As filed with the Securities and Exchange Commission on November __, 1998
Registration No. 333-39761
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COUNTRY STAR RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 5812 62-1536550
- - ---------------------- ----------------------- ------------------------
(State or other juris- Primary Standard Indus- (I.R.S. Employer Identi-
diction of incorpora- trial Classification fication number)
tion or organization) Code Number
4929 WILSHIRE BOULEVARD, SUITE 428, LOS ANGELES, CALIFORNIA 90010 213/634-5588
(Name, address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
--------------------
DAN J. RUBIN, CHIEF EXECUTIVE OFFICER
COUNTRY STAR RESTAURANTS, INC.
4929 Wilshire Boulevard, Suite 428
Los Angeles, California 90010
213/634-5588
-----------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service
--------------------
COPIES TO:
ROBERT L. DAVIDSON, ESQ.
WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP
270 MADISON AVENUE
NEW YORK, NEW YORK 10016
Telephone No. 212/545-4600
Facsimile No. 212/686-0114
Approximate date of commencement of proposed sale to the public: As soon as
practicable after effective date of the registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
(continued overleaf)
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
[ ] ----------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-ii-
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
CROSS-REFERENCE SHEET
Pursuant to Rule 404
Registration Statement
Item Number and Caption Prospectus Caption
----------------------- ------------------
1. Front of the Registration Forepart of Registration
Statement and Outside Front Statement and outside Back
Cover Page of Prospectus Cover Page of Prospectus
2. Inside Front and Outside Inside Front and Outside
Back Cover Pages of Prospectus Back Cover of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk
Factors Factors
4. Use of Proceeds Not Applicable
5. Determination of Offering Price Outside Front Page; Plan
of Distribution
6. Dilution Not Applicable
7. Selling Stockholders Plan of Distribution
8. Plan of Distribution Outside Front Cover; Plan
of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Outside and Inside Cover of
Prospectus; Capital Stock
13. Interest of Named Experts and Legal Matters
Counsel
14. Disclosure of Commission Position Management-Indemnification
on Indemnification for Securities
Act Liabilities
15. Organization Within Last Five Years Prospectus Summary
-iii-
<PAGE>
Registration Statement
Item Number and Caption Prospectus Caption
- - ----------------------- ------------------
16. Description of Business Prospectus Summary;
Business
17. Management's Discussion and Management's Discussion
Analysis of Plan or Operation
18. Description of Property Business
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity and Outside Front Cover;
Related Stockholder Matters Description of Capital
Stock
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes in and Disagreements With Management's Discussion
Accountants on Accounting and
Financial Disclosure
-iv-
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED NOVEMBER __, 1998
SUBJECT TO COMPLETION
COUNTRY STAR RESTAURANTS, INC.
__________ Shares of Common Stock
$.01 PAR VALUE PER SHARE
This Prospectus relates to (i) 14,426,921 shares of common stock, $.01
par value (the "Common Stock"), of Country Star Restaurants, Inc., a Delaware
corporation (the "Company"), held by, and which may be offered from time to time
by, a number of persons and entities (collectively the "Selling Stockholders"),
and offered from time to time by certain of the Selling Stockholders, and (ii)
an indeterminate number of shares (approximately 161,073,000) of Common Stock
presently issuable upon conversion of the outstanding principal amount of
certain Convertible Notes, plus accrued and unpaid interest, held by certain of
the Selling Stockholders (the "Notes"). See "Selling Stockholders and Plan of
Distribution." The Common Stock being offered hereby includes 57,340,000 shares
held by and issuable upon conversion of certain Convertible Notes held by Dan J.
Rubin, President, Chairman of the Board of Directors, Chief Executive Officer
and a Director of the Company, and these shares constitute Mr. Rubin's entire
equity interest in the Company. The shares of Common Stock registered hereunder
are sometimes referred to as the "Securities." All costs in connection with the
registration of the Securities are being borne by the Company. The Company will
not receive any of the proceeds from the sale of the Securities pursuant to this
Prospectus. The shares of Common Stock registered hereunder are sometimes
referred to as the "Common Stock" or the "Securities."
The Common Stock is quoted on the OTC Bulletin Board under the symbol
"KAFE." The closing bid and asked price of the Common Stock on Novmeber 17, 1998
were $.0150 and $.0160, per share, respectively.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND
INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS
WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" COMMENCING ON PAGE 12
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price Underwriting Proceeds to
to Discounts and Selling
Public Commissions(1) Stockholders
------ -------------- ------------
Per Share............ $___ N/A $___
===================== ==== === ====
(1) Not Applicable.
-2-
<PAGE>
The Selling Stockholders Shares may be offered and sold from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. To the extent required, the number
of Securities to be sold, the respective purchase price and public offering
price, the name of any agent, dealer or underwriter and any applicable
commissions or discounts with respect to a particular offer will be set forth in
and accompanied by a Prospectus Supplement. See "Selling Stockholders Plan of
Distribution."
Any agents, dealers or underwriters that participate with the Selling
Stockholders in the distribution of the shares of Common Stock may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and any commissions received by them and any profits on
the resale of the Selling Stockholders' shares, may be deemed to be underwriting
commissions or discounts under the Securities Act. Under applicable rules and
regulations promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including without limitation Regulation M, any person
engaged in a distribution of securities may not simultaneously engage in
market-making activities with respect to such securities for a period beginning
on the later of five business days, or such other period as may be required by
Regulation M, prior to the determination of the offering price or such time that
a person becomes engaged in the distribution and ending when the distribution is
completed (for a selling security holder) or when any other person's
participation has been distributed. In addition to, and without limiting the
foregoing, each of the Selling Stockholders and any other person participating
in a distribution will be subject to the applicable provisions of the Exchange
Act and the rules and regulations thereunder, including, without limitation,
Regulation M, which provisions may limit the timing of purchases and sales of
any of the Securities by each of the Selling Stockholders or any such other
person. All of the foregoing may affect the marketability of the Securities.
The date of this Prospectus is Novmeber ___, 1998.
-3-
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder, and in accordance therewith files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, NW, Washington, D.C. 20549, as well as at the following regional
offices: Northeast Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048 and Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission maintains an Internet Web-Site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
that site is http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and the exhibits thereto, copies of which may be obtained from the
Public Reference Section of the Commission at Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement for a full statement of the provisions thereof, each such
statement contained herein is qualified in its entirety by such reference.
-4-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
descriptions and financial information and statements appearing elsewhere in
this Prospectus and the documents incorporated herein by reference. All
information concerning the Company's issued and outstanding Common Stock and all
financial information presented on a per share basis reflects a one-for-ten
reverse stock split effective February 12, 1998. None of the information
concerning the Company's issued and outstanding Common Stock reflect a
one-for-two hundred reverse stock split to be effective as of December 15, 1998.
This Prospectus contains forward looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
THE COMPANY
The Company, Country Star Restaurants, Inc., develops, constructs, owns
and operates country theme restaurants combining high quality, moderately priced
food with a casual, family oriented environment. The Company currently operates
one restaurant, located in Hollywood, California.
The Company was formed in May of 1993 and, prior to the opening of the
initial Country Star Restaurant on April 2, 1994, did not generate any revenue.
The Company had revenues from Country Star Hollywood in 1995, its first full
calendar year of operations, of approximately $5,200,000. During 1996, the
Company had revenues of approximately $4,200,000 from Country Star Hollywood and
approximately $3,850,000 from its other restaurants, for total revenues of
approximately $8,050,000. During 1997, the Company had revenues of approximately
$3,318,000 from Country Star Hollywood, approximately $2,686,000 from Country
Star Las Vegas, and total revenues of approximately $6,279,000. Total operating
expenses increased from approximately $11,850,000 in 1995, to approximately
$27,637,000 in 1996 and to approximately $24,574,000 in 1997. The increase in
operating expenses during 1996 and 1997 could not be funded by the increase in
revenues. The Company's net loss for 1996 and 1997 was $16,780,382 and
$17,246,290, respectively. The Company closed its Atlanta restaurant in 1997 and
its Las Vegas Restaurant in 1998. The Company continued to fund its operations
by the private sale of the Company's equity securities. The Company anticipates
that it will continue to have substantial capital needs of approximately
$500,000 to $1,000,000 for 1998 that would not be funded from operations and
would continue to need to raise capital through equity or debt financings.
In recent years theme restaurants have gained increasing popularity, as
a number of such restaurants featuring a variety of different themes have
opened. Two popular and well known restaurants of this genre are Planet
Hollywood(R) and Hard Rock
-5-
<PAGE>
Cafe(R), both of which combine an entertainment component with a casual dining
atmosphere. Aside from enhancing the dining experience, the entertainment
component also provides an additional revenue stream, predominantly from
merchandise sales. Patrons of theme restaurants have evidenced a willingness to
purchase souvenir T-shirts, hats, mugs, and other items bearing the logo and
reflecting the lifestyle of the particular theme restaurant. These retail sales
are typically at higher profit margins than food sales, inclusive of labor
costs.
The Company believes that its country theme provides a distinctly
American experience which, combined with its casual, high-quality dining in a
state-of-the-art multimedia environment, is a format with wide demographic
appeal. The Company believes that the country theme is an under-exploited
segment of quality dining in the restaurant industry and will fill a niche in
the casual dining segment of the restaurant industry, and therefore represents
an attractive opportunity for the Company.
The Company has no present expansion plans, although the Company may
explore non-capital intensive ways of promoting the Company's business, such as
licensing agreements, joint ventures and other opportunities. Such expansions
may include off-site catering of parties and at music venues or the
establishment of limited menu restaurants in food courts located throughout the
United States and in foreign locations. The Company may seek to pay for its
portion of any such expansion by issuing shares of its Common Stock. It is
anticipated that any of the future Country Star Restaurants, although modeled
after its flagship Country Star Restaurant, will be smaller and less expensive
to construct. The Company will seek to leverage the recognition and publicity
achieved by its flagship Country Star Restaurant to support its smaller Country
Star Restaurants. The Company believes that the reduced scale of these smaller
Country Star Restaurants will result in lower overall costs to develop,
construct and open.
One of the Company's key priorities in the near term is to inject new
excitement into the Company's restaurant business in order to stimulate greater
customer traffic. The Company plans to increase the frequency of celebrity
events and promotions and broaden the number of celebrities associated with the
Company, with an emphasis on new, up-and-coming stars. In addition, the Company
is taking steps to broaden the appeal of its restaurants through menu revisions
and greater promotion of group sales, in order to attract more local residents
to augment the Company's primarily tourist customer base.
The Company's principal offices are located at 4929 Wilshire Boulevard,
Suite 428, Los Angeles, California 90010, and its telephone number is
213/634-5588.
-6-
<PAGE>
THE OFFERING
Securities offered(1)............. Approximately 175,500,000 Shares of
Common Stock.
Common Stock to be Outstanding
After this Offering. ........... Approximately 188,500,000 shares
of Common Stock.
Use of Proceeds .................. The Company will not receive any of
the proceeds from the sale of the
Securities pursuant to this
Prospectus.
Risk Factors ..................... An investment in the Securities
offered hereby involves a high
degree of risk and should be made
only by investors who can afford the
loss of their entire investment. See
"Risk Factors."
NASDAQ Symbols ................... Common Stock -- KAFE
(1) Approximately 161,073,000 shares of the securities offered hereby will
be issued to repay the loans in the principal amount of $2,100,000 from
Dan Rubin and a pension trust controlled by the father of Dan Rubin.
The loans are evidenced by a convertible note which is convertible into
that number of shares of Common Stock determined by dividing the
principal amount of the loan by the lesser of (i) $13.30; or (ii) the
closing bid price of the Common Stock on the date preceding the date of
conversion. See "Risk Factors."
-7-
<PAGE>
<TABLE>
<CAPTION>
SUMMARY SELECTED FINANCIAL DATA
Year Ended December 31
-----------------------------------
1997 1996
- - ------------------------------------------------------------------------------------
<S> <C> <C>
(Audited)
STATEMENT OF OPERATIONS DATA
Food and Beverage ....................... $ 5,744,789 $ 7,048,023
Merchandise ............................. 534,273 1,011,392
------------ ------------
6,279,062 8,059,415
COST AND EXPENSE:
Cost of revenues:
Food and beverage ........................ 1,924,113 2,222,506
Merchandise .............................. 451,942 656,760
Labor ..................................... 2,650,871 3,917,988
Rent ...................................... 2,465,450 1,275,860
Other restaurant operating ................ 1,273,895 1,967,020
Selling general and administrative ........ 3,590,291 8,801,764
Depreciation and amortization ............. 1,058,608 1,210,658
Settlement of stockholders' claims ........ 980,384 2,000,000
Loss on disposal of assets ................ 10,178,560 --
Impairment of long-lived assets ........... -- 5,584,458
------------ ------------
24,574,114 27,637,041
LOSS FROM OPERATIONS ...................... (18,295,052) (19,577,626)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income .......................... 7,254 302,626
Interest expense ......................... (410,281) (375,936)
Embedded interest expense ................ (2,346,286) --
------------ ------------
MINORITY INTEREST 2,124,446 2,870,554
EXTRAORDINARY ITEM --
SETTLEMENT OF TRADE PAYABLES 1,673,629 --
------------ ------------
NET LOSS .................................. $(17,246,290) $(16,780,382)
============ ============
Net loss per common share ................ $ (5.38) $ (15.54)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES OUTSTANDING ....... 3,208,465 1,107,481
============ ============
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Operations
(Unaudited)
FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------
1998 1997
----------- -----------
REVENUES:
<S> <C> <C>
Food and beverage $ 898,059 $ 1,217,833
Merchandise 22,177 75,193
----------- -----------
920,236 1,293,026
----------- -----------
COST AND EXPENSES:
Cost of revenues:
Food and beverage 281,213 400,327
Merchandise 13,634 75,010
Labor 423,079 588,155
Rent 82,060 674,847
Other restaurant operating 162,244 362,015
Selling, general and administrative 60,948 755,938
Depreciation and amortization 146,699 309,935
Loss on disposal of assets 114,247 --
----------- -----------
1,284,124 3,166,227
----------- -----------
LOSS FROM OPERATIONS (363,888) (1,873,201)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income -- 1,598
Interest expense (79,813) 144,255
----------- -----------
(79,813) 145,853
----------- -----------
LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM (443,701) (1,727,348)
MINORITY INTEREST -- 371,596
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (443,701) (1,355,752)
EXTRAORDINARY ITEM - SETTLEMENT OF NOTES PAYABLE, NET OF 0 TAXES -- 301,161
----------- -----------
NET LOSS $ (443,701) $(1,054,591)
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Loss before extraordinary item $ (0.05) $ (0.45)
Extraordinary item -- 0.10
----------- -----------
Net loss per common share $ (0.05) $ (0.35)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 9,651,749 3,041,412
=========== ===========
December 31, 1997 September 30, 1998
----------------- ------------------
(Audited) (Unaudited)
BALANCE SHEET DATA:
Working Capital (deficit) (353,050) (2,681,321)
Total Assets 7,094,159 5,023,814
Total Liabilities 5,138,772 2,971,289
Shareholders' Equity 1,955,387 2,052,525
The accompanying notes are an integral part of these financial statements.
</TABLE>
-9-
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Food and beverage $ 2,848,738 $ 4,817,375
Merchandise 105,674 471,524
------------ ------------
2,954,412 5,288,899
------------ ------------
COST AND EXPENSES:
Cost of revenues:
Food and beverage 901,018 1,580,653
Merchandise 75,849 398,879
Labor 1,353,881 2,183,509
Rent 327,686 2,104,455
Other restaurant operating 568,417 1,076,772
Selling, general and administrative 1,056,787 2,999,826
Depreciation and amortization 441,746 1,081,466
Loss on disposal of assets 114,247 --
------------ ------------
4,839,631 11,425,560
------------ ------------
LOSS FROM OPERATIONS (1,885,219) (6,136,661)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income -- 5,654
Interest expense (175,182) (54,174)
Embedded interest expense (313,000) (2,001,786)
------------ ------------
(488,182) (2,050,306)
------------ ------------
LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM (2,373,401) (8,186,967)
MINORITY INTEREST -- 1,106,926
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (2,373,401) (7,080,041)
EXTRAORDINARY ITEM - SETTLEMENT OF NOTES PAYABLE, NET OF 0 TAXES 1,527,858 1,654,639
------------ ------------
NET LOSS $ (845,543) $ (5,425,402)
============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Loss before extraordinary item $ (0.26) $ (3.40)
Extraordinary item 0.17 0.80
------------ ------------
Net loss per common share $ (0.09) $ (2.60)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 9,053,963 2,083,525
============ ============
The accompanying notes are an integral part of these financial statements.
-10-
</TABLE>
<PAGE>
RISK FACTORS
Investment in the Company's securities involves a high degree of risk.
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully by prospective investors in evaluating
the Company and its business before purchasing the Shares.
CONTINUING LOSSES; GOING CONCERN QUALIFICATION. The Company opened its
first Country Star Restaurant in August, 1994 and two more restaurants in 1996.
The Company has continued to incur operating losses. During 1997, the Company
permanently closed one of its restaurants and during 1998 permanently closed
another of its restaurants. The Company now operates only one restaurant. For
the fiscal year ended December 31, 1997, the Company had a net loss of
$17,246,000. The Company's independent certified public accountants have
rendered a going concern qualification to their opinion on the Company's 1997
financial statements and stated that the Company has experienced significant
losses in 1996 and 1997, and is experiencing cash flow shortages and that these
factors "raise substantial doubt about the Company's ability to continue as a
going concern."
IMMEDIATE NEED FOR ADDITIONAL CAPITAL AND ADDITIONAL FINANCING. The
Company's ability to generate operating and net income in the future will depend
on the success of its operating restaurant. There can be no assurance that the
Company will be profitable in the future. The Company experienced a loss of over
$34,000,000 for the two year period ended December 31, 1997 and its cash balance
at September 30, 1998 was less than $18,000. During 1997 the Company continued
to fund its operations by the private sale of the Company's equity securities.
The Company anticipates that it will continue to have substantial capital needs
that cannot be funded completely from operations and will be required to raise
additional capital through equity or debt financings. Such sources of financing,
if available, may include bank financing, third party equity investors, capital
leases, private limited partnerships, joint venture financing and sale leaseback
arrangements. The Company has a line of credit in the amount of $3,500,000 of
which approximately $2,100,000 is currently outstanding; however, the Lenders
are under no obligation to make additional advances under the line of credit and
all such advances are in the discretion of the Lenders. The Company has no other
current arrangement with respect to, or potential sources of, additional
financing. Consequently, there can be no assurance that any additional financing
will be available to the Company when needed, on commercially reasonable terms,
or at all. Any inability to obtain additional financing when needed would have a
material adverse effect on the Company. In addition, any additional equity
financing may involve substantial dilution to the interests of the Company's
then existing stockholders. See "Use of Proceeds," "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
-11-
<PAGE>
UNCERTAIN FUTURE OPERATING RESULTS. The Company's future profitability
will depend upon, among other things, the Company's ability to generate a level
of revenues sufficient to offset its cost structure in addition to reducing its
operating costs on a per location basis. There can be no assurance that the
Company will achieve significantly increased revenues or maintain profitable
operations.
LIMITED RESTAURANT BASE; DEPENDENCE UPON ONE PRINCIPAL RESTAURANT; HIGH
RESTAURANT FAILURE RATE. All of the Company's revenues are presently derived
from only one restaurant. There can be no assurance that any new restaurants
will be opened or if opened will be successful or operate profitably. The lack
of success or closing of the Company's existing restaurant, or the unsuccessful
operation of any new restaurant, would have a material adverse effect upon the
financial condition and results of operations of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
CONTROL BY MANAGEMENT. Dan Rubin is the Chief Executive Officer and
President of the Company and a Director of the Company. Dan Rubin is in control
of the management and the day to day operations of the Company. In addition, he
claims the right to appoint three members of the Board of Directors of the
Company, constituting a majority of and control of the Board of Directors. This
right was granted by the Company to Cameron Capital Ltd. and assigned by it to
Dan Rubin in connection with the February 12, 1997 Financing and Change in
Control. This control may have the effect of discouraging certain types of
transactions involving an actual or potential change of control of the Company,
including transactions in which holders of Common Stock might otherwise receive
a premium for their shares over then current market prices. See "Risk Factors -
Potential Conflict of Interest of Dan Rubin."
DEPENDENCE UPON CHIEF EXECUTIVE OFFICER. Dan Rubin is the Chief
Executive Officer and President of the Company. Mr. Rubin is the only employee
of the Company who also serves as an executive officer. The Company is dependent
upon Dan Rubin and his managerial efforts for the conduct and supervision of the
management and day to day operations of the Company. Dan Rubin has no prior
experience in managing or operating any business comparable to the Company.
There is no written agreement relating to the employment of Dan Rubin by the
Company and such employment is terminable at will at any time by either Dan
Rubin or the Company. If Dan Rubin were to resign, there is no assurance the
Company would be able to retain another chief executive officer or chief
operating officer and the inability to do so could materially adversely effect
the Company and its business. See "Management - Certain Transactions."
-12-
<PAGE>
POTENTIAL CONFLICT OF INTEREST OF DAN RUBIN. Dan Rubin has a security
interest in all the assets of the Company to secure his line of credit to the
Company in the aggregate amount of $3,500,000 of which approximately $1,100,000
has been loaned to the Company to date. In addition, on February 18, 1998, a
pension trust controlled by the father of Dan Rubin loaned $1,300,000 to the
Company and received convertible notes which are also secured by all the assets
of the Company. There may be a conflict of interest between a creditor and stock
investors in a company. A creditor may have incentive to conduct the Company's
affairs so as to maximize his claims against the Company's assets and his
security interest may insulate him from the Company's negative performance.
There can be no assurance that future transactions or arrangements between the
Company and Dan Rubin will be advantageous to the Company, that conflicts of
interest will not arise with respect thereto, or that if conflicts do arise,
they will be resolved in a manner favorable to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Management - Certain Transactions."
POTENTIAL ADVERSE EFFECT OF SALE OF SHARES OF COMMON STOCK OFFERED BY
SELLING STOCKHOLDERS. The Company currently has 27,374,293 shares outstanding
and the Selling Stockholders may sell up to 175,500,000 shares pursuant to this
Offering. The sale, or availability for sale, of substantial amounts of shares
of Common Stock pursuant to this Offering could materially adversely affect the
market price of the Securities and could impair the Company's ability to raise
additional capital through the sale of its equity securities or debt financing.
See "The Offering."
CONTRACTOR LITIGATION IN ATLANTA; ATLANTA AND LAS VEGAS LIEN CLAIMS. On
February 3, 1998, Pacific Southwest Design, Inc. filed a suit in Atlanta against
the Company claiming damages of $597,659 for failure to pay amounts due for
services rendered. The Company intends to vigorously defend against this action
and has counterclaimed for damages in an undetermined amount for the
contractor's breach of contract and failure to perform work which caused the
Company to lose its Atlanta lease. In addition, certain contractors have filed
claims of lien against the Company's Atlanta and Las Vegas restaurants that have
not been cleared by the posting of a bond or any payment. Such claims of lien
total approximately $1,200,000. While management believes
-13-
<PAGE>
that the probable resolution of the litigation matters described above will not
materially affect the consolidated financial position or results of operations
of the Company, there can be no assurance that the Company will prevail in these
litigations. See "Business - Legal Proceedings."
NASD DELISTING OF COMMON STOCK. The National Association of Securities
Dealers, Inc. (the "NASD") delisted the Company's Common Stock from the NASD
National Market system on March 10, 1998. The Company's Common Stock is
currently listed in the NASDAQ's OTC Bulletin Board. If the Company is unable to
satisfy the NASDAQ requirements for continued trading in the NASDAQ's OTC
Bulletin Board, the liquidity of the Company's Common Stock could be impaired.
SITE LOCATIONS. The choice of site location for each Country Star
Restaurant is extremely important to the potential success of the particular
establishment. The Company will be competing with a wide range of establishments
in attempting to identify and secure desirable locations. Although the Company
believes that it will be able to locate additional suitable sites, there can be
no assurance that such sites will be available or viable or on economic terms
acceptable to the Company.
RISKS RELATING TO ANY EXPANSION. The Company is currently considering a
strategy to expand its operations and may seek to open additional restaurants.
There can be no assurance that the Company will be successful in opening any
restaurants in a timely manner, or at all, or that, if opened, those restaurants
will operate profitably. See "Business -- Strategy."
DEVELOPMENT AND CONSTRUCTION DELAYS. In connection with the development
and construction of any new Country Star Restaurants, a number of events over
which the Company will have no control could occur which might materially
adversely affect the costs and completion time of such projects. Such events
include governmental regulatory approvals, shortages of or the inability to
obtain labor and/or materials, inability of the general contractor or
subcontractors to perform under their contracts, strikes, adverse weather
conditions and acts of God, availability and cost of needed debt or lease
financing, and changes in Federal, state or local laws or regulations. In
addition, the Company will also be dependent on unaffiliated third parties to
complete the construction of its Country Star Restaurants. Accordingly, there
can be no assurance that the Company will be able to complete any Country Star
Restaurant in a timely manner or within its proposed budget.
NEED FOR ADDITIONAL PERSONNEL. The Company's ability to successfully
open and operate additional Country Star Restaurants will depend upon the
Company's hiring and retaining additional personnel who are experienced in the
operation of casual dining
-14-
<PAGE>
restaurants, of which there can be no assurance. The Company's failure to hire
additional experienced personnel will have a material adverse effect on the
ability of the Company to open and successfully operate Country Star Restaurants
and to expand its operations thereafter.
SIGNIFICANT INDUSTRY COMPETITION; SPECIAL RESTAURANT INDUSTRY
CONSIDERATIONS. The restaurant industry is intensely competitive with respect to
price, service, location and food quality. There are many competitors of the
Company, such as Planet Hollywood(R) and Hard Rock Cafe(R), that are better
established, have substantially greater financial, marketing and other
resources, have been in existence for a substantially longer period of time and
have greater name brand recognition. Further, the restaurant industry is
significantly affected by many external factors, including changes in the
national economy or in regional or local economics, changes in the demographics
of areas in which restaurants are situated, changes in consumer preferences and
demands (including increased awareness of nutrition), and increases in the
number and density of restaurants in a particular locale. Factors such as
inflation and food costs may also affect the restaurant industry. There can be
no assurance that the Company will be able to successfully compete in the
restaurant industry.
INTELLECTUAL PROPERTY RIGHTS. The Company has made such appropriate
filings and registrations that it has deemed appropriate and sufficient in its
business judgment to protect the Company's name in all appropriate categories,
and taken such other actions necessary to obtain and protect all trademarks,
copyrights, tradenames, tradedress and all other intellectual property rights,
relating to its Country Star Restaurants, although there can be no assurance
that the Company will be able to effectively protect its rights. To date, the
Company has been issued a Federal registration by the United States Patent and
Trademark Office for the "Country Star" trademark for clothing and restaurant
services. Third parties may attempt to exercise alleged rights in any of the
trademarks, copyrights or other intellectual property rights or appropriate any
trademarks, copyrights, or other intellectual property rights established by the
Company, and the Company's failure or inability to establish appropriate
copyrights and trademarks, or to adequately protect any of its intellectual
property rights, may have a material adverse effect on the Company.
NO DIVIDENDS WITH RESPECT TO COMMON STOCK. The Company has
-15-
<PAGE>
not paid any dividends since inception and does not intend to pay dividends in
the foreseeable future with respect to its Common Stock.
ANTI-TAKEOVER LAW: ISSUANCE OF OTHER STOCK. The Company is subject to
the provisions of Section 203 of the General Corporation Law of Delaware, an
anti-takeover statute enacted in 1988. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date that
the person became an interested stockholder unless (with certain exceptions) the
business combination of the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years prior did own) 15% or more of a corporation's outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders. As a result of Section 203, potential acquirors of the Company may
be discouraged from attempting to effect acquisition transactions with the
Company, thereby possibly depriving holders of the Company's securities of
certain opportunities to sell or otherwise dispose of such securities at
above-market prices pursuant to such transactions.
In addition, the board of directors of the Company (the "Board of
Directors") may issue one or more series of preferred stock or additional Common
Stock without any action on the part of the stockholders of the Company, the
existence and/or terms of which may adversely affect the rights of holders of
the Common Stock. In addition, the issuance of any such additional preferred
stock or Common Stock may be used as an "anti-takeover" device without further
action on the part of the stockholders. Issuance of additional preferred stock
or Common Stock, which may be accomplished through a public offering or a
private placement to parties favorable to current management, may dilute the
voting power of holders of Common Stock (such as by issuing preferred stock with
super voting rights) and may render more difficult the removal of current
management, even if such removal may be in the stockholders' best interests.
INDEMNIFICATION AND EXCULPATION OF OFFICERS AND DIRECTORS. The
Company's Certificate of Incorporation provides for indemnification of officers
and directors to the fullest extent permitted by Delaware law. In addition,
under the company's Certificate of Incorporation, no director shall be liable
personally to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that the Certificate of Incorporation
does not eliminate the liability of a director for (i) any breach of the
director's duty of
-16-
<PAGE>
loyalty to the Company or its stockholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) acts or omissions in respect of certain unlawful dividend payments or
stock redemptions or repurchases; or (iv) any transaction from which such
director derives improper personal benefit. As a result of such provisions in
the Certificate of Incorporation and the By-Laws of the Company, stockholders
may be unable to recover damages against the directors and officers of the
Company for actions taken by them which constitute negligence, gross negligence
or a violation of their fiduciary duties, which may reduce the likelihood of
stockholders instituting derivative litigation against directors and officers
and may discourage or deter stockholders from suing directors, officers,
employees and agents of the Company for breaches of their duty of care, even
though such an action, if successful, might otherwise benefit the Company and
its stockholders.
GOVERNMENT REGULATION. The Company is subject to various Federal, state
and local laws affecting its business. Each of the Company's restaurants will be
subject to licensing regulation by numerous governmental authorities, which may
include alcohol beverage control, building, health and safety, and fire agencies
in the state or municipality in which the restaurant is located. Difficulties in
obtaining or failure to obtain the necessary licenses or approvals could delay
or prevent the development of a new restaurant in an area.
Alcoholic beverage control regulations in each state require that the
Company's restaurants apply to the specific state authority and, in certain
locations, county and municipal authorities for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. Typically, an alcoholic beverage license must be renewed
annually and may be revoked or suspended for cause at any time. Alcohol beverage
control regulations relate to numerous aspects of the daily operations of the
Company's restaurants, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
and storage and dispensing of alcoholic beverages. The failure of a restaurant
to obtain or retain a liquor or food service license would adversely affect the
particular restaurant's operations.
Restaurants in most states are subject to "dram shop" laws and
legislation, which imposes liability on licensed alcoholic beverage servers for
injuries or damages caused by their negligent service of alcoholic beverages to
a visibly intoxicated person or to a minor, if such service is the proximate
cause of the injury or damage and such injury or damage is reasonably
foreseeable. The Company maintains liquor liability insurance as part of its
existing comprehensive general liability insurance, which it believes to be
adequate to protect against such
-17-
<PAGE>
liability, although there can be no assurance that it will not be subject to a
judgment in excess of such insurance coverage or that it will be able to
continue to maintain such insurance coverage at reasonable costs or at all. The
imposition of a judgment substantially in excess of the Company's insurance
coverage would have a material adverse effect on the Company. In the event that
such insurance coverage were to become unavailable in the future, it could
materially and adversely affect the Company.
-18-
<PAGE>
PRICE RANGE OF SECURITIES
Commencing on December 15, 1993, the date of the Company's initial
public offering, through April 21, 1995, the Company's Common Stock, par value
$.01 per share (the "Common Stock") and redeemable warrants (the "Redeemable
Warrants") were quoted on the NASDAQ SmallCap Market. On April 21, 1995, the
Redeemable Warrants were redeemed by the Company and delisted from the NASDAQ
SmallCap Market. From November 10, 1995 through May 10, 1997, the Company's 6%
Series A Cumulative Convertible Preferred Stock (the "Preferred Stock"), was
quoted on the NASDAQ National Market. On May 10, 1997 the Convertible Preferred
Stock was automatically converted into Common Stock. This automatic conversion
occurred pursuant to the terms and privileges of the Preferred Stock as adopted
by the Board of Directors of the Company. From November 10, 1995 through March
10, 1998 the Common Stock was quoted on the NASDAQ National Market. From March
11, 1998 to date the Common Stock was quoted on the OTC Bulletin Board. The high
and low bid quotations, on a quarterly basis, for the Common Stock for calendar
years 1996 and 1997 is set forth below. The prices for the Common Stock are
adjusted to reflect a one-for-ten reverse split which became effective February
12, 1998 and all of the prices set forth below reflect inter-dealer prices,
without retail mark up, mark down or commission and may not reflect actual
transactions:
1998 COMMON STOCK
- - ---- ------------
QUOTED BID PRICE
----------------
HIGH LOW
---- ---
First Quarter $.3125 .1562
Second Quarter .1289 .0585
Third Quarter .1601 .0330
1997 COMMON STOCK
- - ---- ------------
QUOTED BID PRICE
----------------
HIGH LOW
---- ---
First Quarter 15 5/8 4 11/16
Second Quarter 7 3/16 3 3/4
Third Quarter 5 5/8 1 1/4
Fourth Quarter 1 9/16 5/32
1996 COMMON STOCK
- - ---- ------------
QUOTED BID PRICE
----------------
HIGH LOW
---- ---
First Quarter 37 1/2 18 3/4
Second Quarter 54 3/8 30
Third Quarter 45 5/8 21 1/4
Fourth Quarter 25 5/8 2 3/16
On November 17, 1998, the closing bid and asked prices of the Common
Stock as reported on the OTC Bulletin Board were $.0150 and $.0160,
respectively. On October 14, 1998, there were 300 holders of record of Common
Stock and approximately 7,000 beneficial owners of Common Stock.
On March 10, 1998, the National Association of Securities Dealers, Inc.
(the "NASD") delisted the Company's Common Stock
-19-
<PAGE>
from the NASDAQ National Market because of the Company's failure to meet listing
requirements concerning minimum bid price and market value of public float and
advised the Company its securities may be eligible to trade on the OTC Bulletin
Board. The Company will take all actions reasonably necessary for there to be an
active trading market for its outstanding Common Stock.
DIVIDENDS
No cash dividends have been paid on the Common Stock by the Company and
management does not anticipate paying cash dividends in the foreseeable future.
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the Company's financial condition and
results of operations should be read in conjunction with the Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.
INTRODUCTION
The Company was formed in May of 1993 and, prior to the opening of the
initial Country Star Restaurant on April 2, 1994, did not generate any revenue.
The Company had revenues from Country Star Hollywood in 1995, its first full
calendar year of operations, of approximately $5,200,000. During 1996, the
Company had revenues of approximately $4,200,000 from Country Star Hollywood and
approximately $3,850,000 from its other restaurants, for total revenues of
approximately $8,050,000. During 1997, the Company had revenues of approximately
$3,318,000 from Country Star Hollywood, approximately $2,686,000 from Country
Star Las Vegas, and total revenues of approximately $6,279,000. Total operating
expenses increased from approximately $11,850,000 in 1995, to approximately
$27,637,000 in 1996 and to approximately $24,574,000 in 1997. The increase in
operating expenses during 1996 and 1997 could not be funded by the increase in
revenues. The Company's net loss for 1996 and 1997 was $16,780,382 and
$17,246,290, respectively. The Company continued to fund its operations by the
private sale of the Company's equity securities. As of December 31, 1997, the
Company anticipated that it would continue to have substantial capital needs
that would not be funded from operations and would continue to need to raise
capital through equity or debt financings.
New management has been implementing operational changes since February
12, 1997, that it believes will help the Company realize income from operations.
These operational changes include methods of revenue enhancement and reduction
of direct operating costs and corporate overhead. Methods of revenue enhancement
adopted by Management include (i) hosting of live events at the Hollywood
Restaurant, (ii) development of wholesale business by finding customers in the
tour and travel business, and (iii) modifications in the Company's advertising
program in order to target likely customers. The new plans and policies
implemented by Management to reduce expenses included the establishment of
direct corporate supervision over the purchase of food, beverage and other items
used in the operation of the Company's restaurants. This resulted in the Company
eliminating certain vendors and adding other vendors in order to achieve the
best possible cost for the Company's purchases. These actions have resulted in
reductions in the Company's food and beverage costs. In addition, the Company
has established direct corporate supervision over staffing in the restaurants in
order to achieve the lowest possible personnel costs in light of the Company's
business. The impact of these changes will not be realized until the second
quarter of calendar year 1998 and subsequent periods. The Company believes that
it will need additional capital to fund operations until it can obtain
profitability. Lenders have indicated to Management that they will make
discretionary advances needed to fund cash flow deficiencies for the balance of
1998.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
For the year ended December 31, 1997, revenues of the Company decreased
from approximately $8,059,000 to approximately $6,279,000. The decrease was
attributable primarily to two factors. First, the closing of the Atlanta
restaurant in early 1997 caused a decrease in revenues of approximately $400,000
from 1996. Second, revenues at the Hollywood and Las Vegas restaurants decreased
by approximately $1,400,000 from 1996 to 1997. The decrease in revenues of the
Hollywood and Las Vegas restaurants was attributable primarily to the Company's
inability during 1997 to expend significant sums on advertising and promotional
activities, resulting in reduced customer volume.
-21-
<PAGE>
For the year ended December 31, 1997, the Company had a net loss of
approximately $17,246,000. The Company believes that the loss was attributable
to the Company's inability to overcome the factors that resulted in the
Company's 1996 loss of approximately $16,780,000. These factors include the
failure of the Company to realize chances for increasing revenues because of
inadequate entertainment and a lack of management supervision at the Restaurant
sites. These factors also include a lack of direct management supervision over
selling, general and administrative expenses in relation to overall revenues and
a lack of direct management supervision over food and beverage, merchandise and
labor purchasing.
During 1997 the Company expended substantial sums on activities
relating to the possible reopening of the Atlanta restaurant. Ultimately, the
Company determined that it would not be possible to reopen the Atlanta
restaurant on a profitable basis. Costs and expenses for 1997 include a loss on
disposal of assets of approximately $10,179,000 related to the closure of the
Atlanta restaurant and the lease modification of the Las Vegas restaurant.
The Company recognized a loss on disposal of assets at its Las Vegas
restaurant because of a lease modification, even though the Company continued to
operate this Restaurant until September 1998. The Company anticipates a
contribution to results of operations for 1998 from the Las Vegas restaurant.
REVENUE
FOOD AND BEVERAGE
For the year ended December 31, 1997 food and beverage revenues were
$5,745,000 representing approximately 91% of total revenue.
MERCHANDISE
For the year ended December 31, 1997 merchandise revenues were
$534,000, representing approximately 9% of total revenue.
OPERATING EXPENSES
FOOD AND BEVERAGE COST OF SALES
Food and beverage cost of sales for the year ended December 31, 1997
were $1,924,000, representing approximately 33% of food and beverage revenue.
MERCHANDISE COST OF SALES
Merchandise cost of sales for the year ended December 31, 1997 were
$452,000, which represented 85% of merchandise revenue. Management is in the
process of reducing sales of low margin merchandise in order to reduce
merchandise costs as a percentage of merchandise sales.
PAYROLL AND RELATED TAXES
Payroll and related taxes at Country Star Hollywood were $2,651,000,
representing approximately 42% of total revenues for the year ended December 31,
1997. Management believes the levels of labor costs were the result of
inadequate controls and has taken steps to reduce labor costs as a percentage of
total revenues for 1998. Such steps have included the termination of certain
personnel and the reassignment of other personnel.
-22-
<PAGE>
RENT
Rent expenses were $2,465,000 for the year ended December 31, 1997,
representing approximately 39% of total revenue for year ended December 31,
1997. Rent expenses include amortization of total base rentals over a
straight-line basis. Consequently, $798,000 of deferred rent expenses are
included in 1997 rent expenses.
OTHER OPERATING COSTS
Other operating costs for the year ended December 31, 1997 were
$1,274,000, representing approximately 20% of total revenue for the year ended
December 31, 1997. Other operating costs consist primarily of repair and
maintenance, restaurant supplies, restaurant entertainment, insurance, credit
card fees, utilities and management fees.
INTEREST EXPENSE
Interest expense was $410,000, and embedded interest expense was
$2,346,000. Embedded interest expense arises from the discount feature of the
convertible debt instruments and line of credit advances issued by the Company.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the year ended
December 31, 1997 were $3,590,000. Selling, general and administrative expenses
include corporate salaries of $786,000 including related payroll taxes and
employee benefits, advertising and corporate promotions of $402,000, legal and
professional fees of $1,124,000, insurance expense of $118,000, travel related
costs of $63,000 and office rent of $80,000. The Company believes that it has
taken sufficient steps to reduce selling, general and administrative expenses to
a level commensurate with current sales levels.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1996, revenues from Country Star
Hollywood decreased from approximately $5,200,000 to $4,200,000. Revenues from
the Company's two other restaurants commenced in 1996 and totaled approximately
$3,850,000.
For the year ended December 31, 1996, the Company had a net loss of
approximately $16,780,000. Current management, which took over the Company on
February 12, 1997, believes that the net loss is a result of (i) the failure of
the Company to realize opportunities for increasing revenues because of
inadequate ongoing entertainment and attractions and a lack of supervision of
the Company's restaurant sites, (ii) lack of control over selling, general and
administrative expenses in relation to
-23-
<PAGE>
revenues, (iii) lack of control over food and beverage, merchandise and labor
costs in relation to customer volume, (iv) substantial cost overruns in the
construction of Country Star Las Vegas and Country Star Atlanta and (v)
pre-opening costs in Atlanta running substantially over budget because of
construction delays. Costs and expenses for 1996 include a charge of
approximately $5,600,000 for impairment of long-lived assets. This represents
primarily a write down of the book value of leasehold improvements based on
construction cost overruns for the restaurants.
REVENUE
FOOD AND BEVERAGE
For the year ended December 31, 1996 food and beverage revenues were
$7,048,000 representing approximately 87% of total revenue
MERCHANDISE
For the year ended December 31, 1996 merchandise revenues were
$1,011,000, representing approximately 13% of total revenue.
OPERATING EXPENSES
FOOD AND BEVERAGE COST OF SALES
Food and beverage cost of sales for the year ended December 31, 1996
were $2,223,000, representing approximately 32% of food and beverage revenue.
MERCHANDISE COST OF SALES
Merchandise cost of sales for the year ended December 31, 1996 were
$657,000, which represented 65% of merchandise revenue. Current management is in
the process of reducing sales of low margin merchandise in order to reduce
merchandise costs as a percentage of merchandise sales.
PAYROLL AND RELATED TAXES
Payroll and related taxes were $3,918,000, representing approximately
49% of total revenues for the year ended December 31, 1996. Current management
believes the levels of labor costs were the result of inadequate controls and
has taken steps to reduce labor costs as a percentage of total revenues.
RENT
Rent expenses were $1,276,000 for the year ended December 31, 1996,
representing approximately 16% of total revenue for the year ended December 31,
1996. Rent expenses include amortization
-24-
<PAGE>
of total base rentals over a straight-line basis. Consequently, $227,000 of
deferred rent expenses are included in 1996 rent expenses.
OTHER OPERATING COSTS
Other operating costs for the year ended December 31, 1996 were
$1,967,000, representing approximately 24% of total revenue for the year ended
December 31, 1996. Other operating costs consist primarily of repair and
maintenance, restaurant supplies, restaurant entertainment, insurance, credit
card fees, utilities and management fees.
INTEREST EXPENSE
Interest expense was $376,000. Of this amount, $274,000 represents
negotiated interest on Series B Preferred Stock issued and converted in the
fourth quarter of 1996. Interest liability was satisfied by the issuance of
36,565 common shares on February 12, 1997 valued at $7.50 per share.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the year ended
December 31, 1996 were $8,802,000 which exceeds total revenue for the year ended
December 31, 1996. Selling, general and administrative expenses include
corporate salaries of $1,502,000 including related payroll taxes and employee
benefits, advertising and corporate promotions of $1,782,000, legal and
professional fees of $627,000, insurance expense of $219,000, travel related
costs of $120,000, office rent of $116,000, cost overruns for restaurant
construction of $928,000, and the write off of certain pre-opening costs that
were in excess of budget of $2,080,000, and $1,429,000 of other costs.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting, Standards (SFAS) No. 121, whose
provisions were adopted by the Company in 1996, requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Construction costs overruns
and continuing operating losses were indicators of potential impairment of the
Company's three restaurants.
The impaired assets, primarily leasehold improvements, were written
down by $5,584,458. This non-cash charge to operations increased the 1996 loss
by $5.04 per share.
-25-
<PAGE>
SETTLEMENT OF STOCKHOLDERS' CLAIMS
See "Management's Discussion and Analysis - Liquidity and Capital
Resources."
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES.
Total revenues decreased to $920 thousand for the three months ended
September 30, 1998, compared with $1.293 million for the three months ended
September 30, 1997, a decrease of $373 thousand or 29%. Same store revenues
decreased 28% in Hollywood and 27% in Las Vegas. The decrease was due to the
closing of the Las Vegas restaurant, the Company's limited advertising budget
and customer resistance to changes in food preparation and presentation. Steps
are being taken which management believes will increase sales at the Hollywood
restaurant.
COSTS AND EXPENSES.
Cost of revenues decreased from $475 thousand for the three months
ended September 30, 1997 to $295 thousand for the three months ended September
30, 1998. Cost of revenues as a percentage of revenues decreased from 37% to
32%.
Operating expenses decreased from $1.625 million for the three months
ended September 30, 1997 to $667 thousand for the three months ended September
30, 1998. As a percentage of revenues, operating expenses decreased from 126% to
73%.
General and administrative expenses decreased from $756 thousand for
the three months ended September 30, 1997 to 61 thousand for the three months
ended September 30, 1998. As a percentage of revenues, general and
administrative expenses decreased from 58% to 7%. The decrease is partially due
to the reduction of the estimated accrued legal settlement to $100,000.
The decrease in cost of revenues, operating expenses and general and
administrative expenses were due to the closing of two restaurants and the new
plans and policies implemented by management.
Depreciation and amortization decreased from $310 thousand for the
three months ended September 30, 1997 to $147 thousand for the three months
ended September 30, 1998, reflecting the decrease in the number of buildings
owned from three to one. As a percentage of total revenues, depreciation and
amortization decreased from 24% to 16%.
-26-
<PAGE>
Interest expense increased from a $146 thousand dollar income to an $80
thousand dollar expense, reflecting primarily the interest expense associated
with the convertible debt financing arrangements entered into on February 12,
1997.
Minority interest for the three months ended September 30, 1997
reflected 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. The
Company sold its interest in Country Star Las Vegas LLC on December 30, 1997,
and entered into a new sublease agreement directly between the Company and a
nominee of the landlord. The Company is obligated to pay base rent of 50% of
monthly positive cash flow. During the three months ended September 30, 1998,
the Las Vegas location did not generate positive cash flow and, therefore, no
rental payments were made.
The Company closed its Las Vegas restaurant upon the expiration of its
lease on September 30, 1998. The Landlord of the Restaurant was unwilling to
extend the lease beyond the scheduled expiration date. As a result of this
event, the remaining net value of the Las Vegas Restaurant equipment totaling
$114 thousand was written off on September 30, 1998.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES.
Total revenues decreased to $2.954 million for the nine months ended
September 30, 1998, compared with $5.289 million for the nine months ended
September 30, 1997, a decrease of $2.335 million or 44%. Same store revenues
decreased 35% in Hollywood and 49% in Las Vegas. The decreases were due to the
closing of Atlanta and Las Vegas restaurants, the Company's limited advertising
budget and customer resistance to changes in food preparation and presentation.
Steps are being taken which management believes will increase sales at the
Hollywood restaurant.
COSTS AND EXPENSES.
Cost of revenues decreased from $1.980 million for the nine months
ended September 30, 1997 to $977 thousand for the nine months ended September
30, 1998. Cost of revenues as a percentage of revenues decreased from 37% to
33%.
Operating expenses decreased from $5.365 million for the nine months
ended September 30, 1997 to $2.250 million for the nine months ended September
30, 1998. As a percentage of revenues, operating expenses decreased from 101% to
76%.
General and administrative expenses decreased from $3.0 million for the
nine months ended September 30, 1997 to 1.057 million for the nine months ended
September 30, 1998. As a percentage of revenues, general and administrative
expenses decreased from 57% to 36%. The decrease is partially due to the
reduction of the estimated accrued legal settlement to $100,000.
The decrease in cost of revenues, operating expenses and general and
administrative expenses were due to the closing of two restaurants and the new
plans and policies implemented by management.
Depreciation and amortization decreased from $1.081 million for the
nine months ended September 30, 1997 to $442 thousand for the nine months ended
September 30, 1998, reflecting the decrease in the number of buildings owned
from three to one. As a percentage of total revenues, depreciation and
amortization decreased from 20% to 15%.
-27-
<PAGE>
Interest expense decreased from $2.050 million to $488 thousand,
reflecting primarily the embedded interest expense associated with the
convertible debt financing arrangements entered into on February 12, 1997.
Minority interest for the nine months ended September 30, 1997
reflected 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. The
Company sold its interest in Country Star Las Vegas LLC on December 30, 1997,
and entered into a new sublease agreement directly between the Company and a
nominee of the landlord. The Company is obligated to pay base rent of 50% of
monthly positive cash flow. During the nine months ended September 30, 1998, the
Las Vegas location did not generate positive cash flow and, therefore, no rental
payments were made.
The Company closed its Las Vegas restaurant upon the expiration of its
lease on September 30, 1998. The Landlord of the Restaurant was unwilling to
extend the lease beyond the scheduled expiration date. As a result of this
event, the remaining net value of the Las Vegas Restaurant equipment totaling
$114 thousand was written off on September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 1997
GOING CONCERN
The Company's independent certified public accountants included an
explanatory paragraph in their report for the years ended December 31, 1996 and
December 31, 1997, which indicated a substantial doubt as to the ability of the
Company to continue as a going concern due to significant losses in 1996 and
1997 and cash flow shortages (See Independent Certified Public Accountants'
Reports, pages F-2, and Note 6 of the Notes to Financial Statements.)
At September 30, 1998 the Company had cash on hand of approximately
$17,500. For the year ended December 31, 1997, the Company has primarily funded
its capital requirements from proceeds from the issuance of debt and equity
securities.
-28-
<PAGE>
CONVERTIBLE DEBT AND INSTITUTIONAL DEBT
In the fourth quarter of 1994 and the first and second quarters of
1995, the Company issued an aggregate of $1,000,000 of debt in private
transactions, $500,000 of which represented convertible debt which bore interest
at the rate of eight percent (8%) per annum, and the balance of which
represented institutional debt borrowed from Steel Partners and Leslie Linton
Entertainment, Inc. which bore interest at the rate of nine percent (9%) per
annum. Mr. Robert E. Linton, a principal of Leslie Linton Entertainment, Inc.,
became a member of the Company's Board of Directors in March, 1996. The proceeds
from the convertible debt and institutional debt were used for entering into the
leases for, and commencing the development of, Country Star Las Vegas and
Country Star Atlanta. The convertible debt, which was initially due on February
21, 1995, and was convertible at any time, in whole or in part, into shares of
Common Stock at $4.00 per share, was extended a number of times. On August 1,
1995 the Company repaid $250,000 of principal of the Convertible Debt and the
balance of the principal, an additional $250,000, plus all accrued interest, was
repaid on November 14, 1995, the closing of the Company's secondary offering of
1,200,000 shares of Preferred Stock (the "Secondary Offering"). Similarly, all
principal and accrued interest with respect to the institutional debt was repaid
on the closing of the Company's Secondary Offering. The institutional debt was
due upon the earlier of (i) March 1996, one (1) year from issuance, and (ii) the
Company's raising of at least $5,000,000 in equity capital.
THE BRIDGE FINANCING
On July 28, 1995, the Company completed an interim bridge financing
arranged by and sold through the representative of the underwriters of the
Company's Secondary Offering (the "Bridge Financing"). Pursuant to the Bridge
Financing, the Company sold 37 units (the "Units") to non-affiliated, accredited
investors, each Unit consisting of (i) a $50,000, 6% promissory note due the
earlier of twelve (12) months from the date of issuance or the Company's receipt
of at least $5,000,000 in gross proceeds from a public or private sale of its
securities, a joint venture or licensing agreement (collectively, the "Notes"),
(ii) 5,000 shares of Common Stock, and (iii) 3,000 warrants, each to purchase
one share of Common Stock, exercisable at a price per share equal to the
Conversion Price of the Company's Preferred Stock, which was $2.00. The net
proceeds from the Bridge Financing 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. In connection
with the Bridge Financing pursuant to which the Company issued 6% promissory
notes in the aggregate principal amount of $1,850,000, 185,000 shares of common
Stock and 111,000 warrants, the Company recorded an original issue discount of
$665,518 based on the relative fair market value of the Notes, the Common Stock
and the warrants on the date of issuance. The Company also incurred
approximately $200,000 of offering costs related to the Bridge Financing, of
which $129,015 was recorded as a discount to the Notes with the remainder
recorded as a reduction to the paid-in capital of the Common Stock and warrants
issued in connection therewith. The original issue discount was amortized over
the term of the Notes as an interest expense. After the Secondary Offering, at
which time all of the institutional debt and the Notes were repaid with a
portion of the net proceeds, the Company took a non-recurring charge to interest
expense in an amount equal to the then remaining unamortized portion of the
original issue discount and offering costs of $866,666, which was charged to
interest expense for the year ended December 31, 1995. Under the terms of the
Bridge Financing, all 185,000 shares of Common Stock issued in the Bridge
Financing were automatically exchanged for an aggregate of 77,089 shares of
Preferred Stock upon the effective date of the Secondary Offering. The Company
used the net proceeds of the Bridge Financing to continue the development of
Country Star Las Vegas and Country Star Atlanta, to repay certain indebtedness,
and for working capital purposes.
-29-
<PAGE>
SECONDARY OFFERING
On November 10, 1995, the Company completed its Secondary Offering of
1,200,000 shares of 6% Cumulative Convertible Series A Preferred Stock. The net
proceeds to the Company from the Secondary Offering, after deducting commissions
and expenses, were approximately $11,200,000. The Company applied such net
proceeds towards the continued development of Country Star Las Vegas and Country
Star Atlanta, repayment of certain indebtedness, and working capital. The
Company's Preferred Stock paid a cumulative, quarterly dividend at the rate of
6% per annum of the Preferred Stock's liquidation value, which is $12.00 per
share, on each of December 31, March 31, June 30 and September 30 of each year
commencing December 31, 1995, when, as and if declared by the Board of Directors
out of funds legally available therefor. Dividends were payable in cash or
Common Stock at the Company's election. The Preferred Stock was convertible into
Common Stock commencing on February 8, 1996 at a conversion rate of 6 shares of
Common Stock for each share of Preferred Stock, subject to adjustment in certain
events (a "Conversion Price" of $2.00 per share). Unless previously converted or
redeemed, the Preferred Stock was automatically converted into Common Stock May
10, 1997. Each holder of shares of Preferred Stock were entitled to vote
together with, and on all matters submitted to, the holders of Common Stock on
an as-converted basis. Further, on or after May 8, 1996, in the event that the
Common Stock had a closing bid price that was at least 170% of the Conversion
Price for 20 out of 30 consecutive trading days ending within five (5) days of
the date of the notice of redemption, the Preferred Stock may have been redeemed
at the Company's option, in whole or in part, at $12.00 per share, plus any
declared but unpaid dividends to the date fixed for redemption. In addition, on
or after May 8, 1996, the Preferred Stock may be redeemed at the Company's
option, in whole or in part, at the following per share prices, plus any
declared but unpaid dividends:
Period Redemption Price
------ ----------------
May 8, 1996 - July 9, 1996 $13.08
July 10, 1996 - January 9, 1997 12.72
January 10, 1997 - May 9, 1997 12.36
The liquidation preference of the Preferred Stock was $12.00 per share,
plus any declared but unpaid dividends and in the event of liquidation,
dissolution or winding up of the Company is to be paid to holders of the
Preferred Stock before any distribution to holders of Common Stock or any other
class of capital stock junior to the Preferred Stock.
FEBRUARY 12, 1997 FINANCING AND CHANGE IN CONTROL
On February 12, 1997, the Company entered into a secured loan agreement
with Dan Rubin ("Rubin") and Cameron Capital Ltd., an institutional investor
("Cameron").
Under the secured financing agreement, Rubin and institutional lenders
have 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%), payable 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 16,667 shares of its common stock at an exercise
price of $6.25 per share.
All additional line of credit advances have the same terms and
conditions as the initial line of credit advance. For each such additional
advance, the lender receives one (1) common stock purchase warrant for every $30
advanced. The exercise price for these warrants is $6.25 per share. All of the
warrants issued or to be issued to the lender will be subject to adjustment in
the event of stock splits, stock dividends, mergers, consolidations, or similar
corporate events.
-30-
<PAGE>
FEBRUARY 18, 1998 FINANCIAL RESTRUCTURING
Under the terms of the Settlement Agreement dated February 18, 1998
(the "Settlement Agreement"), Cameron Capital Ltd. ("Cameron") agreed to dismiss
its legal action against the Company and to accept as a full settlement of its
long term debt aggregate consideration consisting of a cash payment of
$1,300,000 payable at closing and the issuance of 670,000 shares of the
Company's Common Stock, par value $.01 per share. For a description of this
transaction see "Management - Certain Transactions."
PRIVATE PLACEMENTS DURING 1996 AND 1997
On February 12, 1996, the Company sold 24,190 shares of Common Stock to
Dan Rubin, an individual, and Roy B. Rubin, M.D., P.C., M.P.P.P., a pension fund
(the "Pension Fund") for an aggregate purchase price of $635,000.
On April 10, 1996, the Company sold 10,000 shares of Common Stock and
50,000 Warrants to Mr. Rex Licklider for an aggregate purchase price of
$300,000. On April 10, 1996, the Company sold 16,666 shares of Common Stock and
83,334 Warrants to the Licklider Living Trust Dated 5/2/86 (the "Trust") for an
aggregate purchase price of $500,000.
On April 10, 1996, the Company also sold (i) 10,000 shares of Common
Stock and 50,000 Warrants to Bruce Sokoloff for an aggregate purchase price of
$300,000, (ii) 13,333 shares of Common Stock and 66,667 Warrants to Wisdom Tree
Associates for an aggregate purchase price of $400,000 and (iii) 25,000 shares
of Common Stock and 125,000 Warrants to Dan Rubin for an aggregate purchase
price of $750,000.
On July 10, 1996, the Company sold 11,428 shares of Common Stock and
85,715 Warrants to Bruce Sokoloff for an aggregate purchase price of $400,000.
On August 28, 1996, the Company sold 170,371 shares of Series A
Preferred Stock to Dan Rubin, an individual, Robert Lyszczarz, an individual and
Roy B. Rubin, M.D., P.C., M.P.P.P., a pension fund (the "Pension Fund") for an
aggregate purchase price of $2,280,000. The Series A Preferred Stock paid
cumulative dividends of 6% per annum, payable in cash or Common Stock. In
connection with the transaction, the Company issued an aggregate of 306,667
warrants.
On September 16, 1996, the Company sold an aggregate of 10,000 shares
of Common Stock and 100,000 Warrants to the Alan & Coralie Goldsmith Trust and
the Alan J. Goldsmith Accountancy Corp. Defined Benefit Pension Trust for an
aggregate purchase price of $200,000.
On October 10, 1996 the Company sold 4,000 shares of newly issued 7%
Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred
Stock"). The sale was made to Cameron Capital Ltd., a foreign institutional
investor, for an aggregate purchase price of $4,000,000, or $1,000 per share. On
February 12, 1997, all of the outstanding shares of Series B Convertible
Preferred Stock was exchanged by the holder with the Company for a Convertible
Term Note in the principal amount of $4,000,000.
-31-
<PAGE>
On May 7, 1997, the Company sold pursuant to Regulation S under the
Securities Act of 1933, as amended (the "Act") 5% Convertible Debentures for
$700,000 to institutional investors abroad, convertible 41 days after closing at
a price equal to 70% of the average closing bid price during the 5 days
preceding the conversion date.
On May 28, 1997, the Company sold pursuant to Regulation S under the
Act 5% Convertible Debentures for $500,000 to institutional investors abroad,
convertible 41 days after closing at a price equal to 70% of the average closing
bid price during the 5 days preceding the conversion date.
On June 30, 1997, the Company issued warrants to acquire 150,000 shares
of its Common Stock at an exercise price of $2.10 per share to a private
investor. The warrants were exercised immediately and the Company issued 150,000
shares of its Common Stock to the private investors. The Company received net
proceeds from the exercise of the warrants of $315,000. No commissions or fees
were paid by the Company.
During July/August 1997, the Company sold in a private offering an
aggregate of 357,857 shares of its Common Stock at a price of $2.80 per share,
for a total offering price of $1,002,000. Josephthal Lyon & Ross Inc. acted as
placement agent and received commissions of approximately $107,000. The net
proceeds received by the Company were approximately $895,000.
During October, 1997 the Company issued 1,045,743 shares of Common
Stock to investors in consideration for a full release of alleged claims arising
out of securities sold to them by the Company from May, 1997 through August,
1997. These claims alleged that the securities sold had been unfairly priced and
the additional shares were issued to give the investors an overall price that
reflected the market value of the Common Stock at the time of settlement. The
investors who received the Common Stock included the investors who purchased the
5% Convertible Debentures from the Company on May 7, 1997 and May 28, 1997, the
investors who acquired warrants to acquire shares of the Company's Common Stock
on June 30, 1997 and the investors who purchased Common Stock in the private
offering made during July/August 1997.
During December, 1997, the Company issued 225,000 shares of Common
Stock to Cirrus LLC in partial consideration for the Company's purchase of
Cirrus' interest in the limited liability company which owned the Company's
restaurant in Las Vegas.
On February 12, 1997, all of the outstanding shares of Series B
Convertible Preferred Stock were exchanged by the holder, Cameron Capital Ltd.
for a Convertible Term Note ("Note") in the principal amount of $4,000,000. The
Note may be converted into common stock 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) $13.30, 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. According to the Note
-32-
<PAGE>
Agreement, the maximum number of shares into which the Note may be converted
shall not exceed 300,000. The maximum number of shares into which the note was
convertible has been amended without obtaining shareholder approval to a maximum
of 2,000,000 shares.
As of December 31, 1997, Cameron had converted $1,004,643 principal
amount of its note into 1,505,000 shares. As of November 4, 1997, Rubin and the
other investors who received convertible notes in the aggregate principal amount
of $1,950,000 had converted the entire $1,950,000 principal amount into
1,780,000 shares of Common Stock plus an additional 300,000 shares of common
stock for interest and penalty.
SEASONALITY
The Company does not believe that seasonality will have a material
impact on the Company's overall operations once it has fully established Country
Star Las Vegas. Country Star Hollywood is in a location that experiences
significantly higher traffic during the summer months due to its popularity as a
tourist destination.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company had a net operating loss carryforward
for Federal tax purposes of approximately $35,500,000 which, if unused to offset
future taxable income, will expire between 2008 and 2012, and approximately
$12,000,000 for state purposes which will expire if unused between 1998 and
2002. A valuation allowance has been recognized for 1997 and 1996 to offset the
related deferred tax assets due to the uncertainty of realizing any benefit
therefrom. During 1997, no changes occurred in the conclusions regarding the
need for a 100% valuation allowance in all tax jurisdictions.
Under Section 382 of the Code ("Section 382"), the utilization of net
operating loss carryforwards is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the market value of the loss
corporation's outstanding stock immediately before the date of the ownership
change multiplied by the highest Federal long-term tax exempt rate in effect for
any month in the three (3) calendar month period ending with the calendar month
in which the ownership change occurred. Due to the ownership change as a result
of the secondary offering completed in November, 1995, the Company is subject to
an annual limitation on the use of its pre-1996 net operating losses of
approximately $1,000,000 per year. Therefore, in the event that the Company
achieves profitability in excess of the annual limitation amount, such
limitation would have the effect of increasing the Company's tax liability and
reducing the net income and available cash resources of the Company in such
year. The determination of whether a change in
-31-
<PAGE>
control has occurred can be a very complex and time consuming process. The
Company is not currently in a position to determine whether additional changes
in control might have occurred since November 1995.
IMPACT OF INFLATION
Increases in food and labor costs and interest rates directly affect
the Company. Many of the Company's employees at Country Star Hollywood are paid
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 lease at Country Star Hollywood
requires the Company, among other things, to pay taxes, maintenance, insurance,
repairs and utility costs, all of which are subject to inflation, as well as
periodic escalations of annual rents. Any future leases that the Company may
enter into with respect to any future Country Star Restaurants may also contain
similar provisions.
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 1998
Net cash provided by financing activities for the nine months ended
September 30, 1997 and September 30, 1998 were $2.981 million and $132 thousand
respectively, due primarily to the net proceeds from issuance of common stock
and borrowings in 1997 and borrowing under and repayment of the convertible
debts in 1998.
Net cash used in operating activities for the nine months ended
September 30, 1997 and September 30, 1998 decreased from $3.782 million to
$1.333 million due primarily to the settlement with over 374 creditors during
the nine months ended September 30, 1997.
The Company's historic liquidity problems arose primarily from the need
to finance construction of its restaurants before revenues from the restaurants
could be realized. There are currently no restaurants under construction and
Management believes that the operational changes it has implemented may lead to
positive cash flow by the end of 1998.
The Company believes that decreases in its accounts payable may be an
indication of improvement in its liquidity condition. For the year ended
December 31, 1997, accounts payable decreased by approximately $506,000 compared
to an increase in accounts payable of approximately $2,955,000 during the year
ended December 31, 1996.
-32-
<PAGE>
The Company will need to raise additional capital before it can attain
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. If it does not do so,
the Company could continue to operate its Hollywood restaurant and Management
believes that it would be in a position to do so with limited additional
capital.
FORWARD LOOKING STATEMENTS
Any statements that are not historical facts contained in this Report
are forward looking statements that involve risks and uncertainties, including
but not limited to those relating to demand for the Company's services, pricing,
market acceptance, competition, the effect of economic conditions, the results
of financing efforts, the Company's ability to complete proposed transactions
and negotiate terms with its creditors, and other risks.
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On January 5, 1996, the Company was informed by its independent
auditor, Ernst & Young, LLP ("E&Y") that E&Y had resigned as the Company's
independent auditor, effective immediately. Contemporaneously, the Company filed
a Current Report on Form 8-K relating to the resignation of E&Y. The Company had
retained E&Y to act as its independent auditor on March 2, 1994. For the period
beginning with the retention of E&Y and ending with the resignation of E&Y, the
reports of E&Y on the financial statements of the Company did not contain any
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. Since initially retaining
E&Y, the Company has not had any disagreements with E&Y on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
On March 18, 1996, the Company engaged BDO Seidman, LLP to
-33-
<PAGE>
replace E&Y as the Company's independent auditor, effective immediately, and
contemporaneously filed a Current Report on Form 8-K relating thereto. On
November 12, 1996, the Company terminated the firm of BDO Seidman, LLP as
independent auditor, and contemporaneously filed a Current Report on Form 8-K
relating thereto. For the period beginning with the retention of BDO Seidman,
LLP and ending with its termination, its reports on the financial statements of
the Company did not contain any adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles. Since retaining BDO Seidman, LLP, the Company has not had any
disagreements with it on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
On January 16, 1997, the Company engaged the services of Deloitte &
Touche LLP to serve as the Company's independent auditor, and contemporaneously
filed a Current Report on Form 8-K relating thereto. On March 29, 1997, the
Company terminated the firm of Deloitte & Touche LLP as its independent auditor.
For the period beginning with the retention of Deloitte & Touche LLP and ending
with its termination, Deloitte & Touche LLP did not prepare any reports or
render any adverse opinion or disclaimer of opinion on the financial statements
of the Company. Since initially retaining Deloitte & Touche LLP the Registrant
has not had any disagreements with it on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
On March 29, 1997, the Company engaged the services of Cacciamatta
Accountancy Corporation to serve as the Company's independent auditor.
Contemporaneously with the dismissal of Deloitte & Touche LLP and the retention
of Cacciamatta Accountancy Corporation the Company filed a Current Report on
Form 8-K relating thereto.
BUSINESS
GENERAL
Country Star Restaurants, Inc., which was formed in May 1993, develops,
constructs, owns and operates country theme restaurants combining high quality,
moderately priced food with a casual, family-oriented environment. The Company
currently operates one restaurant, located in Hollywood, California.
In recent years theme restaurants have gained increasing popularity, as
a number of such restaurants featuring a variety of different themes have
opened. The two most popular and well known restaurants of this genre are Planet
Hollywood(R) and Hard Rock Cafe(R), both of which combine an entertainment
component with a casual dining atmosphere. Aside from enhancing the dining
experience, the entertainment component also provides an additional revenue
stream, predominantly from merchandise sales.
-34-
<PAGE>
Patrons of theme restaurants have evidenced a willingness to purchase souvenir
T-shirts, hats, mugs, and other items bearing the logo and reflecting the
lifestyle of the particular theme restaurant. These retail sales are typically
at higher profit margins than food sales, inclusive of labor costs.
The Company believes that its country theme provides a distinctly
American experience which, combined with its casual, high-quality dining in a
state-of-the-art multimedia environment, is a format with wide demographic
appeal. The Company believes that the country theme is an under-exploited
segment of quality dining in the restaurant industry and will fill a niche in
the casual dining segment of the restaurant industry, and therefore represents
an attractive opportunity for the Company.
The first Country Star(R) Restaurant opened in August 1994 in
Hollywood, California adjacent to Universal Studios Hollywood and the Universal
Citywalk development, a major tourist attraction. Country Star Hollywood
features an exciting, entertaining dining experience, including an extensive
display of country music memorabilia and artifacts, approximately 100 video
monitors, 10 audio listening posts, and a number of interactive audio-video
kiosks. The menu features moderately priced American and country-style food such
as ribs, chili, chicken, burgers, steaks, salad, pizza, fish and desserts, which
was developed to be consistently reproducible domestically and internationally.
Country Star Hollywood also sells a variety of merchandise with the Country Star
logo, including casual clothing, food products and other related items.
The Company opened two additional flagship restaurants: Country Star
Las Vegas commenced operations in July, 1996 and Country Star Atlanta commenced
operations in October, 1996. Country Star Atlanta and Country Star Las Vegas are
now permanently closed and no plans for opening any other restaurants have been
finalized.
Unanticipated financial problems arose with respect to both the Las
Vegas and Atlanta restaurants. Operating expenses at both sites substantially
exceeded budget. In addition, the Atlanta restaurant suffered from substantial
construction cost overruns and a delayed opening which prevented the restaurant
from operating during the 1996 Summer Olympics, which were held in Atlanta. By
early 1997, as a result of the mounting losses at the Las Vegas and Atlanta
restaurants, the Company determined that a major overhaul of corporate strategy
was required.
The most significant step taken was a change of management effected on
February 12, 1997, in which Dan Rubin, an investor in the Company, became Chief
Executive Officer and President. Immediately prior to Mr. Rubin assuming office,
a new Board of Directors was appointed to manage the Company. (See "Management -
Certain Transactions - February 12, 1997 Financing and Change in Control," for a
description of the change in management and
-35-
<PAGE>
the financial terms under which Mr. Rubin made an additional investment in the
Company.)
In order to stem the rising operating losses and put the Company on a
financially solvent course, new management has taken certain interim and
permanent measures.
First, management permanently closed the Atlanta restaurant during
January 1998. Although the restaurant was completed and fully staffed in late
1996, the restaurant realized extremely limited customer revenues. Management
determined that the continued operation of the restaurant as an under utilized
and unprofitable establishment would only hurt the Company's opportunities for
long term success. (See "Business Country Star Atlanta.")
Second, the Company entered into a series of transactions involving the
Las Vegas Restaurant. As a result of these transactions the Company received net
proceeds of $1,350,000, a 100% interest in the Las Vegas Restaurant and entered
into a new lease. The Company permanently closed the Las Vegas restaurant during
September 1998. (See "Business - Country Star Las Vegas").
THE COMPANY'S STRATEGY
The Company has no present expansion plans, although the Company may
explore non-capital intensive ways of promoting the Company's business, such as
licensing agreements, joint ventures and other opportunities. Such expansions
may include off-site catering of parties and at music venues or the
establishment of limited menu restaurants in food courts located throughout the
United States and in foreign locations. The Company may seek to pay for its
portion of any such expansion by issuing shares of its Common Stock. It is
anticipated that any of the future Country Star Restaurant, although modeled
after its flagship Country Star Restaurant, will be smaller and less expensive
to construct. The Company will seek to leverage the recognition and publicity
achieved by its flagship Country Star Restaurant to support its smaller Country
Star Restaurants. The Company believes that the reduced scale of these smaller
Country Star Restaurants will result in lower overall costs to develop,
construct and open.
Management has determined that the best strategy for any potential
expansion will be through joint ventures and licensing arrangements under which
additional Country Star Restaurants could be opened without the Company being
required to incur expensive construction, development and pre-opening costs.
Management is seeking to identify publicly held and private
-36-
<PAGE>
companies that may be interested in working with the Company on a joint venture
or licensing basis.
One of the Company's key priorities in the near term is to inject new
excitement into the Company's restaurant business in order to stimulate greater
customer traffic. The Company plans to increase the frequency of celebrity
events and promotions and broaden the number of celebrities associated with the
Company, with an emphasis on new, up-and-coming stars. In addition, the Company
is taking steps to broaden the appeal of its restaurant through menu revisions
and greater promotion of group sales, in order to attract more local residents
to augment the Company's primarily tourist customer base.
The Company is seeking to increase its name brand recognition and
establish a secondary meaning in the marketplace for Country Star Restaurants.
The Company believes that this will have a favorable impact on the Company's
business operations, particularly with respect to merchandise sales and may open
up the opportunity for sale of certain food products for distribution to
customers through retail channels as well as at restaurant sites. By emphasizing
the high quality of its food and offering an exciting entertainment dining
experience, the Company believes that it will be able to appeal to a broad
consumer base, and specifically those individuals who patronize theme
restaurants.
In light of the Company's personnel reduction, particularly in its
corporate office, the elimination of costs associated with the Atlanta
restaurant, and management's belief that the marketing initiatives described
above represent the best way to increase customer traffic at the lowest possible
cost, management believes that the Company can attain profitable operations.
SETTLEMENT OF TRADE CLAIMS
Management determined that the Company would not be able to pay
existing trade creditors of the Company in full and also realize its strategic
goals. Accordingly, starting in March 1997 the Company made offers to all
creditors to settle their outstanding claims by accepting forty cents for every
dollar owed. Management pointed out to its creditors that the settlement was far
more favorable to them than the alternative of
-37-
<PAGE>
the Company filing a voluntary bankruptcy proceeding.
The Company was successful in settling the majority of the trade
claims, including the claims of the then landlord of the Las Vegas facility and
the claims of the general contractor and certain subcontractors relating to the
construction of the Las Vegas facility. In some instances, the Company paid off
trade debt through the issuance of common stock.
The only trade creditor holding a claim in excess of $25,000 with whom
the Company has not reached a settlement is Pacific Southwest Development, Inc.
("PSD"). (See "Business - Litigation.")
During 1997, the Company recognized extraordinary gains totaling
$1,673,629 on the settlement of trade claims in exchange for discounted cash
payments and common stock issuances.
The Company's trade claims settlement has not materially affected the
Company's ability to obtain supplies at reasonable prices and on reasonable
terms. The Company has selected new suppliers when appropriate and has worked
out acceptable credit and payment terms with existing suppliers for them to
continue doing business with the Company.
COUNTRY STAR HOLLYWOOD
Country Star Hollywood is approximately 18,000 square feet in size,
4,000 of which is a partially enclosed outdoor patio, and has approximately 325
seats inside the restaurant and approximately 150 seats outside on the patio.
One of Country Star Hollywood's dining areas also features a fully operational
stage which is prewired for stage monitors and microphones, has theatrical
lighting and two television cameras. Country Star Hollywood offers a wide range
of moderately priced food in the Company's distinctive, exciting, interactive
country music environment. Entrance to Country Star Hollywood is through a
forty-two foot-high computer-driven electronic sign in the form of a jukebox in
front of which the Country Star line dancers regularly perform. Country Star
Hollywood's menu features basic, but varied, American fare, such as ribs, chili,
chicken, burgers, steaks, salad, pizza, fish and desserts and has a separate bar
area and a number of separate dining areas, all of which feature full waiter and
bar service and revolve around various country music artifacts and/or artists.
Country Star Hollywood is designed to allow diners to be surrounded by the
various artifacts, memorabilia, photographs and audio-visual materials. Country
Star Hollywood's extensive display of artifacts relating to country music and
its heritage is combined with a state-of-the-art multimedia environment.
The Company has recently completed the construction of a dance floor
and bar in its patio area. The Company expects the
-38-
<PAGE>
patio area to serve as a venue for country music promotions, parties sponsored
by local radio station KZLA and other events.
Country Star Hollywood features interactive audio-visual kiosks, which
can be accessed by a touchscreen, offering short biographies, specially recorded
video interviews and fan club information with respect to country celebrities.
Country Star Hollywood also features approximately 100 video monitors and 10
audio listening posts located throughout the restaurant. The audio listening
posts, which can be accessed by listening to an attached headset, are dedicated
to different record labels and feature a recently released country music CD by a
recording artist who is signed to the particular label.
Country Star Hollywood also has a merchandise store that sells a
variety of casual clothing such as T-shirts, sweat shirts, jackets and baseball
caps bearing the Country Star Restaurant logo, other Country Star logo
merchandise such as coffee mugs, belt buckles, tote bags, pins, the Company's
food products and other selected merchandise. The Company has begun to emphasize
the sale of higher volume and higher gross profit merchandise.
COUNTRY STAR LAS VEGAS
Country Star Las Vegas was permanently closed in September, 1998 upon
the expiration of its Lease. The Landlord was unwilling to extend the lease
term beyond the scheduled expiration date.
In December 1997, the Company entered into a series of transactions
involving the Las Vegas Restaurant. Prior to these transactions, the Company
held a majority interest in and managed a limited liability company which leased
the restaurant from the owner and operated the restaurant. As a result of these
transactions, the Company itself directly entered into a new lease, and received
net proceeds of $1,350,000. The new lease grants to the Company as lessee, the
same rights, with certain modifications, previously granted to the limited
liability company as lessee under the prior lease. The modifications in the
lease include a reduction in the base rent payable from $83,334 per month to an
amount equal to one-half (1/2) of the Company's positive cash flow from
operating the restaurant (with no reduction for the Company's corporate overhead
expenses other than for salary and employee related expenses for 1/2 of an
accounts payable employee, 1/2 of a payroll employee and 1/2 of an executive
chef). The new lease terminated on September 30, 1998.
BACKGROUND TO LAS VEGAS RESTAURANT TRANSACTION
From inception, the Country Star Las Vegas restaurant was owned by a
Nevada limited liability company (the limited liability company as an entity is
referred to herein as the "Restaurant Operator"). The Company was the manager of
and held the majority interest in the Restaurant Operator. The other members of
the Restaurant Operator were Cirrus, Cirrus LLC ("Cirrus"), a Delaware limited
liability company and NevStar LLC ("NevStar"), a Nevada limited liability
company. NevStar was also the landlord of the restaurant's leased facility.
The restaurant suffered operating losses since its opening primarily as
a result of customer revenues falling below expectations and unanticipated
expenses.
The Company was in arrears in the payment of October, November and
December, 1997 rent due under the lease.
-39-
<PAGE>
NevStar, as Landlord of the restaurant facility served a notice which
purported to terminate the lease as of December 22, 1997 for non-payment of
rent. The Landlord agreed not to take any actions to terminate the lease prior
to December 24, 1997. Management of the Company negotiated with NevStar as
Landlord for an agreement under which the Landlord would buy out the remaining
term of the lease.
Management was unable to reach an agreement with NevStar as Landlord
regarding a buy out of the lease and NevStar as Landlord would not agree to
delay its termination of the lease beyond December 24, 1997. The Company then
commenced a federal bankruptcy proceeding against the Restaurant Operator in
order to preserve the remainder of the lease and the rights thereunder as an
asset of the Restaurant Operator. Such a bankruptcy proceeding had to be
commenced before the legal termination of the lease in order for the lease and
the rights thereunder to remain an asset of the Restaurant Operator.
The Company, NevStar as Landlord and the other members of the
Restaurant Operator reached a settlement of their disputes and the bankruptcy
proceeding. Under the terms of the settlement, all of the following transactions
closed simultaneously.
The Company purchased the interest of Cirrus in the Restaurant Operator
for aggregate consideration of $200,000 cash and 225,000 shares of the Company's
common stock. The Company agreed to file a registration statement permitting the
resale of the shares.
(Prior to the settlement, Mirage Resorts, Inc. ("Mirage") a Nevada
corporation, through an affiliate, Restaurant Ventures of Nevada, Inc. ("RVNI")
purchased NevStar from its owners, thereby acquiring NevStar's interests as
Landlord of the restaurant facility and as a member of the Restaurant Operator.)
The Company sold all of its interest in the Restaurant Operator,
including the interest purchased from Cirrus, to Mirage for consideration of
$1,550,000 cash. Mirage became the holder of all of the interests in the
Restaurant Operator. The Company agreed to pay when due all of the trade
payables of the Restaurant Operator and resigned as manager of the Restaurant
Operator.
RVNI agreed to a new lease of the restaurant facility directly to the
Company. The new lease took effect on February 8, 1998 upon dismissal of the
bankruptcy proceeding commenced by the Restaurant Operator. The new lease
includes the provisions of the prior lease to Restaurant Operator with certain
modifications. The modifications include a reduction in the base rent payable
from $83,334 per month to an amount equal to one-half (1/2) of the Company's
positive cash flow from operating the
-40-
<PAGE>
restaurant (with no reduction for the Company's corporate overhead expenses
other than for salary and employee related expenses for 1/2 of an accounts
payable employee, 1/2 of a payroll employee and 1/2 of an executive chef). All
arrearages currently due under the prior lease will be waived. The new lease
shall terminate on September 30, 1998, unless RVNI and the Company mutually
agree in writing to extend the lease on a month-to-month basis. The Company now
has a 100% interest as lessee in the leasehold rights in the restaurant
facility. The overall effect of the transaction was that the Company received
$1,350,000 in cash and a 100% interest in the lease rights to the facility.
The Company, Mirage and the Restaurant Operator jointly sought the
dismissal of the Restaurant Operator's bankruptcy proceeding. The proceeding was
dismissed on February 8, 1998.
The Company used the net proceeds from the sale of its interest in the
Restaurant Operator to Mirage for working capital and repayment of indebtedness.
COUNTRY STAR ATLANTA
Country Star Atlanta was permanently closed in January 1998.
The Company's restaurant in Atlanta was the subject of litigation with
the Landlord of the facility since April 1997. In this litigation, the Landlord
sought to have the restaurant turned over to it on the grounds that the Company
was holding over in the premises beyond the term for which they were leased. The
Company defended the action vigorously. The Company contended that many of the
Landlord's allegations of default were false, that others which were not false
have been cured and that others were directly caused by the Landlord's bad faith
in performing its obligations under the lease. The Company also contended that
the Notice which purported to terminate the Lease was defective. Rental payments
under the lease had been prepaid through December 31, 1997. Additional rent in
the amount of $62,500 per month were due and payable commencing January 1, 1998.
The Company did not have the cash available to make the January rental payment.
In light of the defaults alleged in the litigation and the imminent
default of the payment of the January 1998 rent, the Company determined to agree
to a settlement of the dispute with the Landlord of the Atlanta facility. Under
the terms of the settlement, the Company removed some of its fixtures and
-41-
<PAGE>
equipment from the premises during January 1998. The Landlord forgave all past
due rents and additional rent. Under the terms of the settlement, the Landlord
and the Company will pursue claims against the architect and construction
company that designed and built the restaurant facility for negligent design and
construction, and related causes of action. The Landlord will advance the legal
fees required to pursue these actions.
In taking these actions, Management of the Company has recognized that
the development, completion and opening of the Atlanta restaurant as envisioned
by prior management was an unsound business decision. The restaurant never
realized the revenues necessary to support its operations. Under the terms of
the settlement, Management will no longer be required to spend valuable assets
trying to establish a facility that had been performing poorly since it
commenced operations. Moreover, the plan to bring legal actions against the
construction company and the architect who designed the facility for major
construction defects could eventually result in a recovery of damages for the
Company. (See "Business - Litigation - Atlanta Default.")
RESTAURANT OPERATING SYSTEMS
To ensure the quality and consistency of the Company's food items, the
Company has an executive chef who has oversight responsibility for the menu and
has taken measures to distinguish and ensure the high quality of the food served
at the Company's restaurants. For example, to ensure the high quality and
consistency of the Company's various barbecued rib entrees, the Company has
developed its own line of barbeque sauces which is produced at a centralized
location and purchases all of its ribs from one quality Midwestern packing
house. The Company negotiates directly with large, centralized suppliers of
various food and beverage products to ensure consistent quality, freshness and
to obtain competitive prices. Kitchens in the Country Star Restaurants are
designed for efficiency of work flow and to minimize the amount of kitchen space
required.
The Company's sophisticated, state-of-the-art multimedia systems
located throughout its restaurants are operated by the Company's specialized
software, which can be replicated readily for other Country Star Restaurants.
The Company has a training program for all Country Star Restaurant
personnel and a uniform standard of operations relating to food and beverage
preparation, maintenance of facilities and conduct of personnel.
SITE SELECTION
The choice of site location for each Country Star Restaurant is
extremely important to the potential success of the particular
-42-
<PAGE>
establishment. As a consequence, prior management used to devote a significant
amount of time and capital in analyzing each prospective site. A variety of
factors were considered in the site selection process, including, but not
limited to, local demographics, tourism, site visibility and accessibility,
pedestrian and vehicular traffic flow, proximity to significant generators of
potential customers, such as retail centers, convention centers, office
complexes, hotels and entertainment facilities, such as stadiums, arenas and
theaters.
Present management may rely on third parties and commissioned brokers
for site recommendations.
ARTIFACTS AND MEMORABILIA
The Company independently acquires and/or leases artifacts and
memorabilia relating to country music and its heritage from a variety of
sources, such as country music artists and clothing designers, which are
currently on display at the Company's restaurant.
The Company has been able to readily locate and obtain country music
artifacts and memorabilia at a reasonable expense from a variety of sources,
including recording companies, artists and others involved in country music and
is not dependent on any one source for locating and obtaining country music
artifacts and memorabilia. The Company believes this will continue to be true
for the foreseeable future.
COMPETITION
The casual dining restaurant industry is intensely competitive with
respect to price, service, location, themes and food quality. There are many
casual theme dining restaurant competitors of the Company, such as Planet
Hollywood(R), Hard Rock Cafe(R) and the Rain Forest Cafe, that are better
established and have substantially greater financial and other resources than
the Company. Similarly, the restaurant field is quite broad and many of the
Company's other competitors have been in existence for a substantially longer
period of time and may be better established in those markets where the Company
intends to open restaurants. Additionally, the restaurant business is often
affected by changes in consumer taste, national, regional and local economic
conditions, demographic trends, traffic patterns, and the number and location of
competing restaurants. In addition, there are factors that are not within the
Company's or any competitor's control, such as inflation and increased food,
labor and benefit costs, which may have an impact on the restaurant industry in
general and the Company in particular. There can be no assurances that the
Company will be able to withstand the competitive and other external pressures
of the restaurant business.
-43-
<PAGE>
The Company also competes with a wide range of establishments in
attempting to identify and secure desirable locations. The Company presently
intends to lease all of its sites. Although the Company believes that it will be
able to locate additional suitable sites, there can be no assurance that such
sites will be available or viable or on economic terms acceptable to the
Company.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws
affecting its business. Each of the Company's restaurants will be subject to
licensing regulation by numerous governmental authorities, which may include
alcohol beverage control, building, health and safety, and fire agencies in the
state or municipality in which the restaurant is located. Difficulties in
obtaining or failures to obtain the necessary licenses or approvals could delay
or prevent the development of a new restaurant in an area.
Alcoholic beverage control regulations in each state require that the
Company's restaurant apply to the specific state authority and, in certain
locations, county and municipal authorities for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. Typically, an alcoholic beverage license must be renewed
annually and may be revoked or suspended for cause at any time. Alcohol beverage
control regulations relate to numerous aspects of the daily operations of the
Company's restaurants, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
and storage and dispensing of alcoholic beverages. The failure of a restaurant
to obtain or retain a liquor or food service license would adversely affect that
particular restaurant's operations.
Restaurants in most states are subject to "dram shop" laws and
legislation, which typically impose liability on licensed alcoholic beverage
servers for injuries or damages caused by their negligent service of alcoholic
beverages to a visibly intoxicated person or to a minor, if such service is the
proximate cause of the injury or damage and such injury or damage is reasonably
foreseeable. The Company maintains liquor liability insurance as part of its
existing comprehensive general liability insurance, which it believes to be
adequate to protect against such liability, although there can be no assurance
that it will not be subject to a judgment in excess of such insurance coverage
or that it will be able to continue to maintain such insurance coverage or that
it will be able to continue to maintain such insurance coverage at reasonable
costs. The imposition of a judgment substantially in excess of the Company's
insurance coverage would have a material adverse effect on the Company. In the
event that such insurance coverage were to
-44-
<PAGE>
become unavailable in the future, it could materially and adversely affect the
Company.
INTELLECTUAL PROPERTY RIGHTS
The Company has made such appropriate filings and registrations that it
has deemed appropriate and sufficient in its business judgment to protect the
Company's name in all appropriate categories, and taken such other actions
necessary to obtain and protect all trademarks, copyrights, tradenames,
tradedress and all other intellectual property rights relating to its Country
Star Restaurants, although there can be no assurance that the Company will be
able to effectively protect its rights. To date, the Company has been issued a
Federal registration for the "Country Star" trademark for clothing and
restaurant services by the United States Patent and Trademark Office. Third
parties may attempt to exercise alleged rights in any of the trademarks,
copyrights or other intellectual property rights, or appropriate any trademarks,
copyrights, or other intellectual property rights established by the Company,
and the Company's failure or inability to establish appropriate copyrights and
trademarks, or to adequately protect any of its intellectual property rights,
may have a material adverse effect on the Company.
EMPLOYEES
As of September 30, 1998, the Company had 20 full-time employees. The
Company also employs an additional 54 part-time employees as restaurant staff.
The Company believes that its relations with its employees are satisfactory.
INDUSTRY SEGMENT INFORMATION
The Company is engaged in one industry segment.
-45-
<PAGE>
PROPERTIES
The Company leases its executive offices of approximately 3,833 square
feet at 4929 Wilshire Boulevard, Suite 428, Los Angeles, California 90010 for a
five year term commencing July 1, 1997. The Company's rent is $5,175 per month
for the first three years of the lease and $5,558 per month for the last two
years of the lease.
The Company presently leases an approximately 18,000 square foot
restaurant (inclusive of an approximately 4,000 square foot enclosed patio that
is contiguous to the restaurant) in Universal City, which is the site of Country
Star Hollywood. Pursuant to this lease, the Company is obligated to pay minimum
rental payments of $250,000 per annum payable in equal monthly installments,
$50,000 per year in parking assessments and $12,000 per year in marketing
expenses and percentage rent ranging from 6% to 10% of the annual sales volume
of Country Star Hollywood; PROVIDED, HOWEVER, that such percentage rent payments
do not commence until such time as the Company has recouped all sums that it has
expended in connection with leasehold improvements made by the Company with
respect to the premises. Management is currently in the process of determining
with the landlord the amount of leasehold improvements which may be recouped
before percentage rent is payable and the amount, if any, of percentage rent
that has been forgone. The lease, which was entered into in January of 1994, had
an initial term of three years and three five-year options, and is subject to
termination by the landlord at any time after May 31, 1997 on nine months'
notice, provided that the lease cannot be terminated by the landlord if the
subsequent tenant is another restaurant or like type user of the premises. The
Company has exercised the first five-year option extending the term trough May
31, 2002, and subject to the foregoing termination right, the Company has the
right to extend the lease beyond May 31, 2002 for two consecutive five-year
terms. Country Star Hollywood seats approximately 475 people, inclusive of the
approximately 150 seats on the partially enclosed patio.
LEGAL PROCEEDINGS
ATLANTA AND LAS VEGAS LIEN MATTERS. Certain contractors have filed
claims of lien against the Company's Atlanta and Las Vegas restaurants that have
not been cleared by the posting of a bond or any payment. Such claims of lien
total approximately $1,200,000. The Company is pursuing its rights and remedies
against contractors whom it believes have filed invalid lien claims.
CONTRACTOR LITIGATION IN ATLANTA. On February 3, 1998, Pacific
Southwest Design, Inc. ("PSD") filed a suit in Atlanta against the Company
claiming damages of $597,659 for failure to pay amounts due for services
rendered. The Company intends to vigorously defend against this action and has
counterclaimed for damages in an undetermined amount for the contractor's breach
of contract and failure to perform workmanlike work which caused the Company to
lose its Atlanta lease.
ATLANTA LEASE DEFAULT. The Company's restaurant in Atlanta was the
subject of litigation with the Landlord of the facility since April 1997. In
this litigation, the Landlord sought to have the restaurant turned over to it on
the grounds that the Company was holding over in the premises beyond the term
for which they were leased. The Company defended the action vigorously. The
Company contended that many of the Landlord's allegations of default were false,
that others which were not false have been cured and that others were directly
caused by the Landlord's bad faith in performing its obligations under the
lease. The Company also contended that the Notice which purported to terminate
the Lease was defective. Rental payments under the lease had been prepaid
through December 31, 1997. Additional rent in the amount of $62,500 per month
were due and
-46-
<PAGE>
payable commencing January 1, 1998. The Company did not have the cash available
to make this January rental payment.
In light of the defaults alleged in the litigation and the imminent
default of the payment of the January 1998 rent, the Company determined to agree
to a settlement of the dispute with the Landlord of the Atlanta facility. Under
the terms of the settlement, the Company removed some of its fixtures and
equipment from the premises during January 1998 with he balance to be removed on
or about May 1998. The Landlord forgave all past due rents and additional rent.
Under the terms of the settlement, the Landlord and the Company will pursue
claims against the architect and construction company that designed and built
the restaurant facility for negligent design and construction, and related
causes of action. The Landlord will advance the legal fees required to pursue
these actions.
TRADE CLAIM LITIGATIONS. A number of creditors have filed actions
against the Company for amounts allegedly owed for services provided or for
goods delivered by such creditors. Such lawsuits seek monetary damages ranging
from approximately $1,700 to approximately $52,000 and approximately $125,000 in
the aggregate. The Company disputes certain of those claims and will contest
them. The Company is attempting to settle those claims it does not dispute.
EDWARD TECHNOLOGIES, INC. V. COUNTRY STAR RESTAURANTS, INC. AND ROBERT
SCHUSTER. On or about March 18, 1997, Edwards Technologies, Inc. filed an action
in Superior Court, Los Angeles County against the Company and Mr. Schuster
seeking monetary damages in the amount of approximately $318,000 in respect of
equipment sold to the Company for which the Company had allegedly not paid. On
April 7, 1997, Edwards Technologies, Inc., pursuant to a settlement agreement
with the Company, dismissed the action as against the Company in exchange for
payment of $132,000. Edwards Technologies, Inc. reserved the right to continue
to pursue its claims against Mr. Schuster. The Company may be obligated to
indemnify Mr. Schuster against any judgment obtained by Edwards Technologies,
Inc.
COUNTERCLAIM OF JOE BULAT. The Company commenced an action against Joe
Bulat to terminate its agreement with Mr. Bulat under which he was to provide
parking services for the Atlanta restaurant and to recover damages for breaches.
Mr. Bulat has counterclaimed for damages of $110,000 based on alleged breaches
of the agreement by the Company.
-47-
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors and executive officers of the
Company continuing in office, and of executive officers who held office during
1997 are set forth below.
NAME AGE POSITION HELD
Dan J. Rubin 26 President, Chief Executive
Officer and Director
Robert A. Nardone, Jr. 31 Director
Darren C. Rice 28 Director
Robert L. Davidson 46 Secretary
Robert J. Schuster(1) 53 Formerly Chairman of the Board
of Directors, Chief Executive
Officer and Secretary
Mr. Nardone and Mr. Rice serve on the Audit Committee and Compensation
Committee of the Company's Board of Directors.
Set forth below is biographical information for each director of the
Company.
DAN RUBIN, age 26, became Chief Executive Officer, President and a
director of the Company on February 12, 1997. He has been a private investor
during the past five years. He is the President and Chief Executive Officer of
Rubin Investment Group, a private investment company which makes equity and debt
investments in private and publicly held companies. Prior to joining the
Company, Mr. Rubin had no experience in managing or supervising the operations
of a business comparable to the Company.
ROBERT A. NARDONE, JR., age 31, became a Director of the Company on
February 12, 1997. He has been a senior loan officer of Summit Bank since
November, 1992.
DARREN C. RICE, age 28, became a Director of the Company on February
12, 1997. He has been President of Cornerstone Financial, Inc., a mortgage
banking company since October, 1995.
- - -----------------
(1) ROBERT J. SCHUSTER was Chairman of the Board, Chief Executive Officer and
Secretary of the Company from its inception to February, 1997. From
November, 1992 to October, 1995 he was a mortgage sales representative for
Norwest Mortgage, Inc.
-48-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to
the Chief Executive Officer and executive officers of the Company whose total
annual salary and bonus exceeded $100,000 for the years ended December 31, 1995,
1996 and 1997.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN-
PRINCIPAL POSITION YEAR SALARY($) BONUS SATION($) AWARDS($) SARS(#) PAYOUTS($) SATION($)
- - ------------------ ---- --------- ----- --------- --------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dan Rubin 1997 $ 42,769(1) $ 35,000(2) -- -- -- -- --
President and 1996 -- -- -- -- -- -- --
Director 1995 -- -- -- -- -- -- --
Robert J. Schuster 1997 $ 31,250 -- -- -- -- -- --
Former Chief Executive 1996 $ 250,000 $ 40,000 $ 0 $ 0 --(1) $ 0 $ 0
Officer, Secretary and 1995 $ 250,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Director
</TABLE>
- - ----------------------
(1) Mr. Rubin's current compensation is payable at the rate of $50,000 per
annum. To date, Mr. Rubin has received $42,769 of his 1997 salary from the
Company and the balance of $170,000 has been accrued.
(2) Mr. Rubin's bonus was paid by the issuance of 37,000 shares of Common Stock
of the Company, valued at $35,000.
-49-
<PAGE>
1997 OPTION GRANTS
The following table shows information regarding grants of stock options
in 1997 to the executive officers named in the Summary Compensation Table.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- - --------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Executive Officer Granted In Fiscal Year Price ($/Sh) Exp. Date
- - ----------------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C>
Dan Rubin --- --- --- ---
Robert J. Schuster --- --- --- ---
</TABLE>
-50-
<PAGE>
1997 OPTION EXERCISES AND YEAR-END VALUES
The following table shows information regarding the exercise of stock
options during 1997 by the executive officers named in the Summary Compensation
Table and the number and value of any unexercised stock options as of December
31, 1997.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The-Money
Shares Options at Options at
Acquired FY-End (#) FY-End ($)
on Value Exercisable/ Exercisable/
Executive Officer Exercise (#) Realized ($) Unexercisable Unexercisable
- - ----------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Dan Rubin --- --- --- ---
Robert J. Schuster --- --- --- ---
</TABLE>
-51-
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT; PRINCIPAL STOCKHOLDERS
The following table shows as of November 17, 1998 the beneficial
ownership of Common Stock by any holder of more than five percent (5%) of the
outstanding shares, each nominee, by each of the incumbent executive officers
and directors, and such directors and executive officers as a group.
COMMON STOCK
------------
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)
EXERCISABLE PERCENT
NAME AND ADDRESS OF DIRECTLY OPTIONS OF
BENEFICIAL OWNER OWNED AND NOTES TOTAL
------------------- ----- --------- -----
Dan J. Rubin 6,800,000 50,540,000 73.6%
c/o Country Star Restaurants, Inc.
4929 Wilshire Boulevard, Suite 428
Los Angeles, California 90010
Robert A. Nardone, Jr --- --- ---
c/o Country Star Restaurants, Inc.
4929 Wilshire Boulevard, Suite 428
Los Angeles, California 90010
Darren C. Rice --- --- ---
c/o Country Star Restaurants, Inc.
4929 Wilshire Boulevard, Suite 428
Los Angeles, California 90010
Roy B. Rubin, M.D., P.C., M.P.P.P. 6,540,000 110,533,000 84.9%
c/o Country Star Restaurants, Inc.
4929 Wilshire Boulevard
Suite 428
Los Angeles, California 90010
All incumbent officers, directors 6,800,000 50,540,000 73.6%
and director nominees as a
group
(1) The shares of Common Stock owned by each person or by the group, and the
shares included in the total number of shares of Common Stock outstanding,
have been adjusted in accordance with Rule 13d-3 under the Securities Act
of 1934, as amended, to reflect the ownership of shares issuable upon
exercise of outstanding options, warrants, convertible debt or other common
stock equivalents which are exercisable within 60 days. As provided in such
Rule, such shares issuable to any holder are deemed outstanding for the
purpose of calculating such holder's beneficial ownership but not any other
holder's beneficial ownership.
-52-
<PAGE>
INDEMNIFICATION AND EXCULPATION PROVISIONS
The Company's Certificate of Incorporation provides for indemnification
of officers and directors to the fullest extent permitted by Delaware law. In
addition, under the Company's Certificate of Incorporation, no director shall be
liable personally to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director; provided that the Certificate of
Incorporation does not eliminate the liability of a director for (i) any breach
of the director's duty of loyalty to the Company or its stockholders; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) acts or omissions in respect of certain unlawful
dividend payments or stock redemptions or repurchases; or (iv) any transaction
from which such director derives improper personal benefit. Insofar as
Indemnification for liabilities under the Securities Act of 1933, as amended
(the "Securities Act") may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
CERTAIN TRANSACTIONS
PRIVATE PLACEMENTS DURING 1996
On February 12, 1996, the Company sold 24,190 shares of Common Stock to
Dan Rubin, now President and Chief Executive Officer of the Company, and Roy B.
Rubin, M.D., P.C., M.P.P.P., a pension fund (the "Pension Fund") for an
aggregate purchase price of $635,000. Mr. Rubin and the Pension Fund, both of
whom are affiliates of the Rubin Investment Group, also received certain
piggyback and demand registration rights with respect to the shares they
acquired.
On April 10, 1996, the Company sold (i) 13,333 shares of Common Stock
and 66,667 Warrants to Wisdom Tree Associates for an aggregate purchase price of
$400,000 and (ii) 25,000 shares of Common Stock and 125,000 Warrants to Dan
Rubin for an aggregate purchase price of $750,000. Each Warrant entitles the
holder to acquire one (1) share of Common Stock of the Company at an exercise
price of $30 per share. The purchasers received certain demand and piggyback
registration rights with respect to the securities they acquired.
On August 28, 1996, the Company sold 17,037 shares of Series A
Preferred Stock to Dan Rubin, an individual, Robert Lyszczarz, an individual and
Roy B. Rubin, M.D., P.C., M.P.P.P., a pension fund (the "Pension Fund") for an
aggregate purchase price of
-53-
<PAGE>
$2,280,000. The Series A Preferred Stock paid cumulative dividends of 6% per
annum, payable in cash or Common Stock. In connection with the transaction, the
Company issued an aggregate of 306,667 warrants. Each warrant entitles the
holder to acquire one (1) share of Common Stock of the Company at a purchase
price of $22.50 per share. Mr. Rubin and the Pension Fund, both of whom are
affiliates of the Rubin Investment Group, and Mr. Lyszczarz, also received
certain demand registration rights with respect to the Shares they acquired.
On October 10, 1996 the Company sold 4,000 shares of newly issued 7%
Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred
Stock"). The sale was made to Cameron Capital Ltd., a foreign institutional
investor, for an aggregate purchase price of $4,000,000, or $1,000 per share. On
February 12, 1997, all of the outstanding shares of Series B Convertible
Preferred Stock was exchanged by the holder with the Company for a Convertible
Term Note in the principal amount of $4,000,000.
All of the proceeds received by the Company from each of the
aforementioned private placements is for further development of the Company's
Country Star Restaurants and for working capital purposes.
Management believes that all transactions between the Company and
affiliated parties were on no less favorable terms than if the transaction had
been negotiated between the Company and unaffiliated third parties.
FEBRUARY 12, 1997 FINANCING AND CHANGE IN CONTROL
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 provides that Cameron has 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
stockholders of the Company did not approve the granting of the security
interests to Rubin or Cameron or the grant of the right to approve three members
of the Board.
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.
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
-54-
<PAGE>
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%), payable 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 16,667 shares of
its common stock at an exercise price of $6.25 per share.
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 $30
advanced. The exercise price for these warrants shall be $6.25 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) $13.30; 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 2,000,000. 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 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 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 issuance was in settlement of claims arising
out of the sale by the Company to Dan Rubin and other investors of 170,371
shares of Series A Preferred Stock and 30,667 shares of Common Stock Purchase
Warrants for aggregate consideration of $2,300,000. The claims related to
alleged misrepresentations of
-55-
<PAGE>
the financial condition of the Company and alleged misrepresentations concerning
the Company's proposed future sales of equity. The amount of damages was
determined as the difference between the aggregate purchase price of the
securities paid by Mr. Rubin and the investors and the aggregate consideration
of $350,000 received upon the sale of the securities.
The line of credit advances by Rubin, Cameron's convertible term note
and the convertible term notes issued in settlement of claims were 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.
FEBRUARY 18, 1998 FINANCIAL RESTRUCTURING
Cameron Capital, Ltd. ("Cameron"), an institutional investor, had
originally held $4,000,000 of convertible long term debt due on October 9, 1999
and bearing interest at the rate of seven percent (7%) per annum. Cameron had
converted approximately $1,000,000 principal amount of the debt into Common
Stock of the Company, leaving a balance due of approximately $3,000,000. A
dispute between the Company and Cameron had arisen regarding the proper use of
the proceeds realized by the Company from the agreements dated December 30,
1997, it had entered into regarding the modification of the lease of its Las
Vegas facility. Cameron contended that the Company was obligated to use the
proceeds to prepay its debt; the Company believed that the proceeds were needed
for working capital and the repayment of other debt. Cameron had commenced legal
action against the Company on February 13, 1998 in United States District Court
for the Northern District of Illinois in which it sought recovery of the full
$1,550,000 received by the Company in connection with the lease modification.
Cameron had obtained a temporary restraining order which prohibited the Company
from using any of the proceeds of the lease modification until the dispute could
be resolved. The Company and Cameron agreed to settle Cameron's legal action in
order to avoid the uncertainty of litigation and the expense of proceeding
through discovery and trial.
Under the terms of the Settlement Agreement dated February 18, 1998
(the "Settlement Agreement"), Cameron agreed to dismiss its legal action against
the Company and to accept as a full settlement of its long term debt aggregate
consideration consisting of a cash payment of $1,300,000 payable at closing and
the issuance of 670,000 shares of the Company's Common Stock, par value $.01 per
share. Cameron does not have any registration rights with respect to the Common
Stock but is eligible to resell certain amounts immediately pursuant to the
provisions of Rule 144 under the Securities Act of 1933, as amended. The
Settlement Agreement provides for mutual releases of all claims held by the
Company against Cameron and by Cameron against the Company and
-56-
<PAGE>
Dan Rubin, its Chief Executive Officer and President.
The Company was able to fund the cash payment of the Agreement with
Cameron with the proceeds it received from a $1,300,000 line of credit loan to
the Company made by an institutional investor (the "Lender"). The institutional
investor is a pension trust controlled by Dan Rubin's father. This sum was lent
to the Company pursuant to the terms and conditions of the Loan and Security
Agreement dated February 12, 1997 between the Company, Cameron and various
lenders. This loan is due on October 9, 1999 and bears interest at the rate of
prime plus four percent (4%). The Lender also received warrants to acquire
43,333 shares of the Company's Common Stock at an exercise price of $6.25 per
share. Any portion or all of the principal amount of the line of credit advance
made by Lender outstanding may be converted into Common Stock of the Company.
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) $13.30, 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 conversion formula is subject to adjustment in the event of
stock splits, stock dividends, mergers, consolidations, or similar transactions.
The Loan and Security Agreement was also amended to provide for immediate
repayment of the loan in the event of any change in control of the Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of (i) 250,000,000
shares of common stock, par value $.01 per share (the "Common Stock"),
27,374,293 shares of which were outstanding as of November 13, 1998; and (ii)
2,000,000 shares of "blank check" preferred stock, par value $.001 per share
("Preferred Stock"), none of which is outstanding.
COMMON STOCK
Each share of Common Stock is entitled to one vote, either in person or
by proxy, on all matters that may be voted upon by the owners thereof at a
meeting of the stockholders, including the election of directors. The holders of
Common Stock (i) have equal, ratable rights to dividends from funds legally
available therefor, when, as and if declared by the Board of Directors of the
Company; (ii) are entitled to share ratably in all of the assets of the Company
available for distribution to holders of Common Stock upon liquidation,
dissolution or winding up of the affairs of the Company; (iii) do not have
preemptive or redemption provisions applicable thereto; and (iv) are entitled to
one noncumulative vote per share on all matters on which stockholders may vote
at all meetings of stockholders.
All shares of Common Stock issued and outstanding are, and
-57-
<PAGE>
those offered hereby, when issued, will be fully paid and non-assessable, with
no personal liability attaching to the ownership thereof.
6% CUMULATIVE CONVERTIBLE SERIES A PREFERRED STOCK
The Company's outstanding shares of Cumulative Convertible Series A
Preferred Stock have been automatically converted in accordance with the
Company's Certificate of Incorporation into shares of Common Stock as of May 10,
1997 (the "Conversion Date"). Each outstanding share of Series A Preferred Stock
was converted into six (6) shares of Common Stock on the Conversion Date. Former
holders of Series A Preferred Stock have no rights as preferred shareholders
except to receive certificates for their Common Stock upon delivery of their
certificates for Series A Preferred Stock to the Company's transfer agent.
OTHER PREFERRED STOCK
As of the date hereof, there are no shares of preferred stock
outstanding. The Company's Certificate of Incorporation authorizes the issuance
of "blank check" preferred stock in one or more classes or series with such
designations, rights, preferences and restrictions as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors may,
without prior stockholder approval, issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
relative voting power or other rights of the holders of Common Stock. Preferred
Stock could be used, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. Although the Company
has no present intention of issuing any shares of preferred stock, there can be
no assurance that it will not do so in the future. If the Company issues
preferred stock, such issuance may have a dilutive effect upon both the
preferred and common stockholders.
DELAWARE ANTI-TAKEOVER LAW
The Company is subject to certain anti-takeover provisions under
Section 203 of the Delaware General Corporation Law. In general, under Section
203, a Delaware corporation may not engage in any business combination with any
"interested stockholder" (a person that owns, directly or indirectly, 15% or
more of the outstanding voting stock of a corporation or is an affiliate of a
corporation and was the owner of 15% or more of the outstanding voting stock),
for a period of three years following the date such stockholder became an
interested stockholder, unless (i) prior to such date the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, or (ii)
upon consummation of the transaction which resulted in the stockholder becoming
an interested stockholder, the
-58-
<PAGE>
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, or (iii) on or subsequent to
such date, the business combination is approved by the Board of Directors and
authorized at an annual or special meeting of the stockholders by at least
66-2/3% of the outstanding voting stock which is not owned by the interested
stockholder. The restrictions imposed by section 203 will not apply to a
corporation if the corporation's initial certificate of incorporation contains a
provision expressly electing not to be governed by this section or the
corporation by this section or the corporation by action of its stockholders
holding a majority of outstanding stock adopts an amendment to its certificate
of incorporation or by-laws expressly electing not to be governed by Section
203.
The Company has not elected out of Section 203. This statutory
provision could have the effect of discouraging, delaying or preventing a
takeover of the Company, which could otherwise be in the best interests of the
Company's stockholders, and have an adverse effect on the market price for the
Company's Common Stock.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is Continental
Stock Transfer & Trust Company, located at Two Broadway, New York, New York
10004.
-59-
<PAGE>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The Company has agreed to register the public offering of the Selling
Stockholders' Shares under the Securities Act concurrently with this offering.
An aggregate of approximately 175,500,000 Selling Stockholders' Shares may be
offered and sold pursuant to this Prospectus by the Selling Stockholders. Except
as otherwise noted, none of the Selling Stockholders has ever held any position
as officer, director or affiliate of the Company. The Company will not receive
any of the proceeds from the sale of the Selling Stockholders' Shares by the
Selling Stockholders. The following table sets forth certain information with
respect to the Selling Stockholders:
<TABLE>
<CAPTION>
Number of Number of
Shares Warrants
Number of Number of Beneficially Beneficially
Shares Owned Warrants Number of Owned Owned
Prior to Owned Prior Shares to After this After this
Name And Address Offering to Offering Be Offered Offering(1) Offering
- - ---------------- -------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Zeek Family Trust 56,000 -0- 56,000 -0- -0-
16410 S. 37th
Phoenix, AZ 85044
Canine, Ltd. 100,000 -0- 100,000 -0- -0-
Genesis Building
P.O. Box 1
Jacksonville, VT 05342
Boaz and Susan Ben-Moshe 40,000 -0- 40,000 -0- -0-
as JT/WROS
12 The Glenadon
Roslyn, NY 11576
James A. Rexrode 20,000 -0- 20,000 -0- -0-
14703 Oak Bend
Houston, TX 77079
Princeton Otolaryngology 16,000 -0- 16,000 -0- -0-
Assoc
P.A. Retirement Trust
457 North Harrison Street
Princeton, NJ 08540
Stan Wallace 20,000 -0- 20,000 -0- -0-
305 West Baker
Apartment 1801
Baytown, TX 77521
Richard G. Morris 40,000 -0- 40,000 -0- -0-
105 Branchwood Trail
Coppell, TX 75019
</TABLE>
-60-
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Shares Warrants
Number of Number of Beneficially Beneficially
Shares Owned Warrants Number of Owned Owned
Prior to Owned Prior Shares to After this After this
Name And Address Offering to Offering Be Offered Offering(1) Offering
- - ---------------- -------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Morris Mitchell 20,000 -0- 20,000 -0- -0-
3706 East Creek Club Drive
Missouri City, TX 77459
Stanley Katz 22,400 -0- 22,400 -0- -0-
10 Bonnie Drive
Northpoint, NY 11768
Esther Purjes 40,000 -0- 40,000 -0- -0-
285 Central Park West, Apt. 2S
New York, NY 10024
Fredda Sheib 16,000 -0- 16,000 -0- -0-
680 West End Avenue
New York, NY 10025
Maple Partners Ltd. 22,400 -0- 22,400 -0- -0-
345 N. Maple Drive, Ste 358
Beverly Hills, CA 90210
JLA Partners Ltd. 22,400 -0- 22,400 -0- -0-
345 N. Maple Drive, Ste 358
Beverly Hills, CA 90210
David Weiner 40,000 -0- 40,000 -0- -0-
10 Iron Canyon Ct.
Park City, UT 04060
First Comet Corp. 60,000 -0- 60,000 -0- -0-
330 Perimeter Drive
Green Acres, FL 33467
Vermont Museum of 60,000 -0- 60,000 -0- -0-
Natural History
P.O Box 1
Jacksonville, VT 05342
Felix Kaufman 22,400 -0- 22,400 -0- -0-
32 Spring Valley Road
Morristown, NJ 07960
Holistica Int'l Ltd. 40,000 -0- 40,000 -0- -0-
c/o Appleby Spurling & Kempe
Attn: Ruth Campbell
41 Cedar Avenue
Hamilton HM EX Bermuda
</TABLE>
-61-
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Shares Warrants
Number of Number of Beneficially Beneficially
Shares Owned Warrants Number of Owned Owned
Prior to Owned Prior Shares to After this After this
Name And Address Offering to Offering Be Offered Offering(1) Offering
- - ---------------- -------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Keyring Ltd. 20,000 -0- 20,000 -0- -0-
c/o Appleby Spurling & Kempe
Attn: Ruth Campbell
41 Cedar Avenue
Hamilton HM EX Bermuda
Omotsu Holdings Ltd. 64,000 -0- 64,000 -0- -0-
15 Don Street
P.O. Box 302
St. Heller Jersey
Channel Islands
Natper Ltd. 40,000 -0- 40,000 -0- -0-
c/o Eurocanadian Bank
Attn: Russel Barnett
Marlborough Street
P.O. Box N3742
Nassau Bahamas
Mark Anderson 20,000 -0- 20,000 -0- -0-
10219 Burgoyne
Houston, TX 77042
Dan Purjes 60,648 -0- 60,648 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Lawrence Rice 5,855 -0- 5,855 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Charles Roden 4,145 -0- 4,145 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Matthew Balk 40,649 -0- 40,649 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
</TABLE>
-62-
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Shares Warrants
Number of Number of Beneficially Beneficially
Shares Owned Warrants Number of Owned Owned
Prior to Owned Prior Shares to After this After this
Name And Address Offering to Offering Be Offered Offering(1) Offering
- - ---------------- -------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Michael Loew 6,295 -0- 6,295 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Scott A. Weisman 32,049 -0- 32,049 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Paul Fitzgerald 5,801 -0- 5,801 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Sherwood P. Larkin 2,777 -0- 2,777 -0- -0-
c/o Josephthal Lyon
& Ross, Inc.
200 Park Avenue, 25th Floor
New York, New York 10166
Richard Sichenzio 2,102 -0- 2,102 -0- -0-
c/o D.H. Blair & Co.
44 Wall Street
New York, New York 10005
Gary Bielfeldt 75,000 -0- 75,000 -0- -0-
Bielfeldt & Company
4700 N. Prospect Road
Peoria, Illinois 61614
Linda Bielfeldt 25,000 -0- 25,000 -0- -0-
c/o Bielfeldt & Company
4700 N. Prospect Road
Peoria, Illinois 61614
David Bielfeldt 25,000 -0- 25,000 -0- -0-
c/o Bielfeldt & Company
4700 N. Prospect Road
Peoria, Illinois 61614
</TABLE>
-63-
<PAGE>
<TABLE>
<CAPTION>
Number of Number of
Shares Warrants
Number of Number of Beneficially Beneficially
Shares Owned Warrants Number of Owned Owned
Prior to Owned Prior Shares to After this After this
Name And Address Offering to Offering Be Offered Offering(1) Offering
- - ---------------- -------- ----------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Dan J. Rubin(2) 6,800,000 plus -0- 57,340,000(1) -0- -0-
c/o Country Star approximately
Restaurants, Inc. 50,540,000 upon
4929 Wilshire Boulevard Note conversion(3)
Suite 428
Los Angeles, CA 90010
Roy B. Rubin, M.D.(3) 6,540,000 plus -0- 117,073,000(1) -0- -0-
P.C., M.P.P.P. approximately
9 Amherst Place 110,533,000 upon
Woodland CA 95695 Note conversion(3)
----------- -------- ----------- ------- -------
TOTAL 175,499,921 -0- 175,499,921 -0- -0-
</TABLE>
- - -----------------
(1) Assumes all shares of Common Stock being offered pursuant to this
Prospectus are sold by the Selling Stockholders.
(2) Mr. Dan Rubin is President, Chief Executive Officer and a Director of the
Company. Mr. Roy B. Rubin is the father of Dan Rubin.
(3) Includes shares currently held plus maximum number of shares presently
issuable upon conversion of the Note held by Selling Stockholder. The
number of shares issuable upon conversion of the Note is subject to certain
limitations which may be adjusted by agreement between the Company and
Selling Stockholder. The number of shares issuable upon conversion of the
Note is determined by dividing the principal amount of the Note and all
accrued and unpaid interest due thereon by the lesser of (i) $1.33, or (ii)
Eighty Percent (80%) of the average closing bid price of the Common Stock
for the five (5) consecutive trading days immediately prior to the date of
conversion.
-64-
<PAGE>
The Selling Stockholders' Shares may be offered and sold from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then current
market price, or in negotiated transactions. The Selling Stockholders' Shares
may be sold by one or more of the following methods, without limitation: (i) in
a block trade in which a broker or dealer so engaged will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (ii) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(iii) ordinary brokerage transactions and transactions in which broker solicits
purchases; and (iv) transactions between sellers and purchasers without a
broker/dealer. In effecting sales, brokers or dealers engaged by the Selling
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from selling
Stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers and dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales. Sales of any
shares of Common Stock by the Selling Stockholders may depress the price of the
Common Stock in any market that may develop for the Common Stock.
The Company will pay all of the expenses incident to the registration
of the shares of Common Stock other than any fees or expenses or any counsel
retained by the Selling Stockholders and any other out of pocket expenses
incurred by the Selling Stockholders in connection with the registration of the
shares, fees and expenses of compliance with state securities or blue sky laws
and commissions and discounts of underwriters, dealers or agents, if any. The
expenses payable by the Company are estimated to be $________.
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus
will be passed upon for the Company by Wolf Haldenstein Adler Freeman & Herz
LLP, New York, New York.
EXPERTS
The financial statements of the Company for the years ended December
31, 1997 and December 31, 1996 included in this Prospectus have been so included
herein in reliance on the report of Cacciamatta Accountancy Corporation,
independent accountants, given upon the authority of that firm as experts in
auditing and accounting. Such report contains a qualification regarding
uncertainties as to the Company's ability to continue as a going concern.
-65-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants ........................ F-2
Consolidated Balance Sheet as of December 31, 1997 ........................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 ...................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1996 ...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 ...................................... F-6
Condensed Balance Sheet at September 30, 1998 (unaudited)................. F-29
Condensed Statements of Operations for the Quarter Ended
September 30, 1998 and September 30, 1997 (unaudited)........... F-30
Condensed Statements of Operations for the Nine Months
Ended September 30, 1998 and September 30, 1997 (unaudited)..... F-31
Condensed Statements of Cash Flows
for the Quarter Ended September 30, 1998 and
September 30, 1997 (unaudited).................................. F-32
Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and
September 30, 1997 (unaudited).................................. F-33
Notes to Consolidated Financial Statements ............................... F-34
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Country Star Restaurants, Inc.
We have audited the accompanying consolidated balance sheet of Country Star
Restaurants, Inc. as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Country
Star Restaurants, Inc. as of December 31, 1997, and the results of their
operations and their cash flows for each of the two years ended December 31,
1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 6 to the
consolidated financial statements, the Company has experienced significant
losses in 1996 and 1997, and is experiencing cash flow shortages. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 6. The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
April 8, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
COUNTRY STAR RESTAURANTS, INC.
Consolidated Balance Sheet
December 31, 1997
ASSETS
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 1,218,845
Inventories 231,762
Other 189,757
------------
TOTAL CURRENT ASSETS 1,640,364
------------
PROPERTY AND EQUIPMENT AT COST, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION OF $1,061,470:
Leasehold improvements 3,431,250
Furniture and equipment 1,382,755
Memorabilia 372,367
------------
TOTAL PROPERTY AND EQUIPMENT 5,186,372
OTHER 267,423
------------
$ 7,094,159
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 900,000
Accounts payable 375,988
Accrued legal expenses 332,000
Accrued salaries 264,352
Other accrued expenses 121,074
------------
TOTAL CURRENT LIABILITIES 1,993,414
CONVERTIBLE DEBT 3,145,358
TOTAL LIABILITIES 5,138,772
COMMITMENTS AND CONTINGENCIES --
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.001 par value, 2,000,000 shares authorized,
no shares issued and outstanding --
COMMON STOCK, $0.01 par value, 250,000,000 shares authorized,
7,872,755 shares issued and outstanding 78,728
ADDITIONAL PAID-IN CAPITAL 47,201,242
ACCUMULATED DEFICIT (45,324,583)
------------
NET STOCKHOLDERS' EQUITY 1,955,387
------------
$ 7,094,159
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
COUNTRY STAR RESTAURANTS, INC.
Consolidated Statements of Operations
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
REVENUES:
Food and beverage $ 5,744,789 $ 7,048,023
Merchandise 534,273 1,011,392
------------ ------------
6,279,062 8,059,415
------------ ------------
COST AND EXPENSES:
Cost of revenues:
Food and beverage 1,924,113 2,222,506
Merchandise 451,942 656,760
Labor 2,650,871 3,917,988
Rent 2,465,450 1,275,860
Other restaurant operating 1,273,895 1,967,020
Selling, general and administrative 3,590,291 8,801,764
Depreciation and amortization 1,058,608 1,210,685
Settlement of stockholders' claims 980,384 2,000,000
Loss on disposal of assets 10,178,560 --
Impairment of long-lived assets -- 5,584,458
------------ ------------
24,574,114 27,637,041
------------ ------------
LOSS FROM OPERATIONS (18,295,052) (19,577,626)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 7,254 302,626
Interest expense (410,281) (375,936)
Embedded interest expense (2,346,286) --
------------ ------------
(2,749,313) (73,310)
------------ ------------
LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM (21,044,365) (19,650,936)
MINORITY INTEREST 2,124,446 2,870,554
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (18,919,919) (16,780,382)
EXTRAORDINARY ITEM - SETTLEMENT OF TRADE PAYABLES 1,673,629 --
------------ ------------
NET LOSS $(17,246,290) $(16,780,382)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE:
Loss before extraordinary item $ (5.90) $ (15.54)
Extraordinary item 0.52 --
------------ ------------
Net loss per common share $ (5.38) $ (15.54)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 3,208,465 1,107,481
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
COUNTRY STAR RESTAURANTS, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1996
Preferred Stock Preferred Stock
Series A Series B
---------------------------- ----------------------------
Number Number
of Shares Amount of Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 1,277,089 $ 1,277 -- $ --
Common stock issued in settlement of legal claim -- -- -- --
Common stock issued in a private placement -- -- -- --
Preferred stock converted to common (1,047,015) (1,047) -- --
Common stock issued for dividends on preferred stock -- -- -- --
Common stock issued for the exercise of warrants -- -- -- --
Common stock issued for payment of financing charges -- -- -- --
Issuance of preferred stock in a private placement 170,371 170 -- --
Issuance of preferred stock in a private placement -- -- 4,000 4
Preferred stock converted to convertible debt -- -- (4,000) (4)
Unamortized stock option cost -- -- -- --
Amortization of stock option cost -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 400,445 400 -- --
Common stock issued for dividends on preferred stock -- --
Preferred stock converted to common (400,445) (400) -- --
Common stock issued for the exercise of warrants -- -- -- --
Common stock issued upon conversion of debt -- -- -- --
Common stock issued in private placements
net of issuance costs of $107,357 -- -- -- --
Common stock issued in settlement of trade payables -- -- -- --
Common stock issued for purchase of CSLV interest -- -- -- --
Common stock issued in settlement of claims -- -- -- --
Additional paid-in capital related to embedded interest -- -- -- --
Common stock issued for officer bonus -- -- -- --
Common stock issued for payment of financing charges -- -- -- --
Common stock issued for services -- -- -- --
Amortization of stock option cost -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1997 -- $ -- -- $ --
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common Stock
------------------------------------------
Amount Additional Unamortized
Number of ---------------------------- Paid-in Stock Option
Shares Per Share Total Capital Cost
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 594,758 $ -- $ 5,948 $ 29,454,152 $ (232,892)
Common stock issued in settlement of legal claim 4,319 $ 18.52 43 79,957 --
Common stock issued in a private placement 120,619 $20.00-35.00 1,206 3,406,051 --
Preferred stock converted to common 628,209 6,282 (5,235) --
Common stock issued for dividends on preferred stock 20,082 $ 7.20-41.80 201 432,579 --
Common stock issued for the exercise of warrants 24,200 $ 20.93 242 506,258 --
Common stock issued for payment of financing charges 36,565 $ 7.50 366 273,873 --
Issuance of preferred stock in a private placement -- -- -- 2,209,830 --
Issuance of preferred stock in a private placement -- -- -- 3,667,496 --
Preferred stock converted to convertible debt -- -- -- (3,667,496) --
Unamortized stock option cost -- -- -- 249,250 (249,250)
Amortization of stock option cost -- -- -- -- 336,935
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 1,428,752 14,288 36,606,715 (145,207)
Common stock issued for dividends on preferred stock 2,117 $ 5.63 21 11,889 --
Preferred stock converted to common 240,267 2,403 (2,003) --
Common stock issued for the exercise of warrants 200,000 $ .75-4.00 2,000 405,500 --
Common stock issued upon conversion of debt 3,700,670 $ .25-2.84 37,007 4,117,635 --
Common stock issued in private placements
net of issuance costs of $107,357 407,244 $ .62-2.80 4,072 973,209 --
Common stock issued in settlement of trade payables 260,962 $ 2.50-4.25 2,610 980,579 --
Common stock issued for purchase of CSLV interest 225,000 $ 1.44 2,250 322,750 --
Common stock issued in settlement of claims 1,045,743 $ .94 10,457 969,927 --
Additional paid-in capital related to embedded interest -- -- 2,346,286 --
Common stock issued for officer bonus 37,000 $ .95 370 34,630 --
Common stock issued for payment of financing charges 300,000 $ .88-2.80 3,000 325,000 --
Common stock issued for services 25,000 $ 4.38 250 109,125 --
Amortization of stock option cost -- -- -- 145,207
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1997 7,872,755 $ 78,728 $ 47,201,242 $ --
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
------------ ------------
<S> <C> <C> <C>
Balance, January 1, 1996 $(10,853,221) $ 18,375,264
Common stock issued in settlement of legal claim -- 80,000
Common stock issued in a private placement -- 3,407,257
Preferred stock converted to common -- --
Common stock issued for dividends on preferred stock (432,780) --
Common stock issued for the exercise of warrants -- 506,500
Common stock issued for payment of financing charges -- 274,239
Issuance of preferred stock in a private placement -- 2,210,000
Issuance of preferred stock in a private placement -- 3,667,500
Preferred stock converted to convertible debt -- (3,667,500)
Unamortized stock option cost -- --
Amortization of stock option cost -- 336,935
Net loss (16,780,382) (16,780,382)
------------ ------------
Balance, December 31, 1996 (28,066,383) 8,409,813
Common stock issued for dividends on preferred stock (11,910) --
Preferred stock converted to common -- --
Common stock issued for the exercise of warrants -- 407,500
Common stock issued upon conversion of debt -- 4,154,642
Common stock issued in private placements
net of issuance costs of $107,357 -- 977,281
Common stock issued in settlement of trade payables -- 983,189
Common stock issued for purchase of CSLV interest -- 325,000
Common stock issued in settlement of claims -- 980,384
Additional paid-in capital related to embedded interest -- 2,346,286
Common stock issued for officer bonus -- 35,000
Common stock issued for payment of financing charges -- 328,000
Common stock issued for services -- 109,375
Amortization of stock option cost -- 145,207
Net loss (17,246,290) (17,246,290)
------------ ------------
Balance, December 31, 1997 $(45,324,583) $ 1,955,387
============ ============
</TABLE>
F-5
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(17,246,290) $(16,780,382)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,058,608 1,210,685
Stock issued in settlement of legal claim -- 80,000
Embedded interest expense 2,346,286 --
Stock issued for settlement of stockholders' claims 980,384 2,000,000
Stock issued for services 109,375 --
Stock issued for settlement of trade payables 670,689 --
Stock issued for financing charges 328,000 274,239
Stock issued for officer bonus 35,000 --
Amortization of stock options cost 145,207 336,935
Loss on disposal of assets 10,178,560 --
Impairment of long-lived assets -- 5,584,458
Extraordinary gain on settlement of trade payables (1,673,629) --
Minority interests (2,124,446) (2,870,554)
Changes in assets and liabilities:
Decrease (increase) in inventories 512,845 (363,999)
Decrease (increase) in preopening costs -- (300,000)
Decrease (increase) in prepaid expenses and other 141,378 (467,830)
Decrease (increase) in other non-current assets 45,901 (104,899)
(Decrease) increase in accounts payable (506,086) 2,955,362
Increase in accrued expenses 177,234 563,990
------------ ------------
Net cash used by operating activities (4,820,984) (7,881,995)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets -- (15,109,955)
Proceeds from disposal of assets 1,550,000 --
Proceeds received from minority interests -- 4,500,000
------------ ------------
Net cash provided (used) by investing activities 1,550,000 (10,609,955)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 900,000 --
Proceeds from convertible debt 1,350,000 --
Net proceeds from issuance of common and preferred stock 1,384,781 9,791,257
Capital lease payments (94,157) (110,777)
------------ ------------
Net cash provided by financing activities 3,540,624 9,680,480
------------ ------------
Net increase (decrease) in cash 269,640 (8,811,470)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 949,205 9,760,675
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,218,845 $ 949,205
============ ============
(continued)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
---------- ----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment acquired with capital leases $ -- $ 288,474
Common stock issued to settle capital lease obligations 312,500 --
Common stock issued in acquisition of additional CSLV interest 325,000 --
Pre-development costs transferred to leasehold improvements -- 1,142,012
Investments in and advances to Las Vegas, LLC transferred
to leasehold improvements -- 852,488
Note payable transferred to the equity in Las Vegas, LLC -- 495,000
Warrants given for promotional services to be provided
in the future -- 249,250
Common stock issued upon conversion of debt 4,154,642 --
Conversion of preferred stock to convertible debt net of
$332,500 of debt issuance costs -- 3,667,500
SUPPLEMENTAL DISCLOSURE:
Cash paid during the year for interest $ 82,281 $ 44,810
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Country Star Restaurants, Inc. and its majority owned subsidiary, Country
Star Las Vegas, LLC (CSLV) (collectively, the "Company"). Effective
December 30, 1997, as discussed in Note 3, the Company sold its interest
in CSLV. All material intercompany transactions and accounts have been
eliminated in consolidation.
NATURE OF BUSINESS
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 are operated under the name
"Country Star" followed by the name of the city.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
At December 31, 1997, the Company had no cash equivalents, and virtually
all demand deposits were with one financial institution. The Company has
not experienced any losses in such accounts and believes it is not exposed
to any significant credit risks.
INVENTORIES
Inventories, consisting primarily of merchandise, are stated at the lower
of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
SFAS 121, whose provisions were adopted by the Company in 1996, requires
impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Construction costs overruns and continuing operating
losses were indicators of potential impairment of the Company's three
restaurants. Accordingly, the carrying values of these assets were written
down to the Company's estimates of fair values. Fair value was based
principally on a thorough analysis of comparable theme-based restaurant
assets and an appraisal of one of the Company's restaurants. The Company
reviews its assets for impairment on an annual basis.
F-8
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED)
The impairment recorded in 1996 by restaurant location and asset type was
as follows:
LEASEHOLD FURNITURE AND
IMPROVEMENTS EQUIPMENT TOTAL
------------ ---------- ----------
Country Star Hollywood $1,307,363 $ 365,063 $1,672,426
Country Star Las Vegas 2,354,330 -- 2,354,330
----------
Country Star Atlanta 1,557,702 -- 1,557,702
---------- ---------- ----------
$5,219,395 $ 365,063 $5,584,458
========== ========== ==========
This non-cash charge to operations increased the 1996 loss by $5.04 per
share.
Property and equipment are stated at cost, less accumulated depreciation.
Amortization of leasehold improvements is provided over the estimated
useful life of the asset or the lease term, including option periods,
whichever is shorter. Depreciation of memorabilia commences when it is
placed in service upon its installation at a unit location. Depreciation
is provided for by using the straight-line method over the following
useful lives:
YEARS
-----
Furniture and equipment 5 - 8
Memorabilia 5
Leasehold improvements 18
Expenditures for additions and improvements which extend the life of the
assets are capitalized. Expenditures for normal repairs and maintenance
are charged to expense as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes."
Under the asset and liability method of SFAS 109, deferred income taxes
are recognized for the tax consequences of temporary differences by
applying enacted statutory rates applicable to future years to the
difference between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
F-9
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
MINORITY INTERESTS
Minority interests represent the minorities' equity in the earnings or
losses in the entity which is majority owned by the Company.
FOOD, BEVERAGE AND MERCHANDISE REVENUES
Food, beverage and merchandise revenues are recognized as the products are
sold to customers.
STOCK-BASED COMPENSATION
The Company accounts for compensation costs related to employee stock
options and other forms of employee stock-based compensation plans in
accordance with the requirements of Accounting Principles Board Opinion 25
("APB 25"). APB 25 requires compensation costs for stock-based
compensation plans to be recognized based on the difference, if any,
between the fair market value of the stock on the date of grant and the
option exercise price. In October 1995, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards 123,
Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 established
a fair value-based method of accounting for compensation costs related to
stock options and other forms of stock-based compensation plans. However,
SFAS 123 allows an entity to continue to measure compensation costs using
the principles of APB 25 if certain pro forma disclosures are made. SFAS
123 is effective for fiscal years beginning after December 15, 1995. The
Company adopted the provisions for pro forma disclosure requirements of
SFAS 123 in fiscal 1996. Options granted to non-employees are recognized
at their estimated fair value at the date of grant.
ADVERTISING AND PROMOTIONAL COSTS
Costs of advertising and promotion are expensed either as incurred or the
first-time advertising and promotion takes place. Such costs were $402,000
in 1997 and $1,782,000 in 1996.
F-10
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET EARNINGS PER SHARE
The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS
128"), which is effective for all interim and annual periods ending after
December 15, 1997. Those entities that have only common stock outstanding
are required to present basic earnings per share amounts. All other
entities are required to present basic and diluted per share amounts.
Diluted per share amounts assume the conversion, exercise or issuance of
all potential common stock instruments unless the effect is to reduce a
loss or increase the income per common share from continuing operations.
As required by SFAS 128, earnings per share is computed based upon the
weighted average common shares outstanding for the year. Earnings per
share excludes the effect of outstanding warrants and stock options and
the conversion of convertible debt because the effect of their inclusion
would be antidilutive, as defined in the Statement. In conjunction with
SFAS 128, the Company has restated the accompanying 1996 consolidated
financial statements for all per share data presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments, consisting principally of the
line of credit and convertible debt, is based on interest rates available
to the Company and comparison to quoted prices. The fair value of these
financial instruments approximates carrying value.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 consolidated
financial statements to conform with the 1997 presentation.
F-11
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS
REVERSE COMMON STOCK SPLIT
On February 12, 1998 the Company effected a one for ten reverse common
stock split. Accordingly, all references to number of common shares,
except shares authorized, and to per share information in the consolidated
financial statements have been adjusted to reflect the reverse stock split
on a retroactive basis.
PREFERRED STOCK - SERIES A
On November 10, 1995, the Company sold 1,200,000 shares of 6% Cumulative
Convertible Series A Preferred Stock ("Series A") at $12.00 per share. The
net proceeds totaled $12,372,500 after expenses of $2,027,500. Dividends
are payable quarterly in cash or common stock at the Company's election.
Liquidation value is $12.00 per share. Each share of Series A is
convertible into .6 shares of common stock with unconverted shares
automatically converting on May 10, 1997. The Company issued to
underwriters, for nominal consideration, warrants to purchase 120,000
shares of Series A with an exercise price of $14.40, expiring in five
years. No value was assigned to these warrants. These warrants were
automatically converted into warrants to purchase 72,000 of common stock
at $24.00 per share on May 10, 1997 and remain outstanding at December 31,
1997. Concurrent with this offering, 18,500 shares of common stock
included in units sold in a Private Placement on July 28, 1995 were
converted into 77,089 shares of Series A.
On August 28, 1996, the Company sold 170,371 shares of Series A to Dan
Rubin, the pension plan of Dr. Roy Rubin (Dan's father) and another
individual (collectively, the "Rubin Group") at $13.50 per share for
aggregate proceeds of $2,210,000 after expenses of $90,000. In connection
with this transaction, the purchasers received 30,667 common stock
purchase warrants exercisable at $22.50 per share, expiring in 5 years. No
value was assigned to these warrants. These warrants were surrendered in
conjunction with the February 12, 1997 settlement outlined below.
All Series A shares were converted as follows: 1,047,015 shares in 1996,
165,264 shares prior to May 10, 1997 and the remaining 235,181 shares on
May 10, 1997.
PREFERRED STOCK - SERIES B
On October 10, 1996 the Company sold 4,000 shares of newly issued 7%
Convertible Preferred Stock, par value $.001 per share at $1,000 per share
("Series B"). The sale was made to Cameron Capital Ltd., a foreign
institutional investor ("Cameron"), for aggregate net proceeds of
$3,667,500. On February 12, 1997, all the outstanding shares of Series B
were exchanged for a Convertible Term Note in the principal amount of
$4,000,000, as outlined below.
F-12
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
FEBRUARY 12, 1997 - FINANCING AGREEMENTS AND SETTLEMENTS OF CLAIMS
Following the sale of the Series B shares to Cameron, the Rubin Group
asserted claims against the Company relating to alleged misrepresentations
of the financial condition of the Company and concerning the Company's
proposed future sales of its equity instruments. Negotiations ensued, and
on February 12, 1997, the Company finalized the secured loan agreements
with Cameron and the Rubin Group described below.
Cameron exchanged its 4,000 Series B shares purchased on October 10, 1996,
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 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
90 days after February 12, 1997. 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) $13.30, 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. In
addition, the Company shall pay the lenders a premium of 3% per month of
the outstanding convertible note balance if it does not file the required
Registration Statement with the SEC by May 1, 1997 or if such filing is
not declared effective by July 1, 1997. Because such Registration
Statement was not filed by May 1, 1997 and became effective on August 20,
1997, the Company is liable for four months of premium, or 12%. The
maximum number of shares into which the convertible note may be converted,
which was initially set at 300,000, was ultimately increased to 2,000,000.
The conversion formula is subject to adjustment in the event of stock
splits, stock dividends, mergers, consolidations, or similar transactions.
The Company's recording of this exchange transaction included a charge to
debt issuance costs of $332,500, which were fully amortized at February
12, 1997. In addition, the Company recorded $1,000,000 as additional
paid-in capital for the discount related to the embedded interest in the
convertible debentures and amortized this expense over 90 days from
February 12, 1997 to May 13, 1997, when the debentures were first
convertible. This interest expense is included in the caption "Embedded
interest expense" in the accompanying 1997 statement of operations. The
exchange of the 4,000 Series B shares for $4,000,000 debentures was
reflected in the December 31, 1996 balance sheet because substantially all
the conditions precedent to the occurrence of this transaction and those
described below had taken place as of the end of fiscal 1996. Cameron
waived the 7% accrued interest on the convertible debt and the aggregate
12% premium related to the timing of the Registration Statement and
converted $1,004,642 of these debentures into 1,505,000 shares of common
stock in 1997.
F-13
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
FEBRUARY 12, 1997 - FINANCING AGREEMENTS AND SETTLEMENTS OF CLAIMS
(CONTINUED)
As part of the secured financing agreement, the Rubin Group agreed to
settle all claims against the Company for $2,000,000. Accordingly, the
Company issued convertible term notes in the aggregate amount of
$1,950,000 and agreed to pay $50,000 cash to the Rubin Group. The
$2,000,000 charge to "Settlement of stockholders' claims" is included in
the 1996 statement of operations and the related liabilities are reflected
in the December 31, 1996 balance sheet. The convertible term notes contain
the same terms and conditions as the convertible term note issued to
Cameron, except that the Rubin Group may convert at any time following the
closing. The maximum number of shares into which the convertible notes may
be converted is 2,350,000. The Company has recorded $487,500 as additional
paid-in capital for the discount related to the embedded interest in the
convertible debentures and fully amortized the expense on February 12,
1997, when the debentures became convertible. This interest expense is
included in the caption "Embedded interest expense" in the accompanying
1997 statement of operations. In October 1997, the Board of Directors
approved the issuance of 300,000 common shares at a 20% discount in full
payment of the 7% accrued interest and the 12% accrued premium due to the
Rubin Group. Accordingly, the Company has recorded $82,000 in additional
paid-in capital and related embedded interest expense for such discount
feature. During 1997 the Rubin Group converted the entire $1,950,000
debentures into 1,780,000 shares of common stock.
Also as part of the secured financing agreement, the Rubin Group has made
a $3,500,000 line of credit available to the Company at prime plus 4%,
payable semi-annually, commencing on December 31, 1997, due on October 9,
1999. In addition, the Company will issue one warrant to purchase its
common stock for each $30 advanced. These warrants are exercisable at
$6.25 per share and expire on October 9, 1999. As of December 31, 1997,
there was $900,000 outstanding under the line of credit, and the Company
issued 30,000 warrants, none of which has been exercised at December 31,
1997. No value was assigned to these warrants. In October 1997, the terms
of this line of credit were amended to provide that amounts advanced may
be converted to common stock under the same terms and conditions as the
convertible term notes issued to the Rubin Group. Accordingly, the Company
recorded $225,000 as additional paid-in capital for the discount related
to the embedded interest in the line of credit advances and fully
amortized the expense. This interest expense is included in the caption
"Embedded interest expense" in the accompanying 1997 statement of
operations.
F-14
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
FEBRUARY 12, 1997 - FINANCING AGREEMENTS AND SETTLEMENTS OF CLAIMS
(CONTINUED)
The line of credit advances and all convertible term notes are secured by
a lien on substantially all of the 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. Cameron has the right
to name three of the five members of the board. Cameron assigned this
right to the Rubin Group, as its agent, and immediately after the closing,
Dan Rubin was elected Chief Executive Officer and President of the
Company.
MAY 1997 - CONVERTIBLE DEBT TRANSACTIONS
In May 1997, the Company sold pursuant to Regulation S of the Securities
Act of 1933 5% Convertible Debentures for $1,200,000 to institutional
investors abroad, convertible 41 days after closing at a price equal to
70% of the average closing bid price during the 5 days preceding the
conversion date. The Company has recorded $514,286 as additional paid-in
capital for the discount related to the embedded interest in the
convertible debentures and amortized the expense over the 41 day period
before the debentures became convertible. This interest expense is
included in the caption "Embedded interest expense" in the accompanying
1997 statement of operations. In October 1997, the Company issued 500,000
shares of common stock to these investors in consideration for a full
release of claims arising out of the securities sold to them. These claims
alleged that the securities sold in May 1997 had been unfairly priced and
the additional shares were issued to give the institutional investors an
overall price that reflected the market value of the common stock at the
time of settlement. Accordingly, $468,750 has been charged to "Settlement
of stockholders' claims" in the accompanying 1997 statement of operations
reflecting the fair value of the common stock surrendered. All these
debentures were converted into 415,670 shares of common stock during 1997.
OCTOBER 1997 - CONVERTIBLE DEBT TRANSACTIONS
In October 1997, the Company sold pursuant to Regulation S of the
Securities Act of 1993 5% Convertible Debentures due January 31, 1998 for
$150,000 to institutional investors abroad, convertible immediately after
closing at a price equal to 80% of the average closing bid price during
the 5 days preceding the conversion date. The Company has recorded $37,500
as additional paid-in capital for the discount related to the embedded
interest in the convertible debentures and amortized the expense in
October 1997, when the debentures were first convertible. This interest
expense is included in the caption "Embedded interest expense" in the
accompanying 1997 statement of operations. All these debentures were
automatically converted as of January 31, 1998 into 461,504 shares.
F-15
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
FEBRUARY 18, 1998 - FINANCIAL RESTRUCTURING AND SETTLEMENT OF CLAIMS
After Cameron had converted $1,004,642 of its $4,000,000 7% convertible
debt, leaving a balance of $2,995,358, a dispute arose regarding the
proper use of the proceeds realized from the sale of CSLV (See Note 3).
Cameron contended that the Company was obligated to use the proceeds to
prepay its debt; the Company believed that the proceeds were needed for
working capital and the repayment of other debt. Cameron commenced legal
action against the Company on February 13, 1998 in which it sought
recovery of the full $1,550,000 received by the Company in connection with
the sale of CSLV, and obtained a temporary restraining order prohibiting
the Company from using the proceeds until the dispute was resolved.
Under the terms of the Settlement Agreement dated February 18, 1998,
Cameron agreed to dismiss its legal action against the Company and to
accept as payment in full of its unconverted debt $1,300,000 in cash and
670,000 shares of the Company's common stock with a market value of
$167,500. Cameron does not have any registration rights with respect to
the common stock but is eligible to resell certain amounts immediately
pursuant to the provisions of Rule 144 under the Securities Act of 1933.
The Settlement Agreement provides for mutual releases of all claims held
by the Company against Cameron and by Cameron against the Company and Dan
Rubin.
The Company funded Cameron's settlement with an advance of $1,300,000 on
the Rubin Group's $3,500,000 line of credit described above. The lender
also received warrants to acquire 43,333 shares of the Company's common
stock at an exercise price of $6.25 per share. No value was assigned to
these warrants. The Company has recorded $325,000 as additional paid-in
capital for the discount related to the embedded interest in the line of
credit advances and fully amortized the expense on February 18, 1998.
COMMON STOCK
In 1996, the Company sold shares of its common stock in various private
placement transactions as follows:
<TABLE>
<CAPTION>
DATE COMMON STOCK WARRANTS
- - ------------------------- --------------------------------------- -----------------------------------
NET EXERCISE TERMS IN
SHARES PRICE PROCEEDS NUMBER PRICE YEARS
--------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
February 12, 1996 24,190 $ 26.25 $ 635,000 -- n/a n/a
March 28, 1996 75,000 30.00 2,192,257 37,500 $ 30.00 5
July 10, 1996 11,429 35.00 380,000 8,572 35.00 5
September 10, 1996 10,000 20.00 200,000 10,000 20.00 5
-------------- -----------
120,619 $ 3,407,257
============== ===========
</TABLE>
No value was assigned to these warrants.
F-16
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
COMMON STOCK (CONTINUED)
During May through July 1997, the Company issued an aggregate of 260,962
shares of its common stock with a value of $983,189 to certain creditors
and vendors in full settlement of their claims against the Company. The
resulting extraordinary item is more fully described in Note 7.
In June 1997, the Company issued warrants to acquire 150,000 shares of its
common stock at an exercise price of $2.10 per share to private investors.
The warrants were exercised immediately and the Company issued 150,000
shares of its common stock, receiving net proceeds of $315,000. No
commissions or fees were paid by the Company as a part of this
transaction. In October 1997 the Company issued 102,000 shares of common
stock to these investors in consideration for a full release of claims
arising out of the securities sold to them. These claims alleged that the
securities sold in June 1997 had been unfairly priced and the additional
shares were issued to give the investors an overall price that reflected
the market value of the common stock at the time of settlement.
Accordingly, $95,625 has been charged to "Settlement of stockholders'
claims" in the accompanying 1997 statement of operations, reflecting the
fair value of the common stock surrendered.
During July and August 1997, the Company sold in a private offering an
aggregate of 357,857 shares of its common stock at $2.80 per share for net
proceeds of $894,643 after deducting expenses of $107,357. In October 1997
the Company issued 443,743 shares of common stock to these investors in
consideration for a full release of claims arising out of the securities
sold to them. These claims alleged that the securities sold in July and
August 1997 had been unfairly priced and the additional shares were issued
to give the investors an overall price that reflected the market value of
the common stock at the time of settlement. Accordingly, $416,009 has been
charged to "Settlement of stockholders' claims" in the accompanying 1997
statement of operations reflecting the fair value of the common stock
surrendered.
In November 1997, the Company granted a bonus of $35,000 to its President
and CEO, in the form of 37,000 shares of its common stock.
INCENTIVE STOCK OPTION PLAN
In July 1993, the Company adopted an Incentive Stock Option Plan covering
10,000 shares of common stock. In 1994, 9,000 options were granted at an
exercise price of $40.00 per share. During 1997, these 9,000 options were
canceled.
F-17
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
NONQUALIFIED STOCK OPTION PLAN
In January 1994, the Company adopted the 1994 Nonqualified Stock Option
Plan ("NSOP") covering 100,000 shares of common stock. The exercise price
shall not be less than 100% of the fair market value of the common stock
on the date of grant. In April 1994, the Company granted options to
purchase 52,100 shares. During 1997, 48,850 of these options were canceled
and the remaining 3,250 are outstanding, with an exercise price of $20.00
per share.
OTHER OPTIONS
In 1994, the Company granted options to purchase 46,700 common shares at
$40.00 per share to certain non-employees for services to be performed. Of
this amount, 35,000 options were granted to certain celebrities pursuant
to license agreements with such celebrities. The Company recognized a
charge to earnings over the period services were rendered by the
non-employees based on the fair market value of the options at the date
granted. The entire amount has been amortized as of December 31, 1997.
Options totaling 36,250 were canceled in 1997 and 10,450 are outstanding
at December 31, 1997.
NON-EMPLOYEE WARRANTS
The Company had 134,500 common stock purchase warrants outstanding as of
January 1, 1996. Of these, 10,000 issued as part of CSLV's financing
agreement were canceled in 1997, and 124,500 issued to underwriters remain
outstanding. In 1996, the Company issued 5,000 warrants to non-employee
members of the Board of Directors, which were canceled in 1997, and 50,850
warrants were issued to celebrities. Of these 17,000 were canceled in 1997
and 33,850 remain outstanding. An additional 127,238 warrants were issued
in 1996 in conjunction with various private placement transactions. Of
these, 20,000 were exercised in 1997, 86,238 were canceled, and 21,000 are
outstanding at exercise prices ranging from $20.00 to $40.00. In 1997, a
warrant to purchase 150,000 shares was granted and immediately exercised,
and warrants to acquire 30,000 shares at $6.25 were granted in conjunction
with the line of credit advances described above.
F-18
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
NON-EMPLOYEE WARRANTS (CONTINUED)
Combined transactions in non-employee warrants for 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Warrants outstanding January 1 317,588 $ 24.40 134,500 $ 24.00
Granted 180,000 2.44 183,088 24.70
Canceled (118,238) 26.83 -- --
Exercised (170,000) 2.24 -- --
----------- --------- ---------- ---------
Warrants outstanding December 31 209,350 $ 19.23 317,588 $ 24.40
=========== ========= ========== =========
EMPLOYEE WARRANTS
Combined transactions in employee warrants for 1997 and 1996 are as follows:
1997 1996
---------------------------- ----------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Warrants outstanding January 1 151,900 $ 21.58 -- $ --
Granted 105,000 1.25 151,900 21.58
Canceled (96,500) 31.40 -- --
Exercised (30,000) 0.90 -- --
----------- --------- ---------- ---------
Warrants outstanding December 31 130,400 $ 2.21 151,900 $ 21.58
=========== ========= ========== =========
</TABLE>
The following information applies to employee warrants outstanding at December
31, 1997:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
---------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------- ------------- -------------- ----------- --------------
Range of exercise prices
<S> <C> <C> <C> <C> <C> <C>
$1.25 77,500 5 $ 1.25 77,500 $ 1.25
$2.50 50,000 4 $ 2.50 50,000 $ 2.50
$20.00 2,900 4 $ 20.00 2,900 $ 20.00
------------- ------------- -------------- ----------- --------------
130,400 4.5 $ 2.21 130,400 $ 2.21
============= ============= ============== =========== ==============
</TABLE>
F-19
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 2 - CAPITAL AND FINANCING TRANSACTIONS (CONTINUED)
EMPLOYEE WARRANTS (CONTINUED)
Statement of Financial Accounting Standards 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion 25, "Accounting for stock Issued to employees,"
and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock.
Had compensation cost for the plan been determined based on the fair value
of the warrants at the grant dates consistent with the method of SFAS 123,
the Company's net loss and loss per share would have been:
1997 1996
-------------- --------------
Net loss
As reported $ (17,246,290) $ (16,780,382)
Pro forma (17,439,290) (22,227,382)
Basic and diluted earnings per share
As reported $ (5.38) $ (15.54)
Pro forma (5.44) (20.46)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1995. In addition, potential deferred tax
benefits of approximately $77,000 in 1997 and $1,852,000 in 1996 have not
been reflected in the pro forma amounts due to the uncertainty of
realizing any benefit. The fair value of these options was estimated at
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions for 1997 and 1996:
Expected life (years) 5
Risk-free interest rate 6.00%
Volatility 120%-200%
The weighted fair value of warrants granted during 1997 and 1996 for which
the exercise price approximated the market price on the grant date was
$1.25 and $33.90, respectively.
F-20
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 3 - LOSS ON DISPOSAL OF ASSETS
COUNTRY STAR ATLANTA
Pursuant to a settlement agreement effective as of December 23, 1997
between the Company and its Atlanta landlord, the Company agreed to
voluntarily relinquish its rights, title, interest and possession to real
property under the lease agreement for the Atlanta restaurant facility.
Accordingly, as of that date, the Atlanta lease ceased and expired. See
Note 5.
Except for $320,000 of furniture, equipment and memorabilia to be
relocated, all property and equipment associated with this location has
been written off in 1997. The write off amounted to $5,754,000 of
leasehold improvements and $728,267 of furniture and equipment.
COUNTRY STAR LAS VEGAS
During 1996, in connection with certain financing arrangements, the
Company acquired a 50.05% ownership position in CSLV. Pursuant to certain
concurrent agreements concluded on December 30, 1997, the Company first
acquired the remaining interest in CSLV not held by the purchaser for
$200,000 cash and 225,000 shares of common stock valued at $325,000, then
sold its entire interest in CSLV for $1,550,000. Accordingly, the Company
surrendered its properties, interest and rights in CSLV and entered into a
new lease as tenant to operate the restaurant facility, as more fully
disclosed in Note 5. The Company entered into the new lease because
Management believed it could operate the restaurant profitably with the
reduced rent under the new lease and wanted to maintain a Company facility
in Las Vegas. In conjunction with the Las Vegas restaurant facility
transaction, the minority interests' equity in the 1997 loss of CSLV was
limited to their capital balance of $2,124,446.
Except for $268,000 of furniture, equipment and memorabilia still owned by
the Company, all property and equipment associated with this location has
been written off in 1997. The write off amounted to $4,700,000 of
leasehold improvements and $546,293 of furniture and equipment.
The loss on disposal of the Atlanta and Las Vegas assets reflected in the
1997 consolidated statement of operations is as follows:
Country Star Atlanta $ 6,482,267
Country Star Las Vegas 5,246,293
Sale of CSLV - gross proceeds (1,550,000)
--------------
$ 10,178,560
==============
F-21
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 4 - INCOME TAXES
A reconciliation between the actual income tax benefit and the federal
statutory rate follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
AMOUNT % AMOUNT %
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Computed income tax benefit at
statutory rate $ 5,863,000 34% $ 5,705,000 34%
Operating loss with no current
tax benefit (5,863,000) -34% (5,705,000) -34%
----------- ----------- ----------- -----------
Income tax benefit $ -- 0% $ -- 0%
=========== =========== =========== ===========
</TABLE>
At December 31, 1997, the Company had a net operating loss carryforward
for federal tax purposes of approximately $35,500,000 which, if unused to
offset future taxable income, will expire between 2008 and 2012, and
approximately $12,000,000 for state tax purposes which will expire if
unused between 1998 and 2002. A valuation allowance has been recognized
for 1997 and 1996 to offset the related deferred tax assets due to the
uncertainty of realizing any benefit therefrom. During 1997, no changes
occurred in the conclusions regarding the need for a 100% valuation
allowance in all tax jurisdictions.
Under Section 382 of the Internal Revenue Code, the utilization of net
operating loss carryforwards is limited after an ownership change, as
defined, to an annual amount equal to the market value of the loss
corporation's outstanding stock immediately before the date of the
ownership change multiplied by the highest Federal long-term tax exempt
rate in effect for any month in the 3 calendar month period ending with
the calendar month in which the ownership change occurred. Due to the
ownership change as a result of the secondary offering completed in
November 1995, the Company's utilization of pre-1996 net operating losses
is limited to approximately $1,000,000 per year. The determination of
whether a change in control has occurred can be a very complex and time
consuming process. The Company is not currently in a position to determine
whether additional changes in control might have occurred since November
1995.
Significant components of the Company's deferred tax assets are as
follows:
1997 1996
---- ----
Net operating loss carryforwards $ 13,142,000 $ 6,721,000
Impairment of long-lived assets 618,000 2,066,000
Other 199,000 5,000
-------------- -------------
13,959,000 8,792,000
Depreciation (265,000) 152,000
Valuation allowance (13,694,000) (8,944,000)
-------------- -------------
Net deferred tax assets $ -- $ --
============== =============
F-22
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 5 - COMMITMENTS AND CONTINGENCIES
LEASES
As of December 31, 1997 the Company has lease agreements to operate its
two restaurant facilities in Hollywood, California and Las Vegas, Nevada
and for its corporate offices in Los Angeles, California.
COUNTRY STAR HOLLYWOOD
The Hollywood restaurant's lease was extended during 1997 under
substantially the same terms as the prior lease, and under certain
conditions, is subject to two additional extensions of five years each.
The lease requires annual minimum payments of $312,000, subject to annual
adjustment. The adjusted amount was $318,800 for 1997. Additionally, the
lease requires percentage rent to be paid, ranging from 6%-10% of annual
sales volume, although such percentage rent payments will be forgone 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.
COUNTRY STAR LAS VEGAS
As discussed in Note 3, the prior lease for the Las Vegas restaurant
facility was terminated on December 30, 1997 and replaced with a new
lease. The new lease, which is to terminate on September 30, 1998 unless
mutually extended on a month-to-month basis, provides for the Company to
pay a monthly base rent of 50% of positive cash flow from operating the
restaurant (with no reduction for the Company's corporate overhead except
for half the salary and related expenses for an accounts payable employee,
a payroll employee and an executive chef). The Company entered into the
new lease because Management believed it could operate the restaurant
profitably with the reduced rent under the new lease and wanted to
maintain a Company facility in Las Vegas.
CORPORATE OFFICES
The lease on the corporate office expires in June 2002 and provides for a
basic rent of $5,175 per month through June 2000 and $5,558 per month
thereafter.
The Company is subject to minimum annual lease payments as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ -------------
1998 $ 380,809
1999 380,809
2000 349,851
2001 318,804
2002 318,804
Thereafter 3,188,040
--------------
$ 4,937,117
==============
F-23
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 5 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION
ATLANTA AND LAS VEGAS LIEN MATTERS
Certain contractors have filed claims of lien against the Company's
Atlanta and Las Vegas restaurants that have not been cleared by the
posting of a bond or any payment. Such claims of lien total approximately
$1,200,000. Of that amount, the Company believes that all of the
$1,200,000 represent invalid lien claims, either because the contractor
has already been paid, or because the contractor did not perform agreed
upon services or provide agreed upon materials or because the liens have
been bonded. The Company is pursuing its rights and remedies against these
contractors, whom it believes have filed invalid lien claims.
CONTRACTOR LITIGATION IN ATLANTA
On February 3, 1998, Pacific Southwest Design, Inc. filed a suit in
Atlanta against the Company claiming damages of $597,659 for failure to
pay amounts due for services rendered. The Company intends to vigorously
defend against this action and has counterclaimed for damages in an
undetermined amount for the contractor's breach of contract and failure to
perform work which caused the Company to lose its Atlanta lease.
Management believes that the probable resolution of the litigation matters
described above will not materially affect the consolidated financial
position or results of operations of the Company.
NOTE 6 - GOING CONCERN
The Company has experienced a loss of over $34,000,000 for the two year
period ended December 31, 1997 and its cash balance at March 25, 1998 is
less than $10,000.
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 permanent closing of Country Star Atlanta and the sale of CSLV in
December 1997, (ii) the expansion of the "country" theme, (iii) planned
expansion through joint ventures and licensing rather than expensive
construction of new restaurant facilities, and (iv) settlement with trade
creditors.
Management continues to make operational changes to improve revenues,
control operating costs, and limit corporate overhead. 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.
F-24
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 7 - EXTRAORDINARY ITEM
During 1997, the Company recognized an extraordinary gain of $1,673,629 on
the settlement of trade payables and capital leases whereby certain
vendors and lessors accepted cash payments and/or common stock for the
full release of their claims.
<TABLE>
<CAPTION>
Value of
Recorded Cash Stock
Liability Payments Issued Gain
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Trade payables $ 3,005,024 $ 845,667 $ 670,689 $ 1,488,668
Capital leases 497,461 -- 312,500 184,961
--------------- ---------------- --------------- ---------------
$ 3,502,485 $ 845,667 $ 983,189 $ 1,673,629
=============== ================ =============== ===============
</TABLE>
NOTE 8 - BASIC AND DILUTED NET LOSS PER SHARE
The following table illustrates the required disclosure of the
reconciliation of the numerators and denominators of the basic and diluted
loss per share computations:
1997 1996
------------ ------------
BASIC AND DILUTED LOSS PER SHARE:
Numerator
Loss before extraordinary item $(18,919,919) $(16,780,382)
Preferred dividend (11,910) (432,780)
------------ ------------
(18,931,829) (17,213,162)
Extraordinary item 1,673,629 --
------------ ------------
$(17,258,200) $(17,213,162)
============ ============
Denominator
Basic and diluted weighted average number of
common shares outstanding during the period 3,208,465 1,107,481
============ ============
Basic and diluted net loss per share:
Loss before extraordinary item $ (5.90) $ (15.54)
Extraordinary item 0.52 --
------------ ------------
Net loss per common share $ (5.38) $ (15.54)
============ ============
Potential common stock instruments at December 31, 1997, which include
13,700 options, 339,750 warrants, convertible line of credit advances of
$900,000, and convertible debt of $3,145,358 are not included in the loss
per share calculation because their inclusion would be anti-dilutive.
F-25
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 9 - RECENT PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income",
which established standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses). SFAS 130
requires all items that are required to be recognized under accounting
standards as components of comprehensive income to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 requires an enterprise to (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Management
has determined that the adoption of SFAS 130 will not have a material
impact on the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" which established standards for public
business enterprises to report information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS 131 requires, among other items, that a public business
enterprise report a measure of segment profit or loss, certain specific
revenue and expense items, segment assets, information about the revenues
derived from the enterprise's products or services and major customers.
SFAS 131 also requires that the enterprise report descriptive information
about the way that the operating segments were determined and the products
and services provided by the operating segments. SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years to
be restated. SFAS 131 need not be applied to interim financial statements
in the initial year of application, but comparative information for
interim periods in the initial year of application is to be reported in
financial statements for interim periods in the second year of
application. Management has determined that the adoption of SFAS 131 will
not have a material impact on the Company's financial reporting.
F-26
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 10 - REVISED QUARTERLY INFORMATION (UNAUDITED)
The unaudited financial statements included in the Company's 1997 Forms
10-QSB did not include the additional paid-in capital and the equivalent
charge to operations resulting from the discount related to the embedded
interest in the convertible debentures issued in February and May 1997.
Accordingly, the following table shows the pertinent financial statement
information as was originally presented and as now revised. The revisions
affect only equity and embedded interest expense.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR TO DATE
---------------------------- -------------------------------
ORIGINALLY ORIGINALLY
FILED REVISED FILED REVISED
------------ ------------ ------------- -------------
Q1 - MARCH 31, 1997
-------------------
<S> <C> <C>
Preferred stock $ 235 $ 235
Common stock 15,364 15,364
Additional paid in capital 36,180,881 37,190,603
Unamortized stock option cost (136,579) (136,579)
Accumulated deficit (29,823,540) (30,833,262)
------------ ------------
Total stockholders' equity $ 6,236,361 $ 6,236,361
============ ============
Net loss $ (2,189,938) $ (3,199,600)
============ ============
Basic and diluted loss per common share
Loss before extraordinary item $ (1.49) $ (2.18)
Extraordinary item -- --
------------ ------------
Net loss $ (1.49) $ (2.18)
============ ============
Weighted average number of shares 1,470,760 1,470,760
============ ============
Q2 - JUNE 30, 1997
-------------------
Preferred stock $ -- $ --
Common stock 23,619 23,619
Additional paid in capital 38,156,860 40,158,646
Unamortized stock option cost (118,428) (118,428)
Accumulated deficit (30,002,625) (32,004,411)
------------ ------------
Total stockholders' equity $ 8,059,426 $ 8,059,426
============ ============
Net loss $ (179,084) $ (1,171,148) $ (2,369,022) $ (4,370,808)
============ ============ ============= =============
Basic and diluted loss per common share
Loss before extraordinary item $ (0.86) $ (1.43) $ (2.31) $ (3.55)
Extraordinary item 0.76 0.76 0.84 0.84
------------ ------------ ------------- -------------
Net loss $ (0.10) $ (0.67) $ (1.47) $ (2.71)
============ ============ ============= =============
Weighted average number of shares 1,752,408 1,752,408 1,612,239 1,612,239
============ ============ ============= =============
</TABLE>
F-27
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Consolidated Financial Statements
NOTE 10 - REVISED QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR TO DATE
---------------------------- -----------------------------
ORIGINALLY ORIGINALLY
FILED REVISED FILED REVISED
------------ ------------ ------------- ------------
Q3 - SEPTEMBER 30, 1997
----------------------------
<S> <C> <C>
Preferred stock $ -- $ --
Common stock 38,887 38,887
Additional paid in capital 40,649,812 42,651,598
Unamortized stock option cost (100,276) (100,276)
Accumulated deficit (31,057,219) (33,059,005)
------------ ------------
Total stockholders' equity $ 9,531,204 $ 9,531,204
============ ============
Net loss $ (1,054,591) $ (1,054,591) $ (3,423,616) $ (5,425,402)
============ ============ ============= ============
Basic and diluted loss per common share
Loss before extraordinary item $ (0.45) $ (0.45) $ (2.44) $ (3.39)
Extraordinary item 0.10 0.10 0.79 0.79
------------ ------------ ------------- ------------
Net loss $ (0.35) $ (0.35) $ (1.65) $ (2.60)
============ ============ ============= ============
Weighted average number of shares 3,041,412 3,041,412 2,083,525 2,083,525
============ ============ ============= ============
</TABLE>
F-28
<PAGE>
<TABLE>
<CAPTION>
COUNTRY STAR RESTAURANTS, INC.
Condensed Balance Sheet
(Unaudited)
ASSETS
September 30, 1998
------------------
CURRENT ASSETS:
<S> <C>
Cash and cash equivalents $ 17,430
Inventories 130,992
Prepaid expenses 41,711
Other 99,835
------------
Total current assets 289,968
------------
PROPERTY AND EQUIPMENT AT COST, NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION OF $993,188:
Leasehold improvements 3,259,688
Furniture and equipment 1,092,107
Memorabilia 291,790
------------
TOTAL PROPERTY AND EQUIPMENT 4,643,585
------------
OTHER 90,261
------------
$ 5,023,814
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,332,000
Accounts payable 419,335
Accrued legal settlements 100,000
Other accrued expenses 119,954
------------
TOTAL CURRENT LIABILITIES 2,971,289
------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.001 par value, 2,000,000 shares authorized,
no shares issued and outstanding --
Common stock, $0.01 par value, 250,000,000 shares authorized,
11,424,293 shares issued and outstanding 114,243
ADDITIONAL PAID-IN CAPITAL 48,108,403
ACCUMULATED DEFICIT (46,170,121)
------------
NET STOCKHOLDERS' EQUITY 2,052,525
------------
$ 5,023,814
============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-29
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------
1998 1997
----------- -----------
REVENUES:
<S> <C> <C>
Food and beverage $ 898,059 $ 1,217,833
Merchandise 22,177 75,193
----------- -----------
920,236 1,293,026
----------- -----------
COST AND EXPENSES:
Cost of revenues:
Food and beverage 281,213 400,327
Merchandise 13,634 75,010
Labor 423,079 588,155
Rent 82,060 674,847
Other restaurant operating 162,244 362,015
Selling, general and administrative 60,948 755,938
Depreciation and amortization 146,699 309,935
Loss on disposal of assets 114,247 --
----------- -----------
1,284,124 3,166,227
----------- -----------
LOSS FROM OPERATIONS (363,888) (1,873,201)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income -- 1,598
Interest expense (79,813) 144,255
----------- -----------
(79,813) 145,853
----------- -----------
LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM (443,701) (1,727,348)
MINORITY INTEREST -- 371,596
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (443,701) (1,355,752)
EXTRAORDINARY ITEM - SETTLEMENT OF NOTES PAYABLE, NET OF 0 TAXES -- 301,161
----------- -----------
NET LOSS $ (443,701) $(1,054,591)
=========== ===========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Loss before extraordinary item $ (0.05) $ (0.45)
Extraordinary item -- 0.10
----------- -----------
Net loss per common share $ (0.05) $ (0.35)
=========== ===========
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 9,651,749 3,041,412
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-30
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Food and beverage $ 2,848,738 $ 4,817,375
Merchandise 105,674 471,524
------------ ------------
2,954,412 5,288,899
------------ ------------
COST AND EXPENSES:
Cost of revenues:
Food and beverage 901,018 1,580,653
Merchandise 75,849 398,879
Labor 1,353,881 2,183,509
Rent 327,686 2,104,455
Other restaurant operating 568,417 1,076,772
Selling, general and administrative 1,056,787 2,999,826
Depreciation and amortization 441,746 1,081,466
Loss on disposal of assets 114,247 --
------------ ------------
4,839,631 11,425,560
------------ ------------
LOSS FROM OPERATIONS (1,885,219) (6,136,661)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income -- 5,654
Interest expense (175,182) (54,174)
Embedded interest expense (313,000) (2,001,786)
------------ ------------
(488,182) (2,050,306)
------------ ------------
LOSS BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM (2,373,401) (8,186,967)
MINORITY INTEREST -- 1,106,926
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (2,373,401) (7,080,041)
EXTRAORDINARY ITEM - SETTLEMENT OF NOTES PAYABLE, NET OF 0 TAXES 1,527,858 1,654,639
------------ ------------
NET LOSS $ (845,543) $ (5,425,402)
============ ============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE:
Loss before extraordinary item $ (0.26) $ (3.40)
Extraordinary item 0.17 0.80
------------ ------------
Net loss per common share $ (0.09) $ (2.60)
============ ============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 9,053,963 2,083,525
============ ============
The accompanying notes are an integral part of these financial statements.
F-31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Cash Flows
(Unaudited)
FOR THE QUARTER ENDED SEPTEMBER 30,
-----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (171,380) $(1,058,581)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES -- --
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit 180,000 95,000
Payment of note payable -- --
Net proceeds from issuance of common and preferred stock -- 934,642
Capital lease payments -- --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 180,000 1,029,642
----------- -----------
Net increase (decrease) in cash 8,620 (28,939)
Cash and cash equivalents, beginning of period 8,810 166,699
----------- -----------
Cash and cash equivalents, end of period $ 17,430 $ 137,760
=========== ===========
SUPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Common stock issued upon conversion of debt $ 146,554 --
Common stock issued upon extinguishment of debt -- $ 76,578
Common stock issued upon purchase of equipment -- $ 50,000
Common stock issued upon rental discount -- $ 490,000
The accompanying notes are an integral part of these financial statements.
F-32
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COUNTRY STAR RESTAURANTS, INC.
Condensed Statements of Cash Flows
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $(1,333,415) $(3,782,261)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES -- (10,445)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 1,432,000 595,000
Payment of note payable (1,300,000) --
Net proceeds from issuance of common and preferred stock -- 2,926,498
Capital lease payments -- (540,237)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 132,000 2,981,261
----------- -----------
Net decrease in cash (1,201,415) (811,445)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,218,845 949,205
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,430 $ 137,760
=========== ===========
SUPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Common stock issued upon conversion of debt $ 296,554 --
Common stock issued upon extinguishment of debt $ 167,500 $ 76,578
Common stock issued upon purchase of leased equipment -- $ 447,462
Embedded interest relating to convertible debt $ 313,000 $ 2,001,726
Common stock issued upon purchase of equipment -- $ 50,000
Common stock issued upon rental discount -- $ 490,000
The accompanying notes are an integral part of these financial statements.
F-33
</TABLE>
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Condensed Financial Statements
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed 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 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, 1997. Company management believes that the
disclosures are sufficient for interim financial reporting
purposes.
NOTE B - EMBEDDED INTEREST EXPENSE
Under the credit agreement, amounts advanced may be converted
to common stock at the lesser of (i) $13.30, or (ii) 80% of
the average closing bid price of the common stock for the five
consecutive trading days preceding the date of conversion.
Accordingly, the Company recorded embedded interest expense
for advances made under the line of credit. For the six months
ended June 30, 1998, the Company recorded $313,000 of net
embedded interest expense relating to these advances.
The board of directors amended the conversion features on July
27, 1998 so that the line of credit may be converted to common
stock at the lesser of (i) $13.30 per share, or (ii) the
closing bid price of the common stock on the date prior to the
date of conversion.
(continued)
F-34
<PAGE>
COUNTRY STAR RESTAURANTS, INC.
Notes to Condensed Financial Statements-Continued
(Unaudited)
NOTE C - EXTRAORDINARY ITEM
During the first quarter of 1998, the Company recorded an
extraordinary gain of $1.53 million on the extinguishment of
its $2,995,358 note payable to Cameron Capital.
Under the terms of the Settlement Agreement dated February 18,
1998, Cameron agreed to dismiss its legal action against the
Company and to accept as payment in full of its unconverted
debt $1.3 million cash and 670 thousand shares of the
Company's common stock with a market value of $167,500.
Cameron does not have any registration rights with respect to
the common stock, but is eligible to resell certain amounts
immediately pursuant to the provisions of Rule 144 under the
Securities Act of 1933.
NOTE D - YEAR 2K DISCLOSURE
The Company is working to resolve the potential impact of the
year 2000 on the ability of the Company's computerized
information systems to accurately process information that may
be date-sensitive. The Company has one program that recognizes
a date using "00" as the year 1900 rather than the year 2000
that could result in errors or system failures. The Company
has not completed its assessment, but currently believes that
costs of addressing this issue will not have a material
adverse impact on the Company's financial position.
F-35
<PAGE>
- - ---------------------------------------- -----------------------------------
No dealer, salesman or other person is
authorized to give any information or to
make any representations not contained
in this Prospectus, with regard to the _____ Shares of Common
offering made hereby. This Prospectus
does not constitute an offer to sell any
of the securities offered hereby in any
jurisdiction where, or to any person to
whom, it unlawful to make such an offer. COUNTRY STAR RESTAURANTS, INC.
Neither the delivery of this Prospectus
nor any sale made hereunder shall, under
any circumstances, create an implication
that there has been no change in the
information set forth herein or in the
business of the Company since the date
hereof.
TABLE OF CONTENTS
Available Information . . . . . . 4
Prospectus Summary. . . . . . . . 5
Summary Financial Data. . . . . . 9
Risk Factors. . . . . . . . . . . 11
Price Range of Securities . . . . 18 ---------------
Dividends . . . . . . . . . . . . 19 PROSPECTUS
Managements's Discussion and ---------------
Analysis of Financial Condition
and Results of Operations . . . 20
Business. . . . . . . . . . . . . 38
Properties. . . . . . . . . . . . 49
Legal Proceedings . . . . . . . . 49
Management. . . . . . . . . . . . 52
Executive Compensation. . . . . . 53
Principal Stockholders. . . . . . 57
Certain Transactions. . . . . . . 58
Description of Capital Stock. . . 62
Selling Stockholders and Plan
of Distribution. . . . . . . . . 65
Legal Matters . . . . . . . . . . 70 Nobember __, 1998
Experts . . . . . . . . . . . . . 70
Financial Statements. . . . . . . F-1
- - ---------------------------------------- -----------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit a director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following: (i) breaches of the
directors' duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not made in good faith or which involve intentional misconduct or
knowing violations of law; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of the Delaware General Corporation Law; or
(iv) any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the ability of
the corporation or its stockholders to obtain injunction relief, specific
performance or other equitable relief against directors.
The Registrant's Certificate of Incorporation and the Registrant's
By-Laws provide that all persons who the Registrant is empowered to indemnify
pursuant to the provisions of Section 145 of the General Corporation Law of the
State of Delaware (or any similar provision or provisions of applicable law at
the time in effect), shall be indemnified by the Registrant to the full extent
permitted thereby. The foregoing right of indemnification shall not be deemed to
be exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
Article VII of the Amended By-Laws of the Company which is set forth
below in its entirety, provides for indemnification of officers, directors,
employees and agents substantially to the extent permitted under the Delaware
General Corporation Law.
II-1
<PAGE>
Article VII of the Amended By-Laws provides as follows:
"ARTICLE VII"
INDEMNIFICATION
The Corporation shall (a) indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit, (b) indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was a director or officer of the Corporation,
or served at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any such action, suit or proceeding, in each case to the fullest extent
permissible under subsections (a) through (f) of Section 145 of the General
Corporation Law of the State of Delaware or the indemnification provisions of
any successor statute and (c) advance reasonable and necessary expenses in
connection with such actions or suits, and not seek reimbursement of such
expenses unless there is a specific determination that the officer or director
is not entitled to such indemnification. The foregoing right of indemnification
shall in no way be exclusive of any other rights of indemnification to which any
such persons may be entitled, under any by-law, agreement, vote of stockholders
or disinterested directors or otherwise, and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Insofar as indemnification for liabilities under the Securities Act of
1933, as amended (the "Securities Act") may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
II-2
<PAGE>
ITEM 25. OTHER EXPENSES AND ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
commissions) are as follows:
Securities and Exchange Commission
registration fee $ 1,074.18
Printing and engraving expenses *
Legal fees and expenses *
Accounting fees and expenses *
Blue sky fees and expenses (including
legal fees) *
Transfer agent and registrar fees
and expenses *
Miscellaneous *
----------
Total $
==========
- - --------------
To be filed by amendment.
II-3
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Since April 1995, the Registrant has issued securities without
registration under the Securities Act in the following transactions (in each
case giving retroactive effect to the subsequent reverse stock split):
On July 28, 1995, the Company completed an interim bridge financing and
sold 37 units (the "Units") to non-affiliated, accredited investors, each Unit
consisting of (i) a $50,000, 6% promissory note due the earlier of twelve (12)
months from the date of issuance or the Company's receipt of at least $5,000,000
in gross proceeds from a public or private sale of its securities, a joint
venture or licensing agreement, (ii) 5,000 shares of Common Stock, and (iii)
3,000 warrants. The net proceeds from the Bridge Financing 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.
On February 12, 1996, the Company sold 24,190 shares of Common Stock to
Dan Rubin, an individual, and Roy B. Rubin, M.D., P.C., M.P.P.P., a pension fund
(the "Pension Fund") for an aggregate purchase price of $635,000.
On April 10, 1996, the Company sold 10,000 shares of Common Stock and
50,000 Warrants to Mr. Rex Licklider for an aggregate purchase price of
$300,000. On April 10, 1996, the Company sold 16,666 shares of Common Stock and
83,334 Warrants to the Licklider Living Trust Dated 5/2/86 (the "Trust") for an
aggregate purchase price of $500,000.
On April 10, 1996, the Company also sold (i) 10,000 shares of Common
Stock and 50,000 Warrants to Bruce Sokoloff for an aggregate purchase price of
$300,000, (ii) 13,333 shares of Common Stock and 66,667 Warrants to Wisdom Tree
Associates for an aggregate purchase price of $400,000 and (iii) 25,000 shares
of Common Stock and 125,000 Warrants to Dan Rubin for an aggregate purchase
price of $750,000.
On July 10, 1996, the Company sold 11,428 shares of Common Stock and
85,715 Warrants to Bruce Sokoloff for an aggregate purchase price of $400,000.
On August 28, 1996, the Company sold 17,037 shares of Series A
Preferred Stock to Dan Rubin, an individual, Robert Lyszczarz, an individual and
Roy B. Rubin, M.D., P.C., M.P.P.P., a pension fund (the "Pension Fund") for an
aggregate purchase price of $2,280,000. In connection with the transaction, the
Company issued an aggregate of 306,667 warrants.
On September 16, 1996, the Company sold an aggregate of 10,000 shares
of Common Stock and 100,000 Warrants to the Alan &
II-4
<PAGE>
Coralie Goldsmith Trust and the Alan J. Goldsmith Accountancy Corp. Defined
Benefit Pension Trust for an aggregate purchase price of $200,000.
On October 10, 1996 the Company sold 4,000 shares of newly issued 7%
Convertible Preferred Stock, par value $.001 per share (the "Series B Preferred
Stock"). The sale was made to Cameron Capital Ltd., a foreign institutional
investor, for an aggregate purchase price of $4,000,000, or $1,000 per share. On
February 12, 1997, all of the outstanding shares of Series B Convertible
Preferred Stock was exchanged by the holder with the Company for a Convertible
Term Note in the principal amount of $4,000,000.
On February 12, 1997, all of the outstanding shares of Series B
Convertible Preferred Stock were exchanged by the holder, Cameron Capital Ltd.
for a Convertible Term Note in the principal amount of $4,000,000.
On May 7, 1997, the Company sold pursuant to Regulation S under the
Securities Act of 1933, as amended (the "Act") 5% Convertible Debentures for
$700,000 to institutional investors abroad, convertible 41 days after closing at
a price equal to 70% of the average closing bid price during the 5 days
preceding the conversion date.
On May 28, 1997, the Company sold pursuant to Regulation S under the
Act 5% Convertible Debentures for $500,000 to institutional investors abroad,
convertible 41 days after closing at a price equal to 70% of the average closing
bid price during the 5 days preceding the conversion date.
On June 30, 1997, the Company issued warrants to acquire 150,000 shares
of its Common Stock at an exercise price of $2.10 per share to a private
investor. The warrants were exercised immediately and the Company issued 150,000
shares of its Common Stock to the private investors. The Company received net
proceeds from the exercise of the warrants of $315,000. No commissions or fees
were paid by the Company.
During July/August 1997, the Company sold in a private offering an
aggregate of 357,857 shares of its Common Stock at a price of $2.80 per share,
for a total offering price of $1,002,000. Josephthal Lyon & Ross Inc. acted as
placement agent and received commissions of approximately $107,000. The net
proceeds received by the Company were approximately $895,000.
During October, 1997 the Company issued 1,045,743 shares of Common
Stock to investors in consideration for a full release of alleged claims arising
out of securities sold to them by the Company from May, 1997 through August,
1997. These claims alleged that the securities sold had been unfairly priced and
the additional shares were issued to give the investors an overall
II-5
<PAGE>
price that reflected the market value of the Common Stock at the time of
settlement.
During December, 1997, the Company issued 225,000 shares of Common
Stock to Cirrus LLC in partial consideration for the Company's purchase of
Cirrus' interest in the limited liability company which owned the Company's
restaurant in Las Vegas.
During February, 1998, the Company issued 670,000 shares of Common
Stock to Cameron Capital Ltd. under a Settlement Agreement relating to
settlement of the Company's long term debt obligation to Cameron Capital Ltd..
The sales and issuances of the Common Stock and warrants described
above were deemed to be exempt from registration under the Securities Act in
reliance upon Section 4(2) thereof as transactions not involving a public
offering or pursuant to Regulation S. The purchasers in such private offerings
represented their intention to acquire the securities for investment only and
not with a view to the distribution thereof and appropriate legends were affixed
to the stock certificates issued in such transactions.
II-6
<PAGE>
ITEM 27. EXHIBITS.
EXHIBIT NO.
(1) 3.1 Certificate of Incorporation of the Company
(2) 3.2 Amendment to Certificate of Incorporation
(3) 3.3 Amendment to Certificate of Incorporation dated June 27, 1997
(authorization of additional shares)
(3) 3.4 Amendment to Certificate of Incorporation dated February 10,
1998 (reverse split)
(4) 3.5 Amended By-Laws of the Company
(3) 10.1 Lease between Copperfield Investment and Development Company
and the Company relating to office space at 4929 Wilshire
Boulevard, Los Angeles, California, dated May 28, 1997
(5) 10.2 (a) Lease Agreement by and between MCA Development Company and
Roma, LA, Inc., dated May 27, 1987
(b) First Amendment to Lease dated May 27, 1987, by and
between MCA Development Company and Roma California, Inc., as
successor-in-interest to Roma LA, Inc., dated July 28, 1998
(c) Assignment and Assumption of Lease by and between Roma
California, Inc., a successor-in-interest to Roma LA, Inc.,
Romacorp., Inc., as successor-in-interest to Roma Corporation
and the Company, dated January 31, 1994
(d) Consent to Lease Assignment by and among MCA Development
Company, Roma California, Inc., Roma LA, Inc., Roma
Corporation and the Company, dated February 1, 1994
(6) 10.3 Lease by and between Four Seas Investment Company, M.D. Hope
Close Trust R-21 and the Company with respect to the Las Vegas
restaurant, dated February 15, 1995
(7) 10.4 Agreement regarding new lease for Las Vegas restaurant between
Restaurant Ventures of Nevada, Inc. and Country Star
Restaurants, Inc., dated December 30, 1997
(7) 10.5 LLC Interest Purchase Agreement and Assignment between the
Company and Mirage Resorts, Inc., dated December 30, 1997
II-7
<PAGE>
(7) 10.6 Settlement Agreement by and between 3030 Peachtree, L.L.C. and
the Company, dated December 23, 1997
(8) 10.7 Secured Loan Agreement among Dan Rubin, Cameron Capital Ltd.
and the Company, dated February 12, 1997
(3) 10.8 Settlement Agreement between Cameron Capital Ltd. and the
Company, dated February 18, 1998
(3) 10.9 Refinancing Agreement between Roy B. Rubin, M.D., P.C.,
M.P.P.P. and the Company, dated February 18, 1998
(9) 11 Computation of Earnings Per Share
(9) 23.1 Consent of Cacciamatta Accountancy Corporation
(9) 23.2 Consent of Wolf Haldenstein Adler Freeman & Herz LLP
- - ----------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2, File No. 33-67526-A.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1, File No. 33-96450.
(3) Previously filed as an exhibit to the Company's Form 10-KSB dated April 15,
1998.
(4) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, File No. 333-05105.
(5) Previously filed as an exhibit to the Company's Form 10-KSB for the year
ended December 31, 1993. (filed March 30, 1994).
(6) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3, File No. 33-33393.
(7) Previously filed as an exhibit to the Company's Form 8-K dated January 20,
1998.
(8) Previously filed as an exhibit to the Company's Form 8-K dated February 12,
1997.
(9) Previously filed as an exhibit to the Company's Registration Statement on
Form SB-2, File No. 333-39761
II-8
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) include any additional or changed material information
on the plan of distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of
the securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes (1) that for the purpose
of determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
II-9
<PAGE>
Securities Act as part of this Registration Statement as of the time the
Securities and Exchange Commission declares it effective; and (2) that for the
purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
Registration Statement for the securities offered in the Registration Statement
therein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
II-10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Los Angeles, State of California on November 25, 1998.
COUNTRY STAR RESTAURANTS, INC.
By: /s/ DAN J. RUBIN
-------------------------------------
Dan J. Rubin, President
and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
Chairman of the
Board, President
Chief Executive
Officer and
/S/ DAN J. RUBIN Director November 25, 1998
- - --------------------------- --------
Dan J. Rubin
/S/ ROBERT A. NARDONE, JR. Director November 25, 1998
- - --------------------------- --------
Robert A. Nardone, Jr.
/S/ DARREN C. RICE Director November 25, 1998
- - --------------------------- --------
Darren C. Rice
