U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

For the period ended June 30, 2002

 

 

For the transition period from                to              

 

Commission file number 0-25366

 

AUSTINS STEAKS & SALOON, INC.

(Exact name of small business issuer as specified in its charter)

 

 

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

 

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

 

 

AUSTINS STEAKS & SALOON, INC.

Form 10-Q Index

Six Months Ended June 30, 2002

 

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

 

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

AUSTINS STEAKS & SALOON, INC.

Consolidated Balance Sheets

June 30, 2002 and December 31, 2001

 

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

 

See accompanying notes to consolidated financial statements.

 

2

 

AUSTINS STEAKS & SALOON, INC.

Consolidated Statements of Operations

(Unaudited)

 

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

 

See accompanying notes to consolidated financial statements

 

3

 

AUSTINS STEAKS & SALOON, INC.

Consolidated Statement of Changes in Stockholders’ Equity

Six Months Ended June 30, 2002

(Unaudited)

 

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

 

See accompanying notes to consolidated financial statements.

 

4

 

AUSTINS STEAKS & SALOON, INC.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2002 and 2001

(Unaudited)

 

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

 

See accompanying notes to consolidated financial statements.

 

5

 

AUSTINS STEAKS & SALOON, INC.

 

Notes to Consolidated Financial Statements

 

June 30, 2002 and 2001

 

(Unaudited)

 

(1)                 Summary of Significant Accounting Policies

 

                (a)           Basis of Presentation

 

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

 

(2)                 Goodwill and Other Intangible Assets

 

The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002.  Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer systematically amortized but, instead, are reviewed for impairment and written down and charged to results of operations when their carrying amount exceeds their estimated fair value. The Company performed transitional 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-Lived Assets to be Disposed Of,” utilized an undiscounted cash flow approach for the initial impairment assessment, while SFAS No. 142 utilizes a fair value approach. The Company has one of its two reporting units with goodwill, which also are the Company's reportable segments. Goodwill was tested for impairment at the level of reporting unit. Based on the results of the transitional impairment tests, the fair value of the reporting unit supports the goodwill.  The Company is required to perform impairment tests each year, or between yearly tests in certain circumstances, for goodwill. There can be no assurance that future impairment tests will not result in a charge to earnings.

 

6

 

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

 

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

 

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

 

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

 

In accordance with SFAS No. 142, amortization expense for the six-month period ended June 30, 2002 was $336,598 Estimated amortization expense for each of the years ended December 31 is as follows:

 

 

7

 

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

 

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

 

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

 

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

 

(3)                 Earnings Per Share

 

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

 

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

 

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

 

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

 

(4)           Reportable Segments

 

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

 

Generally, the Company evaluates performance and allocates resources based on income from operations before income taxes and eliminations.  Administrative and capital costs are allocated to segments based upon predetermined rates or actual or estimated resource usage.  The Company accounts for intercompany sales and transfers as if the sales or transfers were with third parties and eliminates the related profit in consolidation.

 

Reportable segments are business units that provide different products or services.  Separate management of each segment is required because each business unit is subject to different operational issues and strategies.  Through June 30, 2002, all revenues for each business segment were derived from business activities conducted with customers located in the United States.  No single external customer accounted for 10 percent or more of the Company’s consolidated revenues.

 

9

 

The following table summarizes reportable segment information:

 

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

 

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

 

(5)                 Closed company operated stores expense

 

During the quarter ended June 30, 2002, management determined that the Company would not be renewing the lease, which expires on September 30, 2002, for the five company-operated stores located in the Louisiana market.  As a result of the anticipated closing of these stores, the Company has recorded closed company-operated stores expense during the three-months ended June 30, 2002 totaling approximately $1.03 million, including an impairment charge of $870,009 relating to equipment and leasehold improvements which will have no future use, accrued repairs and maintenance expense of $126,280 and accrued rent of $30,000.

 

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

 

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

 

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

 

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

 

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

 

Overview

 

The Company currently operates and franchises a total of 217 restaurants located in 24 states, including 14 Company-owned and 203 franchise restaurants.  The restaurants include a family steakhouse concept, a steak and buffet concept, and the casual dining steakhouse concept.

 

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

 

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

 

11

 

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

 

Results of Operations

 

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

 

The following table sets forth for the periods presented the percentage relationship to total revenues of certain items included in the consolidated statements of operations and certain restaurant data for the periods presented:

 

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

 

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

 

Revenues

 

Company-operated store revenues decreased $1.8 million (21.0%) to $6.7 million for the three-months ended June 30, 2002 as compared to $8.5 million for the comparable three-month period ended June 30, 2001.  Revenues for company-operated stores decreased $5.2 million (28.3%) to $13.2 million for the six-months ended June 30, 2002 as compared to $18.4 million for the comparable six-month period ended June 30, 2001. The three and six-month decrease over the prior period is primarily attributable to the consolidation of the Quincy operations in 2001, which had revenue of approximately $1.6 million for the six-months ended June 30, 2001 and the closing of under-performing company stores during 2001, and  the transfer of company operations to franchise units during the first quarter of 2002.

 

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

 

Costs and Expenses

 

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

 

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

 

Cost of franchise operations and other cost of operations increased as a percentage of total revenues to 6.8% and $559,000 for the three-months ended June 30, 2002 from 6.5% and $654,000 in 2001.   For the six-months ended June 30, 2002, cost of franchise operations and other cost of operations increased as a percentage of total revenues to 7.3% and $1.2 million and 5.5% and $1.2 million for the six-months ended June 30, 2001 The addition of the Quincy units did not effect these costs, but due to the increased sales did effect the percentages.

 

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

 

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

 

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

 

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

 

Other Income (Expense)

 

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

 

Income tax expense (benefit) is directly affected by the levels of pretax income (loss).  The Company’s effective tax rate of approximately 38.2% and 37.4% percent for the three and six-months ended June 30, 2002 is comparable to the rate of 36.4% and 38.4% for the same periods in 2001.

 

Liquidity and Capital Resources

 

As is customary in the restaurant industry, the Company has operated with negative working capital.  Historically, the Company has leased the majority of its restaurants and through a strategy of controlled growth has financed expansions from operating cash flow, proceeds from the sale of common stock, the utilization of the Company’s line of credit and long-term debt provided by various lenders.

 

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

 

The Company utilizes its existing line of credit to provide additional short-term funding.  Management constantly reviews 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. See, however, Item 5 for information relating to an impending effort by four dissident stockholders to remove and replace six of the current board of directors of the Company. The extent of the cost to be borne by the Company in this matter and the resultant affect upon its cash resources is not known at this time.

 

CRITICAL ACCOUNTING POLICIES

 

Franchise Revenue

 

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

 

Accounts and Notes Receivable and Allowance for Doubtful Accounts

 

In connection with franchise fees charged to our franchisees, we have accounts and notes receivable outstanding from our franchisees at any given time.  We review outstanding accounts and notes receivable monthly and record allowances for doubtful accounts as deemed appropriate for certain individual franchisees.  In determining the amount of allowance for doubtful accounts to be recorded, we consider the age of the receivable, the financial stability of the franchisee, discussions that may have been had with the franchisee and our judgement as to the overall collectibility of the receivable from that franchisee.

 

Franchise Royalty Contracts

 

Franchise royalty contracts are amortized on a straight-line basis over fifteen years, the estimated average life of the franchise agreements.  The Company assesses the recoverability of this intangible asset by determining whether the amortization of the franchise royalty contract balance over their remaining life can be recovered though undiscounted future operating cash flows of the acquired operation.  The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company’s average cost of funds.

 

Impact of Inflation

 

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

 

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Management believes the Company has historically been able to pass on increased costs through certain selected menu price increases and has offset increased costs by increased productivity and purchasing efficiencies, but there can be no assurance that the Company will be able to do so in the future.  Management anticipates that the average cost of restaurant real estate leases and construction cost could increase in the future which could affect the Company’s ability to expand.  In addition, mandated health care or additional increases in the federal or state minimum wages could significantly increase the Company’s costs of doing business.

 

Impact of Recently Issued Accounting Standards

 

The Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effective January 1, 2002.  Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer systematically amortized but, instead, are reviewed for impairment and written down and charged to results of operations when their carrying amount exceeds their estimated fair value.  The Company performed transitional 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-Lived Assets to be Disposed Of,” utilized an undiscounted cash flow approach for the initial impairment assessment, while SFAS No. 142 utilizes a fair value approach.  The Company has one of its two reporting units with goodwill, which also are the Company’s reportable segments.  Goodwill was tested for impairment at the level of reporting unit.  Based on the results of the transitional impairment tests, the fair value of the reporting unit supports the goodwill.  The Company is required to perform impairment tests each year, or between yearly tests in certain circumstances, for goodwill.  There can be no assurance that future impairment tests will not result in a charge to earnings.

 

The Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002.  SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.  SFAS No. 144 also requires companies to separately report discontinued operations and extends the reporting to 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 for sale.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.  The adoption of SFAS No. 144 did not have a significant impact on the consolidated financial statements or results of operations.

 

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities.  It nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).”  The principal difference between SFAS No.146 and Issue 94-3 relates to the recognition of a liability for a cost associated with an exit or disposal activity.  SFAS No. 146 requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework.  In contrast, under Issue 94-3. a company recognized a liability for an exit cost when it committed to an exit plan.  SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002.  Management does not expect the adoption of SFAS No. 146 to have a significant impact on the financial position, results of operations or cash flows of the Company.

 

Item 3.    Quantitative and Qualitative Disclosure about Market Risk

 

The Company does not engage in derivative financial instruments or derivative commodity instruments.  As of June 30, 2002, the Company’s financial instruments are not

 

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exposed to significant market risk due to foreign currency exchange risk or commodity price risk.  However, the Company is exposed to market risk related to interest rates.

 

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

 

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

 

EXPECTED MATURITY DATE

 

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

 

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PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings

 

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

 

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

 

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

 

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

 

 

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

 

Item 3.    Defaults Upon Senior Securities – N/A

 

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

 

 

 

 

 

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

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

 

*Mr. Titus Green resigned July 18, 2002.

 

 

 

Item 5.    Other Information – Dissident Group

 

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

 

Severance Matters

 

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

 

 

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

 

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

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SIGNATURES

 

 

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

 

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

 

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