<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1996
-------------
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from to
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Commission File Number 0 - 23136
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COUNTRY STAR RESTAURANTS, INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1536550
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11150 SANTA MONICA BOULEVARD, LOS ANGELES, CA 90025
---------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(310) 268-2200
---------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
---------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 X No
----------- -------------
The number of shares of common stock outstanding as of
August 15, 1996: 12,908,082
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Index
Page
----
PART I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheet at
March 31, 1996 (unaudited)........................ F-2
Condensed Statements of Operations
for the Quarter Ended March 31, 1996
and March 31, 1995 (unaudited)................... F-4
Condensed Statements of Cash Flows
for the Quarter Ended March 31, 1996
and March 31, 1995 (unaudited)................... F-5
Notes to Condensed Financial Statements
(unaudited)....................................... F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..... 1
SIGNATURES
F-1
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Balance Sheet
June 30, 1996
(Unaudited)
June 30,
1996 December 31,
(Unaudited) 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,048,587 9,760,675
Receivables 55,528
Inventories 251,711 380,608
Prepaid expenses and other 178,232 200,343
----------- -----------
Total current assets 6,534,058 10,341,626
----------- -----------
PROPERTY AND EQUIPMENT AT COST, net of
accumulated depreciation of $837,350.
Leasehold improvements 5,125,306 5,264,336
Equipment 915,466 926,304
Capital lease 584,270 602,372
----------- -----------
Total property and equipment 6,625,042 6,793,012
----------- -----------
INVESTMENTS IN AND ADVANCES TO
LAS VEGAS, LLC 2,782,454 852,488
----------- -----------
OTHER ASSETS
Memorabilia 235,947 179,047
Construction in Progress - Atlanta 3,717,118 1,142,012
Other 212,993 233,566
----------- -----------
Total other assets 4,166,058 1,554,625
----------- -----------
Total assets $20,107,612 $19,541,751
=========== ===========
F-2
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Balance Sheet
June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(Unaudited) 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable trade $ 354,458 $ 155,386
Accrued liabilities 183,362 153,562
Notes Payable 495,000
Capital lease obligation - current portion 87,931 83,660
Deposits and other current liabilities 17,125
------------ ------------
Total current liabilities 642,876 887,608
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligation, net of current portion 233,820 278,879
------------ ------------
Total long term liabilities 233,820 278,879
------------ ------------
Total liabilities 876,696 1,166,487
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 2,000,000 shares
authorized, 469,445 shares issued and outstanding 469 1,277
Common stock, $0.001 par value, 25,000,000 shares
authorized, 12,140,522 shares issued and outstanding 12,141 5,948
Additional paid-in-capital 32,557,524 29,454,152
Unamortized stock option cost (161,643) (232,892)
Accumulated deficit (13,177,575) (10,853,221)
------------ ------------
Total stockholders' equity 19,230,916 18,375,264
------------ ------------
Total liabilities and stockholders' equity $ 20,107,612 $ 19,541,751
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Quarter Ended For the Six Months Ended
------------------------------------ ------------------------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES
Food and Beverage $ 995,638 $ 1,277,925 1,916,283 2,311,499
Merchandise 81,474 113,945 165,019 210,650
Other 5,118 5,118
----------------- ------------------ ------------------ -----------------
Total revenue 1,082,230 1,391,870 2,086,420 2,522,149
OPERATING EXPENSES
Cost of sales
Food and beverage 255,218 375,813 535,556 686,597
Merchandise 38,275 50,706 86,384 97,416
Operating payroll 465,968 516,658 864,657 1,006,068
Other operating 457,408 346,845 752,067 643,664
Rent 78,214 78,000 156,428 156,000
Depreciation and Amortization 117,127 193,429 233,803 381,003
----------------- ------------------ ------------------ -----------------
Total operation expenses 1,412,210 1,561,451 2,628,895 2,970,748
RESTAURANT OPERATIONS, net (329,980) (169,581) (542,475) (448,599)
INTEREST EXPENSE, net (119,436) 57,397 (132,516) 94,127
OTHER INCOME
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 895,855 867,652 1,914,395 1,617,158
----------------- ------------------ ----------------- -----------------
NET LOSS $ (1,106,399) $ (1,094,630) $ (2,324,354) $ (2,159,884)
================= ================== ================== =================
NET LOSS PER SHARE $ (0.10) $ (0.20) $ (0.25) $ (0.42)
================= ================== ================== =================
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 11,481,108 5,449,952 9,401,786 5,092,765
================= ================== ================== =================
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
-----------------------------------------------
June 30, June 30,
1996 1995
--------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,324,354) $ (2,159,884)
------------------- -----------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 343,119 414,269
Charge for settlement 80,000
Discount on notes payable 14,682
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (55,528)
(Increase) decrease in inventories 128,897 (9,748)
Decrease in pre-opening costs 16,749
(Increase) decrease in prepaid expenses 22,111 (144,889)
(Increase) decrease in other noncurrent assets (14,721) (52,032)
Increase (decrease) in accounts payable and
accrued liabilities 228,872 268,257
Increase (decrease) in notes payable (495,000)
Increase (decrease) in deposits and other
current liabilities 17,125
------------------- -----------------
Total adjustment 254,875 507,288
------------------- -----------------
Net cash used in operating activities (2,069,479) (1,652,596)
------------------- -----------------
INVESTING ACTIVITIES
Purchase of leasehold improvements (18,300) (119,846)
Purchase of equipment (50,306) (20,959)
Purchase of memorabilia (56,900) (5,458)
Increase in pre-development and lease costs (80,916)
Investment in Country Star Las Vegas, LLC (1,929,966) (427,536)
Investment in Country Star Atlanta - CIP (2,575,106) (581,035)
------------------- -----------------
Net cash used by investing activities (4,630,578) (1,235,750)
------------------- -----------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock and warrants 3,066,500 1,945,238
NASD fee (37,743)
Issuance of note payable 1,121,874
Decrease in leasehold improvements payable (400,000)
Capital lease payments (40,788) (90,925)
------------------- -----------------
Net cash provided by financing activities 2,987,969 2,576,187
------------------- -----------------
NET DECREASE IN CASH (3,712,088) (312,159)
------------------- -----------------
CASH - beginning of period 9,760,675 543,694
------------------- -----------------
CASH - end of period $ 6,048,587 $ 231,535
=================== =================
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 1 - BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Country Star Restaurants, Inc. (the Company) was formed for
the purpose of owning and operating country music,
theme-oriented, casual dining restaurants in various locations
throughout the United States. The restaurants will be operated
under the name "Country Star," followed by the name of the
city.
For the year ended December 31, 1993, the Company was a
development-stage Company. In August, 1994, the Company opened
its first restaurant and began operations. On July 2, 1996,
the company opened its second restaurant on the Strip in Las
Vegas, Nevada.
Public Offerings
On December 22, 1993, the Company completed an Initial Public
Offering (the "IPO") of its common stock and redeemable common
stock purchase warrants. The net proceeds from the sale of the
IPO, approximately $6,230,200, were used primarily to
construct the Country Star Hollywood Restaurant located in
Universal City, California, which commenced operations during
the third quarter of 1994.
On November 10, 1995, the Company completed a public offering
(the "Secondary Offering") of its 6% Cumulative Convertible
Series A Preferred Stock ("Series A Preferred"). The net
proceeds from the sale of the Series A Preferred amounted to
approximately $12,372,500 and is being used to complete
construction and commence the operations of Country Star Las
Vegas and Country Star Atlanta.
Cash and Cash Equivalents
Cash and cash equivalents are all highly liquid investments
with an original maturity or purchased with a remaining
maturity of three months or less, that are readily convertible
to known amounts of cash. The carrying amount of cash and cash
equivalents approximates fair value due to their short
maturity periods.
Cash is held in demand-deposit and money-market accounts at
quality credit financial institutions. The combined account
balance at these institutions generally exceeds FDIC insurance
coverage, and, as a result, there is a concentration of credit
risk related to amounts on deposit in excess of FDIC insurance
coverage. Management believes the risk is not significant.
F-6
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 1 - BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Inventories
Inventories, consisting primarily of food, beverages and
merchandise, are stated at the lower of cost or market,
determined on a first-in, first-out (FIFO) basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for
additions and major improvements and betterments are
capitalized. Expenditures for repairs and maintenance and
minor improvements and replacements are charged to expense as
incurred. When property or equipment is retired or otherwise
disposed of, the related cost and accumulated depreciation are
removed from the accounts.
Depreciation is provided using the straight-line method over
the estimated useful lives of the related assets, which range
from five to eight years. Amortization of leasehold
improvements is provided over the estimated useful life of the
asset or the lease term, including option periods, whichever
is shorter.
Earnings per share
Loss per share is computed based upon the weighted average
shares outstanding for the period. Loss per share excludes the
effect of outstanding warrants and stock options because the
effect of such inclusion would be to decrease the net loss per
share.
Income Taxes
In accordance with the asset and liability approach specified
by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial and tax
reporting basis of the Company's assets and liabilities.
Further, if it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation
allowance is recognized.
The Company has generated net operating losses since inception
for financial reporting and income tax purposes. The Company
has a net operating loss carryforward of approximately $7.7
million. The potential tax benefit of the Company's net
operating loss carryforward is $1,575,000, $1,172,000 and
$1,020 as of December 31, 1995, 1994 and 1993. No potential
tax benefit has been calculated for the six months ended June
30, 1996. As of December 31, 1995, the Company has reserved
the tax benefit of the net operating loss carryforward, which
begins to expire in 2008.
F-7
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 1 - BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Additionally, a valuation allowance has been recognized to
offset the deferred tax asset of $150,000 and $118,000 for
1994 and 1993, attributable primarily to the temporary
differences for start-up costs expensed for financial
reporting purposes and capitalized for tax purposes due to the
uncertainty of realizing the benefit. Accordingly, no benefit
for income taxes has been reflected for the six months ended
June 30, 1996 and 1995.
Pre-opening Costs
The Company capitalizes certain costs in connection with the
opening of restaurants. Amortization of pre-opening costs is
provided using the straight-line method over twelve months,
beginning with the month in which the restaurant opens.
Pre-development Costs
Pre-development costs includes those costs incurred to prepare
restaurants for opening and include such items as design and
architect fees. Such costs will be transferred to property and
equipment and depreciated over their useful lives beginning
with the month in which the restaurant opens.
Other Assets
Included in other assets are payments made to certain
celebrities for publicity appearances and endorsements.
Amortization of these payments is provided using the
straight-line method for the term of the contract, or 34
months.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles required management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Company
as of June 30, 1996 and 1995 and for the three month period
and six month period ended June 30, 1996 and 1995 have been
prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly,
they do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation
have been included and all such adjustments are of a recurring
nature.
F-8
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 2 - BASIS OF PRESENTATION (Continued)
Certain previously reported amounts have been reclassified to
conform to the current financial statement presentation.
The financial statements should be read in conjunction with
the audited financial statements and notes thereto included in
the Annual Report on Form 10-KSB for the period ended December
31, 1995. It should be understood that accounting measurements
at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the
interim periods presented are not necessarily indicative of
the results for the entire year.
NOTE 3 - CAPITAL TRANSACTIONS
In the IPO closing on December 22, 1993, the Company offered
and sold 1,400,000 shares of common stock and 2,100,000
Redeemable Common Stock Purchase Warrants (the "Redeemable
Warrants") at a price of $5.00 and $0.25 per share, less a 10%
underwriting fee and a 3% non-accountable expense allowance.
Prior to the IPO, the Company issued 2,290,000 shares of
common stock at a price of $.001 per share. Pursuant to the
underwriter's over-allotment option, granted in connection
with the Company's IPO, on January 27, 1994, the underwriter
of the Company's IPO exercised its over-allotment option in
full, purchasing from the Company an additional 210,000 shares
of common stock and 315,000 Redeemable Warrants. The closing
of the over-allotment offering occurred on February 3, 1994,
at which time the Company received net proceeds of $958,268,
after deducting legal and related expenses of $27,397.
Additionally, in connection with the IPO, the underwriter was
granted warrants (the "Underwriter's Warrants") to purchase
from the Company 140,000 shares of common stock and 210,000
warrants, which are substantially identical to the Redeemable
Warrants except that the warrants issuable upon exercise of
Underwriter's Warrants cannot be redeemed by the Company. The
Underwriter's Warrants are initially exercisable at a price of
$8.25 per share of common stock and $4.4125 per share of
common stock for a period of four years commencing one year
from the date of the IPO.
On July 28, 1995, the Company completed a private placement
pursuant to which it sold 37 units (the "Units") to
nonaffiliated, accredited investors (the Private Placement),
each unit consisting of (i) a $50,000 6% promissory note due
the sooner of twelve (12) months from the date of issuance or
the Company's receipt of at least $5,000,000 in gross proceeds
from a public or private sale of its securities, a joint
venture or licensing agreement (the "Note"), (ii) 5,000 shares
of common stock, and (iii) 3,000 warrants exercisable at a
price at a price of $5.00 per share, subject to adjustment, to
purchase 3,000 shares of common stock. The net proceeds from
the Private Placement were approximately $1,650,000 (after
commissions and expenses) and in connection therewith the
Company issued an aggregate of 185,000 shares of common stock
and 111,000 warrants and recorded a discount aggregating
F-9
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 3 - CAPITAL TRANSACTIONS (Continued)
$655,518 based upon the relative fair market value of the
Notes, the common stock and the warrants issued therewith. The
discount is to be amortized over the term of the Notes as
interest expense. On November 10, 1995, the effective date of
the Company's Secondary Offering, the common shares were
converted into 77,089 shares of 6% Cumulative Convertible
Series A Preferred Stock and the promissory notes were repaid.
On November 10, 1995, the Company offered and sold in the
Secondary Offering, 1,200,000 shares of 6% Series A Preferred
Stock at a price of $12.00 per share. The net proceeds from
the sale of the Series A Preferred amounted to approximately
$12,372,500, after deducting expenses of $2,027,500. Such net
proceeds is being used to complete the development and
construction of Country Star Las Vegas and Country Star
Atlanta. In connection with the Secondary Offering, the
Company agreed to issue the representatives of the several
underwriters warrants, for nominal consideration, to purchase
from the Company 120,000 shares of Series A Preferred. Each
share of Series A Preferred is convertible, unless previously
redeemed by the Company, into six shares of the Company's
common stock. Unless earlier converted or redeemed, the Series
A Preferred automatically will convert into common stock upon
the earlier of May 10, 1997 or the Company achieving quarterly
revenues from operations of at least $7,000,000. During the
six months ended June 30, 1996, 807,644 shares of Series A
Preferred stock were redeemed for 4,845,864 shares of common
stock.
During 1995 the Company sold 25,000 unregistered shares of
common stock in a private placement transaction and received
$100,000. In 1995 the Company sold an additional 342,857
unregistered shares of common stock and 257,143 warrants in a
private placement, for an aggregate purchase price of
$600,000.
In addition, warrants, originally sold for $0.25, were
exercised for 275,889 shares of common stock at a price of
$4.00 per share for aggregate total net proceeds of
$1,103,675.
Effective February 12, 1996, the Company sold 241,905
unregistered shares of common stock in a private placement
transaction and received $635,000. Effective March 28, 1996
the Company sold an aggregate of 750,000 unregistered shares
of common stock for an aggregate purchase price of $2,250,000
and in connection therewith issued an aggregate of 375,000
warrants to purchase 375,000 shares of common stock for $3.00
per share in a private placement. In May and June, 1996,
warrants for the purchase of 192,000 shares of common stock
were exercised, for which the company received proceeds of
$406,500. All of the proceeds received by the Company from
each of the aforementioned private placements is for further
development of the Company's Country Star Restaurants and for
working capital purposes.
As of June 30, 1996, the Company had reserved an aggregate of
3,302,708 shares of common stock for the exercise of warrants
and stock options.
F-10
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 4 - UNSECURED NOTES PAYABLE
In December, 1995 the Company entered into a note agreement
for $495,000 with a limited partnership in conjunction with an
investment to be entered into in Country Star Las Vegas, LLC.
The note bears interest at 6% and is due and payable on
December 19, 1996. On April 1, 1996 the note was converted
into an equity ownership in Country Star Las Vegas, LLC. See
Note 8.
NOTE 5 - MINIMUM LEASE PAYMENTS
The Company has lease agreements to operate the restaurant
facility in Universal City, California, and their corporate
offices and warehouse facilities. The restaurant's initial
lease term expires on May 31, 1997, and under certain
conditions is subject to three extensions of five years each.
The lease requires annual minimum payments of percentage rent
to be paid, ranging from 6% to 10% of annual sales volume,
although such percentage rent payments will be foregone by the
landlord until such time as the Company recoups its investment
in the leasehold improvements from amounts that would
otherwise be payable to the landlord as percentage rent.
The Company has also entered into lease agreements in Las
Vegas, Nevada, and Atlanta, Georgia, to operate restaurant
facilities there. The Atlanta lease requires the Company to
pay a minimum base rent, operating expenses, and a percentage
of rent of 6% of gross sales after the Company recoups its
investment in the leasehold improvements from amounts that
would otherwise be payable to the landlord as percentage rent.
The Las Vegas lease requires the Company to pay base rent,
with stipulated fixed annual increases for the first two
years, and thereafter adjust according to the Consumer Price
Index (CPI) for the remainder of the lease.
The Atlanta lease has a 20-year term, which will expire in
2015. The Las Vegas lease has a 10-year term, which will
expire in 2005. Both leases have an option for renewal.
The warehouse and corporate facilities have terms expiring in
1997 and 1999 respectively.
The Company is subject to minimum annual lease payments as
follows:
For the period July 1, 1996 through
December 31, 1996 $ 1,150,000
1997 2,391,000
1998 2,386,000
1999 2,477,000
2000 2,462,000
Thereafter 21,044,000
F-11
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 6 - CAPITAL LEASE
The Company has executed certain leases for signage which are
accounted for as capital leases. At the termination of each
lease, the Company has the option to purchase the signage at a
bargain purchase amount. There were three separate leases, two
of which expired within a twelve month period, and the third
extending for sixty months, expiring in 1999.
The Company is subject to minimum annual lease payments as
follows:
For the period July 1, 1996 through
December 31, 1996 $ 59,004
1997 118,008
1998 118,008
1999 108,174
----------
Total minimum lease payments 403,194
Less amount representing interest (62,849)
----------
Present value of net minimum lease payments $ 340,335
----------
NOTE 7 - STOCK OPTIONS
In July 1993, the Company adopted an Incentive Stock Option
Plan. The total number of shares with respect to which
incentive stock options (ISOs) may be granted is 100,000. The
exercise price of all ISOs granted to an individual owning
more than 10% of the Company's outstanding voting shares shall
be at least 110% of the fair market value of such shares on
the date of the grant. The maximum exercise period for which
options may be granted is ten years from the date of the grant
(five years in the case of an ISO granted to an individual
owning more than 10% of the Company's outstanding voting
shares). The aggregate fair market value (determined at the
date of the option grant) of shares of common stock, with
respect to which ISOs are exercisable for the first time by
the holder of the option during any calendar year, may not
exceed $100,000. Ninety thousand (90,000) options have been
granted under the Plan at an exercise price of $2.00.
In January 1994, the Company adopted the 1994 Nonqualified
Stock Option Plan (the "Plan"). The Plan provides for the
grant of nonqualified stock options to purchase up to
1,000,000 shares of the common stock. The exercise price of
options granted under this plan shall not be less than 100% of
the fair market value of the common stock on the date of the
grant. In April 1994, the Company granted options to purchase
988,000 shares at a price equal to the market price on the
date of grant. In December 1994, the exercise price was
adjusted to the then market price of $4.00.
The Company granted options to purchase 467,000 shares to
certain non-employees for services to be performed. Of this
amount, 350,000 options were granted to certain celebrities
pursuant to license agreements with such celebrities. In
F-12
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 7 - STOCK OPTIONS
addition, options to purchase 60,000 shares were issued
pursuant to a restaurant management agreement. The Company
will recognize a charge to earnings over the period services
are rendered by the non-employees based on the fair market
value of the options at the date granted.
During the first quarter of 1996 the Company issued an
aggregate of 955,000 common stock purchase warrants to
officers, employees, independent contractors, directors and
vendors at prices ranging from $2.00 to $3.00. During the
first quarter of 1996 the Company also repriced 594,565
non-qualified stock options previously granted to certain
officers, employees, directors, investors and independent
contractors from $4.00 to $2.00.
NOTE 8 - INVESTMENT IN COUNTRY STAR LAS VEGAS LLC
On September 6, 1995, the Company entered into a definitive
agreement for the financing of future Country Star Restaurants
with NevStar Restaurants, LLC ("NevStar") a newly formed
Nevada limited liability corporation. Such agreement (the
"Development Financing Agreement") provides that NevStar shall
(i) invest $4.5 million of equity in Country Star Las Vegas,
and (ii) have the right, under certain circumstances, to
invest up to an additional $12.5 million in equity in future
domestic Country Star Restaurants, including Country Star
Atlanta. To secure its investment in Country Star Las Vegas,
NevStar deposited into escrow $5 million in marketable
securities upon the execution of the Development Financing
Agreement. Pursuant to the terms and conditions of the
Development Financing Agreement, a limited liability
corporation has been established to effect each of NevStar's
and the Company's investment in Country Star Las Vegas (the
"Country Star Las Vegas LLC"). NevStar will provide $4.5
million of equity financing for Country Star Las Vegas LLC and
the Company will provide the remaining funds necessary for
Country Star Las Vegas LLC, or approximately $3.0 million
(NevStar and the Company, in their capacity as investors in
the Country Star Las Vegas LLC, are sometimes referred to
herein as the "Equity Investors"). In connection with
NevStar's $4.5 million investment in Country Star Las Vegas
LLC, the Company shall be responsible for legal fees of
$225,000 in connection therewith and with respect to any
additional investments made in any future domestic Country
Star Restaurants by NevStar, additional legal fees in the same
proportion as the $225,000 bears to NevStar's initial $4.5
million investment. All such legal fees will be capitalized by
the Company.
Upon commencement of operations of Country Star Las Vegas,
prior to any cash distributions, the Company, which will be
responsible for managing the day-to-day operations of Country
Star Las Vegas, subject to NevStar's approval for various
matters, will receive a management fee in the amount of
$333,333 per annum, payable in equal monthly installments. In
connection with the Company's management of Country Star Las
Vegas, the Company has agreed with NevStar that labor costs
will be a predetermined percentage of Country Star Las Vegas'
revenues, which percentage shall vary based upon the actual
revenues. In the event that actual labor costs for Country
Star Las Vegas exceeds such percentage of revenues during a
F-13
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 8 - INVESTMENT IN COUNTRY STAR LAS VEGAS LLC (Continued)
twelve (12) month period, the Company will be obligated to
fund any such excess. After the Equity Investors (of which the
Company is a 40% participant) shall receive a rate of return
of 6% per annum on their unrecouped investment, all available
cash shall be distributed 25% to the Company and 75% to the
Equity Investors until such time as the Equity Investors shall
have received cash contributions equal to 100% of their
investment. Thereafter, all available cash shall be
distributed 65% to the Company and 35% to the Equity
Investors. The Company presently reports its investment in
Country Star Las Vegas LLC using the equity method of
accounting. On April 1, 1996, a limited partnership invested
$495,000 in Country Star Las Vegas LLC. See Note 4.
F-14
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial conditions and results of
operations should be read in conjunction with the Financial Statements and the
Notes thereto.
General
The Company was formed in May of 1993 and, prior to the opening of Country Star
Hollywood on August 22, 1994, did not generate any revenue.
The Company will incur significant expenses during the next several months to
complete the development, and to construct, open and begin operations of,
Country Star Las Vegas (opened July 2, 1996) and Country Star Atlanta (retail
store opened July 14, 1996, with the restaurant scheduled to open September 9,
1996). Such costs include but are not limited to architectural and design fees,
permit costs, engineering costs, construction costs, initial food, liquor and
merchandise inventory, furniture and fixtures, initial staffing and employee
training costs, ground breaking and grand opening costs, and initial marketing
and promotional costs. As of June 30, 1996, the Company had expended
approximately $2,800,000 and $3,700,000 with respect to Country Star Las Vegas
and Country Star Atlanta respectively. In addition to the $2,800,000 spent for
Country Star Las Vegas, by the Company, approximately $3,900,000 has been
reimbursed by its financial partners. The Company is paying rent for both
Country Star Las Vegas and Country Star Atlanta.
Results of Operations
For the Three Months Ended June 30, 1996
For the three months ended June 30, 1996, the Company had a net loss of
$1,106,399, compared with net loss of $1,094,630 for the three months ended June
30, 1995. Losses attributed to restaurant operations were $329,980, compared
with $169,581 for the three months ended June 30, 1995. Corporate overhead was
$776,419, compared with $925,049 for the quarter ended June 30, 1995. Losses
from restaurant operations increased due primarily to a decrease in revenues
from the previous year at Country Star Hollywood. The decrease in revenues is
attributable to adverse conditions created by the installation by MCA of a
construction fence blocking access to Country Star Hollywood. In addition, the
Company has reached a level of general and administrative expense which will
provide for the development of the Atlanta and Las Vegas stores and the next
level of "rollout" as projected to take place in 1997. Accordingly there has
been no significant increase in general and administrative expenses from the
prior year's quarter.
1
<PAGE>
Revenue
Food and Beverage
For the three months ended June 30, 1996, food and beverage revenues
were $995,638, compared with $1,277,925 for the three months ended June 30,
1995. All of the revenues were generated by the Company's initial restaurant,
Country Star Hollywood, located in Universal City, California. This represents
approximately 92% of total revenue for each quarters ended June 30, 1996 and
1995. The Company attributes the decrease in food and beverage revenues from the
prior year's three months entirely to construction activity at the main entrance
to Universal Studios Hollywood, which is directly adjacent to the front Juke Box
entrance of Country Star Hollywood. Beginning November 27, 1995, MCA began the
process of reconstruction of the main tour plaza of Universal Studios. The three
phase reconstruction program included the installation of a construction fence
which substantially blocked Country Star Hollywood's visibility from the
"Universal City Walk" entertainment zone and temporarily relocated the entrance
to the Universal Amphitheater to the east end of the park. The reconstruction
fence in Phase II and III almost completely cut off visibility of Country Star
Hollywood from patrons of Universal Studios Hollywood. The Company believes that
the reconstruction process by MCA prevented the Company from meeting its revenue
objectives for the first and second quarters of 1996. The majority of the
reconstruction of the City Walk Plaza was completed subsequent to June 30, 1996.
Additionally, the Company is in discussions with the landlord, MCA, regarding an
overall program which would provide the Company with compensation for lost
revenues.
Merchandise
For the three months ended June 30, 1996, merchandise revenues were
$81,474 compared with $113,945 for the quarter ended June 30, 1995. All of the
revenues were generated by the Company's initial restaurant, Country Star
Hollywood, located in Universal City, California. This represents approximately
8% of total revenue for each quarter ended June 30, 1996 and 1995. The Company
attributes the decrease in merchandise revenues entirely on the reconstruction
activity fully discussed in Food and Beverage.
Other Income
There was other income of $5,118 during Second Quarter, 1996.
2
<PAGE>
Interest Income
For the three months ended June 30, 1996, interest income was $185,497
compared with $1,242 for the quarter ended June 30, 1995. All interest income is
from the temporary investment in interest bearing accounts of funds received
from financing activities. The increase in interest income is due to the larger
balances available from funds received from the Secondary Offering and from
Private Placements in the last quarter of 1995 and the first two quarters of
1996.
Operating Expenses
Food and Beverage Cost of Sales
Food and beverage cost of sales for the three months ended June 30,
1996 were $255,218 and represented 26% of food and beverage revenues. Food and
beverage cost of sales for the three months ended June 30, 1995 were $375,813
and represented 29% of food and beverage revenues.
Merchandise Cost of Sales
Merchandise cost of sales for the three months ended June 30, 1996 were
$38,275and were $50,706 for the three months ended June 30, 1995. This
represents approximately 47% of merchandise revenues for the three months ended
June 30, 1996, and 45% for the prior year period.
Payroll and Related Costs
Payroll and related taxes at Country Star Hollywood was $465,968,
representing nearly 43% of total revenues for the three months ended June 30,
1996, and $516,658, representing approximately 37% of total revenue for the
three months ended June 30, 1995. Management at the restaurant is making
significant efforts to control the labor cost which should decrease as percent
of sales after completion of the construction process and substantial increases
in sales projections are realized.
3
<PAGE>
Other Operating Costs
Other operating costs for Country Star Hollywood for the three months
ended June 30, 1996 were $457,408, representing approximately 42% of total
revenues. Other operating costs for the three months ended June 30, 1995 were
$346,845, representing approximately 25% of total revenues. The increase in
Other Costs is primarily attributable to an increased spending on Advertising.
Rent
For the three months ended June 30, 1996 rent expense for Country Star
Hollywood was $78,214 representing approximately 7% of total revenues. For the
three months ended June 30, 1995 rent expense was $78,000, representing
approximately 6% of total revenues.
Interest Expense
Interest expense for the three months ended June 30, 1996 was $66,061
as compared to $58,639 for the three months ended June 30, 1995. The components
of interest are primarily relating to a capital lease to finance two signs at
Country Star Hollywood and a write off of interest formerly capitalized for the
mortgage on the land purchased and sold in Las Vegas in August, 1995 for both
respective quarters.
Selling, General and Administrative
Selling, general and administrative expenses for the three months ended June 30,
1996 were $895,855 and for the three months ended June 30, 1995 were $867,652.
Selling, general and administrative expenses consist primarily of corporate
salaries, advertising and corporate promotions, legal and professional fees,
insurance expense, travel related costs and amortization of costs associated
with options granted to employees of the company.
For the Six Months Ended June 30, 1996
For the six months ended June 30, 1996, the Company had a net loss of
$2,324,354, compared with net loss of $2,159,884 for the six months ended June
30, 1995. Negative cash flow from restaurant operations was $308,672, compared
with $67,596 for the six months ended June 30, 1995. Restaurant depreciation and
amortization during the periods was $233,803 and $381,003, respectively. The
higher year earlier depreciation and amortization is attributable to the
amortization during that period of pre-opening costs.
4
<PAGE>
Revenue
Food and Beverage
For the six months ended June 30, 1996, food and beverage revenues were
$1,916,283, compared with $2,311,499 for the six months ended June 30, 1995. All
of the revenues were generated by the Company's initial restaurant, Country Star
Hollywood, located in Universal City, California. This represents approximately
92% of total revenue for the six months ended June 30, 1996 and also 92% of
total revenue for the six months ended June 30, 1995. The Company attributes the
decrease in food and beverage revenues from the prior year's six months entirely
to construction activity at the main entrance to Universal Studios Hollywood,
which is directly adjacent to the front Juke Box entrance of Country Star
Hollywood, as discussed more thoroughly in the Management Discussion of the
three month Food and Beverage Revenue results.
Merchandise
For the six months ended June 30, 1996, merchandise revenues were
$165,019 compared with $210,650 for the quarter ended June 30, 1995. All of the
revenues were generated by the Company's initial restaurant, Country Star
Hollywood, located in Universal City, California. This represents approximately
8% of total revenue for each quarter ended June 30, 1996 and 1995. The Company
attributes the decrease in merchandise revenues entirely on the reconstruction
activity fully discussed in Food and Beverage.
Other Income
There was other income of $5,118 during the six months ended June 30,
1996.
5
<PAGE>
Interest Income
For the six months ended June 30, 1996, interest income was $215,742
compared with $5,061 for the six months ended June 30, 1995. All interest income
is from the temporary investment in interest bearing accounts of funds received
from financing activities. The increase in interest income is due to the larger
balances available from funds received from the Secondary Offering and from
Private Placements in the last quarter of 1995 and the first two quarters of
1996.
Operating Expenses
Food and Beverage Cost of Sales
Food and beverage cost of sales for the six months ended June 30, 1996
were $535,556 and represented 28% of food and beverage revenues. Food and
beverage cost of sales for the six months ended June 30, 1995 were $686,597 and
represented 30% of food and beverage revenues.
Merchandise Cost of Sales
Merchandise cost of sales for the six months ended June 30, 1996 were
$86,384 and were $97,416 for the six months ended June 30, 1995. This represents
approximately 52% of merchandise revenues for the six months ended June 30,
1996, and 46% for the prior year period.
Payroll and Related Costs
Payroll and related taxes at Country Star Hollywood was $864,657,
representing nearly 41% of total revenues for the six months ended June 30,
1996, and $1,006,068, representing approximately 40% of total revenue for the
six months ended June 30, 1995.
6
<PAGE>
Other Operating Costs
Other operating costs for Country Star Hollywood for the six months
ended June 30, 1996 were $752,067, representing approximately 36% of total
revenues. Other operating costs for the six months ended June 30, 1995 were
$643,664, representing approximately 26% of total revenues. The increase in
Other Costs is primarily attributable to an increased spending on Advertising.
Rent
For the six months ended June 30, 1996 rent expense for Country Star
Hollywood was $156,428 representing approximately 7% of total revenues. For the
six months ended June 30, 1995 rent expense was $156,000, representing
approximately 6% of total revenues.
Interest Expense
Interest expense for the six months ended June 30, 1996 was $83,226 as
compared to $99,188 for the six months ended June 30, 1995. The components of
interest are primarily relating to a capital lease to finance two signs at
Country Star Hollywood and a write off of interest formerly capitalized for the
mortgage on the land purchased and sold in Las Vegas in August, 1995 for both
respective quarters.
Selling, General and Administrative
Selling, general and administrative expenses for the six months ended June 30,
1996 were $1,914,395 and for the six months ended June 30, 1995 were $1,617,158.
Selling, general and administrative expenses consist primarily of corporate
salaries, advertising and corporate promotions, legal and professional fees,
insurance expense, travel related costs and amortization of costs associated
with options granted to employees of the company.
Liquidity and Capital Resources
At August 12, 1996 the Company had cash on hand of $5,500,000. To date the
Company has funded its capital requirements with proceeds from the public sale
of Common Stock, Redeemable Warrants and Preferred Stock, the exercise of the
publicly traded Redeemable Warrants, the private sale of equity and debt
securities, and mortgage financing on the purchase of land.
7
<PAGE>
Seasonality
The Company does not believe that seasonality will have a material impact on the
Company's overall operations once it has established Country Star Las Vegas and
Country Star Atlanta. Country Star Hollywood is in a location that experiences
significantly higher traffic during the summer months due to its popularity as a
tourist destination. Consequently, until Country Star Las Vegas and Country Star
Atlanta open, seasonality will have a material impact on the Company's
operations.
Impact of Inflation
Increases in food and labor costs and interest rates directly affect the
Company. Many of the Company's employees at Country Star Hollywood are paid, and
many of the Company's employees at Country Star Las Vegas and Country Star
Atlanta will be paid, at hourly rates related to the Federal minimum wage. Any
increases in the Federal minimum wage in the future would further increase the
Company's operating expenses. In addition, the Company's leases at Country Star
Hollywood, Country Star Las Vegas and Country Star Atlanta require the Company,
among other things to pay taxes, maintenance, insurance, repairs and utility
costs, all of which are subject to inflation as well as percentage rent and
periodic escalations of annual rents. Any future leases that the Company may
enter into with respect to any future Country Star Restaurant may also contain
similar provisions.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly authorized and caused the undersigned to sign this
Report on the Registrant's behalf.
COUNTRY STAR RESTAURANTS, INC.
By: /s/ Robert J. Schuster
-------------------------------
Robert J. Schuster
Chief Executive Officer
By: /s/ Peter R. Feinstein
------------------------------
Peter R. Feinstein
President and
Chief Financial Officer
Dated: August 16, 1996
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