**U.S.SECURITIES AND EXCHANGE COMMISSION**

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

 

**FORM10-Q**

 

**ý****  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For theperiod ended June 30, 2003**

 

**o****  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT**

 

#### **For the transitionperiod from              to              **

 

**Commissionfile number 0-25366**

 

| **AUSTINS STEAKS & SALOON, INC.**                              |
|--------------------------------------------------------------------|
| (Exact name of small  business 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   Noo

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).  Yes o   Noý

 

As of August 14, 2003, there were 12,150,099 shares of  Common stock outstanding.

 

 

----

 

**AUSTINSSTEAKS & SALOON, INC.**

**Form10-Q Index**

**SixMonths Ended June 30, 2003**

 
| **PART I.**  | **FINANCIAL INFORMATION** |                                                                                               |
|--------------|---------------------------|----------------------------------------------------------------------------------------------------|
|         |                      |                                                                                               |   |
|         | **Item 1.**               | **Financial Statements (Unaudited)**                                                               |   |
|         |                      |                                                                                               |   |
|         |                      | Consolidated Balance Sheets  – June 30, 2003 and December 31, 2002                            | 3 |
|         |                      |                                                                                               |   |
|         |                      | Consolidated  Statements of Operations - Three Months and Six Months Ended  June 30, 2003 and 2002 | 4 |
|         |                      |                                                                                               |   |
|         |                      | Consolidated  Statement of Changes in Stockholders’ Equity -  Six Months Ended June 30, 2003  | 5 |
|         |                      |                                                                                               |   |
|         |                      | Consolidated  Statements of Cash Flows - Six Months Ended  June 30, 2003 and 2002                  | 6 |
|         |                      |                                                                                               |   |
|         |                      | Notes to  Consolidated Financial Statements                                                        | 7-12 |
|         |                      |                                                                                               |   |
|         | **Item  2.**              | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**    | 12-17 |
|         |                      |                                                                                               |   |
|         | **Item  3.**              | **Quantitative  and Qualitative Disclosure about Market Risk**                                     | 17 |
|         |                      |                                                                                               |   |
|         | **Item  4.**              | **Controls  and Procedures**                                                                       | 17-18 |
|         |                      |                                                                                               |   |
| **PART II.** | **OTHER INFORMATION**     |                                                                                               |
|         |                      |                                                                                               |   |
|         | **Item 1.**               | **Legal  Proceedings**                                                                             | 19 |
|         |                      |                                                                                               |   |
|         | **Item 2.**               | **Change  in Securities and Use of Proceeds**                                                      | 19 |
|         |                      |                                                                                               |   |
|         | **Item 3.**               | **Defaults Upon  Senior Securities**                                                               | 19 |
|         |                      |                                                                                               |   |
|         | **Item  4.**              | **Submission  of Matters to a Vote of Security Holders**                                           | 19-20 |
|         |                      |                                                                                               |   |
|         | **Item  5.**              | **Other  Information**                                                                             | 20 |
|         |                      |                                                                                               |   |
|         | **Item 6.**               | **Exhibits and Reports  on Form 8-K**                                                              | 20 |
|         |                      |                                                                                               |
|         | **Signatures**            | 21                                                                                                 |
|         |                      |                                                                                               |
|         |                      |                                                                                               |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item1.  FinancialStatements**

**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Balance Sheets

June 30, 2003 andDecember 31, 2002

 
|                                                                                                                           |   | **June  30,  2003** |       | **December  31,  2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                                                                                                           |   | **(unaudited****)** |       |                    | ** ** |
| **Assets**                                                                                                                     |   |                |       |                    |       |
| Current assets:                                                                                                                |   |                |       |                    |       |
| Cash and cash  equivalents                                                                                                     |   | $                   | 727,860    |                    | $          | 131,631 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $341,892  in 2003 and $379,887 in 2002                   |   | 961,093             |       | 1,086,180               |       |
| Current  installments of notes receivable                                                                                      |   | 193,532             |       | 203,821                 |       |
| Other receivables                                                                                                              |   | 78,959              |       | 95,527                  |       |
| Inventories                                                                                                                    |   | 109,570             |       | 95,457                  |       |
| Prepaid expenses                                                                                                               |   | 387,314             |       | 328,321                 |       |
| Income taxes  refundable                                                                                                       |   | —              |       | 47,198                  |       |
| Deferred income  taxes                                                                                                         |   | 274,026             |       | 274,026                 |       |
| Total current  assets                                                                                                          |   | 2,732,354           |       | 2,262,161               |       |
| Notes  receivable, less allowance for doubtful accounts of $47,595 in 2003  and 2002, excluding current installments           |   | 1,232,080           |       | 1,286,906               |       |
| Property and  equipment, net                                                                                                   |   | 3,222,662           |       | 3,443,380               |       |
| Franchise  royalty contracts, net of accumulated amortization of $5,987,806  in 2003 and $5,672,658 in 2002                    |   | 3,466,625           |       | 3,781,773               |       |
| Goodwill, net of  accumulated amortization of $2,513,602 in 2003 and 2002                                                      |   | 4,310,200           |       | 4,310,200               |       |
| Financing costs,  net of accumulated amortization of $87,551 in 2003  and $72,020 in 2002                                      |   | 102,752             |       | 118,283                 |       |
| Deferred income  taxes                                                                                                         |   | 1,480,174           |       | 1,480,174               |       |
| Assets held for  sale                                                                                                          |   | 730,082             |       | 1,200,000               |       |
| Other assets,  net                                                                                                             |   | 189,605             |       | 156,548                 |       |
|                                                                                                                           |   | $                   | 17,466,534 |                    | $          | 18,039,425 |   |
| **Liabilities and Stockholders’  Equity**                                                                                 |   |                |       |                    |       |
| Current  liabilities:                                                                                                          |   |                |       |                    |       |
| Bank overdraft                                                                                                                 |   | $                   | 9,241      |                    | $          | 346,351 |   |
| Credit line note  payable to bank                                                                                              |   | —              |       | 363,180                 |       |
| Note payable to  bank                                                                                                          |   | 300,000             |       | —                  |       |
| Current  installments of long-term debt                                                                                        |   | 486,746             |       | 507,590                 |       |
| Accounts payable                                                                                                               |   | 1,163,195           |       | 1,328,813               |       |
| Accrued expenses  and other                                                                                                    |   | 585,558             |       | 896,497                 |       |
| Income taxes  payable                                                                                                          |   | 147,993             |       | —                  |       |
| Total current  liabilities                                                                                                     |   | 2,692,733           |       | 3,442,431               |       |
| Long-term debt,  excluding current installments                                                                                |   | 3,847,062           |       | 4,074,589               |       |
| Total  liabilities                                                                                                             |   | 6,539,795           |       | 7,517,020               |       |
| Stockholders’  equity:                                                                                                    |   |                |       |                    |       |
| Common stock;  $.01 par value.  Authorized 20,000,000  shares; issued  and outstanding 12,150,099 shares in 2003 and 2002 |   | 121,501             |       | 121,501                 |       |
| Additional  paid-in capital                                                                                                    |   | 8,674,846           |       | 8,674,846               |       |
| Retained  earnings                                                                                                             |   | 2,130,392           |       | 1,726,058               |       |
| Total  stockholders’ equity                                                                                               |   | 10,926,739          |       | 10,522,405              |       |
| Commitments and  contingencies                                                                                                 |   |                |       |                    |       |
|                                                                                                                           |   | $                   | 17,466,534 |                    | $          | 18,039,425 |   |

 

See accompanying notes toconsolidated financial statements.

 

3

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statementsof Operations

(Unaudited)

 
|                                                |   | **Three  Months  Ended June 30** |      | **Six  Months  Ended June 30** |   |
|-----------------------------------------------------|--------|----------------------------------|-----------|--------------------------------|--------|
|                                                |   | **2003**                         |      | **2002**                       |   | **2003** |   | **2002** |   |
| Revenues:                                           |   |                             |      |                           |   |   |   |   |   |
| Company-operated  restaurants                       |   | $                                | 4,397,448 |                           | $      | 6,726,458 |   | $ | 8,033,318 |   | $ | 13,178,835 |   |
| Franchise  operations                               |   | 1,235,046                        |      | 1,386,881                      |   | 2,398,449 |   | 2,748,699 |   |
| Other                                               |   | 110,960                          |      | 112,842                        |   | 218,121 |   | 227,868 |   |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Total revenues                                      |   | 5,743,454                        |      | 8,226,181                      |   | 10,649,888 |   | 16,155,402 |   |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Costs and  expenses:                                |   |                             |      |                           |   |   |   |   |   |
| Cost of  company-operated restaurants               |   | 2,919,393                        |      | 4,503,773                      |   | 5,497,618 |   | 8,957,337 |   |
| Cost of  franchise operations                       |   | 359,469                          |      | 478,299                        |   | 690,324 |   | 997,631 |   |
| Other cost of  operations                           |   | 83,111                           |      | 80,682                         |   | 166,497 |   | 169,085 |   |
| Restaurant  operating expenses                      |   | 882,431                          |      | 1,504,175                      |   | 1,740,357 |   | 3,026,146 |   |
| General and  administrative                         |   | 581,214                          |      | 640,026                        |   | 1,099,646 |   | 1,045,555 |   |
| Depreciation and  amortization                      |   | 315,766                          |      | 452,851                        |   | 627,564 |   | 896,931 |   |
| Closed  company-operated restaurants                |   | —                           |      | 1,026,289                      |   | — |   | 1,026,289 |   |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Total costs and  expenses                           |   | 5,141,384                        |      | 8,686,095                      |   | 9,822,006 |   | 16,118,974 |   |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Income (loss)  from operations                      |   | 602,070                          |      | (459,914                       | )      | 827,882 |   | 36,428 |   |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Other income  (expense):                            |   |                             |      |                           |   |   |   |   |   |
| Interest expense                                    |   | (118,386                         | )         | (131,521                       | )      | (237,685 | ) | (265,405 | ) |
| Interest income                                     |   | 23,235                           |      | 14,049                         |   | 46,800 |   | 21,193 |   |
| Other                                               |   | 3,967                            |      | 181,389                        |   | 15,179 |   | 199,851 |   |
|                                                |   |                             |      |                           |   |   |   |   |   |
|                                                |   | (91,184                          | )         | 63,917                         |   | (175,706 | ) | (44,361 | ) |
| Income (loss)  before income  tax expense (benefit) |   | 510,886                          |      | (395,997                       | )      | 652,176 |   | (7,933 | ) |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Income tax  expense (benefit)                       |   | 192,925                          |      | (151,255                       | )      | 247,842 |   | (2,970 | ) |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Net income  (loss)                                  |   | $                                | 317,961   |                           | $      | (244,742 | ) | $ | 404,334 |   | $ | (4,963 | ) |
|                                                |   |                             |      |                           |   |   |   |   |   |
| Earnings (loss)  per share:                         |   |                             |      |                           |   |   |   |   |   |
| Basic                                               |   | .03                              |      | (.02                           | )      | .03 |   | .00 |   |
| Diluted                                             |   | .03                              |      | (.02                           | )      | .03 |   | .00 |   |

 

See accompanying notes toconsolidated financial statements

 

4

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statement ofChanges in Stockholders’ Equity

Six Months Ended June 30,2003

(Unaudited)

 
|                         |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |    | **Retained  Earnings** |   | **Total** |   |
|------------------------------|--------|-------------------|--------|----------------------------------|---------|------------------------|--------|-----------|--------|
|                         |
|                         |   | **Shares**        |   | **Dollars**                      |    |                   |   |
|                         |   |              |   |                             |    |                   |   |      |   |   |   |
| Balances,  December 31, 2002 |   | 12,150,099        |   | $                                | 121,501 |                   | $      | 8,674,846 |   | $ | 1,726,058 |   | $ | 10,522,405 |   |
|                         |   |              |   |                             |    |                   |   |      |   |   |   |
| Net Income                   |   | —            |   | —                           |    | —                 |   | 404,334   |   | 404,334 |   |
|                         |   |              |   |                             |    |                   |   |      |   |   |   |
| Balances, June  30, 2003     |   | 12,150,099        |   | $                                | 121,501 |                   | $      | 8,674,846 |   | $ | 2,130,392 |   | $ | 10,926,739 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statements of Cash Flows

Six Months Ended June 30,2003 and 2002

(Unaudited)

 
|                                                                                       |   | **June** |    |
|--------------------------------------------------------------------------------------------|--------|----------|---------|
|                                                                                       |   | **2003** |    | **2002** |   |
| Cash flows from  operating activities:                                                     |   |     |    |   |   |
| Net income  (loss)                                                                         |   | $        | 404,334 |   | $ | (4,963 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by  operating activities: |   |     |    |   |   |
| Depreciation and  amortization of property and equipment                                   |   | 296,885  |    | 551,550 |   |
| Amortization of  franchise royalty contracts and financing costs                           |   | 330,679  |    | 345,381 |   |
| Loss on disposal  of fixed assets                                                          |   | 351      |    | — |   |
| Gain on sale of  asset held for sale                                                       |   | (790     | )       | — |   |
| Impairment of  property and equipment                                                      |   | —   |    | 870,009 |   |
| Provision for  bad debts                                                                   |   | 7,545    |    | 35,000 |   |
| (Increase)  decrease in:                                                                   |   |     |    |   |   |
| Trade accounts  receivable                                                                 |   | 117,542  |    | 70,295 |   |
| Notes receivable                                                                           |   | 65,115   |    | 27,150 |   |
| Other  receivables                                                                         |   | 16,568   |    | 7,674 |   |
| Inventories                                                                                |   | (14,113  | )       | 33,379 |   |
| Prepaid expenses                                                                           |   | (58,993  | )       | (70,811 | ) |
| Other assets                                                                               |   | (33,057  | )       | 7,170 |   |
| Income taxes  refundable                                                                   |   | 47,198   |    | — |   |
| Increase  (decrease) in:                                                                   |   |     |    |   |   |
| Accounts payable                                                                           |   | (165,618 | )       | (1,048,053 | ) |
| Accrued expenses  and other                                                                |   | (284,539 | )       | (332,661 | ) |
| Income taxes  payable                                                                      |   | 147,993  |    | 51,346 |   |
|                                                                                       |   |     |    |   |   |
| Net cash  provided by operating activities                                                 |   | 877,100  |    | 542,466 |   |
| Cash flows from  investing activities:                                                     |   |     |    |   |   |
| Additions to  property and equipment                                                       |   | (46,600  | )       | (114,264 | ) |
| Proceeds from  sale of asset held for sale                                                 |   | 414,390  |    | — |   |
|                                                                                       |   |     |    |   |   |
| Net cash  provided by (used in) investing activities                                       |   | 367,790  |    | (114,264 | ) |
|                                                                                       |   |     |    |   |   |
| Cash flows from  financing activities:                                                     |   |     |    |   |   |
| Net decrease in  bank overdraft                                                            |   | (337,110 | )       | (337,230 | ) |
| Net increase  (decrease) in credit line note payable                                       |   | (363,180 | )       | 110,895 |   |
| Proceeds from  note payable                                                                |   | 450,000  |    | — |   |
| Payments on note  payable                                                                  |   | (150,000 | )       | — |   |
| Payments on  long-term debt                                                                |   | (248,371 | )       | (262,473 | ) |
|                                                                                       |   |     |    |   |   |
| Net cash used in  financing activities                                                     |   | (648,661 | )       | (488,808 | ) |
|                                                                                       |   |     |    |   |   |
| Net increase  (decrease) in cash and cash equivalents                                      |   | 596,229  |    | (60,606 | ) |
|                                                                                       |   |     |    |   |   |
| Cash and cash  equivalents at beginning of period                                          |   | 131,631  |    | 449,075 |   |
|                                                                                       |   |     |    |   |   |
| Cash and cash  equivalents at end of period                                                |   | $        | 727,860 |   | $ | 388,469 |   |

 

See accompanying notes toconsolidated financial statements.

 

6

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**AUSTINS STEAKS & SALOON, INC.**

 

Notes to ConsolidatedFinancial Statements

 

 Six-Months Ended June 30, 2003 and 2002

 

(Unaudited)

 

**(1)****                                 General**

 

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 yearbecause, among other things, the dining habits of the Company’s customerscannot be certain.  The unauditedconsolidated financial statements and notes are presented as permitted by Form10-Q and do not contain certain information included in the Company’s annualconsolidated financial statements and notes. For further information, refer to the consolidated financial statementsand notes thereto included in the Company’s annual report on Form 10-K for theyear ended December 31, 2002.

 

**(2)****                                 Goodwilland Other Intangible Assets**

 

The Company conforms to the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, “Goodwill and Other IntangibleAssets.”  Under SFAS No. 142, goodwilland intangible assets deemed to have indefinite lives are reviewed forimpairment and written down and charged to results of operations when theircarrying amount exceeds their estimated fair value.  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 changes in the net carrying amount of goodwill, byreporting segment, for the six-month period ended June 30, 2003 areas follows:

 
| **Segment**                   |   | **Goodwill  at  January 1, 2003** |      | **Impairment  Losses** |   | **Goodwill  at  June 30, 2003** |   |
|-------------------------------|--------|-----------------------------------|-----------|------------------------|--------|---------------------------------|--------|
|                          |   |                              |      |                   |   |                            |   |
| Company-operated  restaurants |   | $                                 | 4,310,200 |                   | $      | —                          |   | $ | 4,310,200 |   |
| Franchise  operations         |   | —                            |      | —                 |   | —                          |   |
| Total                         |   | $                                 | 4,310,200 |                   | $      | —                          |   | $ | 4,310,200 |   |

 

The changes in the net carrying amount of goodwill, byreporting segment, for the six-month period ended June 30, 2002 are asfollows:

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

 

7

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*AmortizingIntangible Assets*

 

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 contractsbalance over their remaining life can be recovered through undiscounted futureoperating cash flows of the acquired operation.  The amount of impairment, if any, is measured based on projecteddiscounted future operating cash flows using a discount rate reflecting theCompany’s average cost of funds.

 
|                           |   |                        |      | **As of June 30, 2003**                    |       |                          |   |
|--------------------------------|--------|-----------------------------|-----------|--------------------------------------------|------------|-------------------------------|--------|
|                           |   | **Gross  Carrying  Amount** |      | **Weighted average  Amortization  Period** |       | **Accumulated  Amortization** |   |
| Amortizing  intangible assets: |   |                        |      |                                       |       |                          |   |
| Franchise Royalty Contracts    |   | $                           | 9,454,431 |                                       | 15.0  yrs. |                          | $      | 5,987,806 |   |
|                                |        |                             |           |                                            |            |                               |        |  |  |

 

Aggregate amortization expense for amortizingintangible assets for the three-month and six-month periods ended June 30, 2003was $157,574 and $ 315,148 respectively. Estimated amortization expense is $630,295 per year.

 

**(3)****                                 EarningsPer Share and Stock Option Plan**

 

Basic earnings per shareexcludes dilution and is computed by dividing income available to commonstockholders by the weighted-average number of common shares outstanding forthe period.  Diluted earnings per sharereflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stockor resulted in the issuance of common stock that then shared in the earnings ofthe Company.  Stock options for sharesof common stock were not included in computing diluted earnings per share forthe three-month and six-month periods ended June 30, 2003 and 2002 becausethese effects are anti-dilutive.

 

The following is areconciliation of the numerators and denominators of the basic and dilutedearnings per share computations for the periods indicated:

 
|                                  |   | **Income  (Loss)  (Numerator)** |     | **Weighted  Average  Shares  (Denominator)** |       | **Earnings  (Loss)  Per Share  Amount** |   |
|---------------------------------------|--------|---------------------------------|----------|----------------------------------------------|------------|-----------------------------------------|--------|
| **Three-months  ended June 30, 2003** |   |                            |     |                                         |       |                                    |   |
|                                  |   |                            |     |                                         |       |                                    |   |
| Net income – basic and diluted   |   | $                               | 317,961  |                                         | 12,150,099 |                                    | 0.03   |   |
|                                  |   |                            |     |                                         |       |                                    |   |
| **Three-months ended June 30, 2002**  |   |                            |     |                                         |       |                                    |   |
|                                  |   |                            |     |                                         |       |                                    |   |
| Net loss – basic and diluted     |   | $                               | (244,742 | )                                            | 12,178,800 |                                    | (0.02  | ) |

 

8

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|                                |   | **Income  (Loss)  (Numerator)** |    | **Weighted  Average  Shares  (Denominator)** |       | **Earnings  (Loss)  Per Share  Amount** |   |
|-------------------------------------|--------|---------------------------------|---------|----------------------------------------------|------------|-----------------------------------------|--------|
| **Six-months  ended June 30, 2003** |   |                            |    |                                         |       |                                    |   |
|                                |   |                            |    |                                         |       |                                    |   |
| Net income - basic and diluted      |   | $                               | 404,334 |                                         | 12,150,099 |                                    | 0.03   |   |
|                                |   |                            |    |                                         |       |                                    |   |
| **Six-months ended June 30, 2002**  |   |                            |    |                                         |       |                                    |   |
|                                |   |                            |    |                                         |       |                                    |   |
| Net loss – basic and diluted   |   | $                               | (4,963  | )                                            | 12,178,800 |                                    | 0.00   |   |

 

The Company applies the intrinsic-value-based methodof accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees,*and related interpretations including Financial Accounting Standards Board(FASB) Interpretation No. 44, *Accounting forCertain Transactions involving Stock Compensation, an interpretation of APBOpinion No. 25,* issued in March 2000, to account for its fixed-planstock options.  Under this method,compensation expense is recorded on the date of grant only if the currentmarket price of the underlying stock exceeded the exercise price.  SFAS No. 123, *Accounting for Stock-Based Compensation,* establishedaccounting and disclosure requirements using a fair-value-based method ofaccounting for stock-based employee compensation plans.  As allowed by SFAS No. 123, the Company haselected to continue to apply the intrinsic-value-based method of accountingdescribed above, and has adopted only the disclosure requirements of SFAS No.123.  SFAS No. 148, *Accounting for Stock-Based Compensation – Transitionand Disclosure, an amendment of SFAS No. 123,* amends the disclosurerequirements of SFAS No. 123 to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedcompensation and the effect of the method on reported results.  The Company had no stock-based employeecompensation expense using either the intrinsic-value method or the fair-valuemethod for the three-month and six-month periods ended June 30, 2003 and 2002.

 

**(4)****                                 ReportableSegments**

 

The Company hasdefined two reportable segments: Company-operated restaurants and franchisingand other.  The Company-operatedrestaurant segment consists of the operations of all Company-operatedrestaurants and derives its revenues from restaurant operations. Thefranchising and other segment consists of franchise sales and supportactivities and derives its revenues from sales of franchise and developmentrights and collection of royalties from franchisees.

 

Generally, the Company evaluates performance and allocatesresources 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.

 

Reportablesegments are business units that provide different products or services.  Separate management of each segment isrequired because each business unit is subject to different operational issuesand strategies.  Through June 30, 2003,all revenues for each business segment were derived from business activitiesconducted with customers located in the United States.  No single external customer accounted for 10percent or more of the Company’s consolidated revenues.

 

9

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The following table summarizes reportable segmentinformation:

 
|                                                    |   | **Three-Months  Ended June 30,** |      | **Six-months  Ended June 30,** |      |
|---------------------------------------------------------|--------|----------------------------------|-----------|--------------------------------|-----------|
|                                                    |   | **2003**                         |      | **2002**                       |      | **2003** |   | **2002** |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Revenues from reportable segments:                      |   |                             |      |                           |      |   |   |   |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Restaurants                                             |   | $                                | 4,397,448 |                           | 6,726,458 |   | 8,033,318 |   | 13,178,835 |   |
| Franchising and other                                   |   | 1,346,006                        |      | 1,499,723                      |      | 2,616,570 |   | 2,976,567 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Total revenues                                          |   | $                                | 5,743,454 |                           | 8,226,181 |   | 10,649,888 |   | 16,155,402 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Depreciation and amortization:                          |   |                             |      |                           |      |   |   |   |   |
| Restaurants                                             |   | 132,151                          |      | 262,111                        |      | 260,475 |   | 520,717 |   |
| Franchising and other                                   |   | 183,615                          |      | 190,740                        |      | 367,089 |   | 376,214 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Total depreciation and amortization                     |   | $                                | 315,766   |                           | 452,851   |   | 627,564 |   | 896,931 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Interest expense:                                       |   |                             |      |                           |      |   |   |   |   |
| Restaurants                                             |   | 109,775                          |      | 123,135                        |      | 222,716 |   | 247,166 |   |
| Franchising and other                                   |   | 8,611                            |      | 8,386                          |      | 14,969 |   | 18,239 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Total interest expense                                  |   | $                                | 118,386   |                           | 131,521   |   | 237,685 |   | 265,405 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Interest income:                                        |   |                             |      |                           |      |   |   |   |   |
| Restaurants                                             |   | 22,658                           |      | 12,300                         |      | 45,501 |   | 18,881 |   |
| Franchising and other                                   |   | 577                              |      | 1,749                          |      | 1,299 |   | 2,315 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Total interest income                                   |   | $                                | 23,235    |                           | 14,049    |   | 46,800 |   | 21,193 |   |
|                                                    |   |                             |      |                           |      |   |   |   |   |
| Income (loss) before income tax expense (benefit):      |   |                             |      |                           |      |   |   |   |   |
| Restaurants                                             |   | 191,237                          |      | (799,969                       | )         | 45,889 |   | (845,739 | ) |
| Franchising and other                                   |   | 319,649                          |      | 403,972                        |      | 606,287 |   | 837,806 |   |
| Total income (loss) before income tax expense (benefit) |   | $                                | 510,886   |                           | (395,997  | ) | 652,176 |   | (7,933 | ) |

 
|                                |   | **June 30  2003** |      |   |   | **June 30,  2002** |       |   |   |
|-------------------------------------|--------|-------------------|-----------|--------|--------|--------------------|------------|--------|--------|
|                                |   |              |      |   |   |               |       |   |   |
| Gross fixed assets:                 |   |              |      |   |   |               |       |   |   |
| Restaurants                         |   | 6,176,502         |      |   |   | 12,194,898         |       |   |   |
| Franchising and other               |   | 1,450,978         |      |   |   | 1,545,336          |       |   |   |
|                                |   |              |      |   |   |               |       |   |   |
| Total gross fixed assets            |   | $                 | 7,627,480 |   |   |               | 13,740,234 |   |   |   |
|                                |   |              |      |   |   |               |       |   |   |
| Expenditures for fixed assets:      |   |              |      |   |   |               |       |   |   |
| Restaurants                         |   | 44,537            |      |   |   | 106,864            |       |   |   |
| Franchising and other               |   | 2,063             |      |   |   | 7,400              |       |   |   |
|                                |   |              |      |   |   |               |       |   |   |
| Total expenditures for fixed assets |   | $                 | 46,600    |   |   |               | 114,264    |   |   |   |

 

10

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**(5)****                                 Contingencies**

 

In January 2001, the Company executed a series ofMaster Lease Agreements (Agreements) relating to certain franchised propertiesformerly operated by other parties as “Quincy’s” restaurants (hereinafter“Former Quincy’s”).  Signed copies ofthese Agreements (which were required, pursuant to the terms of the document,to be executed by Franchise Financing Corporation of America (the Lessor), tobe legally binding) were never returned to the Company.  At the end of January 2002, there remainedonly 25 Former Quincy’s operated by Company franchisees, the Lessor havingtaken back, in 2001 and 2002, other restaurants previously operated by Companyfranchisees.

 

The Agreements, incomplete for a lack of signature bythe Lessor, provided for rental payments from the Company to the Lessor.  However, the cost of any rental payments waspassed on to the Company franchisees operating the properties.  During 2002, seven of the remaining 25properties were closed and the franchisees discontinued making payments to theCompany.  During the six-month periodended June 30, 2003, two additional properties were closed and thesefranchisees also discontinued making payments to the Company.  To the Company’s knowledge, as of June 30,2003, a total of approximately $673,000 of rent payments had not been made byeither the franchisees or the Company with regard to the above-referenced nineproperties.  The Company disputes anyliability for these amounts.

 

Rent for the nine properties for the period from July1, 2003 through December 31, 2005 (the end of the lease term) according to thepayment schedule set out in the Agreements, would approximate $1.96million.  However, as noted above, theLessor has never delivered executed Agreements to the Company.  Accordingly, on May 15, 2003, the Companysent a letter to the Lessor, providing notice of the Company’s termination ofany tenancies at-will on any remaining Former Quincy’s units effective May 31,2003.

 

Consistent with this notice, the Company advised fivefranchisees to make any payments directly to the Lessor.  On eleven other properties the Company hasbecome aware that the franchisees have elected to make their payments directlyto the Lessor, and the Lessor has accepted these payments.  There can be no assurance that thesefranchisees will continue to make their lease payments in the future.

 

While the Company has previously engaged indiscussions with the Lessor of the properties to resolve any rental paymentsclaimed by the Lessor under the Agreements, it is not possible at this time todetermine the outcome of these discussions. Nevertheless, the Company has claims against the Lessor which itbelieves will at least offset any lease payments claimed by the Lessor.  Accordingly, no amount has been accrued atJune 30, 2003.

 

The Company is also a guarantor on three leaseagreements for restaurants, which the Company originally operated, but whichwere sold in 2002.  The total monthlypayments on these leases are $20,680 through September 30, 2012 and paymentsare due from the Company if the lessee is unable to fulfill its obligation tothe lessor.  At June 30, 2003 it is notprobable that the Company will be required to make payments under it guarantees.  Thus, no liability has been accrued relatedto the Company’s obligation under this agreement.

 

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 hail damagefor which lessor has collected insurance proceeds and cash payments from theCompany.

 

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.

 

11

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Mr. Greenway alleged that the Company failed tomaintain the properties in first class condition.  Mr. Greenway won the lawsuit at the district court level and wonan appeal to the second Circuit of the Louisiana State Court of Appeals in June2002.  The Company filed a writ with theLouisiana Supreme Court, which was rejected.

 

In January 2003, Mr. Greenway amended his counterclaimseeking damages for an alleged failure by the Company to deliver theproperties, at eviction, in the condition in which the properties had beenmaintained at the inception of the lease. Mr. Greenway has also alleged that the Company removed numerous itemsfrom the leased premises and has refused to return these items.  Company management believes the Companycompleted any necessary repairs before leaving the leased premises.

 

Management believes that the Company has meritoriousclaims against the lessors as a result of its litigation and that even if thelessors were to prevail on their claims regarding the condition and equipmentof the premises, those costs would be approximately offset by the Company’sclaims against lessors.  Management doesnot anticipate a material effect upon its financial condition, results ofoperations or liquidity as a result of this litigation.

 

The Company is involved in various other claims andlegal actions arising in the ordinary course of business.  In the opinion of the management, theultimate disposition of these matters will not have a material adverse effecton the Company’s financial condition, results of operations or liquidity.

 

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

 

**Overview**

 

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 spendingtrends and habits; competition in the restaurant segment with respect to price,service, location, food quality and personnel resources; weather conditions inthe Company’s operating regions; laws and government regulations; generalbusiness and economic conditions; availability of capital; success of operatinginitiatives and marketing and promotional efforts; and changes in accountingpolicies.  In addition, the Companydisclaims any intent or obligation to update those forward-looking statements.

 

The Company-operated and franchised a total of 177restaurants located in 22 states, including 7 Company-operated and 170franchise restaurants as of June 30, 2003. The restaurants include a family steakhouse concept and a steak and buffetconcept.

 

###### **Results of Operations**

 

Net income for thethree-month and six-month periods ended June 30, 2003 was $317,961 and $404,334as compared to net loss of ($244,742) and ($4,963) for the three-month andsix-month periods ended June 30, 2002.  The net losses incurred in 2002 are primarily attributable to recordingimpairment and accrued expenses for five closed company-operated restaurantslocated in Louisiana.

 

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

 
|                                              |   | **Three-Months  Ended June 30,** |   | **Six-Months  Ended June 30,** |   |
|---------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                              |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Revenues:                                         |   |                             |   |                           |   |   |   |   |   |
| Company-operated restaurants                      |   | 76.6                             | %      | 81.8                           | %      | 75.5 | % | 81.6 | % |
| Franchise operations                              |   | 21.5                             |   | 16.9                           |   | 22.5 |   | 17.0 |   |
| Other                                             |   | 1.9                              |   | 1.3                            |   | 2.0 |   | 1.4 |   |
| Total revenues                                    |   | 100.0                            |   | 100.0                          |   | 100.0 |   | 100.0 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Costs and expenses:                               |   |                             |   |                           |   |   |   |   |   |
| Cost of company-operated restaurants              |   | 50.8                             |   | 54.7                           |   | 51.6 |   | 55.4 |   |
| Cost of franchise operations                      |   | 6.3                              |   | 5.8                            |   | 6.5 |   | 6.2 |   |
| Other cost of operations                          |   | 1.4                              |   | 1.0                            |   | 1.6 |   | 1.1 |   |
| Restaurant operating expenses                     |   | 15.4                             |   | 18.3                           |   | 16.3 |   | 18.7 |   |
| General and administrative                        |   | 10.1                             |   | 7.8                            |   | 10.3 |   | 6.5 |   |
| Depreciation and amortization                     |   | 5.5                              |   | 5.5                            |   | 5.9 |   | 5.6 |   |
| Closed company-operated restaurants               |   | —                           |   | 12.5                           |   | — |   | 6.3 |   |
| Total costs and expenses                          |   | 89.5                             |   | 105.6                          |   | 92.2 |   | 99.8 |   |
| Income (loss) from operations                     |   | 10.5                             |   | (5.6                           | )      | 7.8 |   | 0.2 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Other income (expense)                            |   | (1.6                             | )      | 0.8                            |   | (1.7 | ) | (0.2 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Income (loss) before income tax expense (benefit) |   | 8.9                              |   | (4.8                           | )      | 6.1 |   | 0.0 |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| Income tax expense (benefit)                      |   | 3.4                              |   | (1.8                           | )      | 2.3 |   | 0.0 |   |
| Net income (loss)                                 |   | 5.5                              | %      | (3.0                           | )%     | 3.8 | % | 0.0 | % |

 
|                                    |   | **Three-Months  Ended June 30,** |   | **Six-Months  Ended June 30,** |   |
|-----------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                    |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                    |   |                             |   |                           |   |   |   |   |   |
| **Restaurant Data**                     |   |                             |   |                           |   |   |   |   |   |
| Number of Company-Operated Restaurants: |   |                             |   |                           |   |   |   |   |   |
| Beginning of period                     |   | 7                                |   | 14                             |   | 7 |   | 17 |   |
| Opened                                  |   | —                           |   | —                         |   | — |   | — |   |
| Closed                                  |   | —                           |   | —                         |   | — |   | — |   |
| Franchised                              |   | —                           |   | —                         |   | — |   | 3 |   |
| End of period                           |   | 7                                |   | 14                             |   | 7 |   | 14 |   |
|                                    |   |                             |   |                           |   |   |   |   |   |
| Number of U.S. Franchised Restaurants:  |   |                             |   |                           |   |   |   |   |   |
| Beginning of period                     |   | 174                              |   | 212                            |   | 186 |   | 215 |   |
| Opened                                  |   | —                           |   | —                         |   | — |   | 4 |   |
| Closed                                  |   | 4                                |   | 9                              |   | 16 |   | 16 |   |
| End of period                           |   | 170                              |   | 203                            |   | 170 |   | 203 |   |

 

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**Revenues**

 

Company-operatedrestaurant revenues decreased $2.3 million (34.6%) to $4.4 million for thethree-month period ended June 30, 2003 as compared to $6.7 million for thecomparable three-month period ended June 30, 2002.  Revenues for company-operated restaurants decreased $5.2 million(39.0%) to $8.0 million for the six-month period ended June 30, 2003 as comparedto $13.2 million for the comparable six-month period ended June 30, 2002. Thethree-month and six-month decreases over the respective comparable priorperiods is attributable to the closing of under-performing company restaurantsand the transfer of certain company operations to franchise units during 2002.

 

Franchiseand other revenues decreased 10.2% to $1.3 million for the three-month periodended June 30, 2003 as compared to $1.5 million for the comparablethree-month period ended June 30, 2002. Franchise and other revenues decreased 12.1% to $2.6 million for thesix-month period ended June 30, 2002 as compared to $3.0 million for thecomparable six-month period ended June 30, 2002.  The decrease is attributable to less franchised stores in the systemduring the period ended June 30, 2003 as compared to June 30, 2002.

 

###### **Costs and Expenses**

 

Costof company-operated restaurants, consisting of food, beverage, and employeecosts decreased $1.6 million (35.2%) to $2.9 million for the three-month periodended June 30, 2003 from $4.5 million for the comparable three-month periodended June 30, 2002.  These costsdecreased as a percentage of total revenues from 54.7% in 2002 to 50.8% in2003.  For the six-month period endedJune 30, 2003, cost of company-operated restaurants decreased $3.5 million(38.6%) from $9.0 million in 2002 to $5.5 million in 2003. These costsdecreased as a percent of total revenues from 55.4% in 2002 to 51.6% in2003.  The decreases are due to fewercompany-operated restaurants in 2003 due to the closing of under-performingcompany restaurants in 2002 and the franchising of three units in 2002.

 

Costof franchise operations and other cost of operations was $443,000 (7.7%) forthe three-month period ended June 30, 2003 compared to $559,000 (6.8%) in2002.   For the six-month period endedJune 30, 2003, cost of franchise operations and other cost of operations was$857,000 (8.1%) compared to $1.2 million (7.3%) for the six-month period endedJune 30, 2002.  The decrease isattributable to less franchised stores in the system at June 30, 2003.

 

Restaurantoperating expenses, which include utilities, insurance, maintenance, rent andother such costs of the company-operated restaurants, decreased $622,000(41.3%) for the three-month period ended June 30, 2003 over prior year’s comparableperiod.  For the six-month period endedJune 30, 2003 restaurant operating expenses decreased $1.3 million (42.5%) overthe comparable prior period. The majority of the decrease is due to the closingand franchising of company-operated restaurants during 2002.  These expenses as a percentage of totalrevenues decreased to 15.4% and 16.3% in 2003 compared to 18.3% and 18.7% in2002 for the three and six-month periods ended June 30, respectively.  The decrease is attributable to closingunder-performing company operations.

 

Forthe three-month periods ended June 30, 2003 and 2002, general andadministrative expenses were $581,000 and $640,000, respectively and as apercentage of total revenue were 10.1% and 7.8%, respectively.  For the six-month periods ended June 30,2003 and 2002, general and administrative expenses were $1.1 million and $1.0million respectively and as a percentage of total revenue were 10.3% and 6.5%respectively.  The increase for thesix-month period ended June 30, 2003 over the comparable prior period isprimarily due to additional legal fees incurred for litigation matters, as wellas fees associated with reimbursement to shareholders in 2003 that wereinvolved in the proxy contest and settlement in 2002.

 

Depreciationand amortization expense was $137,000 less for the three-month period endedJune 30, 2003 compared to the comparable period in 2002 and $269,000 less forthe

 

14

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comparable six-monthperiod then ended primarily due to closings of under-performingcompany-operated restaurants and retirement of their related long-lived assets.

 

Closedcompany-operated stores expense of $1.0 million for the three and six-monthperiods ended June 30, 2002 is due to the impairment and accrued expensesrecorded for five closed company-operated restaurants in the Louisiana market.

 

**OtherIncome (Expense)**

 

Interestexpense decreased $13,000 and $28,000 for the three and six-month periods endedJune 30, 2003 versus the comparable periods in 2002, due to a lower averageprincipal outstanding balance as well as lower interest rates in 2003.  Interest income fluctuates according to thelevels of available cash balances.  TheCompany employs a cash management system whereby available balances are investedon an overnight basis.

 

**IncomeTax Expense (Benefit)**

 

Incometax expense (benefit) is directly affected by the levels of pretax income(loss).  The Company’s effective taxrate of approximately 37.8% and 38.0% percent for the three and six-month periodsended June 30, 2003 is comparable to the rate of 38.2% and 37.4% for the sameperiods in 2002.

###### ** **

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

 

As iscustomary in the restaurant industry, the Company has operated with negativeworking capital.  Historically, the Companyhas leased the majority of its restaurants and through a strategy of controlledgrowth has financed expansions from operating cash flows, the utilization oflines of credit and long-term debt provided by various lenders.

 

Cashflows provided by operating activities was $877,000 in 2003 compared to$542,000 in 2002. During 2003, net cash provided by operating activitiesconsisted primarily of net income of $404,000 and depreciation and amortizationof $628,000, partially offset by a decrease in accounts payable and accruedexpenses of $450,000.  During 2002, netcash provided by operating activities consisted of $897,000 of depreciation andamortization, and impairment of property and equipment of $870,000, partiallyoffset by a decrease in accounts payable and accrued expenses of $1.4million.  Net cash provided by investingactivities of $368,000 in 2003 consisted of proceeds of $414,000 from the saleof a parcel of land offset by expenditures related to property and equipment.During 2002, net cash used in investing activities of $114,000 was forexpenditures related to property and equipment.  Net cash used in financing activities of  $649,000 in 2003 was primarily for repaymentof long-term debt, offset by proceeds of $450,000 from the issuance of a notepayable. During 2002, net cash used in financing activities was primarily dueto an increase in the line of credit of $111,000, offset by payments oflong-term debt and a decrease in bank overdrafts.

 

Managementreviews available financing alternatives to provide cash for future expansion,restructure existing debt, and provide additional working capital; however,management believes existing financing provides adequate funding.

 

# **CRITICAL ACCOUNTING POLICIES**

 

## **Franchise Revenue**

 

Initial franchise fees are recognized when allmaterial services have been substantially performed by the Company and therestaurant has opened for business. Franchise royalties, which are based on a percentage of monthly sales,are recognized as income on the accrual basis.

 

15

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## **Accounts and Notes Receivable andAllowance for Doubtful Accounts**

 

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

 

**FranchiseRoyalty Contracts**

 

Franchiseroyalty contracts are amortized on a straight-line basis over fifteen years,the estimated average life of the franchise agreements.  The Company assesses the recoverability ofthis intangible asset by determining whether the amortization of the franchiseroyalty contracts balance over their remaining life can be recovered thoughundiscounted future operating cash flows of the acquired operation.  The amount of impairment, if any, ismeasured based on projected discounted future operating cash flows using adiscount rate reflecting the Company’s average cost of funds.

 

**Goodwill**

 

Goodwillrepresents the excess of purchase price over fair value of net assets ofbusinesses acquired.  The Companyapplies the provisions of Statement of Financial Accounting Standards (SFAS)No. 142, *Goodwill and Other IntangibleAssets*.  Goodwill andintangible assets acquired in a purchase business combination and determined tohave an indefinite useful life are not amortized, but instead tested forimpairment at least annually in accordance with the provisions of SFAS No. 142.

 

###### **Impact of Inflation**

 

Theimpact of inflation on the costs of food and beverage product, labor and realestate can affect the Company’s operations. Over the past few years, inflation has had a lesser impact on theCompany’s operations due to the lower rates of inflation in the nation’seconomy and economic conditions in the Company’s market areas.

 

Managementbelieves the Company has historically been able to pass on increased coststhrough certain selected menu price increases and has offset increased costs byincreased productivity and purchasing efficiencies, but there can be noassurance that the Company will be able to do so in the future.  Management anticipates that the average costof restaurant real estate leases and construction costs could increase in thefuture which could affect the Company’s ability to expand.  In addition, mandated health care oradditional increases in the federal or state minimum wages could significantlyincrease the Company’s costs of doing business.

#####  

##### **Impact of Recently Issued AccountingStandards**

 

InDecember 2002, the FASB issued SFAS No. 148 *Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123*.  ThisStatement amends FASB Statement No. 123 *Accountingfor Stock-Based Compensation,* to provide alternative methods oftransition of voluntary change to the fair value method of accounting forstock-based employee compensation.  Inaddition, this Statement amends the disclosure requirements of Statement No.123 to require prominent disclosures in both annual and interim financialsstatements about the method of accounting for stock-based employee compensationand the effect of the method on reported results.  The adoption of the disclosure provisions of SFAS No. 148 did nothave a material effect on the Company’s consolidated financial position,results of operations or cash flows of the Company.

 

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InNovember 2002, the FASB issued Interpretation (FIN) No. 45 *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees Including Indirect Guarantees of Indebtedness of others*,which elaborates on the disclosures to be made by a guarantor in its interimand annual financial statements about its obligations under certain guaranteesthat it has issued.  It also clarifiesthat a guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initialmeasurement provisions of FIN No. 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002, irrespective of theguarantor’s fiscal year end.  Theadoption of FIN No. 45 did not have a material effect on the Company’sconsolidated financial position, results of operations or cash flows of theCompany.

 

InJanuary 2003, the FASB issued Interpretation No. 46 *Consolidation of Variable Interest Entities, an interpretation of ARBNo. 51. *This Interpretationaddresses the consolidation by business enterprises of variable interestentities as defined in the Interpretation. The Interpretation applies immediately to variable interest entitiescreated after January 31, 2003, and to variable interests in variable interestentities obtained after January 31, 2003. The application of this Interpretation did not have any impact on theCompany’s consolidated financial position, results of operations or cash flowsof the Company.

 

As ofJune 30, 2003, there are no other new accounting standards issued, but not yetadopted by the Company, which are expected to be applicable to the Company’sconsolidated financial position, operating results or financial statementdisclosures.

 

**Item 3.****           Quantitative and QualitativeDisclosure about Market Risk**

 

TheCompany does not engage in derivative financial instruments or derivativecommodity instruments.  As of June 30,2003, the Company’s financial instruments are not exposed to significant marketrisk due to foreign currency exchange risk or commodity price risk.  However, the Company is exposed to marketrisk related to interest rates.

 

Thetable below provides information about the Company’s debt obligations that aresensitive to changes in interest rates. The table presents principal cash flows and related weighted averageinterest rates by expected maturity dates.

 

Debtobligations held for other than trading purposes at June 30, 2003 (dollars inthousands):

 

#### **EXPECTED MATURITY DATE**

 
|                   |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Estimated  Fair Value** |   |
|------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|---------------------------|--------|
| Note  Payable to Bank  |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Variable  Rate         |   | $        | 300    |     | — |     | — |     | — |     | — |           | — |      | $      | 300                       |   | $ | 300 |   |
| Average  Interest Rate |   | 4.75     | %      | —   |   | —   |   | —   |   | —   |   | —         |   | 4.75      | %      |                      |   |
| Long-term  debt        |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Fixed  Rate            |   | $        | 487    |     | $      | 530      |   | $        | 505    |     | $      | 522            |   | $         | 361    |                      | $      | 1,929 |   | $ | 4,334 |   | $ | 5,106 |   |
| Average  Interest Rate |   | 9.94     | %      | 9.93     | %      | 9.94     | %      | 9.94     | %      | 10.02    | %      | 10.07          | %      | 10.00     | %      |                      |   |
|                        |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |                           |        |  |  |  |  |  |  |  |  |

 

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

 

As required by Rule 13a-15 under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), as of the end of theperiod covered by this report, the Company carried out an evaluation of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  This evaluation wascarried out under the supervision and with the participation of the Company’smanagement, including the President and Chief Executive Officer and theCompany’s Chief Operating Officer who is also the Company’s Chief FinancialOfficer.  Based upon their evaluation,the officers concluded that the Company’s disclosure controls and proceduresare effective.  There have been nosignificant changes in the

 

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Company’s internal controls, or in other factors, which couldsignificantly affect internal controls subsequent to the date the Companycarried 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 andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in Company reports filed underthe Exchange Act is accumulated and communicated to management, including theCompany’s President and Chief Executive Officer and the Vice President andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.

 

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**PARTII. OTHER INFORMATION**

 

Item 1.             Legal Proceedings

 

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

 

Mr. Greenway filed a counterclaimagainst the Company, seeking to evict the Company from the five restaurantlocations, from which the Company to departed when the lease expired onSeptember 30, 2002.  Mr. Greenwayalleged that the Company failed to maintain the properties in first classcondition.   Mr. Greenway won thelawsuit at the district court level and won an appeal to the second Circuit ofthe Louisiana State Court of Appeals in June 2002.  The Company filed a writ with the Louisiana Supreme Court, whichwas rejected.

 

In January 2003, Mr.Greenway amended his counterclaim seeking damages for an alleged failure by theCompany to deliver the properties, at eviction, in the condition in which theproperties had been maintained at the inception of the lease.  Mr. Greenway has also alleged that theCompany removed numerous items from the leased premises and has refused toreturn these items.  Company managementbelieves the Company completed any necessary repairs before leaving the leasedpremises.

 

Management believes thatthe Company has meritorious claims against the lessors as a result of itslitigation and that even if the lessors were to prevail on their claimsregarding the condition and equipment of the premises, those costs would beapproximately offset by the Company’s claims against the lessors.  Management does not anticipate a materialeffect upon its financial condition, results of operations, or liquidity as aresult of this litigation.

 

Item 2.             Change in Securities and Use ofProceeds – N/A

 

Item 3.             Defaults Upon Senior Securities –N/A

 

Item 4.             Submissionof Matters to a Vote of Security Holders – At the Annual Meeting of theShareholders held June 24, 2003, the following persons were elected to theBoard of Directors:

 
| **Nominees**              |   | **Shares  voted for** |   | **Shares  voted against** |   | **Shares  withheld** |   |
|---------------------------|--------|-----------------------|--------|---------------------------|--------|----------------------|--------|
|                      |   |                  |   |                      |   |                 |   |
| Paul  C. Schorr, III      |   | 9,215,207             |   | 739,646                   |   | 28,816               |   |
| Thomas  M. Hontzas        |   | 9,214,569             |   | 739,646                   |   | 29,454               |   |
| Stanley  L. Bozeman, Jr.  |   | 8,181,799             |   | 739,646                   |   | 1,062,224            |   |
| William  E. Proffitt      |   | 9,215,207             |   | 739,646                   |   | 28,816               |   |
| Jesse  M. Harrington, III |   | 9,214,569             |   | 739,646                   |   | 29,454               |   |
| A.  Jones Yorke           |   | 9,215,207             |   | 739,646                   |   | 28,816               |   |
| Roger  D. Sack            |   | 9,215,207             |   | 739,646                   |   | 28,816               |   |
| Titus  W. Greene          |   | 9,214,569             |   | 739,646                   |   | 29,454               |   |
| Pat  Vezertzis            |   | 9,214,569             |   | 739,646                   |   | 29,454               |   |
| J.  Alan Cowart           |   | 8,756,799             |   | 739,646                   |   | 487,224              |   |

 

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The stockholder proposal,by the former President Victor F. Foti, to communicate all *bona fide* offers to the stockholders for avote, was defeated:

 
|                                                                            |   | **Shares  voted for** |   | **Shares  voted against** |   | **Shares  withheld** |   |
|---------------------------------------------------------------------------------|--------|-----------------------|--------|---------------------------|--------|----------------------|--------|
| Proposal  to communicate  all *bona fide*offers to the  stockholders for a vote |   | 1,031,852             |   | 7,047,207                 |   | 60,768               |   |

 

Item 5.             Other Information – N/A

 

Item 6.             Exhibits and Reports on Form 8-K:

 

(a)          Exhibits:

31.1 Section 302Certificate of Chief Executive Officer

31.2        Section 302 Certificate ofChief Financial Officer

32.1  Section 906 Officer’s Certification

32.2 Section 906Officer’s Certification

 

(b)         Reports on Form 8-K

Form 8-K, May 15, 2003

 

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# **SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.

 

 
|                        |   | **Austins  Steaks & Saloon, Inc.**               |
|-----------------------------|--------|------------------------------------------------------|
|                        |   |
|                        |   |
|                        | By:    | /s*/  James C.  Verney*                         |   |
|                        |   | James C. Verney                                      |
|                        |   | President and Chief  Executive Officer               |
|                        |   |
|                        | By:    | */s/  Robyn B. Mabe*                            |   |
|                        |   | Robyn B. Mabe                                        |
|                        |   | Chief Financial Officer  and Chief Operating Officer |
|                        |   |
|                        |   |
| Date:  August 14, 2003 |   |
|                             |        |                                                      |  |  |  |

 

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