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 March 31, 1997
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 May 14, 1997: 17,412,441
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Index
Page
----
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at
March 31, 1997 (unaudited).............................. 3
Condensed Consolidated Statements of Operations
for the Quarter Ended March 31, 1997
and March 31, 1996 (unaudited)......................... 5
Condensed Consolidated Statements of Cash Flows
for the Quarter Ended March 31, 1997
and March 31, 1996 (unaudited)......................... 6
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 10
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K............................. 12
SIGNATURES ....................................................... 13
2
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Consolidated Balance Sheet
March 31, 1997
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 425,361
Inventories 448,394
Preopening costs 75,000
Prepaid rent 405,000
Other current assets 291,581
-----------
Total current assets 1,645,336
-----------
PROPERTY AND EQUIPMENT AT COST, net of
accumulated depreciation of $435,143
Leasehold improvements 14,283,650
Furniture and equipment 1,985,323
Memorabilia 490,139
Capital lease 784,121
-----------
Total property and equipment 17,543,233
-----------
OTHER ASSETS 282,118
===========
Total assets $19,470,687
===========
(continued)
See accompanying notes to financial statements
3
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Consolidated Balance Sheet(continued)
March 31, 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,414,593
Accrued expenses 646,867
Capital lease obligations - current portion 251,446
------------
Total current liabilities 4,312,906
DEFERRED RENTALS 506,759
CONVERTIBLE DEBT 6,450,000
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 253,265
------------
Total liabilities 11,522,930
------------
COMMITMENTS AND CONTINGENCIES --
MINORITY INTERESTS 1,711,396
------------
STOCKHOLDERS' EQUITY
Preferred stock, $ 0.001 par value, 2,000,000 shares
authorized 6% Cumulative Convertible Series A -
235,181 shares issued and outstanding 235
Common stock, $0.001 par value, 25,000,000 shares
authorized, 15,363,644 shares issued and outstanding 15,364
Additional paid-in-capital 36,180,881
Unamortized stock option cost (136,579)
Accumulated deficit (29,823,540)
------------
Total stockholders' equity 6,236,361
------------
Total liabilities and stockholders' equity $ 19,470,687
============
See accompanying notes to financial statements
4
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
For the Quarter Ended March 31,
--------------------------------
1997 1996
------------ ------------
Revenues $ 2,264,475 $ 1,004,191
------------ ------------
Costs and expenses
Cost of revenues 920,436 328,446
Operating 2,092,392 771,762
General and administrative 1,401,356 988,089
Depreciation and amortization 385,522 116,676
------------ ------------
4,799,706 2,204,973
------------ ------------
Loss from operations (2,535,231) (1,200,782)
Non-operating (expense) income
Interest (67,757) (17,165)
Minority interests 413,050
------------ ------------
Net Loss $ (2,189,938) $ (1,217,947)
============ ============
NET LOSS PER SHARE $ (0.15) $ (0.17)
============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 14,707,598 7,377,064
============ ============
See accompanying notes to financial statements
5
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Quarter Ended March 31,
-------------------------------
1997 1996
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES $ (996,175) $ (551,601)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (505,763)
----------- -----------
Net cash used by investing activities (505,763)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common and
preferred stock 7,857 597,257
Proceeds from convertible debt 500,000
Capital lease payments (35,526) (20,139)
----------- -----------
Net cash provided by financing
activities 472,331 577,118
----------- -----------
NET (DECREASE) IN CASH (523,844) (480,246)
----------- -----------
Cash and cash equivalents, beginning
of period 949,205 9,760,675
----------- -----------
Cash and cash equivalents, end of period $ 425,361 $ 9,280,429
=========== ===========
See accompanying notes to financial statements
6
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Country Star Restaurants, Inc. have been
prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission.
The information furnished herein reflects all adjustments,
consisting of only normal recurring accruals and adjustments
which are, in the opinion of management, necessary to fairly
state the operating results for the respective periods.
Certain information and footnote disclosures normally included
in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The notes to the
condensed consolidated financial statements should be read in
conjunction with the notes to the consolidated financial
statements contained in the Company's Form 10-KSB for the year
ended December 31, 1996. Company management believes that the
disclosures are sufficient for interim financial reporting
purposes.
NOTE B - CAPITAL TRANSACTIONS AND CHANGE IN MANAGEMENT
On February 12, 1997, the Company entered into a secured loan
agreement with Dan Rubin ("Rubin") and Cameron Capital Ltd.,
an institutional investor ("Cameron").
The secured loan agreement provided that Cameron had the fully
assignable right to name three (3) members of the Board of
Directors of the Company and that the Board of Directors shall
not consist of more than five (5) members. Cameron assigned
this right to Rubin as its agent. Immediately after the
closing of the secured financing, Rubin's nominees, Darren
Rice, William Wei and Robert Nardone were elected to the Board
of Directors of the Company. The Board then elected Rubin to
fill the last seat on the Board of Directors.
The Board then elected Dan Rubin as Chief Executive Officer
and President, and Robert L. Davidson as Secretary of the
Company. Mr. Rubin assumed control of day-to-day operations of
the Company. Mr. Rubin is being compensated at the rate of
$20,000 per month, payable in cash or common stock of the
Company, valued at market value at the time of issuance. Mr.
Rubin's employment is terminable at will.
Rubin now owns warrants to acquire and convertible debt which
if converted would allow him to acquire an aggregate of
929,510 shares of the Company's common stock. Upon exercise of
such warrants and conversion of the convertible debt, Rubin
would own 5.7% of the common stock of the Company then
outstanding. None of the other newly elected directors own any
shares or warrants or other rights to acquire any shares of
the Company's common stock.
(continued)
7
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE B - CAPITAL TRANSACTIONS AND CHANGE IN MANAGEMENT(continued)
Under the secured financing agreement, Rubin has made a
$3,500,000 line of credit loan available to the Company, of
which an initial advance of $500,000 was committed at closing.
Rubin, in his sole discretion, may make additional advances to
the Company under this line of credit, but is not required to
make any such additional advances. All advances under the line
of credit loan bear interest at the rate of prime plus four
percent (4%), semi-annually commencing December 31, 1997. The
principal balance of all line of credit advances are due and
payable on October 9, 1999. In consideration for the initial
line of credit advance of $500,000, the Company issued a
warrant to acquire 166,667 shares of its common stock at an
exercise price of $.625 per share, which was the market value
of the Company's common stock on February 12, 1997.
All additional line of credit advances shall have the same
terms and conditions as the initial line of credit advance.
For each such additional advance, Rubin shall receive one (1)
common stock purchase warrant for every $3 advanced. The
exercise price for these warrants shall be $.625 per share.
All of the warrants issued or to be issued to Rubin shall be
subject to adjustment in the event of stock splits, stock
dividends, mergers, consolidations, or similar corporate
events.
Cameron exchanged its 4,000 shares of Series B Convertible
Preferred Stock of the Company, with an aggregate liquidation
preference of $4,000,000, for a convertible term note in the
principal amount of $4,000,000. The convertible term note
bears interest at the rate of seven percent (7%) per annum,
payable semi-annually commencing December 31, 1997. The
principal balance is due and payable on October 9, 1999. Any
portion or all of the principal amount of the note outstanding
may be converted into common stock of the Company commencing
ninety (90) days after the date of closing of the financing.
Upon conversion, the Company shall issue that number of shares
of its common stock obtained by dividing the principal amount
of the loan converted by the lesser of (i) $1.33, or (ii) 80%
of the average closing bid price of the common stock for the
five (5) consecutive trading days preceding the date of
conversion. The maximum number of shares into which the
convertible note may be converted shall not exceed 3,000,000.
The conversion formula is subject to adjustment in the event
of stock splits, stock dividends, mergers, consolidations, or
similar transactions.
In connection with the commitment to make the line of credit
loan, Rubin and other investors in the Company have agreed to
settle certain claims against the Company for the amount of
$1,950,000, plus $50,000 in fees and expenses. The Company has
issued its convertible term notes in the aggregate amount of
$1,950,000 and agreed to pay $50,000 to Rubin and these
investors, in settlement of their claims. These convertible
(continued)
8
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE B - CAPITAL TRANSACTIONS AND CHANGE IN MANAGEMENT(continued)
term notes contain the same terms and conditions as the
convertible term note issued to Cameron, except that the
holders of these convertible term notes may exercise their
conversion feature at any time following the closing.
The agreements described above relating to the exchange of
Convertible Preferred Stock and the issuance of convertible
term notes have been accounted for effective December 31, 1996
because substantially all of the conditions precedent to the
occurrence of these transactions had taken place as of that
date.
The line of credit advances by Rubin, Cameron's convertible
term note and the convertible term notes issued in settlement
of claims are all secured by a lien on substantially all of
the tangible and intangible assets of the Company. In the
event of default, the secured parties shall participate in the
proceeds of the collateral in proportion to their outstanding
debt.
In connection with the secured financing transaction, Robert
Schuster ("Schuster"), Chairman of the Board and Chief
Executive Officer of the Company, resigned as Chief Executive
Officer and agreed to release the Company from all obligations
under his Employment Agreement, including severance
obligations. Schuster continued to serve as a Director until
February 13, 1997. Immediately upon notice from the Company,
Schuster has agreed that he will become a consultant to the
Company for a nine (9) month period with compensation at the
rate of $250,000 per annum, plus the continuation of fringe
benefits consisting of his automobile allowance and payment of
health insurance.
In connection with the secured financing transaction, Mr.
Peter Feinstein resigned as Director, President and Chief
Financial Officer of the Company and released the Company from
all obligations under his Employment Agreement, including
severance obligations. Mr. Feinstein has agreed to become a
consultant to the Company for a nine (9) month period with
compensation at the rate of $240,000 per annum plus the
continuation of fringe benefits consisting of his automobile
allowance and payment of health insurance.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three months ended March 31, 1997 compared to three months ended March 31, 1996
Revenues.
Total revenues increased to $2.264 million for the three months ended March 31,
1997, compared with $1.004 million for the three months ended March 31, 1996, an
increase of $1.260 million or 125%, primarily due to the opening of Country Star
Las Vegas and Country Star Atlanta. Same store revenues (Hollywood) were
substantially unchanged.
Costs and expenses.
Cost of revenues increased from $328 thousand for the three months ended March
31, 1996 to $920 thousand for the three months ended March 31, 1997. Cost of
revenues as a percentage of revenues increased from 33% to 41% primarily due to
the negative impact of the unsatisfactory operations of the Atlanta facility.
Country Star Atlanta was closed on February 22, 1997, and current plans call for
its reopening in the summer of 1997.
Operating expenses increased from $772 thousand for the three months ended March
31, 1996 to $2.092 million for the three months ended March 31, 1997. As a
percentage of revenues, operating expenses increased from 77% to 92% due
primarily to operating difficulties with Atlanta.
General and administrative expenses increased from $988 thousand to $1.401
million. As a percentage of revenues, general and administrative expenses
decreased from 98% of revenues to 62% of revenues.
Depreciation and amortization increased from $117 thousand for the three months
ended March 31, 1996 to $386 thousand for the three months ended March 31, 1997,
reflecting the increase in the number of restaurants from one to three. As a
percentage of total revenues, depreciation and amortization increased from 12%
to 17%.
Interest expense increased from $17 thousand to $68 thousand, reflecting the
convertible debt financing arrangements entered into on February 12, 1997.
(continued)
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
Minority interest for the three months ended March 31, 1997 reflects the
Company's controlling interest of 50.05% in Country Star Las Vegas LLC triggered
by the opening of the Las Vegas facility in July, 1996. Previously, the
Company's investment in Las Vegas was accounted for under the cost method.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in investing activities in the three months ended March 31, 1996
and 1997 was $506 thousand and $0, respectively, reflecting the Company's
development of the Las Vegas and Atlanta facilities in 1996.
Net cash provided by financing activities for the three months ended March 31,
1996 and March 31, 1997 of $577 thousand and $472 thousand respectively is due
primarily to the net proceeds from the issuance of common stock in 1996 and
convertible debt in 1997.
Net cash used in operating activities for the three months ended March 31, 1996
and March 31, 1997 increased from $552 thousand to $996 thousand due primarily
to the greater loss in 1997.
New management took over the Company on February 12, 1997 and determined that a
major overhaul of corporate strategy was required to deal with the Company's
financial problems. Measures taken by new management include (i) the temporary
closing and planned reopening of Country Star Atlanta in the summer of 1997,
(ii) the expansion of the "country" theme, (iii) planned expansion through joint
ventures and licensing rather than expensive construction, and (iv) settlement
with the trade creditors at 40% of the amounts owed.
Management has also made operational changes to improve revenues, control
operating costs, and limit corporate overhead. The impact of these measures and
changes will not be realized until the second quarter of calendar 1997 and in
subsequent periods. The Company will need to raise additional capital before it
can obtain profitability from operations. Management believes it can raise this
capital through private placements of equity and the granting by lenders of
discretionary advances under outstanding lines of credit.
11
<PAGE>
Part II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about April 21, 1997, 3030 Peachtree, LLC ("Landlord"), the Landlord
of the Company's Atlanta restaurant, commenced an action in the Magistrate Court
of Fulton County, Georgia, regarding possession of the Atlanta restauraunt.
Additional information concerning this litigation is set forth in the Company's
Report on Form 8-K dated April 21, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
On January 16, 1997, the Company filed a Current Report on Form 8-K in
connection with the engagement of Deloitte & Touche LLP as Registrant's
independent auditor.
On February 12, 1997 the Company filed a current report on Form 8-K in
connection with the February 12, 1997 Financing and Change in Control.
On March 29, 1997, the Company filed a current report on Form 8-K in
connection with the termination of Deloitte & Touche LLP as the Company's
independent auditors and the retention of Cacciamatta Accountancy Corporation as
the Company's independent auditors.
12
<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/ Dan J. Rubin
-------------------------
Dan J. Rubin
Chief Executive Officer
Dated: May 19, 1997
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 425,391
<SECURITIES> 0
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<PP&E> 17,978,376
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