**U.S. SECURITIES AND EXCHANGECOMMISSION**

### **Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý****   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------------------------|

 

**For the period ended June 30, 2002**

 

| **o****   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT** |
|----------------------------------------------------------------------------------------------------|

 

**For thetransition period from              to              **

 

**Commissionfile number 0-25366**

 

**AUSTINSSTEAKS & SALOON, INC.**

(Exact name of smallbusiness issuer as specified in its charter)

 

| **Delaware**                                                    |   | **86-0723400**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **317  Kimball Avenue, N.E.  Roanoke, Virginia  24016**    |
| (Address of principal  executive offices)                       |
|                                                            |   |                                  |
| **(540)  345-3195**                                             |
| (Issuer’s telephone  number)                               |

 

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15 (d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ýNo o

 

As of August 14, 2002, there were 12,178,800 shares of the issuer’scommon stock outstanding.

 

 

----

 

**AUSTINSSTEAKS & SALOON, INC.**

**Form10-Q Index**

**SixMonths Ended June 30, 2002**

** **
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                      |
|--------------|----------------------------------------------------------------------------------------------------------------|
|         |                                                                                                           |   |
|         | **Item 1.  Financial Statements (Unaudited)**                                                             |
|         |                                                                                                           |   |
|         |                                                                                                           | Consolidated Balance Sheets  – June 30, 2002 and December 31, 2001 |
|         |                                                                                                           |   |
|         |                                                                                                           | Consolidated  Statements of Operations - Three Months and Six Months Ended June 30, 2002  and 2001 |
|         |                                                                                                           |   |
|         |                                                                                                           | Consolidated  Statement of Changes in Stockholders’ Equity - Six Months Ended June 30, 2002 |
|         |                                                                                                           |   |
|         |                                                                                                           | Consolidated  Statements of Cash Flows - Six Months Ended June 30, 2002 and 2001 |
|         |                                                                                                           |   |
|         |                                                                                                           | Notes to  Consolidated Financial Statements |
|         |                                                                                                           |   |
|         | **Item  2.  Management’s Discussion and Analysis  of Financial Condition and Results of Operations** |
|         |                                                                                                           |   |
|         | **Item  3.  Quantitative and Qualitative  Disclosure about Market Risk**                                  |
|         |                                                                                                           |   |
| **PART II.** | **OTHER INFORMATION**                                                                                          |
|         |                                                                                                           |   |
|         | **Item 1.  Legal Proceedings**                                                                            |
|         |                                                                                                           |   |
|         | **Item  2.  Change in Securities and Use of  Proceeds**                                                   |
|         |                                                                                                           |   |
|         | **Item  3.  Defaults Upon Senior Securities**                                                             |
|         |                                                                                                           |   |
|         | **Item  4.  Submission of Matters to a Vote of  Security Holders**                                        |
|         |                                                                                                           |   |
|         | **Item 5.  Other Information**                                                                            |
|         |                                                                                                           |   |
|         | **Item 6.  Exhibits and Reports on Form 8-K**                                                             |

 

----

 

**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Balance Sheets

June 30, 2002 andDecember 31, 2001

 
|                                                                                                                            |   | **June 30,  2002** |       | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|--------|
|                                                                                                                            |   | **(unaudited)**    |       |                   |   |
| **Assets**                                                                                                                      |   |               |       |                   |   |
| Current assets:                                                                                                                 |   |               |       |                   |   |
| Cash and cash  equivalents                                                                                                      |   | $                  | 388,469    |                   | $      | 449,075 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $172,085 in 2002 and  $148,142 in 2001                    |   | 1,175,311          |       | 1,269,549              |   |
| Current  installments of notes receivable                                                                                       |   | 168,795            |       | 208,734                |   |
| Other  receivables                                                                                                              |   | 254,181            |       | 261,855                |   |
| Inventories                                                                                                                     |   | 190,757            |       | 224,136                |   |
| Prepaid expenses                                                                                                                |   | 425,137            |       | 354,326                |   |
| Deferred income  taxes                                                                                                          |   | 143,967            |       | 143,967                |   |
| Total current  assets                                                                                                           |   | 2,746,617          |       | 2,911,642              |   |
| Notes  receivable, less allowance for doubtful accounts of $43,021 in 2002 and  $31,964 in 2001, excluding current installments |   | 150,488            |       | 148,756                |   |
| Property and  equipment, net                                                                                                    |   | 6,518,109          |       | 7,825,404              |   |
| Franchise  royalty contracts, net of accumulated amortization of $5,357,510 in 2002 and  $5,042,363 in 2001                     |   | 4,096,921          |       | 4,412,068              |   |
| Goodwill, net of  accumulated amortization of $2,513,602 in 2002 and 2001                                                       |   | 4,310,200          |       | 4,310,200              |   |
| Favorable lease  rights, net of accumulated amortization of $177,771 in 2002 and $156,320 in  2001                              |   | 376,062            |       | 397,513                |   |
| Financing costs,  net of accumulated amortization of $62,603 in 2002 and $53,820 in 2001                                        |   | 127,700            |       | 136,483                |   |
| Deferred income  taxes                                                                                                          |   | 1,049,008          |       | 1,049,008              |   |
| Other assets,  net                                                                                                              |   | 269,017            |       | 276,187                |   |
|                                                                                                                            |   | $                  | 19,644,122 |                   | $      | 21,467,261 |   |
| **Liabilities and Stockholders’  Equity**                                                                                  |   |               |       |                   |   |
| Current  liabilities:                                                                                                           |   |               |       |                   |   |
| Bank overdraft                                                                                                                  |   | $                  | 74,936     |                   | $      | 412,166 |   |
| Credit line note  payable to bank                                                                                               |   | 500,000            |       | 389,105                |   |
| Current  installments of long-term debt                                                                                         |   | 494,851            |       | 506,919                |   |
| Accounts payable                                                                                                                |   | 1,580,318          |       | 2,628,371              |   |
| Income taxes  payable                                                                                                           |   | 91,729             |       | 40,383                 |   |
| Accrued expenses  and other                                                                                                     |   | 963,383            |       | 1,113,362              |   |
| Total current  liabilities                                                                                                      |   | 3,705,217          |       | 5,090,306              |   |
| Long-term debt,  excluding current installments                                                                                 |   | 4,344,063          |       | 4,594,468              |   |
| Total  liabilities                                                                                                              |   | 8,049,280          |       | 9,684,774              |   |
| Stockholders’  equity:                                                                                                     |   |               |       |                   |   |
| Common stock;  $.01 par value.  Authorized 20,000,000  shares; issued and outstanding 12,178,800 shares in 2002 and 2001   |   | 121,788            |       | 121,788                |   |
| Additional  paid-in capital                                                                                                     |   | 8,699,173          |       | 8,699,173              |   |
| Retained  earnings                                                                                                              |   | 2,773,881          |       | 2,961,526              |   |
| Total  stockholders’ equity                                                                                                |   | 11,594,842         |       | 11,782,487             |   |
| Commitments and  contingencies                                                                                                  |   |               |       |                   |   |
|                                                                                                                            |   | $                  | 19,644,122 |                   | $      | 21,467,261 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

----

 

**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statementsof Operations

(Unaudited)

 
|                                               |   | **Three Months  Ended June 30,** |      | **Six Months  Ended June 30,** |   |
|----------------------------------------------------|--------|----------------------------------|-----------|--------------------------------|--------|
|                                               |   | **2002**                         |      | **2001**                       |   | **2002** |   | **2001** |   |
| Revenues:                                          |   |                             |      |                           |   |   |   |   |   |
| Company-operated  stores                           |   | $                                | 6,726,458 |                           | $      | 8,515,056 |   | $ | 13,178,835 |   | $ | 18,382,379 |   |
| Franchise  operations                              |   | 1,386,881                        |      | 1,454,606                      |   | 2,748,699 |   | 2,968,541 |   |
| Other                                              |   | 112,842                          |      | 145,390                        |   | 227,868 |   | 244,937 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Total revenues                                     |   | 8,226,181                        |      | 10,115,052                     |   | 16,155,402 |   | 21,595,857 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Costs and  expenses:                               |   |                             |      |                           |   |   |   |   |   |
| Cost of  company-operated stores                   |   | 4,503,773                        |      | 6,036,665                      |   | 8,957,337 |   | 12,951,427 |   |
| Cost of  franchise operations                      |   | 478,299                          |      | 545,579                        |   | 997,631 |   | 1,013,353 |   |
| Other cost of  operations                          |   | 80,682                           |      | 108,602                        |   | 169,085 |   | 183,325 |   |
| Restaurant  operating expenses                     |   | 1,504,175                        |      | 1,712,450                      |   | 3,026,146 |   | 3,874,181 |   |
| General and  administrative                        |   | 640,026                          |      | 624,857                        |   | 1,045,555 |   | 1,436,403 |   |
| Depreciation and  amortization                     |   | 452,851                          |      | 577,392                        |   | 896,931 |   | 1,156,057 |   |
| Closed  company-operated stores                    |   | 1,026,289                        |      | —                         |   | 1,026,289 |   | — |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Total costs and  expenses                          |   | 8,686,095                        |      | 9,605,545                      |   | 16,118,974 |   | 20,614,746 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Income (loss)  from operations                     |   | (459,914                         | )         | 509,507                        |   | 36,428 |   | 981,111 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Other income  (expense):                           |   |                             |      |                           |   |   |   |   |   |
| Interest expense                                   |   | (131,521                         | )         | (168,987                       | )      | (265,405 | ) | (344,222 | ) |
| Interest income                                    |   | 14,049                           |      | 1,933                          |   | 21,193 |   | 3,608 |   |
| Other                                              |   | 181,389                          |      | 900                            |   | 199,851 |   | 15,440 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
|                                               |   | 63,917                           |      | (166,154                       | )      | (44,361 | ) | (325,174 | ) |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Income (loss)  before income tax expense (benefit) |   | (395,997                         | )         | 343,353                        |   | (7,933 | ) | 655,937 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Income tax  expense (benefit)                      |   | (151,255                         | )         | 125,000                        |   | (2,970 | ) | 252,050 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Net income  (loss)                                 |   | $                                | (244,742  | )                              | $      | 218,353 |   | $ | (4,963 | ) | $ | 403,887 |   |
|                                               |   |                             |      |                           |   |   |   |   |   |
| Earnings (loss)  per share:                        |   |                             |      |                           |   |   |   |   |   |
| Basic                                              |   | (.02                             | )         | .02                            |   | .00 |   | .03 |   |
| Diluted                                            |   | (.02                             | )         | .02                            |   | .00 |   | .03 |   |

 

See accompanying notes toconsolidated financial statements

 

3

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statement ofChanges in Stockholders’ Equity

Six Months Ended June 30,2002

(Unaudited)

 
|                                   |   | **Common Stock** |   | **Additional  Paid-in  Capital** |    | **Retained  Earnings** |   | **Total** |   |
|----------------------------------------|--------|------------------|--------|----------------------------------|---------|------------------------|--------|-----------|--------|
|                                   |   | **Shares**       |   | **Dollars**                      |    |                   |   |
|                                   |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances,  December 31, 2001           |   | 12,178,800       |   | $                                | 121,788 |                   | $      | 8,699,173 |   | $ | 2,961,526 |   | $ | 11,782,487 |   |
|                                   |   |             |   |                             |    |                   |   |      |   |   |   |
| Net Loss                               |   | —           |   | —                           |    | —                 |   | (4,963    | )      | (4,963 | ) |
|                                   |   |             |   |                             |    |                   |   |      |   |   |   |
| Dividends  declared ($0.015 per share) |   | —           |   | —                           |    | —                 |   | (182,682  | )      | (182,682 | ) |
|                                   |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances, June  30, 2002               |   | 12,178,800       |   | $                                | 121,788 |                   | $      | 8,699,173 |   | $ | 2,773,881 |   | $ | 11,594,842 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statements of Cash Flows

Six Months Ended June 30,2002 and 2001

(Unaudited)

 
|                                                                                                 |   | **June**   |    |
|------------------------------------------------------------------------------------------------------|--------|------------|---------|
|                                                                                                 |   | **2002**   |    | **2001** |   |
| Cash flows from  operating activities:                                                               |   |       |    |   |   |
| Net income  (loss)                                                                                   |   | $          | (4,963  | ) | $ | 403,887 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |       |    |   |   |
| Depreciation and  amortization of property and equipment                                             |   | 551,550    |    | 556,187 |   |
| Amortization of  franchise royalty contracts,  goodwill  and other assets                       |   | 345,381    |    | 599,869 |   |
| Loss on disposal  of fixed assets                                                                    |   | 0          |    | 1,439 |   |
| Impairment of  property and equipment                                                                |   | 870,009    |    | 0 |   |
| Provision for  bad debts                                                                             |   | 35,000     |    | 25,000 |   |
| (Increase)  decrease in:                                                                             |   |       |    |   |   |
| Trade accounts  receivable                                                                           |   | 70,295     |    | (134,393 | ) |
| Notes receivable                                                                                     |   | 27,150     |    | 101,960 |   |
| Other  receivables                                                                                   |   | 7,674      |    | (124,682 | ) |
| Inventories                                                                                          |   | 33,379     |    | 468,884 |   |
| Prepaid expenses                                                                                     |   | (70,811    | )       | (126,512 | ) |
| Other assets                                                                                         |   | 7,170      |    | 77,190 |   |
| Income taxes  refundable                                                                             |   | 0          |    | 943,661 |   |
| Increase  (decrease) in:                                                                             |   |       |    |   |   |
| Accounts payable                                                                                     |   | (1,048,053 | )       | (1,862,460 | ) |
| Accrued expenses                                                                                     |   | (332,661   | )       | (2,054,784 | ) |
| Income taxes  payable                                                                                |   | 51,346     |    | 98,504 |   |
|                                                                                                 |   |       |    |   |   |
| Net cash  provided by (used in) operating activities                                                 |   | 542,466    |    | (1,026,250 | ) |
| Cash flows from  investing activities:                                                               |   |       |    |   |   |
| Additions to  property and equipment                                                                 |   | (114,264   | )       | (131,151 | ) |
|                                                                                                 |   |       |    |   |   |
| Net cash used in  investing activities                                                               |   | (114,264   | )       | (131,151 | ) |
| Cash flows from  financing activities:                                                               |   |       |    |   |   |
| Net decrease in  bank overdraft                                                                      |   | (337,230   | )       | (239,155 | ) |
| Net increase  (decrease) in credit line note payable                                                 |   | 110,895    |    | (243,063 | ) |
| Net increase in  notes payable                                                                       |   | 0          |    | 989,168 |   |
| Payments on  long-term debt                                                                          |   | (262,473   | )       | (376,602 | ) |
|                                                                                                 |   |       |    |   |   |
| Net cash  provided by (used in) financing activities                                                 |   | (488,808   | )       | 130,348 |   |
|                                                                                                 |   |       |    |   |   |
| Net decrease in  cash and cash equivalents                                                           |   | (60,606    | )       | (1,027,053 | ) |
|                                                                                                 |   |       |    |   |   |
| Cash and cash  equivalents at beginning of period                                                    |   | 449,075    |    | 1,467,985 |   |
|                                                                                                 |   |       |    |   |   |
| Cash and cash  equivalents at end of period                                                          |   | $          | 388,469 |   | $ | 440,932 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**AUSTINSSTEAKS & SALOON, INC.**

 

Notes to ConsolidatedFinancial Statements

 

June 30, 2002 and 2001

 

(Unaudited)

 

**(1)                ****Summary of Significant Accounting Policies**

 

                ***(a)           Basisof Presentation***

 

The accompanying unaudited consolidated financialstatements have been prepared by Austins Steaks & Saloon, Inc. (“Austins”or the “Company”) in accordance with accounting principles generally acceptedin the United States of American for interim financial reporting informationand the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements.  In the opinion of management, all materialreclassifications and adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation of the results of operations,financial position and cash flows for each period shown have been included.  Operating results for interim periods arenot necessarily indicative of the results for the full year.  The unaudited consolidated financialstatements and notes are presented as permitted by Form 10-Q and do not containcertain information included in the Company’s annual consolidated financialstatements and notes.  For furtherinformation, refer to the consolidated financial statements and notes theretoincluded in the Company’s annual consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

**(2)                ****Goodwill and Other Intangible Assets**

 

The Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” effective January 1, 2002. Under SFAS No. 142, goodwill and intangible assets deemed to haveindefinite lives are no longer systematically amortized but, instead, arereviewed for impairment and written down and charged to results of operationswhen their carrying amount exceeds their estimated fair value. The Companyperformed transitional impairment tests on its goodwill. The previous methodfor determining impairment prescribed by SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”utilized an undiscounted cash flow approach for the initial impairmentassessment, while SFAS No. 142 utilizes a fair value approach. The Company hasone of its two reporting units with goodwill, which also are the Company'sreportable segments. Goodwill was tested for impairment at the level of reportingunit. Based on the results of the transitional impairment tests, the fair valueof the reporting unit supports the goodwill. The Company is required to perform impairment tests each year, orbetween yearly tests in certain circumstances, for goodwill. There can be noassurance that future impairment tests will not result in a charge to earnings.

 

6

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The following tablereconciles the reported net income and earnings per share before accounting changeto that which would have resulted for the six months-ended June 30, 2001 ifSFAS No. 142 had been adopted effective January 1, 2001:

 
| Reported net income                    |   | $       | 403,887 |   |
|----------------------------------------|--------|---------|---------|--------|
| Goodwill amortization, net of tax      |   | 158,548 |    |
| Adjusted  earnings                     |   | $       | 562,435 |   |
|                                   |   |    |    |
| Basic and  diluted earnings per share: |   |    |    |
| Reported net  earnings                 |   | $       | 0.03    |   |
| Goodwill  amortization, net of tax     |   | 0.01    |    |
| Adjusted net  earnings per share       |   | $       | 0.04    |   |

 

Intangible assets otherthan goodwill at June 30, 2002 and December 31, 2001 consisted of the following:

 
|                                        |   | **Gross  Carrying Amount** |       | **Accumulated  Amortization** |   | **Net  Carrying Amount** |   |
|---------------------------------------------|--------|----------------------------|------------|-------------------------------|--------|--------------------------|--------|
| As of June 30, 2002                         |   |                       |       |                          |   |                     |   |
|                                        |   |                       |       |                          |   |                     |   |
| Intangible  assets subject to amortization: |   |                       |       |                          |   |                     |   |
|                                        |   |                       |       |                          |   |                     |   |
| Franchise  royalty contracts                |   | $                          | 9,454,431  |                          | $      | 5,357,510                |   | $ | 4,096,921 |   |
| Favorable lease  rights                     |   | 553,833                    |       | 177,771                       |   | 376,062                  |   |
| Total                                       |   | $                          | 10,008,264 |                          | $      | 5,535,281                |   | $ | 4,492,983 |   |
|                                        |   |                       |       |                          |   |                     |   |
| As of December  31, 2001                    |   |                       |       |                          |   |                     |   |
|                                        |   |                       |       |                          |   |                     |   |
| Intangible  assets subject to amortization: |   |                       |       |                          |   |                     |   |
|                                        |   |                       |       |                          |   |                     |   |
| Franchise  royalty contracts                |   | $                          | 9,454,431  |                          | $      | 5,042,363                |   | $ | 4,412,068 |   |
| Favorable lease  rights                     |   | 553,833                    |       | 156,320                       |   | 397,513                  |   |
| Total                                       |   | $                          | 10,008,264 |                          | $      | 5,198,683                |   | $ | 4,809,581 |   |

 

In accordance with SFASNo. 142, amortization expense for the six-month period ended June 30, 2002 was$336,598 Estimated amortization expense for each of the years ended December 31is as follows:

 

| **Year** |   | **Amount** |    |
|----------|--------|------------|---------|
| 2002     |   | $          | 673,200 |   |
| 2003     |   | 673,200    |    |
| 2004     |   | 673,200    |    |
| 2005     |   | 673,200    |    |
| 2006     |   | 673,200    |    |
|          |        |            |         |  |

 

7

----

 

The changes in the net carrying amount of goodwill, byreporting segment, for the six months ended June 30, 2002 are as follows:

 
| **Segment**              |   | **Goodwill  at  January 1, 2002** |      | **Impairment  losses** |   | **Goodwill  at  June 30, 2002** |   |
|--------------------------|--------|-----------------------------------|-----------|------------------------|--------|---------------------------------|--------|
|                     |   |                              |      |                   |   |                            |   |
| Company-operated  stores |   | $                                 | 4,310,200 |                   | $      | —                          |   | $ | 4,310,200 |   |
| Franchise  operations    |   | —                            |      | —                 |   | —                          |   |
| Total                    |   | $                                 | 4,310,200 |                   | $      | —                          |   | $ | 4,310,200 |   |

 

The changes in the net carrying amount of goodwill, byreporting segment, for the six months ended June 30, 2001 are as follows:

 
| **Segment**              |   | **Goodwill  at  January 1, 2001** |      | **Amortization** |   | **Goodwill  at  June 30, 2001** |   |
|--------------------------|--------|-----------------------------------|-----------|------------------|--------|---------------------------------|--------|
|                     |   |                              |      |             |   |                            |   |
| Company-operated  stores |   | $                                 | 4,765,121 |             | $      | 227,460                         |   | $ | 4,537,661 |   |
| Franchise  operations    |   | —                            |      | —           |   | —                          |   |
| Total                    |   | $                                 | 4,765,121 |             | $      | 227,460                         |   | $ | 4,537,661 |   |

 

**(3)                ****Earnings Per Share**

 

Basic earnings per share excludes dilution and iscomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects the potentialdilution that could occur if securities or other contracts to issue commonstock were exercised or converted into common stock or resulted in the issuanceof common stock that then shared in the earnings of the Company.  Stock options for shares of common stockwere not included in computing diluted earnings per share for the six-monthperiods ended June 30, 2002 and 2001 because these effects are anti-dilutive.

 

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per share computations forthe periods indicated:

 
|                                  |   | **Income  (Loss)  (Numerator)** |     | **Weighted  Average  Shares  (Denominator)** |       | **Earnings  (Loss)  Per Share  Amount** |   |
|---------------------------------------|--------|---------------------------------|----------|----------------------------------------------|------------|-----------------------------------------|--------|
| **Three-months  ended June 30, 2002** |   |                            |     |                                         |       |                                    |   |
|                                  |   |                            |     |                                         |       |                                    |   |
| Net income (loss) - basic and diluted |   | $                               | (244,742 | )                                            | 12,178,800 |                                    | (0.02  | ) |
|                                  |   |                            |     |                                         |       |                                    |   |
| **Three-months  ended June 30, 2001** |   |                            |     |                                         |       |                                    |   |
|                                  |   |                            |     |                                         |       |                                    |   |
| Net income – basic and diluted   |   | $                               | 218,353  |                                         | 12,178,800 |                                    | 0.02   |   |

 

8

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|                                  |   | **Income  (Loss)  (Numerator)** |    | **Weighted  Average  Shares  (Denominator)** |       | **Earnings  (Loss)  Per Share  Amount** |   |
|---------------------------------------|--------|---------------------------------|---------|----------------------------------------------|------------|-----------------------------------------|--------|
| **Six-months  ended June 30, 2002**   |   |                            |    |                                         |       |                                    |   |
|                                  |   |                            |    |                                         |       |                                    |   |
| Net income (loss) - basic and diluted |   | $                               | (4,963  | )                                            | 12,178,800 |                                    | 0.00   |   |
|                                  |   |                            |    |                                         |       |                                    |   |
| **Six-months  ended June 30, 2001**   |   |                            |    |                                         |       |                                    |   |
|                                  |   |                            |    |                                         |       |                                    |   |
| Net income – basic and diluted   |   | $                               | 403,887 |                                         | 12,129,077 |                                    | 0.03   |   |

 

**(4)           ReportableSegments**

 

The Company has defined two reportable segments:Company-operated restaurants and franchising and other.  The Company-operated restaurant segmentconsists of the operations of all Company-operated restaurants and derives itsrevenues from the operations of “WesterN SizzliN Steakhouse,” “Great AmericanSteak & Buffet,” “WesterN SizzliN Wood Grill,” and “Austins Steaks &Saloon.”  The franchising and othersegment consists of franchise sales and support activities and derives itsrevenues from sales of franchise and development rights and collection ofroyalties from franchisees.

 

Generally, the Company evaluates performance andallocates resources based on income from operations before income taxes andeliminations.  Administrative andcapital costs are allocated to segments based upon predetermined rates oractual or estimated resource usage.  TheCompany accounts for intercompany sales and transfers as if the sales ortransfers were with third parties and eliminates the related profit inconsolidation.

 

Reportable segments are business units that providedifferent products or services. Separate management of each segment is required because each businessunit is subject to different operational issues and strategies.  Through June 30, 2002, all revenues for eachbusiness segment were derived from business activities conducted with customerslocated in the United States.  No singleexternal customer accounted for 10 percent or more of the Company’sconsolidated revenues.

 

9

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The following table summarizes reportable segmentinformation:

 
|                                    |   | **Three Months  Ended June 30,** |      | **Six-months  Ended June 30,** |       |
|-----------------------------------------|--------|----------------------------------|-----------|--------------------------------|------------|
|                                    |   | **2002**                         |      | **2001**                       |       | **2002** |   | **2001** |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Revenues from reportable segments:      |   |                             |      |                           |       |   |   |   |   |
| Restaurants                             |   | $                                | 6,726,458 |                           | 8,515,056  |   | 13,178,835 |   | 18,382,379 |   |
| Franchising and other                   |   | 1,499,723                        |      | 1,599,996                      |       | 2,976,567 |   | 3,213,478 |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Total revenues                          |   | $                                | 8,226,181 |                           | 10,115,052 |   | 16,155,402 |   | 21,595,857 |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Depreciation and amortization:          |   |                             |      |                           |       |   |   |   |   |
| Restaurants                             |   | 262,111                          |      | 389,817                        |       | 520,717 |   | 779,633 |   |
| Franchising and other                   |   | 190,740                          |      | 187,575                        |       | 376,214 |   | 376,424 |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Total depreciation and amortization     |   | $                                | 452,851   |                           | 577,392    |   | 896,931 |   | 1,156,057 |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Interest expense:                       |   |                             |      |                           |       |   |   |   |   |
| Restaurants                             |   | 123,135                          |      | 135,764                        |       | 247,166 |   | 286,689 |   |
| Franchising and other                   |   | 8,386                            |      | 33,223                         |       | 18,239 |   | 57,533 |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Total interest expense                  |   | $                                | 131,521   |                           | 168,987    |   | 265,405 |   | 344,222 |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Interest income:                        |   |                             |      |                           |       |   |   |   |   |
| Restaurants                             |   | 12,300                           |      | 1,933                          |       | 18,881 |   | 3,608 |   |
| Franchising and other                   |   | 1,749                            |      | —                         |       | 2,315 |   | — |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Total interest income                   |   | $                                | 14,049    |                           | 1,933      |   | 21,193 |   | 3,608 |   |
|                                    |   |                             |      |                           |       |   |   |   |   |
| Income (loss) before income taxes:      |   |                             |      |                           |       |   |   |   |   |
| Restaurants                             |   | (799,969                         | )         | (224,265                       | )          | (845,739 | ) | (556,362 | ) |
| Franchising and other                   |   | 403,972                          |      | 567,618                        |       | 837,806 |   | 1,212,299 |   |
| Total income (loss) before income taxes |   | $                                | (395,997  | )                              | 343,353    |   | (7,933 | ) | 655,937 |   |

 

10

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|                                |   | **June 30,  2002** |       | **June 30,  2001** |       |
|-------------------------------------|--------|--------------------|------------|--------------------|------------|
| Gross fixed assets:                 |   |               |       |               |       |
| Restaurants                         |   | 12,194,898         |       | 11,220,355         |       |
| Franchising and other               |   | 1,545,336          |       | 1,398,117          |       |
|                                |   |               |       |               |       |
| Total gross fixed assets            |   | $                  | 13,740,234 |               | 12,618,472 |   |
|                                |   |               |       |               |       |
| Expenditures for fixed assets:      |   |               |       |               |       |
| Restaurants                         |   | 106,864            |       | 109,159            |       |
| Franchising and other               |   | 7,400              |       | 21,992             |       |
|                                |   |               |       |               |       |
| Total expenditures for fixed assets |   | $                  | 114,264    |               | 131,151    |   |

 

**(5)                ****Closed company operated stores expense**

** **

During the quarter ended June 30, 2002, managementdetermined that the Company would not be renewing the lease, which expires onSeptember 30, 2002, for the five company-operated stores located in theLouisiana market.  As a result of theanticipated closing of these stores, the Company has recorded closedcompany-operated stores expense during the three-months ended June 30, 2002totaling approximately $1.03 million, including an impairment charge of$870,009 relating to equipment and leasehold improvements which will have nofuture use, accrued repairs and maintenance expense of $126,280 and accruedrent of $30,000. 

 

The Company filed an action in the first JudicialDistrict Court  for the Parish of Caddo,Louisiana in October 2001, against Kenneth A. Greenway, and others as owners andlessors of five restaurant locations, requesting (1) lessors to allow asublease according to terms of the lease; (2) payment of lease revenues due tothe Company from Mr. Greenway for billboards located on three of the restaurantlocations; (3) to reimburse the Company for damages incurred as a result oflessors' breach of  a warranty withinthe lease that the equipment was in normal operating condition with no majorrepairs required; and (4) to make repairs required as a result of hail damagefor which lessor had collected insurance proceeds and cash payments from theCompany. These cases are expected to be litigated after a final decision hasbeen reached on Mr. Greenway's counterclaim, described as follows.

 

Mr. Greenway filed a counterclaim against the Company,seeking to evict the Company from the five restaurant locations, from which theCompany intends to depart when the lease expires on September 30, 2002regardless of the outcome of the litigation. Mr. Greenway won the lawsuit at the district court level and won anappeal to the second Circuit of the Louisiana State Court of Appeals in June2002. The Company has requested a rehearing of the case to the Second Circuit,and is awaiting a decision on the rehearing.

 

The Company has been notified that the lessors believethat additional monies need to be spent by the Company to bring the propertiesto "first class condition." No action has been commenced by thelessors with respect to this allegation.

 

Management believes thatthe Company has meritorious claims against the lessors as a result of itslitigation and that even if the lessors were to prevail in a lawsuit to bringthe properties up to "first class condition", those costs would beapproximately offset by the Company's claims against the lessors. Managementdoes not anticipate a material effect upon its financial condition as a resultof this litigation.

 

**Item2.    Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Overview**

 

The Company currently operates and franchises a totalof 217 restaurants located in 24 states, including 14 Company-owned and 203franchise restaurants.  The restaurantsinclude a family steakhouse concept, a steak and buffet concept, and the casualdining steakhouse concept.

 

During June 2000, the Company negotiated a short-termlease agreement with Franchise Finance Corporation of America (FFCA).  Under the short-term lease agreement, theCompany leased and operated 97 Quincy Steakhouses, owned by FFCA.  In December 2000, the Company closed 44 ofthe restaurants.  Of the 53 restaurantsthat remained open at December 31, 2000, 43 restaurants were franchised duringthe first quarter of 2001, with the remaining 10 restaurants closing during thefirst quarter of 2001.  At the end ofthe first quarter of 2001, no Quincy Steakhouses remained as Company-ownedrestaurants.

 

From time to time, the Company may publishforward-looking statements relating to certain matters, including anticipatedfinancial performance, business prospects, the future opening ofCompany-operated and franchised restaurants, anticipated capital expenditures,and other matters.  All statements otherthan statements of historical fact contained in the Form 10-Q or in any otherreport of the Company are forward-looking statements.  The Private Securities Litigation Reform Act of 1995 provided asafe harbor for forward-looking statements. In order to comply with the terms of that safe harbor, the Company notesthat a variety of factors, individually or in the aggregate, could cause theCompany’s actual results and experience to differ materially from theanticipated results or other expectations expressed in the Company’sforward-looking statements including, without limitation, the following:  the ability of the Company or its franchisesto obtain

 

11

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suitable locations for restaurant  development; consumer spending trends andhabits; competition in the restaurant segment with respect to price, service,location, food quality and personnel resources; weather conditions in theCompany’s operating regions; laws and government regulations; general businessand economic conditions; availability of capital; success of operatinginitiatives and marketing and promotional efforts; and changes in accountingpolicies.  In addition, the Companydisclaims any intent or obligation to update those forward-looking statements.

 

**Resultsof Operations**

 

Net loss for the three and six-month periods endedJune 30, 2002 was ($244,742) and ($4,963) as compared to net income of $218,353and $403,887 for the three and six-month periods ended June 30, 2001.  The Quincy operations had a net loss of$123,067 and $164,093 for the three and six-month periods ended June 30,2001.    The net losses incurred in 2002are primarily attributable to recording impairment and accrued expenses, forthe five company-operated stores located in Louisiana, totaling $1,026,289 forthe three months ended June 30, 2002. Without this loss on the closed restaurants, income before taxes wouldhave been $630,292 and $1,018,356 for the three and six-month periods endedJune 30, 2002, which is an increase over the prior periods in 2001.

 

The following table sets forth for the periodspresented the percentage relationship to total revenues of certain itemsincluded in the consolidated statements of operations and certain restaurantdata for the periods presented:

 
|                                              |   | **Three-Months  Ended June 30,** |   | **Six-Months  Ended June 30,** |   |
|---------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                              |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Revenues:                                         |   |                             |   |                           |   |   |   |   |   |
| Company-operated stores                           |   | 81.8                             | %      | 84.2                           | %      | 81.6 | % | 85.1 | % |
| Franchise royalties and fees                      |   | 16.9                             |   | 14.4                           |   | 17.0 |   | 13.8 |   |
| Other sales                                       |   | 1.3                              |   | 1.4                            |   | 1.4 |   | 1.1 |   |
| Total revenues                                    |   | 100.0                            |   | 100.0                          |   | 100.0 |   | 100.0 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Costs and expenses:                               |   |                             |   |                           |   |   |   |   |   |
| Cost of Company-operated stores                   |   | 54.7                             |   | 59.7                           |   | 55.4 |   | 60.0 |   |
| Cost of franchise operations                      |   | 5.8                              |   | 5.4                            |   | 6.2 |   | 4.7 |   |
| Other cost of operations                          |   | 1.0                              |   | 1.1                            |   | 1.1 |   | 0.8 |   |
| Restaurant operating expenses                     |   | 18.3                             |   | 16.9                           |   | 18.7 |   | 17.9 |   |
| General and administrative                        |   | 7.8                              |   | 6.2                            |   | 6.5 |   | 6.7 |   |
| Depreciation and amortization                     |   | 5.5                              |   | 5.7                            |   | 5.6 |   | 5.4 |   |
| Closed Company-operated stores                    |   | 12.5                             |   | 0.0                            |   | 6.3 |   | 0.0 |   |
| Total costs and expenses                          |   | 105.6                            |   | 95.0                           |   | 99.8 |   | 95.5 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Income (loss) from operations                     |   | (5.6                             | )      | 5.0                            |   | 0.2 |   | 4.5 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Other income (expense)                            |   | 0.8                              |   | (1.6                           | )      | (0.2 | ) | (1.5 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Income (loss) before income tax expense (benefit) |   | (4.8                             | )      | 3.4                            |   | 0.0 |   | 3.0 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Income tax expense (benefit)                      |   | 1.8                              |   | 1.2                            |   | 0.0 |   | 1.2 |   |
| Net income (loss)                                 |   | (3.0                             | )%     | 2.2                            | %      | 0.0 | % | 1.8 | % |

 

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|                                    |   | **Three-Months  Ended June 30,** |   | **Six-Months  Ended June 30,** |   |
|-----------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                    |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
|                                    |   |                             |   |                           |   |   |   |   |   |
| **Restaurant  Data**                    |   |                             |   |                           |   |   |   |   |   |
| Number of Company-Operated Restaurants: |   |                             |   |                           |   |   |   |   |   |
| Beginning of period                     |   | 14                               |   | 21                             |   | 17 |   | 21 |   |
| Opened                                  |   | —                           |   | —                         |   | — |   | — |   |
| Closed                                  |   | —                           |   | 3                              |   | — |   | 3 |   |
| Franchised                              |   | —                           |   | —                         |   | 3 |   | — |   |
| End of period                           |   | 14                               |   | 18                             |   | 14 |   | 18 |   |
| Number of Quincy-operated Restaurants:  |   |                             |   |                           |   |   |   |   |   |
| Beginning of period                     |   | —                           |   | —                         |   | — |   | 53 |   |
| Opened                                  |   | —                           |   | —                         |   | — |   | — |   |
| Closed                                  |   | —                           |   | —                         |   | — |   | 10 |   |
| Franchised                              |   | —                           |   | —                         |   | — |   | 43 |   |
| End of period                           |   | —                           |   | —                         |   | — |   | 0 |   |
| Number of U.S. Franchised Restaurants:  |   |                             |   |                           |   |   |   |   |   |
| Beginning of period                     |   | 212                              |   | 240                            |   | 215 |   | 198 |   |
| Opened                                  |   | —                           |   | —                         |   | 4 |   | 43 |   |
| Closed                                  |   | 9                                |   | 6                              |   | 16 |   | 7 |   |
| End of period                           |   | 203                              |   | 234                            |   | 203 |   | 234 |   |

 

**Revenues**

 

Company-operated storerevenues decreased $1.8 million (21.0%) to $6.7 million for the three-monthsended June 30, 2002 as compared to $8.5 million for the comparable three-monthperiod ended June 30, 2001.  Revenuesfor company-operated stores decreased $5.2 million (28.3%) to $13.2 million forthe six-months ended June 30, 2002 as compared to $18.4 million for thecomparable six-month period ended June 30, 2001. The three and six-monthdecrease over the prior period is primarily attributable to the consolidationof the Quincy operations in 2001, which had revenue of approximately $1.6million for the six-months ended June 30, 2001 and the closing ofunder-performing company stores during 2001, and  the transfer of company operations to franchise units during thefirst quarter of 2002.

 

Franchise and otherrevenues decreased 6.3% to $1.5 million for the three-months ended June 30,2002 as compared to $1.6 million for the comparable three-month period endedJune 30, 2001.  Franchise and otherrevenues decreased 7.4% to $3.0 million for the six-month ended June 30, 2002as compared to $3.2 million for the comparable six-month period ended June 30,2001.  The decrease is attributable toless franchised stores in the system at June 30, 2002 as compared to June 30,2001 and the franchising of the Quincy stores in the first quarter of 2001which resulted in initial franchise fees of $134,000.

 

**Costsand Expenses**

 

Cost of Company-operatedstores, consisting of food, beverage, and employee costs decreased $1.5 million(25.4%) for the three-months ended June 30, 2002 from $6.0 million in 2001 to$4.5 million in 2002 and as a percentage of total revenues from 59.7% in 2001,to 54.7% in 2002.  For the six-monthsended June 30, 2002, cost of company operated stores decreased $4.0 million(30.8%) from $13.0 million in 2001 to $9.0 million in 2002 and as a percent oftotal revenues from 60.0% in 2001, to 55.4% in 2002.  The decrease is due to the Quincy operations

 

13

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during 2001 and the result of less Company stores in2002 due to the closing of under-performing stores during 2001 and thefranchising of three additional stores on February 1, 2002.  The primary reason for the decrease of thesecosts as a percentage of total revenues is the costs of the Quincy stores andthe closing of under-performing stores, whose operating margins weresignificantly less than the Company's other operated restaurants.

 

Cost of franchiseoperations and other cost of operations increased as a percentage of totalrevenues to 6.8% and $559,000 for the three-months ended June 30, 2002 from6.5% and $654,000 in 2001.   For thesix-months ended June 30, 2002, cost of franchise operations and other cost ofoperations increased as a percentage of total revenues to 7.3% and $1.2 millionand 5.5% and $1.2 million for the six-months ended June 30, 2001 The additionof the Quincy units did not effect these costs, but due to the increased salesdid effect the percentages.

 

Restaurant operatingexpenses, which include utilities, insurance, maintenance, rent and other suchcosts of the Company-operated stores, decreased $208,000  (12.2%) for the three-months ended June 30,2002 over prior year’s comparable period.  For the six-months ended June 30, 2002 restaurant operations expensedecreased $848,000 (21.9%) over the same prior period. The majority of thedecrease is due to the operation of the Quincy stores in 2001 and the closingand franchising of Company-operated stores during 2001 and the first quarter of2002.  These expenses as a percentage oftotal revenues increased slightly to 18.3% and 18.7% in 2002 compared to 16.9%and 17.9% in 2001 for the three and six-months ended June 30, respectively.

 

For the six-months endedJune 30, 2002 and 2001, general and administrative expenses were comparable asa percentage of total revenue at 6.5% for 2002 and 6.7% for 2001. 

 

Depreciation andamortization expense is $125,000 less for the three-months ended June 30, 2002compared to 2001 and $260,000 less for the six-months ended primarily due toclosings of under-performing Company-operated restaurants and retirement oftheir related long-lived assets and the discontinuance of goodwill amortizationeffective January 1, 2002.  Goodwillamortization totaled $114,000 and $228,000 for the three and six-months endedJune 30, 2001.

 

Closed company-operatedstores expense of $1.0 million for the three and six months ended June 30, 2002is due to the impairment and accrued expenses recorded for the five locationsin the Louisiana market.  

 

**Other Income (Expense)**

 

Interest expensedecreased $37,000 and $79,000 for the three and six months ended June 30, 2002compared to 2001, due to a lower average principal outstanding balance comparingthe respective periods and to lower interest rates in 2002.  Interest income fluctuates according to thelevels of available and investable cash balances.  The Company employs a cash management system whereby availablebalances are invested on an overnight basis.

 

Income tax expense(benefit) is directly affected by the levels of pretax income (loss).  The Company’s effective tax rate ofapproximately 38.2% and 37.4% percent for the three and six-months ended June30, 2002 is comparable to the rate of 36.4% and 38.4% for the same periods in2001.

###### ** **

###### **Liquidity and Capital Resources**

 

As is customary in therestaurant industry, the Company has operated with negative workingcapital.  Historically, the Company hasleased the majority of its restaurants and through a strategy of controlledgrowth has financed expansions from operating cash flow, proceeds from the saleof common stock, the utilization of the Company’s line of credit and long-termdebt provided by various lenders.

 

14

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Cash flows provided by operating activities was$542,000 in 2002 compared to cash used in operating activities of $1.0 millionin 2001. During the first six months of 2002, depreciation and amortization of$897,000 along with impairment of property and equipment of $870,000 was offsetby a decrease in accounts payable and accrued expenses of $1.3 million.  During 2001, cash flows used by operationswere primarily due to a $3.9 million decrease in accounts payable and accruedexpenses offset by net income of $404,000, depreciation and amortization of$1.2 million, a decrease in taxes refundable of $944,000 and a decrease ininventories totaling $469,000.  Net cashused by investing activities of $114,000 in 2002 and $131,000 in 2001, was forexpenditures related to property and equipment.  Net cash provided by (used in) financing activities of ($489,000)in 2002 was primarily for repayment of long-term debt.  During 2001, the cash provided by financingactivities was primarily due to an increase in notes payable of $989,000,offset by payments of long-term debt.  

 

The Company utilizes itsexisting line of credit to provide additional short-term funding.  Management constantly reviews availablefinancing alternatives to provide cash for future expansion, restructureexisting debt, and provide additional working capital; however, managementbelieves existing financing provides adequate funding. See, however, Item 5 forinformation relating to an impending effort by four dissident stockholders toremove and replace six of the current board of directors of the Company. Theextent of the cost to be borne by the Company in this matter and the resultantaffect upon its cash resources is not known at this time.

 

# **CRITICALACCOUNTING POLICIES**

 

**Franchise Revenue**

 

Initial franchise feesare recognized when all material services have been substantially performed bythe Company and the restaurant has opened for business.  Franchise royalties, which are based on apercentage of monthly sales, are recognized as income on the accrualbasis.  Costs associated with franchiseoperations are recognized on the accrual basis.

 

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

 

In connection withfranchise fees charged to our franchisees, we have accounts and notesreceivable outstanding from our franchisees at any given time.  We review outstanding accounts and notesreceivable monthly and record allowances for doubtful accounts as deemedappropriate for certain individual franchisees.  In determining the amount of allowance for doubtful accounts tobe recorded, we consider the age of the receivable, the financial stability ofthe franchisee, discussions that may have been had with the franchisee and ourjudgement as to the overall collectibility of the receivable from thatfranchisee.

 

**Franchise Royalty Contracts**

 

Franchise royaltycontracts are amortized on a straight-line basis over fifteen years, theestimated average life of the franchise agreements.  The Company assesses the recoverability of this intangible assetby determining whether the amortization of the franchise royalty contractbalance over their remaining life can be recovered though undiscounted futureoperating cash flows of the acquired operation.  The amount of impairment, if any, is measured based on projecteddiscounted future operating cash flows using a discount rate reflecting theCompany’s average cost of funds.

 

**Impactof Inflation**

 

The impact of inflationon the costs of food and beverage products, labor and real estate can affectthe Company’s operations.  Over the pastfew years, inflation had had a lesser impact on the Company’s operations due tothe lower rates of inflation in the nation’s economy and economic conditions inthe Company’s market areas.

 

15

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Management believes theCompany has historically been able to pass on increased costs through certainselected menu price increases and has offset increased costs by increasedproductivity and purchasing efficiencies, but there can be no assurance thatthe Company will be able to do so in the future.  Management anticipates that the average cost of restaurant realestate leases and construction cost could increase in the future which couldaffect the Company’s ability to expand. In addition, mandated health care or additional increases in the federalor state minimum wages could significantly increase the Company’s costs ofdoing business.

#####  

**Impact of Recently Issued Accounting Standards**

 

The Company adopted SFASNo. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002.  Under SFAS No. 142, goodwill and intangibleassets deemed to have indefinite lives are no longer systematically amortizedbut, instead, are reviewed for impairment and written down and charged to resultsof operations when their carrying amount exceeds their estimated fairvalue.  The Company performedtransitional impairment tests on its goodwill. The previous method for determining impairment prescribed by SFAS No.121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of,” utilized an undiscounted cash flow approach for theinitial impairment assessment, while SFAS No. 142 utilizes a fair valueapproach.  The Company has one of itstwo reporting units with goodwill, which also are the Company’s reportablesegments.  Goodwill was tested forimpairment at the level of reporting unit. Based on the results of the transitional impairment tests, the fairvalue of the reporting unit supports the goodwill.  The Company is required to perform impairment tests each year, orbetween yearly tests in certain circumstances, for goodwill.  There can be no assurance that futureimpairment tests will not result in a charge to earnings.

 

The Company adopted SFASNo. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, effectiveJanuary 1, 2002.  SFAS No. 144 requiresthat long-lived assets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of anasset to future net cash flows expected to be generated by the asset.  If the carrying amount of an asset exceedsits estimated future cash flows, an impairment charge is recognized for theamount by which the carrying amount of the asset exceeds the fair value of theasset.  SFAS No. 144 also requirescompanies to separately report discontinued operations and extends thereporting to a component of an entity that either has been disposed of (bysale, abandonment, or in a distribution by owners) or is classified as held forsale.  Assets to be disposed of arereported at the lower of the carrying amount or fair value less cost to sell.  The adoption of SFAS No. 144 did not have asignificant impact on the consolidated financial statements or results ofoperations.

 

In July 2002, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 146, *Accounting for Costs Associated with Exit or DisposalActivities.*  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities.  It nullifies EITFIssue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  The principaldifference between SFAS No.146 and Issue 94-3 relates to the recognition of aliability for a cost associated with an exit or disposal activity.  SFAS No. 146 requires that a liability berecognized for those costs only when the liability is incurred, that is, whenit meets the definition of a liability in the FASB’s conceptual framework.  In contrast, under Issue 94-3. a companyrecognized a liability for an exit cost when it committed to an exit plan.  SFAS No. 146 is effective for exit ordisposal activities that are initiated after December 31, 2002.  Management does not expect the adoption ofSFAS No. 146 to have a significant impact on the financial position, results ofoperations or cash flows of the Company.

 

**Item3.      Quantitative and QualitativeDisclosure about Market Risk**

 

The Company does notengage in derivative financial instruments or derivative commodityinstruments.  As of June 30, 2002, theCompany’s financial instruments are not

 

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exposed to significant market risk due to foreigncurrency exchange risk or commodity price risk.  However, the Company is exposed to market risk related tointerest rates.

 

The table below providesinformation about the Company’s debt obligations that are sensitive to changesin interest rates.  The table presentsprincipal cash flows and related weighted average interest rates by expectedmaturity dates.

 

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Debt obligations held forother than trading purposes at June 30, 2002 (dollars in thousands):

####  

#### EXPECTED MATURITY DATE

 
|                     |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Estimated  Fair Value** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|---------------------------|--------|
| Credit Line Note Payable |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Variable Rate            |   | $        | 500    |     | — |     | — |     | — |     | — |           | — |      | $      | 500                       |   | $ | 500 |   |
| Average Interest Rate    |   | 4.75     | %      | —   |   | —   |   | —   |   | —   |   | —         |   | 4.75      | %      |                      |   |
| Long-term debt           |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Fixed Rate               |   | $        | 245    |     | $      | 520      |   | $        | 538    |     | $      | 505            |   | $         | 522    |                      | $      | 2,509 |   | $ | 4,839 |   | $ | 5,475 |   |
| Average Interest  Rate   |   | 9.94     | %      | 9.94     | %      | 9.94     | %      | 9.94     | %      | 9.94     | %      | 10.06          | %      | 10.00     | %      |                      |   |
|                          |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |                           |        |  |  |  |  |  |  |  |  |

 

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**PART II. OTHERINFORMATION**

 

Item 1.    LegalProceedings

 

The Company filed anaction in the First Judicial District Court for the Parish of Caddo, Louisianain October 2001, against Kenneth A. Greenway, and others as owners and lessorsof five restaurant locations, requesting (1) lessors to allow a subleaseaccording to terms of the lease; (2) payment of lease revenues due to theCompany from Mr. Greenway for billboards located on three of the restaurantlocations; (3) to reimburse the Company for damages incurred as a result oflessors’ breach of a warranty within the lease that the equipment was in normaloperating condition with no major repairs required; and (4) to make repairsrequired as a result of hail damage for which lessor had collected insuranceproceeds and cash payments from the Company. These cases are expected to be litigated after a final decision has beenreached on Mr. Greenway’s counterclaim, described as follows.

 

Mr. Greenway filed a counterclaim against the Company,seeking to evict the Company from the five restaurant locations, from which theCompany intends to depart when the lease expires on September 30, 2002regardless of the outcome of the litigation. Mr. Greenway won the lawsuit at the district court level and won anappeal to the second Circuit of the Louisiana State Court of Appeals in June 2002.  The Company has requested a rehearing of thecase to the Second Circuit, and is awaiting a decision on the rehearing.

 

The Company has been notified that the lessors believethat additional monies need to be spent by the Company to bring the propertiesto "first class condition". No action has been commenced by the lessors with respect to thisallegation.

 

Management believes that the Company has meritoriousclaims against the lessors as a result of its litigation and that even if thelessors were to prevail in a lawsuit to bring the properties up to "firstclass condition", those costs would be approximately offset by theCompany's claims against the lessors. Management does not anticipate a materialeffect upon its financial condition as a result of this litigation.

 

 

Item 2.    Changein Securities and Use of Proceeds – N/A

 

Item 3.    DefaultsUpon Senior Securities – N/A

 

Item 4.    Submissionof Matters to a Vote of Security Holders – At the Annual Meeting of theShareholders held June 25, 2002, the following persons were elected to theBoard of Directors with the following votes:

 

 

 

|                 |   | **VOTES FOR**    |   | **VOTES  AGAINST** |   |
|----------------------|--------|------------------|--------|--------------------|--------|
| J. Carson  Quarles   |   | 7,198,147 shares |   | 10,000 shares      |   |
| Victor F Foti        |   | 7,198,147 shares |   | 10,000 shares      |   |
| Stan Bozeman,  Jr.   |   | 7,198,147 shares |   | 10,000 shares      |   |
| Ron Stancill         |   | 7,198,147 shares |   | 10,000 shares      |   |
| J. Alan Cowart       |   | 7,198,147 shares |   | 10,000 shares      |   |
| Jones Yorke          |   | 7,198,147 shares |   | 10,000 shares      |   |
| Paul C. Schorr,  III |   | 7,198,147 shares |   | 10,000 shares      |   |
| Roger D. Sack        |   | 7,198,147 shares |   | 10,000 shares      |   |
| Titus Greene*        |   | 6,666,147 shares |   | 542,000 shares     |   |

 

 

The amount of shares that withheld authority on thenine nominees was 2,552,408.

The amount of shares abstaining was 2,112,722.

 

*Mr. Titus Green resigned July 18, 2002.

 

 

 

Item 5.    Other Information–Dissident Group

 

Schedule 13D was filed with the Securities andExchange Commission (SEC) on July 17, 2002, amended on August 6, 2002, and apreliminary Schedule 14A on August 6, 2002 by Titus Greene, Thomas M. Hontzas,Charles W. Mantooth, and G. Thomas Cliett. The group is seeking to replace sixof the current board of directors. The Company is currently preparing aresponse for filing with the SEC.

 

Severance Matters

 

At the November 14, 2001 board of directors meeting, aresolution was adopted providing for severance payments equal to the currentannual salaries for Victor F. Foti and Robyn B. Mabe in the event they areterminated following a merger or sale of the Company.

 

 

Item 6.    Exhibitsand Reports on form 8-K:

 
| (a)    | Exhibits:           |                                               |   |
|--------|---------------------|----------------------------------------------------|--------|
|   | 3.2                 | Restated Bylaws of Corporation                     |   |
|   | 4.0                 | Captec Promissory Notes and related loan documents |   |
|   | 10.1                | November 2001 Severance Agreement                  |   |
|   | 99.1                | Officers' Certification                            |   |
|   |                |                                               |   |
| (b)    | Reports on Form 8-K |                                               |   |
|   | None                |                                               |   |
|        |                     |                                                    |        |  |  |  |

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# **SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 
|                         | **Austins  Steaks & Saloon, Inc.** |
|------------------------------|----------------------------------------|
|                         |                                   |
|                         |                                   |
| Date:  August  14, 2002 | By:                               | /s/ Robyn B. Mabe |   |
|                         |                                   |   | Robyn B. Mabe |
|                         |                                   |   | Chief Financial Officer |
|                              |                                        |  |  |  |

 

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