SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number 33-39263-NY
March 31, 1996
CABARET ROYAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2993070
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
PO Box 794183
Dallas, Texas 75379-4183
(972) 866-8366
(Principal Executive Offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
COMMON STOCK, PAR VALUE $0.001 7,298,854 SHARES
- ------------------------------ ----------------
Class Outstanding at March 31, 1996
<PAGE>
CABARET ROYALE CORPORATION
FORM 10-QSB
INDEX
Page
----
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Balance Sheets -
March 31, 1996 and December 31, 1995 3
Condensed Statements of Operations -
Three Months Ended March 31, 1996 and 1995 4
Condensed Statement of Changes in
Stockholders' Equity - Three Months Ended
March 31, 1996 5
Condensed Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION AND SIGNATURES
- ------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Signatures
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<PAGE>
CABARET ROYALE CORPORATION
FORM 10-QSB
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
March 31, 1996 and December 31, 1995
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 202 $ 1,469
A/R - affiliate 56,583 68,094
Prepaid expenses 682 682
Current portion of note receivable 64,813 64,813
Other note receivable 200,440 200,440
Federal tax refund 3,409 3,409
------------ ------------
Total current assets 326,129 338,907
Note receivable, net of current portion 1,330,656 1,346,733
--------- ---------
$ 1,656,785 $ 1,685,640
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,977 $ 44,977
Accrued payroll 393,000 378,000
Accrued interest 485,501 428,802
Current portion of long-term debt 64,813 64,813
Bridge financing notes payable 2,835,000 2,835,000
Other notes payable 63,633 63,633
----------- -----------
Total current liabilities 3,886,924 3,815,225
--------- ---------
Notes payable, net of current portion 1,330,656 1,346,733
--------- ---------
Stockholders' equity:
Common stock; $.001 par; 60,000,000
shares authorized, 7,298,854 outstanding 7,299 7,299
Additional paid-in capital 5,308,572 5,308,572
Retained earnings (8,876,666) (8,792,189)
--------- ---------
Total stockholders' equity (3,560,795) (3,476,318)
--------- ---------
$ 1,656,785 $ 1,685,640
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE>
CABARET ROYALE CORPORATION
Condensed Statements of Operations
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
---------- -------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Rental income $ - $ 127,942
Franchise fees - 30,934
---------------- ------------
- 158,876
---------------- -----------
Operating costs and expenses:
General and administrative expenses 30,430 197,106
Depreciation and amortization - 67,774
--------------- ------------
30,430 264,880
----------- -----------
Operating income (loss) ( 30,430) ( 106,004)
---------- -----------
Other income (expenses):
Miscellaneous income 4 1,719
Interest income 39,883 -
Interest expense ( 93,934) ( 94,928)
Gain on sale of fixed assets - 11,151
-------------- -----------
( 54,047) ( 82,058)
---------- -----------
Income (loss) from continuing operations ( 84,477) ( 188,062)
Gain from disposal of CAT Entertainment
a discontinued operation - 3,802,482
-------------- ---------
Net income (loss) $ ( 84,477) $ 3,614,420
========== =========
Income (loss) per share (Note 3) $ ( .01) $ ( .50)
============= =============
Weighted average shares outstanding 7,298,854 7,298,854
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE>
CABARET ROYALE CORPORATION
Condensed Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
March 31, 1996
(Unaudited)
Common stock
Number Additional Total
of paid-in Retained stockholders'
shares Amount capital earnings equity
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 7,298,854 $ 7,299 $ 5,308,572 $ (8,792,189) $ (3,476,318)
Net income (loss) - - - ( 84,477) ( 84,477)
-------------- -------- ----------- ----------- -----------
Balance at March 31, 1996 7,298,854 $ 7,299 $ 5,308,572 $ (8,876,666) $ (3,560,795)
========= ===== ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE>
CABARET ROYALE CORPORATION
Condensed Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Three months ended
March 31,
1996 1995
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ ( 84,477) $ (188,062)
Noncash revenues, expenses, gains and
losses included in net income (loss):
Depreciation and amortization - 67,775
Gain on sale of fixed assets - ( 11,151)
Changes in assets and liabilities:
Prepaid expenses 603
Accounts receivable 11,511 16,879
Accounts payable - 21,908
Accrued expenses 71,699 157,839
Other notes payable - 961
--------------- -------------
Net cash provided by (used in) continuing operations ( 1,267) 66,752
------------ -----------
Gain from discontinued operation - 3,802,482
Net adjustments to reconcile gain from discontinued
operations to cash used in discontinued operations - (3,811,945)
--------------- ---------
Net cash used in discontinued operation - ( 9,463)
--------------- ------------
Net cash provided from operations 57,289
Net cash provided by (used in) financing activities:
Payment of mortgages and notes payable - ( 13,405)
--------------- ----------
Net cash provided by (used in) financing activities - ( 13,405)
--------------- ----------
Net increase (decrease) in cash
and cash equivalents ( 1,267) 43,884
Cash and cash equivalents - beginning of period 1,469 ( 69,412)
------------ ----------
Cash and cash equivalents - end of period $ 202 $ ( 25,528)
============ ==========
Supplemental information:
Interest paid $ - $ 39,005
============== ==========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE>
1. CONDENSED FINANCIAL STATEMENTS
The condensed financial statements included herein have been prepared by the
Company and are unaudited. Certain information and footnote disclosures normally
include in financial statements prepared in accordance with generally accepted
accounting principles may have been condensed or omitted. Management believes
the disclosures are adequate to prevent the financial information from being
misleading and believes all adjustments deemed necessary for a fair presentation
of the financial position and operating results for the interim period have been
reflected. Operating results through March 31, 1996, are not necessarily
indicative of operating results for the year ending December 31, 1996.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these condensed financial
statements be read in conjunction with the annual report on Form 10-KSB filed
with the Securities and Exchange Commission.
The December 31, 1995 Condensed Balance Sheet and related notes thereto were
derived from the December 31, 1995 audited Balance Sheet and Notes to the
financial statements. On February 21, 1997, the Company's auditors issued an
unqualified opinion (including an emphasis paragraph) on the fairness of those
financial statements.
2. ORGANIZATION AND BUSINESS OPERATIONS
Exceptional Enterprises Inc. (Exceptional) was organized to acquire interests in
business opportunities and engage in and provide financial and management
services to those businesses.
Walhill Partners, Ltd. (Walhill) a Texas limited partnership, was formed for the
purpose of owning a restaurant, bar and club facility in Dallas, Texas.
Walhill's operations consisted of leasing the facility to an affiliated company
which operated under the name Cabaret Royale.
On September 30, 1993, Exceptional acquired the assets and assumed the
liabilities of Walhill and acquired the "Cabaret Royale" trade names and
trademarks from Cabaret Royale Corporation, a Texas corporation. Subsequent to
the acquisition, Exceptional changed its name to Cabaret Royale Corporation. The
acquisition of Walhill by Exceptional was accounted for as a reverse
acquisition. Under the reverse acquisition, Walhill was effectively the acquirer
of Exceptional.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation policy - The Company's policy is to consolidate the accounts of
Cabaret Royal Corporation and all majority owned subsidiaries under control of
the parent company ("the Company"). At December 31, 1994 and for the year then
ended the accounts of CAT Entertainment ("CAT"), a wholly owned subsidiary, were
consolidated since at that date the Company had control of CAT. In January, 1995
CAT filed a chapter 11 bankruptcy petition under the Federal Bankruptcy Code was
sold to a third party and subsequently liquidated under Chapter 7 of the Federal
Bankruptcy Code (see Note 9). Consequently, subsequent to January 1, 1995 CAT is
not consolidated.
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<PAGE>
Cabaret Royale Corporation
Notes to Condensed Financial Statements
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Cash equivalents - For purposes of the statement of cash flows, the Company
considers all short-term investments with original maturities of three months or
less to be cash equivalents.
Income taxes - In the event differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities result in deferred tax
assets, generally accepted accounting principles requires an evaluation of the
probability of being able to realize the future benefits indicated by such
assets. A valuation allowance is provided for a portion or all of the deferred
tax assets when there is an uncertainty regarding the Company's ability to
recognize the benefits of the assets in future years.
Loss per share - Per share information is computed using weighted average common
and common equivalent shares outstanding during the respective periods. Warrants
are common stock equivalents, however, they are not included in the computation
of loss per common share since the effect would be anti-dilutive.
4. BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern; they do not include any adjustments that may
be necessary relating to the amounts, classification and recoverability of
recorded asset amounts and amounts and classification of recorded liabilities.
The going concern basis might not be appropriate since the Company has incurred
substantial operating losses in 1996 and 1995 and as of March 31, 1996, current
liabilities exceed current assets and the Company is in default on various note
payable agreements.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to develop profitable operations and obtain additional equity
or long-term debt financing. With the sale of the Dallas facility and the
decline of the Mexico City franchise, management does not expect any operating
activity for the foreseeable future. Therefore, management expects the Company
to be in an inactive or dormant state until such time as profitable operations
can be developed and the Company can resolve its debt default issues.
5. SALE OF DALLAS FACILITY
On December 23, 1995 the company sold it major operating asset, the Dallas
restaurant , bar and club facility and all associated equipment and real estate
to an unrelated party for $1,800,000. The consideration was paid $25,000 in
cash, assumption of $1,574,000 in liabilities (including $150,000 borrowed from
the purchaser prior to the sale) and $200,440 in a note receivable. As a result
of the sale the company recognized a loss on sale of $2,181,720.
The liabilities assumed in connection with the sale of the building included two
mortgage notes payable. These notes have not been formally assumed by the
purchaser from the lender, however, the purchaser has made the required
payments. Therefore, the purchasers commitment to assume the notes has been
recorded as a note receivable and the Company's obligation to the lender has
remained as a note payable until such time as the purchaser formally assumes the
notes. Management believes that the notes will be formally assumed by the
purchaser as soon as practicable. Title to the building has transferred to the
new owner.
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<PAGE>
Cabaret Royale Corporation
Notes to Condensed Financial Statements
5. SALE OF DALLAS FACILITY (CONT.)
Future principal amounts due/payable under the mortgage notes are as follows:
March, 31
1997 $ 64,813
1998 79,447
1999 87,924
2000 97,310
2001 107,700
Thereafter 958,275
Total $ 1,395,469
=========
In November, 1996, due to cash flow problems, the company negotiated an early
payoff of the$200,440 note receivable for $150,000 resulting in a loss of
$50,440.
6. BRIDGE FINANCING NOTES PAYABLE
During 1994, the Company borrowed an aggregate $2,835,000 by issuing 8%
convertible subordinated notes. The proceeds from the notes were used to
renovate and provide operating capital to a facility in New York City. The notes
and related accrued interest were payable on August 31, 1994. These notes are
currently in default.
Each note is convertible, at the option of the holder, into Class A Common Stock
at the price then offered by the Company in any private or public offering. In
connection with the issuance of the convertible subordinated notes, the Company
issued 2,835,000 warrants to purchase Class A Stock, exercisable at $2.50 per
share. The warrants provide that if the related notes were not repaid by May 31,
1994, the number of shares subject to warrants doubled. The warrants further
provide that if the related notes were not repaid by July 31, 1994, the exercise
price decreased to $1.25 per share. The warrants expire three years from the
date of issuance.
In exchange for providing the subordinated financing described above, two
individuals received a total of 760,000 warrants (300,000 to related party) to
purchase a corresponding number of Class A Stock at $1.00 a share. These
warrants were valued for financial statement purposes at $.25 per share. The
warrants expire two years from the date of issuance.
7. CAPITAL TRANSACTIONS
Common Stock - On January 26, 1994, the Company amended its articles of
incorporation to increase the number of authorized shares of common stock from
10,000,000 to 60,000,000, and designated 50,000,000 of such shares as Class A
Common Stock (Class A Stock) and 10,000,000 of such shares as Class B Common
Stock (Class B Stock). Class B Stock can be converted to one share of Class A
Stock and Class B Stock has a 10-to-1 voting right.
Warrants - At March 31, 1996, the Company had 5,710,000 common stock purchase
warrants outstanding. Each warrant is exercisable for one share of common stock
at a purchase price ranging from $1.00 to $1.25 per share. The warrants expire
in 1997 (5,670,000) and 1998 (40,000).
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<PAGE>
Cabaret Royale Corporation
Notes to Condensed Financial Statements
8. FRANCHISE AGREEMENT
Effective May, 1994 the Company entered into a franchise agreement with the
operator of a Mexico City facility. Under the agreement the Mexico City Club has
right to use the Cabaret Royale name and trademarks as well as receive guidance
and assistance in developing operating procedures, promotional programs,
administrative and hiring practices, among other things, in exchange for a fee
ranging from 5% to 12% of gross revenues depending on club volume. In July, 1996
the Company and the franchisee renegotiated the fee to $5,000 a month through
December, 1996.
As part of its franchise support services, the Company regularly recruited and
trained entertainers for the Mexico City Club. Management maintains that the
entertainers are employees of the Mexico City Club and that the franchisee is
responsible for all related taxes. However, as a result of related Department of
Labor and Internal Revenue Services actions (see Note 11), the Company may have
contingent payroll tax consequences with respect to this practice.
9. CAT ENTERTAINMENT
On January 7, 1994, the Company made an unsecured loan of $2,000,000 to an
unrelated company, which was used to renovate a facility in New York City. On
February 24, 1994, the Company acquired, from Brian A. Travis ("Travis"), the
outstanding common stock of CAT Entertainment ("CAT") which owned the leasehold
for the New York facility. As consideration for the acquisition, the Company
issued 2,400,000 shares of Class A Common Stock, 1,000,000 warrants to purchase
Class A Common Stock at $2.50 a share and 1,000,000 warrants to purchase Class A
Common Stock at $5.00 a share. The acquisition was accounted for as a purchase.
The warrants are subject to adjustments corresponding to those in the
convertible note warrants. As a result, warrants increased to 4,000,000 shares
and the exercise price deceased to $1.25. The warrants expired in 1996, two
years from the date of issuance .erred to CAT.
The New York club opened for business in March 1994. CAT incurred operating
losses of $5,375,205 during 1994 and closed the club on December 31, 1994. Such
action resulted in subsequent default on the New York facility's rent agreement
and ultimately the loss of the facility and its leasehold improvements.
On January 25, 1995, CAT filed a voluntarily petition for relief under Chapter
11 of the Federal Bankruptcy Code. On January 31, 1995 the Company sold its
stock of CAT to an unrelated entity for $100 resulting in a gain to the Company
of $3,797,297. On April 6, 1995 the U.S. Bankruptcy Court converted the
bankruptcy filing to a Chapter 7 liquidation proceeding under the Federal
Bankruptcy Code. On July 14,1995 an order was entered by the U.S. Bankruptcy
Court closing the bankruptcy proceeding as a "no asset" case. As a result, CAT's
assets were written off at December 31, 1994 resulting in a loss on disposal of
$4,122,546. In January 1995, the Company sold equipment from CAT to a related
party for $69,000 to raise funds for payroll obligations. The Company does not
expect to incur any significant additional losses from CAT.
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<PAGE>
Cabaret Royale Corporation
Notes to Condensed Financial Statements
9. CAT ENTERTAINMENT (CONT.)
In connection with the purchase of CAT, CAT's operation of the New York club and
the bankruptcy of CAT, the Company may have various contingent claims asserted
against it or which it may assert against others. The Company believes that
there will not be any further adverse effects to the financial statements as a
result of its ownership of CAT.
The company has initiated a lawsuit against the seller of CAT alleging fraud and
breech of contract. The Company seeks return of its stock and other damages.
10. RELATED PARTY TRANSACTIONS
During 1995, the Company's Dallas real estate facility was leased by an
affiliated operating company ("Dallas Food and Beverage"). The agreement
required the affiliated company to pay rent equal to 12% of its adjusted gross
receipts (minimum $20,000 per month) as well as various operating expenses such
as insurance and real estate taxes, through December 31, 2004 with two five year
extensions at the option of the tenant. During 1996, the affiliated company
discontinued operations due to cash flow problems.
Dallas Food and Beverage and the company are parties to a lawsuit alleging
violation of the Texas Dram Shop & Liquor Liability Statute. Management intends
to vigorously defend against the lawsuit.
During 1995 affiliates of certain management members operated concession
activities in the Dallas real estate facility without rental costs. Management
believes these concessions earned insignificant revenues but enhanced and
supported the operations of the facility. The concession was closed in 1995 due
to poor operating results.
11. COMMITMENTS AND CONTINGENCIES
In 1993, the Company entered into a two year employment agreement with the
Company's President calling for compensation of $300,000 per year. In 1996, the
president voluntarily reduced his compensation to $60,000 a year. At March 31,
1996 and 1995 the Company owed the President $393,000 and $378,000 under this
agreement.
An affiliate of the Company, which was a former lessee of the Dallas real estate
facility (before Dallas Food and Beverage), lost a lawsuit filed in U.S. Federal
district court brought by the U.S. Department of Labor and the Internal Revenue
Service. The lawsuit claimed certain entertainers were employees of such
affiliate, rather than independent contractors. The affiliate and the Company
president (as an individual defendant) reached a settlement with the U.S.
Department of Labor and the IRS for claims against them for unpaid payroll.
Although the Company was not a party to the above proceedings, the results of
the suits and settlement could negatively impact the Company.
The Company also is involved in various legal actions incidental to its business
including the Texas Dram Shop and Liquor Liability Statue case mentioned above.
In the Company's opinion, none of these proceedings will have a material adverse
effect on the Company's financial position.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
MARCH 31, 1996 COMPARED TO MARCH 31, 1995
- -----------------------------------------
Revenues- Rent revenues during the first quarter 1996 decreased 100% compared
with the same period fee the prior year due to sale of the Dallas property and
operations in December 1995. Franchise for revenue, if any, derived from the
Mexico City, Mexico franchise had decreased significantly from similar period in
1995 due to the economic decline in Mexico in general and material internal
problems experienced by the franchise.
General and administrative expenses- Executive salaries decreased significantly
during the first quarter of 1996 and professional fees increased during such
period compared to the same period of the prior year, equating to a significant
decrease in general and administrative expense, the operations of the Registrant
having decreased materially and litigation proceedings having been actively
pursued.
Depreciation and amortization- There was no such cost in the first quarter 1996
because of the sale of the Registrant's capital assets in 1995.
Interest income- Interest income was the only other material income experienced
by the Registrant during the first quarter 1996 and was significantly higher
than for the similar period of the prior year, deriving from notes taken back by
the Registrant in the sale of its capital assets in 1995.
Net income (loss)- The net loss from operations experienced by the Registrant in
the first quarter 1996 was less than that for the similar period in 1995 because
of the effective termination of business operations subsequent to and as part
result of the Registrant's sale of its capital assets in 1995.
Liquidity and capital resources- The Registrant has continued to operate with a
working capital deficiency during 1996. Due to severe cash flow problems and
slow pace of business, the Registrant was compelled to sell its capital assets
at significant discounts constituting a material loss to the Registrant. There
has been no expansion of business and no new business, and the outlook by the
Registrant is to eventually terminate its business and/or seek other sources of
income or capital to meet its future needs. The franchise operations in Mexico
City have been severely hampered by adverse governmental regulation and
depressed economy and income therefrom is minimal and constitutes the only
material source of income for the Registrant. Registrant's intent is to close
its present business, and to pay its debts to the extent it is able, without any
defined future business plan.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Form 8-K's filed:
Form 8-K dated February 28, 1996 disclosing material discord regarding
operations of Registrant's franchise operations in Mexico City, Mexico.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereupon duly authorized.
CABARET ROYALE CORPORATION
March 31, 1997 /s/ Salah Izzedin
- -------------- -----------------
Salah Izzedin
Chief Executive Officer, Chairman of the Board of
Directors, and President
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