<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 September 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
-------- -------
Commission File Number 0 - 23136
--------------
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 October 31, 1996:
12,790,163
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheet at
September 30, 1996 and December 31, 1995....... F-2
Condensed Statements of Operations
for the Quarter Ended September 30, 1996
and September 30, 1995......................... F-4
Condensed Statements of Cash Flows
for the Nine Months Ended September 30, 1996
and September 30, 1995 (unaudited)............. F-5
Notes to Condensed Financial Statements
(unaudited).................................... F-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 1
Item 6. Exhibits and Reports on Form 8-K.................. 7
</TABLE>
SIGNATURES
F - 1
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Balance Sheet
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1996 December 31,
(Unaudited) 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,340,050 9,760,675
Trade Receivables 228,406
Inventories 692,152 380,608
Prepaid expenses and other 243,871 200,343
----------- -----------
Total current assets 3,504,479 10,341,626
----------- -----------
PROPERTY AND EQUIPMENT AT COST, net of
accumulated depreciation of $1,110,958
and $478,476 for 1996 and 1995
Leasehold improvements 12,545,154 5,264,336
Equipment 1,450,090 926,304
Capital lease 795,484 602,372
----------- -----------
Total property and equipment 14,790,728 6,793,012
----------- -----------
INVESTMENTS IN AND ADVANCES TO
LAS VEGAS, LLC 852,488
----------- -----------
OTHER ASSETS
Memorabilia 430,114 179,047
Construction in Progress - Atlanta 8,353,886 1,142,012
Orlando Pre Development 20,390
Pre-Opening Costs-Net of Accumulated
Amortization of $472,893 for 1996 1,592,571
Other 192,829 233,566
----------- -----------
Total other assets 10,589,793 1,554,625
----------- -----------
Total assets $28,885,000 $19,541,751
=========== ===========
</TABLE>
F - 2
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Balance Sheet
September 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1996 December 31,
(Unaudited) 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable trade and
construction $ 3,877,241 $ 155,386
Accrued liabilities 155,209 153,562
Notes Payable 495,000
Capital lease obligation - current portion 173,205 83,660
Deposits and other current liabilities 6,653
------------ ------------
Total current liabilities 4,212,308 887,608
------------ ------------
LONG-TERM LIABILITIES
Capital lease obligation, net of current portion 294,247 278,879
------------ ------------
Total long term liabilities 294,247 278,879
------------ ------------
Total liabilities 4,506,555 1,166,487
------------ ------------
Minority Interest in Las Vegas Investment 4,229,643
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 2,000,000 shares
authorized, 600,137 and 1,277,089 shares issued
and outstanding for September 30, 1996 and December
31, 1995 600 1,277
Common stock, $0.001 par value, 25,000,000 shares
authorized, 12,687,587 and 5,947,577 shares issued and
outstanding for September 30, 1996 and December 31, 1995 12,687 50,948
Additional paid-in-capital 35,663,597 29,454,152
Unamortized stock option cost (344,185) (232,892)
Accumulated deficit (15,183,897) (10,853,221)
------------ ------------
Total stockholders' equity 20,148,802 18,375,264
------------ ------------
Total liabilities and stockholders' equity $ 28,885,000 $ 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 Nine Months Ended
--------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Food and Beverage $ 2,425,600 $ 1,377,212 $ 4,341,883 $ 3,688,711
Merchandise 415,782 126,366 580,801 337,016
Other 540 5,658
----------- ----------- ----------- -----------
Total revenue 2,841,922 1,503,578 4,928,342 4,025,727
OPERATING EXPENSES
Cost of sales
Food and beverage 861,931 426,197 1,397,485 1,112,794
Merchandise 238,783 55,371 325,170 152,787
Operating payroll 1,359,901 465,070 2,224,555 1,471,138
Other operating 1,264,384 318,963 2,016,176 987,127
Rent 332,591 78,214 489,284 234,214
Depreciation and Amortization 717,719 118,934 951,522 352,737
---------- ---------- ---------- ----------
Total operating expenses 4,775,309 1,462,749 7,404,192 4,310,797
RESTAURANT OPERATIONS, net (1,933,387) 40,829 (2,475,850) (285,070)
INTEREST (INCOME) EXPENSE, net (49,609) (217,362) 182,125 (336,727)
DEPRECIATION AND
AMORTIZATION 86,472 42,414 195,787 234,221
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 780,081 1,686,386 2,605,941 3,400,628
MINORITY INTEREST IN
COUNTRY STAR LAS VEGAS LLC (764,765) (764,765)
----------- ----------- ----------- -----------
NET LOSS $(2,006,334) $(1,905,333) $(4,330,688) $(4,256,646)
=========== =========== =========== ===========
NET LOSS PER SHARE $ (0.16) $ (0.33) $ (0.44) $ (0.80)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 12,473,469 5,768,280 9,811,992 5,322,625
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------
September 30, September 30,
1996 1995
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,330,688) $(4,256,646)
------------ -----------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,508,913 600,138
Charge for non-cash settlement 80,000
Discount on notes payable 240,200
Amortization of stock option cost, net: 137,957 177,949
Executive compensation from release of escrowed
shares 1,425,000
Gain on sale of Las Vegas Land 502,230
Changes in assets and liabilities
(Increase) decrease in accounts receivable (228,394)
(Increase) decrease in inventories (311,544) (52,891)
(Increase) decrease in pre-opening costs (2,065,464) 16,749
(Increase) decrease in pre-paid expenses (43,528) (76,529)
(Increase) decrease in other noncurrent assets 40,737 (482,582)
Increase (decrease) in accounts payable and
accrued liabilities 3,723,502 464,608
Increase (decrease) in Notes payable (495,000)
Increase (decrease) in deposits and other
current liabilities 6,653
------------ -----------
Total adjustment 2,353,832 2,814,872
------------ -----------
Net cash used in operating activities (1,976,856) (1,441,774)
------------ -----------
INVESTING ACTIVITIES
Purchase of leasehold improvements (7,619,970) (166,464)
Purchase of equipment (1,413,766)
Purchase of memorabilia (251,067) (13,302)
Proceeds from sale of Las Vegas land 1,156,974
Proceeds from financing of Las Vegas land 1,000,000
Pay-off of Las Vegas debt (1,823,284)
Increase in pre-development and lease costs (1,660,387)
Investment in Country Star Las Vegas 852,488
Minority interest in Country Star Las Vegas 4,229,643
Investment in Country Star Atlanta (7,211,874)
Investment in Country Star Orlando (20,393)
------------ -----------
Net cash used by investing activities (11,434,939) (1,506,463)
------------ -----------
</TABLE>
F-5
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Cash Flows (Continued)
(Unaudited)
<TABLE>
<S> <C> <C>
FINANCING ACTIVITIES
Net proceeds from issuance of common
and preferred stock and warrants 5,924,000 3,763,352
Fee for equity placement NASD fee (37,743)
Issuance of note payable (250,000)
Decrease in leasehold improvements payable (400,000)
Capital lease payments 104,913 (146,501)
----------- ----------
Net cash provided by financing activities 5,991,170 2,966,851
----------- ----------
NET INCREASE (DECREASE) IN CASH (7,420,625) 18,614
----------- ----------
CASH - beginning of period 9,760,675 543,694
----------- ----------
CASH - end of period $ 2,340,050 $ 562,308
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<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. On October
14, 1996, the Company opened its third restaurant in Atlanta, Georgia.
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 - 7
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 1 - BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Country Star Las Vegas LLC
--------------------------
The Company presently reports its investment in Country Star Las
Vegas LLC using the consolidated method of accounting (see note 8.)
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
F - 8
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 1 - BACKGROUND OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 nine months ended September 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.
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 nine months
ended September 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.
F - 9
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 2 - BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Company as of
September 30, 1996 and 1995 and for the three month period and nine
month period ended September 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.
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
F - 10
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 3 - CAPITAL TRANSACTIONS (CONTINUED)
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 $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 nine months ended September 30, 1996, 847,323
shares of Series A Preferred stock were redeemed for 5,083,938 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
F - 11
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 3 - CAPITAL TRANSACTIONS (CONTINUED)
aforementioned private placements is for further development of the
Company's Country Star Restaurants and for working capital purposes.
Effective July 10, 1996, the Company sold an aggregate of 514,288
shares of common stock in a private placement to two separate
investors for aggregate gross proceeds of $1,800,000. In connection
therewith, the Company also issued to these two investors and
aggregate of 385,715 common stock purchase warrants, each warrant to
purchase one (1) share of common stock at an exercise price of $3.50
per share.
Effective August 28, 1996, one of the two purchasers in the July 10,
1996 private transaction restructured his transaction with Company in
connection with causing an additional $900,000 in gross proceeds to be
invested in the Company. Specifically, the purchaser of 400,000 shares
of common stock and 300,000 common stock purchase warrants,
representing $1,400,000 of the $1,800,000 invested in July 1996,
returned all such securities to the Company and in return, the entire
$1,400,000 purchase prices was credited, in equal portions, to two
entities affiliated with such July purchaser. The two entities
affiliated with such July purchaser invested an aggregate of an
additional $900,000 in gross proceeds and, when added to the
$1,400,000 credited to them, purchased an aggregate of $2,300,000
shares of the Company's Series A Preferred Stock at a purchase price
$13.50 per share. Consequently, these two affiliated purchasers
purchased an aggregate of 170,371 shares of the Company's Series A
Preferred Stock and received an aggregate of 306,667 common stock
purchase warrants, each warrant to purchase one share of common stock.
The Company is obligated to file a registration statement on November
19, 1996 (the "November 19th Registration Statement") with respect to
the registration of all of the shares of the Series A Preferred Stock
issued in the August 28, 1996 transaction, all of the remaining
114,228 shares common stock issued in the July 10, 1996 transaction,
all of the shares of common stock issuable upon the exercise of the
remaining 87,715 warrants issued in the July 10th transaction and the
306,667 warrants issued in the August 28th transaction, and all of the
shares of common stock issuable upon the conversion of the Series A
Preferred Stock.
Effective September 10, 1996 the Company sold an aggregate of 100,000
shares of common stock to two related individual pension funds for
aggregate gross proceeds of $200,000. In connection therewith, the
Company also issued to these two funds an aggregate of 100,000 common
stock purchase warrants, each convert to purchase one (1) share of
common stock at an exercise price of $2.00 per share. The Company is
also obligated to include on the November 19th Registration Statement,
among other securities, all of the shares of common stock issued in
the September 10th transaction and the shares of common stock issuable
upon the exercise of the warrants issued in the September 10th
transaction, and all of the shares of common stock issuable upon the
conversion of the Series B Preferred Stock issued by the Company in a
private transaction that resulted in the Company receiving gross
proceeds of $4,000,000, which was effected on October 11, 1996, as
more fully described in the Company's Report on Form 8-K annexed
hereto.
F - 12
<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:
<TABLE>
<S> <C>
For the period September 30, 1996 through December 31, 1996 $ 603,562
1997 2,391,000
1998 2,386,000
1999 2,477,000
2000 2,462,000
Thereafter 21,044,000
</TABLE>
F - 13
<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 for the Hollywood
facility, two of which expired within a twelve month period, and the
third extending for sixty months, expiring in 1999. The lease for the
signage at the Las Vegas facility expires in 1998.
The Company is subject to minimum annual capital lease payments as
follows:
<TABLE>
<S> <C>
For the period September 30, 1996 through December 31, 1996 $ 53,502
1997 214,008
1998 182,008
1999 108,174
--------
Total minimum lease payments 557,692
Less amount representing interest (71,704)
--------
Present value of net minimum lease payments $485,988
--------
</TABLE>
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.
F-14
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 7 - STOCK OPTIONS (CONTINUED)
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 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 nine months of 1996 the Company issued an aggregate
of 2,082,500 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.
As of September 30, 1996, the Company had reserved an aggregate of
4,922,590 shares of common stock for the exercise of warrants and
stock options.
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,
F-15
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Financial Statements (Continued)
(Unaudited)
NOTE 8 - INVESTMENT IN COUNTRY STAR LAS VEGAS LLC (CONTINUED)
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
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 (during this distribution period the Company owns
a total of 50.05% of distribution and the minority interest 49.95%).
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 consolidated method
of accounting. On April 1, 1996, a limited partnership invested
$495,000 in Country Star Las Vegas LLC. See Note 4.
NOTE 9 - SUBSEQUENT EVENTS
Effective October 7, 1996 the Company signed a fifteen year lease with
two successive five year options for a 10,000 square foot Country Star
Orlando scheduled to begin construction in 1997 and open by summer,
1997.
Subsequent to September 30, 1996 the Company raised an additional
$4,000,000 in a private preferred stock transaction, as more fully
disclosed in Note 3.
F-16
<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 following table outlines the specific details of the
Company's three restaurant locations.
<TABLE>
<CAPTION>
SITE DATE OPENED SQUARE FOOTAGE MAX. SEATS
===================================================================
<S> <C> <C> <C>
HOLLYWOOD August 22, 1994 14,000 325 + 200 (patio)
LAS VEGAS July 2, 1996 22,000 600
ATLANTA October 14, 1996 20,000 400 + 120 (patio)
------ ----------------
56,000 1,325 + 320
</TABLE>
The Company incurred significant expenses to complete the development,
and to construct, open, and begin operations of Country Star Las Vegas
and Country Star Atlanta. Such additional costs included significant
construction cost, some of which were unanticipated, plus overtime
labor costs, architectural and design fees, permit costs, initial
food, liquor and merchandise inventory, furniture and fixtures,
initial staffing and related costs, employee training, grand opening
parties and related expenditures, and initial marketing, advertising,
and related promotional costs. The Company also signed a lease in
October to open a Country Star Restaurant in Orlando, Florida.
As of September 30, 1996, the Company had expended approximately
$5,108,327 and $8,444,380 with respect to Country Star Las Vegas and
Country Star Atlanta, respectively, and additional significant costs
subsequent to September 30, 1996 were expended, primarily in
connection with Country Star Atlanta. Although Country Star Atlanta
is open and operating, there still remain construction and development
that require completion. Accordingly, the Company anticipates it will
have to spend approximately $1,500,000 to complete the development and
construction of Country Star Atlanta, in the fourth quarter of 1996.
The Company has expended $20,390 with respect to Country Star Orlando.
COUNTRY STAR LAS VEGAS
----------------------
Country Star Las Vegas, a free standing 22,000 square foot building,
was built on a "fast track" schedule. Site improvement work began in
January 1996 and the building was completed on June 29, 1996. The
"Grand Opening" party was held on July 1, 1996 and included a
celebrity driven concert emceed by Reba McEntire and performances by
celebrity representatives Vince Gill, Lee Roy Parnell, Tracy Lawrence,
Bryan White, Leann Rimes, Trisha Yearwood, Charlie Pride, and others.
In attendance were Las Vegas notables including the Govenor of the
State of Nevada and Steve Wynn.
1
<PAGE>
The Grand Opening party was scheduled months in advance based on the
availability of the celebrity representatives. No in-store training
could be started prior to the opening of the restaurant, which was not
completed until right before the Grand Opening Party As a
consequence, the company incurred significant extra costs including
overtime expense in construction and off-site training of staff.
Further, due to a lack of "soft opening", food and labor costs were
significantly high as a percentage of sales during the quarter ended
September 30, 1996.
The five major components of sales for Las Vegas are:
1. residential community which exceeds 1 million
2. convention business
3. tour groups
4. tourists
5. entertainment programs
The Company believes that is has not communicated effectively with Las
Vegas tourists beyond a certain radius of the site either during or
prior to their visit to Las Vegas. The Company is taking steps to
attempt to correct this and to date, the Company has spent over
$300,000 in advertising, which includes taxi tops, passenger busses,
airport signage (including video in the baggage area), billboards,
radio, television, and cable, all of which, in time, the Company
believes, should convert into increased customer awareness and related
revenues.
A major strength of the Country Star concept is that 25% of all radio
stations in the United States are broadcasting country music full
time. In 70% of all radio markets, country music is either number one
or two. In Las Vegas, there are two country music stations: KNRW and
KFM. The company has jointly promoted many events with both stations.
KFM 102 in particular has, on a regular basis, broadcast live from
Country Star. Typically, this type of broadcast takes place during the
noon hour and includes a presentation to a country star of a "Star" to
be placed on a booth or table with that person's name. The
presentation is followed by a mini performance and live on-the-air
performance. Among the stars who have participated in this or similar
type of live broadcast are Charlie Pride, Doug Supernaw, Tracy
Lawrence, Leann Rimes, Eddie Rabbit, and Mark Wills.
Further the Company believes the anticipated opening of the "New York,
New York Hotel and Casino", located on the Strip, near Country Star
Las Vegas will increase the traffic volume for the Las Vegas site.
Country Star Las Vegas has also implemented significant entertainment
programs. Country Star line dancers and waiter/waitress singers
entertain throughout the night. On Sundays beginning in September,
1996, Country Star Las Vegas began the "Gospel Sunday Brunch" with
gospel music groups and three seatings on Sundays. Weekly events at
the restaurant have included numerous country music celebrities
cooperating with Country Star in various presentations. In
accordance with the Company's concept as an entertainment venue,
Country Star recently began late-night dancing in the restaurant on
Friday and Saturday nights, and is currently looking for a nightly
entertainment show which would be appropriate and draw late night
business.
COUNTRY STAR ATLANTA
--------------------
The general contractor on Country Star Atlanta anticipated a "turn
over" date to be September 9, 1996. Based on that schedule, the
Company began hiring in mid-August,
2
<PAGE>
and by early September, the Company had hired approximately 200
persons. These staff were trained off-site and were on the payroll
beginning in August 1996. Each staff member received up to 40 hours of
classroom training and several were flown to Las Vegas and Hollywood
(which are substantially similar in design) to observe and train.
On September 9, 1996, the facility was not available. Due to
construction delays, some of which were caused by an unusually rainy
September, the restaurant was actually turned over to Country Star
Atlanta in early October. This later than expected turnover resulted
in loss of employees and added additional costs in rehiring and
training staff. The Company is in negotiations with the General
Contractor regarding the Company's added costs.
COUNTRY STAR HOLLYWOOD
----------------------
The reconstruction of the front entrance to Universal Studios, which
began November 27, 1995, and was completed approximately July 15,
1996, had and continues to have material adverse effect on Country
Star Hollywood. The reconstruction of the Plaza areas which, among
other elements, included a new entrance and an architectural fountain,
also included a new tree shading program which partially blocks the
front entrance (Juke Box) from "Universal City Walk" entertainment
zone, although the electronic message board located at the end of the
patio is now more visible. Additionally, the exiting from both the
amusement park and the Universal Amphitheater is no longer directly
across from Country Star. The Company is in negotiations with MCA
regarding the reconstruction process and the related effect on the
Company.
COUNTRY STAR ORLANDO
--------------------
In October, 1996 the Company signed a lease to open a Country Star
Restaurant in Orlando, Florida at the Pointe Orlando Entertainment
Center which is expected to be completed in the summer of 1997 and
will be located across the street from the Convention Center in
Orlando, Florida. Subject to securing the necessary financing, the
Company presently anticipates opening Country Star Orlando in July of
1997.
RESULTS OF OPERATIONS
---------------------
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------
For the three months ended September 30, 1996 the Company had a net
loss of $2,006,334, compared with a net loss of $1,905,333 for the
three months ended September 30, 1995. Losses attributed to restaurant
operations were $1,933,387 compared with $1,585 for the three months
ended September 30, 1995. Restaurant operations for the quarter are
not comparable as the Company opened its second restaurant, Country
Star Las Vegas, on July 2, 1996. Included in the Country Star Las
Vegas loss from operations is amortization of pre-opening expense in
the amount of $472,892.
COUNTRY STAR HOLLYWOOD
----------------------
For the three months ended September 30, 1996 losses from restaurant
operations for Country Star Hollywood were $422,545 compared with
$1,585 for the three month ended September 30, 1995. Revenues from
Country Star Hollywood for the three months ended September 30, 1996
were $1,142,410 compared to $1,503,578 for the three months ended
September 30, 1995 representing a decrease of 24%. Management
3
<PAGE>
attributed the decrease in sales to several major factors as discussed
in the "General" overview section, which includes the reconstruction
of the Plaza and the exiting from the Park and Amphitheater. Also, the
Reba McEntire July, 1995 concerts were a major component in the
revenues for the quarter ended September 30, 1995.
Merchandise revenues for the three months ended September 30, 1996
were $109,338 compared with $126,365 for the quarter ended September
30, 1995. This represents 9.6% of total revenue for the quarter ended
September 30, 1996 as compared to 8.0% for the quarter ended September
30, 1995. The merchandise sales as a percentage of the total for the
quarter represents a 20% increase in percentage merchandise sales. The
company expects that as stores open and customer awareness increases
merchandise sales as a percentage of total sales will increase.
Food and beverage cost of sales for the three months ended September
30, 1996 were $368,980 and represented 36% of food and beverage
revenue. Food and beverage cost of sales for the three months ended
September 30, 1995 were $426,197 and represented 31% of sales. It is
estimated that higher food cost of sales for the quarter is a result
of the majority of Country Star Hollywood kitchen management, the
executive Chef, Layne Wootten and corporate staff being all involved
in the training of employees at Country Star Las Vegas and Atlanta.
Merchandise cost of sales for the three months ended September 30,
1996 were $70,353 and were $55,371 for the three months ended
September 30, 1995. Merchandise cost of sales as a percentage of
merchandise sales was 64% and 44% for the quarters ending September
30, 1996 and 1995 respectively. This increase in merchandise cost is a
result of the Company's beginning a new "logo merchandise" line with
the opening of Country Star Las Vegas. Further, the classic logo held
in inventory by Country Star Hollywood began being sold at cost in
late July, 1996 which also contributed to an unusually high cost of
sales. Additionally, a significant amount of classic logo items were
given away as corporate and store promotions.
Payroll and related taxes for the three months ended September 30,
1996 were $456,434 (net of $50,634 corporate line dancers) and were
$465,070 representing approximately 40% and 31% of total revenue for
the three months ended September 30, 1996 and 1995 respectively.
Payroll was higher in the quarter ended September 30, 1996 due to
numerous Country Star Hollywood employees involved in training both on
site in Hollywood and at Country Star Las Vegas and Atlanta.
Other operating costs for the three months ended September 30, 1996
and 1995 were $401,100 and $318,963 representing 32% and 21% of
revenues respectively. Other operating costs for the quarter ending
September 30, 1996 were higher as a result of increased advertising
costs ($26,000) repairs and maintenance ($9,000), property taxes
($12,000), and new menus and dishes ($51,000) which included the new
"logo" design.
Rent for the quarter ending September 30, 1996 and 1995 was
comparable.
Interest income (expense) net for the three months ended September 30,
1996 and 1995 were $49,609 and ($217,362) respectively. Income for the
three months ending September 30, 1996 relates to interest on
certificate of deposit and money market accounts net of capital lease
expense. Interest expense for the three months ending September 30,
1995 relates to capital leases and interest expense on the mortgage
with respect to property owned by the company in 1995 and sold in
August, 1995.
4
<PAGE>
Other income relates to management fees of $27,500 per month for
managing Country Star Las Vegas, a limited liability company with
outside shareholders.
Selling, general and administrative expenses for the three months
ended September 30, 1996 and 1995 were $780,081 and $1,496,497
representing 27% and 100% of total revenues for their respective
periods. Selling, general and administrative expenses consist
primarily of corporate salaries, promotions, legal and professional
fees, insurance, travel and other related expenses. During the third
quarter of 1995 the Company incurred a non-cash non-recurring charge
to executive compensation in the amount of $1,425,000 relating to a
release of escrowed shares of which approximately $600,000 relates to
the period ending September 30, 1995.
Minority interest in Country Star Las Vegas LLC represents a 49.95%
held by minority interests and their related share of losses for the
quarter ended September 30, 1996.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------
For the nine months ended September 30, 1996, the Company had a net
loss of $4,330,688 compared with a net loss of $4,256,646 for the nine
months ended September 30, 1996. Negative cash flow from restaurant
operations was $1,524,328 for the nine months ended September 30, 1996
compared to $67,667 positive cash flow for September 30, 1995.
The significant increase in net loss, negative cash flow from
operations and depreciation and amortization is the result of Country
Star Las Vegas beginning operations on July 2, 1996 and more fully
discussed in the preceding narrative.
Additionally, revenue, operating expenses, merchandise sales, other
operating costs, rent relating to operations are not necessarily
comparable based on the Las Vegas store opening July 2, 1996. The
differences are so varied that the discussion for the three month
period ending September 30, 1996 and 1995 is not applicable.
Selling, general and administrative expenses for the nine months ended
September 30, 1996 were $2,585,170 and $3,400,628 for the period
ending September 30, 1995. The major difference between the periods,
is explained by $1,425,000 charged to executive compensation as a non-
recurring charge for escrowed founders shares released from escrow
during the period ending September 30, 1995. The shares were valued
at market and charged against earnings as executive compensation.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At November 18, 1996, the Company had cash in bank and money market
accounts of approximately $2,800,000. Approximately $1,500,000 of
said funds are to pay off the construction of Country Star Atlanta.
In order for the Company to continue to operate its existing Country
Star Restaurants, and to develop, build, open and operate its next
Country Star Restaurant in Orlando, Florida (and continue to expand
thereafter) the Company will require substantial additional financing
in the immediate future. The Company has no current arrangements with
respect to any such additional financing and there can be no
assurance whatsoever that the Company will be able to locate any such
additional financing on a timely basis in sufficient amounts or on
terms and conditions acceptable to the Company, or at all. In
5
<PAGE>
the event that the Company is not successful in securing any other
sources of financing on a timely basis in amounts and on terms and
conditions acceptable to the Company, or at all, the Company's ability
to continue its current operations, as well as its ability to develop,
build, open and operate Country Star Orlando, and expand thereafter,
will be materially adversely affected.
In addition to needing to secure additional financing on a timely
basis, the Company's ability to attain profitability will depend on
the Company's ability to reduce expenses, increase the revenues from
Country Star Hollywood, Country Star Las Vegas and Country Star
Atlanta, successfully implement its expansion strategy and achieve
operating efficiencies.
SEASONALITY
The Company does not believe that seasonality will have a material
impact on the Company's overall operations although 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, the continuing operation of Country Star
Las Vegas and Country Star Atlanta which are now open, should offset
the seasonality issue as 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, Las Vegas and Atlanta are 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 escalation 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.
6
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
EXHIBITS
27 Financial Data Schedule
99.A Form 8-K filed October 10, 1996
99.B Form 8-K filed November 14, 1996
Reports on Form 8-K
On October 10, 1996, the Company filed a Current Report on
Form 8-K in connection with a private placement of $4,000,000
of the Company's stock.
On November 14, 1996, the Company filed a Current Report on
form 8-K in connection with the Company's termination of BDO
Seidman, LLP as its independent auditor, and the resignation
of Robert Linton from the Board of Directors.
7
<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: November 18, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,340,050
<SECURITIES> 0
<RECEIVABLES> 228,406
<ALLOWANCES> 0
<INVENTORY> 692,152
<CURRENT-ASSETS> 3,504,479
<PP&E> 15,901,686
<DEPRECIATION> 1,110,958
<TOTAL-ASSETS> 28,885,000
<CURRENT-LIABILITIES> 4,212,308
<BONDS> 0
600
0
<COMMON> 12,687
<OTHER-SE> 20,135,515
<TOTAL-LIABILITY-AND-EQUITY> 28,885,000
<SALES> 2,841,922
<TOTAL-REVENUES> 2,901,366
<CGS> 1,100,714
<TOTAL-COSTS> 4,775,309
<OTHER-EXPENSES> 101,788
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,835
<INCOME-PRETAX> (2,006,334)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,006,334)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,006,334)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
<PAGE>
================================================================================
EXHIBIT A
SECURITIES AND EXHANGE COMMISSION
Wshington, D.C. 20549
FORM 8 - K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) October 10, 1996
----------------
COUNTRY STAR RESTAURANTS, INC
----------------------------------------------------
(Exact name of registrant as specified In its charter)
Delaware 33-67526-A 62-1536550
------------------------- ------------ ------------------
(State or other (Commission (IRS Employer
jurisdiction of formation) File Number) Identification No.)
11150 Santa Monica Boulevard, Suite 650, Los Angeles, CA 90025
- --------------------------------------------------------- --------
(Address if principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 268-2200
--------------
(Former name or former address, if changes since last report)
================================================================================
<PAGE>
Item 1. Changes in Control of Registrant
--------------------------------
Not applicable.
Item 2. Acquisition or Disposition of Assets.
-------------------------------------
Not applicable.
Item 3. Bankruptcy or Receivership
--------------------------
Not applicable.
Item 4. Changes in Registrant's Certifying Accountant.
----------------------------------------------
Not applicable.
Item 5. Other Events.
-------------
On October 10, 1996, the Company closed with respect to the sale
of 4,000 shares of a newly issued 7% convertible preferred stock, par value
of $.001 per share (the "Preferred Stock"). The sale was made to a foreign,
single, institutional investor for an aggregate purchase price of
$4,000,000 or $1,000 per share. The sale of Preferred Stock was effected in
a transaction exempt from the registration requirements of the Securities
Act of 1934, as amended (the "Act"), pursuant to Rules 501-508 promulgated
thereunder.
Each share of Preferred Stock may be converted at the option of
the holder in the time frames set forth in the following paragraph into
such number of shares of the Company's common stock, par value $.001 per
share (the "Common Stock"), as determined by dividing the original issuance
price of $1,000 per share (the "Original Issuance Price"), by the lesser of
(1) $3.25, or (ii) 80% of the average closing bid price of the Common Stock
as reported on the NASDAQ Stock Market for the five (5) consecutive trading
days immediately prior to the date of conversion; provided, however, that
during the one hundred twenty (120) day period after the original date of
issuance if the five (5) consecutive trading day average closing bid price
of the Common Stock is less than $1.50 per share, then under no
circumstances can any shares of Preferred Stock be converted into Common
Stock until the five (5) consecutive trading day average
1
<PAGE>
closing bid price of the Common Stock exceeds $1.50 per share. Further, in
no event can the aggregate of all the Preferred Stock be converted, at any
time, into more than three million (3,000,000) shares of the Company's
Common Stock (the "Maximum Number of Shares"). In the event that any
conversions of Preferred Stock would result in the issuance of shares of
Common Stock in excess of the Maximum Number of Shares (the "Excess
Conversions"), result in Excess Conversion will, instead of being
converted, be redeemed by the Company at a rate equal to the Original
Issuance Price (plus any accrued and unpaid dividends thereon) within
ninety (90) days after the Company receives a written redemption notice
from the holder.
Subject to the provisions of the foregoing paragraph, the Preferred
Stock shall be convertible as follows; (I) up to , shares of Preferred
Stock at any time from and after the sixtieth (60th) day from the date on
which the shares of Preferred Stock were first issued on October , 1996
(the "Original Issuance Date"); (ii) up to 2,000 shares of Preferred Stock
at any time from and after the ninetieth (90th) day following the Original
Issuance Date; (iii) up to 3,000 shares of Preferred Stock at any time from
and after the one hundred twentieth (120th) day following the Original
Issuance Date; and (iv) all of the shares of Preferred Stock originally
issued to such holder at any time from and after one hundred fiftieth
(150th) day following the Original Issuance Date. Notwithstanding the
foregoing, in no event shall the holder of the Preferred Stock be entitled
to convert the Preferred Stock in the vent that such conversion would
result in such holder's beneficially owning more than 5% of the outstanding
shares of the Company's Common Stock. For purposes of computing 5%
ownership, beneficial ownership shall be calculated in accordance with Rule
13d-3 promulgated under the Securities Exchange Act of 1934 as amended.
The Preferred Stock shall pay cumulative dividends at the rate of 7%
per anum, which shall accrue and be payable in arrears on the outstanding
share of Preferred stock on each anniversary of the Original Issuance Date.
The dividend may be paid, at the election of the Company, in cash or in
shares of the Company's Common Stock.
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The Preferred Stock shall not have any voting rights accept to the
extent that under Delaware law the vote of the holders of the Preferred
Stock, voting separately as a class, is required to authorize a given
action of the Company. To the extent that under Delaware law the holders of
the Preferred Stock are entitled to vote on matters with holders of Common
Stock voting together as one class, each share of Preferred Stock shall be
entitled to the number of votes equal to the number of share of Common
Stock into which it is then convertible, using the record date for the
taking of such vote of stockholders as the date as of which the conversion
price is determined. To the extent that the Preferred Stock is entitled to
Delaware law to vote separately as a class to authorize any action of the
company, the affirmative vote of the holders of at least the majority of
outstanding class of Preferred Stock shall constitute the approval of such
action by the class.
In the event of any liquidation, disillusion or winding up of the
Company, the holders of the Preferred Stock shall be entitled to receive,
immediately after distributions to the senior securities, including
distributions on issued and outstanding shares of the Company's 6%
cumulative convertible series a Preferred Stock, and prior to any
distribution to the holders of Company's Common Stock an amount equal to
the sum of the Original Issuance Price plus any accrued but unpaid
dividends.
In connection with the issuance of the Preferred Stock, the Company
also issued five (5) year common stock purchase warrant to purchase up to
300,000 shares of the Company's Common Stock at an exercise price of $4.50
per share (the "Warrant"). In connection with the exercise of the Warrant,
there is a "cashless exercise" provision that is applicable in the event
that at the time of exercise the market price of the Company's Common Stock
exceeds the $4.50 exercise price.
The Company has covenanted with the purchaser of the Preferred Stock
to file a registration statement with the Securities and Exchange
Commission on or before November 19, 1996, which shall include all of its
shares of Common Stock Issuable upon conversion of the Preferred Stock and
upon exercise of the Warrant. Such registration statement shall also
include certain other shares of Common Stock that the Company is
3
<PAGE>
obligated to register in connection with its raising of $2.7 million from
private investors in the third quarter of 1996. In the event that the
Company fails to effect such registration statement by November 19, 1996,
or alternatively, fails to have such registration statement declared
effective on or before January 31, 1997, the Company will be obligated to
pay the Purchaser of the Preferred Stock a premium on a monthly basis equal
to 1.5% of the Original Issuance Amount of all the Preferred Stock
commencing as of November 20, 1996 or February 1, 1997, as the case may be,
until such time as either the registration statement has been filed or the
registration statement is effective (or alternatively, the shares of
Preferred Stock are no longer restricted securities within the meaning of
the Securities Act and Rule 144 promulgated thereunder and bear no
restrictive legend), as the case may be. In addition, the Company will also
be obligated for significant penalties in terms of additional securities
and a reduction of warrants in connection with the sale of $2.3 million of
securities issued to private investors in the third quarter of 1996 in the
event that the Company does not file the aforementioned registration
statement on or before November 19, 1996.
In December of 1995, the Company entered into a private financing
transaction with the Rubin Investment Group, A New Jersey corporation
("RIG") pursuant to which RIG acquired the right, until December 1996, to
match (the "Matching Rights") any sale by the Company of equity securities
in a transaction exempt from registration under the Act upon the Company's
written notice to RIG (the "Matching Rights Notice") of the material terms
and conditions of any such private equity securities transaction. On
October 11, 1996, the Company sent to RIG the Matching Rights Notice with
respect to the sale of the Preferred Stock. RIG has, in accordance with its
Matching Rights, ten (10) days after RIG is deemed to have been given the
Matching Rights Notice to actually effect a closing identical to the one
the Company entered into with the foregoing investor with respect to the
Preferred Stock. To date, the Company has not closed a matching transaction
with RIG and the Company believes, for a variety of reasons, that at this
time the Company is no longer obligated to do so. The Company has been
advised by RIG and its counsel that RIG presently disputes the Company's
position with respect to this matter. In the event that RIG actually closes
transaction with the Company in accordance with the terms and conditions of
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<PAGE>
its Matching Rights, the Company is obligated to promptly provide written
notice thereof to the purchaser of the Preferred Stock the "RIG Notice").
The purchaser of the Preferred Stock shall then have the right , but not
the obligation, for a period of ten (10) business days after receiving the
RIG Notice to advise the Company in writing that it wishes to rescind its
transaction with the Company. In the event that it so advises the Company,
within three (3) business days thereafter, the Company shall be obligated
to return to the purchaser the entire purchase price for the Preferred
Stock whereupon the purchaser will return to the Company the Preferred
Stock and Warrants. The Company is not permitted to engage in any other
equity financing (other than an equity financing pursuant to RIG's Matching
Rights) for 120 days after the Original Issuance Date. Thereafter, until
January 7, 1998, the purchaser shall have a right of first refusal with
respect to any private equity financing in which the Company wishes to
engage in
Item 6. Resignation of Registrant's Directors
--------------------------------------
Not applicable.
Item 7. Financial Statements and Exhibits.
-----------------------------------
Press release dated October 11, 1996
Item 8. Change in Fiscal Year.
----------------------
Not applicable.
5
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Security 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
Dated: October 10, 1996
6
<PAGE>
================================================================================
EXHIBIT B
SECURITIES AND EXHANGE COMMISSION
Washington, D.C. 20549
FORM 8 - K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 14, 1996
-----------------
COUNTRY STAR RESTAURANTS, INC
----------------------------------------------------
(Exact name of registrant as specified In its charter)
Delaware 33-67526-A 62-1536550
---------------------- ---------- -----------------
(State or other (Commission (IRS Employer
jurisdiction formation) File Number) Identification No.)
11150 Santa Monica Boulevard, Suite 650, Los Angeles, CA 90025
- --------------------------------------------------------- --------
(Address if principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 268-2200
--------------
(Former name or former address, if changes since last report)
================================================================================
<PAGE>
Item 4. Changes in Registrant's Certifying Accountant
---------------------------------------------
The Registrant's Board of Directors has determined, effective
November 12, 1996, to terminate the firm of BDO Seidman, LLP ("BDO") as
the Registrant's independent auditor. The Registrant is presently in
discussions with a national, "big six" accounting firm regarding the
engagement of such firm to be the Registrant's new independent auditor.
The registrant previously retained BDO to act as its independent
auditor commencing on March 18, 1996. For the period beginning with the
retention of BDO and ending with the termination of BDO, the reports of
BDO on the financial statements of the Registrant did not contain any
adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure.
Annexed hereto as Exhibit "A" is a letter from BDO dated November
14, 1996 confirming the disclosures made herein.
Item 5. Other Events
------------
On October 28, 1996, Robert Linton advised the Registrant that,
for personal reasons, he had decided to resign from the Board of
Directors effective immediately. In doing so, Mr. Linton also advised
representatives of the Registrant that he did not have any disagreement
with management.
Item 7. Financial Statements and Exhibits
---------------------------------
A. Letter from BDO Seidman, LLP, dated November 14, 1996,
confirming Form 8-K disclosure.
2
<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
Dated: November 14, 1996
3
<PAGE>
EXHIBIT A
November 14, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read Item 4 form 8-K dated November 14, 1996 of Country Star
Restaurants, Inc. (the "Registrant"), and are in agreement with the
statements made in response to that Item insofar as they relate to our
Firm. We have no basis to agree or disagree with other statements of the
Registrant contained therein.
Very truly yours,
BDO Seidman, LLP
4
