U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
[ ] Transition report under Section 13 or 15 (d) of the Exchange Act
For the Transition period from _____________________ to ________________________
Commission file number 0-92402
ON STAGE ENTERTAINMENT, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 88-0214292
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4625 W. NEVSO DRIVE, LAS VEGAS, NEVADA 89103
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (ZIP CODE)
(702) 253-1333
Issuer's Telephone Number, Including Area Code
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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 [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at November 1, 1997
- ----------------------------- -------------------------------
Common Stock, $0.01 par value 6,584,480
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Balance Sheets....................................
Statements of Operations..........................
Statements of Cash Flow...........................
Notes to Financial Statements.....................
Item 2. Management's Discussion and Analysis Of Financial
Condition and Results of Operations ...............
Part II. Other Information
Item 1. Legal Proceedings..................................
Item 2. Changes in Securities..............................
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...................
Signatures........................................................
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
September 30,
December 31, 1997
1996 (Unaudited)
------------ -------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ....................................... $ 290,751 $ 3,593,277
Accounts receivable ............................................. 490,465 674,799
Inventory ....................................................... 67,853 90,861
Deposits ........................................................ 231,601 462,679
Prepaid and other assets ........................................ 236,295 533,023
Pre-opening costs, net .......................................... 129,180 543,482
----------- -----------
Total current assets ................................... 1,446,145 5,898,121
----------- -----------
Property, equipment and leasehold improvements ........................ 3,725,941 4,804,832
Less: Accumulated depreciation and amortization ...................... (1,937,718) (2,407,141)
----------- -----------
Property, equipment and leasehold improvements, net ................... 1,788,223 2,397,691
----------- -----------
Cost in excess of net assets acquired, net of accumulated amortization
of $1,053 and $5,791 .............................................. 62,123 57,385
Offering costs ........................................................ 657,801 --
----------- -----------
$ 3,954,292 $ 8,353,197
=========== ===========
Liabilities and Stockholder's Equity (Deficit)
Current liabilities
Accounts payable and accrued expenses ............................. $ 599,045 $ 781,374
Accrued payroll and other liabilities ............................. 621,986 643,712
Litigation settlement accrual ..................................... 100,000 --
Current maturities of long-term debt .............................. 228,510 346,534
----------- -----------
Total current liabilities ............................ 1,549,541 1,771,620
DYDX LP Loan .......................................................... 750,000 --
Long-term debt, less current maturities ............................... 1,877,391 617,959
Commitments and contingencies
Stockholder's equity (deficit)
Preferred stock, par value $1 per share, 1,000,000 shares
authorized; none issued and outstanding ...................... -- --
Common stock, par value $0.01 per share; authorized 25,000,000
shares; 4,002,044 and 6,584,480 shares issued and outstanding 40,020 66,375
Additional paid-in-capital ............................................ 121,024 7,240,504
Accumulated deficit .............................................. (383,684) (1,343,261)
----------- -----------
Total stockholder's equity (deficit) ....................... (222,640) 5,963,618
----------- -----------
$ 3,954,292 $ 8,353,197
=========== ===========
</TABLE>
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
Three months ended
September 30,
--------------------------
1996 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Net revenues ................................................. $ 4,591,738 $ 5,070,727
Direct production costs ...................................... 1,630,146 2,288,531
Indirect production costs .................................... 649,541 1,182,281
----------- -----------
Gross profit ................................................. 2,312,051 1,599,915
----------- -----------
Operating expenses
Selling, general and administrative .................. 758,406 1,091,304
Depreciation and amortization ........................ 251,376 282,707
Principal stockholder compensation ................... 62,500 284,021
----------- -----------
Total operating expenses .................. 1,072,282 1,658,032
----------- -----------
Operating income (loss) ...................................... 1,239,769 (58,117)
Interest expense, net of interest income of $311 and $24,578 . 68,392 681,084
----------- -----------
Net income (loss) before income taxes ....................... 1,171,377 (739,201)
Income taxes ................................................. 1,963 3,644
----------- -----------
Net income (loss) ............................................ $ 1,169,414 $ (742,845)
=========== ===========
Net income (loss) per share .................................. $ 0.29 $ (0.13)
=========== ===========
Weighted average number of common and common equivalent shares 4,112,643 5,675,235
=========== ===========
</TABLE>
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
Nine months ended
September 30,
---------------------------
1996 1997
(Unaudited) (Unaudited)
------------ -----------
<S> <C> <C>
Net revenues .................................................. $ 11,204,673 $ 11,769,189
Direct production costs ....................................... 4,577,019 5,593,058
Indirect production costs ..................................... 1,716,521 2,350,506
------------ ------------
Gross profit .................................................. 4,911,133 3,825,625
------------ ------------
Operating expenses
Selling, general and administrative ................... 2,066,683 2,913,307
Depreciation and amortization ......................... 545,244 601,816
Principal stockholder compensation .................... 187,500 409,021
------------ ------------
Total operating expenses ................... 2,799,427 3,924,144
------------ ------------
Operating income (loss) ...................................... 2,111,706 (98,519)
Interest expense, net of interest income of $1,722 and $27,576 202,084 855,095
------------ ------------
Net income (loss) before income taxes ......................... 1,909,622 (953,614)
Income taxes .................................................. 5,982 5,963
------------ ------------
Net income (loss) ............................................. $ 1,903,640 $ (959,577)
============ ============
Net income (loss) per share ................................... $ 0.46 $ (0.20)
============ ============
Weighted average number of common and common equivalent shares 4,112,643 4,807,972
============ ============
</TABLE>
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
Nine months ended
September 30,
--------------------------
1996 1997
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ....................................................... $1,903,640 $ (959,577)
---------- ----------
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization ......................................... 488,020 511,990
Interest paid in common stock ......................................... -- 194,228
Issuance of Common Stock to CFO ....................................... -- 162,129
Non-cash interest ..................................................... -- 444,000
Forgiveness of note receivable from stockholder ...................... -- 221,521
Increase (decrease) from changes in operating assets and
liabilities
Accounts receivable ................................. (137,906) (184,334)
Inventory ........................................... (28,294) (23,008)
Offering costs ...................................... (354,263) --
Deposits ............................................ (69,118) (231,078)
Pre-opening costs ................................... (33,052) (452,131)
Prepaid and other assets ............................ (154,013) (296,728)
Accounts payable and accrued expenses ............... 67,009 182,329
Accrued payroll and other liabilities ............... 312,901 21,726
Litigation settlement accrual ....................... -- (100,000)
----------- -----------
Total adjustments ..................................................... 91,284 450,644
----------- -----------
Net cash provided by (used in) operating activities ............................ 1,994,924 (508,933)
----------- -----------
Cash used in investing activities
Advances on note receivable from stockholder .......... (420,039) (221,521)
Capital expenditures .................................. (1,052,254) (506,235)
----------- -----------
Net cash used in investing activities .......................................... (1,472,293) (727,756)
----------- -----------
Cash used in financing activities
Repayments under line of credit ....................................... (200,000) --
Proceeds from short-term borrowing .................................... 196,462 --
Proceeds from long-term borrowing ..................................... 1,000,000 --
Repayments on long-term borrowing ..................................... (377,577) (750,000)
Proceeds from Bridge Notes ............................................ -- 875,000
Payments of Bridge Notes .............................................. -- (875,000)
Net proceeds from sale of common stock and warrants ................... -- 5,289,215
---------- -----------
Net cash provided by financing activities ...................................... 618,885 4,539,215
---------- -----------
Net increase in cash and cash equivalents ..................................... 1,141,516 3,302,526
Cash and cash equivalents at beginning of period .............................. 20,098 290,751
---------- ----------
Cash and cash equivalents at end of period .................................... $1,161,614 $3,593,277
========== ==========
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest ............................................................... $ 221,664 $ 218,879
Taxes .................................................................. $ 5,982 $ 5,963
</TABLE>
<PAGE>
Supplemental schedule of non-cash investing and financing activities
During the nine months ended September 30, 1996 and 1997, $307,000 and $704,000
of lease assets and obligations were capitalized, respectively.
During the nine months ended September 30, 1997, On Stage Entertainment, Inc., a
Nevada corporation , borrowed an aggregate of $1,000,000 from 21 private
investors, in return for which the Company issued to such investors unsecured
non-negotiable notes payable, which accrued interest at an annual rate of 9% and
which matured upon the consummation the initial public offering (the "Bridge
Notes"), Common Stock and warrants (collectively, the "Bridge Financing"). The
Common Stock issued in connection with the Bridge Financing was valued at
$440,000. As no consideration was paid for the Common Stock, this amount is
considered an original issue discount and amortized over the term of the Bridge
Notes.
During the nine months ended September 30, 1997, the Company exchanged all of
its outstanding warrants for 440,755 shares of Common Stock, which had no effect
on the Company's earnings.
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30,1997
(1) Basis of Presentation
The financial statements included herein include the accounts of On Stage
Entertainment, Inc. ("the Company") and its subsidiaries, Legends in Concert
Inc., a Nevada corporation; On Stage Marketing, Inc., a Nevada corporation; and
Interactive Events, Inc., a Georgia corporation. In the opinion of the Company's
management, all adjustments considered necessary for fair presentation have been
reflected in the financial statements. These adjustments are of a normal,
recurring nature. Operating results for the three and nine months ended
September 30, 1997, are not necessarily indicative of those expected for the
full year. Certain prior year amounts have been adjusted and reclassified to
conform to the 1997 presentation.
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and the rules and
regulations of the Securities and Exchange Commission. These consolidated
financial statements have been prepared under the presumption that users of the
interim consolidated financial information have either read or have access to
the Company's audited financial statements and footnotes thereto for the year
ended December 31, 1996, included in Amendment No. 5 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-24681) filed with the
Securities and Exchange Commission on August 13, 1997 ("Amendment No. 5").
Accordingly, footnote disclosures, which would substantially duplicate the
disclosures contained in the Company's December 31, 1996, audited financial
statements, have been omitted from these interim consolidated financial
statements. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such
instructions. Although the Company believes that the disclosures are adequate to
make the information presented not misleading, it is suggested that these
unaudited interim consolidated financial statements be read in conjunction with
the audited consolidated financial statements and the notes thereto for the year
ended December 31,1996, included in Amendment No. 5.
(2) Initial Public Offering
On August 13, 1997, the Company completed an initial public offering of
1,400,000 shares of Common Stock at $5.00 per share and redeemable warrants to
purchase 1,610,000 shares of Common Stock at $0.10 per Warrant (the "IPO"). The
net proceeds to the Company of the offering after underwriting discounts and
commissions, was approximately $6,270,070.
(3) Computation of Net Income (Loss) Per Common and Common Equivalent Share
Loss per share data is based upon the weighted average number of common shares
and dilutive common equivalent shares outstanding. Common equivalent shares
result from the assumed exercise of outstanding stock options and warrants that
have a dilutive effect when applying the treasury stock method. Common stock
issued by the Company at a price less than the initial public offering price
during the twelve months immediately preceding the initial filing of the
offering together with common stock options and convertible debt issued during
such period with an exercise price less than the IPO price, are treated as
outstanding for all periods presented. Except where the provisions of the
Securities and Exchange Commission's Staff Accounting Bulletin No. 83 are
applicable, common share equivalents have been excluded in all years presented
in the Statements of Operations when the effect of their inclusion would be
anti-dilutive.
(4) Commitments and Contingencies
On September 19, 1997, the Company entered into an agreement for the lease of a
500-seat dinner theater located in the Castillo Del Mar Resort in Miami,
Florida, commencing on January 1, 1998 (the "Miami Lease"). The Miami Lease is a
triple net lease under which the Company will operate its flagship Legends in
Concert(R) production, a live tribute show featuring recreations of past and
present music and motion picture superstars through the use of impersonators
("Legends"). The Legends show will be performed under a four-wall, at-risk
financial structure (as defined below), in accordance with the Company's
business plan. The term of the Miami Lease is for five years, subject to certain
tenant improvement costs and minimum attendance goals. The Miami Lease provides
for a monthly rent of approximately $12,000, which may be paid by means of "rent
credits" whereby all expenditures the Company makes in renovating the theater
are offset against monthly rent payments on a dollar for dollar basis.
<PAGE>
The Company is a party to various legal proceedings in which the adverse parties
are seeking damages from the Company. While there can be no assurance that any
of the instituted or threatened lawsuits will be settled or decided in favor of
the Company, the management of the Company does not believe the final resolution
of these matters will have a material adverse effect upon the Company's
financial condition and results of operations.
(5) Subsequent Events
On October 17, 1997, the Company entered into a three year performance agreement
with the Sheraton Hotel in Valley Forge, Pennsylvania under which the Company is
to present a variety of its live theatrical productions. The agreement provides
the Company with the option of taking a split of the gross proceeds derived from
the sale of tickets to its variety shows or accepting a guaranteed weekly fee
arrangement.
In March 1997, the Company agreed with its underwriter, Whale Securities Co., LP
(the "Underwriter"), that it would neither loan nor advance any sums to or on
behalf of Mr. Stuart other than those sums advanced to Mr. Stuart from December
31, 1996 through the date of the IPO, without the Underwriter's prior written
consent. On October 23, 1997, the Company obtained the written consent of the
Underwriter to advance Mr. Stuart the sum of $50,000 (the "Advance"), which
Advance bears interest at a rate of 10% per annum, matures one year from the
date of the Advance and is evidenced by a promissory note executed by Mr. Stuart
in favor of the Company.
(6) Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company, a Utah corporation,
approved for the Company a $1,000,000 lease line. Advances under the credit line
incur interest at rate of 9.75% per annum. The financing commitment will expire
on September 29, 1998. As of September 30, 1997, there were no amounts
outstanding under the line.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This document contains certain forward-looking statements that are subject to
risks and uncertainties. Forward-looking statements include certain information
relating to the Company's utilization of tax benefits, the seasonal nature of
the Company's business, general business strategy, the introduction of new
theatrical productions, expansion plans, litigation matters, operating
performance and liquidity, as well as information contained elsewhere in this
Quarterly Report where statements are preceded by, followed by or include the
words "believes," "expects," "anticipates" or expressions of similar import. For
such statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. The forward-looking statements in this document are subject to
risks and uncertainties that could cause the assumptions underlying such
forward-looking statements and the actual results to differ materially from
those expressed in or implied by the statements. The most important factors that
could prevent the Company from achieving its goals - and cause the assumptions
underlying the forward-looking statements and the actual results of the Company
to differ materially from those expressed in or implied by those forward-looking
statements - include, without limitation and in addition to those discussed in
the various documents filed by the Company with the Securities and Exchange
Commission, the following: (i) the highly competitive nature of the leisure and
entertainment market, which includes the market for live theatrical productions,
in which the Company competes and the ability of the Company to successfully
compete in this market with other production companies for the most desirable
commercial and tourist venues; (ii) the ability of the Company to successfully
implement its expansion strategy which contemplates the opening of approximately
nine additional "four wall" resident productions over the next 24 months; (iii)
future capital needs and the uncertainty of additional funding (whether through
financial markets, collaborative or other arrangements with strategic partners,
or from other sources); (iv) the outcome of litigation matters; (v) risks
associated with acquisition strategy; (vi) the Company's working capital
position ; (vii) the ability of the Company to utilize certain operating loss
carryforwards; and (viii) the Company's ability to reproduce the performance,
likeness and voice of various celebrities without infringing on the publicity
rights of such celebrities or their estates.
Overview
The Company derives the majority of its revenue from the sale of its theatrical
productions to audiences at venues in urban and resort tourist locations and to
commercial clients, which include casinos, corporations, theme parks and cruise
lines. In addition, the Company generates revenue from the sale of merchandise,
food and beverages in certain of its venues, and from time to time, from the
sale of technical equipment, services to commercial clients, and design and
fabrication of sets and props.
The Company classifies its productions (both its resident and limited-run
engagements) into two main categories: "at-risk" shows and "low-risk" shows.
"At-risk" shows are classified as any of the Company's resident or longer term
limited-run productions where the amount of the revenue to be obtained by the
Company in connection with the show is uncertain (as is typical in the case of
shows produced by the Company at theaters leased and or purchased directly by
the Company in urban and resort tourist locations and of shows produced by the
Company in certain casino markets like Las Vegas). "Low-risk" shows are
contracted productions in which the client guarantees a fee (typical of shows
produced by the Company in certain smaller casino markets like Atlantic City and
for other commercial clients such as corporations, theme parks and cruise
lines).
<PAGE>
Results of Operations
The following table sets forth certain financial data as a percentage of net
revenue of the Company for the periods presented:
<TABLE>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
1996 1997 1996 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Direct production costs 35.5 45.1 40.8 47.5
Indirect production costs 14.1 23.3 15.3 20.0
------ ------ ------ ------
Gross profit 50.4 31.6 43.9 32.5
------ ------ ------ ------
Operating expenses
Selling, general and administrative 16.5 21.5 18.4 24.8
Depreciation and amortization 5.5 5.6 4.9 5.1
Principal stockholder compensation 1.4 5.6 1.7 3.5
------ ------ ------ ------
Total operating expenses 23.4 32.7 25.0 33.4
------ ------ ------ ------
Operating income (loss) 27.0 (1.1) 18.9 (0.9)
Interest, net 1.5 13.4 1.8 7.3
------ ------ ------ ------
Net income (loss) before income taxes 25.5 (14.5) 17.1 (8.2)
Income tax 0.4 0.1 0.1 0.1
------ ------ ------ ------
Net income (loss) 25.1% (14.6%) 17.0% (8.3%)
====== ====== ====== ======
</TABLE>
Quarter Ended September 30, 1996 versus Quarter Ended September 30, 1997
Net Revenues. Net revenue consists of sales of the Company's theatrical
productions, concession sales, photo sales, and income generated from equipment
rental. Net revenue for the quarter ended September 30, 1997, increased by
$479,000, or 10.4%, to $5,071,000 from $4,592,000 as compared to the third
quarter ended September 30, 1996. Contributing to this increase were increases
of approximately: (i) $642,000 attributable to the Legends show at the Osmond
Family Theater in Branson, Missouri, which ran in 1997, but not in 1996; (ii)
$39,000 attributable to a resident Legends show at the Imperial Palace in Las
Vegas, Nevada; (iii) $5,000 attributable to the Legends show at Bally's Park
Place in Atlantic City, New Jersey; (iv) $366,000 attributable to the new
Legends show in Daytona Beach, Florida; (v) $369,000 attributable to limited
engagements and corporate events which includes limited engagements of the
Legends show at Empress Casino in Joliet, Illinois and the Company's joint
venture (Camouflage Aux Folles(R)) show at Trump's Taj Mahal Hotel and Casino in
Atlantic City, New Jersey, which ran in 1997, but not in 1996; (vi) $76,000
attributable to other revenue; and (vii) $39,000 attributable to management fees
from the Legends show in Hawaii. These increases were partially offset by
decreases of approximately: (a) $115,000 attributable to a resident Legends show
in Myrtle Beach, South Carolina; (b) $909,000 attributable to the Legends show
at the Grand Palace in Branson, Missouri, which ran in 1996, but not in 1997;
and (c) $33,000 attributable to the Legends shows on Premier Cruise Lines.
Direct Production Costs. Direct production costs include salaries for
impersonators, stars, singers, dancers, musicians, technical operators,
choreographers, wardrobe personnel, production managers and concession
personnel, license fees, electronic supplies, lighting, sound, wardrobe, sets,
props, and the costs of goods for merchandise and food and beverage. Direct
production costs for the quarter ended September 30, 1997 increased by $658,000
or 40.4%, as compared to the quarter ended September 30, 1996. Direct production
costs increased to 45.1% of net revenue for the quarter ended September 30,
1997, as compared to 35.5% for the quarter ended September 30, 1996. This
increase was primarily attributable to costs associated with increases in
salaries, electronic supplies, make-up and wardrobe. The increase was partially
offset by a decrease in costs associated with props and production supplies.
<PAGE>
Indirect Production Costs. Indirect production costs include salaries for
operations, box office, finance and marketing personnel, advertising and
promotion, insurance, rent, utilities, property taxes, housing, legal,
accounting and travel. Indirect production costs for the quarter ended September
30, 1997 increased by $533,000 or 82.0%, as compared to the quarter ended
September 30, 1996. Indirect production costs increased to 23.3% of net revenue
for the quarter ended September 30, 1997, as compared to 14.1% for the quarter
ended September 30, 1996. The increase was primarily attributable to a higher
level of indirect salaries, advertising, promotion and rent.
Selling, General and Administrative. Selling, general and administrative
expenses include officers' salaries, finance, operations, development, marketing
and technical personnel salaries, office supplies, rent, utilities and legal
expenses. Selling, general and administrative expenses for the quarter ended
September 30, 1997 increased by $333,000, or 43.8 %, as compared to the quarter
ended September 30, 1996. Selling, general and administrative as a percent of
net revenues increased to 21.5% for the quarter ended September 30, 1997, as
compared to 16.5% for the quarter ended September 30, 1996. The increase was
primarily due to increases in salaries, auto expense, rent, commissions,
corporate advertising and promotion as well as a one time charge of
approximately $221,000 resulting from forgiveness of a note receivable from Mr.
Stuart. As of August 12, 1997, Mr. Stuart owed the Company a total note
receivable, together with principal and interest received thereon (the "Stuart
Note"), which the Company forgave, in full, on said date. The Company has agreed
with the Underwriter not to loan or advance any further sums to Mr. Stuart in
the future, without the prior written consent of the Underwriter. These
increases were partially offset by decreases in costs associated with travel,
entertainment, and professional fees.
Depreciation and Amortization. Depreciation and amortization for the quarter
ended September 30,1997 increased by $31,000, or 12.5%, as compared to the
quarter ended September 30, 1996. The increase was primarily due to increases in
depreciation and goodwill amortization.
Interest Expense, Net. Interest expense is currently incurred and/or was
incurred as a result of the following: (i) a term loan with First Security Bank,
approximately $19,091 of which was outstanding as of September 30, 1997, and
which accrued interest at the annual rate of 11.5%; (ii) a loan between the
Company and DYDX Legends Group, L.P. in the amount of approximately $750,000
which accrued interest at the annual rate of 9.0% (the "DYDX Loan"); (iii)
$1,714,064 in principal amount outstanding under the Company's 8% amended and
restated Convertible Subordinated Debentures due in January of 1999 (the
"Debentures"); (iv) $250,000 line of credit with First Security Bank, which
accrued variable interest at the rate of 1.5% over the First Security of Idaho
Index (10% per year as of the date of the facility's inception), is due on
demand, and which is scheduled to expire on May 19, 1998 (the "Line of Credit");
and (v) $1,000,000 Bridge Notes, which accrued interest at the annual rate of
9%. Interest expense for the quarter ended September 30, 1997, increased by
$613,000 or 895.9%, as compared to the quarter ended September 30, 1996. The
increase was primarily attributable to a one time, non-recurring, interest
expense charges in the amount of $194,000 related to the conversion of the
Debentures and the original issue discount of $444,000 related to the Bridge
Financing. These increases were partially offset by interest income derived from
the investment of approximately 49% of the net proceeds of the IPO.
Income Taxes. The Company is a Nevada corporation with a substantial portion of
revenue and income derived in Nevada. There are no state or local income taxes
in Nevada. The Company accrued no federal income tax for the quarter ended
September 30, 1997. Income taxes for the quarters ended September 30, 1996 and
1997, relate to income taxes due in those states other than Nevada in which the
Company conducts business.
<PAGE>
Nine Months Ended September 30, 1996 versus Nine Months Ended September 30, 1997
Net Revenues. Net revenue for the nine months ended September 30, 1997 increased
by $564,000 or 5%, from $11,205,000 to $11,769,000, as compared to the nine
months ended September 30, 1996. Contributing to this increase were increases of
approximately: (i) $1,142,000 attributable to limited engagements and corporate
events which includes limited engagements of the Legends show at the Empress
Casino in Joliet, Illinois and the Company's joint ventures ( An Evening at the
Improv(R) Spectacular and Camouflage Aux Folles(R)) at Trump's Taj Mahal Hotel
and Casino in Atlantic City, New Jersey, each of which ran in 1997, but not in
1996; (ii) $379,000 attributable to the new resident Legends show in Daytona
Beach, Florida, which ran in 1997, but not in 1996; (iii) $642,000 attributable
to the Legends show at the Osmond Family Theater in Branson, Missouri, which ran
in 1997, but not in 1996; (iv) $103,000 attributable to management fees from the
Legends show in Hawaii; and (v) $72,000 attributable to other revenue. These
increases were partially offset by decreases of: (a) $1,519,000 attributable to
the discontinuation of the Legends show at the Grand Palace in Branson,
Missouri; (b) $65,000 attributable to the resident Legends show at the Imperial
Palace in Las Vegas, Nevada; (c) $12,000 attributable to the resident Legends
show at Bally's Park Place in Atlantic City, New Jersey; (d) $142,000
attributable to the resident Legends show in Myrtle Beach, South Carolina; and
(e) $36,000 attributable to the Legends shows on Premier Cruise Lines.
Direct Production Costs. Direct production costs include salaries for
impersonators, stars, singers, dancers, musicians, technical operators,
choreographers, wardrobe personnel, production managers and concession
personnel, license fees, electronic supplies, lighting, sound, wardrobe, sets,
props, and the cost of goods for merchandise and food and beverage. Direct
production costs for the nine months ended September 30, 1997 increased by
$1,016,000, or 22.2%, as compared to the first nine months of fiscal 1996.
Direct production costs increased to 47.5% of net revenue for the nine months
ended September 30, 1997, as compared to 40.8% for the first nine months of
fiscal 1996. The increase was primarily attributable to costs associated with
increases in salaries, electronic supplies, make-up, wardrobe, and operating
supplies. These increases were partially offset by decreases in costs associated
with workers compensation, props and production supplies.
Indirect Production Costs. Indirect production costs include salaries for
operations, box office, finance, and marketing personnel, advertising and
promotion, insurance, rent, utilities, property taxes, housing, legal,
accounting and travel. Indirect production costs for the nine months ended
September 30, 1997 increased by $634,000 or 36.9%, as compared to the first nine
months of fiscal 1996. Indirect production costs increased to 20.0% of net
revenue for the nine months ended September 30, 1997, as compared to 15.3% for
the first nine months of fiscal 1996. These increases were primarily
attributable to increases in salaries, rent, utilities and insurance. These
increases were offset partially by decreases in housing, storage and moving.
Selling, General and Administrative. Selling, general and administrative
expenses include officers' salaries, finance, operations, development, marketing
and technical personnel salaries, office supplies, rent, utilities and legal
expenses. Selling, general and administrative expenses for the nine months ended
September 30, 1997 increased by $846,000, or 40.9%, as compared to the first
nine months of fiscal 1996. Selling, general and administrative expenses as a
percent of net revenues were 24.8% for the nine months ended September 30,1997,
as compared to 18.4% for the first nine months of fiscal 1996. The increase was
mainly due to increases in costs associated with salaries, auto expense,
freight, shipping, office supplies, telephone, commissions, advertising,
promotion, and bad debts as well as one time charges of approximately $163,000
and $221,000, resulting from the issuance of 40,532 shares of Common Stock to
Kiran Sidhu, the Company's Chief Financial Officer and forgiveness of the Stuart
Note, respectively. As of August 12, 1997, the Stuart Note, which together with
principal and interest totaled $221,000, was forgiven in full. The Company has
agreed with the Underwriter not to loan or advance any further sums to Mr.
Stuart, without the prior written consent of the Underwriter. These increases
were partially offset by a decrease in costs associated with bonus accrual, and
legal expenses.
<PAGE>
Depreciation and Amortization. Depreciation and amortization for the first nine
months ended September 30, 1997, increased by $57,000, or 10.4%, as compared to
the first nine months of fiscal 1996. The increase was due primarily to capital
additions to existing and new shows.
Interest Expense, Net. Interest expense for the nine months of fiscal 1997
increased by $653,000, or 323.3%, as compared to the first nine months of fiscal
1996. The increase was primarily attributable to one time, non-recurring,
interest expense charges of $194,000 related to the conversion of the Debentures
and an original issue discount of $444,000 related to the Bridge Financing.
These increases were partially offset by interest income earned from the
Company's investment of approximately 49% of the net proceeds generated from the
IPO.
Income Taxes. At December 31, 1996, and September 30, 1997, the Company had
federal net operating loss carryforwards of $657,214 and $1,616,791,
respectively. Under Section 382 of the Internal Revenue Code, certain
significant changes in ownership that the Company is currently undertaking may
restrict the future utilization of these tax loss carryforwards. Income taxes
for the periods ended September 30, 1996 and 1997 relate to income taxes in
those states other than Nevada in which the Company conducts business.
Seasonality and Quarterly Results
The Company's business has been, and is expected to remain, highly seasonal,
generating the majority of its revenues from April through October. Part of the
Company's business strategy is to increase sales in tourist markets that
experience their peak seasons from November to March. The Company is exploring
opportunities in markets such as Florida and Arizona, domestically, and
Australia, Beirut, South Africa, Singapore, New Zealand and Hong Kong, abroad.
The Company believes that penetration of these markets could help mitigate this
seasonality.
The following table sets forth the Company's net revenue for each of the last
eleven quarters ended September 30, 1997:
Net Revenues
($ in thousands)
------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
Fiscal 1995 ............... $2,319 $2,747 $4,388 $3,321
Fiscal 1996 ............... $2,347 $4,266 $4,591 $3,074
Fiscal 1997 ............... $2,719 $3,979 $5,071
Liquidity and Capital Resources
General
The Company has historically met its working capital and capital requirements
through a combination of cash flow from operations, debt offerings and
traditional bank financing. The Company anticipates, based on its currently
proposed plans and assumptions relating to its operations (including assumptions
regarding the anticipated timetable of its new show openings and the costs
associated therewith), that the Company's current cash and cash equivalent
balances and anticipated revenues from operations will be sufficient to fund its
current expansion strategy and contemplated capital requirements (including
those associated with the opening of nine resident "four-wall" productions) for
the next 24 months. In the event the Company's plans or assumptions change, or
prove to be incorrect, or if balances and/or anticipated revenues otherwise
prove to be insufficient, the Company would need to revise its expansion
strategy (which revision could include the curtailment, delay or elimination of
certain of its anticipated productions or the funding of such productions
through arrangements with third parties which would require it to relinquish
rights to a substantial portion of its revenues) and/or seek additional
financing prior to the end of such period.
For the nine months ended September 30, 1996, the Company generated net cash
from operations of approximately $1,995,000. The cash provided by operations was
primarily attributable to an increase in revenues and a decrease in direct and
indirect production costs partially offset by an increase in selling, general
and administrative costs. For the nine months ended September 30, 1997, the
Company had a net cash deficit from operations of $509,000. This operating
deficit was primarily attributable to increases in selling, general and
administrative expenses made in anticipation of future growth.
The net cash used in investing activities for the nine months ended September
30, 1996, and September 30, 1997, of $1,472,000 and $728,000, respectively, was
primarily due to capital expenditures and advances to Mr. Stuart.
<PAGE>
Net cash provided by financing activities for the nine months ended September
30, 1996 of $619,000 was attributable to the DYDX Loan and bank financing. Net
cash provided by financing activities for the nine months ended September 30,
1997, of $4,539,000 was primarily attributable to proceeds from sale of common
stock. This increase in net cash provided by financing activities was partially
offset by the repayment of DYDX Loan.
At September 30, 1997, the Company had working capital of approximately
$4,127,000, which resulted, primarily, from the proceeds of the sale of common
stock. The proceeds from the sale of common stock were partially offset by
increases in accounts receivable, inventory, deposits, prepaid, other assets and
pre-opening costs.
As of September 30, 1997, the Company had a bank term loan outstanding in the
principal amount of $19,091, which accrued interest at a rate of 11.5% per
annum. On October 10, 1997, the Company paid off, in full, all outstanding
principal and accrued interest.
On August 13, 1997, the Company converted all of the $1,714,064 of principal
amount currently outstanding under the Debentures into an aggregate of 505,649
shares of Common Stock. The aforementioned conversion was based upon a ratio of
295 shares of Common Stock per each $1,000 principal amount of Debenture. The
conversion resulted in a one time, non-recurring, interest expense charge in the
amount of $194,228 (based on an imputed value of $4.00 per share of Common
Stock).
On August 13,1997, the Company paid off, in full, all outstanding principal and
accrued interest, $773,014, owed by the Company under the DYDX Loan.
On August 19,1997, the Company paid off, in full, all the outstanding principal
and accrued interest, $223,228, owed by the Company under the line of credit
facility.
On August 13,1997, the Company paid off, in full, all outstanding principal and
accrued interest, $1,036,746, owed by the Company under the Bridge Notes.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the legal matters reported in Part
II, Item 1 of the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997.
ITEM 2. CHANGES IN SECURITIES.
Use of Proceeds from the Company's Initial Public Offering
The following information is being provided in accordance with Rule 463 of the
Securities Act of 1933 (the "Securities Act") and Item 701 of Regulation S-B
under the Securities Act. On August 13, 1997, the Company completed an initial
public offering of 1,400,000 shares of its Common Stock and Warrants to purchase
1,610,000 shares of its Common Stock (the "Offering").
The effective date of the Company's Registration Statement on Form SB-2
(Registration No. 333-24681) (the "Registration Statement") was August 13, 1997.
The net proceeds to the Company of the Offering were $6,270,070.
From the effective date of the Registration Statement to September 30, 1997, the
Company incurred for its account approximately: (i) $714,000 for underwriting
discounts and commissions, (ii) $214,200 for expenses paid to the Underwriter,
and (iii) $492,000 for other expenses related to the offering. The total
expenses incurred by the Company in connection with the IPO were approximately
$706,000, excluding amounts incurred for the Company's account for underwriting
discounts and commissions. None of such payments were made to a director,
officer, person owning 10% or more of the Common Stock, or an affiliate of the
Company.
From the effective date of the Registration Statement to September 30, 1997, the
approximate amount of the net offering proceeds to the Company used for various
purposes is set forth below:
Application Amount
- -------------------------------------------------------------- ----------
Repayment of indebtedness .................................... $2,032,988
Short-term investment (Certificate of Deposit) ............... 1,000,000
Short-term investment (Money Market) ......................... 2,471,597
Working capital and general corporate purposes* .............. 765,485
----------
Total amount applied ................................ $6,270,070
==========
* Includes the payment of fees for professional services rendered in connection
with the IPO.
None of the amounts listed above were paid to a director, officer, person owning
10% or more of the Common Stock, or an affiliate of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
NONE.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
The following is a list of exhibits filed as part of this quarterly report on
Form 10-QSB. Where so indicated by footnote, exhibits that were previously filed
are incorporated by reference. Unless otherwise indicated, the location of the
exhibit in the previous filing is the same number as listed below.
Exhibit
Number Description
3.1 Articles of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant. (4)
4.1 Specimen Stock Certificate Representing the Common Stock. (4)
4.2 Specimen Warrant Certificate Representing the Warrants. (4)
4.3 Form of Public Warrant Agreement. (4)
4.4 Form of Underwriter's Warrant Agreement. (4)
10.1 Employment Agreement between the Registrant and John W. Stuart. (1)
10.2 Employment Agreement between the Registrant and David Hope. (1)
10.3 Employment Agreement between the Registrant and Kiranjit S. Sidhu. (1)
10.4 Confidentiality and Non-Competition Agreement between the
Registrant and John W. Stuart.(1)
10.5 Confidentiality and Non-Competition Agreement between the
Registrant and David Hope. (1)
10.6 Confidentiality and Non-Competition Agreement between the
Registrant and Kiranjit S. Sidhu. (1)
10.7 Amended and Restated 1996 Stock Option Plan. (1)
10.8 Contribution Agreement between the Registrant and John W. Stuart. (1)
10.9 Security and Pledge Agreement between the Registrant and John W.
Stuart Relating to Contribution of LVHE Shares. (1)
10.10 Security and Pledge Agreement between the Registrant and John W.
Stuart Relating to LVHE Litigation Indemnity. (1)
10.11 Indemnification Agreement between the Registrant, John W. Stuart
and Grand Strand Entertainment, Inc. (1)
10.12 Security and Pledge Agreement between the Registrant and John W.
Stuart Relating to Grand Strand Entertainment, Inc. Litigation
Indemnity. (1)
10.13 Lease between the Registrant and Great American Entertainment
Company. (3)
10.14 Entertainment Production Agreement between the Registrant,
Imperial Palace, Inc. and John W. Stuart dated December 8, 1995.
(4)
10.15 Agreement between the Registrant and Bally's Park Place, Inc.
dated September 1, 1994 and Subsequent Renewal Letter. (4)
10.16 Agreement between Registrant and Improv West, Inc. (2)
10.17 Amended and Restated Loan Agreement between Registrant and DYDX
Legends Group, L.P. (2)
10.18 Common Stock Purchase Agreement between Registrant and
Interactive Events, Inc. (2)
10.19 Show Production Agreement between the Registrant and Kurz
Management. (4)
10.20 Lease between the Registrant and Burgoyne Properties, Limited. (4)
27.1 Financial Data Schedule. *
* Filed herewith
Filed as an exhibit to the Company's Registration Statement on Form SB-2 dated
April 7, 1997 (Registration No. 333-24681)
Filed as an exhibit to Amendment No. 1 to the Company's Registration Statement
on Form SB-2 dated September 3, 1997 (Registration No. 333-24681).
Filed as an exhibit to Amendment No. 2 to the Company's Registration Statement
on Form SB-2 dated September 30, 1997 (Registration No. 333-24681).
Filed as an exhibit to Amendment No. 3 to the Company's Registration Statement
on Form SB-2 dated August 6, 1997 (Registration No. 333-24681).
(b) Form 8-K - None
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ON STAGE ENTERTAINMENT, INC.
Date: November 12, 1997 /s/ John W. Stuart
--------------------------------
John W Stuart, Chairman
and Chief Executive
Officer
Date: November 12, 1997 /s/ Kiranjit S. Sidhu
--------------------------------
Kiranjit S. Sidhu, Senior
Vice President, Finance and
Administration, and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1997 FORM 10-QSB OF ON STAGE ENTERTAINMENT, INC. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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