2,664 2,350 2,261
Income before extraordinary item................................. 153 1,169 1,056 562 811
Extraordinary loss, net of income tax benefit(2)................. -- (52) -- -- --
Net income....................................................... 153 1,117 1,056 562 811
Basic and diluted earnings, before extraordinary item, per share. $ 0.01 $ 0.13 $ 0.12 $ 0.06 $0.11
Basic and diluted extraordinary loss, net of income tax benefit,
per share........................................................ -- (0.01) -- -- --
Basic and diluted earnings per share............................. 0.01 0.12 0.12 0.06 0.11
Shares used in computing diluted earnings per share.............. 10,494 9,171 9,128 9,078 7,640
Balance Sheet Data:
Working capital deficit.......................................... $ (3,976) $ (2,784) $ (1,816) $ (3,484) $ (297)
Total assets..................................................... 25,543 21,294 19,509 20,653 12,073
Obligations under capital lease, excluding current maturities.... 44 82 115 54 5
Long-term debt, excluding current maturities..................... 5,576 5,916 5,624 6,876 3,539
Stockholders' equity............................................. 13,143 9,805 9,303 8,009 6,380
Other Financial Data:
Dividends paid(1)................................................ - - - - -
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(1) The Company has never paid any dividends.
(2) On March 31, 1998, WesterN SizzliN completed financing agreements to
replace certain notes payable to stockholders,
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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) In January 1996, the Company purchased eight (8) stores and accounted
for this transaction using the purchase method of accounting.
Accordingly, the 1996 selected consolidated financial information
includes the net assets and results of operations from these eight (8)
stores from the date of acquisition.
(4) 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 1999 selected
historical consolidated financial information includes the net assets
and results of the operations from these six (6) stores from the date
of acquisition.
ITEM 2. DESCRIPTION OF PROPERTIES
The majority of the Company's current restaurants are 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.
The Company currently leases its executive offices, approximately 5,220
square feet, which are 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.
The following table sets forth the location, approximate square footage
and nature of ownership of company locations:
<TABLE>
<CAPTION>
LOCATION APPROX. SQ. FT. OWNERSHIP
- ----------------------------- -------------------- ------------------------------
<S> <C> <C>
12020 Anne Street 5,200 Lease
Omaha, Nebraska
1414 South 72nd Street 10,000 Lease
Omaha, Nebraska
2400 Cerrillos Road 5,817 Lease
Santa Fe, New Mexico
3636 North Scottsdale Road 6,000 Lease
Scottsdale, Arizona
1101 Harney Street 7,450 Lease
Omaha, Nebraska
11111 Emmet Street 6,000 Lease
Omaha, Nebraska
5902 Richmond Highway 6,600 Lease
Alexandria, Virginia
8365 Sudley Road 9,000 Lease
Manassas, Virginia
10
<PAGE>
3135 Crain Highway 7,500 Lease
Waldorf, Maryland
3490 South Jefferson 10,000 Lease
Falls Church, Virginia
900 Merchants Road 8,400 Lease
Knoxville, Tennessee
2107 Jacksboro Pike 6,300 Lease
LaFollette, Tennessee
4310 Chapman Highway 8,400 Lease
Knoxville, Tennessee
655 Buford Drive 8,400 Owned
Lawrenceville, Georgia
7904 N. Kings Highway 7,500 Lease
Myrtle Beach, South
Carolina
8312 Geyer Springs Road 6,450 Lease
Little Rock, Arkansas
5306 JFK Boulevard 9,100 Lease
North Little Rock, Arkansas
9210 Rodney Parham 9,300 Lease
Little Rock, Arkansas
500 Gregory Street 6,000 Lease
Jacksonville, Arkansas
100 N. Blake Street 6,625 Lease
Pine Bluff, Arkansas
2900 E. Harding 7,050 Lease
Pine Bluff, Arkansas
9176 Mansfield Road 9,500 Lease
Shreveport, Louisiana
642 Benton Road 8,000 Lease
Bossier City, Louisiana
1758 E. 70th Street 8,500 Lease
Shreveport, Louisiana
6122 Greenwood Road 7,500 Lease
Shreveport, Louisiana
4630 E. Texas 8,000 Lease
Bossier City, Louisiana
</TABLE>
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.
11
<PAGE>
On September 10, 1999, the Company completed its settlement agreement
with David K. Wachtel, Jr. with respect to long-standing litigation initiated in
February 1995. Under the terms of the settlement agreement, Austins paid Mr.
Wachtel $1,000,000 in settlement of all claims he had in the litigation.
Additionally, Mr. Wachtel withdrew his notice to dissent from the merger between
Austins and The WesterN SizzliN Corporation with respect to the 684,000 WesterN
SizzliN shares (premerger) owned by him, and Austins repurchased these shares
for the sum of $3,420,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company was traded on the NASDAQ Small-Cap
Market System under the symbol "STAK" from January 25, 1995 to November 19,
1997. Prior to that date, there was no public market for the Common Stock. On
November 19, 1997 the Company was delisted from NASDAQ due to the Company's
failure to meet the $1 minimum bid price requirement. The following table sets
forth, for the periods indicated, the high and low closing prices for the Common
Stock as reported to the NASDAQ Small-Cap Market System and the Bulletin Board
Section of NASDAQ:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998 HIGH LOW
---- ---
<S> <C> <C>
First Quarter 1999 (1) $5.88 $2.35
Second Quarter 1999 (1) $6.37 $2.74
Third Quarter 1999 $4.50 $1.88
Fourth Quarter 1999 $2.19 $1.06
First Quarter 1998 (1) $4.31 $0.78
Second Quarter 1998 (1) $4.51 $2.16
Third Quarter 1998 (1) $2.74 $1.76
Fourth Quarter 1998 (1) $2.55 $1.37
</TABLE>
(1) First and second quarter prices for 1999 and all 1998 quarters have been
adjusted to reflect the 1 for 3.135 reverse split effective with the merger July
1, 1999.
As of March 12, 2000, there were approximately 150 stockholders of
record.
The Company has never paid or declared cash dividends on its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company expects to retain its earnings to finance the
development and expansion of its business. The payment by the Company of cash
dividends, if any, on its Common Stock in the future is subject to the
discretion of the Board of Directors and will depend on the company's earnings,
financial condition, capital requirements, and other relevant factors.
12
<PAGE>
ITEM 6. 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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
INCOME STATEMENT DATA: 1999 1998 1997
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
REVENUES:
Restaurant sales ................................... 85.3% 81.9% 79.5%
Franchise royalties and fees ....................... 13.5 16.5 18.3
Seasoning sales .................................... 1.2 1.4 1.8
Other sales ........................................ -- 0.2 0.4
----- ----- -----
Total revenues ..................................... 100.0 100.0 100.0
COSTS AND EXPENSES:
Cost of company-operated stores ....................... 69.9 65.3 64.3
Cost of franchise operations .......................... 6.4 8.4 8.9
Other cost of operations .............................. 0.9 1.1 1.3
Restaurant operating expenses ......................... 10.0 10.2 9.3
General and administrative expenses ................... 7.8 8.3 8.3
----- ----- -----
Income from operations ................................ 5.0 6.7 7.9
Other income (expense) ................................ (4.2) (1.4) (2.6)
Income before income tax expense and extraordinary item 0.8 5.3 5.3
Income tax expense .................................... 0.4 2.1 2.1
Income before extraordinary item ...................... 0.4 3.2 3.2
Extraordinary loss on debt extinguishment, net of tax . -- 0.2 --
----- ----- -----
Net income ............................................ 0.4% 3.0% 3.2%
===== ===== =====
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
RESTAURANT DATA:
Percentage increase (decrease) in comparable Company-operated restaurant sales (1.1) (3.14) (2.42)
Number of Company-operated restaurants included in the respective years'
most recent comparable restaurant base ................................... 26 20 16
Average sales for Company-owned restaurants included in the respective years'
most recent comparable restaurant base .................................... $ 1,821,000 $ 1,841,000 $ 1,901,000
NUMBER OF COMPANY-OPERATED RESTAURANTS:
Beginning of period ....................................................... 20 16 11
Opened .................................................................... 0 2 1
Closed .................................................................... 0 0 0
Acquired from franchisee or other ......................................... 6 2 4
----------- ----------- -----------
End of period ............................................................. 26 20 16
=========== =========== ===========
NUMBER OF U.S. FRANCHISED RESTAURANTS:
Beginning of period ....................................................... 225 229 249
Opened .................................................................... 3 11 7
Closed .................................................................... 19 13 23
Acquired by Company ....................................................... 0 2 4
----------- ----------- -----------
End of period ............................................................. 209 225 229
=========== =========== ===========
</TABLE>
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 currently operates and franchises a total of 235
restaurants located in 24 states, including 26 company-owned and 209 franchise
restaurants. The restaurants include a family steakhouse concept, a steak and
buffet concept, and the casual dining steakhouse concept.
Net income for the year ended December 31, 1999 was $152,989 compared
to $1,117,340, and $1,056,493 for the years ended December 31, 1998 and 1997,
respectively. The 1999 results were significantly effected by a $1,000,000
charge related to the settlement of litigation with the former president of the
WesterN SizzliN Corporation and approximately $200,000 of expenses associated
with the merger and closing of corporate offices in Knoxville, Tennessee and
Lincoln, Nebraska.
1999 COMPARED TO 1998
REVENUES
Total revenues increased 14.64% to $42.5 million in 1999, from $37.1
million in 1998. Company-operated restaurant sales increased 19.3% to $36.3
million in 1999, from $30.4 million in 1998. This increase was primarily due to
the addition of six (6) units during 1999. Comparable sales decreased 1.1% in
1999 over 1998 for Company-operated restaurants open throughout both years.
Franchise operation revenues decreased 6.3% to $5.72 million in
1999, from $6.11 million in
14
<PAGE>
1998. This decrease was primarily due to a decrease in the number of franchised
units. Comparable sales decreased 0.30% in 1999 over 1998 for franchised
restaurants open throughout both years.
COSTS AND EXPENSES
Restaurant cost of sales, consisting of food, beverage and paper costs,
decreased as a percentage of restaurant sales to 44.3% in 1999, from 45.1% in
1998. The primary reason for the decrease is attributable to concentration on
operating margins and matured operations.
Restaurant salaries and related taxes were slightly higher as a
percentage of restaurant sales, increasing to 26.9% from 26.8% in 1998.
Occupancy costs increased as a percentage of restaurant sales to 5.1% in 1999
from 4.9% in 1998 as a result of remodeling and property renovations.
Restaurant advertising and related costs remained flat as a percentage
of restaurant sales at approximately 1.89% in 1999 and 1998. The Company is
actively evaluating marketing initiatives for 2000 aimed at increasing store
sales.
General and administrative expenses decreased as a percentage of total
revenues from 8.3% in 1998 to 7.8% in 1999. The Company is very cognizant of
maintaining tight controls for overhead expenses and this decrease is
attributable to cost controls as well as the increased revenue base offset
slightly by hiring of additional corporate personnel.
Depreciation and amortization increased slightly as a percentage of
total revenues to 5.7% in 1998, from 5.4% in 1998 primarily due to depreciation
of remodels.
The largest factors in the increase in other expense are the lawsuit
settlement for $1,000,000 and the $200,000 of office closing and merger
expenses. Excluding these items other expense is comparable from 1999 to 1998.
INCOME TAX EXPENSE
The Company's effective tax rate was 51.1% in 1999 and 40.5% in 1998.
The increase in the effective rate is attributable to the relationship of income
levels and nondeductible goodwill associated with the Company's recent merger.
1998 COMPARED TO 1997
REVENUES
Total revenues increased 10.65% to $37.1 million in 1998, from $33.5
million in 1997. Company-operated restaurant sales increased 14% to $30.4
million in 1998, from $26.7 million in 1997. This increase was primarily due to
the addition of four (4) units during 1998. Comparable sales decreased 3.2% in
1998 over 1997 for Company-operated restaurants open throughout both years.
Franchise operation revenues decreased 0.6% to $6.11 million in 1998,
from $6.15 million in 1997. This decrease was due to a decrease in the number of
franchised units. Comparable sales increased 0.75% in 1998 over 1997 for
franchised restaurants open throughout both years.
15
<PAGE>
COSTS AND EXPENSES
Restaurant cost of sales, consisting of food, beverage and paper costs,
decreased as a percentage of restaurant sales to 45.1% in 1998, from 46.7% in
1997. The primary reason for the decrease is attributable to concentration on
operating margins and matured operations.
Restaurant salaries and related taxes were comparable as a percentage
of restaurant sales for both years: 26.8% in 1998, and 26.2% in 1997. Occupancy
costs increased as a percentage of restaurant sales to 4.9% in 1998 from 4.3% in
1997 as a result of remodeling and property renovations.
Restaurant advertising and related costs increased as a percentage of
restaurant sales to 1.89% in 1998, from 1.0% in 1997 as a result of increased
advertising relating to reopenings of remodeled stores.
General and administrative expenses remained flat as a percentage of
total revenues at 8.3% in 1998 and 1997.
Depreciation and amortization decreased slightly as a percentage of
total revenues to 5.4% in 1998, from 6.1% in 1997 as a result of certain assets
being fully depreciated or amortized prior to or during 1998.
INCOME TAX EXPENSE
The Company's effective tax rate was 40.5% in 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the development and
acquisition of restaurants. Capital expenditures of $1.1 million, $2.7 million
and $0.8 million for 1999, 1998 and 1997, respectively, were primarily funded by
cash flow from operations. Cash flows generated by operating activities were
approximately $2.60 million, $3.26 million, and $3.99 million in 1999, 1998, and
1997, respectively. Cash flows from operations were the primary source of
capital expenditures and debt repayments during those years. During 1999, the
Company obtained $3.18 million in cash from the private placement of common
stock and the exercise of stock options, as well as $1.77 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 2000 are presently expected to be
approximately $500,000 to $1,000,000, primarily for the development or
conversion of restaurants and may increase depending upon timing of further
expansion.
Capital resources available at December 31, 1999 include $510,833 of
cash and cash equivalents, and approximately $54,000 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
16
<PAGE>
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 approximately $4.0 million at December 31, 1999.
YEAR 2000 ISSUE
Based on the results to date Year 2000 issues have had no significant
impact on the Company's operations and we do not foresee significant risks
associated with Year 2000 compliance at this time. However, if the Company
identifies significant risks or problems related to Year 2000 compliance it will
develop contingency plans as deemed necessary at that time.
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.
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; changes
in federal and state laws, such as increases in minimum wage; and factors
associated with any Year 2000 issues subsequently arising.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference to
the financial statements set forth on pages F-1 through F-27 included herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. 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 20, 2000.
17
<PAGE>
ITEM 10. 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 20, 2000.
ITEM 11. 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" to be
filed on or before April 20, 2000.
ITEM 12. 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 20, 2000.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
18
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.0** Plan of Agreement and Merger dated April 30, 1999
between Austins Steaks & Saloon, Inc. and the
WesterN SizzliN Corporation
3.1* Certificate of Incorporation of the Company, as
amended
3.2* Bylaws of the Company
10.11* 1994 Austins Steaks & Saloon, Inc. Incentive and
Nonqualified Stock Option Plan, as amended
10.11.1**** Amendment No. 2 to the 1994 Incentive and
Nonqualified Stock Option Plan of the Company
10.11.2**** Amendment No. 3 to the 1994 Incentive and
Nonqualified Stock Option Plan of the Company
21 Subsidiaries of the Issuer:
The WesterN SizzliN Corporation
The WesterN SizzliN Stores, Inc.
The WesterN SizzliN Stores of Little Rock, Inc.
The WesterN SizzliN Stores of Louisiana, Inc.
Missouri Development Company
Austins Albuquerque, Inc.
Austins Omaha, Inc.
Austins 72nd, Inc.
Austins Lincoln, Inc.
Austins New Mexico, Inc.
Austins Old Market, Inc.
Austins Scottsdale, Inc.
Austins Rio Rancho, Inc.
Austins Albuquerque East, Inc.
23.1 Consent of KPMG LLP
27 Financial Data Schedule
- ---------------------------
* 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, 1999, Registration No. 333-78375.
19
<PAGE>
**** Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1999.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
20
<PAGE>
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.
AUSTINS STEAKS & SALOON, INC.
Dated: March 28, 2000 By: /s/ Robert N. Collis, II
----------------------------
Robert N. Collis, II
Vice President and Chief Financial Officer
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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ J. Carson Quarles Chairman of the Board March 28, 2000
- ----------------------------------------
J. Carson Quarles
/s/ Victor F. Foti President, Chief Executive Officer March 28, 2000
- ---------------------------------------- and Director
Victor F. Foti
/s/ Paul C. Schorr Director March 28, 2000
- ----------------------------------------
Paul C. Schorr, III
/s/ Roger D. Sack Director March 28, 2000
- ----------------------------------------
Roger D. Sack
/s/ A. Jones Yorke Director March 28, 2000
- ----------------------------------------
A. Jones Yorke
/s/ Thomas Hontzas Director March 28, 2000
- ----------------------------------------
Thomas Hontzas
/s/ Jerry Gardner Director March 28, 2000
- ----------------------------------------
Jerry Gardner
/s/ Ron Stancil Director March 28, 2000
- ----------------------------------------
Ron Stancil
/s/ Titus Greene Director March 28, 2000
- ----------------------------------------
Titus Greene
/s/ J. Alan Cowart Director March 28, 2000
- ----------------------------------------
J. Alan Cowart
/s/ Stan Bozeman, Jr. Director March 28, 2000
- ----------------------------------------
Stan Bozeman, Jr.
</TABLE>
21
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
February 11, 2000, except for note 5 with
respect to the debt waiver letter, as
to which the date is March 21, 2000
F-2
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 510,833 643,536
Trade accounts receivable, less allowance for doubtful
accounts of $185,062 in 1999 and $251,397 in 1998 910,552 870,552
Current installments of notes receivable 131,584 115,699
Other receivables 73,682 76,205
Inventories 383,281 298,617
Prepaid expenses 242,556 201,982
Income taxes refundable 348,046 --
Deferred income taxes 202,372 121,883
------------- -------------
Total current assets 2,802,906 2,328,474
Notes receivable, less allowance for doubtful accounts of
$148,902 in 1999 and $123,414 in 1998, excluding
current installments 106,249 172,697
Property and equipment, net 9,820,221 7,440,426
Franchise royalty contracts, net of accumulated amortization
of $3,781,772 in 1999 and $3,151,477 in 1998 5,672,659 6,302,954
Goodwill, net of accumulated amortization of $1,603,760
in 1999 and $1,179,686 in 1998 5,220,042 4,718,743
Favorable lease rights, net of accumulated amortization
of $35,383 in 1999 518,450 --
Financing costs, net of accumulated amortization of
$30,875 in 1999 and $12,145 in 1998 159,428 178,158
Deferred income taxes 873,418 --
Other assets, net 369,161 152,392
------------- -------------
$ 25,542,534 21,293,844
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------- -------------
<S> <C> <C>
Current liabilities:
Bank overdraft $ 149,305 --
Credit line note payable to bank 446,139 410,868
Current installments of long-term debt 2,686,973 1,589,928
Current installments of obligations under capital
leases 39,851 46,956
Accounts payable 2,780,388 2,186,236
Accrued expenses and other 676,202 878,805
------------- -------------
Total current liabilities 6,778,858 5,112,793
Long-term debt, excluding current installments 5,576,155 5,915,892
Obligations under capital leases, excluding current
installments 44,339 81,599
Deferred income taxes -- 378,494
------------- -------------
Total liabilities 12,399,352 11,488,778
------------- -------------
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; issued and outstanding
874,375 shares in 1998 -- 874,375
Common stock, $.01 par value. Authorized 20,000,000
shares; issued and outstanding 12,103,824 shares in
1999 and 8,678,000 shares in 1998 121,038 86,780
Additional paid-in capital 8,677,425 4,652,181
Retained earnings 4,344,719 4,191,730
------------- -------------
Total stockholders' equity 13,143,182 9,805,066
Commitments and contingencies
------------- -------------
$ 25,542,534 21,293,844
============= =============
</TABLE>
F-4
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Company-operated stores $ 36,264,433 30,396,292 26,653,025
Franchise operations 5,722,434 6,108,504 6,146,601
Other 538,897 589,551 724,320
--------------- --------------- ---------------
Total revenues 42,525,764 37,094,347 33,523,946
--------------- --------------- ---------------
Costs and expenses:
Cost of company-operated stores 29,713,899 24,238,703 21,544,382
Cost of franchise operations 2,739,987 3,100,239 2,998,837
Other cost of operations 388,665 403,149 442,471
Restaurant operating expenses 4,263,312 3,772,553 3,107,482
General and administrative 3,314,558 3,092,985 2,767,090
--------------- --------------- ---------------
Total costs and expenses 40,420,421 34,607,629 30,860,262
--------------- --------------- ---------------
Income from operations 2,105,343 2,486,718 2,663,684
--------------- --------------- ---------------
Other income (expense):
Interest expense, including discount amortization
of $27,276 and $161,742 in 1998 and 1997,
respectively (796,650) (746,012) (1,169,962)
Interest income 50,698 45,015 24,711
Other (1,046,568) 179,221 256,210
--------------- --------------- ---------------
(1,792,520) (521,776) (889,041)
--------------- --------------- ---------------
Income before income tax expense
and extraordinary item 312,823 1,964,942 1,774,643
Income tax expense 159,834 796,151 718,150
--------------- --------------- ---------------
Income before extraordinary item 152,989 1,168,791 1,056,493
Extraordinary loss on debt extinguishment (net of
income tax benefit of $31,689) -- 51,451 --
--------------- --------------- ---------------
Net income $ 152,989 1,117,340 1,056,493
=============== =============== ===============
Earnings per share:
Income before extraordinary item:
Basic .01 .13 .12
Diluted .01 .13 .12
Extraordinary item:
Basic -- (.01) --
Diluted -- (.01) --
Net income:
Basic .01 .12 .12
Diluted .01 .12 .12
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK, SERIES B COMMON STOCK
------------------------ -------------------------
SHARES DOLLARS SHARES DOLLARS
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 $ 874,375 874,375 4,539,000 4,539,000
Restated for reverse merger acquisition -- -- 4,539,000 (4,448,220)
---------- ------- ---------- ----------
Balances, December 31, 1996, as restated 874,375 874,375 9,078,000 90,780
Issuance of common stock in connection with
noncompete agreement -- -- 200,000 2,000
Net income -- -- -- --
---------- ------- ---------- ----------
Balances, December 31, 1997 874,375 874,375 9,278,000 92,780
Issuance of common stock in connection with the
purchase of equipment and leasehold improvements -- -- 400,000 4,000
Repurchase of common stock -- -- (1,000,000) (10,000)
Net income -- -- -- --
---------- ------- ---------- ----------
Balances, December 31, 1998 874,375 874,375 8,678,000 86,780
Conversion of preferred stock in reverse merger
acquisition (874,375) (874,375) 1,748,750 17,488
Conversion of warrants in reverse merger acquisition -- -- 742,500 7,425
Common stock issued in reverse merger acquisition -- -- 861,374 8,613
Proceeds from exercise of common stock options -- -- 155,000 1,550
Proceeds from issuance of common stock in private
placement -- -- 1,286,200 12,862
Repurchase of common stock -- -- (1,368,000) (13,680)
Net income -- -- -- --
---------- ------- ---------- ----------
Balances, December 31, 1999 $ -- -- 12,103,824 121,038
========== ======= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
---------- ---------- ---------
<S> <C> <C> <C>
Balances, December 31, 1996 577,363 2,017,897 8,008,635
Restated for reverse merger acquisition 4,448,220 -- --
---------- --------- ----------
Balances, December 31, 1996, as restated 5,025,583 2,017,897 8,008,635
Issuance of common stock in connection with
noncompete agreement 235,598 -- 237,598
Net income -- 1,056,493 1,056,493
---------- --------- ----------
Balances, December 31, 1997 5,261,181 3,074,390 9,302,726
Issuance of common stock in connection with the
purchase of equipment and leasehold improvements 496,000 -- 500,000
Repurchase of common stock (1,105,000) -- (1,115,000)
Net income -- 1,117,340 1,117,340
---------- --------- ----------
Balances, December 31, 1998 4,652,181 4,191,730 9,805,066
Conversion of preferred stock in reverse merger
acquisition 856,887 -- --
Conversion of warrants in reverse merger acquisition (7,425) -- --
Common stock issued in reverse merger acquisition 3,419,655 -- 3,428,268
Proceeds from exercise of common stock options 230,950 -- 232,500
Proceeds from issuance of common stock in private
placement 2,931,497 -- 2,944,359
Repurchase of common stock (3,406,320) -- (3,420,000)
Net income -- 152,989 152,989
---------- --------- ----------
Balances, December 31, 1999 8,677,425 4,344,719 13,143,182
========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 152,989 1,117,340 1,056,493
Adjustments to reconcile net income to net cash provided
by operating activities, net of acquisition:
Extraordinary loss on debt extinguishment -- 51,451 --
Depreciation and amortization of property and equipment 1,207,882 662,301 656,826
Amortization of discount on debt -- 27,276 161,742
Amortization of franchise royalty contracts, goodwill
and other assets 1,201,361 1,315,689 1,209,783
Provision for bad debts 99,793 143,669 114,572
Provision for deferred taxes 11,783 39,417 298,266
(Gain) loss on sale/disposal of property and equipment 144,961 4,004 (35,714)
(Increase) decrease in:
Trade accounts receivable (114,305) (205,130) 16,561
Notes receivable 25,075 116,202 (29,677)
Lease receivable -- 8,579 18,589
Other receivables 2,523 75,733 7
Inventories 45,146 (73,416) (36,485)
Prepaid expenses 23,860 (93,065) 203,670
Income taxes refundable (348,046) -- --
Other assets 147,249 29,385 157,895
Increase (decrease) in:
Accounts payable 242,508 145,729 128,779
Accrued expenses (247,792) (100,652) 72,983
----------- ---------- ----------
Net cash provided by operating activities 2,594,987 3,264,512 3,994,290
----------- ---------- ----------
Cash flows from investing activities:
Acquisition, net of cash received (560,382) -- --
Additions to property and equipment (1,070,277) (2,740,496) (849,886)
Proceeds from sale of property and equipment 10,000 7,000 495,507
----------- ---------- ----------
Net cash used in investing activities (1,620,659) (2,733,496) (354,379)
----------- ---------- ----------
Cash flows from financing activities:
Decrease in bank overdraft (137,912) -- --
Net increase (decrease) in credit line note payable 35,271 16,868 (102,013)
Proceeds from long-term debt 1,766,542 7,250,000 --
Payments on long-term debt and capital leases (2,527,791) (6,567,291) (3,127,225)
Financing costs -- (190,303) --
Proceeds from exercise of common stock options 232,500 -- --
Proceeds from issuance of common stock in private placement 2,944,359 -- --
Repurchase of common stock (3,420,000) (1,115,000) --
----------- ---------- ----------
Net cash used in financing activities (1,107,031) (605,726) (3,229,238)
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents (132,703) (74,710) 410,673
Cash and cash equivalents at beginning of the year 643,536 718,246 307,573
----------- ---------- ----------
Cash and cash equivalents at end of the year $ 510,833 643,536 718,246
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS AND PRINCIPLES OF CONSOLIDATION
Austins Steaks & Saloon, Inc. is a franchisor and operator of
restaurants. At December 31, 1999, the Company had 235 franchises
and company-operated stores operating in 24 states. The
consolidated financial statements include the accounts of Austins
Steaks & Saloon, Inc. and its wholly-owned subsidiaries,
The WesterN SizzliN Corporation, The WesterN SizzliN Stores,
Inc., WesterN SizzliN Stores of Little Rock, Inc., WesterN
SizzliN Stores of Louisiana, Inc. and Austins of Omaha, Inc.
(collectively the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
(b) CASH EQUIVALENTS
Cash equivalents of $663,077 and $1,120,273 consist of overnight
repurchase agreements at December 31, 1999 and 1998, respectively.
The Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash
equivalents.
(c) NOTES RECEIVABLE
Notes receivable are recorded at cost, less an allowance for
impaired notes receivable. Management, considering current
information and events regarding the borrowers' ability to repay
their obligations, considers a note receivable to be impaired when
it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the note
agreement. When a note receivable is considered to be impaired,
the amount of the impairment is measured based on the present
value of expected future cash flows discounted at the note's
effective interest rate. Impairment losses are included in the
allowance for doubtful notes receivable through a charge to bad
debt expense. Interest income on impaired notes is recognized on
the cash basis.
(d) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of food, beverages and
restaurant supplies.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on the
straight-line basis over the following estimated useful lives:
buildings and improvements - 15 to 40 years; furniture, fixtures
and equipment - 3 to 10 years. Property and equipment under
capital leases and leasehold improvements are generally amortized
over the shorter of the asset's estimated useful life or the
F-8
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
lease term. If the estimated useful life of a leasehold
improvement exceeds the lease term and the lease allows for a
renewable term and the Company intends to renew the lease, the
estimated useful life of the leasehold improvement is used for
amortization purposes. Gains or losses are recognized upon the
disposal of property and equipment and the cost and the related
accumulated depreciation and amortization are removed from the
accounts. Maintenance, repairs and betterments which do not
enhance the value of or increase the life of the assets are
expensed as incurred.
(f) 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 through 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.
(g) 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 measured 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.
(h) FAVORABLE LEASE RIGHTS
Favorable lease rights are being amortized on the straight-line
method over the remaining life of the related leases.
(i) FINANCING COSTS
Financing costs are being amortized on the straight-line method
over the life of the related debt.
F-9
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company reviews long-lived assets and certain identifiable
intangibles 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
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(k) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(l) 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. The president and certain
members of the board of directors are also franchisees. As
franchisees these individuals have transactions from time to time
with the Company, including payments for franchise fees, during
the normal course of business.
(m) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations. As such,
compensation expense would be recorded on the date of grant only
if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits
entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows
F-10
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income disclosures for employee
stock option grants as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosures under SFAS No. 123.
(n) SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid approximately $811,000, $719,000 and $947,000 in
cash for interest and $507,000, $936,000 and $508,000 in cash for
income taxes during 1999, 1998 and 1997, respectively. Noncash
transactions for 1999 include write-offs of accounts and notes
receivable of $164,058. Noncash transactions for 1998 include
capital lease obligations for equipment of $14,581, write-offs of
accounts and notes receivable of $91,728, transfers between
accounts receivable and notes receivable of $119,372, equipment
purchases included in accounts payable of $387,994 and the
issuance of 400,000 shares of common stock with an estimated value
of $500,000 in connection with the purchase of equipment and
leasehold improvements (see note 4). Noncash transactions for 1997
include capital lease obligations for equipment totaling $113,986,
write-offs of accounts and notes receivable of $160,515, transfers
between accounts receivable and notes receivable of $100,045 and
the issuance of 200,000 shares of common stock with an estimated
value of $237,598 under provisions of a noncompete agreement (see
note 8).
(o) EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of
the Company. Stock options for shares of common stock were not
included in computing diluted earnings per share for the years
ended December 31, 1998 and 1997 because these effects are
anti-dilutive. Convertible preferred stock and common stock
warrants are not included in computing diluted earnings per share
prior to their conversion in connection with the reverse merger
acquisition (see note 2), since the conditions for their issuance,
such as an initial public offering or registration of the
Company's common stock, had not taken place.
F-11
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share
computations for the years indicated:
<TABLE>
<CAPTION>
WEIGHTED
INCOME AVERAGE EARNINGS
(LOSS) SHARES PER SHARE
YEAR ENDED DECEMBER 31, 1999 (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income - basic $ 152,989 10,457,214 $ .01
=======
Effect of dilutive stock options -- 37,482
----------- -----------
Net income - diluted $ 152,989 10,494,696 $ .01
=========== =========== =======
YEAR ENDED DECEMBER 31, 1998
Income before extraordinary item -
basic and diluted $ 1,168,791 9,171,150 $ .13
Extraordinary item - basic and diluted (51,451) 9,171,150 $ .01
----------- -------
Net income - basic and diluted $ 1,117,340 9,171,150 $ .12
=========== =========== =======
YEAR ENDED DECEMBER 31, 1997
Net income - basic and diluted $ 1,056,493 9,128,410 $ .12
=========== =========== =======
</TABLE>
(p) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could
differ from those estimates.
(q) RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997
consolidated financial statements to conform to the 1999
presentation.
(2) BUSINESS COMBINATION
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. As a result of the merger, Austins' six restaurants
located in Arizona, Nebraska and New Mexico have been combined with
WesterN SizzliN.
F-12
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
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 of 861,374
Austins shares outstanding prior to the merger. Upon completion of the
merger, the Austins shareholders own approximately 7 percent of the
outstanding equity and the WesterN SizzliN shareholders own 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.
The purchase price of the business combination was determined based on
the market price of Austins' securities over a reasonable period of time
before and after the two companies reached an agreement on the purchase
price and the proposed transaction was announced. On February 23, 1999,
Austins and WesterN SizzliN signed a letter of intent agreeing on the
purchase price and announced the proposed transaction. The average
closing market price for the five business day period beginning February
19, 1999 and ending February 25, 1999 for Austins was $1.2695. Applying
this price per share to the Austins' presplit common shares issued, and
including the estimated direct costs incurred as a result of the
acquisition of $570,813, resulted in a purchase price of $3,999,081. The
aggregate purchase price was allocated based upon management's best
estimate of the fair values of identifiable assets and liabilities of
Austins at the date of acquisition as follows:
<TABLE>
<S> <C>
Current assets (including cash of $10,431) $ 204,675
Property and equipment, net 2,672,361
Other assets 380,615
Favorable lease rights 553,833
Goodwill 925,372
Trademarks 76,283
Deferred tax assets 1,344,184
Long-term debt (1,204,264)
Current liabilities (684,050)
Note payable to shareholder (269,928)
-----------
Total $ 3,999,081
===========
</TABLE>
F-13
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Goodwill resulting from the acquisition is being amortized on a
straight-line basis over 15 years.
The following unaudited pro forma financial information presents the
combined results of operations of WesterN SizzliN and Austins as if the
acquisition had occurred as of the beginning of 1999 and 1998 after
giving effect to certain adjustments, including amortization of goodwill
and favorable lease rights and related income tax effects. The pro forma
financial information does not necessarily reflect the results of
operations that would have occurred had WesterN SizzliN and Austins
constituted a single entity during such periods.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
-----------------------------
(UNAUDITED)
<S> <C> <C>
Total revenues $ 47,072,370 46,467,994
================ ==========
Net income $ 39,193 706,511
================ ==========
Earnings per share $ -- .07
================ ==========
</TABLE>
(3) ACCOUNTS AND NOTES RECEIVABLE
Activity in the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ----------- ---------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Beginning of year $ 374,811 322,870 368,813
Provision for bad debts 99,793 143,669 114,572
Recoveries 23,418 -- --
Accounts and notes receivable written off (164,058) (91,728) (160,515)
------------- ------- --------
End of year $ 333,964 374,811 322,870
============= ======= ========
Allowance for doubtful accounts allocated to:
Accounts receivable $ 185,062 251,397 190,739
Notes receivable 148,902 123,414 132,131
------------- ------- --------
$ 333,964 374,811 322,870
============= ======= ========
</TABLE>
The Company has various notes receivable from franchisees for amounts due
under franchise agreements. The recorded investment in notes receivable
for which an impairment has been recognized and the related allowance for
doubtful accounts were $386,735 and $148,902, respectively, at December
31, 1999, and $411,810 and $123,414, respectively, at December 31, 1998.
The average recorded investment in impaired notes was approximately
$399,000, $424,000 and $451,000 during 1999, 1998 and 1997, respectively.
F-14
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The Company's franchisees and company-operated stores are not
concentrated in any specific geographic region, but are concentrated in
the family steak house business. No single franchisee accounts for a
significant amount of the Company's franchise revenue, and there were no
significant accounts or notes receivable from a single franchisee at
December 31, 1999 or 1998. The Company establishes an allowance for
doubtful accounts based upon factors surrounding the credit risk of
specific franchisees, historical collection trends and other information.
Generally, the Company does not require collateral to support
receivables.
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 consists of the
following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Land and improvements $ 775,000 300,000
Buildings and improvements 400,000 400,000
Furniture, fixtures and equipment 4,567,086 3,657,565
Leasehold improvements 7,197,070 5,195,406
---------------- ---------
12,939,156 9,552,971
Less accumulated depreciation and amortization 3,118,935 2,112,545
---------------- ---------
$ 9,820,221 7,440,426
================ =========
</TABLE>
On September 18, 1998, the Company assumed an existing lease of a store
from a franchisee. The purchase price for the store's equipment and
leasehold improvements was $700,000 and included a combination of
$200,000 of cash and 400,000 shares of common stock with an estimated
fair value of $500,000. The $1.25 per share fair market value assigned to
the common stock was based on negotiations between the Company and the
seller, a related party who owns more than 10 percent of the Company's
stock, and the Company's consideration of the estimated fair market value
of the stock. The Company has an option until September 17, 2000 to buy
back the stock for $500,000 which is based on $1.25 per share. From
September 17, 2000 until September 17, 2002, the Company has an option to
buy back the stock at increasing purchase prices ranging from $600,000
($1.50 per share) to $700,000 ($1.75 per share).
(5) DEBT
Long-term debt at December 31, 1999 and 1998 consists of the following:
F-15
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Notes payable to finance company with interest rates ranging from 9.82% to
10.07% due in equal monthly installments, including principal and interest,
ranging from $5,395 to $17,182, with final payments due from April 1, 2005
through April 1, 2013; collateralized by real property, accounts receivable,
inventory and furniture, fixtures and equipment $5,688,333 6,005,556
$750,000 note payable to bank, paid in full during 1999 -- 750,000
$300,000 term note payable to stockholder, paid in full
during 1999 -- 300,000
12% notes payable to stockholders with effective interest
rate of 13.82% due in equal monthly principal installments of $17,470, with
final payment due February 1, 2001; collateralized by the assignment of
franchise revenues 227,120 436,769
Various notes payable to finance company, paid in full
during 1999 -- 13,495
$1,000,000 note payable to bank with an interest rate of the bank's prime rate
(8.5% at December 31, 1999), payable in monthly installment of $83,333, with
final payment due August 31, 2000; collateralized by accounts
and notes receivable 771,050 --
$300,000 note payable to bank with an interest rate of
the bank's prime rate (8.5% at December 31, 1999), with interest payable
monthly, with final payment due June 9,
2000; collateralized by accounts and notes receivable 300,000 --
Notes payable to bank with an interest rate of the bank's prime
rate (8.5% at December 31, 1999), with interest payable
monthly, with final payment due January 30, 2000;
collateralized by real property, accounts receivable,
inventory and furniture, fixtures and equipment 605,000 --
Note payable to bank with an interest rate of the bank's prime
rate plus 1% (10.50% at December 31, 1999), due in monthly
installments of $5,000 plus interest, with final payment due
January 31, 2000, collateralized primarily by all assets of one
of the Company's subsidiaries 85,617 --
</TABLE>
F-16
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
10% unsecured notes payable to stockholders, due in monthly installments of
$37,500 plus interest, with final payment due September 15, 2000 $ 341,667 --
Unsecured note payable with an interest rate of 9.0%, payable in
monthly installments of $1,620, with final payment due August 15, 2001 167,513 --
Other 76,828 --
---------- ----------
Total long-term debt 8,263,128 7,505,820
Less current installments 2,686,973 1,589,928
---------- ----------
Long-term debt, excluding current installments $5,576,155 5,915,892
========== ==========
</TABLE>
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1999 and years thereafter are as follows: 2000,
$2,686,973; 2001, $585,525; 2002, $447,103; 2003, $487,544; 2004,
$519,334 and years thereafter, $3,536,649.
On March 31, 1998, the Company 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.
During 1998, the Company replaced its existing line of credit with a
$500,000 secured line of credit from a commercial bank payable on demand,
bearing interest at the bank's prime rate which approximated 8.5 and 7.75
percent at December 31, 1999 and 1998, respectively, subject to annual
renewal by the bank, and collateralized by accounts receivable and the
assignment of franchise royalty contracts. Borrowings outstanding under
the line of credit at December 31, 1999 and 1998 were $446,139 and
$410,868, respectively.
The notes payable to finance company referred to above with a balance of
$5,688,333 at December 31, 1999 contain certain restrictive covenants
including debt coverage ratios and periodic reporting requirements. In
addition, certain subsidiaries are restricted from transferring assets or
paying dividends to The WesterN SizzliN Corporation without obtaining the
prior written consent of the lender. The net assets of these subsidiaries
subject to such restrictions approximated $152,000 of consolidated net
assets at December 31, 1999. At December 31, 1999, the Company was not in
compliance with the debt coverage ratio related to one store. A letter
was obtained from the finance company dated March 21, 2000, which waived
such noncompliance through February 15, 2001.
F-17
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(6) LEASES
The Company is obligated under various leases for offices,
Company-operated stores and equipment. The following schedule summarizes
equipment under leases that have been accounted for as capital leases and
are included in property and equipment in the accompanying consolidated
balance sheets:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment $199,927 199,927
Less accumulated amortization 92,733 62,684
-------- --------
Equipment under capital leases, net $107,194 137,243
======== ========
</TABLE>
At December 31, 1999, minimum rental payments due under capital and
operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------------- -----------------
<S> <C> <C>
2000 $ 48,162 1,804,421
2001 36,316 1,791,288
2002 20,269 1,714,662
2003 -- 1,316,460
2004 -- 1,201,506
Subsequent years -- 3,641,385
----------------- -----------------
Total minimum lease payments 104,747 $ 11,469,722
=================
Imputed interest (rates ranging from 7% through 10%) 20,557
-----------------
Present value of net minimum lease payments 84,190
Less current installments of obligations under capital leases 39,851
-----------------
Obligations under capital leases, excluding
current installments $ 44,339
=================
</TABLE>
Total rent expense under operating leases for 1999, 1998 and 1997
approximated $1,763,000, $1,579,000 and $1,284,000, respectively. Taxes,
insurance and maintenance expenses relating to all leases are obligations
of the Company.
The Company leases the location of one of its stores from a partnership,
one of whose partners is the former president of the Company. The
operating lease term is 20 years and calls for rental payments of
approximately $86,190 per year. In addition, the Company leases chartered
air service from time to time from a company owned by the president of
the Company. The total expenses for chartered air service were
approximately $158,491, $147,800 and $87,500 for 1999, 1998 and 1997,
respectively.
F-18
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The Company currently has management agreements for the operation of two
properties. Future minimum payments to be received under these management
agreements for each of the five years subsequent to December 31, 1999 and
years thereafter are as follows: 2000, $96,000; 2001, $96,000; 2002,
$104,000; 2003, $104,000; 2004, $104,000 and years thereafter, $407,000.
(7) INCOME TAXES
Income tax expense for the years ended December 31, 1999, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------------- -------------- ---------------
<S> <C> <C> <C>
Year ended December 31, 1999:
Federal $ 124,650 10,712 135,362
State 23,401 1,071 24,472
-------------- ------------- ---------------
$ 148,051 11,783 159,834
============== ============== ===============
Year ended December 31, 1998:
Federal $ 646,618 26,749 673,367
State 110,116 12,668 122,784
-------------- ------------- ---------------
$ 756,734 39,417 796,151
============== ============== ===============
Year ended December 31, 1997:
Federal $ 329,189 281,241 610,430
State 90,695 17,025 107,720
-------------- ------------- ---------------
$ 419,884 298,266 718,150
============== ============== ===============
</TABLE>
Income tax expense differs from the amount computed by applying the
statutory corporate tax rate of 34 percent to income before income tax
expense and extraordinary item as follows for the years ended December
31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ---------------
<S> <C> <C> <C>
Expected income tax expense $ 106,360 668,080 603,378
State income tax, net of federal income tax benefit 16,152 77,900 71,095
Nondeductible goodwill 27,034 16,547 16,547
Other 10,288 33,624 27,130
-------------- -------------- ---------------
$ 159,834 796,151 718,150
============== ============== ===============
</TABLE>
F-19
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
During the year ended December 31, 1998, the Company recognized an
extraordinary loss on debt extinguishment of $51,451 net of the related
income tax benefit of $31,689.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 925,460 --
Accounts receivable, principally due to allowance for
doubtful accounts 126,773 121,883
Property and equipment, principally due to differences
in depreciation 286,868 --
Other 95,903 48,854
----------------- -----------------
Total gross deferred tax assets 1,435,004 170,737
----------------- -----------------
Deferred tax liabilities:
Property and equipment, principally due to differences
in depreciation -- 245,888
Accounting method change 120,973 181,460
Favorable lease rights 196,804 --
Other 41,437 --
----------------- -----------------
Total gross deferred liabilities 359,214 427,348
----------------- -----------------
Net deferred tax asset (liability) $ 1,075,790 (256,611)
================= =================
</TABLE>
Management has determined that a valuation allowance for deferred tax
assets is not necessary.
At December 31, 1999, the Company has loss carryforwards for income tax
purposes of $2,437,987 available to offset future taxable income. These
loss carryforwards, which were acquired with the reverse merger
acquisition, are subject to certain annual limitations. If not utilized,
these loss carryforwards will expire as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE
<S> <C>
2010 $ 262,794
2011 1,204,458
2012 567,299
2018 403,436
-----------------
$ 2,437,987
=================
</TABLE>
F-20
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(8) COMMON STOCK OPTIONS AND WARRANTS
The Company's Board of Directors has adopted an Employee Stock Option
Plan (the Plan) pursuant to which the Company's Board of Directors may
grant stock options to officers and key employees. The Plan authorizes
grants of options to purchase up to 400,000 shares of the Company's
authorized, but unissued common stock. Accordingly, 400,000 shares of
authorized, but unissued common stock are reserved for use in the Plan.
All stock options have been granted with an exercise price equal to or in
excess of the stock's fair market value at the date of grant. The term of
each stock option is fixed but no stock option shall be exercisable more
than ten years after the date the stock option is granted. Stock options
granted under the Plan are exercisable either at the date of grant or
twelve months from the date of grant.
The per share weighted average fair value of stock options granted during
1999, 1998 and 1997 of $1.27, $.10 and $.04, respectively, was determined
on the date of grant utilizing the Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Risk-free interest rate 5% 6% 7%
Expected life of options 4.0 years 5.5 years 7.5 years
Expected volatility 57% 5% 5%
</TABLE>
As discussed in note 1(m), the Company applies APB Opinion No. 25 in
accounting for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial
statements. Had the Company determined compensation cost based on the
fair value of its stock options at the grant date under SFAS No. 123, the
Company's net income and net income per share would have decreased to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- --------------- ---------------
<S> <C> <C> <C>
Net income:
As reported $ 152,989 1,117,340 1,056,493
Pro forma 87,122 1,106,299 1,054,645
Basic and diluted net income per share:
As reported $ .01 .12 .12
Pro forma .01 .12 .12
</TABLE>
F-21
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Stock option activity during the years ended December 31, 1999, 1998 and
1997 was as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1996 182,000 $1.50
Granted 170,000 $1.50
Forfeited (30,000) $1.50
-------- -----
Balance at December 31, 1997 322,000 $1.50
Granted 144,000 $1.50
Forfeited (16,000) $1.50
--------
Balance at December 31, 1998 450,000 $1.50
Additional options arising from reverse
merger acquisition 87,406 $5.06
Granted 80,000 $1.50
Exercised (155,000) $1.50
Forfeited (71,897) $4.66
--------
Balance at December 31, 1999 390,509 $1.72
========
Exercisable at December 31, 1999 390,509 $1.72
========
</TABLE>
At December 31, 1999, the weighted average remaining contractual life of
outstanding options was 4.5 years. The 390,509 stock options outstanding
at December 31, 1999 include 100,000 stock options issued in connection
with a noncompete agreement (see below).
In conjunction with the 12 percent notes payable to stockholders, which
were partially refinanced during 1998 (see note 5) and originally issued
in 1996, the Company issued 371,250 detachable stock purchase warrants to
the note holders. The value ascribed to these warrants, as determined by
an independent investment banker, was $.37 per warrant for an aggregate
of $137,363. Accordingly, the face amount of the notes payable were
discounted and a corresponding amount was recorded as additional paid-in
capital. The discount on the notes payable was amortized as interest
expense using the interest method over the life of the notes payable,
except for the portion that was written off in connection with the debt
refinancing in 1998 (see note 5). Effective with the reverse merger
acquisition (see note 2), these warrants were converted into 742,500
shares of common stock.
On October 1, 1997, the Company leased five stores from a former
franchisee. In connection with this transaction, the former franchisee
entered into a noncompete agreement for a period of two years in exchange
for 200,000 shares of the Company's common stock and stock options for
100,000 shares
F-22
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
exercisable at $1.50 per share. The value assigned to the noncompete
agreement by the Company was $237,598 and was determined based
on the estimated fair market value of the stock at the date of grant.
This amount was amortized on a straight-line basis over the term of the
agreement. In addition, the Company is required to spend at least
$500,000 on property improvements over the original lease term of five
years.
(9) EMPLOYEE BENEFIT PLAN
The Company implemented a 401(k) investment plan (the Plan) on January 1,
1999 for the benefit of its employees. Employees are eligible to
participate in the 401(k) plan after a 12-month period of service. Under
the 401(k) plan, employees may elect to have up to 16 percent of their
salary, subject to Internal Revenue Service limitations, withheld on a
pretax basis and invested on their behalf. The Plan provides for
discretionary contributions by the Company. As of December 31, 1999, the
Company had accrued approximately $26,000 for 1999's discretionary
contribution.
(10) LEGAL SETTLEMENT AND PRIVATE PLACEMENT OF COMMON STOCK
On September 10, 1999, the Company completed a settlement agreement with
David K. Wachtel, Jr. with respect to long-standing litigation initiated
in February 1995. Under the terms of the settlement agreement, Austins
paid Mr. Wachtel $1,000,000, which is included in other expense for the
year ended December 31, 1999, in settlement of all claims he had in the
litigation. Additionally, Mr. Wachtel withdrew his notice to dissent from
the merger between Austins and WesterN SizzliN with respect to the
684,000 WesterN SizzliN shares (premerger) owned by him, and Austins
repurchased these shares for the sum of $3,420,000.
In order to obtain the funds with which to pay Mr. Wachtel under the
settlement agreement, the Company conducted a private placement of its
common stock at prices ranging from $2.25 to $2.50 per share to qualified
shareholders, principally former WesterN SizzliN stockholders. On the
closing date of September 10, 1999, the Company had received
approximately $2.9 million of proceeds which it used, along with
approximately $1.5 million of bank and other financing to complete the
settlement with Mr. Wachtel.
As a part of the private placement, Austins issued 1,286,200 shares of
its common stock to the qualified investors-purchasers. The holders of a
majority of the stock ultimately acquired in the private placement have
the right, for the one-year period commencing March 15, 2000, to request
Austins to file a registration statement with the Securities and Exchange
Commission to permit the resale of the stock. The registration must
remain effective for 45 days and Austins must cover the costs of the
registration. If any investor may resell all of his or her share in a
single three-month period utilizing Rule 144, then the registration
rights will not apply to that investor.
F-23
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1999 and
1998. Statement of Financial Accounting Standards No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 510,833 510,833 643,536 643,536
Accounts receivable 910,552 910,552 870,552 870,552
Notes receivable 237,833 217,457 288,396 263,688
Other receivables 73,682 73,682 76,205 76,205
Financial liabilities:
Credit line note payable to bank $ 446,139 446,139 410,868 410,868
Accounts payable 2,780,388 2,780,383 2,186,236 2,186,236
Accrued expenses and other 676,202 676,202 878,805 878,805
Long-term debt 8,263,128 8,186,075 7,505,820 7,408,810
</TABLE>
The carrying amounts shown in the table are included in the balance sheet
under the indicated captions.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
- Cash and cash equivalents, accounts receivable, other receivables,
credit line note payable to bank, accounts payable and accrued
expenses and other: The carrying amounts approximate fair value
because of the short maturity of those instruments.
- Notes receivable: The fair value is determined as the present value
of expected future cash flows discounted at the interest rate which
approximates the rate currently offered by local lending
institutions for loans of similar terms to companies with comparable
credit risk.
- Long-term debt: The fair value of the Company's long-term debt is
estimated by discounting the future cash flows of each instrument at
rates which approximate those currently offered to the Company for
similar debt instruments of comparable maturities by the Company's
lenders.
F-24
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(12) REPORTABLE SEGMENTS
Effective January 1, 1998, the Company adopted SFAS No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131
establishes standards for the way the Company reports information about
operating segments in its financial statements. The adoption did not
affect results of operations or financial position.
The Company has defined two reportable segments: Company-operated
restaurants and franchising. The Company-operated restaurant segment
consists of the operations of all Company-operated restaurants and
derives its revenues from the operations of "WesterN SizzliN Steakhouse,"
"Great American Steak & Buffet" and "WesterN SizzliN Wood Grill." The
franchising segment consists of franchise sales and support activities
and derives its revenues from sales of franchise and development rights
and collection of royalties from franchisees.
Generally, the Company evaluates performance and allocates resources
based on income from operations before income taxes. Administrative and
capital costs are allocated to segments based upon predetermined rates or
actual or estimated resource usage. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company accounts for intercompany sales and
transfers as if the sales or transfers were with third parties and
eliminates the related profit in consolidation.
Reportable segments are business units that provide different products or
services. Separate management of each segment is required because each
business unit is subject to different operational issues and strategies.
Through December 31, 1999, all revenues for each business segment were
derived from business activities conducted with customers located in the
United States. No single external customer accounted for 10 percent or
more of the Company's consolidated revenues.
F-25
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
The following table summarizes reportable segment information:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Revenues from reportable segments:
Restaurants $ 36,264,433 30,396,292 26,653,025
Franchising and other 6,261,331 6,698,055 6,870,921
--------------- ---------- ----------
Total revenues $ 42,525,764 37,094,347 33,523,946
=============== ========== ==========
Depreciation and amortization:
Restaurants $ 1,490,554 1,198,998 784,321
Franchising and other 918,689 778,992 1,052,588
--------------- ---------- ---------
Total depreciation and amortization $ 2,409,243 1,977,990 1,836,909
============== ========== =========
Interest expense:
Restaurants $ 671,079 612,415 676,246
Franchising and other 125,571 133,597 493,716
-------------- ---------- ---------
Total interest expense $ 796,650 746,012 1,169,962
=============== ========== =========
Interest income:
Restaurants $ 30,725 27,630 10,971
Franchising and other 19,973 17,385 13,740
--------------- ---------- ---------
Total interest income $ 50,698 45,015 24,711
============== ========== =========
Income (loss) before income taxes and extraordinary item:
Restaurants $ (126,237) 337,197 579,813
Franchising and other 439,060 1,627,745 1,194,830
-------------- ---------- ---------
Total income before income
taxes and extraordinary item $ 312,823 1,964,942 1,774,643
============== ========== =========
Gross fixed assets:
Restaurants $ 11,562,730 8,011,776 4,430,570
Franchising and other 1,376,426 1,541,195 1,539,658
-------------- ---------- ---------
Total gross fixed assets $ 12,939,156 9,552,971 5,970,228
============== ========== =========
</TABLE>
F-26
<PAGE>
AUSTINS STEAKS & SALOON, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C>
Expenditures for fixed assets (including acquisitions):
Restaurants $ 3,632,515 3,641,534 849,886
Franchising and other 110,123 1,537 --
--------------- --------------- --------------
Total expenditures for fixed assets $ 3,742,638 3,643,071 849,886
=============== =============== ==============
</TABLE>
(13) CONTINGENCIES
In September 1997, the Company filed suit against a former franchisee
seeking to recover past due franchise fees. Subsequently, during 1998,
the former franchisee filed a counterclaim against the Company alleging
breach of contract and warrant, fraud, negligence, negligent
misrepresentation, breach of fiduciary duty, tortious interference, and
breach of the duty of good faith and fair dealing. The suit requests
compensatory damages, treble damages and exemplary damages of not less
than $500,000 plus prejudgment interest and attorney's fees.
The court has ordered that the Company and former franchisee submit the
dispute to arbitration. Management and its legal counsel cannot predict
the outcome of the arbitration, and are unable to determine the effect on
the consolidated financial statements of the Company.
In addition to the litigation discussed in the preceding paragraphs, the
Company is involved in other litigation from time to time during the
normal course of its operations. Management does not believe the ultimate
outcome of this litigation will have a material effect on the financial
position or the results of operations of the Company. During 1999, 1998
and 1997, respectively, the Company recognized $351,947, $594,072 and
$692,194 of legal expenses.
F-27
<PAGE>
Exhibit 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Austins Steaks & Saloon, Inc.
We consent to incorporation by reference in Registration Statement No.
33-92196 on Form S-8 of our report dated February 11, 2000, except for note 5
with respect to the debt waiver letter, as to which the date is March 21,
2000, relating to the consolidated balance sheets of Austins Steaks &
Saloon, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999,
which report is included in the December 31, 1999 annual report on Form
10-KSB OF Austins Steaks & Saloon, Inc.
KPMG LLP
Roanoke, Virginia
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 510,833
<SECURITIES> 0
<RECEIVABLES> 1,482,349
<ALLOWANCES> 333,964
<INVENTORY> 383,281
<CURRENT-ASSETS> 2,802,906
<PP&E> 12,939,156
<DEPRECIATION> 3,118,935
<TOTAL-ASSETS> 25,542,534
<CURRENT-LIABILITIES> 6,778,858
<BONDS> 5,620,494
0
0
<COMMON> 121,038
<OTHER-SE> 13,022,144
<TOTAL-LIABILITY-AND-EQUITY> 25,542,534
<SALES> 42,525,764
<TOTAL-REVENUES> 42,576,462
<CGS> 29,713,899
<TOTAL-COSTS> 40,420,421
<OTHER-EXPENSES> 1,046,568
<LOSS-PROVISION> 99,793
<INTEREST-EXPENSE> 796,650
<INCOME-PRETAX> 312,823
<INCOME-TAX> 159,834
<INCOME-CONTINUING> 152,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,989
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
