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

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

 

**FORM 10-Q**

 

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIES EXCHANGEACT OF 1934**

 

**For the period ended March 31, 2002**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE**

**SECURITIES EXCHANGEACT**

 

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

 

**Commissionfile number 0-25366**

 

**AUSTINSSTEAKS & SALOON, INC.**

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

 

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

 

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

 

As of May 15, 2002, there were 12,178,800 shares of the issuer’s commonstock outstanding.

 

 

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**AUSTINSSTEAKS & SALOON, INC.**

**Form10-Q Index**

**ThreeMonths Ended March 31, 2002**

** **

 

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

 

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Balance Sheets

March 31, 2002 andDecember 31, 2001

 
|                                                                                                                            |   | **March 31,  2002** |       | **December 31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|------------------------|--------|
|                                                                                                                            |   | **(unaudited)**     |       |                   |   |
| **Assets**                                                                                                                      |   |                |       |                   |   |
| Current assets:                                                                                                                 |   |                |       |                   |   |
| Cash and cash  equivalents                                                                                                      |   | $                   | 86,277     |                   | $      | 449,075 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $158,142 in 2002 and  $148,142 in 2001                    |   | 1,211,005           |       | 1,269,549              |   |
| Current  installments of notes receivable                                                                                       |   | 254,423             |       | 208,734                |   |
| Other  receivables                                                                                                              |   | 240,807             |       | 261,855                |   |
| Inventories                                                                                                                     |   | 202,611             |       | 224,136                |   |
| Prepaid expenses                                                                                                                |   | 422,421             |       | 354,326                |   |
| Deferred income  taxes                                                                                                          |   | 143,967             |       | 143,967                |   |
| Total current  assets                                                                                                           |   | 2,561,511           |       | 2,911,642              |   |
| Notes  receivable, less allowance for doubtful accounts of $36,964 in 2002 and  $31,964 in 2001, excluding current installments |   | 135,898             |       | 148,756                |   |
| Property and  equipment, net                                                                                                    |   | 7,631,742           |       | 7,825,404              |   |
| Franchise  royalty contracts, net of accumulated amortization of $5,199,937 in 2002 and  $5,042,363 in 2001                     |   | 4,254,494           |       | 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 $167,046 in 2002 and $156,320 in  2001                              |   | 386,787             |       | 397,513                |   |
| Financing costs,  net of accumulated amortization of $58,389 in 2002 and $53,820 in 2001                                        |   | 131,914             |       | 136,483                |   |
| Deferred income  taxes                                                                                                          |   | 1,049,008           |       | 1,049,008              |   |
| Other assets,  net                                                                                                              |   | 269,017             |       | 276,187                |   |
|                                                                                                                            |   | $                   | 20,730,571 |                   | $      | 21,467,261 |   |
| **Liabilities and Stockholders’  Equity**                                                                                  |   |                |       |                   |   |
| Current  liabilities:                                                                                                           |   |                |       |                   |   |
| Bank overdraft                                                                                                                  |   | $                   | 88,898     |                   | $      | 412,166 |   |
| Credit line note  payable to bank                                                                                               |   | 500,000             |       | 389,105                |   |
| Note payable to  bank                                                                                                           |   | 300,000             |       | —                 |   |
| Current  installments of long-term debt                                                                                         |   | 462,298             |       | 506,919                |   |
| Accounts payable                                                                                                                |   | 1,912,656           |       | 2,628,371              |   |
| Income taxes  payable                                                                                                           |   | 168,168             |       | 40,383                 |   |
| Accrued expenses  and other                                                                                                     |   | 783,598             |       | 1,113,362              |   |
| Total current  liabilities                                                                                                      |   | 4,215,618           |       | 5,090,306              |   |
| Long-term debt,  excluding current installments                                                                                 |   | 4,492,687           |       | 4,594,468              |   |
| Total  liabilities                                                                                                              |   | 8,708,305           |       | 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                                                                                                              |   | 3,201,305           |       | 2,961,526              |   |
| Total  stockholders’ equity                                                                                                |   | 12,022,266          |       | 11,782,487             |   |
| Commitments and  contingencies                                                                                                  |   |                |       |                   |   |
|                                                                                                                            |   | $                   | 20,730,571 |                   | $      | 21,467,261 |   |

 

See accompanying notes toconsolidated financial statements.

 

2

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statementsof Operations

(Unaudited)

 
|                              |   | **Three Months  Ended March 31,** |       |
|-----------------------------------|--------|-----------------------------------|------------|
|                              |   | **2002**                          | ** ** | **2001** | ** ** |
| Revenues:                         |   |                              |       |   |   |
| Company-operated  stores          |   | $                                 | 6,452,377  |   | $ | 9,867,323 |   |
| Franchise  operations             |   | 1,361,818                         |       | 1,513,935 |   |
| Other                             |   | 115,026                           |       | 99,547 |   |
| Total revenues                    |   | 7,929,221                         |       | 11,480,805 |   |
|                              |   |                              |       |   |   |
| Costs and  expenses:              |   |                              |       |   |   |
| Cost of  company-operated stores  |   | 4,453,564                         |       | 6,914,762 |   |
| Cost of  franchise operations     |   | 519,332                           |       | 467,774 |   |
| Other cost of  operations         |   | 88,403                            |       | 74,723 |   |
| Restaurant  operating expenses    |   | 1,521,971                         |       | 2,317,123 |   |
| General and  administrative       |   | 405,529                           |       | 656,154 |   |
| Depreciation and  amortization    |   | 444,080                           |       | 578,665 |   |
| Total costs and  expenses         |   | 7,432,879                         |       | 11,009,201 |   |
| Income from  operations           |   | 496,342                           |       | 471,604 |   |
|                              |   |                              |       |   |   |
| Other income  (expense):          |   |                              |       |   |   |
| Interest expense                  |   | (133,884                          | )          | (175,235 | ) |
| Interest income                   |   | 7,144                             |       | 1,675 |   |
| Other                             |   | 18,462                            |       | 14,540 |   |
|                              |   | (108,278                          | )          | (159,020 | ) |
| Income before  income tax expense |   | 388,064                           |       | 312,584 |   |
|                              |   |                              |       |   |   |
| Income tax  expense               |   | 148,285                           |       | 127,050 |   |
| Net income                        |   | $                                 | 239,779    |   | $ | 185,534 |   |
| Earnings per  share:              |   |                              |       |   |   |
| Basic                             |   | .02                               |       | .02 |   |
| Diluted                           |   | .02                               |       | .02 |   |

 

See accompanying notes toconsolidated financial statements

 

3

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statement ofChanges in Stockholders’ Equity

Three Months Ended March31, 2002

(Unaudited)

 
|                         |   | **Common Stock** |   | **Additional  Paid-in  Capital** |    | **Retained  Earnings** |   | **Total** |   |
|------------------------------|--------|------------------|--------|----------------------------------|---------|------------------------|--------|-----------|--------|
| **Shares**                   |   | **Dollars**      |
|                         |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances,  December 31, 2001 |   | 12,178,800       |   | $                                | 121,788 |                   | $      | 8,699,173 |   | $ | 2,961,526 |   | $ | 11,782,487 |   |
|                         |   |             |   |                             |    |                   |   |      |   |   |   |
| Net income                   |   | —           |   | —                           |    | —                 |   | 239,779   |   | 239,779 |   |
|                         |   |             |   |                             |    |                   |   |      |   |   |   |
| Balances, March  31, 2002    |   | 12,178,800       |   | $                                | 121,788 |                   | $      | 8,699,173 |   | $ | 3,201,305 |   | $ | 12,022,266 |   |

 

See accompanying notes toconsolidated financial statements.

 

4

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**AUSTINSSTEAKS & SALOON, INC.**

Consolidated Statements of Cash Flows

Three Months Ended March31, 2002 and 2001

(Unaudited)

 
|                                                                           |   | **March** |    |
|--------------------------------------------------------------------------------|--------|-----------|---------|
|                                                                           |   | **2002**  |    | **2001** |   |
| Cash flows from  operating activities:                                         |   |      |    |   |   |
| Net income                                                                     |   | $         | 239,779 |   | $ | 185,534 |   |
| Adjustments to  reconcile net income to net cash used in operating activities: |   |      |    |   |   |
| Depreciation and  amortization of property and equipment                       |   | 271,211   |    | 280,044 |   |
| Amortization of  franchise royalty contracts,  goodwill  and other assets |   | 172,869   |    | 298,621 |   |
| Loss on disposal  of fixed assets                                              |   | —    |    | 1,601 |   |
| Provision for  bad debts                                                       |   | 15,000    |    | 15,000 |   |
| (Increase)  decrease in:                                                       |   |      |    |   |   |
| Trade accounts  receivable                                                     |   | 48,544    |    | 35,347 |   |
| Notes receivable                                                               |   | (37,831   | )       | 17,725 |   |
| Other  receivables                                                             |   | 21,048    |    | 286,917 |   |
| Inventories                                                                    |   | 21,525    |    | 416,066 |   |
| Prepaid expenses                                                               |   | (68,095   | )       | 9,939 |   |
| Other assets                                                                   |   | 7,170     |    | 122,795 |   |
| Increase  (decrease) in:                                                       |   |      |    |   |   |
| Accounts payable                                                               |   | (715,715  | )       | (946,918 | ) |
| Accrued expenses                                                               |   | (329,764  | )       | (2,071,715 | ) |
| Income taxes  payable                                                          |   | 127,785   |    | — |   |
|                                                                           |   |      |    |   |   |
| Net cash used in  operating activities                                         |   | (226,474  | )       | (1,349,044 | ) |
|                                                                           |   |      |    |   |   |
| Cash flows from  investing activities:                                         |   |      |    |   |   |
| Additions to  property and equipment                                           |   | (77,549   | )       | (57,200 | ) |
|                                                                           |   |      |    |   |   |
| Net cash used in  investing activities                                         |   | (77,549   | )       | (57,200 | ) |
|                                                                           |   |      |    |   |   |
| Cash flows from  financing activities:                                         |   |      |    |   |   |
| Net decrease in  bank overdraft                                                |   | (323,268  | )       | (239,155 | ) |
| Net increase in  credit line note payable                                      |   | 110,895   |    | 3,679 |   |
| Proceeds from  note payable                                                    |   | 300,000   |    | — |   |
| Proceeds from  long-term debt                                                  |   | —    |    | 1,410,000 |   |
| Payments on  long-term debt                                                    |   | (146,402  | )       | (341,611 | ) |
|                                                                           |   |      |    |   |   |
| Net cash  provided by (used in) financing activities                           |   | (58,775   | )       | 832,913 |   |
|                                                                           |   |      |    |   |   |
| Net decrease in  cash and cash equivalents                                     |   | (362,798  | )       | (573,331 | ) |
|                                                                           |   |      |    |   |   |
| Cash and cash  equivalents at beginning of period                              |   | 449,075   |    | 1,467,985 |   |
|                                                                           |   |      |    |   |   |
| Cash and cash  equivalents at end of period                                    |   | $         | 86,277  |   | $ | 894,654 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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**AUSTINSSTEAKS & SALOON, INC.**

 

Notes to ConsolidatedFinancial Statements

 

March 31, 2002 and 2001

 

(Unaudited)

 

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

 

***(a)******                                ******Basisof Presentation***

 

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

 

***(b)******                                ******Reclassifications***

 

Certain reclassificationshave been made to 2001 financial statement amounts to conform to the 2002presentation.

 

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

 

The Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets” effective January 1, 2002. Under SFAS No. 142, goodwill and intangible assets deemed to haveindefinite lives are no longer systematically amortized but, instead, arereviewed for impairment and written down and charged to results of operationswhen their carrying amount exceeds their estimated fair value. The Companyperformed transitional impairment tests on its goodwill. The previous methodfor determining impairment prescribed by SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”utilized an undiscounted cash flow approach for the initial impairmentassessment, while SFAS No. 142 utilizes a fair value approach. The Company hasone of its two reporting units with goodwill, which also are the Company’sreportable segments. Goodwill was tested for impairment at the level 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

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The following table reconciles the reported net incomeand earnings per share before accounting change to that which would haveresulted for the three months-ended March 31, 2001 if SFAS No. 142 had beenadopted effective January 1, 2001:

 
| Reported net income                    |   | $      | 185,534 |   |
|----------------------------------------|--------|--------|---------|--------|
| Goodwill amortization, net of tax      |   | 79,274 |    |
| Adjusted  earnings                     |   | $      | 264,808 |   |
|                                   |   |   |    |
| Basic and  diluted earnings per share: |   |   |    |
| Reported net  earnings                 |   | $      | 0.02    |   |
| Goodwill  amortization, net of tax     |   | — |    |
| Adjusted net  earnings per share       |   | $      | 0.02    |   |

 

Intangible assets otherthan goodwill at March 31, 2002 and December 31, 2001 consisted of thefollowing:

 
|                                        |   | **Gross  Carrying Amount** |       | **Accumulated  Amortization** |   | **Net  Carrying Amount** |   |
|---------------------------------------------|--------|----------------------------|------------|-------------------------------|--------|--------------------------|--------|
| As of March 31, 2002                        |   |                       |       |                          |   |                     |   |
|                                        |   |                       |       |                          |   |                     |   |
| Intangible  assets subject to amortization: |   |                       |       |                          |   |                     |   |
|                                        |   |                       |       |                          |   |                     |   |
| Franchise  royalty contracts                |   | $                          | 9,454,431  |                          | $      | 5,199,937                |   | $ | 4,254,494 |   |
| Favorable lease  rights                     |   | 553,833                    |       | 167,046                       |   | 386,787                  |   |
| Total                                       |   | $                          | 10,008,264 |                          | $      | 5,366,983                |   | $ | 4,641,281 |   |
|                                        |   |                       |       |                          |   |                     |   |
| 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 three-month period ended March 31, 2002 was $168,300.  Estimated amortization expense for each ofthe 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

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The changes in the net carrying amount of goodwill, byreporting segment, for the three months ended March 31, 2002 are as follows:

 
| **Segment**              |   | **Goodwill  at  January 1, 2002** |      | **Impairment  losses** |   | **Goodwill  at  March 31, 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 three months ended March 31, 2001 are as follows:

 
| **Segment**              |   | **Goodwill  at  January 1, 2001** |      | **Amortization** |   | **Goodwill  at  March 31, 2001** |   |
|--------------------------|--------|-----------------------------------|-----------|------------------|--------|----------------------------------|--------|
|                     |   |                              |      |             |   |                             |   |
| Company-operated  stores |   | $                                 | 4,765,121 |             | $      | 113,730                          |   | $ | 4,651,391 |   |
| Franchise  operations    |   | —                            |      | —           |   | —                           |   |
| Total                    |   | $                                 | 4,765,121 |             | $      | 113,730                          |   | $ | 4,651,391 |   |

 

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

 

Basic earnings per share excludes dilution and iscomputed by dividing income available to common stockholders by theweighted-average number of common shares outstanding for the period.  Diluted earnings per share reflects 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 stockwere not included in computing diluted earnings per share for the three-monthperiods ended March 31, 2002 and 2001 because these 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  (Numerator)** |    | **Weighted  AverageShares  (Denominator)** |       | **EarningsPer Share  Amount** |   |
|----------------------------------------|--------|-------------------------|---------|--------------------------------------------|------------|-------------------------------|--------|
| **Three-months  ended March 31, 2002** |   |                    |    |                                       |       |                          |   |
|                                   |   |                    |    |                                       |       |                          |   |
| Net income - basic and diluted         |   | $                       | 239,779 |                                       | 12,178,800 |                          | 0.02   |   |
|                                   |   |                    |    |                                       |       |                          |   |
| **Three-months ended March 31, 2001**  |   |                    |    |                                       |       |                          |   |
|                                   |   |                    |    |                                       |       |                          |   |
| Net income - basic and diluted         |   | $                       | 185,534 |                                       | 12,079,900 |                          | 0.02   |   |

 

8

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**(4)           Reportable Segments**

 

The Company hasdefined two reportable segments: Company-operated restaurants and franchisingand other.  The Company-operatedrestaurant segment consists of the operations of all Company-operated restaurantsand derives its revenues from the operations of “WesterN SizzliN Steakhouse,”“Great American Steak & Buffet,” “WesterN SizzliN Wood Grill,” “Quincy’sSteakhouse and “Austins Steaks & Saloon.” The franchising and other segment consists of franchise sales andsupport activities and derives its revenues from sales of franchise anddevelopment rights and collection of royalties 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.

 

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 March 31, 2002,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.

 

The following table summarizes reportable segmentinformation:

 
|                                |   | **Three-months  Ended March 31,** |   |
|-------------------------------------|--------|-----------------------------------|--------|
|                                |   | **2002**                          |   | **2001** |   |
|                                |   |                              |   |   |   |
| Revenues from reportable segments:  |   |                              |   |   |   |
| Restaurants                         |   | 6,452,377                         |   | 9,867,323 |   |
| Franchising and other               |   | 1,476,844                         |   | 1,613,482 |   |
|                                |   |                              |   |   |   |
| Total revenues                      |   | 7,929,221                         |   | 11,480,805 |   |
|                                |   |                              |   |   |   |
| Depreciation and amortization:      |   |                              |   |   |   |
| Restaurants                         |   | 258,606                           |   | 389,816 |   |
| Franchising and other               |   | 185,474                           |   | 188,849 |   |
|                                |   |                              |   |   |   |
| Total depreciation and amortization |   | 444,080                           |   | 578,665 |   |
|                                |   |                              |   |   |   |
| Interest  expense:                  |   |                              |   |   |   |
| Restaurants                         |   | 124,031                           |   | 150,926 |   |
| Franchising and other               |   | 9,853                             |   | 24,309 |   |
|                                |   |                              |   |   |   |
| Total interest expense              |   | 133,884                           |   | 175,235 |   |
|                                |   |                              |   |   |   |
| Interest income:                    |   |                              |   |   |   |
| Restaurants                         |   | 6,581                             |   | 1,675 |   |
| Franchising and other               |   | 563                               |   | — |   |
|                                |   |                              |   |   |   |
| Total interest income               |   | 7,144                             |   | 1,675 |   |
|                                |   |                              |   |   |   |
| Income (loss) before income taxes:  |   |                              |   |   |   |
| Restaurants                         |   | (45,770                           | )      | (332,097 | ) |
| Franchising and other               |   | 433,834                           |   | 644,681 |   |
|                                |   |                              |   |   |   |
| Total income before income taxes    |   | 388,064                           |   | 312,584 |   |

 

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|                                |   | **March 31,  2002** |       | **March 31,  2001** |       |
|-------------------------------------|--------|---------------------|------------|---------------------|------------|
| Gross fixed assets:                 |   |                |       |                |       |
| Restaurants                         |   | 12,150,784          |       | 11,150,968          |       |
| Franchising and other               |   | 1,552,735           |       | 1,393,970           |       |
|                                |   |                |       |                |       |
| Total gross fixed assets            |   | $                   | 13,703,519 |                | 12,544,938 |   |
|                                |   |                |       |                |       |
| Expenditures for fixed assets:      |   |                |       |                |       |
| Restaurants                         |   | 62,750              |       | 1,603               |       |
| Franchising and other               |   | 14,799              |       | 55,597              |       |
|                                |   |                |       |                |       |
| Total expenditures for fixed assets |   | $                   | 77,549     |                | 57,200     |   |

 

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

 

**Overview**

 

The Company currently operates and franchises a totalof 226 restaurants located in 24 states, including 14 Company-owned and 212franchise restaurants.  The restaurantsinclude a family steakhouse concept, a steak and buffet concept, and the casualdining steakhouse concept.

 

During June 2000, the Company negotiated a short-termlease agreement with Franchise Finance Corporation of America (FFCA).  Under the short-term lease agreement, theCompany leased and operated 97 Quincy Steakhouses, owned by FFCA.  In December 2000, the Company closed 44 of

 

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the restaurants. Of the 53 restaurants that remained open at December 31, 2000, 43restaurants were franchised during the first quarter of 2001, with theremaining 10 restaurants closing during the first quarter of 2001.  At the end of the first quarter of 2001, noQuincy Steakhouses remained as Company-owned restaurants.

 

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; availabilityof capital; success of operating initiatives and marketing and promotionalefforts; and changes in accounting policies. In addition, the Company disclaims any intent or obligation to updatethose forward-looking statements.

 

###### **Results ofOperations**

 

Net income for the three-month period ended March 31,2002 was $239,779 as compared to $185,534 for the three-month period endedMarch 31, 2001.  The Quincy operationshad a net loss of $41,026 for the three-months ended March 31, 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 March 31,** |   |
|----------------------------------|--------|-----------------------------------|--------|
|                             |   | **2002**                          |   | **2001** |   |
| Revenues:                        |   |                              |   |   |   |
| Company-operated stores          |   | 81.4                              | %      | 85.9 | % |
| Franchise royalties and fees     |   | 17.2                              |   | 13.2 |   |
| Other sales                      |   | 1.4                               |   | 0.9 |   |
| Total revenues                   |   | 100.0                             |   | 100.0 |   |
|                             |   |                              |   |   |   |
| Costs and expenses:              |   |                              |   |   |   |
| Cost of Company-operated stores  |   | 56.2                              |   | 60.2 |   |
| Cost of franchise operations     |   | 6.5                               |   | 4.1 |   |
| Other cost of operations         |   | 1.1                               |   | 0.7 |   |
| Restaurant operating expenses    |   | 19.2                              |   | 20.2 |   |
| General and administrative       |   | 5.1                               |   | 5.7 |   |
| Depreciation and amortization    |   | 5.6                               |   | 5.0 |   |
| Total costs and expenses         |   | 93.7                              |   | 95.9 |   |
|                             |   |                              |   |   |   |
| Income from operations           |   | 6.3                               |   | 4.1 |   |
|                             |   |                              |   |   |   |
| Other income (expense)           |   | (1.4                              | )      | (1.4 | ) |
|                             |   |                              |   |   |   |
| Income before income tax expense |   | 4.9                               |   | 2.7 |   |
|                             |   |                              |   |   |   |
| Income tax expense               |   | 1.9                               |   | 1.1 |   |
| Net income                       |   | 3.0                               | %      | 1.6 | % |

 

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|                                    |   | **Three-Months  Ended March 31,** |   |
|-----------------------------------------|--------|-----------------------------------|--------|
|                                    |   | **2002**                          |   | **2001** |   |
|                                    |   |                              |   |   |   |
| **Restaurant Data**                     |   |                              |   |   |   |
| Number of Company-Operated Restaurants: |   |                              |   |   |   |
| Beginning of period                     |   | 17                                |   | 23 |   |
| Opened                                  |   | —                            |   | — |   |
| Closed                                  |   | —                            |   | 2 |   |
| Franchised                              |   | 3                                 |   | — |   |
| End of period                           |   | 14                                |   | 21 |   |
| Number of Quincy-operated Restaurants:  |   |                              |   |   |   |
| Beginning of period                     |   | 0                                 |   | 53 |   |
| Opened                                  |   | —                            |   | — |   |
| Closed                                  |   | —                            |   | 10 |   |
| Franchised                              |   | —                            |   | 43 |   |
| End of period                           |   | 0                                 |   | 0 |   |
| Number of U.S. Franchised Restaurants:  |   |                              |   |   |   |
| Beginning of period                     |   | 215                               |   | 198 |   |
| Opened                                  |   | 4                                 |   | 43 |   |
| Closed                                  |   | 7                                 |   | 1 |   |
| End of period                           |   | 212                               |   | 240 |   |

 

###### **Revenues**

 

Company-operated storerevenues decreased $3.4 million (34.6 percent) to $6.5 million for thethree-months ended March 31, 2002 as compared to $9.9 million for thecomparable three-month period ended March 31, 2001.  The three-month decrease over the prior period is primarilyattributable to the consolidation of the Quincy operations in 2001, which hadrevenue of approximately $1.6 million, and the closing of four under-performingstores after March 31, 2001, which contributed $1.0 million in revenues duringthe first quarter ended March 31, 2001 and the franchising of three additionalCompany stores on February 1, 2002 which contributed $0.8 million in revenuesduring February and March of 2001.

 

Franchise and otherrevenues decreased 8.5 percent to $1.5 million for the three-months ended March31, 2002 as compared to $1.6 million for the comparable three-month periodended March 31, 2001.  The decrease isattributable to less franchised stores in the system at March 31, 2002 ascompared to March 31, 2001 and the franchising of the Quincy stores in thefirst quarter of 2001 which resulted in initial franchise fees of $134,000.

 

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

 

Cost of Company-operatedstores, consisting of food, beverage, and employee costs decreased $2.4 million(35.6 percent) for the three-months ended March 31, 2002 from $6.9 million in2001 to $4.5 million in 2002 and as a percentage of total revenues from 60.2%in 2001,

 

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to 56.2% in 2002. The decrease is due to the Quincy operations during 2001 and the resultof less Company stores in 2002 due to the closing of under-performing storesafter March 31, 2001 and the franchising of three additional stores on February1, 2002.  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 increased as a percentage of totalrevenues to 7.6% and $608,000 for the three-months ended March 31, 2002 from4.8% and $542,000 in 2001.  The additionof the Quincy units did not effect these costs, but due to the increased salesdid effect the percentages.

 

Restaurant operatingexpenses, which include utilities, insurance, maintenance, rent and other suchcosts of the Company-operated stores, decreased $0.8 million (34.3 percent) forthe three-months ended March 31, 2002 over prior year’s comparable period.  The majority of the decrease is due to theoperation of the Quincy stores in 2001 and the closing and franchising ofCompany-operated stores during 2001 and the first month of 2002.  These expenses as a percentage of totalrevenues decreased slightly to 19.2% in 2002 compared to 20.2% in 2001 for thethree-months ended March 31.

 

General andadministrative expenses decreased as a percentage of total revenue to 5.1% in2002 compared to 5.7% in 2001. The decrease is due to the operation of theQuincy stores during the first quarter of 2001 and the closing and franchisingof Company stores during 2001 and first quarter of 2002.

 

Depreciation andamortization expense is $135,000 less for the three-months ended March 31, 2002compared to 2001 primarily due to closings of under performing Company-operatedrestaurants and retirement of their related long-lived assets and thediscontinuance of goodwill amortization effective January 1, 2002.  Goodwill amortization totaled $114,000 forthe three-months ended March 31, 2001.

 

**Other Income (Expense)**

 

Interest expensedecreased $41,000 comparing the periods ended March 31, 2002 and 2001 due to alower average principal outstanding balance comparing the respective periodsand to lower interest rates in 2002. Interest income fluctuates according to the levels of available andinvestable cash balances.  The Companyemploys a cash management system whereby available balances are invested on anovernight basis.

 

Income tax expense isdirectly affected by the levels of pretax income.  The Company’s effective tax rate of approximately 38.2 percentfor the three-months ended March 31, 2002 is comparable to the rate of 40.6 percentin 2001.

###### ** **

###### **Liquidity andCapital 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 used inoperating activities were $226,000 in 2002 compared to cash used in operatingactivities of $1,349,000 in 2001.  For2002 cash flows used in operations were primarily due to a $1.0 milliondecrease in accounts payable and accrued expenses, offset by net income of$240,000 and $444,000 in depreciation and amortization.  For 2001 cash flows used by operations wereprimarily due to a $3.0 million decrease in accounts payable and accruedexpenses offset by

 

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net income of $186,000, depreciation and amortizationof $579,000 and a decrease in receivables, and inventories totaling$756,000.  Net cash used by investingactivities of $78,000 in 2002 and $57,000 in 2001, was for expenditures relatedto property and equipment.  Net cashused by financing activities of $59,000 in 2002 was primarily for repayment oflong-term debt offset by proceeds from short-term borrowings of $300,000.

 

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**

 

## **Franchise Revenue**

 

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

 

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

 

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

 

**Franchise Royalty Contracts**

 

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

 

###### **Impact ofInflation**

 

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

 

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.

#####  

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##### **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.  The Company has one of itstwo reporting units with goodwill, which also are the Company’s reportablesegments.  Goodwill was tested forimpairment at the level of reporting unit. Based on the results of the transitional impairment tests, the fairvalue of the reporting unit supports the goodwill.  The Company is required to perform impairment tests each year, orbetween yearly tests in certain circumstances, for goodwill.  There can be no assurance that futureimpairment tests will not result in a charge to earnings.

 

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

 

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

 

The Company does notengage in derivative financial instruments or derivative commodity instruments.  As of March 31, 2002, the Company’sfinancial instruments are not exposed to significant market risk due to foreigncurrency exchange risk or commodity price risk.  However, the Company is exposed to market risk related tointerest rates.

 

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

 

15

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Debt obligations held forother than trading purposes at March 31, 2002 (dollars in thousands):

#### ** **

#### **EXPECTED MATURITYDATE**

 
|                     |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Estimated  Fair Value** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|---------------------------|--------|
| Credit Line Note Payable |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Variable Rate            |   | $        | 500    |     | — |     | — |     | — |     | — |           | — |      | $      | 500                       |   | $ | 500 |   |
| Average Interest  Rate   |   | 4.75     | %      | —   |   | —   |   | —   |   | —   |   | —         |   | 4.75      | %      |                      |   |
| Note Payable to  Bank    |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Variable Rate            |   | $        | 300    |     | — |     | — |     | — |     | — |           | — |      | $      | 300                       |   | $ | 300 |   |
| Average Interest  Rate   |   | 4.75     | %      | —   |   | —   |   | —   |   | —   |   | —         |   | 4.75      | %      |                      |   |
| Long-term debt           |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |                      |   |
| Fixed Rate               |   | $        | 361    |     | $      | 520      |   | $        | 538    |     | $      | 505            |   | $         | 522    |                      | $      | 2,509 |   | $ | 4,955 |   | $ | 5,864 |   |
| Average Interest  Rate   |   | 9.94     | %      | 9.94     | %      | 9.94     | %      | 9.94     | %      | 9.94     | %      | 10.06          | %      | 10.00     | %      |                      |   |
|                          |        |          |        |          |        |          |        |          |        |          |        |                |        |           |        |                           |        |  |  |  |  |  |  |  |  |

 

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**PARTII. OTHER INFORMATION**

 

 

Item 1.    LegalProceedings – N/A

 

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

 

Item 3.    DefaultsUpon Senior Securities – N/A

 

Item 4.    Submissionof Matters to a Vote of Security Holders – N/A

 

Item 5.    OtherInformation – N/A

 

Item 6.    Exhibitsand Reports on form 8-K:

 

(a)          Exhibits:

None

 

(b)         Reports on Form 8-K

None

 

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# **SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned hereunto dulyauthorized.

 
|   |         |   |   | **Austins  Steaks & Saloon, Inc.** |                    |
|--------|--------------|--------|--------|----------------------------------------|-------------------------|
|   |         |   |   |                                   |                    |   |
|   |         |   |   |                                   |                    |   |
|   |         |   |   |                                   |                    |   |
| Date:  | May 13, 2002 |   |   | By:                                    | /s/Robyn B. Mabe        |   |
|   |         |   |   |                                   | Robyn B. Mabe           |   |
|   |         |   |   |                                   | Chief Financial Officer |   |

 

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