U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

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

 

For the period ended June 30, 2003

 

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

 

For the transition period from               to               

 

Commission file number 0-25366

 

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No ý

 

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

 

 

AUSTINS STEAKS & SALOON, INC.

Form 10-Q Index

Six Months Ended June 30, 2003

 

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

 

2

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

AUSTINS STEAKS & SALOON, INC.

Consolidated Balance Sheets

June 30, 2003 and December 31, 2002

 

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

 

See accompanying notes to consolidated financial statements.

 

3

 

AUSTINS STEAKS & SALOON, INC.

Consolidated Statements of Operations

(Unaudited)

 

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

 

See accompanying notes to consolidated financial statements

 

4

 

AUSTINS STEAKS & SALOON, INC.

Consolidated Statement of Changes in Stockholders’ Equity

Six Months Ended June 30, 2003

(Unaudited)

 

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

 

See accompanying notes to consolidated financial statements.

 

5

 

AUSTINS STEAKS & SALOON, INC.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2003 and 2002

(Unaudited)

 

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

 

See accompanying notes to consolidated financial statements.

 

6

 

AUSTINS STEAKS & SALOON, INC.

 

Notes to Consolidated Financial Statements

 

 Six-Months Ended June 30, 2003 and 2002

 

(Unaudited)

 

(1)                                 General

 

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 America 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 because, among other things, the dining habits of the Company’s customers cannot be certain.  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 report on Form 10-K for the year ended December 31, 2002.

 

(2)                                 Goodwill and Other Intangible Assets

 

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

 

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

 

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

 

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

 

7

 

Amortizing Intangible Assets

 

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 contracts balance over their remaining life can be recovered through 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.

 

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

 

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

 

(3)                                 Earnings Per Share and Stock Option Plan

 

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 three-month and six-month periods ended June 30, 2003 and 2002 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, 2003
Net income – basic and diluted		$	317,961		12,150,099		0.03
Three-months ended June 30, 2002
Net loss – basic and diluted		$	(244,742	)	12,178,800		(0.02	)

 

8

 

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

 

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

 

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

 

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

 

10

 

(5)                                 Contingencies

 

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

 

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

 

Rent for the nine properties for the period from July 1, 2003 through December 31, 2005 (the end of the lease term) according to the payment schedule set out in the Agreements, would approximate $1.96 million.  However, as noted above, the Lessor has never delivered executed Agreements to the Company.  Accordingly, on May 15, 2003, the Company sent a letter to the Lessor, providing notice of the Company’s termination of any tenancies at-will on any remaining Former Quincy’s units effective May 31, 2003.

 

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

 

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

 

The Company is also a guarantor on three lease agreements for restaurants, which the Company originally operated, but which were sold in 2002.  The total monthly payments on these leases are $20,680 through September 30, 2012 and payments are due from the Company if the lessee is unable to fulfill its obligation to the lessor.  At June 30, 2003 it is not probable that the Company will be required to make payments under it guarantees.  Thus, no liability has been accrued related to the Company’s obligation under this agreement.

 

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 has collected insurance proceeds and cash payments from the Company.

 

Mr. Greenway filed a counterclaim against the Company, seeking to evict the Company from the five restaurant locations, from which the Company departed when the lease expired on September 30, 2002.

 

11

 

Mr. Greenway alleged that the Company failed to maintain the properties in first class condition.  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 filed a writ with the Louisiana Supreme Court, which was rejected.

 

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

 

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 on their claims regarding the condition and equipment of the premises, those costs would be approximately offset by the Company’s claims against lessors.  Management does not anticipate a material effect upon its financial condition, results of operations or liquidity as a result of this litigation.

 

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

 

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

 

Overview

 

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 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.

 

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

 

Results of Operations

 

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

 

12

 

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

 

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

 

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Revenues

 

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

 

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

 

Costs and Expenses

 

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

 

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

 

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

 

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

 

Depreciation and amortization expense was $137,000 less for the three-month period ended June 30, 2003 compared to the comparable period in 2002 and $269,000 less for the

 

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comparable six-month period then ended primarily due to closings of under-performing company-operated restaurants and retirement of their related long-lived assets.

 

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

 

Other Income (Expense)

 

Interest expense decreased $13,000 and $28,000 for the three and six-month periods ended June 30, 2003 versus the comparable periods in 2002, due to a lower average principal outstanding balance as well as lower interest rates in 2003.  Interest income fluctuates according to the levels of available cash balances.  The Company employs a cash management system whereby available balances are invested on an overnight basis.

 

Income Tax Expense (Benefit)

 

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

 

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 flows, the utilization of lines of credit and long-term debt provided by various lenders.

 

Cash flows provided by operating activities was $877,000 in 2003 compared to $542,000 in 2002. During 2003, net cash provided by operating activities consisted primarily of net income of $404,000 and depreciation and amortization of $628,000, partially offset by a decrease in accounts payable and accrued expenses of $450,000.  During 2002, net cash provided by operating activities consisted of $897,000 of depreciation and amortization, and impairment of property and equipment of $870,000, partially offset by a decrease in accounts payable and accrued expenses of $1.4 million.  Net cash provided by investing activities of $368,000 in 2003 consisted of proceeds of $414,000 from the sale of a parcel of land offset by expenditures related to property and equipment. During 2002, net cash used in investing activities of $114,000 was for expenditures related to property and equipment.  Net cash used in financing activities of  $649,000 in 2003 was primarily for repayment of long-term debt, offset by proceeds of $450,000 from the issuance of a note payable. During 2002, net cash used in financing activities was primarily due to an increase in the line of credit of $111,000, offset by payments of long-term debt and a decrease in bank overdrafts.

 

Management 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.

 

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.

 

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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 contracts 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.

 

Goodwill

 

Goodwill represents the excess of purchase price over fair value of net assets of businesses acquired.  The Company applies the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142.

 

Impact of Inflation

 

The impact of inflation on the costs of food and beverage product, labor and real estate can affect the Company’s operations.  Over the past few years, inflation has 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.

 

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 costs 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

 

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.  This Statement amends FASB Statement No. 123 Accounting for Stock-Based Compensation, to provide alternative methods of transition of voluntary change to the fair value method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financials statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results.  The adoption of the disclosure provisions of SFAS No. 148 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows of the Company.

 

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In November 2002, the FASB issued Interpretation (FIN) No. 45 Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of others, which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year end.  The adoption of FIN No. 45 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows of the Company.

 

In January 2003, the FASB issued Interpretation No. 46 Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.  This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation.  The Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003.  The application of this Interpretation did not have any impact on the Company’s consolidated financial position, results of operations or cash flows of the Company.

 

As of June 30, 2003, there are no other new accounting standards issued, but not yet adopted by the Company, which are expected to be applicable to the Company’s consolidated financial position, operating results or financial statement disclosures.

 

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, 2003, the Company’s financial instruments are not 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.

 

Debt obligations held for other than trading purposes at June 30, 2003 (dollars in thousands):

 

EXPECTED MATURITY DATE

 

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

 

Item 4.         Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Company’s Chief Operating Officer who is also the Company’s Chief Financial Officer.  Based upon their evaluation, the officers concluded that the Company’s disclosure controls and procedures are effective.  There have been no significant changes in the

 

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Company’s internal controls, or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its evaluation.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s President and Chief Executive Officer and the Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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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.

 

Mr. Greenway filed a counterclaim against the Company, seeking to evict the Company from the five restaurant locations, from which the Company to departed when the lease expired on September 30, 2002.  Mr. Greenway alleged that the Company failed to maintain the properties in first class condition.   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 filed a writ with the Louisiana Supreme Court, which was rejected.

 

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

 

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 on their claims regarding the condition and equipment of the premises, 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, results of operations, or liquidity 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 24, 2003, the following persons were elected to the Board of Directors:

 

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

 

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

 

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

 

Item 5.             Other Information – N/A

 

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

 

(a)          Exhibits:

31.1 Section 302 Certificate of Chief Executive Officer

31.2        Section 302 Certificate of Chief Financial Officer

32.1  Section 906 Officer’s Certification

32.2 Section 906 Officer’s Certification

 

(b)         Reports on Form 8-K

Form 8-K, May 15, 2003

 

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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.
	By:	/s/  James C. Verney
		James C. Verney
		President and Chief Executive Officer
	By:	/s/  Robyn B. Mabe
		Robyn B. Mabe
		Chief Financial Officer and Chief Operating Officer
Date:  August 14, 2003

 

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