U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
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1934
For the fiscal year ended December 31, 1995
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________to________
Commission file number 33-39263-NY
CABARET ROYALE CORPORATION
(Name of Small Business Issuer in its charter)
Delaware 22-2993070
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(State or other jurisdiction (IRS Employer Identification No.)
or incorporation or organization)
PO Box 794183
Dallas, Texas 75379-4183
(Address of principal executive offices)
Issuer's telephone number including area code: 214-866-8366
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
NONE
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 issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405 of Regulation S
- - B is not contained in this form, and no disclosure will be contained, to the
best of issuers knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $661,533.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of the Common n Shares
as reported for March 20, 1996: $ nil.
State the number of the issuer's Common shares outstanding on March 20, 1996:
7,298,854
*Class A Common Stock only; no Class B Common Stock outstanding
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Form 8-K and 8-K/A dated September 30, 1993, Form 8-K dated January 30, 1995,
From 8-K dated August 24, 1995 and corresponding From 8-K/A dated August 24,
1995, Form 8-K dated December 23, 1995, and registration statement on Form S-18
effective July 18, 1991.
Total number of pages: 30
Exhibit Index on page: 13
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Registrant was initially formed and organized in September 1988 as a
general purpose Delaware corporation in search of an acceptable business, which
Corporation completed a public offering of certain of its securities in October
1991. In September 1993 the Registrant acquired all of the assets and assumed
all of the liabilities of Walhill Partners, Ltd., a Texas limited partnership,
and acquired certain assets of Cabaret Royale Corporation, a Texas Corporation,
both being entities located and doing business in Dallas, Texas, (collectively,
hereinafter, referred to as "Cabaret"), in exchange for 4,450,000 authorized but
previously unissued shares of the Registrant's common stock. Upon consummation
of the said acquisition voting control of Registrant was transferred to the
controlling persons in Cabaret, and the members of the board of directors of the
Registrant resigned in favor of the nominees of said Cabaret affiliates. For
further information on the mechanics of the referenced acquisition review may be
made of the Form 8-K and Form 8-K/A regarding such acquisition filed with the
Securities and Exchange Commission ("SEC"), dated September 30, 1993, and
incorporated herein by reference. Effective November 2, 1993 the Registrant
changed its corporate name to Cabaret Royale Corporation.
Registrant is now a Dallas-based enterprise, having terminated its
operations in New York and having only a minor interest in its Mexico City
operations, said locales being the only other operations recently handled by the
Registrant, originally having featured premier cabaret style topless adult
entertainment, restaurant, and bar operations and continuing to do so on a
limited basis through its Mexico City franchise, but with insignificant income
therefrom. Dallas is the Registrant's initial location and was established and
leased to an operator in December 1988 and has since undergone significant
improvements and upgrading. The Dallas facility was sold in late 1995. The
market segment which Registrant's business operations were designed to address
is the discriminating business patronage and convention clientele who desire a
discrete ambiance set in opulent surroundings. The Registrant maintains an
insignificant franchise agreement with an investor group in Mexico which
established a Cabaret Royale club in Mexico City. The Mexico city club opened on
May 15, 1994. Due to the instability of the Mexican peso in 1995, the revenues
from the Mexico City franchise have been less than projected. The Registrant has
provided both assistance and support concerning the design and construction of
the Mexico City club before opening and, since opening, procedural advice,
promotional support and materials. 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 significant 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.
On December 23, 1995 the Registrant signed with AAI Investments, Inc., a
Florida Corporation (hereinafter the "Buyer") a contract for and closed on Sale
of their major asset, the restaurant/bar/nightclub facility located at 10723
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Composite Drive, Dallas, Texas, with all associated real property, equipment and
facilities owned by Registrant and located there, together with all rights to
such address and ownership rights to the name "Cabaret Royale'. The Registrant,
pursuant to said contract, closed on the described transaction on December 23,
1995 and vacated the referenced premises as of December 30, 1995. Certain of the
Registrant's debts and liabilities were also assumed by the said Buyer in the
described transaction. Other assets of the Registrant not directly associated
with the facilities at 10723 Composite Drive, Dallas, Texas were not affected,
including but not limited to Registrant's rights as franchisor of similar
facilities located in Mexico City, Mexico operated as "Club Royale", and other
liabilities of the Registrant. Upon vacating the premises at 10723 Composite
Drive, Dallas, Texas, the Registrant relocated its business offices to 16135
Preston Road, Suite 121, Dallas, Texas, telephone (214) 866-8366 fax (214) 866-
8797. The Buyer is an entity not affiliated with the Registrant and no officers
and/or directors or their associates, of the Registrant have any similar status
with the Buyer, nor do they have any stock interest therein.
The Registrant has also taken steps to amend its certificate of
incorporation to change its corporate name back to its original name of
Exceptional Enterprises Inc. There has been no change in the identity of the
Registrant's officers and directors, except that in an unrelated circumstance
the Registrant has had elected a new director, Katia Hiles, making the current
board of directors of the Registrant consist of two members, to wit Salah
Izzedin and Katia Hiles.
ITEM 2. DESCRIPTION OF PROPERTY
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The Registrant leases limited office space at 16135 Preston Rd., Suite 121,
Dallas, Texas as its administrative offices and has no other business premises.
ITEM 3. LEGAL PROCEEDINGS
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Registrant is not aware of any pending or anticipated material legal
proceeding involving Registrant or its affiliates which, in the opinion of
Registrant, will, if successful, materially affect the status of Registrant's
business or assets except as set forth hereinbelow.
The former contact operator of the Dallas facility of the Registrant under
a now terminated operating agreement, Prive Corp. ("Prive") and Priba Corp.
("Priba") is the defendant in a lawsuit filed in the United States District
Court for the Northern District of Texas, Dallas Division by the United States
Department of Labor in 1991 alleging that entertainers were employees of such
operator, rather than independent contractors with such operator. The lawsuit
was stayed by operation of 11 U.S.C. 362 as a result of the Prive and Priba's
bankruptcy filing under Chapter 7 of the U.S. Bankruptcy Code in July 1994.
Registrant is not a party to such lawsuit. Mediation was ordered by the court
but was not successful. Therefore, the lawsuit was tried to the Court in 1993.
In May 1995, the court held for the Department of Labor. Subsequent to such
finding, Salah Izzedin stipulated to a personal judgment of $1,000,000. The
Internal Revenue Service has not pursued any claims as of this time.
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The former contact operator of the Dallas facility of the Registrant under
a now terminated operating agreement, Prive Corp. ("Prive") and Priba Corp.
("Priba") are defendants in another lawsuit filed in the United States District
Court for the Northern District of Texas, Dallas Division in 1990 by two (2)
former waitresses, Ann Marie Lindsey and Lindsey York, alleging certain
violations by Prive and Priba of age discrimination and other employment laws.
This lawsuit was stayed by operation of 11 U.S.C. 362 as a result of Prive and
Priba's bankruptcy filings. Recently, CRC (Dallas Food & Beverage) Operating
Corp. ("Food & Beverage"), the most current Operator of the club (prior to its
sale by th Registrant), DNL Corporation (an assumed business name for Food &
Beverage), and Walhill Partners, Ltd. (now Registrant) were added as party
defendants. Food & Beverage intends to vigorously defend such action. Food &
Beverage and the Registrant are each strongly of the opinion that such lawsuit
is without merit.
Food & Beverage, among others, is a defendant in a case filed in the State
District Court in Dallas County, Texas styled Cheri Houston, Plaintiff vs.
Sherrye Jinks, et al. This a "dram shop" action alleging that Food & Beverage
allowed an intoxicated dancer to leave its premises who later became involved in
an accident with the Plaintiff, Cheri Houston. Food & Beverage is strongly of
the opinion that the lawsuit is without merit and is vigorously defending the
same. Food & Beverage does not have insurance coverage for this alleged
liability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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In the fourth quarter of fiscal year 1995, one matter was approved by
written consent of a majority of the shareholders of the Registrant with written
notice sent to all other shareholders in accord with the applicable laws of
Delaware, the Registrant's state of incorporation, that matter being the sale of
the Dallas facility as substantially all of the Registrant's assets and
corresponding authority to change the corporate name of the Registrant back to
Exceptional Enterprises Inc.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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The Registrant's initial public offering of units consisting of common
stock and warrants to purchase common stock closed on October 4, 1991, and
trading in the common stock of the Registrant commenced October 5, 1991. There
has never been, to the best knowledge of Registrant, any market for or trading
in Registrant's public warrants or initial offering units. The public warrants
of Registrant were redeemed effective December 9, 1993, with none having been
exercised prior thereto. The common stock of Registrant,until October 1993,
traded sporadically without any material activity and, as of the first quarter
of 1995 and forward therefrom, has not been quoted. The securities of the
Registrant have never traded on any organized exchange.
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The Registrant's Class A Common Stock, when traded, is traded over the
counter on the NASD Electronic Bulletin Board.
The high and low closing bid quotations in the over-the-counter market for
the Registrant's common stock as reported by the relevant market makers for the
quarterly periods from October 1993 through the date hereof are as follows:
QUARTER ENDED HIGH BID LOW BID
- ------------- -------- -------
December 31, 1993 2 1
March 31, 1994 3 1/4 2 5/8
June 30, 1994 4 1/4 1
September 30, 1994 3 1
December 31, 1994 2 1/4 1
March 30, 1995 1 1
NO QUOTES AFTER FIRST QUARTER 1995
Quotations represent inter-dealer quotations without adjustment for retail
markups or markdowns of commissions and may not necessarily represent actual
transactions.
At November 1, 1995, the approximate number of holders of the Registrant's
Common Stock was 489. A few shares of the Registrant's common stock are held of
record in brokerage accounts in street names and may or may not be held for more
than one stockholder. There has been no significant change in the number of
shareholders since November 1995. The Company has not paid any cash dividends on
its common stock and does not anticipate paying dividends in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
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Introduction -
On September 30, 1993, Exceptional Enterprises Inc. (:Registrant") acquired the
assets and assumed the liabilities of Walhill Partners, Ltd. ("Walhill"), a
Texas limited partnership and acquired the trade name and trademark of Cabaret
Royale Corporation, a Texas corporation. After the acquisition, Exceptional
changed its name to Cabaret Royale Corporation.
Registrant was originally organized to acquire interest in business opportunity
and engage in and provide financial and management services to those businesses.
Walhill was formed for the purpose of owning a cabaret facility in Dallas,
Texas. the facility is leased to an operator operating company which operates a
restaurant, bar and cabaret under the name Cabaret Royale. the Registrant's
primary source of income was derived from the lease payments equal to 16% of
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adjusted gross receipts (minimum of $30,000 a month) during 1994, and 12% of
adjusted gross receipts in 1995.
The acquisition, for accounting purposes, was recorded as a reverse acquisition,
with Walhill surviving as the acquiror. The acquisition accounting was
equivalent to the issuance of stock by Walhill for the net monetary assets of
Registrant, accompanied by a recapitalization. the stock was then distributed to
the partners of Walhill, and Walhill ceased to exist as an entity.
The Registrant closed its New York operations in late 1994 and sold its Dallas
operation in late 1995 and has experienced a significant decrease in revenues
from its Mexico City franchise in 1995 and continuing to date.
RESULTS OF OPERATIONS
The following table sets forth the percentage which the items in the statements
of operations bear to revenues for each period presented. Year ended December
31,
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Rental Revenues 70.38% 80.04%
Franchise Fees 21.15 17.38
Other Income 8.47 2.58
TOTAL REVENUES 100.00% 100.00%
Operating expenses:
Depreciation & Amortization 36.84 24.27
Executive Compensation 56.95 48.62
Professional Fees 21.15 36.76
General & administrative 16.08 34.14
Bad debt expense 25.70 --
Operating Income (Loss) (56.71) (43.79)
Loss on sale of assets (329.80) --
Interest income .52 .33
Interest expense (59.24) (46.30)
Income (loss) from continuing
operations before provision
for income taxes (445.52) (89.76)
Income taxes (benefit) -- 0.28
Net income (loss)
from continuing operations (445.52) (89.47)
Discontinued operations of CAT Entertainment:
Loss on discontinuance -- (479.23)
of CAT operations
Net loss (445.52) (568.70)
</TABLE>
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Revenues - Rent revenues in the twelve months ended December 31, 1995 decreased
486,578 or 51.1% compared with the same period for the year ended December 31,
1994. The decrease was due to rent decrease from 16% to 12% and slow pace of
business, and a slow down in business overall due to more competition and
internal problems experienced by the Registrant. Franchise fee revenue is
derived from franchise location in Mexico City, and was $142,184 for 1995 and
for seven months during 1994 was $206,801. Other income of $53,795 was derived
from IRS refund, rental fees, and studio site fees for filming.
Depreciation and Amortization - Depreciation and amortization decreased by
$45,036 in 1995 compared to 1994 because of closure of certain business assets
and sale of others.
General and Administrative - Executive compensation decreased in 1995 by
$201,521 due to reduction of executive salary and decrease in personnel.
Professional fees declined $297,390 because of decline in business and
settlement of certain legal issues.
Bad Debt Expense - Bad debt expense increased to $169,988 in 1995 due to write
off of accounts receivable from the operating company as results of the sale of
the Dallas facility.
Loss on Sale of Assets - The loss on the sale of assets of $2,181,720 resulted
from difference in book value and market value of assets sold.
Interest Expense - Interest expense decreased $158,880 or 28.8% due to less
debt.
Net Income (Loss) - The 1995 Net Loss from continuing operations was $2,945,283,
an increase of $1,877,577 due to loss on sale of assets.
LIQUIDITY AND CAPITAL RESOURCES
The Registrant has continued to operate with a working capital deficiency during
1995. 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.
ITEM 7. FINANCIAL STATEMENTS
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The report of the Registrant's Independent Auditors, Financial Statements and
Notes to Financial Statements appear herein commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The Registrant's independent accountant who was previously engaged as the
principal accountant to audit the Registrant's financial statements, Belew,
Averitt & Company, CPA's, resigned effective August 24, 1995, but assured the
Registrant that the basis for their resignation was not because of any concerns
on their part as to the accounting records of Registrant or its predecessors
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being unauditable and they have provided a letter confirming the same. To the
best knowledge of Registrant the said principal accountant's past reports on the
financial statements have not contained any adverse opinion or a disclaimer of
opinion, or been qualified or modified as to uncertainty, audit scope or
accounting principles except for an emphasis paragraph concerning the
Registrant's ability to continue as a going concern if the Company was not able
to successfully complete a further public or private securities placement or to
locate other alternative financing. Their decision to resign was not recommended
by Registrant.
The Registrant has engaged, effective August 24, 1995, a new independent
accountant as its principal accountant to audit the Registrant's financial
statements. The identity of the new accountant is Swalm & Associates, P.C., 2929
N. Central Expressway, Suite 250, Richardson, Texas 75080, telephone (214) 980-
7801. No particular transaction regarding the Registrant prompted the
engagement.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE
- --------------------------------------------------------------------------------
WITH SECTION 16(A) OF THE EXCHANGE ACT
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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- ---- --- --------
Salah Izzedin 48 President, Chairman of the Board,
Chief Executive Officer, Director
Katia Hiles 26 Director
Salah Izzedin is the President, Chairman of the Board and Chief Executive
Officer and a Director of the Registrant and, prior to closing the transaction
wherein the Registrant acquired the assets of Walhill Partners Ltd. and Cabaret
Royale Corporation (hereinafter the "Transaction"), Mr. Izzedin had served in
similar positions with said other companies since 1987. From 1983 until 1988,
Mr. Izzedin operated Rick's Restaurant and Bar in Houston, Texas, a gentleman's
club. Prior to 1983, Mr. Izzedin was the President of Oceanic Oil Corporation,
the representative of various European energy interests in Central and South
America, and otherwise engaged in various oil trading activities. Mr. Izzedin
holds a Bachelor of Business Administration degree from the American University
of Beirut, a Master of Business Administration (Finance and Accounting) degree
from Columbia University Graduate School of Business, and is a Certified Public
Accountant in the State of New York.
Katia Hiles is a Director. From 1989 through 1990 she held a position with Irell
& Mannela, a securities litigation law firm. During 1992 through 1994 she worked
with Lehman Brothers Investment Banking group. She holds a Bachelor of Arts
degree in Economics and a Bachelor of Arts degree in Political Science from the
University of Houston, and a Master of Business Administration degree in Finance
from the University of Southern California.
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Registrant has no securities registered pursuant to Section 12 of the Exchange
Act and is not thereby subject to the filing requirements of Section 16(a),
Registrant having terminated its registration of securities under Section 12(g)
in November 1995.
ITEM 10. EXECUTIVE COMPENSATION
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No officer or director of the Registrant has received or is under a present
contract to receive salaries or other annual compensation exceeding $100,000,
except Salah Izzedin whose annual salary is presently $300,000. 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 December 31, 1996 and
1995 the Company owed the President $328,000 and $330,043 under this agreement.
There are no special benefit packages given to any officer or director, but the
Registrant may and has reserved the right to institute such in the future. There
are presently no stock options, warrants or other rights to receive securities
of the Registrant held by any officer or director.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The following table sets forth information with respect to the share ownership,
as of March 31, 1996, of those persons known to Registrant to be the beneficial
owners of more than 5% of Registrant's common stock, and of all officers and
directors of the Registrant, individually and as a group:
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Common Stock Owned Beneficially and of Record
Percentage of Class (1)
Name and Address Number Percentage
- ---------------- ------ ----------
Idona Corporation 3,647,601 50.32%
Brian A. Travis 2,400,000 33.11%
All officers and directors
as a group 0 0%
(1) The table only includes outstanding shares of Registrant's Class A Common
Stock. The Registrant also has authorized for issuance but has not issued Class
B Common Stock which carries as its only distinction from Class A Common Stock
as increased per share voting right of 10 votes per share. Class A Common Stock
carries a voting right of one vote per share. All Class B Common Stock is
convertible on a share for share basis into Class A Common Stock. The table also
does not include Class A Common Stock to be issued on exercise of any
outstanding warrants or conversions. Those warrants, and/or conversions which,
if exercised, would require issuance of restricted Class A Common Stock
constituting more than 5% of outstanding stock of such class (or held by
officers or directors of Registrant), are as follows. The Class A Common Stock
to be issued upon exercise and/or conversion as listed herein have attached
thereto certain limited registration rights.
<TABLE>
<CAPTION>
Amount of Class A
Common Stock available
Name Type of Security upon exercise
- ---- ---------------- -------------
<S> <C>
Brian A. Travis warrants exercisable 2,000,000
at $1.25 per share
Brian A. Travis warrants exercisable 2,000,000
at $2.50 per share
Water-Jel Technologies Inc. warrant attached to 500,000
convertible subordinated note
exercisable at $1.25 per share
Enrique Brodchandel warrant attached to 1,000,000
convertible subordinated note
exercisable at $1.25 per share
Jeshayahu Boymelgreen warrant attached to 1,000,000
convertible subordinated note
exercisable at $1.25 per share
Paramount Acquisition Inc. warrant attached to 700,000
convertible subordinated note
exercisable at $1.25 per share
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Werner Haase warrant attached to 700,000
convertible subordinated note
exercisable at $1.25 per share
Samuel M. Borofsky warrant attached to 600,000
convertible subordinated note
exercisable at $1.25 per share
Joseph Salvani warrant exercise at $1.00 300,000
Yitz Grossman warrant exercisable at $1.00 460,000
Avi Grossman warrant attached to 200,000
convertible subordinated note
exercisable at $1.25 per share
Allan L. Schrager warrant attached to 50,000
convertible subordinated note
exercisable at $1.25 per share
Morgan L. Miller warrant attached to 100,000
convertible subordinated note
exercisable at $1.25 per share
Vita A. & Nella J. warrant attached to 10,000
Colaninno convertible subordinated note
exercisable at $1.25 per share
Lucy Gugliotta warrant attached to 10,000
convertible subordinated note
exercisable at $1.25 per share
Thomas J. Piccone warrant attached to 10,000
convertible subordinated note
exercisable at $1.25 per share
David P. Dweck warrant attached to 100,000
convertible subordinated note
exercisable at $1.25 per share
S.S. Dweck & Sons, warrant attached to 50,000
Inc., Pension Plan convertible subordinated note
exercisable at $1.25 per share
Helen Dweck warrant attached to 50,000
convertible subordinated note
exercisable at $1.25 per share
Stephen S. Dweck warrant attached to 20,000
convertible subordinated note
exercisable at $1.25 per share
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Michael Jemal warrant attached to 50,000
convertible subordinated note
exercisable at $1.25 per share
Sammy Jemal warrant attached to 160,000
convertible subordinated note
exercisable at $1.25 per share
Shlomo Sitt warrant attached to 50,000
convertible subordinated note
exercisable at $1.25 per share
Evan Hedaya warrant attached to 50,000
convertible subordinated note
exercisable at $1.25 per share
Richard Dweck warrant attached to 200,000
convertible subordinated note
exercisable at $1.25 per share
C. Peter Cole warrant attached to 60,000
convertible subordinated note
exercisable at $1.25 per share
Randall J. Perry $1.00 20,000
Debra Gallaro $1.00 20,000
Total Warrants 10,470,000
</TABLE>
All of these warrants and conversion privileges are scheduled to expire by 1997
and are not expected by the Registrant to be exercised/converted because of the
lack of any appreciable market for the registrant's securities, and no
appreciable market is expected to develop in the near future.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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Transactions and Business Relationships with Management
The Registrant has no material debts outstanding, and has not engaged in any
transactions, and has had no significant independent business relationships with
any of its officers and/or directors.
CHANGES IN CONTROL
Registrant is not aware of any arrangements which may at a subsequent date
result in a change in control of Registrant except that if certain warrants'
and/or convertible subordinated notes are transformed through exercise and/or
conversion into Class A Common Stock of the Registrant there may be an effect on
change in control since certain of those latter convertible securities allow for
issuance of between 1,000,000 and 2,000,000 shares of Class A Common Stock which
in each instance would constitute probably a minimum of 14% of the then
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outstanding Class A Common Stock of the Registrant, although no such
exercise/conversion is expected by the Registrant because of the lack of any
appreciable market for the Registrant's securities, and no appreciable market is
expected to develop in the near future.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
- -------- ---------------------------------------
(a) (1) Financial Statements
See Index to Financial Statements, infra
(2) No financial statement schedules are filed as part of this report
(3) Exhibits
The exhibits filed as a part of this report are as follows:
Exhibit No. as filed
Exhibits with documents indicated
- -------- ------------------------
2(a) Asset Purchase Agreement between 1
Registrant and AAI Investment Inc.
dated December 23, 1995 (1)
Footnotes to Exhibit Schedule:
(1) Filed with the Securities and Exchange Commission as exhibit, numbered as
indicated above, to the Form 8-K of the Registrant, dated December 23, 1995.
(b) Reports on Form 8-K
The Forms 8-K filed by the Registrant with the Securities and Exchange
Commission for fiscal year 1993 to the date hereof are as follows:
1. Form 8-K dated September 29, 1993 wherein notice was given of the execution
of agreements for the asset purchase from Walhill Partners, Ltd. and Cabaret
Royale Corporation, a texas corporation.
2. Form 8-K dated September 30, 1993 wherein the closing on the Walhill
Partners/Cabaret Royale asset purchase was disclosed and disclosure was made of
the resignation of the Registrant's auditors, BDO Seidman, with subsequent filed
Form 8-K/A disclosing financial information on such closing and further
disclosing the amendment to Registrant's certificate of incorporation to change
its corporate name to Cabaret Royale Corporation, and a later filed Form 8-K/A
including the confirmation letter from BDO Seidman of statements made by
Registrant regarding such auditor's resignation.
3. Form 8-K dated November 30, 1993 disclosing the engagement by Registrant of
new auditors, Belew, Averitt & Company, CPA.
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4. Form 8-K dated January 27, 1994 disclosing the closing on the asset
acquisition between Registrant and CAT Entertainment Corp., and disclosing
amendment of Registrant's certificate of incorporation to increase its
authorized stock and divide such into classes, and further to disclose the
resignation of Joanne Bertolini as a director of the Registrant.
5. Form 8-k dated August 24, 1995 disclosing the termination of the contractual
agreement with current auditors Belew, Averitt & Company, CPA and the later
filed 8-K/A including the confirmation letter from Belew, Averitt & Company, CPA
of statements made by the Registrant regarding such auditor's termination. The
Form 8-K also disclosed the engagement by the Registrant of new auditors, Swalm
& Associates, P.C. The Form 8-K also disclosed the election of a new board of
directors, and officers.
6. Form 8-K dated December 23, 1995 disclosing sale by Registrant of its Dallas
facilities, movement of its principal offices, and steps taken toward amending
its certificate of incorporation to change its corporate name.
-14-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Independent auditor's report F-1
Financial statements:
Balance sheet as of December 31, 1995 F-3
Statements of operations for the years ended
December 31, 1995 and 1994 F-4
Statements of changes in stockholders' equity (deficit)
for the years ended December 31, 1995 and 1994
F-5
Statements of cash flows for the years ended
December 31, 1995 and 1994 F-6
Notes to financial statements F-7
All other schedules and financial statements are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
-15-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Cabaret Royale Corporation
We have audited the accompanying balance sheet of Cabaret Royale Corporation as
of December 31, 1995 and the related statements of operations, changes in
stockholders' equity (deficit) and cash flows for the years ended December 31,
1995 and 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
Except as discussed in the following paragraph, we conducted our audits in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that
our audit provides a reasonable basis for our opinion.
Prior to its acquisition by the Company in 1994, CAT Entertainment ("CAT")
maintained inadequate and incomplete accounting records. In addition, in 1995,
prior to our appointment as auditors, CAT filed a petition for bankruptcy
reorganization and was subsequently liquidated under Chapter 7 of the Federal
Bankruptcy Code. Consequently, we were unable to satisfy ourselves as to the
loss from discontinued operations of $5,700,472 for the year ended December 31,
1994.
Because of the significance of the matter discussed in the preceding paragraph,
the scope of our work was not sufficient to enable us to express, and we do not
express, an opinion on the financial statements for the year ended December 31,
1994.
In our opinion, the 1995 financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Cabaret
Royale Corporation as of December 31, 1995 and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 10 to the financial statements, a majority of the Company's
revenue was derived from an affiliated entity, upon which the Company was
economically dependant. In addition, as explained in Note 2, the company changed
its consolidation policy with regard to CAT Entertainment.
F-1
<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company
has suffered recurring losses from operations and has a working capital deficit
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Swalm & Associates, P. C.
Richardson, Texas
February 21, 1997
F-2
<PAGE>
CABARET ROYALE CORPORATION
Balance Sheet
December 31, 1995
Assets
Current assets:
Cash and cash equivalents $ 1,469
Accounts receivable franchise, net of
allowance for doubtful accounts (Note 7) 9,510
Prepaid expenses 682
Current portion of note receivable (Note 4) 64,813
Note receivable affiliate 58,584
Other note receivable 200,440
Federal income tax refund (Note 8) 3,409
----------
Total current assets 338,907
Note receivable, net of current portion (Note 4) 1,346,733
----------
$1,685,640
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable - Trade $ 44,977
Accrued interest payable 428,802
Other accrued expenses 378,000
Bridge financing notes payable (Note 5) 2,835,000
Current portion of long-term debt (Note 4) 64,813
Other notes payable 63,633
-----------
Total current liabilities 3,815,225
Long-term debt, net of current portion, (Note 4) 1,346,733
-----------
Commitments and contingencies (Notes 3, 5, 9, 10, and 11) --
Stockholders' equity (deficit) (Notes 6 and 9):
Class A Common stock, $.001 par, 50,000,000
shares authorized, 7,298,854 outstanding 7,299
Class B Common Stock, $.001 par, 10,000,000
shares authorized, none outstanding --
Additional paid-in capital 5,308,572
Retained earnings (deficit) (8,792,189)
-----------
Total stockholders' equity (deficit) (3,476,318)
$ 1,685,640
See accompanying notes to financial statements.
F-3
<PAGE>
CABARET ROYALE CORPORATION
Statements of Operations
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Rental income (Note 10) $ 465,554 $ 952,132
Franchise fees (Note 7) 142,184 206,801
Other income 53,795 30,572
----------- -----------
661,533 1,189,505
---------- ---------
Operating expenses:
Depreciation and amortization 243,698 288,734
Executive compensation 376,715 578,236
Professional fees 139,911 437,301
General and administrative 106,375 406,092
Bad debt expense (Note 10) 169,988 -
---------- ---------------
Total operating expenses 1,036,687 1,710,363
--------- ---------
Operating loss ( 375,154) ( 520,858)
---------- ----------
Other income (expenses):
Loss on sale of assets (Note 4) (2,181,720) -
Interest income 3,500 3,941
Interest expense ( 391,909) ( 550,789)
---------- ----------
(2,570,129) ( 546,848)
--------- ----------
Loss from operations before income taxes (2,945,283) (1,067,706)
Income taxes (benefit) (Note 8) - ( 3,409)
--------------- ------------
Net loss from continuing operations (2,945,283) (1,064,297)
Loss on disposal of CAT Entertainment a
discontinued operation (Note 9): - (5,700,472)
---------------- ---------
Net Income (loss) $ (2,945,283) $ (6,764,769)
========= =========
Income (loss) per share:
Loss from continuing operations $ (.40) $ (.15)
Gain from discontinued operations - (.83)
--------------- --------------
Income (loss) per share $ (.40) $ (.98)
============== ================
Weighted average shares outstanding 7,298,854 6,921,735
========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CABARET ROYALE CORPORATION
Statements of Changes in Stockholders' Equity (Deficit)
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock Additional
paid-in Retained Total
Shares Amount capital earnings equity (deficit)
------ ------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993 4,847,496 $ 4,848 $ 2,018,307 $ 917,863 $ 2,941,018
Acquisition of CAT
Entertainment (Note 9) 2,400,000 2,400 2,997,600 -- 3,000,000
Conversion of debt to
common stock (Note 6) 51,358 51 102,665 -- 102,716
Finders fee warrants (Note 4) -- -- 190,000 -- 190,000
Net loss -- -- -- (6,764,769) (6,764,769)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1994, 7,298,854 7,299 5,308,572 (5,846,906) ( 531,035)
Net Income -- -- -- (2,945,283) (2,945,283)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1995 7,298,854 $ 7,299 $ 5,308,572 $(8,792,189) $(3,476,318)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CABARET ROYALE CORPORATION
Statements of Cash Flows
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations $ (2,945,283) $ (1,064,297)
Noncash revenues, expenses, gains and losses
included in loss from continuing operations:
Depreciation and amortization 243,698 288,734
Loss on sale of assets (Note 4) 2,181,720 -
Finders fee warrants (Note ) - 190,000
Net (increase) decrease in:
Prepaid expenses 1,128 -
Accounts receivable - affiliates 81,936 ( 15,586)
Other assets - 78,121
Net increase (decrease) in:
Accounts payable ( 76,707) 105,125
Accrued expenses 504,967 277,040
Federal taxes payable - ( 14,393)
--------------- ----------
Net cash provided by (used in) continuing operations ( 8,541) ( 155,256)
------------ ---------
Gain (loss) from discontinued operation (Note 9) - (5,700,472)
Net adjustments to reconcile loss from discontinued
operations to cash used in discontinued operations - 2,996,130
--------------- ---------
Net cash used in discontinued operations - (2,704,342)
--------------- ---------
Net cash provided by (used in) operating activities ( 8,541) (2,859,598)
----------- ---------
Cash flows from investing activities:
Purchase of property & equipment - ( 38,068)
Sale of property and equipment 25,000 -
----------- ----------------
Net cash provided by investing activities 25,000 ( 38,068)
----------- -----------
Cash flows from financing activities:
Proceed from bridge financing - 2,835,000
Proceeds from notes payable 150,000 79,624
Payment on notes payable ( 31,000) -
Payments on long term debt and capital leases ( 64,578) ( 125,689)
----------- ----------
Net cash provided by financing activities 54,422 2,788,935
----------- ---------
Net increase in cash and cash equivalents 70,881 ( 108,731)
Cash and cash equivalents (overdrafts)at beginning of year ( 69,412) 39,319
----------- ----------
Cash and cash equivalents (overdrafts) at end of year $ 1,469 $ ( 69,412)
============ ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
1. 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. The acquisition
of Walhill by Exceptional was accounted for as a reverse acquisition. Under the
reverse acquisition, Walhill was effectively the acquirer of Exceptional.
Subsequent to the acquisition, Exceptional changed its name to Cabaret Royale
Corporation.
2. 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, at December 31, 1995 CAT is not
consolidated and the financial statements for the year ended December 31, 1994
have been restated to deconsolidate CAT for that period. The effect of that
change was to reduce 1994 net loss and retained deficit by $3,797,279.
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 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 requires
an asset and liability approach to financial accounting for 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, SFAS 109
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.
F-7
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
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.
3. 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 1995 and 1994 and as December 31, 1995, current
liabilities exceed current assets and the Company is in default on various note
payable agreements (Note 5).
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.
4. 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.
F-8
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
4. SALE OF DALLAS FACILITY (CONT.)
Future principal amounts due/payable under the mortgage notes are as follows:
December, 31
1996 $ 64,813
1997 71,787
1998 79,447
1999 87,924
2000 97,310
Thereafter 1,010,265
---------
Total $ 1,411,546
=========
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.
5. 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 (see Note
9). 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.
F-9
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
6. 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 December 31, 1995, the Company had 10,470,000 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 1996 (4,760,000), 1997 (5,670,000) and 1998 (40,000). Warrant
activity for the two year period ended December 31, 1995 consists of the
following: Warrants Price
Balance December 31, 1993 40,000 $1.00
Options granted 10,430,000 $1.00 - $2.50
Warrants exercised - -
Warrants expired - -
Balance December 31, 1994 10,470,000 $1.00 - $2.50
Options granted - -
Warrants exercised - -
Warrants expired - -
Balance December 31, 1995 10,470,000 $1.00 - $2.50
==========
Conversion of debt to equity - In 1994, 51,358 shares of Class A Stock were
issued upon conversion of an outstanding loan to the Company. The loan was
converted at $2.00 a share.
7. FRANCHISE AGREEMENT
Effective May, 1994 the Company entered into a franchise agreement with the
operator of a Mexico City Club. Under the agreement the Mexico City Club has the
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 of December 31, 1995 the Mexico City Club owed the Company
$20,240 of which $10,730 has been included in the allowance for doubtful
accounts. Due to poor economic conditions in Mexico, declining operations in the
Mexico club and inconsistent collection history, the Company does not expect any
future revenue from this relationship.
F-10
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
7. FRANCHISE AGREEMENT (CONT.)
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.
8. INCOME TAXES
SFAS 109 provides for deferred tax assets for such item as depreciation and
amortization timing differences and net operating loss carry forwards. Due to
the Company's recent history of operating losses all such deferred tax assets
have been fully offset by valuation allowances due to uncertainties regarding
realization of the tax benefits in future years. In 1994, a portion of the
Company's net operating loss was carried back against taxes paid for 1993 net
income resulting in a refund due of $3,409. Remaining net operating losses will
be carried forward and available to offset future taxable income through the
year 2010.
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 (see Note 4). As a result, warrants increased to
4,000,000 shares and the exercise price decreased to $1.25. The warrants expired
in 1996, two years from the date of issuance. In connection with the
acquisition, the $2,000,000 loan was transferred 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.
F-11
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
9. CAT ENTERTAINMENT (CONT.)
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. 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 and the Company's investment in and
advances to CAT were written off at December 31, 1994 resulting in a loss on
disposal of $5,700,472. 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.
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.
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.
10. RELATED PARTY TRANSACTIONS
During 1995 and 1994, 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. At December 31, 1995, the Company had
accounts receivable from this affiliated company of $161,258. During 1996, the
affiliated company discontinued operations due to cash flow problems and
$159,258 was written off to bad debt expense.
Unaudited financial information of the Dallas Food and Beverage's 1995
operations are as follows:
Revenues $ 4,619,459
Cost of sales 603,693
Operating expenses 3,949,053
---------
Net Income $ 66,713
===========
F-12
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
10. RELATED PARTY TRANSACTIONS (CONT.)
Dallas Food and Beverage is party 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 December
31, 1995 the Company owed the President $330,043 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 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.
12. SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during 1995 and 1994 was $-0- and $162,264 respectively. In 1995
and 1994 the Company paid $-0- and $3,409 for income taxes respectively.
Noncash Investing and Financing Activities consist of the following:
F-13
<PAGE>
CABARET ROYALE CORPORATION
Notes to Financial Statements
December 31, 1995 and 1994
12. SUPPLEMENTAL CASH FLOW INFORMATION: (CONT.)
In 1995, the company sold property plant and equipment with a net book value of
$3,990,244 cash of $25,000, a note receivable of $200,440 and assumption of
$1,574,560 in liabilities (including $150,000 due the purchaser).
On February 24, 1994 the Company acquires all the outstanding common stock of
CAT Entertainment for, among other consideration, 2,400,000 shares of class A
Common Stock which was valued a $3,000,000.
In 1994 , the Company converted a note payable and accrued interest, amounting
to $102,716 into 51,358 shares of Class A Common Stock and additional
paid-in-capital.
In 1994, the Company acquired $19,975 of computer equipment by entering into a
capital lease agreement.
F-14
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CABARET ROYALE CORPORATION
BY /S/ Salah Izzedin
- -- -----------------
Salah Izzedin, President
DATE: 4-15-97
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN
THE CAPACITIES AND ON THE DATED INDICATED.
BY: /S/ Salah Izzedin
- --- -----------------
Salah Izzedin, President and director
DATE: 4-15-97
BY: /s/ Katia Hiles, Director
- -----------------------------
Katia Hiles, director
DATE: 4-15-97
