**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**ý****  QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

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

 

**o****  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT**

 

#### **For the transition period from              to              **

 

**Commissionfile number 0-25366**

 

**AUSTINS STEAKS & 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 ý  No o

 

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

 

 

----

 

**AUSTINSSTEAKS & SALOON, INC.**

**Form10-Q Index**

**NineMonths Ended September 30, 2002**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                           |
|--------------|---------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                |
|         | **Item 1.   Financial Statements (Unaudited)**                                                            |
|         |                                                                                                                |
|         | Consolidated Balance Sheets  – September 30, 2002 and December 31, 2001                                        |
|         |                                                                                                                |
|         | Consolidated  Statements of Operations - Three Months and Nine Months Ended September 30,  2002 and 2001            |
|         |                                                                                                                |
|         | Consolidated  Statement of Changes in Stockholders’ Equity - Nine Months Ended September  30, 2002             |
|         |                                                                                                                |
|         | Consolidated  Statements of Cash Flows - Nine Months Ended September 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**                                   |
|         |                                                                                                                |
|         | **Item 4.   Controls and Procedures**                                                                     |
|         |                                                                                                                |
| **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

September 30, 2002 andDecember 31, 2001

 
|                                                                                                                            |   | **September 30,  2002** |       | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|--------|
|                                                                                                                            |   | **(unaudited)**         |       |                   |   |
| **Assets**                                                                                                                      |   |                    |       |                   |   |
| Current assets:                                                                                                                 |   |                    |       |                   |   |
| Cash and cash  equivalents                                                                                                      |   | $                       | 407,128    |                   | $      | 449,075 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $204,313 in 2002 and  $148,142 in 2001                    |   | 1,145,269               |       | 1,269,549              |   |
| Current  installments of notes receivable                                                                                       |   | 141,795                 |       | 208,734                |   |
| Other  receivables                                                                                                              |   | 267,836                 |       | 261,855                |   |
| Inventories                                                                                                                     |   | 180,825                 |       | 224,136                |   |
| Prepaid expenses                                                                                                                |   | 404,603                 |       | 354,326                |   |
| Income taxes  refundable                                                                                                        |   | 217,579                 |       | —                 |   |
| Deferred income  taxes                                                                                                          |   | 143,967                 |       | 143,967                |   |
| Total current  assets                                                                                                           |   | 2,909,002               |       | 2,911,642              |   |
| Notes  receivable, less allowance for doubtful accounts of $40,793 in 2002 and  $31,964 in 2001, excluding current installments |   | 145,995                 |       | 148,756                |   |
| Property and  equipment, net                                                                                                    |   | 6,345,730               |       | 7,825,404              |   |
| Franchise  royalty contracts, net of accumulated amortization of $5,515,084 in 2002 and  $5,042,363 in 2001                     |   | 3,939,347               |       | 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 $188,497 in 2002 and $156,320 in  2001                              |   | 365,336                 |       | 397,513                |   |
| Financing costs,  net of accumulated amortization of $67,476 in 2002 and $53,820 in 2001                                        |   | 122,827                 |       | 136,483                |   |
| Deferred income  taxes                                                                                                          |   | 1,049,008               |       | 1,049,008              |   |
| Other assets,  net                                                                                                              |   | 268,657                 |       | 276,187                |   |
|                                                                                                                            |   | $                       | 19,456,102 |                   | $      | 21,467,261 |   |
| **Liabilities and Stockholders’  Equity**                                                                                  |   |                    |       |                   |   |
| Current  liabilities:                                                                                                           |   |                    |       |                   |   |
| Bank overdraft                                                                                                                  |   | $                       | 21,372     |                   | $      | 412,166 |   |
| Credit line note  payable to bank                                                                                               |   | 463,505                 |       | 389,105                |   |
| Current  installments of long-term debt                                                                                         |   | 491,231                 |       | 506,919                |   |
| Accounts payable                                                                                                                |   | 1,411,390               |       | 2,628,371              |   |
| Income taxes  payable                                                                                                           |   | —                  |       | 40,383                 |   |
| Accrued expenses  and other                                                                                                     |   | 1,617,172               |       | 1,113,362              |   |
| Total current  liabilities                                                                                                      |   | 4,004,670               |       | 5,090,306              |   |
| Long-term debt,  excluding current installments                                                                                 |   | 4,237,124               |       | 4,594,468              |   |
| Total  liabilities                                                                                                              |   | 8,241,794               |       | 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                                                                                                              |   | 2,393,347               |       | 2,961,526              |   |
| Total  stockholders’ equity                                                                                                |   | 11,214,308              |       | 11,782,487             |   |
| Commitments and  contingencies                                                                                                  |   |                    |       |                   |   |
|                                                                                                                            |   | $                       | 19,456,102 |                   | $      | 21,467,261 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

----

 

**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statementsof Operations

(Unaudited)

 
|                                               |   | **Three Months  Ended September 30** |      | **Nine Months  Ended September 30** |   |
|----------------------------------------------------|--------|--------------------------------------|-----------|-------------------------------------|--------|
|                                               |   | **2002**                             |      | **2001**                            |   | **2002** |   | **2001** |   |
| Revenues:                                          |   |                                 |      |                                |   |   |   |   |   |
| Company-operated  stores                           |   | $                                    | 5,870,739 |                                | $      | 8,089,136 |   | $ | 19,049,574 |   | $ | 26,471,515 |   |
| Franchise  operations                              |   | 1,311,763                            |      | 1,407,957                           |   | 4,060,462 |   | 4,376,498 |   |
| Other                                              |   | 117,351                              |      | 116,313                             |   | 345,219 |   | 361,250 |   |
| Total revenues                                     |   | 7,299,853                            |      | 9,613,406                           |   | 23,455,255 |   | 31,209,263 |   |
| Costs and  expenses:                               |   |                                 |      |                                |   |   |   |   |   |
| Cost of  company-operated stores                   |   | 4,043,666                            |      | 5,573,122                           |   | 13,001,003 |   | 18,524,549 |   |
| Cost of  franchise operations                      |   | 490,308                              |      | 600,874                             |   | 1,487,939 |   | 1,614,227 |   |
| Other cost of  operations                          |   | 86,679                               |      | 83,755                              |   | 255,764 |   | 267,080 |   |
| Restaurant  operating expenses                     |   | 1,416,167                            |      | 1,772,044                           |   | 4,442,313 |   | 5,646,225 |   |
| General and  administrative                        |   | 905,935                              |      | 701,726                             |   | 1,951,490 |   | 2,138,129 |   |
| Depreciation and  amortization                     |   | 411,246                              |      | 589,554                             |   | 1,308,177 |   | 1,745,611 |   |
| Closed  company-operated stores                    |   | 568,997                              |      | —                              |   | 1,595,286 |   | — |   |
| Total costs and  expenses                          |   | 7,922,998                            |      | 9,321,075                           |   | 24,041,972 |   | 29,935,821 |   |
| Income (loss)  from operations                     |   | (623,145                             | )         | 292,331                             |   | (586,717 | ) | 1,273,442 |   |
| Other income  (expense):                           |   |                                 |      |                                |   |   |   |   |   |
| Interest expense                                   |   | (123,500                             | )         | (154,229                            | )      | (388,905 | ) | (498,451 | ) |
| Interest income                                    |   | 7,112                                |      | 11,366                              |   | 28,305 |   | 14,974 |   |
| Other                                              |   | 125,569                              |      | 107,631                             |   | 325,420 |   | 123,071 |   |
|                                               |   | 9,181                                |      | (35,232                             | )      | (35,180 | ) | (360,406 | ) |
| Income (loss)  before income tax expense (benefit) |   | (613,964                             | )         | 257,099                             |   | (621,897 | ) | 913,036 |   |
| Income tax  expense (benefit)                      |   | (233,430                             | )         | 125,760                             |   | (236,400 | ) | 377,810 |   |
| Net income  (loss)                                 |   | $                                    | (380,534  | )                                   | $      | 131,339 |   | $ | (385,497 | ) | $ | 535,226 |   |
| Earnings (loss)  per share:                        |   |                                 |      |                                |   |   |   |   |   |
| Basic                                              |   | (.03                                 | )         | .01                                 |   | (.03 | ) | .04 |   |
| Diluted                                            |   | (.03                                 | )         | .01                                 |   | (.03 | ) | .04 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

----

 

**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statement ofChanges in Stockholders’ Equity

Nine Months EndedSeptember 30, 2002

(Unaudited)

 
|                               |   |             |   |        |                   | **Additional  Paid-in  Capital** |   |      |   |     |      |
|------------------------------------|--------|------------------|--------|-------------|------------------------|----------------------------------|--------|-----------|--------|----------|-----------|
|                               |   | **Common Stock** |   |        | **Retained  Earnings** |                             |   |      |
|                               |   | **Shares**       |   | **Dollars** |                   |                             |   | **Total** |   |
|                               |   |             |   |        |                   |                             |   |      |   |     |      |
| Balances,  December 31, 2001       |   | 12,178,800       |   | $           | 121,788                |                             | $      | 8,699,173 |   | $        | 2,961,526 |   | $ | 11,782,487 |   |
|                               |   |             |   |        |                   |                             |   |      |   |     |      |
| Net Loss                           |   | —           |   | —      |                   | —                           |   | (385,497  | )      | (385,497 | )         |
|                               |   |             |   |        |                   |                             |   |      |   |     |      |
| Dividends paid  ($0.015 per share) |   | —           |   | —      |                   | —                           |   | (182,682  | )      | (182,682 | )         |
|                               |   |             |   |        |                   |                             |   |      |   |     |      |
| Balances,  September 30, 2002      |   | 12,178,800       |   | $           | 121,788                |                             | $      | 8,699,173 |   | $        | 2,393,347 |   | $ | 11,214,308 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statements of Cash Flows

Nine Months EndedSeptember 30, 2002 and 2001

(Unaudited)

 
|                                                                                                 |   | **September** |     |
|------------------------------------------------------------------------------------------------------|--------|---------------|----------|
|                                                                                                 |   | **2002**      |     | **2001** |   |
| Cash flows from  operating activities:                                                               |   |          |     |   |   |
| Net income  (loss)                                                                                   |   | $             | (385,497 | ) | $ | 535,226 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |          |     |   |   |
| Depreciation and  amortization of property and equipment                                             |   | 789,623       |     | 844,080 |   |
| Amortization of  franchise royalty contracts,  goodwill  and other assets                       |   | 518,554       |     | 901,531 |   |
| Loss on disposal  of fixed assets                                                                    |   | —        |     | 561 |   |
| Impairment of  property and equipment                                                                |   | 826,286       |     | — |   |
| Closed  company-operated stores expense accrual                                                      |   | 500,000       |     | — |   |
| Provision for  bad debts                                                                             |   | 65,000        |     | 70,172 |   |
| (Increase)  decrease in:                                                                             |   |          |     |   |   |
| Trade accounts  receivable                                                                           |   | 68,109        |     | (324,554 | ) |
| Notes receivable                                                                                     |   | 60,871        |     | 139,252 |   |
| Other  receivables                                                                                   |   | (5,981        | )        | 219,700 |   |
| Inventories                                                                                          |   | 43,311        |     | 513,439 |   |
| Prepaid expenses                                                                                     |   | (50,277       | )        | (91,045 | ) |
| Other assets                                                                                         |   | 7,530         |     | 138,911 |   |
| Income taxes  refundable/payable                                                                     |   | (257,962      | )        | 943,661 |   |
| Increase  (decrease) in:                                                                             |   |          |     |   |   |
| Accounts payable                                                                                     |   | (1,216,981    | )        | (2,277,103 | ) |
| Accrued expenses                                                                                     |   | 186,492       |     | (1,899,058 | ) |
| Net cash  provided by (used in) operating activities                                                 |   | 1,149,078     |     | (285,227 | ) |
| Cash flows from  investing activities:                                                               |   |          |     |   |   |
| Additions to  property and equipment                                                                 |   | (136,235      | )        | (322,459 | ) |
| Proceeds from  fixed asset sales                                                                     |   | —        |     | 11,000 |   |
| Net cash used in  investing activities                                                               |   | (136,235      | )        | (311,459 | ) |
| Cash flows from  financing activities:                                                               |   |          |     |   |   |
| Net decrease in  bank overdraft                                                                      |   | (390,794      | )        | (239,155 | ) |
| Net increase in  credit line note payable                                                            |   | 74,400        |     | 5,769 |   |
| Net increase in  notes payable                                                                       |   | 0             |     | 920,832 |   |
| Payments on  long-term debt                                                                          |   | (373,032      | )        | (1,339,643 | ) |
| Payments of  dividends on common stock                                                               |   | (365,364      | )        | — |   |
| Net cash used in  financing activities                                                               |   | (1,054,790    | )        | (652,197 | ) |
| Net decrease in  cash and cash equivalents                                                           |   | (41,947       | )        | (1,248,883 | ) |
| Cash and cash  equivalents at beginning of period                                                    |   | 449,075       |     | 1,467,985 |   |
| Cash and cash  equivalents at end of period                                                          |   | $             | 407,128  |   | $ | 219,102 |   |

 

5

----

 

**AUSTINS STEAKS & SALOON, INC.**

 

Notes to Consolidated FinancialStatements

 

September 30, 2002 and2001

 

(Unaudited)

 

**(1)****                                 Summaryof 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 America for interim financial reporting information andthe 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 beenincluded.  Operating results for interimperiods are not 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 financial statementsand notes.  For further information,refer to the consolidated financial statements and notes thereto included inthe Company’s annual consolidated financial statements and notes theretoincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

**(2)****                                 Goodwilland 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. Goodwill existson one of the Company’s two reporting units, which also are the Company’sreportable segments. Goodwill was tested for impairment at the level ofreporting unit. Based on the results of the transitional impairment tests, thefair value of the reporting unit supports the goodwill.  The Company is required to performimpairment tests each year, or between yearly tests in certain circumstances,for goodwill. There can be no assurance that future impairment tests will notresult in a charge to earnings.

 

6

----

 

The following table reconciles the reported net incomeand earnings per share before accounting change to that which would haveresulted for the nine months-ended September 30, 2001 if SFAS No. 142 had beenadopted effective January 1, 2001:

 
| Reported net  income                   |   | $       | 535,226 |   |
|----------------------------------------|--------|---------|---------|--------|
| Goodwill  amortization, net of tax     |   | 237,822 |    |
| Adjusted  earnings                     |   | $       | 773,048 |   |
| Basic and  diluted earnings per share: |   |    |    |
|                                   |   |    |    |
| Reported net  earnings                 |   | $       | 0.04    |   |
| Goodwill  amortization, net of tax     |   | 0.02    |    |
| Adjusted net  earnings per share       |   | $       | 0.06    |   |

 

Intangible assets other than goodwill at September 30,2002 and December 31, 2001 consisted of the following:

 
|                                        |   | **Gross  Carrying  Amount** |       | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
|---------------------------------------------|--------|-----------------------------|------------|-------------------------------|--------|---------------------------|--------|
|                                        |   |                        |       |                          |   |                      |   |
| As of September 30, 2002                    |   |                        |       |                          |   |                      |   |
|                                        |   |                        |       |                          |   |                      |   |
| Intangible  assets subject to amortization: |   |                        |       |                          |   |                      |   |
|                                        |   |                        |       |                          |   |                      |   |
| Franchise  royalty contracts                |   | $                           | 9,454,431  |                          | $      | 5,515,084                 |   | $ | 3,939,347 |   |
| Favorable lease  rights                     |   | 553,833                     |       | 188,497                       |   | 365,336                   |   |
| Total                                       |   | $                           | 10,008,264 |                          | $      | 5,703,581                 |   | $ | 4,304,681 |   |
|                                        |   |                        |       |                          |   |                      |   |
| 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 SFAS No. 142, amortization expensefor the nine-month period ended September 30, 2002 was $504,898 Estimatedamortization expense for each of the years ended December 31 is 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 nine months ended September 30, 2002 are as follows:

 
| **Segment**              |   | **Goodwill  at  January 1, 2002** |      | **Impairment  losses** |   | **Goodwill  at   September 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 nine months ended September 30, 2001 are as follows:

 
| **Segment**              |   | **Goodwill  at  January 1, 2001** |      | **Amortization** |    | **Goodwill  at  September 30, 2001** |   |
|--------------------------|--------|-----------------------------------|-----------|------------------|---------|--------------------------------------|--------|
|                     |   |                              |      |             |    |                                 |   |
| Company-operated  stores |   | $                                 | 4,765,121 |             | 341,191 |                                 | $      | 4,423,930 |   |
| Franchise  operations    |   | —                            |      | —           |    | —                               |   |
| Total                    |   | $                                 | 4,765,121 |             | $       | 341,191                              |   | $ | 4,423,930 |   |
|                          |        |                                   |           |                  |         |                                      |        |  |  |  |

 

**(3)****                                 EarningsPer 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 thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted into common stock or resulted in theissuance of common stock that then shared in the earnings of the Company.  Stock options

for shares of common stock were not included incomputing diluted earnings per share for the three and nine-month periods endedSeptember 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 ShareAmount**   |   |
|--------------------------------------------|--------|---------------------------------|----------------|----------------------------------------------|------------|-----------------------------------------|--------|
| **Three-months ended September 30,  2002** |   |                            |           |                                         |       |                                    |   |
|                                       |   |                            |           |                                         |       |                                    |   |
| Net loss - basic and diluted               |   | $                               | (380,534       | )                                            | 12,178,800 |                                    | $      |  (0.03 | ) |
|                                       |   |                            |           |                                         |       |                                    |   |
| **Three-months ended September 30, 2001**  |   |                            |           |                                         |       |                                    |   |
|                                       |   |                            |           |                                         |       |                                    |   |
| Net income – basic and diluted        |   | $                               |  131,339  |                                         | 12,178,800 |                                    | $      |  0.01 |   |
|                                       |   | **Income  (Loss)  (Numerator)** |           | **Weighted  Average  Shares  (Denominator)** |       | **Earnings  (Loss)  Per Share  Amount** |   |
|                                       |   |                            |
|                                       |   |                            |
|                                       |   |                            |
|                                       |   |                            |
| **Nine-months ended September 30,  2002**  |   |                            |           |                                         |       |                                    |   |
|                                       |   |                            |           |                                         |       |                                    |   |
| Net loss - basic and diluted               |   | $                               |  (385,497 | )                                            | 12,178,800 |                                    | $      |  (0.03 | ) |
|                                       |   |                            |           |                                         |       |                                    |   |
| Nine-months ended September 30, 2001       |   |                            |           |                                         |       |                                    |   |
|                                       |   |                            |           |                                         |       |                                    |   |
| Net income – basic and diluted        |   | $                               |  535,226  |                                         | 12,146,196 |                                    | $      |  0.04 |   |
|                                            |        |                                 |                |                                              |            |                                         |        |  |  |  |  |  |  |  |  |

 

8

----

 

**(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 September 30, 2002, all revenues foreach business segment were derived from business activities conducted withcustomers located in the United States. No single external customer accounted for 10 percent or more of theCompany’s consolidated revenues.

 

9

----

 

The following table summarizes reportable segmentinformation:

 
|                                    |   | **Three Months  Ended September 30,** |      | **Nine-months  Ended September 30,** |      |
|-----------------------------------------|--------|---------------------------------------|-----------|--------------------------------------|-----------|
|                                    |   | **2002**                              |      | **2001**                             |      | **2002** |   | **2001** |   |
| Revenues from reportable segments:      |   |                                  |      |                                 |      |   |   |   |   |
| Restaurants                             |   | $                                     | 5,870,739 |                                 | 8,089,136 |   | 19,049,574 |   | 26,471,515 |   |
| Franchising and other                   |   | 1,429,114                             |      | 1,524,270                            |      | 4,405,681 |   | 4,737,748 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total revenues                          |   | $                                     | 7,299,853 |                                 | 9,613,406 |   | 23,455,255 |   | 31,209,263 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Depreciation and amortization:          |   |                                  |      |                                 |      |   |   |   |   |
| Restaurants                             |   | 225,231                               |      | 395,839                              |      | 745,948 |   | 1,175,472 |   |
| Franchising and other                   |   | 186,015                               |      | 193,715                              |      | 562,229 |   | 570,139 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total depreciation and amortization     |   | $                                     | 411,246   |                                 | 589,554   |   | 1,308,177 |   | 1,745,611 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Interest expense:                       |   |                                  |      |                                 |      |   |   |   |   |
| Restaurants                             |   | 118,280                               |      | 133,739                              |      | 365,446 |   | 420,428 |   |
| Franchising and other                   |   | 5,220                                 |      | 20,490                               |      | 23,459 |   | 78,023 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total interest expense                  |   | $                                     | 123,500   |                                 | 154,229   |   | 388,905 |   | 498,451 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Interest income:                        |   |                                  |      |                                 |      |   |   |   |   |
| Restaurants                             |   | 6,942                                 |      | 11,366                               |      | 25,823 |   | 11,195 |   |
| Franchising and other                   |   | 170                                   |      | —                               |      | 2,482 |   | 3,779 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Total interest income                   |   | $                                     | 7,112     |                                 | 11,366    |   | 28,305 |   | 14,974 |   |
|                                    |   |                                  |      |                                 |      |   |   |   |   |
| Income (loss) before income taxes:      |   |                                  |      |                                 |      |   |   |   |   |
| Restaurants                             |   | (732,648                              | )         | 36,848                               |      | (1,580,387 | ) | (519,514 | ) |
| Franchising and other                   |   | 118,684                               |      | 220,251                              |      | 958,490 |   | 1,432,550 |   |
| Total income (loss) before income taxes |   | $                                     | (613,964  | )                                    | 257,099   |   | (621,897 | ) | 913,036 |   |

 

10

----

 
|                                |   | **September 30,  2002** |       | **September 30  2001** |       |
|-------------------------------------|--------|-------------------------|------------|------------------------|------------|
| ** **                          |   |
| Gross fixed assets:                 |   |                    |       |                   |       |
| Restaurants                         |   | 12,341,111              |       | 11,394,028             |       |
| Franchising and other               |   | 1,565,347               |       | 1,408,862              |       |
|                                |   |                    |       |                   |       |
| Total gross fixed assets            |   | $                       | 13,906,458 |                   | 12,802,890 |   |
|                                |   |                    |       |                   |       |
| Expenditures for fixed assets:      |   |                    |       |                   |       |
| Restaurants                         |   | 116,224                 |       | 298,656                |       |
| Franchising and other               |   | 20,011                  |       | 23,803                 |       |
|                                |   |                    |       |                   |       |
| Total expenditures for fixed assets |   | $                       | 136,235    |                   | 322,459    |   |

 

**(5)****         Closed company operatedstores expense**

 

In regards to certain locations in Omaha, Nebraska,during October 2002, the Company entered into a purchase agreement for threeCompany-operated stores that the Company considered to be under-performingCompany stores and one franchised location. Also, one additional location remaining in Omaha was closed in October,2002.  As a result of these transactionsthe Company accrued closed company-operated stores expense of $500,000 duringthe third quarter ended September 30, 2002.

 

During the quarter ended June 30, 2002, managementdetermined that the Company would not be renewing the lease, which expired onSeptember 30, 2002, for the five company-operated stores located in theLouisiana market.  As a result of theanticipated closing of these stores, the Company  recorded closed company-operated stores expense during thethree-months ended June 30, 2002 totaling approximately $1.03 million,including an impairment charge of $821,000 relating to equipment and leaseholdimprovements which will have no future use, accrued repairs and maintenanceexpense of $175,000 and accrued rent of $30,000.  An additional $69,000 was recorded during the three months endedSeptember 30, 2002 for closing costs totaling $1.1 million of closedcompany-operated stores expense in Louisiana for the nine months endedSeptember 30, 2002.

 

The Company filed an action in the First JudicialDistrict Court for the Parish of Caddo, Louisiana in October 2001, againstKenneth A. Greenway, and others as owners and lessors of five restaurantlocations, requesting (1) lessors to allow a sublease according to terms of thelease; (2) payment of lease revenues due to the Company from Mr. Greenway forbillboards located on three of the restaurant locations; (3) to reimburse theCompany for damages incurred as a result of lessors’ breach of a warrantywithin the lease that the equipment was in normal operating condition with nomajor repairs required; and (4) to make repairs required as a result of haildamage for which lessor had collected insurance proceeds and cash payments fromthe Company.

 

Mr. Greenway filed a counterclaim against the Company,seeking to evict the Company from the five restaurant locations, from which theCompany departed when the lease expired on September 30, 2002.  Mr. Greenway won the lawsuit at the districtcourt level and won an appeal to the second Circuit of the Louisiana StateCourt of Appeals in June 2002.  TheCompany has retained new legal counsel and has filed a writ with the LouisianaSupreme Court.

 

The Company had previously been notified that thelessors believe that additional monies needed to be spent by the Company tobring the properties to “first class condition.”  No action has been

 

11

----

 

commenced by the lessors with respect to thisallegation.  Management believes theCompany completed the necessary repairs before departing the properties.

 

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 “first classcondition”, those costs would be approximately offset by the Company’s claimsagainst the lessors.  Management doesnot anticipate a material effect upon its financial condition as a result ofthis litigation.

 

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

 

**Overview**

 

The Company operated and franchised a total of 203restaurants located in 24 states, including 11 Company-owned and 192 franchiserestaurants as of September 30, 2002. The restaurants include a family steakhouse concept, a steak and buffetconcept, and the casual dining steakhouse concept.  Four additional Company operated restaurants were sold or closedafter September 30, 2002.

 

A group of shareholders, namely Titus Greene, ThomasM. Hontzas, Charles W. Mantooth, and G. Thomas Cliett filed a Schedule 13D withthe Securities and Exchange Commission (SEC) on July 17, 2002, amended onAugust 6, 2002.  The group was seekingto replace six of the current board of directors.  After several SEC filings by the Company and the dissident group,a settlement agreement was reached by the parties on September 27, 2002.  Details of the settlement are found in the8-K filing with the SEC on September 27, 2002. The Company has expensed a total of $453,000 for the three and nine-monthsended September 30, 2002, which includes legal fees of approximately $287,000,public relations and SEC filing fees of approximately $60,000, and board ofdirector fees related to the dissident matter of approximately $106,000.

 

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 suitable locations for restaurant development; consumer spending trends and habits; competition in therestaurant segment with respect to price, service, location, food quality andpersonnel resources; weather conditions in the Company’s operating regions;laws and government regulations; general business and economic conditions;availability of capital; success of operating initiatives and marketing andpromotional efforts; and changes in accounting policies.  In addition, the Company disclaims anyintent or obligation to update those forward-looking statements.

 

###### **Resultsof Operations**

 

Net loss for the three and nine-month periods endedSeptember 30, 2002 was ($380,534) and ($385,497) as compared to net income of$131,339 and $535,226 for the three and nine-month

 

12

----

 

periods ended September 30, 2001.  The Quincy operations had a net loss ofapproximately ($165,000) for the nine-month period ended September 30,2001.   The net losses incurred in 2002are attributable to the following: recording impairment and accrued expense, forthe five company-operated stores located in Louisiana, totaling $69,000 and$1,095,000 for the three and nine months ended September 30, 2002; recording ofimpairment and accrued expenses on the five Austins locations totaling $500,000for the three and nine months ended September 30, 2002; and expenses related tothe dissident group of four shareholders seeking to replace six of theCompany’s board of directors of $287,000 of legal expenses, $60,000 of publicrelations and SEC filing expenses and $106,000 of director fee expensestotaling approximately $453,000 for the three and nine months ended September30, 2002.  Without these expenses,income before taxes would have been approximately $408,000 and $1,426,000 forthe three and nine-month periods ended September 30, 2002, which is asignificant increase over the comparable 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 September 30,** |   | **Nine-Months  Ended September 30,** |   |
|---------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                              |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** | ** ** |
| Revenues:                                         |   |                                  |   |                                 |   |   |   |   |   |
| Company-operated stores                           |   | 80.4                                  | %      | 84.1                                 | %      | 81.2 | % | 84.8 | % |
| Franchise royalties and fees                      |   | 18.0                                  |   | 14.6                                 |   | 17.3 |   | 14.0 |   |
| Other sales                                       |   | 1.6                                   |   | 1.3                                  |   | 1.5 |   | 1.2 |   |
| Total revenues                                    |   | 100.0                                 |   | 100.0                                |   | 100.0 |   | 100.0 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Costs and expenses:                               |   |                                  |   |                                 |   |   |   |   |   |
| Cost of Company-operated stores                   |   | 55.4                                  |   | 58.0                                 |   | 55.4 |   | 59.3 |   |
| Cost of franchise operations                      |   | 6.7                                   |   | 6.3                                  |   | 6.4 |   | 5.2 |   |
| Other cost of operations                          |   | 1.2                                   |   | 0.9                                  |   | 1.1 |   | 0.9 |   |
| Restaurant operating expenses                     |   | 19.4                                  |   | 18.4                                 |   | 18.9 |   | 18.1 |   |
| General and administrative                        |   | 12.4                                  |   | 7.3                                  |   | 8.3 |   | 6.9 |   |
| Depreciation and amortization                     |   | 5.6                                   |   | 6.1                                  |   | 5.6 |   | 5.5 |   |
| Closed Company-operated stores                    |   | 7.8                                   |   | —                               |   | 6.8 |   | — |   |
| Total costs and expenses                          |   | 108.5                                 |   | 97.0                                 |   | 102.5 |   | 95.9 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss) from operations                     |   | (8.5                                  | )      | 3.0                                  |   | (2.5 | ) | 4.1 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Other income (expense)                            |   | 0.1                                   |   | (0.4                                 | )      | (0.1 | ) | (1.2 | ) |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Income (loss) before income tax expense (benefit) |   | (8.4                                  | )      | 2.6                                  |   | (2.6 | ) | 2.9 |   |
|                                              |   |                                  |   |                                 |   |   |   |   |   |
| Income tax expense (benefit)                      |   | (3.2                                  | )      | 1.3                                  |   | (1.0 | ) | 1.2 |   |
| Net income (loss)                                 |   | (5.2                                  | )%     | 1.3                                  | %      | (1.6 | )% | 1.7 | % |

 

13

----

 
|                                    |   | **Three-Months  Ended September 30,** |   | **Nine-Months  Ended September 30,** |   |
|-----------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                    |   | **2002**                              |   | **2001**                             |   | **2002** |   | **2001** |   |
|                                    |   |                                  |   |                                 |   |   |   |   |   |
| **Restaurant Data**                     |   |                                  |   |                                 |   |   |   |   |   |
| Number of Company-Operated Restaurants: |   |                                  |   |                                 |   |   |   |   |   |
| Beginning of period                     |   | 14                                    |   | 18                                   |   | 17 |   | 23 |   |
| Opened                                  |   | —                                |   | —                               |   | — |   | — |   |
| Closed                                  |   | 3                                     |   | —                               |   | 3 |   | 5 |   |
| Franchised                              |   | —                                |   | —                               |   | 3 |   | — |   |
| End of period                           |   | 11                                    |   | 18                                   |   | 11 |   | 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                     |   | 203                                   |   | 234                                  |   | 215 |   | 198 |   |
| Opened                                  |   | 1                                     |   | —                               |   | 2 |   | 45 |   |
| Closed                                  |   | 12                                    |   | 10                                   |   | 28 |   | 19 |   |
| Franchised                              |   | —                                |   | —                               |   | 3 |   | — |   |
| End of period                           |   | 192                                   |   | 224                                  |   | 192 |   | 224 |   |

 

###### **Revenues**

 

Company-operated storerevenues decreased $2.2 million (27.4%) to $5.9 million for the three-monthsended September 30, 2002 as compared to $8.1 million for the comparablethree-month period ended September 30, 2001. Revenues for company-operated stores decreased $7.4 million (28.0%) to$19.1 million for the nine-months ended September 30, 2002 as compared to $26.5million for the comparable nine-month period ended September 30, 2001. Thethree and nine-month decrease over the prior period is primarily attributableto the consolidation of the Quincy operations in 2001, which had revenue ofapproximately $1.6 million for the three months and nine-months ended September30, 2001 and the closing of under-performing company stores during late 2001and 2002, and the transfer of certain company operations to franchise unitsduring the first quarter of 2002.

 

Franchise and otherrevenues decreased 6.2% to $1.4 million for the three-months ended September30, 2002 as compared to $1.5 million for the comparable three-month periodended September 30, 2001.  Franchise andother revenues decreased 7.0% to $4.4 million for the nine-month endedSeptember 30, 2002 as compared to $4.7 million for the comparable nine-monthperiod ended September 30, 2001.  Thedecrease is attributable to less franchised stores in the system at September30, 2002 as compared to September 30, 2001 and the franchising of the Quincystores in the first quarter of 2001 which resulted in initial franchise fees ofapproximately $134,000.

 

###### **Costsand Expenses**

 

Cost of Company-operatedstores, consisting of food, beverage, and employee costs decreased $1.5 million(27.4%) for the three-months ended September 30, 2002 from $5.6 million in 2001to $4.1 million in 2002 and as a percentage of total revenues from 58.0% in2001, to 55.4% in 2002.  For thenine-months ended September 30, 2002, cost of company operated stores decreased$5.5 million (29.8%) from $18.5 million in 2001 to $13.0 million in 2002 and asa

 

14

----

 

percent of total revenues from 59.3% in 2001, to 55.4%in 2002.  The decrease is due to theQuincy operations in existence during 2001 and the result of less Companystores in 2002 due to the closing of under-performing stores during late 2001and 2002 and the franchising of three stores during the first quarter of2002.  The primary reason for thedecrease of these costs as a percentage of total revenues is the costs of theQuincy stores and the closing of under-performing stores, whose operatingmargins were significantly less than the Company’s other operated restaurants.

 

Cost of franchiseoperations and other cost of operations as a percentage of total revenues was7.9% and $577,000 for the three-months ended September 30, 2002 compared to7.2% and $685,000 in 2001.   For thenine-months ended September 30, 2002, cost of franchise operations and othercost of operations as a percentage of total revenues was 7.5% and $1.7 millionand 6.1% and $1.9 million for the nine-months ended September 30, 2001. Theaddition of the Quincy units did not affect these costs, but the increasedsales did effect the percentages.

 

Restaurant operatingexpenses, which include utilities, insurance, maintenance, rent and other suchcosts of the Company-operated stores, decreased $356,000  (20.1%) for the three-months ended September30, 2002 over prior year’s comparable period.  For the nine-months ended September 30, 2002 restaurant operatingexpenses decreased $1.2 million (21.3%) over the same prior period. Themajority of the decrease is due to the operation of the Quincy stores in 2001and the closing and franchising of Company-operated stores during late 2001 and2002, and the first quarter of 2002. These expenses as a percentage of total revenues increased slightly to19.4% and 18.9% in 2002 compared to 18.4% and 18.1% in 2001 for the three andnine-months, respectively.

 

For the three andnine-months ended September 30, 2002 and 2001, general and administrativeexpenses as a percentage of total revenue was 12.4% and 8.3% for 2002 and 7.3%and 6.9% for 2001. The increases are primarily due to the expenses associatedwith the dissident shareholder matter totaling $453,000 for the three andnine-months ended September 30, 2002

 

Depreciation andamortization expense was $178,000 less for the three-months ended September 30,2002 compared to 2001 and $437,000 less for the nine-month period primarily dueto the closings of under-performing Company-operated restaurants and retirementof their related long-lived assets and the discontinuance of goodwillamortization effective January 1, 2002. Goodwill amortization totaled $118,000 and $341,000 for the three andnine-months ended September 30, 2001.

 

Closed company-operatedstores expense of $569,000 and $1.6 million for the three and nine months endedSeptember 30, 2002 is due to the impairment and accrued expenses recorded forthe five locations in the Louisiana market and four locations run as AustinsSteak & Saloon in Omaha, Nebraska and one location in Scottsdale, Arizona.

 

**OtherIncome (Expense)**

 

Interest expensedecreased $31,000 and $110,000 for the three and nine months ended September30, 2002 compared to 2001, due to a lower average principal outstanding balancecomparing the 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 wasapproximately 38.0% for the three and nine-months ended September 30, 2002.

 

15

----

 

###### **Liquidityand 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.

 

Cash flows provided byoperating activities was $1,149,000 in 2002 compared to cash used in operatingactivities of $285,000 in 2001. During the first nine months of 2002,depreciation and amortization of $1,308,000 along with impairment of propertyand equipment of $826,000 was offset by a decrease in accounts payable of $1.2million.  During 2001, cash flows usedby operations were primarily due to a $4.1 million decrease in accounts payableand accrued expenses offset by net income of $535,000, depreciation andamortization of $1.7 million, a decrease in taxes refundable of $944,000 and adecrease in inventories totaling $513,000. Net cash used by investing activities of $136,000 in 2002 and $311,000in 2001, was primarily for expenditures related to property and equipment.  Net cash used in financing activities of$1.1 million in 2002 was primarily for repayment of long-term debt and thepayment of two cash dividend to shareholders during 2002 totaling $365,000which included a dividend that was declared in 2001.  During 2001, the cash used in financing activities was primarily dueto payments of long-term debt offset by the issuance of notes payable of$920,000.

 

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.

 

# **CRITICAL ACCOUNTING POLICIES**

 

## **FranchiseRevenue**

 

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.

 

## **Accountsand Notes Receivable and Allowance for Doubtful Accounts**

 

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 to berecorded, we consider the age of the receivable, the financial stability of thefranchisee, discussions that may have been had with the franchisee and ourjudgement as to the overall collectibility of the receivable from thatfranchisee.

 

**FranchiseRoyalty 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 through future net cashflows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cashflows, an impairment charge is recognized for the amount by which the carryingamount of the asset exceeds the fair value of the asset.

 

16

----

 

###### **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 has 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.

 

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 AccountingStandards**

 

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 toresults of 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.  Goodwill exists on one of theCompany’s two reporting units, 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 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 no assurance that futureimpairment tests will not result in a charge to earnings.

 

The Company adopted SFASNo. 144, Accounting for the *Impairment orDisposal of Long-Lived Assets*, effective January 1, 2002.  SFAS No. 144 requires that long-lived assetsbe reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to future netcash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated futurecash flows, an impairment charge is recognized for the amount by which thecarrying amount of the asset exceeds the fair value of the asset.  SFAS No. 144 also requires companies toseparately report discontinued operations and extends the reporting to acomponent of an entity that either has been disposed of (by sale, abandonment,or in a distribution by owners) or is classified as held for sale.  Assets to be disposed of are reported at thelower 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 CostsAssociated with Exit or Disposal Activities*.  SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities.  It nullifies EITF Issue No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  The principal difference between SFAS No.146and Issue 94-3 relates to the recognition of a liability for a cost associatedwith an exit or disposal activity.  SFASNo. 146 requires that a liability be recognized for those costs only when theliability is incurred, that is, when it meets the definition of a liability inthe FASB’s conceptual framework.  Incontrast, under Issue 94-3. a company recognized a liability for an exit costwhen it committed to an exit plan.  SFASNo. 146 is effective for exit or disposal activities that are initiated afterDecember 31, 2002.

 

17

----

 

Management does not expect the adoption of SFAS No.146 to have a significant impact on the financial position, results ofoperations or cash flows of the Company.

 

 

**Item3****.      Quantitative and Qualitative Disclosureabout Market Risk**

 

The Company does notengage in derivative financial instruments or derivative commodityinstruments.  As of September 30, 2002,the Company’s financial instruments are not exposed to significant market riskdue to foreign currency exchange risk or commodity price risk.  However, the Company is exposed to marketrisk related to interest 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.

 

Debt obligations held for other than trading purposesat September 30, 2002 (dollars in thousands):

#### ** **

#### **EXPECTED MATURITYDATE**

 
|                     |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Estimated  Fair Value** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|---------------------------|--------|
| Credit Line Note Payable |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Variable Rate            |   | $        | 464    |     | — |     | — |     | — |     | — |           | — |      | $      | 464                       |   | $ | 464 |   |
| Average Interest Rate    |   | 4.75     | %      | —   |   | —   |   | —   |   | —   |   | —         |   | 4.75      | %      |                      |   |
| Long-term debt           |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Fixed Rate               |   | $        | 137    |     | $      | 520      |   | $        | 538    |     | $      | 505            |   | $         | 522    |                      | $      | 2,506 |   | $ | 4,728 |   | $ | 5,344 |   |
| Average Interest Rate    |   | 9.97     | %      | 9.95     | %      | 9.94     | %      | 9.94     | %      | 9.94     | %      | 10.06          | %      | 10.00     | %      |                      |   |
|                          |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |                           |        |  |  |  |  |  |  |  |  |

 

 

**Item4****.  Controls and Procedures**

 

As required by Rule13a-15 under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), within the 90 days prior to the filing date of this report, the Companycarried out an evaluation of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures.  This evaluation was carried out under the supervision and withthe participation of the Company’s management, including the Company’sPresident and Chief Executive Officer along with the Company’s Vice Presidentand Chief Financial Officer.  Based uponthat evaluation, the President and Chief Executive Officer along with the VicePresident and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures are effective. There have been no significant changes in the Company’s internalcontrols, or in other factors, which could significantly affect internalcontrols subsequent to the date the Company carried out its evaluation.

 

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in Company reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rulesand forms. Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed in Company reports filed under the Exchange Act is accumulated andcommunicated to management, including the Company’s President and ChiefExecutive Officer and the Vice President and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

 

18

----

 

**PART II.****OTHER INFORMATION**

 

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 restaurant locations;(3) to reimburse the Company for damages incurred as a result of lessors’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.

 

Mr. Greenery filed acounterclaim against the Company, seeking to evict the Company from the fiverestaurant locations, from which the Company planned and departed when thelease expired on September 30, 2002. 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 retained newlegal counsel and has filed a writ with the Louisiana Supreme Court.

 

The Company hadpreviously been notified that the lessors believe that additional monies neededto be spent by the Company to bring the properties to “first classcondition.”  No action has beencommenced by the lessors with respect to this allegation.  Management believes the Company completedthe necessary repairs before departing the properties.

 

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.  Management does not anticipate a materialeffect upon its financial condition as a result of this litigation.

 

Item 2.    Change inSecurities and Use of Proceeds — N/A

 

Item 3.    DefaultsUpon Senior Securities — N/A

 

Item 4.  Submission ofMatters to a Vote of Security Holders — N/A

 

Item 5.    OtherInformation —

 

Dissident Group of Shareholders

 

A group of shareholders, namely Titus Greene, ThomasM. Hontzas, Charles W. Mantooth, and G. Thomas Cliett filed a Schedule 13D withthe Securities and Exchange Commission (SEC) on July 17, 2002, amended onAugust 6, 2002.  The group was seekingto replace six of the current board of directors.  After several SEC filings by the Company and the dissident group,a settlement agreement was reached by the parties on September 27, 2002.  Details of the settlement are found in the 8-Kfiling with the SEC on September 27, 2002. The Company has expensed a total of $453,000 for the three andnine-months ended September 30, 2002, which includes legal fees ofapproximately $287,000, public relations and SEC filing fees of approximately $60,000,and board of director fees related to the dissident matter of approximately$106,000.

 

Related Party Transactions

 

Directors Foti, Bozeman, Cowart, Proffitt, Hontzas andVezertzis, collectively own franchises with respect to eighteenrestaurants.  The franchises weregranted on the same terms and conditions as franchises to non-affiliatedpersons and these gentlemen paid the same royalty, advertising and other costsas any other non-affiliated franchisee.

 

19

----

 

The Company leases chartered air service for corporateusage from time to time for an airplane owned by the President of theCompany.  Charges are made on an hourlyrate approximately 80% of the competitive rate for chartered air serviceavailable for non-affiliated vendors. The Company paid $23,000 and $65,000 directly to the chartered airservice for the three and nine-month periods ended September 30, 2002, and$31,000 and $63,000 for the three and nine-month periods ended September 30,2001.

 

The Company leases its headquarters office space froman entity in which two of Mr. Foti’s adult children collectively own a 50%interest.  The rental rate was $3,750per month through September, 2001 and increased to $6,540 per month in October,2001 when an addition to the building was leased to the Company.  The lease was approved by the CompensationCommittee of the Board and the per square foot rental rate is deemed to becomparable and competitive with similar space in Roanoke.

 

The Board of Directors has a policy that alltransactions with its Officers, Directors, employees and affiliates of theCompany will be approved by a majority of disinterested Directors of theCompany or a special committee of the Board of Directors consisting ofdisinterested persons, and will be on terms no less favorable to the Companythat such Directors or committee believe would be available from unrelatedthird parties.

 

Item 6.  Exhibits andReports on Form 8-K —

 
| a)   Exhibits:            |
|-------------------------------------|
|                                | 3.1 | Certificate of Incorporation, as amended, January 4,  1996. |
|                                |   |   |
|                                | 99.1 | Officers’ Certification pursuant to the  Sarbanes-Oxley Act of 2002, Section 906. |
|                                |   |   |
|                                |
| b)   Reports  on Form 8-K |
|                                |   |   |
|                                | 1.0 | September 27, 2002, Item 5.  Settlement with Dissident Group of  Shareholders. |

 

20

----

 

# **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:   November 14, 2002 | By:                                   | /s/  Robyn B.  Mabe |   |
|                           |                                  | Robyn B. Mabe |
|                           |                                  | Chief Financial Officer |

 

 

21

----

 

 

**OFFICERS’ CERTIFICATION**

 

I  Robyn B. Mabe, VicePresident and Chief Financial Officer certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of Austins Steaks &Saloon, Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15b-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 

 
| Date:   November 14, 2002 |   |   |   |   |                                                       |   |   |
|--------------------------------|--------|--------|--------|--------|------------------------------------------------------------|--------|--------|
|                           |   |   |   |   |                                                       |   |   |
|                           |   |   |   | By:    | /s/  Robyn B.  Mabe                                   |
|                           |   |   |   |   | Robyn B. Mabe

Vice President  and Chief Financial Officer |

 

 

22

----

 

**OFFICERS’ CERTIFICATION**

 

I Victor F. Foti, President and Chief Executive Officer certifythat:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Austins Steaks & Saloon, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15b-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 

 
| Date:   November 14, 2002 |   |   |   |   |                                                   |   |   |
|--------------------------------|--------|--------|--------|--------|--------------------------------------------------------|--------|--------|
|                           |   |   |   |   |                                                   |   |   |
|                           |   |   |   | By:    | /s/  Victor  F. Foti                              |
|                           |   |   |   |   | Victor F. Foti

President and  Chief Executive Officer |

 

 

23

----