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 June 30, 1999
[] 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.
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 88-0214292
(State or Other Jurisdiction (IRS Employer
of 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 August 13, 1999
----- ------------------------------
Common Stock, $0.01 par value 6,985,279
<PAGE>
ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Balance sheets.................................. 1
Statements of operations........................ 2 -3
Statements of cash flows........................ 4
Notes to financial statements................... 5-12
Item 2. Management's Discussion and Analysis
Of Financial Condition and Results of Operations. 13-20
Part II. Other Information
Item 1. Legal Proceedings...................................... 21
Item 2. Changes in Securities and Use of Proceeds.............. 21
Item 3. Defaults Upon Senior Securities........................ 22
Item 4. Submission of Matters of a Vote of Security Holders.... 22
Item 5. Other Information...................................... 22
Item 6. Exhibits and Reports on Form 8-K....................... 22
Signatures.......................................................... 23
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<S> <C> <C> <C>
December 31, June 30,
1998 1999
Assets --------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents............................................. $ 1,009,768 $ 466,077
Accounts receivable, net.............................................. 1,264,526 1,072,708
Inventory............................................................. 243,413 247,851
Deposits.............................................................. 125,784 346,135
Prepaid and other assets.............................................. 594,777 667,928
Notes receivable from officers ........................................ 77,330 93,754
---------------- ---------------
Total current assets......................................... 3,315,598 2,894,453
---------------- ---------------
Property, equipment and leasehold improvements.............................. 24,130,663 24,156,527
Less: Accumulated depreciation and amortization............................ (4,396,229) (5,020,946)
---------------- ---------------
Property, equipment and leasehold improvements, net......................... 19,734,434 19,135,581
---------------- ---------------
Deferred financing costs, net of amortization of $80,813 and $136,812...... 1,039,187 983,188
================ ===============
$ 24,089,219 $ 23,013,222
================ ===============
Liabilities and Stockholders' Equity
Current liabilities
Working capital line ................................................... $ 999,679 $ 871,845
Accounts payable and accrued expenses................................... 2,533,232 2,389,736
Accrued payroll and other liabilities................................... 1,891,924 2,677,693
Current maturities of long-term debt.................................... 14,682,246 14,665,016
Note payable to officer ................................................ - 217,000
---------------- ---------------
Total current liabilities............................................... 20,107,081 20,821,290
---------------- ---------------
Long-term debt, less current maturities..................................... 786,468 539,722
---------------- ---------------
Total liabilities and long-term debt............................. 20,893,549 21,361,012
---------------- ---------------
Commitments and contingencies (Note 4)
Stockholders' equity
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; 7,452,350 and 6,985,279 shares issued and outstanding..... 74,523 69,853
Additional paid-in-capital.............................................. 11,254,587 11,332,250
Currency exchange adjustment.......................................... 67,289 (17,167)
Accumulated deficit................................................... (8,200,729) (9,732,726)
---------------- ---------------
Total stockholders' equity........................................ 3,195,670 1,652,210
---------------- ---------------
$ 24,089,219 $ 23,013,222
================ ===============
</TABLE>
1
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<S> <C> <C> <C>
Three months ended
June 30,
1998 1999
--------------- ----------------
(Unaudited) (Unaudited)
Net revenues.................................................................... $ 8,244,581 $ 7,403,008
Costs of revenues............................................................... 6,466,463 5,379,324
---------------- -----------------
Gross profit.................................................................... 1,778,118 2,023,684
Selling, general & administrative............................................... 1,076,753 1,035,952
Depreciation and amortization................................................... 329,939 353,534
Restructuring charges (Note 10)................................................. - 262,793
---------------- -----------------
Operating income................................................................ 371,426 371,405
Interest, net................................................................... 384,514 1,019,838
---------------- -----------------
Net loss........................................................................ $ (13,088) $ (648,433)
================ =================
Basic and diluted loss per share................................................ $ (0.00) $ (0.09)
================ =================
Basic and diluted average number of common shares outstanding................... 7,193,008 7,354,676
================ =================
</TABLE>
2
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<C> <C>
<S>
Six months ended
June 30,
--------------------------------------
1998 1999
--------------- ----------------
(Unaudited) (Unaudited)
Net revenues.................................................................... $ 11,969,067 $ 13,675,247
Costs of revenues............................................................... 9,130,737 10,829,833
---------------- -----------------
Gross profit.................................................................... 2,838,330 2,845,414
Selling, general & administrative............................................... 2,461,414 2,081,868
Depreciation and amortization................................................... 463,896 603,601
Restructuring charges (Note 10)................................................. - 262,793
---------------- -----------------
Operating loss.................................................................. (86,980) (102,848)
Interest, net................................................................... 454,834 1,429,149
---------------- -----------------
Net loss........................................................................ $ (541,814) $ (1,531,997)
================ =================
Basic and diluted loss per share................................................ $ (0.08) $ (0.21)
================ =================
Basic and diluted average number of common shares outstanding................... 6,883,421 7,459,597
================ =================
</TABLE>
3
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<C> <C>
<S>
Six months ended
June 30,
-----------------------------------------
1998 1999
----------------- ------------------
(Unaudited) (Unaudited)
Cash flows from operating activities
Net loss.............................................................. $ (541,814) $ (1,531,997)
------------------ -------------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 318,799 676,087
Increase (decrease) from changes in operating assets and liabilities
Accounts receivable.................................... (898,311) 180,505
Inventory.............................................. 11,687 (4,438)
Deposits............................................... (152,127) (223,792)
Pre-opening costs...................................... (1,256,382) -
Prepaid and other assets............................... (8) (73,151)
Accounts payable and accrued expenses.................. 297,458 (143,496)
Accrued payroll and other liabilities.................. 808,063 794,769
------------------ -------------------
Total adjustments................................................. (870,821) 1,206,484
------------------ -------------------
Net cash used in operating activities...................................... (1,412,635) (325,513)
------------------ ------------------
Cash flows from investing activities
Advances on notes receivable from officer............. (81,127) (31,950)
Payments received on notes receivable from officer.... 32,626 15,526
Capital expenditures.................................. (167,920) (42,538)
Direct acquisition costs ................................... 829,665 -
Payment for purchase of Gedco, USA, net of cash received (Note 5) (14,602,005) -
------------------ ------------------
Net cash used in investing activities..................................... (13,988,761) (58,962)
------------------ ------------------
Cash used in financing activities
Borrowings/repayments under working capital line (Note 5)........... 1,000,000 (127,834)
Proceeds from long-term borrowing................................... 13,727,237 -
Repayment on long-term borrowing.................................... (561,426) (263,976)
Notes payable to officer............................................ - 300,000
Cash received on notes payable from officer......................... - (83,000)
Issuance of common stock............................................ - 100,050
------------------ ------------------
Net cash provided by (used in) financing activities....................... 14,165,811 (74,760)
------------------ ------------------
Effect of exchange rate changes on cash and cash equivalents.............. - (84,456)
------------------ ------------------
Net decrease in cash and cash equivalents................................. (1,235,585) (543,691)
Cash and cash equivalents at beginning of period.......................... 2,323,559 1,009,768
------------------ -------------------
Cash and cash equivalents at end of period................................ $ 1,087,974 $ 466,077
================== ===================
Supplemental disclosure of cash flow information Cash paid during
the period for:
Interest........................................................... $ 539,303 $ 460,827
================== ===================
</TABLE>
4
<PAGE>
Supplemental schedule of non-cash investing and financing activities
On February 23, 1999, On Stage entered into a Common Stock Purchase
Agreement with Richard S. Kanfer, effectively unwinding the November 1996
acquisition of Interactive Events, Inc. Under the Interactive Re-Conveyance, On
Stage re-conveyed all of the assets of Interactive to Kanfer in consideration
for Kanfer's re-conveyance of the 30,304 shares of On Stage's common stock
valued at $1.125 per share, issued to Kanfer during On Stage's original
acquisition of Interactive, along with the cancellation of a non-plan option to
purchase 15,000 shares of common stock and incentive stock options to purchase
19,835 shares of common stock at a price of $5.00 per share. In addition, the
parties agreed to release one another from any liability arising out of the
acquisition of Interactive by On Stage and any claim relating to Kanfer's
subsequent employment with us. Kanfer also entered into an exclusive right of
representation agreement with us in February 1999, under which we granted to
Kanfer the right to represent our Legends production in designated areas in
consideration for a portion of the gross proceeds generated by that
representation.
On April 23, 1999, On Stage granted its securities counsel, Nida & Maloney,
P.C. an option to purchase 40,000 shares of common stock at a purchase price of
$1.00 per share as payment for $38,469 in legal services performed for On Stage
by Nida & Maloney, P.C. The securities were issued under the exception from
registration provided by Section 4 (2) of the Securities Act.
On May 7, 1999, On Stage issued 8,471 shares of common stock valued at
$1.06 per share to Jim Owen, a former performer with On Stage. These shares were
issued in connection with the resolution of litigation that arose several years
ago between On Stage and Owen with regard to the right to the use of certain
photographs taken of Owen by On Stage. The securities were issued under the
exception from registration provided by Section 4 (2) of the Securities Act.
On May 27, 1999, Hanover Restaurants, Inc. returned 595,238 shares of On
Stage common stock originally issued to Hanover in connection with the Gedco
asset acquisition. The Hanover shares were returned to On Stage under the terms
of a Mutual Release and Settlement Agreement, which was entered into by and
between On Stage and Gedco as a result of a dispute that arose in connection
with the Gedco asset acquisition. In exchange for the return of the Hanover
shares, On Stage: (1) granted Hanover a warrant to purchase 595,238 shares of
common stock at a purchase price of $1.50; and (2) released its claim to
approximately $925,000 which was being held in escrow as security for those
representations and warranties made by Gedco representatives in connection with
the Gedco asset acquisition.
5
<PAGE>
On Stage Entertainment, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 1999
Basis of Presentation
The financial statements include herein included the accounts of On Stage
Entertainment, Inc., a publicly traded Nevada corporation and its subsidiaries:
Legends in Concert, Inc., a Nevada corporation; On Stage Marketing, Inc., a
Nevada corporation; On Stage Theaters, Inc., a Nevada corporation; Wild Bill's
California, Inc., a Nevada corporation; Blazing Pianos, Inc., a Nevada
corporation; King Henry's Inc., a Nevada corporation; On Stage Merchandise,
Inc., a Nevada corporation; On Stage Events, Inc., a Nevada corporation; On
Stage Casino Entertainment, Inc., a Nevada corporation; On Stage Productions,
Inc., a Nevada corporation; On Stage Theaters North Myrtle Beach, Inc., a Nevada
corporation; On Stage Theaters Surfside Beach, Inc., a Nevada corporation; and
Interactive Events, Inc., a Georgia corporation.
On Stage derives net revenues from five reportable segments:
o Casinos. The Casinos segment primarily sells live theatrical productions to
casinos worldwide for a fixed fee. In addition, this Casinos segment also
operates our Legends show at the Imperial Palace in Las Vegas, Nevada and
Biloxi, Mississippi and at Bally's Park Place in Atlantic City, New Jersey.
o Theaters. The Theaters segment owns and/or rents live theaters and dinner
theaters in urban and resort tourist locations primarily in the United
States. This Theaters segment derives revenues from the sale of tickets,
along with food and beverages to patrons who attend our live theatrical
productions.
o Events. The Events segment sells live theatrical productions to commercial
clients, which include corporations, theme and amusement parks and cruise
lines for a fixed fee. Revenues generated from the Events segment are
included in the Casinos segment.
o Merchandise. The Merchandise segment sells merchandise and souvenir
photography products to patrons who attend our Casinos, Theaters and Events
segment productions. Revenues generated from the Merchandise segment are
included in the Theaters segment.
o Production Services. The Production Services segment sells technical
equipment and services to commercial clients. However, the Productions
Services segment's primary focus is to provide technical support for all of
the Casinos, Theaters, Events and Merchandise segments.
(1) Subsequent Events
On July 9, 1999 David Hope resigned from his positions with On Stage as its
President, Chief Operating Officer and Director to pursue other interests.
However, Mr. Hope has agreed to provide consulting services to On Stage on a
part-time basis to assist On Stage with the consummation of its restructuring
and strategic growth strategies.
On July 14, 1999, James Nederlander resigned his post as a Director for On
Stage. The reason given for such resignation was that Mr. Nederlander's other
business interests were increasingly consumming the majority of his time, which
left him unable to devote sufficient time to his future duties as a Director of
On Stage.
On July 12, 1999, First Security Bank of Nevada filed a complaint against
On Stage, its subsidiaries and John W. Stuart in the District Court of Nevada in
Clark County, Nevada. The complaint alleges that On Stage has breached its
contract with First Security by refusing to repay our outstanding indebtedness
to First Security Bank and First Security Leasing. The complaint prays for
repayment of the matured loan and lease lines in the amount of approximately
$1,955,998, together with interest, attorneys' fees and associated costs.
Additionally, the complaint seeks to enforce the personal guaranty of Mr. Stuart
to repay $1,000,000 of this outstanding balance and prays for writs of
garnishment and attachments of On Stage's personal property.
6
<PAGE>
(2) New Accounting Pronouncements
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5") issued by the American Institute of Certified Public Accountants is
effective for financial statements beginning after December 15, 1998. SOP 98-5
requires that the costs of start-up activities, including organization costs, be
expensed as incurred. Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customers (excluding ongoing customer acquisition costs, such as policy
acquisition costs and loan origination costs) or beneficiary, initiating a new
process in an existing facility, or commencing some new operation. We do not
expect the adoption of SOP 98-5 to have a material impact, if any, on our
financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") effective for financial
statements with fiscal years beginning after June 15, 1999. SFAS No. 133
provides a comprehensive and consistent standard for the recognition and
measurement of derivatives and hedging activities and requires all derivatives
to be recorded on the balance sheet at fair value. We do not expect the adoption
of SFAS No. 133 to have a material impact, if any, on our results of operations,
financial position or cash flows.
(3) Loss Per Share
Statement of Financial Accounting Standard No. 128 provides a different
method of calculating earnings per share than is currently used in accordance
with APB 15, Earnings per Share. SFAS 128 provides for the calculation of Basic
and Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of securities that could share
in the earnings of the entity, similar to fully diluted earnings per share. SFAS
128 is effective for fiscal years and interim periods after December 15, 1997.
We have adopted this pronouncement during the fiscal year ended December 31,
1997.
For the six months ended June 30, 1998, potential dilutive securities
representing 773,853 outstanding stock options and 4,480,956 outstanding
warrants are not included, since their effect would be anti-dilutive. For the
six months ended June 30, 1999, potential dilutive securities representing
1,121,550 outstanding stock options and 3,660,155 outstanding warrants are not
included, since their effect would be anti-dilutive.
(4) Commitments and Contingencies
We are a party to various legal proceedings in which the adverse parties
are seeking damages from us. While there can be no assurance that any of the
instituted or threatened lawsuits will be settled or decided in favor of us, the
management of On Stage does not believe the final resolution of these matters
will have a material adverse effect upon the our financial condition and results
of operations.
(5) Business Acquisition
Interactive Events, Inc. Acquisition and Re-Conveyance
On November 1, 1996, On Stage entered into Common Stock Purchase Agreement
with Interactive Events, Inc. Under this agreement, Interactive sold all of its
assets to On Stage in exchange for an aggregate of 30,304 share of On Stage's
common stock. Additionally, Richard S. Kanfer, President of Interactive, agreed
to join On Stage as our Vice President of Sales. On Stage recorded $129,180 as
the excess of the purchase price over the net assets acquired, which was being
amortized over ten years. At December 31, 1998, On Stage determined there was an
impairment in the value of the excess of the purchase price over the net assets
acquired in connection with the Interactive purchase and wrote off the remaining
unamortized balance of $102,131.
7
<PAGE>
On February 23, 1999, On Stage entered into a Common Stock Purchase
Agreement with Richard S. Kanfer, effectively unwinding the November 1996
acquisition of Interactive Events, Inc. Under the Interactive Re-Conveyance, On
Stage re-conveyed all of the assets of Interactive to Kanfer in consideration
for Kanfer's re-conveyance of the 30,304 shares of On Stage's common stock
valued at $1.125 per share, issued to Kanfer during On Stage's original
acquisition of Interactive, along with the cancellation of a non-plan option to
purchase 15,000 shares of common stock and incentive stock options to purchase
19,835 shares of common stock at a price of $5.00 per share. In addition, the
parties agreed to release one another from any liability arising out of the
acquisition of Interactive by On Stage and any claim relating to Kanfer's
subsequent employment with us. Kanfer also entered into an exclusive right of
representation agreement with us in February 1999, under which we granted to
Kanfer the right to represent our Legends production in designated areas in
consideration for a portion of the gross proceeds generated by that
representation.
Gedco USA, Inc. Acquisition
On March 13, 1998, we completed our acquisition of certain assets from
Gedco USA, Inc. and its affiliates for a purchase price of $14,000,000,
consisting of $11,500,000 in cash and 595,238 shares of common stock valued at
$2,500,000. Included in the Gedco asset acquisition were substantially all of
the income producing assets and associated real property of Orlando Entertains
and LA Entertains, consisting of King Henry's Feast, Blazing Pianos piano bar,
the Fort Liberty shopping complex that includes a Wild Bill's Dinner Theater,
each of which is located in greater Orlando, Florida, and a second Wild Bill's
Dinner Theater located in Buena Park, California. Gerard O'Riordan, President of
Gedco joined us as President of On Stage Theaters, Inc., a wholly subsidiary
have On Stage that manages the acquired dinner theaters and piano bar as well as
other selected theaters.
On May 27, 1999, Hanover Restaurants, Inc. returned 595,238 shares of On
Stage common stock originally issued to Hanover in connection with the Gedco
asset acquisition. The Hanover shares were returned to On Stage under to the
terms of a Mutual Release and Settlement Agreement, which was entered into by
and between On Stage and Gedco as a result of a dispute that arose in connection
with the Gedco asset acquisition. In exchange for the return of the Hanover
shares, On Stage: (1) granted Hanover a warrant to purchase 595,238 shares of
common stock at a purchase price of $1.50; and (2) released its claim to
approximately $925,000 which was being held in escrow as security for those
representations and warranties made by Gedco representatives in connection with
the Gedco asset acquisition.
On March 13, 1998, Imperial Credit Commercial Mortgage Investment
Corporation signed an agreement with On Stage to fund up to $20,000,000 of
mortgage financing. On the same day, On Stage used $12,500,000 of the facility
to fund the cash portion of the Gedco asset acquisition. On June 30, 1998, On
Stage used an additional $1,100,000 to fund the cash portion of the purchase of
a fee simple interest in the Legends Theater in Surfside Beach, South Carolina,
and the purchase of a leasehold interest in the Eddie Miles Theater in North
Myrtle Beach, South Carolina. On October 7, 1998, On Stage used an additional
$550,000 for working capital purposes. In addition, On Stage granted Imperial
Credit and related entity warrants to purchase an aggregate of 575,000 shares of
common stock at an exercise price of $4.44 per share. In consideration for
Imperial Credit's October 7, 1998 funding of $550,000, On Stage reset the strike
price on 325,000 of the Imperial Credit warrants from $4.44 to $1.25 per share.
We made January, February and March 1999 payments to Imperial Credit after
the due date for those payments. As a result of those delinquencies, we have
incurred late charges and default interest, which we have not paid. We are in
default under the Imperial Credit facility and we are unable to borrow
additional funds under the facility. As of August 6, 1999, we have not made our
payments to Imperial Credit due April 1, 1999, May 1, 1999, June 1, 1999, July
1, 1999 or August 1, 1999. We are currently negotiating with Imperial Credit to
extend some of the repayment terms under this facility and to obtain waivers or
amendments with respect to other defaults under the facility, including a breach
of debt service coverage ratio warranties.
8
<PAGE>
The components of the purchase price and its allocation to the assets
and liabilities are as follows:
<TABLE>
<S> <C>
Purchase Price:
Liabilities assumed.............................................. $ 986,044
Issuance of 595,238 restricted shares of common stock............ 2,500,000
--------------
3,486,044
Costs of acquisition incurred.................................... 1,645,874
Cash paid...................................................... 11,500,000
--------------
$16,631,918
==============
</TABLE>
The acquisition was accounted for as a purchase and the assets acquired
were recorded at a fair market value. The building and equipment are being
depreciated over twenty and three years, respectively, under the straight-line
method. The allocation of the purchase price was as follows:
<TABLE>
<S> <C>
Cash................................................................. $ 383,444
Inventory............................................................ 120,084
Prepaid expenses..................................................... 157,516
Land................................................................. 11,275,507
Building............................................................. 3,214,740
Equipment............................................................ 730,627
Deferred financing acquisition expenses.............................. 750,000
==============
$ 16,631,918
==============
</TABLE>
The assets acquired and liabilities assumed were transferred to either to
our wholly owned subsidiary, On Stage Theaters, Inc., or a wholly owned
subsidiary of On Stage Theaters, Inc., concurrent with the acquisition.
The unaudited pro-forma results of operations presented below reflect our
operations as though the acquisition had taken place at the beginning of each
period presented. The pro-forma results have been prepared for comparative
purposes only, and are not necessarily indicative of what the actual result of
operations would have been had such acquisitions occurred at the beginning of
the periods presented, or what results of operations will be in the future.
<TABLE>
<S> <C> <C>
Six months ended June 30,
--------------------------------------
1998 1999
----------------- --------------------
Revenues ...............................................$ 14,449,952 13,675,247
Operating income (loss)................................. 188,632 (102,848)
Net loss................................................ (175,298) (1,531,997)
Basic and diluted loss per share........................$ (0.04) (0.21)
Basic and diluted average number of common
Shares outstanding................................... 6,883,421 7,459,597
</TABLE>
9
<PAGE>
(6) Going Concern
The accompanying consolidated financial statements have been prepared
assuming that we will continue as a going concern which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the
financial statements do not purport to represent realizable or settlement
values. However, we have suffered recurring operating losses and have a working
capital deficit that impairs our ability to obtain additional financing. Our
auditors have included an explanatory paragraph in their report for the year
ended December 31, 1998, indicating that there is substantial doubt regarding
our ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of any uncertainty.
We have historically met our working capital requirements through a
combination of cash flow from operations, equity and debt offerings, and
traditional bank financing. We anticipate, based on our proposed plans and
assumptions relating to our operations that our current cash, cash equivalent
balances, anticipated revenues from operations are insufficient to fund our
ongoing operations.
On Stage intends to manage short-term liquidity concerns through the
renegotiation of our expired working capital line, capital leases and mortgage
facilities. We have either closed down or restructured any business units that
are not generating positive cash flow. In addition, we have lowered selling,
general and administrative costs as a percent of net revenues from 20.6% in the
six months ended June 30, 1998 to 15.2% in the six months ended June 30, 1999
and continue to downsize and restructure our selling, general and administrative
functions.
In addition, we are continuing our efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that we will be
able to secure additional capital or that if such capital is available, whether
the terms or conditions would be acceptable to us.
(7) Year 2000
We believe that our accounting and financial reporting systems are in full
compliance with Year 2000 preparedness. We have invested in the latest hardware
and software and have implemented standards that require Year 2000 compliance
from all vendors. We do not anticipate any problems in maintaining this
compliance in the future.
However, On Stage is continuing to assess Year 2000 preparedness, through
actively coordinating with vendors, creditors, and financial organizations to
prepare for possible repercussions of non-compliance. On Stage is also
undertaking exhaustive surveys in each of our geographic locations to further
determine preparedness. We have a full-time certified in-house management
information systems employee who has the authority to hire local computer
certification companies to visit each site and physically re-certify that each
machine, microprocessor and software program in use is Year 2000 compliant. We
have allocated $25,000 to complete our certification program and anticipate
completion by September 30, 1999.
10
<PAGE>
(8) Segment Information
The following tables set forth the segment profit/loss and asset
information.
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
<S> <C> <C> <C> <C>
-------------- -------------- ------------- ------------- ----------------
Total
Casino Production Theaters OSE Consolidated
-------------- -------------- ------------- ------------- ----------------
Revenues from external customers $4,498,359 $ - $ 7,470,708 $ - $ 11,969,067
Interest expense $ (33) $ - $ 432,713 $ 22,154 $ 454,834
Depreciation and amortization $ 96,048 $ 59 $ 200,230 $ 167,559 $ 463,896
Segment profit (loss) $ 964,534 $ (134,727) $ 74,541 $ (1,446,162) $ (541,814)
Segment assets $2,763,234 $ 740,828 $ 18,288,553 $ 1,641,129 $ 23,433,744
Additions to long-lived assets $ 241,897 $ 33,089 $ 2,155,928 $ 625,212 $ 3,056,126
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
<S> <C> <C> <C> <C>
-------------- -------------- ------------- ------------- ----------------
Total
Casino Production Theaters OSE Consolidated
-------------- -------------- ------------- ------------- ----------------
Revenues from external customers $4,848,049 $ 45,499 $ 8,781,699 $ - $ 13,675,247
Interest expense $ 27 $ 1,123 $ 1,323,694 $ 104,305 $ 1,429,149
Depreciation and amortization $ 185,583 $ 43,923 $ 280,397 $ 93,698 $ 603,601
Segment profit (loss) $1,246,182 $ (342,939) $ (1,092,935) $ (1,342,305) $ (1,531,997)
Segment assets $3,182,401 $ 775,783 $ 18,336,767 $ 1,861,576 $ 24,156,527
Additions to long-lived assets $ 20,091 $ - $ 22,447 $ - $ 42,538
</TABLE>
(9) Possible Delisting of Securities from the Nasdaq SmallCap Market
In order to continue to be listed on The Nasdaq SmallCap Market, On Stage
must maintain $2,000,000 in total assets, a $200,000 market value of the public
float and $1,000,000 in total capital and surplus. In addition, continued
inclusion requires two market-makers and a minimum bid price of $1.00 per share;
provided, however, that if On Stage falls below that minimum bid price, we will
remain eligible for continued inclusion on The Nasdaq SmallCap Market if the
market value of the public float is at least $1,000,000 and we have $2,000,000
in capital surplus. Our stock price has been below $1.00 per share for most of
1999. Nasdaq has recently proposed new maintenance criteria which, if
implemented, would eliminate the foregoing exception to the minimum bid price
requirement and require, among other things, $2,000,000 in net tangible assets,
$1,000,000 market value of the public float and adherence to certain governance
provisions.
On April 20, 1999, On Stage received a letter of inquiry from The Nasdaq
Stock Market, Inc. requesting that we submit a detailed letter describing our
plan to address the specific items that led to the issuance of "going concern"
opinion from our independent auditors. The letter further requested that we
discuss why we believe we will be able to sustain compliance with the continued
listing standards of Nasdaq. We were required to provide a responsive answer by
June 4, 1999, which we did. The failure to meet the maintenance criteria in the
future, and the failure to adequately assure Nasdaq that we will be able to meet
the listing criteria in the future, may result in the delisting of our
securities from The Nasdaq SmallCap Market. If this occurs, the trading,
11
<PAGE>
if any, in our securities would be conducted in the non-Nasdaq over-the-counter
market. As a result of such a delisting, an investor would find it more
difficult to dispose of, or to obtain accurate quotations as to the market value
of our securities.
On June 4, 1999, On Stage responded to the April 30, 1999, letter from
Nasdaq providing information regarding the auditors' "going concern" and On
Stage's growth strategy and the ability to comply with the continued listing
standards of The Nasdaq SmallCap Market.
On June 8, 1999, On Stage received a response letter from Nasdaq, pursuant
to which Nasdaq afforded On Stage ninety (90) days in which to raise its minimum
bid price to $1.00 or more for a minimum of ten (10) consecutive trading days.
In the event, we are unsuccessful in our attempt to accomplish this requirement,
our securities will be delisted at the opening of business on September 9, 1999.
(10) Downsizing and Restructuring
On April 30, 1999, the board of directors adopted a restructuring plan. The
restructuring plan focuses on four key areas:
o overhead reduction;
o debt restructuring;
o accounts payable rescheduling; and
o overall cost containment.
We have already implemented the initial phase of the plan by reducing
overhead by approximately $707,000 on an annualized basis. We also expect the
cost containment measures implemented to yield another $100,000 of annualized
savings, for a total savings of $807,000 for the two measures. Subsequent
overhead reductions were implemented by June 30, 1999. In addition to these
measures, we are also in the process of attempting to restructure our debts and
rescheduling payments of our accounts payable in order to maximize cash flow.
(11) Toronto Closing
Our Legends in Concert production opened at the Sheraton Centre Toronto
Hotel in May 1997. Unfortunately, for reasons discussed below, this Legends
production did not prove to be successful and was discontinued in April 1999
after generating an operating loss of $717,000 for the year ended December 31,
1998 and $264,000 for the four months ended April 1999. At December 31, 1998, On
Stage had an impairment of net assets associated with the Toronto show and wrote
off net assets of $409,000.
We believe that the operating performance of Legends at the Sheraton Centre
Toronto Hotel suffered from inadequate sales and marketing resulting in less
than optimal ticket sales in the start-up phase of the production. The lower
than anticipated revenue levels, combined with high indirect production costs
associated with the "four wall" costs structure resulted in the losses.
12
<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 potential new show openings, the potential markets for
On Stage's productions, the expansion of existing and potential gaming and
tourist markets, our exposure to various trends in the gaming industry, our
acquisition plans and the benefits we anticipate from these acquisitions, our
business strategy, our outstanding litigation matters and the defenses available
to us, the seasonality of our business, and liquidity issues, as well as
information contained elsewhere in this report where current statements are
preceded by, followed by or include the words "believes," "expects,"
"anticipates" or similar expressions. For these statements, On Stage 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 the 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 On Stage from achieving our
goals--and cause the assumptions underlying the forward-looking statements and
the actual results to differ materially from those expressed in or implied by
those forward-looking statements include the information provided under the
heading "Description of Business-Risk Factors" in Item 1 of our Annual Report on
Form 10-KSB for the year ended December 31, 1998, as well as the following:
o On Stage's dependence on our flagship Legends in Concert production and our
principal production venues;
o The ability to successfully produce and market new productions and to
manage the growth associated with the any new productions;
o Risks associated with our acquisition strategy, including our ability to
successfully identify, complete and integrate strategic acquisitions;
o The ability to meet our commitments under our credit facilities, which are
currently in default, and to obtain alternative, additional financing on
commercially reasonable terms;
o The ability to continue as an ongoing concern;
o The competitive nature of the leisure and entertainment industry and the
ability to continue to distinguish our services;
o Fluctuations in quarterly operating results and the highly seasonal nature
of our business;
o The ability to reproduce the performance, likeness and voice of various
celebrities without infringing on the publicity rights of those celebrities
or their estates, as well as our ability to protect our intellectual
property rights;
o The ability to successfully manage the litigation pending against us and to
avoid future litigation;and
o The results of operations which depend on numerous factors, including the
commencement and expiration of contracts, the timing and amount of new
business generated by us, our revenue mix, the timing and level of
additional selling, general and administrative expense and the general
competitive conditions in the leisure and entertainment industry as well as
the overall economy.
13
<PAGE>
Results of Operations
The following tables set forth, the results of operations for the
reportable segments indicated:
<TABLE>
<CAPTION>
For the quarter ended June 30, 1998
<S> <C> <C> <C> <C> <C> <C>
-------------- ------------- -------------- --------------- ---------------- ---------------
Sub-Total
Operating Total
Casino Production Theaters Segments OSE Consolidated
-------------- ------------- -------------- -------------- --------------- --------------
Net revenues............. $ 2,420,165 $ - $ 5,824,416 $ 8,244,581 $ - $ 8,244,581
Cost of revenues......... 1,601,519 94,711 4,770,233 6,466,463 - 6,466,463
-------------- ------------- -------------- -------------- --------------- --------------
Gross profit (loss)...... 818,646 (94,711) 1,054,183 1,778,118 - 1,778,118
Selling, general &
administrative........... 230,948 - 338,280 569,228 507,525 1,076,753
Depreciation &
amortization............ 54,898 59 183,043 238,000 91,939 329,939
-------------- ------------- -------------- -------------- --------------- --------------
Operating income (loss). 532,800 (94,770) 532,860 970,890 (599,464) 371,426
Interest expense, net... (13) - 369,337 369,324 15,190 384,514
-------------- ------------- -------------- -------------- --------------- --------------
Net income (loss)....... $ 532,813 $ (94,770) $ 163,523 $ 601,566 $ (614,654) $ (13,088)
============== ============= ============== ============== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
For the quarter ended June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
-------------- ------------- ------------- --------------- --------------- ---------------
Sub-Total
Operating Total
Casino Production Theaters Segments OSE Consolidated
-------------- ------------- ------------- -------------- --------------- --------------
Net revenues.......... $ 2,274,856 $ 26,929 $ 5,101,223 $ 7,403,008 $ - $ 7,403,008
Cost of revenues...... 1,437,970 170,628 3,770,726 5,379,324 - 5,379,324
-------------- ------------- ------------- -------------- --------------- --------------
Gross profit (loss)... 836,886 (143,699) 1,330,497 2,023,684 - 2,023,684
Selling, general &
administrative........ 132,112 - 425,132 557,244 478,708 1,035,952
Depreciation &
amortization.......... 86,204 22,029 199,724 307,957 45,577 353,534
Restructuring charges 10,000 - 113,359 123,359 139,434 262,793
-------------- ------------- ------------- -------------- --------------- --------------
Operating income (loss). 608,570 (165,728) 592,282 1,035,124 (663,719) 371,405
Interest expense, net.. 27 - 966,804 966,831 53,007 1,019,838
-------------- ------------- ------------- -------------- --------------- --------------
Net income (loss)...... $ 608,543 $ (165,728) $ (374,522) $ 68,293 $ (716,726) $ (648,433)
============== ============= ============= ============== =============== ==============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1998
<S> <C> <C> <C> <C> <C> <C>
-------------- ------------- -------------- --------------- ---------------- ---------------
Sub-Total
Operating Total
Casino Production Theaters Segments OSE Consolidated
-------------- ------------- -------------- --------------- ---------------- ---------------
Net revenues.......... $ 4,498,359 $ - $ 7,470,708 $ 11,969,067 $ - $ 11,969,067
Cost of revenues...... 2,922,840 126,260 6,081,637 9,130,737 - 9,130,737
-------------- ------------- -------------- --------------- ---------------- ---------------
Gross profit (loss)... 1,575,519 (126,260) 1,389,071 2,838,330 - 2,838,330
Selling, general &
administrative........ 514,970 8,408 681,587 1,204,965 1,256,449 2,461,414
Depreciation &
amortization.......... 96,048 59 200,230 296,337 167,559 463,896
-------------- ------------- -------------- --------------- ---------------- ---------------
Operating income (loss). 964,501 (134,727) 507,254 1,337,028 (1,424,008) (86,980)
Interest expense, net... (33) - 432,713 432,680 22,154 454,834
-------------- ------------- -------------- --------------- ---------------- ---------------
Net income (loss)....... $ 964,534 $ (134,727) $ 74,541 $ 904,348 $ (1,446,162) $ (541,814)
============== ============= ============== =============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
<S> <C> <C> <C> <C> <C> <C>
-------------- ------------- -------------- --------------- ----------------- --------------
Sub-Total
Operating Total
Casino Production Theaters Segments OSE Consolidated
-------------- ------------- -------------- --------------- ----------------- --------------
Net revenues.......... $ 4,848,049 $ 45,499 $ 8,781,699 $ 13,675,247 $ - $ 13,675,247
Cost of revenues...... 3,082,748 343,392 7,403,693 10,829,833 - 10,829,833
-------------- ------------- -------------- --------------- ----------------- --------------
Gross profit (loss)... 1,765,301 (297,893) 1,378,006 2,845,414 - 2,845,414
Selling, general &
administrative........ 323,509 - 753,491 1,077,000 1,004,868 2,081,868
Depreciation &
amortization.......... 185,583 43,923 280,397 509,903 93,698 603,601
Restructuring charges. 10,000 - 113,359 123,359 139,434 262,793
-------------- ------------- -------------- --------------- ----------------- --------------
Operating income (loss). 1,246,209 (341,816) 230,759 1,135,152 (1,238,000) (102,848)
Interest expense, net... 27 1,123 1,323,694 1,324,844 104,305 1,429,149
-------------- ------------- -------------- --------------- ----------------- --------------
Net income (loss)....... $ 1,246,182 (342,939) (1,092,935) (189,692) (1,342,305) (1,531,997)
============== ============= ============== =============== ================= ==============
</TABLE>
15
<PAGE>
Quarter Ended June 30, 1998 versus Quarter Ended June 30, 1999
Net Revenues. Revenues decreased by $841,000 or 10.2% to $7,403,000 for the
quarter ended June 30, 1999 compared to $8,244,000 for the quarter ended June
30, 1998. Our revenue is derived from five principal operating segments:
Casinos, Events, Merchandise, Production Services, and Theaters. Revenues from
Events are included in the Casino segment. Revenues from Merchandise are
included in the Theaters segment.
Casinos revenues were approximately $2,275,000 for the quarter ended June
30, 1999 compared to $2,420,000 for the quarter ended June 30, 1998, a decrease
of $145,000, or 6.0%. Contributing to this decrease were decreases in revenues
primarily attributable to limited engagements and corporate events. These
decreases were partially offset by increases in revenue at the Legends show at
the Imperial Palace and Casino in Las Vegas, Nevada, the addition of new shows
at The River Palms Resort and Casino in Laughlin, Nevada and The Showboat in
Atlantic City, New Jersey.
Production Services revenues were approximately $27,000 for the quarter
ended June 30, 1999 compared to $0 for the quarter ended June 30, 1998. The
increase was attributable to equipment rentals.
Theaters revenues were approximately $5,101,000 for the quarter ended June
30, 1999 compared to $5,824,000 for the quarter ended June 30, 1998, a decrease
of $723,000, or 12.4%. This decrease was primarily attributable to decreases in
revenues generated by On Stage's dinner theaters, the discontinuation of the
Legends shows at the Estrel Residence & Congress Hotel in Berlin, Germany and at
the Sheraton Centre Hotel in Toronto, Canada. These decreases were partially
offset by increases in revenues at the Legends show in Branson, Missouri and
rental income derived from The Eddie Miles Theater.
Costs of Revenues. Total costs of revenues were $5,379,000 for the quarter
ended June 30, 1999 compared to $6,466,000 for the quarter ended June 30, 1998,
a decrease of $1,087,000, or 16.8%. Costs of revenues decreased to 72.7% of net
revenues for the quarter ended June 30, 1999, as compared to 78.4% for the
quarter ended June 30, 1998. This decrease in cost of sales as a percentage of
revenues was primarily attributable to a change in the mix of our revenues.
Selling, General and Administrative. Selling, general and administrative
costs were approximately $1,036,000 for the quarter ended June 30, 1999 as
compared to $1,077,000 for the quarter ended June 30, 1998, a decrease of
$41,000, or 3.8%. This is primarily attributable to our reduction of overhead
associated with On Stage discontinued "roll-out" strategy. Selling, general and
administrative costs increased to 14.0% of net revenues for the quarter ended
June 30, 1999, as compared to 13.1% for the quarter ended June 30, 1998.
Depreciation and Amortization. Depreciation and amortization for the
quarter ended June 30, 1999 increased by $24,000, or 7.2%, as compared to the
quarter ended June 30, 1998. The increase was primarily due to capital additions
to current shows and new shows.
Restructuring Charges. Restructuring charges represents expenses related to
the closing of the Legends show in Toronto, Canada, payment of
employment-related severance and termination benefits, legal expenses, and
relocation expenses of a key executive.
Operating Income. Our operating income was approximately $371,000 for the
quarter ended June 30, 1999, compared to an operating income of $371,000 for the
quarter ended June 30, 1998.
Interest Expense, Net. Interest expense for the quarter ended June 30, 1999
increased by $635,000, or 165.3% as compared to the quarter ended June 30, 1998.
The increase was primarily due to interest accrued on the Imperial Credit debt,
together with penalties and default interest rates.
Income Taxes. On Stage 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. We have not accrued any federal income tax for the quarter
ended June 30, 1998. At June 30, 1998 and 1999, we had federal net operating
loss carryforwards of approximately $4,339,000 and $7,907,190 respectively.
Under Section 382 of the Internal Revenue Code, certain significant changes in
ownership that On Stage is currently undertaking may restrict the future
utilization of these tax loss carryforwards. The net deferred tax assets have a
100% valuation allowance, as management cannot determine if it is more likely
than not that the deferred tax assets will be realized.
16
<PAGE>
Six Months Ended June 30, 1998 versus Six Months Ended June 30, 1999
Net Revenues. Revenues increased by $1,706,000 or 14.3 % to $13,675,000 for
the six months ended June 30, 1999 compared to $11,969,000 for the six months
ended June 30, 1998. Our revenue is derived from five principal operating
segments: Casinos, Events, Merchandise, Productions and Theaters. Revenues from
Events are included in the Casino segment. Revenues from Merchandise are
included in the Theaters segment.
Casinos revenues were approximately $4,848,000 for the six months ended
June 30, 1999 compared to $4,498,000 for the six months ended June 30, 1998, an
increase of $350,000, or 7.8%. Contributing to this increase were increases in
revenues generated at the Legends show at the Imperial Palace and Casino in Las
Vegas, Nevada, the addition of new shows at the River Palms Resort and Casino in
Laughlin, Nevada, Taj Mahal Hotel and Casino, Hilton Hotel and Casino and
Atlantic City Showboat.
Production Services revenues were approximately $45,000 for the six months
ended June 30, 1999 compared to $0 for the six months ended June 30, 1998. The
increase was attributable to equipment rentals.
Theaters revenues were approximately $8,782,000 for the six months ended
June 30, 1999 compared to $7,471,000 for the six months ended June 30, 1998, an
increase of $1,311,000, or 17.6%. This increase was primarily attributable to
the fact that the dinner theaters acquired as a result of the Gedco asset
acquisition were given a full six (6) month results of operations in 1999,
compared to only 4.5 months results of operations during the first six months of
1998.
Costs of Revenues. Total costs of revenues were $10,830,000 for the six
months ended June 30, 1999 compared to $9,131,000 for the six months ended June
30, 1998, an increase of $1,699,000, or 18.6%. Costs of revenues increased to
79.2% of net revenues for the six months ended June 30, 1999, as compared to
76.3% for the six months ended June 30, 1998. This increased in cost of sales as
a percentage of revenues was primarily attributable to a change in the mix of
our revenues due to the inclusion of the dinner theaters revenues, which have
higher costs of revenues than our other business segments.
Selling, General and Administrative. Selling, general and administrative
costs were approximately $2,082,000 for the six months ended June 30, 1999 as
compared to $2,461,000 for the six months ended June 30, 1998, a decrease of
$379,000, or 15.4%. Selling, general and administrative costs decreased to 15.3%
of net revenues for the six months ended June 30, 1999, as compared to 20.6% for
the six months ended June 30, 1998. This is primarily attributable to our
reduction of overhead associated with On Stage's discontinued "roll-out"
strategy.
Depreciation and Amortization. Depreciation and amortization for the six
months ended June 30, 1999 increased by $140,000, or 30.2%, as compared to the
six months ended June 30, 1998. The increase was primarily due to capital
additions to current shows, new shows, and an increase in assets as a result of
the Gedco asset acquisition.
Restructuring Charges. Restructuring charges represents expenses related to
the closing of the Legends show in Toronto, Canada, payment of
employment-related severance and termination benefits, legal expenses, and
relocation expenses of a key executive.
17
<PAGE>
Operating Loss. On Stage's operating loss was approximately $103,000 for
the six months ended June 30, 1999, compared to an operating loss of $87,000 for
the six months ended June 30, 1998, an increase of $16,000, or 18.4%.
Interest Expense, Net. Interest expense for the six months ended June
30,1999 increased by $974,000, or 214.2% as compared to the six months ended
June 30, 1998. The increase was primarily due to interest accrued on the
Imperial Credit debt, together with penalties and default interest rates.
Income Taxes. On Stage 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. We have not accrued any federal income tax for the six months
ended June 30, 1998. At June 30, 1998 and 1999, we had federal net operating
loss carryforwards of approximately $4,339,000 and $7,907,190 respectively.
Under Section 382 of the Internal Revenue Code, certain significant changes in
ownership that On Stage is currently undertaking may restrict the future
utilization of these tax loss carryforwards. The net deferred tax assets have a
100% valuation allowance, as management cannot determine if it is more likely
than not that the deferred tax assets will be realized.
Seasonality and Quarterly Results
On Stage's business has been, and is expected to remain, highly seasonal,
with the majority of our revenue being generated during the months of April
through October. Part of our business strategy is to increase sales in tourist
markets that experience their peak seasons from November through March, so as to
offset this seasonality in revenues.
The following table sets forth On Stage's net revenue for each of the last
ten quarters ended June 30, 1999:
<TABLE>
<CAPTION>
Net Revenues ($ in thousands)
<S> <C> <C> <C> <C>
March 31, June 30, September 30, December 31,
Fiscal 1997................. $ 2,719 $ 3,979 $ 5,071 $ 3,957
Fiscal 1998................. $ 3,724 $ 8,245 $ 8,059 $ 7,819
Fiscal 1999................. $ 6,272 $ 7,403
</TABLE>
Liquidity and Capital Resources
General
We have historically met our working capital requirements through a
combination of cash flow from operations, equity and debt offerings and
traditional bank financing. We anticipate, based on our proposed plans and
assumptions relating to our operations, that our current cash, cash equivalent
balances, anticipated revenue from operations and our working capital line are
insufficient to fund our ongoing operations.
On Stage intends to manage short-term liquidity concerns through the
renegotiations of our expired working capital line, capital leases and mortgage
facilities. We have either closed down or restructured any business units that
were not generating positive cash flow. In addition, we have lowered selling,
general and administrative expenses as a percentage of net revenues from 20.6%
for the six months ended June 30, 1998 to 15.2% for the six months ended in June
30, 1999 and continues to downsize and restructure our selling, general and
administrative functions.
18
<PAGE>
In addition, we are continuing our efforts to secure working capital for
operations, expansion and possible acquisitions, mergers, joint ventures, and/or
other business combinations. However, there can be no assurance that we will be
able to secure additional capital or that if such capital is available, whether
the terms or conditions would be acceptable to us.
For the six months ended June 30, 1998, On Stage had net cash deficit used
by operations of approximately $1,413,000. As of June 30, 1998, On Stage had
approximately $1,100,000 in cash and cash equivalents. For the six months ended
June 30, 1999, On Stage had net cash deficit used by operations of approximately
$325,000. As of June 30, 1999, On Stage had approximately $466,000 in cash and
cash equivalents. The operating deficits for both periods were primarily
attributable to pre-opening costs for new shows and business seasonality.
The net cash used in investing activities for the six months ended June 30,
1998 of $13,989,000 was primarily attributable to direct acquisition costs
related to the Gedco asset acquisition. The net cash used in investing
activities for the quarter ended June 30, 1999 of $59,000, was primarily
attributable to capital expenditures.
Net cash provided by financing activities for the six months ended June 30,
1998 of $14,166,000, was attributable to Imperial Credit's funding of
$12,500,000 for the Gedco asset acquisition. Net cash provided by financing
activities for the six months ended June 30, 1999 of $75,000 was primarily
attributable to notes payable from officer and the issuance of common stock,
offset by repayment of long-term borrowing and repayment under working capital
lines.
Working Capital
At June 30, 1998, we had a working capital of approximately $112,000
primarily attributable to the pre-opening costs of new shows. At June 30, 1999,
we had working capital deficit of approximately $17,927,000 which resulted
primarily from an increase in the accrued expenses, accrued payroll and other
liabilities, notes payable to officer, and the default and concurrent
acceleration of our lease lines and loan from First Security Bank and Imperial
Credit to current liabilities. Because of the recurring losses, the working
capital deficit and the loan defaults, our auditors issued a going concern
opinion for the year ended December 31, 1998.
Working Capital Line
In May 1997, First Security Bank of Nevada issued a line of credit to us
for up to $250,000. Borrowings under this line of credit bear variable interest
at 1.5% over the First Security Bank of Idaho's index 10% per year as of the
facility's inception--and are due on demand. John W. Stuart has personally
guaranteed this line of credit.
On March 28, 1998, First Security agreed to increase this line of credit
from $250,000 to $1,000,000 and the expiration date was extended to March 25,
1999. As of December 31, 1998, On Stage had drawn $1,000,000 on the line of
credit. As of March 31, 1999, On Stage had failed to pay off any part of the
line of credit and is in default under its terms.
Capital Equipment Financing Commitment
On September 29, 1997, First Security Leasing Company, a Utah corporation,
approved On Stage for a $1,000,000 lease line of credit. Advances under the
lease line incur interest at a rate of 9.75% per annum. The lease line has been
utilized in the following amounts: $389,290, $442,997 and $167,713, commencing
in April 1998 and May 1998, respectively, and terminating on October 2001,
September 2001 and November 2001.
19
<PAGE>
Mortgage Financing Commitment
On March 13, 1998, Imperial Credit Commercial Mortgage Investment
Corporation signed an agreement with On Stage to fund up to $20,000,000 of
mortgage financing. On the same day, On Stage used $12,500,000 of the facility
to fund the cash portion of the Gedco asset acquisition and related fees. On
June 30, 1998, On Stage used an additional $1,100,000 to fund the cash portion
of the purchase of a fee simple interest in the Legends Theater in Surfside
Beach, South Carolina, and the purchase of a leasehold interest in the Eddie
Miles Theater in North Myrtle Beach, South Carolina. On October 7, 1998, On
Stage used an additional $550,000 for working capital purposes. The initial
$12,500,000 loan and the subsequent $1,650,000 in loans extended by Imperial
Credit to On Stage under the mortgage financing facility currently bear interest
at the rate of 9.06% and 9.9%, respectively. In addition, On Stage granted
Imperial Credit and related entity warrants to purchase an aggregate of 575,000
shares of common stock at an exercise price of $4.44 per share. In consideration
for Imperial Credit's October 7, 1998 funding of $550,000, On Stage reset the
strike price on 325,000 of the Imperial Credit warrants from $4.44 to $1.25 per
share.
Existing Defaults Under Credit Facilities
As of March 31, 1999, On Stage had failed to pay off any part of the line
of credit with First Security and is in default under its terms. On April 29,
1999, we received a notice of default under the line of credit from First
Security. Our default on the line of credit with First Security caused an
automatic default on our lease line with First Security Leasing due to a
cross-default provision contained in the line of credit. While we are
negotiating with First Security and First Security Leasing to convert the line
of credit and lease line into term loan facilities, there can be no assurance
that we will be successful in accomplishing this task. Additionally, on July 12,
1999, First Security Bank filed a complaint on behalf of First Security and
First Security Leasing against On Stage demanding repayment under the line of
credit and lease lines.
On May 28, 1999, we issued a press release announcing that we had received
notice of default from Imperial Credit. The notice of default was received May
24, 1999. We are currently negotiating with Imperial Credit to cure the default
through a continuation of our restructuring to improve cash flow and a
restructuring of our debt. There can be no assurance that we will be able to
cure the default, effect an appropriate restructuring or develop an alternative
financing strategy.
In the event that First Security, First Security Leasing or Imperial
Credit, initiates foreclosure action against us or our assets, all or a portion
of our property and assets securing the credit facilities and mortgage financing
extended by those lenders may be sold to satisfy our commitments under the terms
of those facilities. We intend to renegotiate the terms of our credit
facilities, to obtain extensions of the terms of those facilities and to seek
alternative additional financing, there can be no assurance that our efforts
will be successful.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 28, 1998, Silver State Property Management, a Nevada corporation,
Roger A. Bergmann Enterprises, a Nevada corporation, and R.E. Lyle Corp., a
Nevada corporation filed a complaint in the Second Judicial District Court of
the State of Nevada, County of Washoe, alleging, among other things, that John
W. Stuart, acting as an agent, chairman of the board and chief executive officer
of On Stage, breached an alleged oral agreement to purchase the Plaintiff's
respective interests in the Legends in Concert production in Hawaii for an
aggregate purchase price of $1,000,000. The case is currently in the discovery
stage of litigation and the matter has been set for trial on September 20, 1999.
On July 12, 1999, First Security Bank of Nevada filed a complaint against
On Stage, its' subsidiaries and John W. Stuart in the District Court of Nevada
in Clark County, Nevada. The complaint alleges that On Stage has breached its'
contract with First Security by refusing to repay our outstanding indebtedness
to First Security Bank and First Security Leasing. The Complaint prays for
repayment of the matured loan and lease lines in the amount of approximately
$1,955,998, together with interest, attorneys' fees and costs associated
therewith. Additionally, the Complaint seeks to enforce the personal guaranty of
John W. Stuart to repay $1,000,000 of this outstanding balance and prays for
writs of garnishment and attachments of On Stage's personal property. On Stage
has recently filed its' answer to this complaint.
On August 2, 1999, Hemisphere Tour & Travel, Inc., n/k/a HT&T, Inc.,
Richard Winokur, Media Corp. of America and Stephen Zadrick filed a complaint
against On Stage and Gedco USA, Inc. in the Circuit Court of the Ninth Judicial
Circuit in and for Orange County, Florida. The complaint alleges that
representatives from On Stage and Gedco breached an oral contract with
plaintiffs to pay them a commission in connection with the Gedco asset
acquisition. More specifically, the plaintiffs allege that had it not been for
their introduction of Gedco and On Stage, the parties would never have
consummated the Gedco asset acquisition. On Stage is currently preparing an
answer to this complaint.
Item 2. Changes in Securities and Use of Proceeds.
On February 23, 1999, On Stage entered into a Common Stock Purchase
Agreement with Richard S. Kanfer, effectively unwinding the November 1996
acquisition of Interactive Events, Inc. Under the Interactive Re-Conveyance, On
Stage re-conveyed all of the assets of Interactive to Kanfer in consideration
for Kanfer's re-conveyance of the 30,304 shares of On Stage's common stock
valued at $1.125 per share, issued to Kanfer during On Stage's original
acquisition of Interactive along with the cancellation of a non-plan option to
purchase 15,000 shares of common stock and incentive stock options to purchase
19,835 shares of common stock at a price of $5.00 per share. In addition, the
parties agreed to release one another from any liability arising out of the
acquisition of Interactive by On Stage and any claim relating to Kanfer's
subsequent employment with us. Kanfer also entered into an exclusive right of
representation agreement with us in February 1999, under which we granted to
Kanfer the right to represent our Legends production in designated areas in
consideration for a portion of the gross proceeds generated by that
representation.
On April 23, 1999, On Stage granted it securities counsel, Nida & Maloney,
P.C. an option to purchase 40,000 shares of common stock at a purchase price of
$1.00 per share as payment for $38,469 in legal services performed for On Stage
by Nida & Maloney, P.C. The securities were issued under the exception from
registration provided by Section 4 (2) of the Securities Act.
On May 7, 1999, On Stage issued 8,471 shares of common stock valued at
$1.06 per share to Jim Owen, a former performer with On Stage. These shares were
issued in connection with the resolution of litigation that arose several years
ago between On Stage and Owen with regard to the right to the use of certain
photographs taken of Owen by On Stage. The securities were issued under the
exception from registration provided by Section 4 (2) of the Securities Act.
21
<PAGE>
On May 27, 1999, Hanover Restaurants, Inc. returned 595,238 shares of On
Stage common stock originally issued to Hanover in connection with the Gedco
asset acquisition. The Hanover shares were returned to On Stage under to the
terms of a Mutual Release and Settlement Agreement, which was entered into by
and between On Stage and Gedco as a result of a dispute that arose in connection
with the Gedco asset acquisition. In exchange for the return of the Hanover
shares, On Stage: (1) granted Hanover a warrant to purchase 595,238 shares of
common stock at a purchase price of $1.50; and (2) released its claim to
approximately $925,000 which was being held in escrow as security for those
representations and warranties made by Gedco representatives in connection with
the Gedco asset acquisition.
Item 3. Defaults Upon Senior Securities.
On May 24,1999, On Stage received a notice of default from Imperial
Commercial Credit and Investment Corporation, the first mortgage lender on On
Stage's dinner theaters in Florida and California and its theatrical venues in
the greater Myrtle Beach, South Carolina are. See additional information as
filed on Form 8-K dated May 28, 1999.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
On May 24,1999, On Stage filed Form 8-K regarding the notice of default On
Stage received from Imperial Credit Commercial Mortgage Investment Corporation.
On July 12,1999 On Stage filed Form 8-K regarding the resignation of David
Hope, On Stage's President and Chief Operating Officer.
22
<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: August 16, 1999 /s/ John W. Stuart
-----------------------------------
John W Stuart
Chairman and Chief Executive
Officer
Date: August 16, 1999 /s/ Pedro Perez
------------------------------------
Pedro Perez
Chief Accounting Officer
23
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements set forth in the Form 10-QSB On Stage Entertainment, Inc.
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
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<NAME> On Stage Entertainment, Inc.
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
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<CASH> 466
<SECURITIES> 0
<RECEIVABLES> 1073
<ALLOWANCES> 0
<INVENTORY> 248
<CURRENT-ASSETS> 2894
<PP&E> 24157
<DEPRECIATION> 5021
<TOTAL-ASSETS> 23013
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<BONDS> 540
0
0
<COMMON> 70
<OTHER-SE> 1582
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<SALES> 13675
<TOTAL-REVENUES> 13675
<CGS> 6501
<TOTAL-COSTS> 10830
<OTHER-EXPENSES> 2948
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1429
<INCOME-PRETAX> (1532)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1532)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1532)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
