As filed with the Securities and Exchange Commission on June 13, 1997
Registration No. 333-21547
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2
to the
FORM SB-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
WESTERN COUNTRY CLUBS, INC.
(Name of small business issuer in its charter)
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<S> <C> <C>
Colorado 5813 84-1131343
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification Number)
organization)
Western Country Clubs, Inc.
1601 N. W. Expressway, Suite 1610
Oklahoma City, OK 73118
(405) 848-0996
(Address and telephone number of
principal executive offices
and principal place of business)
James E. Blacketer
Western Country Clubs, Inc.
1601 N.W. Expressway, Suite 1610
Oklahoma City, OK 73118
(405) 848-0996
(Name, address and telephone number of
agent for service) Copies of all
communications to:
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A. Thomas Tenenbaum, Esq. Maurice J. Bates, Esq.
D. Elizabeth Wills, Esq. Maurice J. Bates L.L.C.
Brenman Bromberg & Tenenbaum, P.C. 8214 Westchester Drive
Mellon Financial Center Suite 500
1775 Sherman Street, Suite 1001 Dallas, Texas 75225
Denver, Colorado 80203 (214) 692-3566
(303) 894-0234 (214) 987-2091 FAX
(303) 839-1633 FAX
Approximate date of proposed sale to public: As soon as practicable after the
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.|_|
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 delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.|_| The Registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the
Commission, acting pursuant to said section 8(a), may determine.
<PAGE>
CALCULATION OF REGISTRATION FEE
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Title of each Proposed
class of Amount Proposed maximum Amount of
securities to to be maximum aggregate registration
be registered registered offering price (1)offering price (1) fee
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Series A Preferred Stock (2) 460,000 $ 12.00 $ 5,520,000 $1,673
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Common Stock Underlying Series A 2,300,000 0 0 0
Preferred Stock
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Series A Common Stock Purchase
Warrants (2) 1,380,000 .125 172,500 52
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Common Stock Underlying Warrants (3) 1,380,000 6.00 8,280,000 2,509
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Common Stock (4) 350,000 4.00 1,400,000 424
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Underwriters' Warrants (5) 100 100 Nil
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Series A Preferred Stock included in 40,000 0 0 0
Underwriters' Warrants
- ----------------------------------------------------------------------------------------------------------
Series A Warrants included in
Underwriters' Warrants 120,000 0 0 0
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Common Stock Underlying Series
A Warrants (3) 120,000 .15 18,000 5
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Total: $15,390,600 $4,664
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rules 457(a) and (g).
(2) Includes 60,000 shares of Series A Preferred Stock and 180,000 Warrants
that may be issued upon exercise of the Underwriters' over- allotment
option.
(3) Pursuant to Rule 416, there are also being registered such additional
securities as may become issuable pursuant to the anti-dilution provisions
of the Warrants.
(4) Shares registered on behalf of Selling Securityholders.
(5) Warrants to purchase 40,000 shares of Series A Preferred Stock and 100,000
Warrants.
(6) A filing fee of $4,237 was paid with the filing of this Registration
Statement. An additional fee of $426 is being paid with the filing of
Amendement No. 1
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Cross Reference Sheet
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Form SB-2
Item No. Sections in Prospectus
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1 Front of Registration Statement and Outside Front
Cover of Prospectus................................................................Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus.........................................................................Inside Front Cover Pages (i)(ii);
Table of Contents
3 Summary Information and Risk Factors...............................................Prospectus Summary; Risk Factors
4 Use of Proceeds....................................................................Prospectus Summary; Use of Proceeds
5 Determination of Offering Price....................................................Cover Page; Underwriting
6 Dilution...........................................................................Not Applicable
7 Selling Security Holders...........................................................Not Applicable
8 Plan of Distribution...............................................................Prospectus Summary; Underwriting
9 Legal Proceedings..................................................................Business
10 Directors, Executive Officers, Promoters and
Control Persons....................................................................Management - Directors and Executive Officers
11 Security Ownership of Certain Beneficial Owners
and Management.....................................................................Principal Shareholders
12 Description of Securities..........................................................Description of Securities; Dividend Policy
13 Interest of Named Experts and Counsel..............................................Experts
14 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities.....................................Statement as to Indemnification
15 Organization within Last Five Years................................................Business; Certain Relationships and Related
Transactions
16 Description of Business............................................................Prospectus Summary; Risk Factors; Business
17 Management's Discussion and Analysis or Plan of
Operation..........................................................................Management's Discussion and Analysis
18 Description of Property............................................................Business
19 Certain Relationships and Related Transactions.....................................Certain Relationships and Related Transactions
<PAGE>
20 Market for Common Equity and Related
Stockholder Matters................................................................Market for Common Stock
21 Executive Compensation.............................................................Management - Executive Compensation
22 Financial Statements...............................................................Index to Financial Statements
23 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.............................................Business
24 Indemnification of Directors and Officers..........................................Executive Compensation - Limitations on
Directors and Officers Liability
25 Other Expenses of Issuance and Distribution........................................Other Expenses of Issuance and Distribution
26 Recent Sales of Unregistered Securities............................................Recent Sales of Unregistered Securities
27 Exhibits...........................................................................Exhibits
28 Undertakings.......................................................................Undertakings
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 13, 1997
PROSPECTUS
WESTERN COUNTRY CLUBS, INC.
400,000 Shares of Series A Cumulative Convertible Redeemable Preferred Stock and
1,200,000 Series A Redeemable Common Stock Purchase Warrants
This Prospectus relates to the offering (the "Offering") by Western
Country Clubs, Inc. (the "Company") of 400,000 shares of Series A Cumulative
Convertible Redeemable Preferred Stock ("Series A Preferred Stock") and
1,200,000 Series A Redeemable Common Stock Purchase Warrants (the "Warrants").
The Series A Preferred Stock and Warrants may be purchased separately and will
be transferable separately upon issuance.
The initial public offering price of the Series A Preferred Stock and
the Warrants and the initial exercise price and other terms of the Warrants have
been arbitrarily determined by negotiation between the Company and National
Securities Corporation (the "Representative"), as representative of the
participating underwriters (the "Underwriters"). It is anticipated that the
offering price of the Series A Preferred Stock will be $12.00 per share and the
offering price of the Warrants will be $0.125.
Each share of Series A Preferred Stock can be converted by the Company
into Common Stock after ___, 1998, carries a cumulative 10% dividend rate and is
redeemable by the Company under certain conditions. Each Warrant entitles the
registered holder thereof to purchase one share of Common Stock at an exercise
price of $ 1.50 per share, subject to adjustment in certain events, at any time
prior to _________, 199_. The Warrants are subject to redemption by the Company
at $.05 per Warrant, at any time commencing ______, 1998 (twelve months from the
date of this Prospectus) and prior to their expiration, on 30 days' prior
written notice to the holders of Warrants, provided that the daily trading price
per share (as defined on page 42) of the Company's Common Stock has been as
least $ 7.00 for a period of at least ten consecutive trading days ending within
10 days prior to the date upon which the notice of redemption is given. The
Warrants will be exercisable until the close of the business day preceding the
date fixed for redemption, if any. See Description of Securities - Series A
Preferred Stock and Series A Redeemable Warrants.
Prior to this offering, there has been no public market for the Series A
Preferred Stock or Warrants. The Series A Preferred Stock and the Warrants have
been approved for quotation and trading on the NASDAQ SmallCap Market under the
trading symbols "WCCIP" and "WCCIW." The Company's Common Stock is traded on the
NASDAQ SmallCap Market under the symbol "WCCI." On May 14, 1997, the closing
high bid price for the Common Stock on NASDAQ was $1.375.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. SEE RISK
FACTORS, COMMENCING ON PAGE 7 OF THIS PROSPECTUS.
After completion of this Offering, the Company will amend this
Prospectus to permit certain of its security holders to publicly offer and sell
up to 350,000 shares of Common Stock. See Shares Eligible for Future Sale.
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.
Underwriting Discounts
Price to Public and Commissions(1) Proceeds to Company(2)
Per Share............. $12.00 $1.20 $10.80
Per Warrant........... $0.125 $0.0125 $0.1125
Total(3).............. $4,950,000 $495,000 $4,455,000
1) The Company has also agreed to pay the Representative a non-accountable
expense allowance equal to 3% of the gross proceeds of this Offering and to
issue to the Representative and its designees, for a nominal consideration,
warrants to purchase 40,000 shares of Series A Preferred Stock and 120,000
Warrants (collectively, "the Underwriters' Warrants"). The Underwriters'
Warrants will be exercisable at a price equal to 120% of the Price to the
Public of the Preferred Stock and the Warrants. Subject to certain
limitations, upon exercise of each Warrant which occurs after one year from
the date of this Prospectus, the Company has also agreed to pay the
Representative a commission equal to 10% of the exercise price of the
Warrants. In addition, the Company has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act.
See Underwriting.
2) Before deducting expenses of the Offering payable by the Company estimated
at $230,000, which excludes the non-accountable expense allowance .
3) The Company has granted to the Underwriters a 45-day option to purchase up
to 60,000 additional shares of Series A Preferred Stock and 180,000
additional Warrants from the Company at the Price to Public, less
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $5,692,500, $569,250
and $5,123,250, respectively. See Underwriting.
It is expected that the delivery of the Series A Preferred Stock and
Warrants will be made at the offices of the Representative on or about , 1997.
NATIONAL SECURITIES CORPORATION.
The date of this Prospectus is , 1997.
THIS LEGEND APPEARS ON THE LEFT SIDE MARGIN OF THE PROSPECTUS
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 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.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act
of 1933, as amended with respect to the securities offered hereby with the
United States Securities and Exchange Commission ("SEC"), 450 Fifth Street,
N.W., Washington, D.C. 20549. This Prospectus, which is a part of the
Registration Statement, does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including all exhibits
and schedules therein, which may be examined at the SEC's Washington, D.C.
office, 450 Fifth Street, N.W., Washington, D.C. 20549 without charge, or copies
of which may be obtained from the SEC upon request and payment of the prescribed
fee. Statements made in this Prospectus as to the contents of any contract,
agreement or document are summarized herein, and in each instance reference is
made to the copy of such contract, agreement or other document filed as an
exhibit to the Registration Statement, and each such summary is qualified in its
entirety by such reference. The Company is a reporting company under the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports and other information with the SEC. All of such reports and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at the address set forth above in Washington, D.C. and at
regional offices of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New
York10048. In addition, the Company provides its shareholders with annual
reports, including audited financial statements, unaudited semi-annual reports
and such other reports as the Company may determine. The SEC maintains a Web
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ significantly
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.
Unless otherwise indicated, the information in this Prospectus assumes
that the Underwriters' over-allotment option is not exercised, and does not give
effect to the exercise of the Warrants, including the Underwriters' Warrants.
The Company
The Company currently operates three "country-western" theme nightclubs
under the name InCahoots located in Indianapolis, Indiana (the "Indy Club"), St.
Louis, Missouri (the "St. Louis Club") and Wichita, Kansas (the "Wichita
Club")(collectively, the "Clubs"). Each Club features live entertainment,
dancing, bar and food in a country-western atmosphere. The Clubs are large,
ranging in size from 30,000 to 50,000 square feet. Annual gross revenues per
Club range from$2.0 million to $3.4 million based on 1996 results.
In September 1996, Red River Concepts, Inc. ("Red River") entered into
an agreement to purchase 1,300,000 shares of the Company's Common Stock from Mr.
Troy Lowrie, the Company's then President, director and largest shareholder.
This sale resulted in a change of control of the Company, and new officers and
directors. New management of the Company introduced substantial changes in the
Company's plan of operations and management strategies, replacing much of the
Club-level management with new, experienced managers, instituting management
training procedures, implementing a cost management system which includes daily
unit-level accounting and reporting, improving the sound, light and video
systems, increasing and redirecting radio buys within the local markets, and
implementing new advertising and in-store promotions. These changes reflect
current management's belief that long-term strategies involving greater
investment in personnel and physical facilities will ultimately produce superior
financial performance.
With the proceeds of this Offering, the Company intends to expand its
network of clubs, either through acquisition of existing clubs or by building
new clubs. Potential future locations include Houston, Texas; Louisville,
Kentucky; Dallas, Texas; Oklahoma City, Oklahoma; Tulsa, Oklahoma and Tampa Bay,
Florida. Decisions as to potential club locations are highly influenced by site
availability and price, zoning, competition and demographic factors. See
Business
The Company's principal corporate offices are presently located at
1601N.W. Expressway, Suite 1610, Oklahoma City, Oklahoma 73118 and its telephone
number is (405) 848-0996.
3
<PAGE>
THE OFFERING
Securities Offered....................400,000 shares of Series A Preferred
Stock and 1,200,000 Warrants. The Common
Stock and the Warrants are separately
tradeable and transferable.
See Description of Securities and
Underwriting.
Series A Preferred Stock..............Each share of Series A Preferred Stock is
convertible at the option of the Company
after ____, 1998 into shares of Common
Stock quarterly at the average closing
bid price of the Common Stock for the five
days immediately preceding the close of
the quarter, less a 20% discount, carries
a cumulative 10% dividend rate and is
redeemable by the Company under certain
circumstances. See Description of
Securities - Series A Convertible
Redeemable Preferred Stock.
Warrants..............................Each Warrant entitles the holder to
purchase one share of Common Stock at
$ 1.50 per share, subject to adjustment
in certain circumstances and is
redeemable by the Company at a price of
$.05 per Warrant at any time after 12
months from the date of this Prospectus
under certain circumstances. See
Description of Securities - Series A
Redeemable Common Stock Purchase Warrants.
Offering..............................Prices $12.00 per share of Series A
Preferred Stock and $.125 per
Warrant.
Common Stock Outstanding(1)...........3,634,721 shares
Series A Preferred Stock to
be Outstanding after the Offering.....400,000 shares (460,000 shares if the
over-allotment option is exercised)
Warrants to be Outstanding
after the Offering 1,200,000 Warrants (1,380,000 if the
over-allotment option is exercised)
Expiration Date of Warrants _______, 2002 (five
years after the date of this
Prospectus.)
Estimated net proceeds
to the Company(2) $4,076,500
Use of Proceeds The Company intends to
use the net proceeds of this
Offering to retire existing debt,
remodel its existing Clubs, develop
and acquire additional clubs and to
increase working capital. See Use of
Proceeds and Business.
Risk Factors An investment in the securities
offered by this Prospectus involves
a high degree of risk. See Risk
Factors and Dilution.
NASDAQ Symbols(3) Common Stock: WCCI
Series A Preferred Stock: WCCIP (Proposed)
Warrants: WCCIW (Proposed)
4
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(1) Does not include: (i) up to _____ shares of Common Stock (______ shares
if the over-allotment option is exercised) into which the shares of
Series A Preferred Stock may be converted; (ii) up to 1,200,000 shares
of Common Stock issuable upon exercise of the Warrants to be sold by the
Company in this Offering (1,380,000 shares if the over-allotment option
is exercised); and (iii) up to 160,000 shares of Common Stock issuable
upon the exercise of the Underwriters' Warrants.
(2) After deduction of the Underwriting Discount and expense allowance and
additional offering expenses estimated at $230,000.
(3) The continuation of quotations on NASDAQ is subject to certain
conditions. The failure to meet these conditions may prevent the
Company's securities from continuing to be quoted on NASDAQ. Failure to
maintain continued quotations on NASDAQ may have an adverse effect on
the market for the Company's securities. See Risk Factors.
Other Securities Being Registered
As a result of agreements with third parties, the Company has included
in the Registration Statement of which this Prospectus is a part an additional
350,000 shares of Common Stock for resale by certain persons. Each such person
has agreed that they will not publicly offer, sell or otherwise dispose of, any
of such shares of the Company's Common Stock for a period of six months after
the date of this Prospectus. After the completion of this Offering, the Company
will amend its Registration Statement and this Prospectus to permit such persons
to publicly offer and sell such Common Stock. See Shares Eligible for Future
Sale - Selling Security Holders.
5
<PAGE>
Summary Financial Information
The following sets forth summary income statement data for the years
ended December 31, 1996 and 1995, and summary balance sheet data at December 31,
1996 which have been derived from and should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto audited by
Gross Collins & Cress, P.C., independent auditors. The following data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and the Consolidated Financial Statements and related Notes appearing
elsewhere in this Prospectus.
The selected financial data as of and for the three months ended March
31, 1997 and 1996, are derived from the unaudited financial statements of the
Company, which, in the opinion of the Company reflected all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the results for the three months ended March 31, 1997 and 1996, which are not
necessarily indicative of the results for a full year.
Statement of Operational Data:
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Three Month Periods
Ended March 31,
Years Ended December 31, (unaudited)
1996 1995 1997 1996
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Revenues $ 7,667,685 $ 8,508,058 $ 2,104,885 2,137,728
Operating expenses $ 9,812,948 $ 8,166,747 2,173,745 1,994,047
Net income (loss) before
extraordinary items $ (1,979,176) $ (211,233) (82,044) 90,670
Net income (loss) per
common share before
extraordinary items $ (.65) $ (.07) (.02) .03
Weighted average common
shares outstanding: 3,035,079 3,030,383 3,587,525 3,085,000
</TABLE>
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Balance Sheet Data: Dec. 31, 1996 March 31, 1997 March 31, 1997
------------- -------------- --------------
(As Adjusted)(1)
<S> <C> <C> <C>
Working capital (deficit) $ (533,633) $ (541,145) 430,605
Total assets $ 4,509,126 $ 4,385,358 7,941,858
Long-term liabilities $ 555,052 $ 531,094 531,094
Stockholders' equity $ 2,076,435 $ 2,109,191 6,185,691
</TABLE>
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(1) Adjusted to give effect to the sale by the Company of the 400,000 shares of
Series A Preferred Stock at an assumed offering price of $12.00 per share
and of the 1,200,000 Warrants at $0.125 per Warrant and application of
$4,076,500 of the net proceeds.
6
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and involve a
high degree of risk. The shares of Series A Preferred Stock and Warrants should
be purchased only by persons who can afford to lose their entire investment.
Therefore, prior to making any purchase, each prospective investor should
consider very carefully the following risk factors, as well as all of the other
information set forth elsewhere in this Prospectus, including the information
contained in the financial statements.
History of Declining Revenues and Profits
The Company's operations began in April 1993 when the Indy Club opened.
The St. Louis Club opened in May 1994 and the Company purchased the Tucson Club
in November 1994. The Company acquired the Wichita Club in 1996. Historically,
the Clubs have shown significant declines in revenues and profitability. There
can be no assurance that new management will be able to reverse this trend. The
Company's operating and overhead expenses can be expected to increase
significantly as more Clubs are acquired and operated. The Company's ability to
achieve profits will depend on the revenues from the Clubs. There can be no
assurance that the Company will be able to acquire or construct additional
nightclubs, or that such additional clubs will increase the profitability of the
Company. See Business.
Lack of Significant Operating History
The Company is subject to many of the risks common to enterprises with a
limited operating history, including potential under-capitalization, limitations
with respect to personnel, financial and other resources and limited customers
and revenues. The likelihood of success of the Company must be considered in
light of the problems, expenses, and difficulties, complications and delays
frequently encountered in connection with the development and expansion of new
businesses. See Business.
Proposed Expansion; Need for Additional Financing
The Company intends to grow through the acquisition or construction of
additional clubs. The Company anticipates that its existing capital resources,
including the net proceeds from the Offering, will be adequate to satisfy its
cash requirements for the next 12 months. Thereafter, the Company will be
required to seek additional financing or curtail its expansion activities. The
Company has no current commitments or arrangements for additional financing and
there can be no assurance that additional financing will be available on
acceptable terms, if at all. The Company currently is considering locations in
Louisville, Kentucky; Houston, Texas; Dallas, Texas; Oklahoma City, Oklahoma;
Tulsa, Oklahoma; and Tampa Bay, Florida. The Company, however, does not have any
commitments for any additional nightclubs, and there can be no assurance that
new management will be successful in securing appropriate locations, facilities
and financing for any additional clubs. Accordingly, new management will have
wide discretion in the application of proceeds from this Offering. See
Management's Discussion and Analysis and Business.
No Assurance That Additional Clubs Will Be Successful
Although the Company intends to open, operate and manage additional
nightclubs, the future success of the Company will be dependent on, among other
things, market acceptance for the "country-western" nightclubs concept, the
availability of suitable nightclub sites, negotiation of acceptable lease terms,
timely development, construction or renovation of nightclubs, the hiring of
skilled management and other personnel, the general ability to successfully
manage growth (including monitoring nightclubs, controlling costs, and
maintaining effective quality controls) and the availability of adequate
financing. See Business.
Dependence on New Senior Management
The Company is substantially dependent upon the personal efforts and
abilities of its senior management. Current management is new to the Company's
operations, having replaced prior management following a change of control in
late 1996. New management's ability to improve existing operations, to acquire
new nightclubs and to achieve and maintain the Company's competitive position
depends, in large part, on its ability to implement its policies. Although the
Company's management has substantial experience in the nightclub industry, the
Company's operations may be affected by management's lack of familiarity with
historical operations, and the effect of new management's policies may not be
immediately apparent. The loss of any of the Company's senior management
personnel could adversely affect the Company. See Management.
7
<PAGE>
Government Regulation
The nightclub business is subject to extensive Federal, state and local
governmental regulations, including regulations relating to alcoholic beverages
control, public health and safety, zoning and fire codes. The failure to obtain
or retain food, liquor or other licenses would adversely affect the operations
of the nightclubs. Licenses to sell alcoholic beverages must be renewed annually
and may be suspended or revoked at any time for cause, including violation by
the Company or its employees of any law or regulation pertaining to alcoholic
beverage control, such as those regulating the minimum age of patrons or
employees, advertising, wholesale purchasing, and inventory control, handling
and storage. The Company and the nightclubs may be subject in certain states to
"dram-shop" statutes, which generally provide that a person injured by an
intoxicated person has the right to recover damages from an establishment which
wrongfully served alcoholic beverages to the intoxicated person. See Business-
Government Regulation.
Adverse Effects of Competition on the Company
The nightclub industry is highly competitive with respect to price,
service, theme, entertainment and location. There are numerous well-established
competitors in the areas in which the Clubs operate or intend to operate,
possessing substantially greater financial, marketing, personnel and other
resources than the Company. There can be no assurance that these
well-established competitors will not locate additional nightclubs in close
proximity to any of the Company's present Clubs or to proposed locations of
future clubs. In addition, the nightclub business is often affected by changes
in consumer tastes, spending habits, national, regional or local economic
conditions, population and traffic patterns. These changes could adversely
affect the Clubs, and therefore the Company. Furthermore, factors such as
inflation, labor and benefits costs and the availability of experienced managers
and hourly employees affect the service business in general and the Clubs in
particular. See Business - Competition.
Lack of Dividends on Common Stock
While payment of dividends on the Company's Common Stock is in the
discretion of the Board of Directors, there can be no assurance that dividends
can or will ever be paid. Payments of dividends are contingent upon, among other
things, future earnings, if any, and the financial condition of the Company,
capital requirements, general business conditions, and other factors which
cannot now be predicted. The Company has never paid dividends and expects that
future earnings, if any, will be used to finance growth. The Company will be
required to pay dividends on the Series A Preferred Stock at the rate of 10% per
annum before any dividends are paid on the Common Stock. See Description of
Securities.
Competing Trademark Usage; Uncertainty of Trademark Protection.
The Company's trademark, InCahoots, is used by other competitors in
other markets, including Southern California, Texas and Oklahoma. These
competing uses may require the Company to negotiate license agreements with the
competitors before using the InCahoots trademark in these markets and, in the
absence of license agreements, will preclude the Company from using the
trademarks in the markets. The Company may find it necessary to use other names
for its nightclubs to enter these markets. Management does not believe that such
limitations would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance,
however, that these limitations will not cause the Company to pay license fees
or avoid otherwise desirable markets and the limitations may complicate the
Company's marketing efforts and result in claims of trademark infringement. The
Company relies and will continue to rely on a combination of trade secret,
copyright and trademark laws, non-disclosure and other arrangements to protect
its proprietary rights. Despite the Company's efforts to protect its rights,
unauthorized parties may attempt to use the Company's trademarks or to copy or
obtain and use information that the Company regards as proprietary. There can be
no assurance that the steps taken by the Company to protect its trademarks or
proprietary information will prevent the misappropriation and the unauthorized
use of the Company's trademarks or proprietary information and such protections
may not preclude competitors from developing confusingly similar marks. See
Business - Trademarks.
Fluctuations in Operating Results
The Company's sales fluctuate seasonally. Historically, the Company's
highest sales have occurred in its fourth quarter; the lower sales tend to occur
in the second or third quarters. In addition, quarterly results are likely to be
substantially affected by the timing of new nightclub openings. Because of the
seasonality of the Company's business and the impact of new nightclub openings,
results for any quarter are not necessarily indicative of the results that maybe
achieved for a full year. See Management's Discussion and Analysis.
Limitations on Directors' and Officers' Liability
The Company's Articles of Incorporation provide that its directors shall
not be liable for monetary damages to the Company's shareholders except as
required by law. In addition, the Company's Bylaws provide indemnification to
the Company's officers and directors to the fullest extent permitted by the
Colorado Business Corporation Act. To the extent that shareholders are unable to
prevail in actions for monetary damages against the Company's directors, their
rights in this regard are limited in comparison to those where a corporation has
elected not to include such a provision in its Articles of Incorporation. In
addition, to the extent that the Company's officers and directors may seek
indemnification from the Company, it may suffer a financial loss as a result of
its obligation to pay such amounts (which may prove to be significant) to its
officers or directors.
Authorized Stock Available for Issuance by the Company
After the sale of the shares of Series A Preferred Stock and Warrants
being offered hereby, the Company will have 3,634,721 shares of Common Stock
outstanding, out of a total of 25,000,000 shares of Common Stock authorized for
issuance, and 400,000 (460,000 if the over-allotment is exercised) shares of
Series A Preferred Stock outstanding, out of a total of 10,000,000 shares of
Preferred Stock authorized for future issuance under the Company's Articles of
Incorporation. Each share of Series A Preferred Stock is convertible by the
Company after _____, 1998 into Common Stock (quarterly, based on the average
closing price of the Common Stock for the five days immediately preceding the
close of the quarter) less a twenty percent (20%) discount. The remaining shares
of Common Stock and Preferred Stock not issued or reserved for specific purposes
may be issued without any action or approval of the Company's shareholders. If
issued below the then book value for the Company's Common Stock, the issuance of
additional equity securities would be dilutive to the then shareholders.
Although there are no present plans, agreements or undertakings involving the
issuance of such shares except as disclosed in this Prospectus, any such
issuances could be used as a method of discouraging, delaying or preventing a
change in control of the Company or could dilute the public ownership of the
Company. There can be no assurance that the Company will not undertake to issue
such shares if it deems it appropriate to do so. See Description of Securities.
Restrictions on Exercise of Warrants; Possible Redemption of Warrants
Investors purchasing shares of Series A Preferred Stock and Warrants in
this Offering will not be able to exercise the Warrants unless at the time of
exercise a post-effective amendment to this Registration Statement is current or
a new registration statement registering the Common Stock issuable upon exercise
of the Warrants is effective and such shares have been registered and/or
qualified or deemed to be exempt under the securities laws of the state of
residence of the holder of the Warrants. The Company does not intend to advise
holders of the Warrants of their inability to exercise the Warrants other than
in response to a specific written inquiry to the Company. The value of the
Warrants may be greatly reduced if a current registration statement covering the
shares of Common Stock underlying the Warrants is not effective or if such
Common Stock is not registered or exempt from registration in the states in
which the holders of the Warrants reside. The Warrants are subject to redemption
by the Company on 30 days prior written notice at $.05 per share provided that
the closing bid price for the Company's Common Stock has been at least
$____(200% of the closing bid price of the Company's Common Stock on the date of
effectiveness of this Registration Statement) for at least ten consecutive
trading days ending within ten days prior to the date of the notice of
redemption. If the Warrants are redeemed, Warrantholders will lose their right
to exercise the Warrants except during such 30-day redemption period. See
Description of Securities Warrants.
<PAGE>
Shares Eligible for Future Sale
Of the 3,634,721 shares of the Company's Common Stock presently issued
and outstanding, approximately 2,234,600 shares are "restricted securities" as
that term is defined under Rule 144 promulgated under the Securities Act of
1933, as amended. Of this amount, 350,000 shares have been registered for sale
under the Registration Statement of which this Prospectus is a part, and will be
eligible for sale commencing six months after the date of this Prospectus. Sales
of substantial amounts of shares by shareholders after such six month period
pursuant to this Prospectus or sales made pursuant to Rule 144 or otherwise
could adversely affect the market price of the Company's securities and make it
more difficult for the Company to sell equity securities in the future at a time
and price which it deems appropriate. The Company is unable to predict the
effect that sales made after such six month period or Rule 144 or otherwise may
have on the then prevailing market price of the Common Stock. Nonetheless, the
possibility exists that the sale of these shares may have a depressive effect on
the prices of the Company's Common Stock, Series A Preferred Stock and Warrants.
See Description of Securities.
No Prior Public Market for Series A Preferred Stock and Warrants; Possible
Volatility of Price of Shares of Common Stock
The prices of securities of publicly traded corporations tend to
fluctuate widely. It can be expected, therefore, that if and when trading
commences in the Company's Series A Preferred Stock and Warrants, there may be
wide fluctuations in price. There has been no prior public market for the Series
A Preferred Stock or Warrants and despite the present listing of the Company's
Common Stock on NASDAQ, there is no assurance that a market will develop in the
Series A Preferred Stock and/or Warrants or be sustained. The lack of a current
market for the Series A Preferred Stock and Warrants, fluctuations in trading
interest and changes in the Company's operating results, financial condition and
prospects could have a significant impact on the market prices for the Series A
Preferred Stock and the Warrants. See Underwriting.
NASDAQ Maintenance Requirements and Effects of Possible Delisting
Although the Company's Series A Preferred Stock and Warrants have been
approved for initial listing on the NASDAQ Small-Cap Market upon notice of
issuance of such securities, the Company must continue to meet certain
maintenance requirements in order for such securities to continue to be listed
on NASDAQ. Further, the Company must meet such maintenance requirements for the
Company to be able to list the Company's Common Stock and Warrants on NASDAQ at
such time as they are separately tradeable and transferable. NASDAQ recently
announced that it intended to propose new entry and maintenance requirements for
companies traded on the NASDAQ Small-Cap Market, including increased financial
standards and requiring the companies to have at least two independent directors
and an audit committee, a majority of which are independent directors. There can
be no assurance that the Company will be able to meet such new proposals if such
new proposals are adopted. If the Company's securities are delisted from NASDAQ,
this could restrict investors' interest in the Company's securities and could
materially and adversely affect the trading market and prices for such
securities. In addition, if the Company's securities are delisted from NASDAQ,
and if the Company's net tangible assets do not exceed $2 million, and if the
Company's Common Stock and/or Series A Preferred Stock is trading for less than
$5.00 per share, then the Company's Common Stock, Series A Preferred Stock and
Warrants would each be considered a "penny stock" under Federal securities law.
Additional regulatory requirements apply to trading by broker-dealers of penny
stocks which could result in the loss of effective trading markets, if any, for
the Company's Common Stock, Series A Preferred Stock and Warrants.
Dilution and Expenses Due to Underwriters' Warrants
Upon successful completion of this Offering, the Company will sell to
the Representative and its designees, for a nominal cost, warrants to purchase
up to 40,000 shares of Series A Preferred Stock and Warrants to purchase 120,000
shares of Common Stock. The Underwriters' Warrants will be exercisable for a
four year period, commencing 12 months from the date of this Prospectus and
ending 48 months thereafter, at an exercise price equal to 120% of the public
offering price of the shares of Series A Preferred Stock and Warrants. The
Representative will be given the opportunity to profit from a rise in the market
price of the Company's Series A Preferred Stock with a resulting dilution of the
interest of stockholders. Furthermore, the Company will give "piggy-back"
registration rights with regard to the Series A Preferred Stock issuable upon
exercise of the Underwriters' Warrants and such registration could result in
additional expense to the Company. See Underwriting.
Risks Associated with Forward-Looking Statements
This Prospectus contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"), and the Company intends that such forward-looking statements be subject
to the safe harbors for such statements under such sections. The Company's
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the Company's
future economic performance. The forward-looking statements and associated risks
set forth in this Prospectus include or relate to: (i) the ability of the
Company to locate additional locations for its nightclubs and obtain liquor
licenses related thereto, (ii) the ability of the Company to generate interest
in, and attract and retain customers for its Clubs, (iii) the ability of the
Company to generate sufficient revenue to operate and expand on its base of
nightclubs, (iv) the ability of the Company to recruit and retain quality
management and (v) the ability of the Company to acquire additional profitable
operating clubs. The use in this Prospectus of such words as "believes",
"anticipates", "expects", "intends" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that the Company's Clubs will continue to
produce sufficient revenues, that there will be no material adverse competitive
change in condition in the Company's business, that profitability of the
Company's Clubs will significantly increase, that the Company's forecasts
accurately anticipate market demand, and that there will be no material adverse
change in the Company's operations, business or governmental regulation
affecting the Company or its business. The foregoing assumptions are based on
judgments with respect to, among other things, future economic, competitive and
market conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in the Risk Factors section of this Prospectus,
there are a number of other risks inherent in the Company's business and
operations which could cause the Company's operating results to vary markedly
and adversely from prior results or the results contemplated by the
forward-looking statements. Growth in absolute and relative amounts of cost of
goods sold and general and administrative expenses or the occurrence of
extraordinary events could cause actual results to vary materially from the
results contemplated by the forward-looking statements. Management decisions,
including budgeting, are subjective in many respects and periodic revisions must
be made to reflect actual conditions and business developments, the impact of
which may cause the Company to alter its marketing, capital investment and other
expenditures, which may also materially adversely affect the Company's results
of operations. In light of significant uncertainties inherent in the
forward-looking information included in this Prospectus, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved See
Management's Discussion and Analysis, Use of Proceeds and Business.
11
<PAGE>
USE OF PROCEEDS
Assuming an offering price of $12.00 per share of Series A Preferred
Stock and 1,200,000 Warrants at $.125 per Warrant, the net proceeds to the
Company after deduction of the underwriting discount (10%) and estimated
expenses of the offering, including the Representative's nonaccountable expense
allowance, will be approximately $4,054,750.
The net proceeds are anticipated to be used as follows:
Repayment of debt (1) $ 520,000
Remodeling and expansion of
existing Clubs 250,000
Development and/or acquisition
of additional clubs 2,854,750
Working capital 451,750
-------
$4,076,750
- --------------------
(1)Represents (i) note payable to a bank in the amount of $275,742, due
February 19, 1997, bearing interest at 6.36% per annum; (ii) a note payable
to the former President and largest shareholder, in the amount of $100,000,
due on demand, bearing interest at a rate of 12% per annum; (iii) a note
payable by the Wichita Club to a mortgage company in the amount of $73,501,
bearing interest at a rate of 18% per annum, due November, 1997; (iv) notes
payable to a former limited partner of InCahoots, Limited Partnership in the
aggregate amount of $10,000, bearing interest at 18% per annum, due July,
1997, including accrued interest; and (v) notes payable to limited partners
of the Wichita Club, in the aggregate amount of $42,000, bearing interest at
10% per annum, originally due in March, 1995, and subsequently extended,
including accrued interest.
The allocation of the net proceeds from this Offering set forth above
represents the Company's best estimate based on its present plans and certain
assumptions regarding general economic and industry conditions and the Company's
anticipated future revenues and expenditures. If any of these factors change,
the Company may find it necessary or advisable to reallocate some of the
proceeds from working capital to other of the above-described categories. The
Company anticipates, based on its current proposed plans and assumptions
relating to its operations, that the proceeds of this Offering, together with
projected cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for the next 12 months, although the Company may
incur operating losses and significant capital expenses during that period. The
Company's cash requirements beyond the 12 month period will depend on many
factors, including (but not limited to) the Company's cash flow from operations,
the length of time it may take for the Company to select additional locations
for nightclubs and build and open such new clubs, the market acceptance of its
Clubs, and the response of competitors who may open similar theme nightclubs in
locations in which the Company's Clubs are located. To the extent that the funds
generated by this Offering are insufficient to fund the Company's activities in
the short or long term, the Company may need to raise additional debt or equity
through public or private financing. The Company has no commitment for any such
financing, and there can be no assurance that any additional financing will be
available to the Company, when needed, and on reasonable terms. Certain
statements set forth below under this caption constitute "forward-looking
statements" within the meaning of the Reform Act. See Risk Factors - Risks
Associated With Forward-Looking Statements for additional factors relating to
such statements.
If the over-allotment option is exercised (of which there can be no
assurance), the Company will receive additional net proceeds of approximately
$668,250. Any proceeds received from the exercise of the over-allotment option
will be added to working capital.
The amounts set forth above merely indicate the proposed use of
proceeds, and the actual expenditures may vary substantially from the estimates.
None of the items set forth in the foregoing table should be considered as a
firm commitment by the Company.
To the extent that the net proceeds are not used immediately, the
Company will invest such net proceeds in short-term government securities.
12
<PAGE>
DIVIDEND POLICY
Dividends are payable on the Common Stock when, as, and if declared by
the Board of Directors out of funds legally available to pay dividends, subject
to any preferences which may be given to holders of preferred stock. The Company
has paid no cash dividends on the Common Stock to date and it does not
anticipate payment of cash dividends the Common Stock in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 and as adjusted, to give effect to (i) the sale of the 400,000
Shares of Series A Preferred Stock at a price of $ 12.00 per share and 1,200,000
Warrants at $ .125 per Warrant and the application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
March 31, 1997
Pro Forma
Actual As Adjusted
------ -----------
<S> <C> <C>
Long-term debt:
Long-term debt not of
current maturities $ 531,094 $ 531,094
------------------ --------- -------
Shareholders' equity
Preferred Stock, $.10 par value
10,000,00 shares authorized,
no shares issued and outstanding
and 400,000 shares issued and
outstanding, as adjusted - 40,000
Common Stock, $.01 par value,
25,000,000 shares authorized,
3,519,921 shares issued
and outstanding 36,347 36,347
Additional Paid-In-Capital 4,314,739 8,351,239
Retained Earnings (Deficit) (2,241,895) (2,241,895)
---------- ----------
Total stockholders' equity 2,109,191 6,185,691
--------- ---------
Total capitalization $ 2,640,285 $6,716,785
============= ==========
</TABLE>
14
<PAGE>
MARKET FOR COMMON STOCK
The Company's Common Stock was approved for listing on the NASDAQ
SmallCap MarketSM, effective May 18, 1994 under the symbol "WCCI." Prior to
listing on NASDAQ, the Company's Common Stock had briefly traded in the pink
sheets.
The range of high and low bid quotations for the Company's Common Stock
set forth below were obtained from the National Quotation Bureau. The volume of
trading in the Company's Common Stock has been limited and the bid and ask
prices as reported may not be indicative of the value of the Common Stock or the
existence of an active trading market. These over-the-counter market quotations
reflect inter-dealer prices without retail markup, markdown or commissions and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
1995 Fiscal Year High Bid Low Bid
- ---------------- -------- -------
<S> <C> <C>
First Quarter $ 6.00 $ 5.50
Second Quarter. $ 6.125 $ 5.875
Third Quarter $ 6.125 $ 5.50
Fourth Quarter $ 6.125 $ 5.125
1996 Fiscal Year
- ----------------
First Quarter $ 5.875 $ 3.75
Second Quarter $ 5.25 $ 3.50
Third Quarter $ 4.625 $ 3.25
Fourth Quarter $ 3.75 $ 2.00
1997 Fiscal Year
- ----------------
First Quarter $ 2.25 $ 1.375
Second Quarter (through May 14) $ 1.375 $ 1.125
</TABLE>
On May 14, 1997, the last reported bid and asked prices for the Common
Stock were $1.125 and $1.375, respectively.
The number of record holders of the Common Stock on May 14, 1997 was 83.
15
<PAGE>
UNAUDITED PRO FORMA INFORMATION
Entertainment Wichita, Inc. ("EWI") is the general partner of In
Cahoots, Limited Partnership ("In Cahoots"). Through September 30, 1996, EWI
owned a 1% interest in the profits and losses of In Cahoots. On October 1, 1996,
limited partners of In Cahoots owning an aggregate 79% limited partnership
interest, exchanged these partnership interests for an aggregate of 36,800
shares of common stock of EWI and the assumption of $150,000 of debt related to
a previous acquisition of limited partnership interests by another party.
On December 16, 1996,the Company and EWI entered into an agreement and
plan of merger whereby EWI would become a 100% subsidiary of the Company. On
December 16, 1996, the Company issued 400,000 shares of its common stock and
assumed $150,000 of notes owed to former limited partners of In Cahoots in
exchange for all of the outstanding common shares of EWI.
The exchange of partnership interests of In Cahoots for shares of common
stock of EWI and the merger of the Company with EWI have been treated as
transactions between entities under common control and, therefore, the
consolidated assets and liabilities of EWI are recorded at historical cost. The
operations of EWI and In Cahoots are included in the consolidated statement of
income beginning October 1, 1996, the first date that common control existed
between them and the Company.
The following unaudited pro forma information presents the consolidated
results of operations as if the acquisitions had occurred at the beginning of
the period presented and do not purport to be indicative of what would have
occurred had the acquisitions been made as of that date or of results which may
occur in the future.
16
<PAGE>
WESTERN COUNTRY CLUBS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
EWI
Pro Forma
for the Nine
Months Ended
September 30,
Western 1996 Pro Forma
Historical (Unaudited) Adjustments Pro Forma
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Beverage and food sales $4,961,467 $957,951 $ - $5,919,418
Admission fees 2,312,992 456,636 - 2,769,628
Other revenues 393,226 35,934 - 429,160
----------- ------------ ----------- -----------
TOTAL REVENUES 7,667,685 1,450,521 - 9,118,206
----------- ------------ ----------- -----------
COSTS AND EXPENSES
Cost of products and services 2,488,218 445,184 - 2,933,402
Depreciation 439,802 38,363 - 478,165
Amortization 197,004 - 197,004
Interest 135,630 25,681 - 161,311
General and administrative expense 4,832,476 690,256 - 5,522,732
Impairment of long-lived assets 1,719,818 - - 1,719,818
Consulting fees, related parties - 73,685 - 73,685
Rent, related party - 112,500 - 112,500
----------- ------------ ----------- -----------
TOTAL COSTS AND EXPENSES 9,812,948 1,385,669 - 11,198,617
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, OTHER
PARTNERS' INTERESTS AND EXTRAORDINARY
ITEM (2,145,263) 64,852 - (2,080,411)
PROVISION (BENEFIT) FOR INCOME TAXES (185,605) 24,190 - (161,415)
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE OTHER PARTNERS'
INTERESTS AND EXTRAORDINARY ITEM (1,959,658) 40,662 - (1,918,996)
OTHER PARTNERS' INTERESTS IN NET INCOME
OF CONSOLIDATED SUBSIDIARIES, net of income tax
benefit of $16,868 for Western and $4,838 for EWI (19,518) (8,132) - (27,650)
------- ------ -------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,979,176) 32,530 - (1,946,646)
========== ====== ==========
NET INCOME (LOSS) FROM CONTINUING
OPERATIONSPER COMMON SHARE $ (0.65) $ 0.08 $ - (0.57)
========== ======= ======== =====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,035,079 400,000 - 3,418,641
========= ======= =========
</TABLE>
The merger of Western and EWI was accounted for similar to the pooling of
interest method, since the two entities were under common control. The pro forma
consolidated statement of income includes twelve months of operations for EWI:
nine months of EWI as a separate entity from January 1, 1996 to September 30,
1996 and three months consolidated with Western from October 1, 1996 to December
31, 1996.
17
<PAGE>
ENTERTAINMENT WICHITA, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
In Cahoots,
Limited Pro Forma EWI
EWI Partnership Adjustments Pro Forma
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Beverage and food sales $ - $957,951 $ - $957,951
Admission fees - 456,636 - 456,636
Other revenues - 35,934 - 35,934
----------- ------------ ----------- -----------
TOTAL REVENUES - 1,450,521 - 1,450,521
----------- ------------ ----------- -----------
COSTS AND EXPENSES
Cost of products and services - 445,184 - 445,184
Depreciation - 38,363 - 38,363
Amortization
Interest - 25,681 - 25,681
General and administrative expense - 690,256 - 690,256
Consulting fees, related parties - 73,685 - 73,685
Rent, related party - 112,500 - 112,500
----------- ------------ ----------- -----------
TOTAL COSTS AND EXPENSES - 1,385,669 - 1,385,669
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES, EQUITY
IN INCOME OF PARTNERSHIP, AND OTHER
PARTNERS' INTERESTS - 64,852 - 64,852
PROVISION FOR INCOME TAXES - 24,190 - 24,190
----------- ------------ ----------- -----------
INCOME BEFORE EQUITY IN INCOME OF
PARTNERSHIP AND OTHER PARTNERS'
INTERESTS - 40,662 - 40,662
EQUITY IN INCOME OF PARTNERSHIP, net of tax
expense of $97 552 - (552) -
OTHER PARTNERS' INTERESTS IN NET INCOME
OF CONSOLIDATED SUBSIDIARY, net of income tax
benefit of $4,838 - - (8,132) (8,132)
----------- ------------ ----------- -----------
NET INCOME $552 $40,662 $(8,684) $32,530
=========== ============ =========== ===========
</TABLE>
The activity of In Cahoots, Limited Partnership for the nine months from January
1, 1996 until acquired is shown within the pro forma income statement as if the
acquisition occurred on January 1, 1996. The pro forma adjustments consist of
the elimination of the "Equity in income of partnership" and the
reclassification of the "Other partners' interests in net income of consolidated
subsidiary."
18
<PAGE>
WESTERN COUNTRY CLUBS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Western EWI Pro Forma
Historical Pro Forma Adjustments Pro Forma
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Beverage and food sales $5,878,502 $1,616,741 $ - $7,495,243
Admission fees 1,986,847 735,881 - 2,722,728
Other revenues 642,709 67,133 - 709,842
----------- ------------ ----------- -----------
TOTAL REVENUES 8,508,058 2,419,755 - 10,927,813
----------- ------------ ----------- -----------
COSTS AND EXPENSES
Cost of products and services 2,349,097 811,945 - 3,161,042
Depreciation and amortization 642,812 65,212 - 708,024
Interest 137,059 46,002 - 183,061
General and administrative expense 4,909,189 1,109,054 - 6,018,243
Consulting fees, related parties 11,400 127,005 - 138,405
Rent, related parties - 157,011 - 157,011
Merger expenses 117,190 - - 117,190
----------- ------------ ----------- -----------
TOTAL COSTS AND EXPENSES 8,166,747 2,316,229 - 10,482,976
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES, OTHER
PARTNERS' INTEREST, EQUITY IN LOSS OF
PARTNERSHIP AND WRITE OFF OF INVESTMENT
IN PARTNERSHIP 341,311 103,526 - 444,837
PROVISION FOR INCOME TAXES (133,660) (40,700) - (174,360)
----------- ------------ ----------- -----------
INCOME BEFORE OTHER PARTNERS' INTERESTS,
EQUITY IN LOSS OF PARTNERSHIP AND WRITE
OFF OF INVESTMENT IN PARTNERSHIP 207,651 62,826 - 270,477
OTHER PARTNERS' INTERESTS IN NET INCOME
OF CONSOLIDATED SUBSIDIARIES, net of income tax
benefit (20,587) (13,460) - (34,047)
EQUITY IN LOSS OF PARTNERSHIP, net of income tax
benefit (123,676) - - (123,676)
WRITE OFF OF INVESTMENT IN PARTNERSHIP, net of
income tax benefit (274,621) - - (274,621)
----------- ------------ ----------- -----------
NET INCOME (LOSS) $(211,233) $49,366 $ - $(161,867)
=========== ============ =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $(0.07) $0.12 $ - $0.05
=========== ============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,030,383 400,000 - 3,430,383
=========== ============ =========== ===========
</TABLE>
19
<PAGE>
ENTERTAINMENT WICHITA, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
In Cahoots,
Limited Pro Forma EWI
EWI Partnership Adjustments Pro Forma
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Beverage and food sales $ - $1,616,741 $ - $1,616,741
Admission fees - 735,881 - 735,881
Other revenues - 67,133 - 67,133
----------- ------------ ----------- -----------
TOTAL REVENUES - 2,419,755 - 2,419,755
----------- ------------ ----------- -----------
COSTS AND EXPENSES
Cost of products and services - 811,945 - 811,945
Depreciation and amortization - 65,212 - 65,212
Interest - 46,002 - 46,002
General and administrative expense 4,500 1,104,554 - 1,109,054
Consulting fees, related parties - 127,005 - 127,005
Rent, related party - 157,011 - 157,011
----------- ------------ ----------- -----------
TOTAL COSTS AND EXPENSES 4,500 2,311,729 - 2,316,229
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES, EQUITY
IN INCOME OF PARTNERSHIP, AND OTHER
PARTNERS' INTERESTS (4,500) 108,026 - 103,526
PROVISION FOR INCOME TAXES - 40,700 - 40,700
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE EQUITY IN INCOME
OF PARTNERSHIP AND OTHER PARTNERS'
INTERESTS (4,500) 67,326 - 62,826
EQUITY IN INCOME OF PARTNERSHIP, net of tax
expense of $142 938 - (938) -
OTHER PARTNERS' INTERESTS IN NET INCOME
OF CONSOLIDATED SUBSIDIARY, net of income tax
benefit of $4,838 - - (13,460) (13,460)
----------- ------------ ----------- -----------
NET INCOME (LOSS) $(3,562) $67,326 $(14,398) $49,366
=========== ============ =========== ===========
</TABLE>
The activity of In Cahoots, Limited Partnership for the year ended December 31,
1995 is shown within the pro forma income statement as if the acquisition
occurred on January 1, 1995. The pro forma adjustments consist of the
elimination of the "Equity in income of partnership" and the reclassification of
the "Other partners' interests in net income of consolidated subsidiary."
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the Consolidated Financial Statements and
accompanying notes thereto and the other sections contained in the Prospectus.
Special Note: Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See Risk
Factors - Risks Associated With Forward-Looking Statements for additional
factors relating to such statements.
General
The Company started in April 1993 with a country-western nightclub in
Indianapolis, Indiana (the "Indy Club"). In April 1994, the Company opened a
nightclub in St. Louis, Missouri (the "St. Louis Club"). The Company financed
these Clubs though limited partnerships in which it was the general partner. In
May 1994, the Company completed its initial public offering of securities
receiving net proceeds of approximately $1.9 million. In November 1994, the
Company purchased a nightclub in Tucson, Arizona (the "Tucson Club"). At this
time the Company also increased its ownership of the Indy Club to 80% and
acquired 100% of the St. Louis Club.
In June 1995, the Company participated as a 50% limited partner in a
partnership formed to acquire the Atlanta Club. The Company contributed $500 in
partnership capital and loaned an additional $638,822 to the partnership. Due to
continuing losses, the Company wrote off its interest in the Atlanta partnership
effective December 31, 1995. See Business - Investment in Limited Partnership.
In September 1996, Troy H. Lowrie, then President and largest
shareholder of the Company entered into a Stock Purchase Agreement whereby (i)
Red River Concepts, Inc., a Delaware corporation ("Red River"), would acquire
1,300,000 shares of Mr. Lowrie's Common Stock; (ii) new management assumed
control of the operations of the Company; and (iii) James E. Blacketer and Joe
R. Love, directors of Red River, were appointed to the Company's Board of
Directors.
The change of control occurred in October 1996.
New management immediately instituted a plan to acquire the Wichita
Club, which had been in operation since March 1994, and had continuously
generated operating profits. Management believed that the Wichita operation
would be an appropriate addition to the Company's Clubs, and would provide
additional profit contribution to the Company with minimal increase in overhead.
Subsequently, on December 16, 1996, the Company acquired the Wichita Club for
400,000 shares of the Company's Common Stock and assumption of $150,000 in debt.
The Wichita Club was owned in part by persons or entities affiliated with James
E. Blacketer and Joe R. Love directors of the Company. See Certain Relationships
And Related Transactions.
New management of the Company introduced substantial changes in the
Company's plan of operations and management strategies. The Company's prior
strategies focused primarily on cost reduction as the preferred means of
improving profitability. Such strategies resulted in lean Club-level management
and loss of experienced personnel, low levels of physical facility maintenance
and reinvestment, and reduced levels of advertising, promotion and entertainment
expenses. Current management has replaced much of the Club-level management with
new, experienced managers, instituted management training procedures,
implemented a cost management system which includes daily unit-level accounting
and reporting, improved the sound, light and video systems, increased and
redirected radio buys within the local markets, and implemented new advertising
and in-store promotions. Current management has also dedicated approximately
$250,000 of this offering's proceeds to the remodeling and enhancements of its
clubs in order to address those maintenance items and enhancements which have
been deferred by previous management. These changes reflect current management's
belief that long-term strategies involving greater investment in personnel and
physical facilities will ultimately produce superior financial performance.
New management also undertook steps to improve the financial performance
of the Tucson Club, which was hampered by high acquisition, leasehold and
operating costs and declining revenues. During October 1996, the Club was
remodeled into two entertainment venues in order to attract new customers and
revenues, cost cutting measures were instituted, and new unit-level management
was installed. Despite these measures, based on the Club's continuing decline in
performance, high overhead and occupancy costs, and lack of foreseeable benefit
from any of the turnaround measures instituted, management recommended, and the
Company's Board of Directors approved, the closure of the Tucson Club in March
1997. Subsequently, the company sold the Tucson Club assets in May 1997 and has
reached an agreement in principle to settle the leasehold obligations. Details
of the sale and lease settlement are described more fully below.
21
<PAGE>
Liquidity and Capital Resources
Historically, the Company has funded its capital needs through a
combination of cash flows from operations, proceeds from public and private
securities issuances, and loans from commercial banks, principal shareholders or
related persons or entities. In July 1996, the Company issued 95,200 shares of
Common Stock in a private placement generating proceeds of $238,000. The Company
also borrowed $300,000 from a bank to fund the early settlement of a covenant
not to compete related to the purchase of the Tucson Club and to repay $100,000
to the Company's former president. Repayment of notes payable of $871,265 during
1996 included: $393,000 repaid to International Entertainment Consultants, Inc.,
a Company owned by a relative of the Company's former president; $100,000 to
Lowrie Management, a company owned by the Company's former president; $42,730 to
Dulaney Bank, holder of the first mortgage on the Indy Club; $27,317 to Expo
Bowl, holder on the second mortgage for the Indy Club; and $269,197 to
extinguish the covenant not to compete. The Company also invested $226,818 in
remodeling, refurbishing and enhancing its Clubs during 1996. During the first
quarter of 1997 the Company borrowed $140,000 from a lender to supplement its
cash. Uses of cash during the quarter included repayment of notes payable of
$248,086 ($200,000 to a commercial bank; $27,714 to related parties on notes
outstanding; and $20,372 to holders of the first and second mortgages on the
Indy Club). See Consolidated Statement of Cash Flows, below.
As of December 31, 1996, the Company had cash of $190,624, which was
generated from operating activities, financing activities and equity
participation. Cash for the twelve months ended December 31, 1996 decreased
$33,215 from cash of $223,839 reported at December 31, 1995. For the year ended
December 31, 1996, the Company generated $818,620 in cash flows from operations
compared to $934,831 from operations for the year ended December 31, 1995, or a
decrease of $116,211. This decrease in cash flow for 1996 is primarily due to
the decrease in revenues experienced by the Company and $142,857 expended in
offering costs during the period, which was partially offset by an increase in
accounts payable and accrued expenses of $276,135 and a refund of income taxes
of $152,851. Net cash provided from operations was primarily generated from
depreciation and amortization expense of $636,806, and Common Stock issued for
services of $159,166 for the twelve months ended December 31, 1996.
As of March 31, 1997, the Company had cash of $154,152, which was
generated from operating activities, financing activities and equity
participation. Cash for the quarter ended March 31, 1997 decreased $36,472 from
cash of $190,624 reported at December 31, 1996. For the quarter ended March 31,
1997, the Company generated a negative $97,217 in cash flow from operations
compared to positive cash flow of $143,628 from operations for the quarter ended
March 31, 1996, or a decrease of $240,845. This decrease in cash flow for the
quarter is primarily due to the loss from operations experienced by the Company
and $66,134 expended in costs related to the Public Offering during the period.
Store-level losses of $90,023 at the Tucson were the principal component in the
operating loss and the decrease in cash flow.
At December 31, 1996, the Company's working capital position (current
assets minus current liabilities) was a negative $533,633, compared with a
negative $640,215 at the end of 1995, an improvement of $106,582. At March 31,
1997, the Company's working capital position was a negative $541,145 compared
with a negative $533,633 at the end of 1996, or an additional $7,512 deficit.
Management does not believe the negative working capital position poses a
liquidity risk or is unusual in the Company's line of business, which is labor
intensive, has significant payables and does not have significant receivables or
inventory. During 1996 working capital was impacted most heavily by the use of
cash in the amount of $226,818 during the year to remodel and enhance the
Company's Clubs, and by the net reduction of current notes payable and current
portion of long-term debt of the Company in the amount of $181,799.
Property and equipment is primarily made up of assets required to open
and operate the Indy, St. Louis and Wichita Clubs. Leasehold improvements total
$2,116,885; equipment, furniture and fixtures are $1,009,131; buildings and
improvements are $755,900; and land and improvements are $298,286. As of
December 31, 1996, management determined that the value of the long-lived assets
related to the Tucson Club, including furniture and fixtures, equipment and
leasehold improvements, would not be realized based on future expected cash
flows. Therefore, the carrying value of these assets in the amount of $927,152
has been charged to expense in 1996.
22
<PAGE>
Goodwill and the amount of the covenant not to compete decreased during
1996 by $414,502 and $508,019, respectively, due to amortization during the year
and the impairment write-offs as of December 31, 1996, relating to the Tucson
Club in the amounts of $321,371 for goodwill and $471,295 for the covenant not
to compete.
During 1996 deferred income tax asset increased $136,621 to $333,621 due
primarily to the expected tax benefit from the impairment of the Tucson Club
assets. Future realization of this asset is dependent upon the generation of
sufficient future taxable income liability against which its loss carryforward
and losses from the impairment of the Tucson Club assets can be offset. The
amount of the deferred tax asset at December 31, 1996 and March 31,1997 does not
include $668,244 reserved as a deferred income tax valuation allowance based on
historical operating results and projected levels of future income tax
liability. The reserved allowance will provide additional benefit if the
Company's level of future income tax liability exceeds the deferred income tax
asset within the carryforward period (15 years). Income taxes receivable at
December 31, 1996 decreased $152,851 due to refunds received from Federal and
state authorities by the Company during the year.
Accounts payable at December 31, 1996 increased $145,467 as compared to
amounts due a year earlier in part because new management established revolving
credit terms with a number of service providers at the club level whereas prior
management had paid these expenses as incurred. The Company also had additional
amounts owing at year end 1996 related to this public securities offering, which
were not present at December 31, 1995. Accounts payable at March 31, 1997
decreased $77,812 as compared to amounts due at December 31, 1996. Total
liabilities decreased by $55,686 during 1996, due to a decrease of $331,821 in
notes payable ($181,799 relating to current notes payable and $150,022 relating
to long-term notes payable) which was partially offset by the increase in
accounts payable of $145,467 and an increase in accrued expenses of $130,668.
The reduction in notes payable is primarily attributable to the satisfaction of
the Tucson Club covenant not to compete offset by new borrowings incurred to
effect such settlement, in the net amount of $98,961, and the reduction in the
notes payable to related parties in the amount of $113,621. In the first quarter
of 1997, total liabilities decreased by $167,207 due to the decrease in accounts
payable and a net decrease in notes payable by the Company of $108,086,
partially offset by an increase of $18,691 in accrued expenses which relate to
accruals for future rent escalations. Long term liabilities decreased by $23,958
due to the continued reduction of these notes in accordance with required
monthly amortization.
The Company has and is aggressively looking toward expanding its
operations in the future. It intends to expand its ownership and operation of
country-western nightclubs and may acquire other nightclub or restaurant
concepts. Potential locations are being considered in both the Midwestern and
Southwestern sections of the country. This growth strategy will dictate the need
for and application of funding though 1997 and beyond. New management expects to
fund its growth strategy primarily with proceeds from the Public Offering, which
is expected close in June 1997. Further expansion may be financed through
private and/or public equity offerings, internal funding, bank financing, or a
combination of the foregoing. The Company may also purchase existing clubs or
restaurants through transactions involving the issuance of the Company's Common
Stock or cash. Until the Company's profitability is restored and debt levels are
decreased, management does not foresee commercial banks as a significant source
of capital financing. If the Company is unsuccessful in completing the Public
Offering in the near future, the Company's planned expansion will be sharply
curtailed. Management believes that current levels of cash flow will support
existing operations for the foreseeable future.
Results of Operations
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Total revenues of the Company decreased by 10% during 1996, including a
decline in beverage and food sales of $917,035 or 16%, which was partially
offset by an increase in admission fees of $326,145. This decline in core
business of the Company is attributed to declining sales in each of the
Company's existing Clubs, which was offset in part by the addition of the
Wichita Club sales for the fourth quarter. The Indy Club experienced a sales
decline of $293,068 or 13%; the St. Louis Club experienced a sales decline of
$482,306 or 13%; and the Tucson Club experienced a sales decline of $461,299 or
20%. Other revenues, consisting of machine, boutique and consignment income,
declined by $249,483, or 39%. During October 1996, new management instituted
marketing promotions which shifted revenues from beverage sales to admission
fees. This change accounts for the increase in admission fees while beverage and
food sales were concurrently showing declines.
23
<PAGE>
Due to the Tucson Club's inability to generate current or projected
positive cash flow, and the subsequent decision to discontinue the Club's
operations, the Company concluded that the assets of the Club were completely
impaired at December 31, 1996, and were written off as an impairment expense in
the amount of $1,719,818 in the Company's financial statements.
Total costs and expenses in 1996 increased by $1,646,201, or 20%, most
of which is attributable to the impairment of the Tucson Club assets. The
Company's cost of products and services increased by $139,121 due to the
increased costs of beverage purchases associated with the new promotions
discussed above, and additional salary expense incurred in the implementation of
additional management personnel at each Club. Depreciation expense increased by
$56,911 as a result of the increased expense recorded on the Tucson Club
remodeling completed in 1995, and the addition of the Wichita Club as of October
1, 1996. Amortization expense decreased by $62,917 due to the pre-opening
expenses relating to the St. Louis and Tucson Clubs being completely amortized
in 1995 and 1996, respectively. General and administrative expenses decreased by
$76,713, even though prior management and certain consultants to prior
management received additional compensation of $112,500 from stock and stock
option grants recorded in the third quarter of 1996, and the Company wrote off a
note receivable from Cowboys Entertainment, Inc. in the amount of $100,000 in
the fourth quarter of 1996.
In September 1996, the Company settled its remaining obligations under
the liability relating to the Tucson Club covenant not to compete for $300,000
cash. The Company was reflecting a liability of $405,506 at that time and
therefore, recognized an extraordinary gain on the extinguishment of the debt of
$105,506, reduced by income tax of $39,776 thereon.
For the year ended December 1996, the Company incurred a consolidated
loss of $1,913,446 compared to a consolidated loss of $211,233 in 1995. This
increased loss was caused by the following factors: (i) the loss from operations
suffered by the Tucson Club of approximately $419,000 coupled with the resulting
impairment of the Tucson Club assets of approximately $1,720,000; (ii) the
write-off of the note receivable from Cowboys Entertainment, Inc. in the amount
of $100,000; (iii) the decline in revenues of the Indy and St. Louis Clubs
during the fiscal year; (iv) additional expense incurred in the transition to
new management's operational and marketing strategies, consisting of relocation
and training costs and attention to repairs and maintenance items which had
previously been deferred.
Quarter Ended March 31, 1997 Compared to the Quarter Ended March 31, 1996
For the period ended March 31, 1997, total revenues of the Company
decreased by $32,943 or 1.5% as compared to the First quarter of 1996. The
decline in revenues was primarily attributable to sharply lower revenues of the
Tucson Club, the assets of which were sold May 1, 1997. Beverage and food sales
increased by $36,216 or 2.5%, but this increase was more than offset by a
decrease in admission fees and other revenues of $69,059 of 9.9%. This decline
admission fees and other revenues is primarily attributable to the Company's
decision in January, 1997 to contract with an independent promoter for
entertainment performances instead of contracting performances internally. This
change reduces both admission and fee revenue and concert-related expense, which
are generally borne by the promoter.
Total costs and expenses for the first 1997 increased $179,698, or 9%
over the first quarter of 1996. The cost of products and services increased
$152,269 or 24%, partially as a result of additional beverage costs associated
with marketing promotions implemented during the fall or 1996. The increase in
cost of products and services was partially offset by (i) decreases in
depreciation and amortization of $43,356 or 27% (related to the write-off of the
Tucson Club's assets at December 31, 1996); and (ii) decreases in interest
expense of $7,839 or 21%. General and administrative expenses increased $78,624
or 7%.
The Company operated three Clubs during the first quarter 1996: the Indy
Club the St. Louis Club and the Tucson Club. During the first quarter 1997, the
Company also operated the Wichita Club. The Tucson Club was sold May 1, 1997,
and became a discontinued operation. The Indy Club reported sales of $451,477
and $508,264 for the first quarter 1997 and 1996, respectively, or a decline of
10.8%. Sales at the St. Louis Club were $721,867 for the first quarter 1997
compared to $1,024,822 for 1996, a decline of 29.6%. The Tucson Club experienced
a sales decline of 32.7% for the first quarter 1997 compared to 1996, reporting
sales of $400,970 versus $595,804. The Wichita Club recorded an increase in
first quarter sales or $39,474 or 8.1%, showing sales of $526,694 as compared to
$497,220 a year ago. The Company believes that the decline in sales at the Indy
24
<PAGE>
and St. Louis Clubs were due in part to its conversion of these Clubs to the
entertainment format used in the Wichita Club and this deferred maintenance and
enhancements. The format changes, which are designed to appeal to a younger and
more diverse customer, are expected to show positive results in future quarters.
The Wichita Club is experiencing growth in sales and operating income and
management believes the Indy and St. Louis Clubs will experience similar
improvements. The Company has dedicated a portion of the proceeds this Public
Offering to the remodeling of these Clubs, which is expected to restore
profitability.
The Company has sold the Tucson Club assets effective May 1, 1997, and
reached an agreement in principle to settle its future rental obligations under
the related lease. Under the purchase and sale agreement with an affilated , the
Company will receive $325,000 from the sale as follows: $100,000 cash which was
paid at closing, $10,000 to be paid in cash each month for three months
beginning June 1997, and the balance of $195,000 to be paid by promissory note
having monthly payments of $7,500 beginning in November 1997 until maturity at
September 30, 1999. The note bears interest at eight percent per year and
provides for prepayment discounts of $20,000 if paid before December 31, 1997,
and $10,000 if paid before December 31, 1998. Under the lease settlement, the
Company is obligated for rent and property taxes through July 1997 in the amount
of $93,400, which obligation will be paid in monthly installments of $10,750
beginning June 1997, with the balance due December 31, 1997. The Company's
security deposit of $24,000 will be transferred to the benefit of the new
lessee. This settlement agreement is expected to close in May, 1997. During the
first quarter, the Tucson Club suffered an operating loss before taxes of
$90,023. Additionally, the Company expects to report an additional Tucson Club
operating loss for April, 1997.
For the quarter ended March 31, 1997, the Company incurred a
consolidated loss of $82,044 compared to a consolidated gain of $90,670 for the
quarter ended March 31, 1996. This loss was primarily due to the operating loss
of the Tucson Club or approximately $90,000.
With the sale of the Tucson Club assets as of May 1, 1997, and the gain
to be reported thereon in the second quarter, management believes the Company
and its three remaining Clubs will return to profitability. Management also
believes that, assuming completion of the Public Offering, the Company can
expand its number of operating locations, and that the combination of the
elimination of Tucson Club losses and the expansion of new locations will ensure
the Company's success in future periods.
25
<PAGE>
BUSINESS
The Company operates three "country-western" theme nightclubs under the
name InCahoots. The nightclubs are located in Indianapolis, Indiana (the "Indy
Club"); St. Louis, Missouri (the "St. Louis Club"); and Wichita, Kansas (the
"Wichita Club"). The Clubs are large, ranging in size from 30,000 to 50,000
square feet, and each Club features live entertainment, dancing, bar and food in
a country-western atmosphere.
The Company intends to expand its network of Clubs, either through
acquisition of existing clubs or by building new clubs. Potential future
locations include Louisville, Kentucky; Houston, Texas; Dallas, Texas; Oklahoma
City, Oklahoma; Tulsa, Oklahoma; and Tampa Bay, Florida. Decisions as to
potential club locations are highly influenced by site availability and price,
zoning, competition and demographic factors.
Gross revenues by Club for each of the past three years are as follows:
Club(1) Year Ended December 31,
1994 1995 1996
---- ---- ----
The Indy Club(2) $3,301,252 $2,249,516 $1,956,448
The St. Louis Club(3) $2,400,548 $3,843,062 $3,360,756
The Wichita Club(4) $2,811,776 $2,419,755 $1,988,095
The Tucson Club(5) $3,125,288 $2,257,848 $1,796,549
- --------------------
(1)The Company is also a 50% limited partner of Cowboys Concert Hall/Atlanta,
Ltd., a Texas limited partnership (the "Atlanta Partnership") formed June
29, 1995 to own and operate a country-western nightclub in Atlanta under the
name of Cowboys (the "Atlanta Club"). The Company accounted for its interest
in the Atlanta Club using the equity method, pursuant to which it recognized
a loss of $123,676, net of income taxes, for the year ended December 31,
1995. Due to continuing losses, the Company wrote off its investment in the
Atlanta Club as of December 31, 1995, resulting in a charge against income
of $274,621 after taxes. The Atlanta Partnership was placed in Chapter 11
bankruptcy in September 1996, and although the Atlanta Club continues to
operate, substantial doubt exists whether the Company will recover any of
its investment. For the six-month period ended December 31, 1995, gross
revenues earned by the Atlanta Club were $1,344,262. The Company lacks
reliable information regarding gross revenues for the year ended December
31, 1996. See Investment in Limited Partnership, below.
(2) The Indy Club opened in April 1993. During 1993, the Company accounted for
the Indy Club by the equity method and therefore recognized its share of the
Indy Club net income of $272,381 as revenues on the Company's financial
statements.
(3) The St. Louis Club opened as a non-alcoholic establishment in April 1994,
and began marketing alcoholic beverages in May 1994.
(4) The Wichita Club opened in February 1994. The Company acquired its interest
in the Wichita Club in December 1996. See The Wichita Club, below.
(5) The Company purchased the Tucson Club in November 1994, and expects to sell
the Club in May 1997. See The Tucson Club, below.
The Indy Club
The Indy Club, the first of the Company's clubs, operates under the name
InCahoots. From 1993 to 1996, it operated under the name A Little Bit of Texas.
The Indy Club consists of approximately 34,300 square feet of entertainment
facilities, including several bars, a state-of-the-art sound and light system
(which supports live and taped music), a walk up food service facility featuring
hamburgers, pizza, sandwiches and franks, and two in-club stores which sell
western wear and souvenirs. National name entertainment, such as Blackhawk, Lori
Morgan, Tracy Lawrence, Tracy Byrd, Little Texas and Bryan White, are featured
26
<PAGE>
at the Indy Club on a regular basis, usually scheduled during the middle of the
week to attract audiences on what would otherwise be the club's less popular
days. In addition, regional name entertainers are scheduled Tuesday through
Saturday evenings. A modest cover charge is required to enter the Indy Club, and
a customer's average expenditure, exclusive of food and souvenirs, is
approximately $12.00.
The Homestead Store a non-affiliated entity, leases approximately 500
square feet of the Indy Club, and sells wardrobe items on a commission basis.
The Logo Boutique, which is owned by the Indy Club, also sells proprietary
wardrobe items.
The Indy Club is owned by Western Country Club, I, Ltd., ("WCC I,
Ltd."), a Colorado limited partnership, of which the Company is general partner
and an 80% owner. The Company acquired its majority interest in September 1994
through an exchange of cash and Common Stock for partnership interests. Costs
and revenues are borne in proportion to the ownership interests. See Certain
Relationships and Related Transactions.
The St. Louis Club
The St. Louis Club is located on the I-70 corridor between St. Louis,
Missouri and Kansas City, Kansas. The design of the St. Louis Club is similar to
that of the Indy Club and operates under the name InCahoots. From 1994 to 1996,
it operated under the name A Little Bit of Texas. The Club consists of
approximately 50,000 square feet, and is the largest of the Company's Clubs.
Sundance Silver & Hide, which sells wardrobe items, including hats and boots,
occupies approximately 800 square feet of the Club. The Homestead Store, which
sells Western Indian artifacts, clothing and jewelry, occupies approximately 600
square feet of the Club. The Austin Eatery, a walk-up restaurant selling
hamburgers, pizza, sandwiches and franks, occupies approximately 2,000 square
feet of the Club. Sundance Silver & Hide and the Homestead Store are
non-affiliated entities. The customer's average expenditure, exclusive of food
and souvenirs, is approximately $12.00.
Western Country Club III, Ltd. ("WCC III, Ltd."), a Colorado limited
partnership formed in 1994, provided the initial funding for the construction,
renovation and furnishing of the St. Louis Club. The Company served as the
general partner of WCC III, Ltd., and in September 1994, purchased all of the
assets of WCC III, Ltd. in exchange for 158,664 shares of its unregistered
Common Stock. See Certain Relationships and Related Transactions.
The Wichita Club
The Wichita Club opened in February 1994, and has been voted the top
country-western club in Wichita since opening. The Club consists of
approximately 30,000 square feet, has a maximum occupancy of 1600 persons and
has parking for 900 cars. The Wichita Club is designed to appeal to rodeo
cowboys as well as the casual country-western music lover. It blends high tech,
state-of-the-art, and "good old country boy" entertainment. The high tech
presentation includes giant 20-foot video screens, double CD players, a roll up
lighted American flag, neon touch lighting and the capability to include a live
band's sound throughout the house speaker system. A comfortable ambiance is
achieved through rustic wooden floors, old west photographs, antique back bars
and huge hand painted mural of past and present Country and Western
entertainers. The showcase of the Club is the circular, racetrack style dance
floor, complete with a bar in the center allowing for more dancing room.
The Company acquired its 80% interest in the Wichita Club on December
16, 1996 when it acquired Entertainment Wichita, Inc. ("EWI"), the general
partner and 80% owner of InCahoots Limited Partnership, a Kansas limited
partnership. InCahoots, Limited Partnership owns the Wichita Club. In exchange
for the 80% interest, the Company issued 400,000 shares of its Common Stock and
assumed $150,000 in debt through a merger transaction with EWI. The ownership of
EWI included Dominic W. Grimmett, an officer of the Company, an entity owned by
James E. Blacketer, President and a director of the Company, two adult sons of
Mr. Blacketer and an entity owned by an adult son of Joe R. Love, also a
director of the Company. See Certain Relationships and Related Transactions.
The Tucson Club
The Company purchased the Wild Wild West nightclub from Wild Wild West,
Inc. and Buckaroos, Inc. on November 1, 1994 for $1,000,000 in cash and $700,000
payable to certain individuals in consideration of covenants not to compete
through October 31, 1997. Subsequently, in 1995, the term of the covenants not
27
<PAGE>
to compete was extended from three to fifteen years. The Tucson Club was
remodeled to the A Little Bit of Texas format and operated under that name until
November 1996, when the Club was again remodeled and its name was changed to
Stampede. Revenues at the Tucson Club have steadily declined and the Club has
not been profitable, particularly when compared to its acquisition debt. In
March 1997, management determined that it would be in the best interests of the
Company and its shareholders to discontinue the Tucson Club's operations, and
sold the Tucson Club assets effective May 1, 1997. Management has also reached
an agreement in principle to settle its future leasehold obligations, which is
expected to close in May 1997. See Management's Discussion and Analysis.
New Management and Revised Plan of Operations
The Company's senior management changed in late 1996 introducing
substantial changes in the Company's plan of operations and management
strategies. The Company's prior strategies focused heavily on cost reduction as
the preferred means of improving profitability. Such strategies resulted in lean
Club-level management and loss of experienced personnel, low levels of physical
facility maintenance and reinvestment, and reduced levels of advertising,
promotion and entertainment expense. Current management has replaced much of the
Club-level management, added experienced Club-level management, instituted
management training procedures, implemented a cost management system which
includes daily unit-level accounting and reporting, improved the sound, light
and video systems, increased radio buys within the local markets, and
implemented new advertising and in-store promotions. These changes reflect
current management's belief that long-term strategies involving greater
investment in personnel and physical facilities will produce a superior
financial performance.
Entertainment
The Company seeks to book nationally known entertainers as well as
regionally-known entertainers and/or bands which do not yet have national
recognition. The Company believes it will have a better chance to book
nationally known entertainers after two or three more clubs are opened and
operating, as entertainers can then be offered three or four appearances,
instead of just one or two appearances. The Company believes its ability to
offer several scheduled performances to an entertainer will result in a lower
price for all performances than if booked on a one-performance-at- a-time basis.
Expansion Strategy
The Company intends to grow primarily through owning and operating
additional nightclubs. Additional nightclubs may be financed through private
and/or public equity offerings, internal funding, bank financing or a
combination of the foregoing. The Company may also purchase existing clubs
through transactions involving the issuance of the Company's stock and/or cash.
Future locations under consideration by the Company include Houston, Texas;
Louisville, Kentucky; Dallas, Texas; Oklahoma City, Oklahoma; Tulsa, Oklahoma;
and Tampa Bay, Florida.
Investment in Limited Partnership
The Company is a 50% limited partner of Cowboys Concert Hall/Atlanta,
Ltd, a Texas limited partnership (the "Atlanta Partnership") formed June 29,
1995 to own and operate a country-western nightclub in Atlanta under the name of
Cowboys (the "Atlanta Club"). The Atlanta Club consists of 49,000 square feet
with three different levels for seating, general entertainment, dining and
dancing. The Club's maximum occupancy is 4,000 people. The Company initially
loaned the Atlanta Partnership $638,822, but wrote off its investment in the
Atlanta Partnership effective December 31, 1995, due to continuing losses.
On September 16, 1996, the Atlanta Partnership filed a Voluntary
Petition in Bankruptcy under Chapter 11 in the United States Bankruptcy Court,
Northern District of Georgia, Atlanta Division (96-74391). Although the Atlanta
Club continues to operate, substantial doubt exists whether the Company will
recover any of its investment if and when the Atlanta Partnership is
reorganized.
Government Regulation
The Company's business is subject to extensive Federal, state and local
government regulations, including regulations relating to alcoholic beverage
control, public health and safety, zoning and fire codes. In addition, each
nightclub restaurant must have food service licenses from local health
authorities. The failure to obtain or retain food, liquor or other licenses
would adversely affect the operations of the Company's nightclubs.
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Alcoholic beverage control regulations require each of the nightclubs to
apply to a state authority, and, in certain locations, county or municipal
authorities for a license or permit to sell alcoholic beverages on the premises
and to provide service for extended hours and on Sundays. Alcoholic beverage
control regulations relate to numerous aspects of the daily operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. Any difficulties, delays or failures in
obtaining such licenses, permits or approvals could delay or prevent the opening
of a nightclub in a particular area.
Licenses to sell alcoholic beverages must be renewed annually and may be
suspended or revoked at any time for cause, including violation by the Company
or its employees of any law or regulation pertaining to alcoholic beverage
control, such as those regulating the minimum age of patrons or employees,
advertising, wholesale purchasing, and inventory control, handling and storage.
Although each nightclub is operated in accordance with procedures designed to
assure compliance with all applicable codes and regulations, liquor licenses are
renewed by agencies of local governments, which are subject to political
pressures and community attitudes toward establishments which sell liquor. There
can be no assurance that even if a liquor license is obtained that it will
continue to be renewed. Failure of a nightclub to obtain or retain a liquor
license would adversely affect its operations.
The Company may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated person the right to
recover damages from the establishment which wrongfully served alcoholic
beverages to the intoxicated person. A judgment against the Company under a
dram-shop statute in excess of its insurance coverage and any reserve provided
by the Company could have a material adverse effect on the Company. Kansas,
Indiana and Missouri do not presently have dram-shop statutes. There can be no
assurance that states in which the Company has clubs or proposes to locate clubs
will not in the future adopt such legislation.
The development and construction of additional nightclubs will be
subject to compliance with applicable zoning, land use and environmental
regulations. Management believes that Federal and state environmental
regulations have not had a material effect on the Company's operations, but more
stringent and varied requirements of local governmental bodies with respect to
zoning, land use and environmental factors could delay construction of new
nightclubs and add to their cost.
The Company is also subject to the Fair Labor Standards Act, the
Immigration Reform and Control Act of 1986 and various state laws governing such
matters as minimum wages, overtime, tip credits and other working conditions. A
significant number of the Company's hourly personnel are paid at rates relating
to the Federal minimum wage and, accordingly, increases in the minimum wage or
decrease in the allowable tip credit will increase the Company's labor cost. The
Company may also incur labor cost increases as a result of certain mandatory
medical and parental leave benefits legislation enacted by the United States
Congress.
The Americans With Disabilities Act prohibits discrimination in
employment and public accommodations, such as restaurants and nightclubs, on the
basis of disability. Under the Act, the Company is required to provide service
to, or make usable accommodations for the employment and service of, disabled
persons.
Competition
The nightclub business is highly competitive. Many of the companies
which own and/or operate nightclubs are substantially larger than the Company,
and have greater resources, operating histories and experience. They include
many national, regional and local chains with more locations and larger
advertising budgets. Nightclub and theme entertainment businesses are also
affected by changing customer tastes, local and national economic conditions
affecting spending habits, population shifts and traffic patterns. Quality of
service, attractiveness of facilities, operating and popularity of entertainment
and price are also important factors.
The popularity of the concept of "country and western" nightclubs has
spawned a number of companies and nightclubs seeking to capitalize on that
phenomenon. There can be no assurance that the market for nightclubs with the
same or similar themes will not be saturated in any particular area.
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<PAGE>
Suppliers
The Company obtains supplies for the Clubs from local vendors. The
Company does not rely on any one or more vendors for a significant amount of its
supplies.
Trademarks
The Company uses the trademark InCahoots in the operation of its
business. This mark is used by others in the operation of businesses throughout
the country, including other nightclub operators. Because of these uses, the
Company believes that it cannot, nor can its competitors, register these marks
with the United States Patent and Trademark office to obtain exclusive,
nationwide rights to the marks. The Company believes, however, that it has
enforceable common law rights to its marks for use in the immediate trade areas
in which the Clubs operate, and it has encountered no claims of trademark
infringement. As the Company implements its expansion strategy, it may encounter
claims of trademark infringement requiring the Company to negotiate license
agreements with the prior user or to use other non-infringing trademarks for
nightclubs in the affected areas. See Risk Factors - Competing Trademark Usage;
Uncertainty of Trademark Protection.
The Company also believes that, in the food service industry, its
service marks and "look" ("trade dress"), as well as its advertising and
promotional design and artwork, can be adequately protected by common law, and
that is has enforceable rights to this proprietary information.
Employees and Consultants
The Company presently has five full time employees in the corporate
office, including James E. Blacketer, President and a Director of the Company,
Ted W. Strickland, Chief Financial Officer, Treasurer and Director, Dominic W.
Grimmett, Vice President of Operations and two part time employees exclusive of
club employees. The Company has approximately 250 employees in the Clubs. See
Management.
Properties
The Company's principal offices are located at 1601 N.W. Expressway,
Suite 1610, Oklahoma City, Oklahoma 73118. The Company's offices occupy
approximately 2,460 square feet, for which it pays $3,075 pursuant to a lease
which expires in June 2001. The Company subleases a portion of this space to a
non-affiliated company for which it receives a total monthly fee of $1,000.
The Indy Club occupies a 34,306 square foot building which is adjacent
to approximately 3.4 acres of land used for parking by the Indy Club's
customers. On January 31, 1994, WCC I, Ltd. exercised an option to purchase the
building for $750,000. WCC I, Ltd. borrowed $600,000 at prime plus 3% from the
Dulaney National Bank, which is due February 1, 2004, and the seller financed
the remaining $150,000 at 10% interest. Monthly payments of $3,187 and $7,546
are payable to the seller and to the Dulaney National Bank, respectively. Troy
H. Lowrie, the Company's former President, has personally guaranteed repayment
of the note to the seller. The note to the Dulaney National Bank is secured by
the building and the furniture, equipment and fixtures therein, and by rental
payments from the tenants of the Indy Club. WCC I, Ltd. also owns the 3.4 acres
of parking adjacent to the building. It purchased the adjacent land for $105,000
on February 24, 1993.
On August 26, 1993, the Company entered into a lease for nightclub space
in St. Louis, Missouri. The lease, which expires in August 2003, is for a 10
acre parcel of land, a 106,744 square foot building located thereon, and
existing parking facilities. The rental for the first five years is $22,238 per
month, and $26,686 per month for the second five years. The Company has the
right to extend the lease for two five year periods at increased rental rates.
The lease is guaranteed by International Entertainment Consultants, Inc., a
company affiliated with Mr. Lowrie.
The Wichita Club is leased from Boots, Inc., a 20% limited partner in
the InCahoots Limited Partnership, a Kansas limited partnership. Boots, Inc. is
otherwise unaffiliated with the Company. The lease is for a ten year term,
terminating in the year 2003, with an option to extend the term for two periods
of five years each, and requires monthly payments of the greater of $12,500 or
6% of gross sales.
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On November 1, 1994, with its acquisition of the Tucson Club, the
Company took an assignment of the lease covering the Club's building and entered
into a lease with the sellers for the parking lot. The building lease terminates
in February, 2001, and presently requires monthly rental payments of $22,145,
which escalates to approximately $24,200 over the term of the lease. The lease
on the parking lot is for a four year term, ending October 31, 1998, and
requires monthly rental payments of $3,000. Management has reached an agreement
in principle for the termination of these leases in connection with the Club's
closing. Under the agreement, the Company is obligated for rent and property
taxes through July 1997 in the approximate amount of $93,000, which obligation
will be paid in monthly installments of $10,750, with the balance due December
31, 1997. The Company's security deposit of $24,000 will also be transferred to
the benefit of the new lessee. These agreements are expected to close in May
1997. See Management's Discussion and Analysis.
WCC I, Ltd. carries general liability insurance in the amount of
$2,000,000 for the Indy Club, and building and property insurance coverage in
the amount of $1,200,000 and $300,000, respectively. The Company has obtained
general liability insurance for the St. Louis Club in the amount of $2,000,000,
and $310,000 in property liability coverage. The Wichita Club carries $2,000,000
general liability insurance and building and property insurance coverage in the
amount of $1,200,000. The Company has general liability insurance for the Tucson
Club in the amount of $2,000,000 and property insurance coverage in the amount
of $700,000. The Company maintains $1,000,000 in liquor liability insurance
coverage on each Club.
Legal Proceedings
Special Note: Certain statements set forth below under this caption
constitute "forward-looking statements" within the meaning of the Reform Act.
See Risk Factors - Risks Associated With Forward-Looking Statements for
additional factors relating to such statements.
From time to time, the Company is party to certain legal proceedings
arising in the ordinary course of business. The Company cannot accurately
predict the amount of any liability that could arise with respect to these
proceedings due to, among other reasons, large variances in judicial and jury
perceptions of case facts and uncertainty in the scope of insurance coverages.
One such proceeding is Oelkers v. InCahoots Ltd. Partnership (Case No. 96 C.
695, Dist. Ct., Sedgwick Cnty, Kansas), in which the plaintiff alleges that
InChaoots Ltd. Partnership (owner of the Wichita Club) is responsible for
personal injuries sustained when she was knocked down in an incident involving
two patrons. The Wichita Club's insurer is currently providing the costs of
defense, yet it is also asserting that the basis of the claim is an assault and
battery and that its policy excludes coverage for liability arising out of an
assault and battery. Although the Company contests the plaintiff's and carrier's
claims and believes it will prevail, an unfavorable judgement in this proceeding
would have a material impact on the viability of the Wichita Club, and
management cannot accurately predict the outcome of the proceeding for the
reasons cited above. In the opinion of the Company, any liability from other
proceedings or claims will not likely have a material adverse effect on the
Company and its business. Nevertheless, a lawsuit or claim could result in a
material adverse effect on the Company or its business.
Changes in Independent Public Accountants
On January 30, 1997, the Company dismissed the auditing and accounting
firm of Causey Demgen & Moore Inc., Denver, Colorado, who have acted as
certifying accountants for the Company for the years ended December 31, 1993,
1994 and 1995, and engaged the auditing and accounting firm of Gross Collins &
Cress, P.C., Atlanta, Georgia, to act as certifying accountants for the year
ended December 31, 1996. The Company is not aware of any disagreements with the
prior accountants, and the decision to change accountants was not based upon any
question as to accounting treatment of any transaction or type of audit opinion
that might be issued. Rather, the Company believed that the change in accounting
firms would be beneficial to the Company's planned expansion over the next
several years.
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MANAGEMENT
The following table sets forth the names and positions of the directors,
executive officers and key employees of the Company:
Officer
Name Age Position or Director Since
- ---- --- -------- -----------------
James E. Blacketer 54 President and a Director 1996
Dominic W. Grimmett 41 Vice President of Operations 1996
and Secretary
Ted W. Strickland 44 Chief Financial Officer, Treasurer 1996
and Director
Joe R. Love 58 Director 1996
John R. Ritter 39 Director 1997
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected by the Board of
Directors and hold office until their successors are elected and qualified.
James E. Blacketer has a marketing degree from Oklahoma City University
and extensive experience in the restaurant and night club business. During the
last five years Mr. Blacketer has served as managing principal to several
hospitality entities including Yucatan Liquor Stands (Tulsa and Oklahoma City),
InCahoots (Oklahoma City, Tulsa and Wichita). Previously, he was a multiple
franchisee of Steak & Ale Restaurants and Chi Chi Restaurants chain. Mr.
Blacketer also conceived and developed a chain of Hungry Lion Steak Houses
located in Chicago, Milwaukee and Grand Rapids, Michigan areas.
Dominic W. Grimmett also has extensive experience in the restaurant and
night club business, receiving his initial restaurant management training in
1978 with Gilbert/Robinson, Inc. (Houlihan's Old Place and Biba's) in Kansas
City, Missouri. During his career, he has served in increasing capacities as
assistant manager, general manager, Director of Operations and Vice President
for such nationally know operations as Champion Sports Bar, Washington, D.C.;
Greenstreet and Chiquita's; an Applebee's Restaurants franchisee in Houston,
Texas: and Pyramid Pizza in Kansas City. Mr. Grimmett has long-term experience
in development and implementation of marketing and promotions strategies as well
as restaurant and club operations management.
Ted W. Strickland is a 1974 graduate of Oklahoma State University and a
Certified Public Accountant with experience in marketing, financial management
and public accounting. He began his career in public accounting, employed seven
years with the firm of KPMG Peat Marwick, LLP, serving as a Senior Tax
Specialist/Staff Accountant in the Oklahoma City, Oklahoma office from 1974 to
1978; a Supervisor in the Professional Development Department and as National
Recruiter Training Coordinator, both in the New York Executive office from 1978
to 1979; and a Senior Tax Manager in the Dallas, Texas office from 1979 to 1981.
Mr. Strickland was most recently Chief Financial Officer, Secretary and
Treasurer for UNICO, Inc., a publicly-owned marketing services company located
in Oklahoma City.
Joe R. Love graduated from the University of Oklahoma in 1960 with a
degree in Finance. Since 1990 he has served as Chairman of C.H. Financial
Corporation, Oklahoma City, Oklahoma, a financial services company. Mr. Love has
served as a director of First Cash, Inc., Arlington, Texas, a public company
which owns a national chain of pawn shops, since 1991. Mr. Love also has served
since 1989 as a director of Tatonka Energy Corporation, formerly Sooner Energy
Corporation, Dallas, Texas, a public company engaged in oil and gas exploration
and production.
John W. Ritter currently serves as Vice President of Data Information
Services, Inc. a company specializing in pre-employment screening. He also is an
independent management consultant specializing in the restaurant industry, in
which he has been involved for over 15 years. From 1981 to 1994, Mr. Ritter was
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employed by the McDonalds Corporation, both in the field and the corporate
offices. He last served as Senior Business Consultant, working with McDonalds
franchisees in the development of their businesses. He resides in Eureka
Springs, Arkansas.
There are no family relationships among any of the Company's officers
and directors.
No officer, director, significant employee, promoter or control person
of the Company has been involved in any event of the type described in Item
401(d) of Regulation S-B during the past five years.
The Company's Compensation Committee, which will recommend compensation
levels to the Board of Directors, consists of Joe R. Love and John R. Ritter,
who were recently appointed in such capacity and have met once as a committee.
The Compensation Committee will review salaries, bonuses, and other forms of
compensation for officers and key employees of the Company and its subsidiaries,
and will establish salaries, benefits, and other forms of compensation for
employees. Included in the Compensation Committee's responsibility is the
issuance of stock bonuses and stock options under the Company's Omnibus Plan. In
addition, the Compensation Committee will review other matters concerning
compensation and personnel as the Board of Directors may request. The
Compensation Committee will design the Company's compensation to enable the
Company to attract, retain, and reward highly qualified executives, while
maintaining a strong and direct link between executive pay, the Company's
financial performance, and total stockholder return. The Compensation Committee
believes that officers and certain other key employees should have a significant
stake in the Company's stock price performance under programs which link
executive compensation to stockholder return.
The Company has no audit or nominating committee.
Change in Control
In October 1996, the Company's then principal shareholder, President and
Director sold substantially all of his shares of Common Stock in the Company.
This sale caused a change in control of the Company to occur. See Certain
Relationships and Related Transactions.
Executive Compensation
Effective October 10, 1996, James E. Blacketer became Chief Executive
Officer at $100,000 per year, Ted W. Strickland became Chief Financial Officer
and Director at $70,000 per year and Dominic W. Grimmett became Vice President
of Operations at $75,000 per year. There are no written employment agreements
with Messrs. Blacketer, Strickland or Grimmett; all compensation arrangements
are oral.
Summary Compensation Table
The following table sets forth information regarding compensation paid
to the Company's Chief Executive Officer and the other executive officers of the
Company who received in excess of $100,000 of salary and bonus from the Company
during the year ended December 31, 1996:
<TABLE>
<CAPTION>
Annual Compensation ($$) Long Term Compensation
----------------------------- -----------------------
Awards
------
Restricted
Name and Stock Options Other
Position Year Salary Bonus Awards & SARs
- -------- ---- ------ ----- ------ ------
Compensation
------------
($$) ($$) ($$) (##) ($$)
<S> <C> <C> <C> <C> <C> <C>
James E. Blacketer, ............ 1996 $12,000 -0- -0- -0- -0-
President
Troy H, Lowrie, ................ 1996 $ 3,000 -0- -0- 10,000 $35,000(1)
former President ............... 1995 $36,000 -0- -0- -0- -0-
1994 $50,416 -0- -0- -0- -0-
</TABLE>
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- --------------------
(1) Represents proceeds from the sale of 10,000 shares of the Company's stock
issued as compensation during 1996.
Option Grants
There were no options to purchase shares of Common Stock granted to
Executive Officers of the Company during the fiscal year ended December 31, 1995
and 1996.
In 1995 and 1996, the Company established equity incentive compensation
plans covering up to 350,000 shares of Common Stock. Under the plans, the
Company could issue shares or options to acquire shares. Shares under these
plans were registered under Form S-8 registration statements with the Securities
and Exchange Commission, which made the shares issued under the plans freely
tradable. During these years, prior management granted options covering 145,000
shares and made share grants for 103,791 shares. An option for 145,000 shares at
$3.50 per share was made to a consultant retained for stock market advisory
matters. Such option was coupled with the grant of 45,000 shares of Common Stock
and given in exchange for cancellation of options for 240,000 unregistered and
restricted shares at $2.50 per share. New management subsequently negotiated an
exchange of the option to purchase 145,000 shares for an option to purchase
55,000 shares exercisable at $2.50. In 1995, 23,791 shares valued at $3.50 per
share were issued to the Company's legal counsel in satisfaction of outstanding
invoices for legal services. In 1996, 82,000 shares were granted to Troy Lowrie,
the then President, 72,000 shares of which were subsequently cancelled. Share
grants covering 25,000 shares were made in exchange for advertising services.
In July 1994, the Company granted Ladenburg Thalmann & Co., Inc.
("Ladenburg") a warrant to purchase 60,000 shares exercisable at $6.00 per
share, exercisable through June 1999, in consideration of Ladenburg's agreement
to render financial consulting services to the Company through June 30, 1995. In
lieu of exercising the warrant at $6.00 per share, the warrant provides that
Ladenburg may surrender the warrant and pay $.01 per share acquired. The number
of shares which may be acquired under the alternative provision is equal to the
product of (x) the excess of the market price of the Company's Common Stock on
the date of surrender over the per share warrant price ($6.00) and (y) the
number of shares subject to issuance on exercise of the warrant divided by the
market price of the Company's Common Stock on that date.
Omnibus Equity Compensation Plan
In April 1997, the Company established the Western Country Clubs, Inc.
Omnibus Equity Compensation Plan (the "Omnibus Plan"). The purpose of the
Omnibus Plan is to attract and retain capable people by providing them an
incentive for outstanding performance. The Omnibus Plan permits the Company to
grant officers, directors and other employees of the Company and its
subsidiaries and their advisors and consultants, stock options, restricted
stock, stock appreciation rights and other equity-based awards, or a combination
thereof.
The Company has reserved Common Stock for award under the Omnibus Plan
in an amount equal to five percent (5%) of the number of shares of Common Stock
outstanding from time to time. At present, there are 181,736 shares reserved for
award, subject to appropriate adjustment in the event of a reorganization, stock
split, stock dividend, combination of shares, merger, consolidation or other
recapitalization of the Company. Conversion of the Series A Preferred Stock or
exercise of the Warrants will increase the number of shares of Common Stock
reserved for award under the Omnibus Plan. The Omnibus Plan has been adopted by
the Board of Directors of the Company, and will be submitted to the shareholders
for their approval at the Company's next annual meeting of shareholders.
If the shareholders do not approve the Omnibus Plan, the Plan
will be terminated and all awards previously made will be cancelled.
Administration of the Omnibus Plan. The Omnibus Plan will be
administered by the Compensation Committee. Members who serve on this Committee
are ineligible to receive discretionary awards under the Omnibus Plan.
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<PAGE>
Awards under the Omnibus Plan. Awards under the Omnibus Plan will be
made at the discretion of the Compensation Committee. Transferability of awards
is limited to persons having a family relationship with the recipient or to
trusts, corporations or other entities of which such person has 10% or more of
the ownership, unless the Compensation Committee permits other transfers (such
as to charities). Awards of incentive stock options under Section 422 of the
Code are transferable during their terms only by will or pursuant to the laws of
descent and distribution. A recipient may designate a beneficiary who may
exercise any rights pertaining to such an award under its normal provisions
after the recipient's death.
Each award will be made through a written agreement between the Company
and the recipient. The Omnibus Plan, by its terms, is governed by the laws of
Oklahoma and is to be construed according to that law, except to the extent that
certain Federal laws may otherwise control its construction.
Under the Omnibus Plan, any vesting or other restrictions limiting a
recipient's ownership of an award of the Common Stock underlying it will lapse
if certain events occur which are deemed to cause a change of control in the
Company. Unless the Board of Directors waives the provisions, a change of
control occurs if (i) any person (other than those persons listed in the
Principal Shareholders table or their respective affiliates, successors, heirs
or permitted assigns) become the beneficial owner of 20% or more of Common Stock
or (ii) during any period of two consecutive years the directors at the
beginning of such period, and any new directors approved by a vote of at least
75% of the directors then still in office who were either directors at the
beginning of such period or whose election was previously so approved, cease to
comprise a majority of the Board of Directors. Such provisions could have
anti-takeover effects to the extent any potential acquirer of the Company
considers the provisions to be adverse to any proposed acquisition.
Options. Under the option component of the Omnibus plan, recipients will
receive options to purchase a specified number of shares of Common Stock at some
time in the future at a fixed exercise price. Such options will be evidenced by
an option agreement conforming to the Omnibus Plan, but which may contain terms
in addition to those of the Omnibus Plan. Shares underlying an option granted
and subsequently terminated without issuance will then be generally available
for grant. The Committee may impose restrictions on shares issued as a result of
the exercise of options as it deems proper.
Each option may be granted for a term fixed by the Committee. Shares
purchased upon exercise of any option must be paid for in full at the time of
exercise in cash or with such other consideration as the Committee may permit,
including, without limitation, currently owned shares or options. Awards of
options under the Omnibus Plan will be either ISOs meeting the requirements of
Section 422 of the Code or non-qualified stock options. To the extent that the
fair market value of the Common Stock underlying a recipient's ISOs exceeds the
$100,000 limit imposed by the Code, such options will become non-qualified
options. With respect to these non-qualified options, to the extent of
compensation expense actually realized by the Company under Federal or state
income tax laws, the Company will pay the Federal or state income tax liability
incurred by the recipient. The Company does not expect such obligation to have a
material adverse effect on its financial condition or results of operations.
The Company has granted to its executive officers non-qualified options
under the Omnibus Plan exercisable for 100,000 shares of Common Stock, subject
to shareholder approval. The options vest on the first anniversary date of grant
(April 18, 1997), and are exercisable upon vesting. Messrs. Blacketer, Grimmett
and Strickland have been granted options exercisable for 40,000, 30,000 and
30,000 shares of Common Stock, respectively. The exercise price of the options
is $1.125 per share, which was the public offering price at the date of grant.
The Omnibus Plan also provides for a non-discretionary, one-time grant
of non-qualified options for 0.3% of the outstanding shares of Common Stock
(presently 10,904 shares) to each of the Company's directors when he or she is
first elected to the Board, or in the case of the current directors, upon the
Omnibus Plan's effective date. The exercise price of the options is the fair
market price at date of grant. Each of the current directors, Messrs. Blacketer,
Love, Ritter and Strickland, received a grant on April 18, 1997, of an option
for 10,904 shares with an exercise price of $1.125.
Restricted Stock. Under the restricted stock component of the Omnibus
Plan, the Company may issue to the recipient a given number of shares of
restricted stock evidenced by a restricted stock agreement conforming to the
Omnibus Plan, but which may contain terms in addition to those of the Omnibus
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Plan. Restricted stock under the Omnibus Plan is defined as Common Stock
restricted as to sale for such time as the Compensation Committee shall
determine. The recipient will be entitled to receive any dividends from and to
vote the shares of restricted stock prior to the lifting of the restrictions.
The Omnibus Plan provides for forfeiture of restricted stock for breach of
conditions and for modification or acceleration by the Company of the schedule
for lifting restrictions. The Omnibus Plan affords the directors the opportunity
to take Restricted Stock in lieu of cash compensation, subject to additional
terms set forth by the Compensation Committee. Since the directors do not
presently receive cash compensation, they are not eligible to receive Restricted
Stock.
Other Equity-Based Awards. The Omnibus Plan also provides for the grant
of equity-based awards which are not characterized by one of the other
components. These awards may be of any type which is valued, in whole or in
part, by reference to or otherwise based on Common Stock. The awards may be
granted separately, in addition to, or in tandem with, restricted stock, options
or other equity-based awards. The awards will be make upon such terms and
conditions as the Compensation Committee determines are consistent with the
purposes of the Omnibus Plan.
Limitations on Directors' and Officers' Liability
The Company's Articles of Incorporation limit the liability of directors
to shareholders for monetary damages for breach of a fiduciary duty except in
the case of liability: (i) for any breach of their duty of loyalty to the
Company or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
unlawful distributions as provided in Section 7-108-403 of the Colorado Business
Corporation Act; or (iv) for any transaction from which the director derived an
improper personal benefit.
The Company's Articles of Incorporation and Bylaws provide for the
indemnification of directors and officers of the Company to the maximum extent
permitted by law, including Section 7-109-102 of the Colorado Business
Corporation Act, against all liability and expense (including attorneys' fees)
incurred by reason of the fact that the officer or director served in such
capacity for the Company, or in a certain capacity for another entity at the
request of the Company. Section 7-109-102 of the Colorado Business Corporation
Act provides generally for indemnification of directors against liability
incurred as a result of actions, suits or proceedings if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company. The Company has entered into employment
agreements with certain of its employees which provide for indemnification in
addition to the indemnification provided for above. These agreements, among
other things, indemnify and hold harmless the employees against all claims,
actions, costs, expenses, damages and liabilities arising out of or in
connection with activities of the Company or its employees or other agents
within the scope of the employment agreements or as a result of being an officer
or director of the Company. Excluded is indemnification for matters resulting
from gross negligence or willful misconduct of the employee. The Company
believes that these provisions and agreements are necessary to attract and
retain qualified persons as directors and officers. Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended (the "Act")
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the Company 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 small business issuer 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 whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being or may be sought, and the Company is not aware of any other pending or
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
36
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of the date hereof, the ownership of
the Company's Common Stock by (i) each director and executive officer of the
Company, (ii) all executive officers and directors of the Company as a group,
and (iii) all persons known by the Company to beneficially own more than 5% of
the Company's Common Stock.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Percent of
Shareholder Class Beneficial Ownership (1) Before Offering After Offering
- ----------- ------------------------------ --------------- ----- --------
<S> <C> <C> <C>
James E. Blacketer 863,000(2) 23.7% 23.7%
1236 Westchester
Oklahoma City, OK 73114
Joe R. Love 800,000(3) 22.0% 22.0%
1601 N. W. Expressway, Suite
1910
Oklahoma City, OK 73118
Joe Robert Love, Jr. 1,050,500(4) 28.9% 28.9%
2200 N. Lamar, #250
Dallas, TX 75202
Dominic W. Grimmett 50,000(5) 1.4% 1.4%
5804 Country Club Drive
Edmond, OK 73003
Ted W. Strickland 25,000(5) * *
1209 Larchmont Lane
Oklahoma City, OK 73116
John W. Ritter 35,000 1.0% 1.0%
43 Bluewater Drive, Apt. 3
Eureka Springs, AR 72632
Red River Concepts, Inc. 800,000(6) 22.0% 22.0%
1601 N.W. Expressway, Suite
1910
Oklahoma City, OK 73118
Shane Investments, L.C. 1,050,500(7) 28.9% 28.9%
2200 N Lamar, #250
Dallas, TX 75202
All Directors and Officers 973,000(8) 26.4% 26.4%
as a Group (5 persons)
</TABLE>
* Less than one percent
37
<PAGE>
- --------------------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of 1934.
Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the percentage
owned by each other person listed.
(2) Reflects 63,000 shares owned indirectly and beneficial ownership of shares
owned directly by Red River Concepts, Inc., a company of which Mr. Blacketer
serves as an officer and a director.
(3) Reflects indirect beneficial ownership of shares owned directly by Red River
Concepts, Inc., a company of which Mr. Love serves a director. See
"Management - Changes in Control.
(4) Reflects indirect beneficial ownership of shares owned directly by Red River
Concepts, Inc., a company owned 100% by Shane Investments, L.C. Mr. Love is
the manager and 100% owner of Shane Investments, L.C., is an officer and
director of Red River Concepts, Inc. and is the adult son of Joe R. Love, a
director of the Company.
(5) Includes options to purchase 25,000 shares held by each of Mr. Grimmett and
Mr. Strickland.
(6) Of the shares owned by Red River, 550,000 shares are pledged as collateral
for purchase notes payable to Mr. Troy Lowrie. See Management - Change in
Control.
(7) Reflects indirect beneficial ownership of 800,000 shares owned directly by
Red River Concepts, Inc., a company owned 100% by Shane Investments, L.C.,
and 250,500 shares owned directly.
(8) Includes options to purchase 50,000 shares held by executive officers of the
Company. See note 5 above.
38
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transaction with former President The Company was founded in 1989, but
had no operations until 1993, when the Indy Club opened. The following
transactions involved Troy H. Lowrie, the former President, director and
largest shareholder of the Company.
(i) Troy H. Lowrie purchased an eight percent limited partnership interest
in WCC I, Ltd., for $96,000 and a three percent limited partnership interest
in WCC III, Ltd. for $51,000 in 1993. In September, 1994, the Company made
an offer to all limited partners of WCC I, Ltd. and WCC III, Ltd., to
purchase limited partners' interests in WCC I, Ltd. for stock or cash at the
limited partner's option and all of the assets of WCC III, Ltd. for stock.
Effective September 30, 1994, Mr. Lowrie received $57,600 and Mr. Peterson
received 3,200 shares, respectively, for their limited partnership interests
in WCCI, Ltd. pursuant to such offer. Mr. Peterson received 6,476 shares
pursuant to the Company's offer to purchase the assets of WCC III, Ltd. for
stock; Mr. Lowrie had sold his limited partnership interest in WCC III, Ltd.
and consequently did not receive any shares in the WCC III, Ltd. exchange.
(ii) The Company, WCC I, Ltd. and WCC III, Ltd. paid IEC $95,362, $86,043
and $41,032 for payroll and support services, including insurance and office
expenses, for the years ended December 31, 1994, 1995 and 1996,
respectively. Until his resignation as an officer and director of IEC, and
the sale of his IEC shares to his sister, all of which occurred in November,
1993, Troy H. Lowrie received a monthly salary from IEC of $5,000 plus
monthly dividends of $2,400.
(iii) Prior to September 30, 1993, the Company borrowed $15,000 from IEC to
pay the legal fees and costs associated with the liquor license application
for the St. Louis Club. This amount had been repaid as of December 31, 1993.
(iv) In 1995, the Company borrowed $200,000 from its then president, Troy H.
Lowrie, and $100,000 from another company affiliated with Mr. Lowrie, at 12%
per annum. Of the $300,000, the $100,000 due the affiliated entity and
$100,000 of the $200,000 due Mr. Lowrie has been repaid. The Company also
borrowed $493,000 from IEC, of which $100,000 was repaid during 1995, and
the remaining $393,000 was repaid during the first six months of 1996.
During 1996, the Company borrowed an additional $100,000 from a company
affiliated with Troy H. Lowrie, which was repaid during the first six months
of 1996.
Change of Control Effective September 20, 1996, Red River Concepts,
Inc., a Delaware corporation ("Red River"), and Troy Lowrie, entered
into a Stock Purchase Agreement dated as of September 20, 1996 ("Agreement")
for Red River to purchase 1,300,000 shares of the Company's Common Stock
owned by Mr. Lowrie. James E. Blacketer and Joe R. Love, directors of the
Company, are directors of Red River. Mr. Blacketer is also President of Red
River. Shane Investments, L.C., a limited liability company owned and
controlled by Joe Robert Love, Jr., the adult son of
Mr. Love, is the sole shareholder of Red River.
Pursuant to the Agreement, on October 10, 1996, Mr. Lowrie sold: (i)
200,000 shares of the Company's Common Stock to certain assignees of Red River
for $200,000 in cash; and (ii) 800,000 shares to Red River for an $800,000
promissory note due the earlier of June 1, 1997, or the effective date of this
Offering and bearing interest at the prime rate of First Interstate Bank of
Denver, N.A. Such note was secured by the 800,000 shares. The balance of 300,000
shares were to be sold for $300,000 cash on or before April 15, 1997.
On April 14, 1997, the parties amended the Agreement so that (i) Red
River purchased the 800,000 shares for $100,000 in cash and a $300,000
promissory note due July 14, 1997, bearing interest at the rate of 10% per
annum, secured by 550,000 of the original 800,000 shares and personally
guaranteed by James E. Blacketer, Joe R. Love and C.H. Financial Corporation, a
company controlled by Joe R. Love, and the $800,000 note was cancelled; (ii) L A
F, a limited partnership, purchased 137,500 shares for $68,750 in cash; (iii)
the John Michael Love Trust purchased 122,500 shares for $61,250 in cash; and
(iv) JEBCO, L.L.C. purchased 30,000 shares for $15,000 in cash. Under the
amendment to the Agreement, the Company has agreed to pay a bank note with a
current balance of approximately $278,000 and a note to Mr. Lowrie with a
current balance of approximately $106,000 from the proceeds of this Offering;
and, in the event the Offering is not closed by June 1, 1997, the Company will
begin on June 1, 1997, to make payments to the bank of $10,000 per month and
payments to Mr. Lowrie of $3,000 per month and will pay both balances by
December 31, 1997.
39
<PAGE>
Red River is controlled by Mr. James E. Blacketer, President and a
director of the Company, and by Mr. Joe R. Love, a director of the Company.
JEBCO, L.L.C. is owned by the adult sons of Mr. Blacketer. The John Michael Love
Trust is a trust for the benefit of an adult son of Mr. Love. Messrs, Blacketer
and Love have no financial interest in or control over either entity and
disclaim beneficial ownership of the shares owned by JEBCO or the trust. L A F
is not affiliated with the Company or its directors or officers.
Under the Agreement, Mr. Lowrie and the Company agreed to cause James E.
Blacketer and Joe R. Love to be appointed as Directors of the Company, as well
as a person to be selected by Red River at a future date, which person shall be
subject to the approval of the existing Board of Directors. Mr. Blacketer and
Mr. Love became Directors of the Company on November 5, 1996, and the former
board members, other than Mr. Lowrie, resigned. James E. Blacketer was then
appointed President, Dominic W. Grimmett was appointed Vice President of
Operations and Ted W. Strickland was appointed Chief Financial Officer and
Treasurer. Under the Agreement, Red River agreed to use its best efforts to
arrange a suitable second public offering for the Company, which resulted in
this offering.
Under an agreement dated February 4, 1997, Mr. Lowrie resigned as a
director of the Company and agreed to divest himself of all beneficial ownership
in the Company by May 15, 1997. As part of the divestiture, Mr. Lowrie agreed to
sell 90,000 shares to JEBCO, L.L.C. for a $75,000 promissory note due May 15,
1998, payable in two semi-annual installments, and bearing interest at eight
percent per year. This note will be secured by the 90,000 shares. In exchange,
the Company agreed to hold Mr. Lowrie harmless from loss on certain promissory
notes and guarantees made in favor of the Company and to indemnify him against
certain claims until February 4, 1999. Mr. Strickland became a Director upon Mr.
Lowrie's resignation.
Prior to the purchase of the shares from Mr. Lowrie, neither Red River,
Mr. Blacketer, Mr. Love, nor any of their affiliates, owned any voting
securities of the Company. See Principal Shareholders.
The Company knows of no other arrangements, the operation of which may,
at a subsequent date, result in a change of control of the Company.
Entertainment Wichita Merger On December 16, 1996, the Company
acquired Entertainment Wichita, Inc.("EWI"), a Kansas corporation, for
400,000 shares of the Company's Common Stock
and the assumption of $150,000 in debt. EWI is the general partner and 80% owner
of InCahoots Limited Partnership, a Kansas limited partnership, which owns and
operates the Wichita Club. In connection with the transaction, a company owned
by James E. Blacketer, President and a director of the Company, received 75,000
shares, Donald W. Grimmett, Vice President of Operations and Secretary of the
Company, received 25,000 shares and two adult sons of Mr. Blacketer received an
aggregate of 32,000 shares. Shane Investments, L.C. received 250,500 shares of
the Company's Common Stock. Shane Investments, L.C. is also the indirect
beneficial owner of 28.9% of the Company's outstanding Common Stock, which
shares are owned directly by Red River Concepts, Inc. The sole manager and
member of Shane Investments, L.C. is Joe Robert Love, Jr., the adult son of Joe
R. Love, a director of the Company. The merger was approved by Troy H. Lowrie,
the only disinterested member of the Board of Directors, with Messrs. Blacketer
and Love abstaining from voting. The Company's Board of Directors received an
opinion from American Business Capital Corporation ("ABCC"), which was engaged
to act as the Company's financial advisor, stating that the merger was fair,
from a financial point of view, to the holders of the Company's Common Stock. In
rendering its opinion, ABCC considered the historical financial statements of
both the Company and EWI, projections of future income from operations of both
entities, the increase in the market capitalization which might be expected as a
result of the merger, similarity of operations and the fact that cash was not
required for the purchase of EWI. Based on the fairness opinion and the
directors' knowledge of business and financial matters, the Board of Directors
believes that the acquisition of the Wichita Club was in the best interests of
the Company and its shareholders and that the terms were no less favorable than
could have been realized in an arms' length transaction and were fair to the
Company's shareholders. See Principal Shareholders.
Resolutions Regarding Related Transactions On April 18, 1997, the
Board of Directors of the Company adopted a
resolution that all future transactions between the Company and its officers,
directors, or principal shareholders, or any affiliate of any of such person,
must be approved or ratified by a majority of the independent and disinterested
directors of the Company, and the terms of such transaction must be no less
favorable to the Company than could have been realized by the Company in an
arms' length transaction with an unaffiliated person.
40
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue up to 25,000,000 shares of Common
Stock, $.01 par value. There are 3,634,721 shares presently outstanding. All
shares of Common Stock have equal voting rights and, when validly issued and
outstanding, have one vote per share in all matters to be voted upon by
shareholders. There are approximately 84 holders of record of the Company's
Common Stock. The shares of Common Stock have no preemptive, subscription,
conversion or redemption rights and may be issued only as fully paid and
non-assessable shares. Cumulative voting in the election of directors is not
allowed, which means that the holders of a majority of the outstanding shares
represented at any meeting at which a quorum is present will be able to elect
all of the directors if they choose to do so and, in such event, the holders of
the remaining shares will not be able to elect any directors. On liquidation of
the Company, each common shareholder is entitled to receive a pro rata share of
the Company's assets available for distribution to common shareholders.
Preferred Stock
The Company is authorized to issue up to a total of 10,000,000 shares of
Preferred Stock, $.10 par value, in one or more series, with such rights,
preferences, qualifications, limitations and restrictions as shall be set forth
in the Certificate of Designation authorizing the issuance of such stock. The
Company's Board of Directors has designated 500,000 shares of Preferred Stock as
Series A Preferred Stock. The remaining shares of Preferred Stock may be issued
in one or more series from time to time with such designations, rights,
preferences and limitations as the Company's board of directors may determine
without approval of its shareholders. The rights, preferences and limitations of
separate series of serial Preferred Stock may differ with respect to such
matters as may be determined by the Company's Board of Directors, including
without limitation, the rate of dividends, method or nature or prepayment of
dividends, terms of redemption, amounts payable on liquidation, sinking fund
provisions, conversion rights and voting rights. The ability of the Board to
issue Preferred Stock could also be used by it as a means for resisting a change
of control of the Company and can therefore be considered an "anti-takeover"
device. Other than as set forth below, the Company currently has no plans to
issue any shares of Preferred Stock.
Series A Cumulative Convertible Redeemable Preferred Stock
Dividends. Holders of Series A Preferred Stock are entitled to receive
dividends at a rate of $1.20 per share per year, payable in arrears
semi-annually to holders of record on the first banking day of each January and
July after issuance. Dividends are payable in cash. Such dividends are
cumulative. With respect to the payment of dividends, the Series A Preferred
ranks senior to the Common Stock.
Liquidation Preference. The Series A Preferred Stock has a preference
upon liquidation equal to $12 per share plus all accrued and unpaid dividends.
After payment of the preference amount, the Series A Preferred Stock will
participate no further in distribution of proceeds.
Conversion. Commencing _____, 1998, each share of Series A Preferred
Stock may be converted by the Company into shares of Common Stock based on the
average closing price of the Common Stock for the five days immediately
preceding the close of the quarter then ended. The conversion rate (the
"Conversion Rate") is based upon the bid price of the Company's Common Stock
less a 20% discount. The Conversion Rate is subject to adjustment, on the terms
described below.
The Conversion Rate is subject to adjustment upon the occurrence of the
following events: the issuance of shares of Common Stock or other securities of
the Company as a dividend or distribution on shares of Common Stock of the
Company to the holders of all of its outstanding shares of Common Stock;
subdivisions, combinations, or certain reclassifications of shares of Common
Stock of the Company; or the distribution to the holders of shares of Common
Stock of the Company generally of evidences of indebtedness or assets (excluding
cash dividends and distributions made out of current or retained earnings) or
rights, options, or warrants to subscribe for securities of the Company other
than those mentioned above. No adjustment in the conversion rates will be
required to be made with respect to the Series A Preferred Stock until
cumulative adjustments amount to one percent or more; however, any such
adjustment not required to be made will be carried forward and taken into
account in any subsequent adjustment. In lieu of fractional shares of Common
Stock, the number of shares to be issued will be rounded up or down to the
nearest whole share as the case may be.
41
<PAGE>
Redemption. At any time after _________, 1998 (twelve months from
issuance), the Company may redeem the Series A Preferred Stock at $13.20 plus
payment of all accrued and unpaid dividends. To redeem the Series A Preferred
Stock, the Company must give record holders notice of at least 30 days and no
more than 60 days prior to the redemption date.
In the event of any consolidation with or merger of the Company into
another corporation, or sale of all or substantially all of the properties and
assets of the Company to any other corporation, or in case of any reorganization
of the Company, each share of Series A Preferred Stock would thereupon become
convertible only into the number of shares of stock of other securities, assets
or cash to which a holder of the number of shares of Common Stock of the Company
issuable (at the time of such consolidation, merger, sale or reorganization)
upon conversion of such share of Series A Preferred Stock would have been
entitled upon such consolidation, merger, sale or reorganization.
Voting and Preemptive Rights. The holders of the Series A Preferred
Stock have voting rights on the basis of one vote for each share of Common Stock
into which each share of Series A Preferred Stock may be converted. The Series A
Preferred Stock shall not be entitled to preemptive rights.
Series A Redeemable Common Stock Purchase Warrants
Each Warrant entitles the holder thereof to purchase one share of Common
Stock at an exercise price of $ 1.50, subject to adjustment for anti-dilutive
events, at any time prior to ______, 2002 (five years from date of issuance)
unless earlier redeemed by the Company as described below.
The Warrants are subject to redemption by the Company at $.05 per
Warrant, at any time commencing ______ (12 months from the date of this
Prospectus), on 30 days' prior written notice to the holders of Warrants,
provided that the daily trading price per share of Common Stock has been at
least $ 7.00 for a period of at least ten consecutive trading days ending within
ten days prior to the date upon which the notice of redemption is given. For
purposes of determining the daily trading price of the Company's Common Stock,
if the Common Stock is listed on a national securities exchange, is admitted to
unlisted trading privileges on a national securities exchange, or is listed for
trading on a trading system of the NASD such as the NASDAQ Small Cap Market or
the NASDAQ/NMS, then the last reported sale price of the Common Stock on such
exchange or system each day shall be used or if the Common Stock is not so
listed on such exchange or system or admitted to unlisted trading privileges
then the average of the last reported high bid prices reported by the National
Quotation Bureau, Inc. each day shall be used to determine such daily trading
price. The Warrants will be exercisable until the close of the business day
preceding the date fixed for redemption, if any.
The Warrants will be issued in registered form pursuant to the terms of
a Warrant Agreement dated as of _______, 1997, (the "Warrant Agreement") between
the Company and American Securities Transfer & Trust Inc., as Warrant Agent.
Reference is made to said Warrant Agreement (which has been filed as an Exhibit
to the Registration Statement of which this Prospectus is a part) for a complete
description of the terms and conditions thereof. The description herein is
qualified in its entirety by reference to the Warrant Agreement.
The exercise prices and number of shares of Common Stock or other
securities issuable on exercise of the Warrants are subject to adjustment in
certain circumstances, including in the event of a stock dividend, stock split,
recapitalization, reorganization, merger or consolidation of the Company.
The Warrants may be exercised upon surrender of the Warrant certificate
on or prior to the expiration date at the offices of the Warrant Agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
cashier's or certified check payable to the Company) to the Warrant Agent for
the number of warrants being exercised. The Warrant holders do not have the
rights or privileges of holders of Common Stock.
At any time when the Warrants are exercisable and as a condition to
redemption of the Warrants, the Company is required to have a current
registration statement on file with the Securities and Exchange Commission and
to effect appropriate qualifications under the laws and regulations of the
42
<PAGE>
states in which the holders of Warrants reside in order to comply with
applicable laws in connection with the exercise of the Warrants and the resale
of the Common Stock issued upon such exercise. So long as the Warrants are
outstanding, the Company will undertake to file all post-effective amendments to
the registration statement required to be filed under the Securities Act, and to
take appropriate action under Federal and state securities laws to permit the
issuance and resale of Common Stock issuable upon exercise of the Warrants. The
Company will use its best efforts to register or qualify the shares issuable
upon conversion of the Warrants in all of the jurisdictions in which the
securities offered hereby are registered or qualified. However, the Company may
determine not to register or qualify the shares underlying the Warrants in
certain other jurisdictions where the time and expense involved would not
justify such registration and qualification. There can be no assurance that the
Company will be in a position to effect such action under the Federal and
applicable state securities laws, and the failure of the Company to effect such
action may cause the exercise of the Warrants and the resale or other
disposition of the Common Stock issued upon such exercise to become unlawful.
The Company may amend the terms of the Warrants, but only by extending the
termination date or lowering the exercise price. The Company has no present
intention of amending such terms.
Stock Transfer Agent/Warrant Agent/Exchange Agent
The Company has designated American Securities Transfer & Trust, Inc. as
its transfer agent for the Common Stock, its Warrant Agent and its Exchange
Agent for the Series A Preferred Stock.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
3,634,721 shares of Common Stock. The shares of Series A Preferred Stock offered
hereby (other than those which may be acquired by affiliates of the Company)
will be freely tradable, without restrictions, under the Securities Act of 1933,
as amended (the "Act"). Holders of ________ shares have entered into a lock up
agreement with the Representative. See Underwriting.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated), including persons deemed to be affiliates,
whose restricted securities have been fully paid for and held for at least one
year from the later of the date of payment therefor to the Company or
acquisition thereof from an affiliate, may sell such securities in brokers'
transactions or directly to market makers, provided that the number of shares
sold in any three month period may not exceed the greater of 1% of the then
outstanding Common Stock or the average weekly trading volume of the Common
Stock during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain notice requirements and the availability of current
public information about the Company. After two years have elapsed from the
later of the issuance of restricted securities by the Company or their
acquisition from an affiliate, such securities may be sold without limitation by
persons who are not affiliates under Rule 144.
Sales of substantial amounts of Common Stock by shareholders of the
Company under Rule 144 or otherwise, or even the potential for such sales, are
likely to have a depressive effect on the market price of the Common Stock and
Warrants and could impair the Company's ability to raise capital through the
sale of its equity securities.
Selling Security Holders
The Company has registered under the Registration Statement of which
this Prospectus is a part, 350,000 shares of Common Stock on behalf of Selling
Security Holders. Of the 350,000 shares to be sold, Red River Concepts, Inc.
plans to sell 300,000 shares. Each such Selling Security Holder has agreed with
the Underwriter that such holder will not publicly offer, sell or otherwise
dispose of, any of such shares of the Company's Common Stock for a period of six
months after the date of this Prospectus, without the prior written consent of
the Underwriter. After the completion of this offering, the Company will amend
its Registration Statement and this Prospectus to permit such persons to
publicly offer and sell all such shares of Common Stock. After the sale of such
shares of Common Stock, none of such persons is expected to own more than 1% of
the outstanding Common Stock of the Company.
44
<PAGE>
UNDERWRITING
The Underwriters named below, acting through the Representative, have
jointly and severally agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company and the Company has agreed
to sell to the Underwriters, the respective number of shares of Series A
Preferred Stock and Warrants set forth opposite their names below at the initial
public offering price less the underwriting discount set forth on the cover page
of this Prospectus:
Underwriters Number of Shares Number of Warrants
National Securities Corporation
--------------- -----------------
TOTAL 400,000 1,200,000
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the securities offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to purchase 400,000 shares of
Series A Preferred Stock and 1,200,000 Warrants, if any are purchased.
The Underwriters propose to offer part of the shares of Series A
Preferred Stock and Warrants offered hereby directly to the public at the
offering price and part of such shares of Series A Preferred Stock and Warrants
to certain dealers at a price that represents a concession within the discretion
of the Representative. The Underwriters do not intend to confirm sales to
accounts over which they exercise discretionary authority. The Underwriters may
allow, and such dealers may re-allow, a concession within the discretion of the
Representative. After the initial offering, the offering price and the selling
terms may be changed by the Underwriters.
The Series A Preferred Stock and Warrants offered by the Underwriters
are subject to prior sale. The Underwriters reserve the right to withdraw,
cancel or modify such offer (which may be done only by filing an amendment to
the Registration Statement) and to reject orders in whole or in part for the
purchase of any of the Series A Preferred Stock and Warrants and to cancel any
sale even after the purchase price has been paid if such sale, in the opinion of
the Underwriters, would violate federal or state securities laws or a rule or
policy of the NASD.
The Company and the Underwriters have agreed to indemnify each other and
related persons against certain liabilities, including liabilities under the
Securities Act, and, if such indemnifications are unavailable or are
insufficient, the Company and the Underwriters have agreed to damage
contribution arrangements between them based upon the relative benefits received
from the Offering and the relative fault resulting in such damages. Such
relative benefits and relative fault would be determined in legal actions among
the parties. Under such contribution arrangements, the maximum amount payable by
any Underwriter would be the public offering price of the Series A Preferred
Stock and Warrants underwritten and distributed by such Underwriter.
The officers and directors of the Company, holders of more than 5% of
the Company's outstanding Common Stock prior to the Offering, and their
affiliates have entered into agreements which provide that such persons, who own
an aggregate of _________ shares of Common Stock, may not sell any of such
shares without the consent of the Representative during a 24 month period
commencing on the date of this Prospectus.
The Company has granted to the Underwriters an option exercisable for 45
days from the date of this Prospectus to purchase up to 60,000 additional shares
of Series A Preferred Stock and 180,000 Warrants from the Company at the
respective Prices to Public less the Underwriting Discounts solely to cover
over-allotments, if any. In addition, the Company has agreed to pay to the
Representative at the closing of the Offering, a non-accountable expense
allowance of 3% of the aggregate initial public offering price of the Series A
Preferred Stock and Warrants to cover expenses incurred by the Representative in
connection with the Offering, reduced by $25,000 previously advanced by the
Company.
45
<PAGE>
The Company has agreed to issue for $100, the Underwriters' Warrants to
purchase 40,000 shares of Series A Preferred Stock and 120,000 Warrants. The
Underwriters' Warrants are exercisable any time during the four year period
commencing one year after the date of this Prospectus at $14.40 per share and
$.15 per Warrant (120% of the initial public offering price). The Underwriters'
Warrants are not transferable for one year from the date of this Prospectus
except to (i) officers of the Underwriters or any successors thereof; (ii) a
successor to an Underwriter in a merger or consolidation; (iii) a purchaser of
all or substantially all of the assets of an Underwriter; (iv) shareholders of
an Underwriter in the event of liquidation of the Underwriter; (v)
broker-dealers participating in this offering and (vi) officers or partners of
such participating broker-dealers. Any profit realized on the sale of the Series
A Preferred Stock, the Warrants or the underlying shares of Common Stock may be
deemed additional underwriting compensation. Commencing one year from the date
hereof, holders of the Underwriters' Warrants will have piggyback registration
rights for a period of five years with respect to the securities underlying the
Underwriters' Warrants.
The Prices to Public of the Series A Preferred Stock and Warrants have
been determined by negotiations between the Company and the Representative, with
consideration being given to the current status of the Company's business, its
financial condition, its present and prospective operations, the general status
of the securities market, and the market conditions for new offerings of
securities.
If the Representative, at its election, at any time one year after the
date of this Prospectus, solicits the exercise of the Warrants, the Company will
be obligated, subject to certain conditions, to pay the Representative a
solicitation fee equal to 10% of the aggregate proceeds received by the Company
as a result of the solicitation. No warrant solicitation fees will be paid
within one year after the date of this Prospectus. No solicitation fee will be
paid if the market price of the Common Stock is lower than the then exercise
price of the Warrants, no solicitation fee will be paid if the Warrants being
exercised are held in a discretionary account at the time of exercise, except
where prior specific approval for exercise is received from the customer
exercising the Warrants, and no solicitation fee will be paid unless the
customer exercising the Warrants states in writing that the exercise was
solicited and designates in writing the Representative or other broker-dealer to
receive compensation in connection with the exercise. The Representative may
reallow a portion of the fee to soliciting broker-dealers.
46
<PAGE>
LEGAL MATTERS
Legal matters in connection with the shares of Series A Preferred Stock
and Warrants being offered hereby have been passed on for the Company by the law
firm of Brenman Bromberg & Tenenbaum, P.C., Denver, Colorado. Maurice J. Bates
L.L.C., Dallas, Texas has acted as legal counsel to the Underwriters in
connection with certain legal matters relating to the Offering.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1995 and for the year then ended included in this Prospectus and Registration
Statement have been audited by Causey Demgen & Moore Inc., independent auditors,
as set forth in their report appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The Consolidated Financial Statements of the Company as
of December 31, 1996 and for the year then ended included in this Prospectus and
Registration Statement have been audited by Gross Collins & Cress, P.C.,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND NOTES
<TABLE>
<S> <C>
Independent Auditors' Reports ........................................... F-3
Consolidated Balance Sheets - December 31, 1996 and 1995 ................ F-5
Consolidated Statements of Income -
Years Ended December 31, 1996 and 1995 ................................ F-7
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1996 and 1995 ................................ F-8
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996 and 1995 ................................ F-9
Notes to Consolidated Financial Statements .............................. F-11
Consolidated Condensed Balance Sheets - March 31,1997.................... F-24
Consolidated Condensed Statements of Income -
For Three Months Ended March 31, 1997 and 1996......................... F-26
Consolidated Condensed Statements of Stockholders' Equity -
For Three Months Ended March 31, 1997 and 1996......................... F-27
Consolidated Condensed Statements of Cash Flows -
Years Ended December 31, 1996 and 1995................................. F-28
Notes to Consolidated Financial Statements............................... F-29
INDEX TO FINANCIAL STATEMENTS OF IN CAHOOTS
Report of Independent Certified Public Accountants....................... F-30
Balance Sheets at December 31, 1994 and 1995............................. F-31
Statements of Income for Each of the Two Years
in the Period Ended December 31, 1995.................................. F-33
Statements of Partners' Capital for Each of the
Two Years in the Period Ended December 31, 1995........................ F-34
Statements of Cash Flows for Each of the Two Years
in the Period Ended December 31, 1995.................................. F-35
Notes to the Financial Statements........................................ F-36
Unaudited Balance Sheets at September 30, 1995 and 1996.................. F-41
Unaudited Statement of Income for the Nine Months
Ended September 30, 1995 and 1996...................................... F-43
Unaudited Statement of Partners' Capital for the
Nine Months Ended September 30, 1995 and 1996.......................... F-44
</TABLE>
F-1
<PAGE>
Unaudited Statements of Cash Flows for Nine
Months Ended September 30, 1995 and 1996............................... F-45
Notes to Unaudited Financial Statements
September 30, 1996..................................................... F-46
INDEX TO FINANCIAL STATEMENTS OF
ENTERTAINMENT WICTHITA, INC.
Report of Independent Certified Public Accountants....................... F-51
Balance Sheets at December 31, 1994 and 1995............................. F-52
Statements of Operations for Each of the Two Years
in the Period Ended December 31, 1995.................................. F-53
Statements of Stockholders' Equity for Each of the
Two Years in the Period Ended December 31, 1995........................ F-54
Statements of Cash Flows for Each of the Two Years
in the period Ended December 31, 1995.................................. F-55
Notes to the Financial Statements........................................ F-56
Unaudited Balance Sheets at September 30, 1995 and 1996.................. F-58
Unaudited Statement of Income for the Nine Months
Ended September 30, 1995 and 1996...................................... F-59
Unaudited Statement of Stockholders' Equity for the
Nine Months Ended September 30, 1995 and 1996.......................... F-60
Unaudited Statements of Cash Flows for Nine
Months Ended September 30, 1995 and 1996............................... F-61
Notes to Unaudited Financial Statements
September 30, 1996..................................................... F-62
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Western Country Clubs, Inc.
We have audited the accompanying consolidated balance sheet of
Western Country Clubs, Inc. as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Western Country Clubs, Inc. as of December 31, 1996, the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Atlanta, Georgia /s/ GROSS, COLLINS + CRESS, P.C. March 8, 1997 GROSS, COLLINS +
CRESS, P.C.
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Stockholders
Western Country Clubs, Inc.
We have audited the accompanying consolidated balance sheet of Western Country
Clubs, Inc. and subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Western Country
Clubs, Inc. and subsidiaries as of December 31, 1995, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
February 26, 1996
F-4
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 190,624 $ 223,839
Certificate of deposit, restricted (Note 3) 200,000 -
Accounts receivable 44,736 35,533
Notes and loans receivable (Note 4) 100,000 100,000
Inventories 79,628 96,867
Prepaid expenses 68,889 96,741
Capitalized offering costs 142,857 -
Pre-opening expenses - 52,272
Deferred income taxes (Note 11) 244,287 112,000
Income taxes receivable 7,269 160,120
---------- ----------
TOTAL CURRENT ASSETS 1,078,290 877,372
---------- ----------
PROPERTY AND EQUIPMENT, at cost
Land and improvements 298,286 224,989
Building and building improvements 755,900 755,900
Leasehold improvements 2,112,942 2,605,056
Equipment 667,393 524,783
Furniture and fixtures 333,330 427,009
---------- ----------
4,167,851 4,537,737
Less accumulated depreciation 1,104,353 722,999
---------- ----------
PROPERTY AND EQUIPMENT, net 3,063,498 3,814,738
---------- ----------
OTHER ASSETS
Deferred income taxes (Note 11) 89,334 85,000
Goodwill, net of accumulated amortization of $170,701 in 1996 169,747 584,249
and $189,215 in 1995
Covenant not to compete, net of accumulated amortization of - 508,019
$68,768 in 1995
Deposits and other 108,257 139,765
---------- ----------
TOTAL OTHER ASSETS 367,338 1,317,033
---------- ----------
TOTAL ASSETS $4,509,126 $6,009,143
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-5
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 325,822 $ 180,355
Notes payable (Note 8) 475,742 283,872
Current portion of notes payable - related parties (Note 8) 323,129 493,000
Accrued expenses 390,167 259,499
Current portion of long-term debt (Note 8) 97,063 79,080
Current portion of liability under non-compete - 221,781
agreement (Note 13)
---------- ----------
TOTAL CURRENT LIABILITIES 1,611,923 1,517,587
NOTES PAYABLE - related parties (Note 8) 56,250 -
LONG-TERM DEBT (Note 8) 498,802 552,152
LIABILITY UNDER NON-COMPETE AGREEMENT (Note 13) - 152,922
---------- ----------
TOTAL LIABILITIES 2,166,975 2,222,661
EQUITY INTEREST, other partners in consolidated subsidiary
(Note 1) 265,716 217,854
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 15, 16, and 17)
STOCKHOLDERS' EQUITY (Note 10) - -
Preferred stock, $.10 par value; 10,000,000 shares authorized,
none issued and outstanding
Common stock, $.01 par value; 25,000,000 shares authorized, 35,199 29,447
3,519,921 in 1996 and 2,944,721 in 1995 shares issued
and outstanding
Additional paid-in capital 4,201,087 3,782,738
Retained earnings (deficit) (2,159,851) (243,557)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,076,435 3,568,628
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,509,126 $6,009,143
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-6
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
----------- ----------
<S> <C> <C>
REVENUES
Beverage and food sales $ 4,961,467 $5,878,502
Admission fees 2,312,992 1,986,847
Other revenues 393,226 642,709
----------- ----------
TOTAL REVENUES 7,667,685 8,508,058
----------- ----------
COSTS AND EXPENSES
Cost of products and services 2,488,218 2,349,097
Depreciation 439,802 382,891
Amortization 197,004 259,921
Interest 135,630 137,059
General and administrative expense 4,832,476 4,909,189
Impairment of long-lived assets (Note 7) 1,719,818 -
Consulting fees, related parties - 11,400
Merger expenses - 117,190
----------- ----------
TOTAL COSTS AND EXPENSES 9,812,948 8,166,747
----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES, OTHER PARTNERS'
INTERESTS, EQUITY IN LOSS OF PARTNERSHIP, WRITE OFF
OF INVESTMENT IN PARTNERSHIP AND EXTRAORDINARY ITEM (2,145,263) 341,311
----------- ----------
PROVISION (BENEFIT) FOR INCOME TAXES (Note 11)
Current (48,984) 183,660
Deferred (136,621) (50,000)
----------- ----------
TOTAL PROVISION (BENEFIT) FOR INCOME TAXES (185,605) 133,660
----------- ----------
INCOME (LOSS) BEFORE OTHER PARTNERS' INTERESTS, EQUITY
IN LOSS OF PARTNERSHIP, WRITE OFF OF INVESTMENT IN
PARTNERSHIP, AND EXTRAORDINARY ITEM (1,959,658) 207,651
OTHER PARTNERS' INTERESTS IN NET INCOME (LOSS) OF
CONSOLIDATED SUBSIDIARIES, net of income tax benefit of
$16,868 in 1996 and $12,458 in 1995 (Note 1) (19,518) (20,587)
EQUITY IN LOSS OF PARTNERSHIP, net of income tax benefit
of $74,841 (Note 1) - (123,676)
WRITE OFF OF INVESTMENT IN PARTNERSHIP, net of income
tax benefit of $166,183 (Note 14) - (274,621)
----------- ----------
NET LOSS BEFORE EXTRAORDINARY ITEM (1,979,176) (211,233)
GAIN ON EXTINGUISHMENT OF DEBT, net of income tax
provision of $39,776 (Note 13) 65,730 -
----------- ----------
NET LOSS $(1,913,446) $ (211,233)
=========== ==========
NET LOSS PER COMMON SHARE
Loss before extraordinary Item $ (0.65) $ (0.07)
Extraordinary item 0.02 -
----------- ----------
NET LOSS PER COMMON SHARE $ (0.63) $ (0.07)
=========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,035,079 3,030,383
=========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-7
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------------------- Paid-In Earnings
Shares Amount Capital (Deficit)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ 3,477,263 $ 34,773 $ 3,544,912 $ (32,324)
Expiration of the recision period for common stock sold
in February 1994 (Note 10) 116,667 1,167 348,833 -
Common stock repurchased from the Company's president
(Note 10) (700,000) (7,000) (1,918,000) -
Deemed contribution of capital by the Company's president representing the
excess of the fair market of the stock repurchased over the amount actually
paid ($.40 per share)
(Note 10) - - 1,645,000 -
Exercise of stock options at $2.50 per share (Note 10) 27,000 269 67,231 -
Common stock issued in exchange for promotional service 15,000 150 44,850 -
Common stock issued in exchange for legal services 8,791 88 49,912 -
Net loss for the year ended December 31, 1995 - - - (211,233)
----------- ----------- ----------- -----------
Balance at December 31, 1995 2,944,721 29,447 3,782,738 (243,557)
Common stock issued for cash in private placement (Note 10) 95,200 952 237,048 -
Common stock issued pursuant to stock compensation plan
(Note 10) 80,000 800 158,366 -
Common stock issued in acquisition of subsidiary (Note 6) 400,000 4,000 22,935 (2,848)
Net loss for the year ended December 31, 1996 - - - (1,913,446)
----------- ----------- ----------- -----------
Balance at December 31, 1996 3,519,921 $ 35,199 $ 4,201,087 $(2,159,851)
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1995
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,913,446) $ (211,233)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization 636,806 654,910
Gain on extinguishment of debt (105,506) -
Write-off of note receivable 100,000 -
Loss from impairment of assets 1,719,818 -
Minority interest in earnings of subsidiaries 36,386 33,045
Equity in loss of limited partnership - 639,322
Loss in disposal of property and equipment - 10,762
Common stock issued for services 159,166 95,000
Deferred tax provisions (136,621) (50,000)
Changes in assets (increase) decrease
(Increase) decrease in accounts receivable (9,203) 11,780
Increase in pre-opening expenses - (69,686)
(Increase) decrease in inventories 17,239 (17,286)
(Increase) decrease in prepaid expenses 27,852 (33,527)
(Increase) decrease in refundable income taxes 152,851 (160,120)
Increase in capitalized offering costs (142,857) -
Changes in liabilities increase (decrease)
Increase in accounts payable 145,467 104,018
Decrease in income taxes payable - (116,471)
Increase in accrued expenses 130,668 44,317
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 818,620 934,831
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted certificate of deposit (200,000) -
Investment and advances to Limited Partnership - (639,322)
Notes and loans receivable (100,000) (100,000)
Acquisition of property and equipment (226,818) (626,399)
Decrease in deposits 8,383 15,277
Acquisition of Entertainment Wichita, Inc. (2,936) -
----------- ------------
NET CASH USED BY INVESTING ACTIVITIES (521,371) (1,350,444)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of common stock - (280,000)
Proceeds from sale of common stock 238,000 -
Proceeds from exercise of stock options - 67,500
Partnership distributions to minority interests (32,050) (45,400)
Borrowings under notes payable 234,851 300,070
Repayments of notes payable (347,545) (416,658)
Borrowings under notes payable - related parties 100,000 793,000
Repayments of notes payable, related parties (523,720) (300,000)
----------- ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (330,464) 118,512
----------- ------------
</TABLE>
Continued . . .
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-8
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
NET DECREASE IN CASH (33,215) (297,101)
CASH, BEGINNING OF YEAR 223,839 520,940
---------- ----------
CASH, END OF YEAR $ 190,624 $ 223,839
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 141,225 $ 123,524
---------- ----------
Cash paid for income taxes $ - $ 92,120
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
During 1996 and 1995, the Company issued 80,000 and 23,791 shares,
respectively, of its common stock in exchange for various services,
including legal, consulting, and promotional aggregating $159,166 in 1996
and $95,000 in 1995.
During 1996, the Company exchanged 400,000 shares of its common stock for
all the common stock of Entertainment Wichita, Inc. (Note 6).
The Company acquired the following assets and liabilities in the
transaction:
<TABLE>
<S> <C>
Working capital $ (2,936)
Property and equipment, net 380,648
Notes payable (310,099)
Minority interest (43,526)
---------
Net book value of acquisition $ 24,087
=========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
F-10
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS
Western Country Clubs, Inc. ( the "Company" ) was
incorporated in Colorado on December 19, 1989, and commenced operations
in 1993. The Company's operations have consisted primarily of owning
and operating "country-western" theme nightclubs. The Company's
subsidiaries and divisions are as follows:
Western Country Club 1, Ltd. ("Western 1, Ltd.") is a
limited partnership formed on January 19, 1993. Western 1, Ltd. owns
and operates a nightclub in Indianapolis, Indiana. The operations of
the nightclub began on April 14, 1993. The Company has an 80% profit
interest in the partnership.
WCWW Acquisition Corporation ("WCWW") is a wholly owned
subsidiary formed in January 1995 to hold the interim and final liquor
licenses for the Company's nightclub in Tucson, Arizona.
The St. Louis division of the Company was acquired on
October 7, 1994. This division operates a nightclub in St. Louis,
Missouri.
Entertainment Wichita, Inc. ("EWI"), a wholly owned
subsidiary, owns an 80% interest in In Cahoots, Ltd. ("In Cahoots"). In
Cahoots is a limited partnership that owns and operates a nightclub in
Wichita, Kansas (Note 6).
Western Newco, Inc. ("Newco") was formed on October 5,
1995, for the purpose of participating in the proposed merger with
Cowboys Concert Hall - Arlington, Inc. ("Cowboys"). The merger was
never submitted to the shareholders of Cowboys for approval; hence,
Newco is presently inactive.
In addition to these subsidiaries and divisions, the
Company holds a 50% interest in a nightclub in Atlanta, Georgia (Note
14).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting
policies followed by the Company:
Cash and cash equivalents - The Company considers all
highly liquid investments with original maturities of three months or
less to be cash equivalents.
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.
Consolidation - The consolidated financial statements
include the accounts of the Company, two limited partnerships over which
the Company has financial control, and three wholly owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-11
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments - Investments in partnerships, which the
Company does not financially control, are accounted for on the equity
method until financial control is established.
Inventories - Inventories consist of liquor, wine, beer,
and boutique items. Inventories are stated at the lower of cost
(first-in, first-out) or market.
Depreciation and amortization - Property and equipment are
stated at cost. Depreciation is provided using the straight-line method
over the assets' estimated useful lives as follows: land improvements,
10-15 years; building and improvements, 10-30 years; leasehold
improvements, 7-10 years; equipment, 7-10 years; furniture and fixtures,
7-10 years.
Intangibles - Organization costs, liquor license costs and
goodwill are amortized over five years. Certain costs incurred before a
nightclub is opened are capitalized as pre-opening expenses and amortized
over a 12-month period commencing the first full month the nightclub
begins operation. The covenant not to compete is amortized over 15
years, the period covered by the amended agreement.
Measurement of impairment - At each balance sheet date, the
Company reviews the amount of recorded goodwill, covenant not to compete
and related nightclub assets (separately by club) for impairment.
Whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable out of undiscounted future
operating cash flows and the sum of the expected cash flows from these
assets is less than the carrying amount of these assets, the Company will
recognize an impairment loss in such period in the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Repairs and maintenance - Normal costs incurred to repair
and maintain fixed assets are charged to operations as incurred. Repairs
and betterments which extend the life of an asset are capitalized and
subsequently depreciated on a straight-line basis over the remaining
useful life of the asset. When assets are sold or retired, the cost and
accumulated depreciation are removed from the accounts and any resulting
gain or loss is included in operations.
Income taxes - Income taxes are provided based on earnings
reported in the financial statements. The Company follows Statement of
Financial Accounting Standards No. 109 whereby deferred income taxes are
provided on temporary differences between reported earnings and taxable
income.
Net income per common share - Net income per common share
is computed based on the weighted average number of shares outstanding
during the periods. Common stock equivalents included in the computation
represent shares issuable upon assumed exercise of stock options which
would have a dilutive effect. Shares issuable under stock warrants have
been excluded since they would be antidilutive.
Concentration of credit risk - Financial instruments which
potentially subject the Company to concentrations of credit risk are
primarily cash and temporary cash investments. The Company places its
cash investments in highly rated financial institutions. At times, the
Company may have bank deposits in excess of Federal Deposit Insurance
Commission (FDIC) limits.
F-12
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) RESTRICTIONS OF CASH
Restricted cash is composed of a certificate of deposit for
$200,000. This money is used to secure an outstanding loan with a bank in
the amount of $200,000 (Note 8).
(4) NOTES AND LOANS RECEIVABLE
On November 30, 1995, the Company loaned to Cowboys
Entertainment, Inc. $100,000 which was to be repaid on November 30, 1996.
The note was determined to be uncollectible and was written off in 1996.
During 1996, the Company made three loans to other parties.
The first loan is for $25,000 and is secured by the stock granted under
the Company's qualified stock option plan. The second loan is for $55,000
and will be repaid in early 1997 when the exchange for Cowboys stock
occurs (Note 18). The third loan for $20,000 is due on April 9, 1997 and
carries an interest rate of 8% per annum.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, short-term notes receivable,
commercial paper and notes payable approximates fair value because of the
short-term maturity of these instruments.
The fair value of long-term debt, including current
portion, is estimated based on quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of
the same maturities.
(6) ACQUISITIONS
Atlanta club investment - On June 29, 1995, the Company, as
the limited partner, contributed $500 to the capital of Cowboys Concert
Hall/Atlanta, Ltd. ("Atlanta") in exchange for a 50% interest in the
Partnership. The Company also agreed to lend the Partnership up to
$750,000 and loaned the Partnership $638,822 pursuant to a three-year
unsecured promissory note, due June 29, 1998 bearing interest at 10% per
annum. The Company accounted for its interest in the Partnership using
the equity method until the investment was written off at December 31,
1995 (Note 14).
On June 29, 1995, the Partnership closed on the acquisition
of certain assets and liabilities of a country-western nightclub in
Atlanta, Georgia. The purchase price was $1,650,000 payable $425,000 at
closing plus a $1,225,000 promissory note due December 29, 1999 bearing
interest at 8% per annum.
Condensed financial information of Atlanta as of December
31, 1995 and for the six months ended December 31, 1995 are as follows:
<TABLE>
<S> <C>
Current assets $ 103,081
Noncurrent assets 1,785,138
Current liabilities 1,645,431
Long-term debt 638,822
Partners' equity (deficit) (396,034)
Net loss (397,034)
</TABLE>
F-13
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) ACQUISITIONS (CONTINUED)
Wichita club acquisition - EWI, a Kansas Corporation, is
the general partner of In Cahoots. Through September 30, 1996, EWI owned
a 1% interest in the profits and losses of In Cahoots. On October 1,
1996, limited partners of In Cahoots owning an aggregate 79% limited
partnership interest exchanged these partnership interests for an
aggregate of 36,800 shares of common stock of EWI and the assumption of
$150,000 of debt related to a previous acquisition of limited partnership
interest by another party.
On December 16, 1996, the Company and EWI entered into an
agreement and plan of merger whereby EWI would become a 100% subsidiary
of the Company. On December 16, 1996, the Company issued 400,000 shares
of its common stock and assumed $150,000 of notes owed to former limited
partners of In Cahoots in exchange for all of the outstanding common
shares of EWI.
The exchange of partnership interests of In Cahoots for
shares of common stock of EWI and the merger of the Company with EWI have
been treated as transactions between entities under common control and,
therefore, the consolidated assets and liabilities of EWI are recorded at
historical cost. The operations of EWI and In Cahoots are included in the
consolidated statement of income beginning October 1, 1996, the first
date that common control existed between them and the Company.
The following unaudited pro forma summary presents the
consolidated results of operations as if the acquisitions had occurred at
the beginning of the period presented and do not purport to be indicative
of what would have occurred had the acquisitions been made as of that
date or of results which may occur in the future.
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Net sales $ 9,118,206 $10,927,813
Net loss $(1,880,916) $ (161,867)
Net loss per common share $ (0.55) $ (0.05)
</TABLE>
(7) IMPAIRMENT OF LONG-LIVED ASSETS
As of December 31, 1996, management determined that the
long-lived assets related to its Tucson operations including furniture
and fixtures, equipment, leasehold improvements, and intangibles would
not be realized based on future expected cash flows. Therefore, the
carrying values of these assets have been charged to expense in 1996. In
addition, the deferred rental obligation has been decreased by $45,955 to
recognize the fact that the lease will not be renewed at the end of five
years. The charge to expense is included in "Impairment of long-lived
assets" and the reduction of the deferred rental obligation is recorded
as a reduction in rental expense.
F-14
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) NOTES PAYABLE
Short-term notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Note payable, due in monthly installments of interest only
through February 19, 1997, at which time, a final payment of
unpaid principal is due. Interest is computed at 6.36%.
Collateralized by an interest in certain cash accounts of the
Company and of the Company's former president (Note 18). $ 275,742 $ 283,872
Note payable, due on January 31, 1997. Secured by a
certificate of deposit (Note 3). 200,000 -
--------- ---------
Total short term notes $ 475,742 $ 283,872
Notes payable - related parties consist of the following:
1996 1995
--------- ---------
Note payable - relative of former president, bearing interest
at 12% annually. The note matured on April 28, 1996 (Note 9). $ - $ 393,000
Note payable - officer, bearing interest at 12% annually.
The note matured on November 30, 1996 (Note 9). - 100,000
Note payable - former officer, bearing interest at 12%
annually. The note is due on demand (Note 9). 100,000 -
Notes payable - affiliates of a limited partner, payable on
demand, including interest at 10%. Secured by the personal
guarantee of the Company's president (Note 9). 50,000 -
Note payable - former limited partners, payable on demand,
including interest at 10%, unsecured (Note 9). 10,000 -
Note payable - former limited partner, payable in monthly installments
of $6,250 plus interest at prime plus 1%. Secured by the ownership
interest of a stockholder and the guarantee of a financial corporation.
Prime was 8.5% at December 31, 1996
(Note 9). 139,223 -
Note payable - affiliate of a limited partner, due in monthly
installments of $8,069, including interest at 18% through November 1997.
Secured by equipment, inventories, receivables,
furniture and fixtures (Note 9). 80,156 -
--------- ---------
Total notes payable - related parties 379,379 493,000
Less current portion 323,129 493,000
--------- ---------
Noncurrent portion $ 56,250 $ -
========= =========
</TABLE>
F-15
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) NOTES PAYABLE (CONTINUED)
Long-term debt consists of the following at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable - bank, due in monthly installments of $8,437,
including interest at 3% above prime through February 2004.
Secured by first mortgage on real estate. $486,982 $529,712
Note payable - seller, due in monthly installments of $3,187,
including interest at 10% through January 1999. Secured by
second mortgage on real estate and the personal guarantee of
the Company's former president. 74,203 101,520
Capitalized lease - bank, due in monthly installments of $256,
including interest at 20.5% through November 1998.
Secured by equipment. 4,834 -
Note payable - seller, noninterest bearing, due in monthly
installments of $1,000, through July 1999. Secured by
equipment. 29,846 -
-------- --------
Total long-term debt 595,865 631,232
Less current portion 97,063 79,080
-------- --------
Noncurrent portion $498,802 $552,152
======== ========
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ --------
<S> <C>
1997 $ 97,063
1998 103,965
1999 68,956
2000 67,220
2001 75,371
Thereafter 183,290
--------
Total $595,865
========
</TABLE>
(9) RELATED PARTY TRANSACTIONS
During the years ended December 31, 1996 and 1995, the
Company utilized a service organization whose president is a stockholder
of the Company. The service organization was responsible for the
management of the daily operations of the Company in 1995 and through
September 1996. The total amounts paid to the organization during 1996
and 1995 were $59,936 and $177,647, respectively. Of these amounts,
$14,522 and $91,604 represented reimbursement of Company expenses
incurred.
F-16
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) RELATED PARTY TRANSACTIONS (CONTINUED)
In August 1995, International Entertainment Consultants,
Inc. ("IEC") loaned the Company $300,000 at 12% annual interest payable
monthly, to complete the renovation of the Tucson club into the "A Little
Bit of Texas" format. IEC is owned by a relative of the Company's former
president. The loan was due December 28, 1995, and was extended until
January 28, 1996 after the payment of $100,000 in principal by the
Company. During October 1995, the Company borrowed an additional $193,000
from IEC to make the required payment under the covenant not to compete.
The note bears interest at 12% annually, was due December 28, 1995, and
was extended until January 28, 1996. During January 1996, $262,000 in
principal had been repaid and the remaining balance was repaid on April
28, 1996. In addition, the Company paid IEC $38,540 and $86,043 for the
years ended December 31, 1996 and 1995, respectively, for payroll and
support services, including insurance and office expenses.
During 1995, the Company's then president and a company
owned by the Company's then president loaned the Company $300,000 which
has been repaid. On October 10, 1996, the former president loaned the
Company an additional $100,000 which is due on demand and bears interest
at 12% annually (Note 8).
On July 3, 1993, In Cahoots signed a ten-year lease. The
lessor is a 20% limited partner of In Cahoots. Rent expense under this
lease for the three months ended December 31, 1996 amounted to $39,511
(Note 15).
During 1994, In Cahoots borrowed $150,000 from four limited
partners, $90,000 of which was repaid in 1994. The remaining $60,000
balance is made up of $50,000 which is secured by the personal guarantee
of the president of the Company and $10,000 which is unsecured. The notes
are due upon demand and accrue interest at a rate of 10% per annum (Note
8).
On October 1, 1996, EWI assumed $150,000 of debt when it
acquired control of In Cahoots. The remaining balance of $139,223 at
December 31, 1996 is due to a former limited partner of the Company
(Notes 6 and 8).
On May 24, 1994, In Cahoots entered into a loan agreement
with a mortgage company whose owner is an affiliate of a limited partner
of In Cahoots. Interest expense on this loan amounted to $4,263 for the
three months ended December 31, 1996. The balance as of December 31, 1996
was $80,156 (Notes 6 and 8).
(10) STOCKHOLDERS' EQUITY
Stock options - On December 16, 1993 the Company granted an
option to purchase 250,000 shares of the Company's $.01 par value common
stock at $2.50 per share, to an employee of the Company. The option
expires on December 1, 1998. During 1995, 20,000 options were exercised
resulting in proceeds to the Company of $50,000.
Private placements of common stock - In December 1993, the
Company consummated the private placement of 110,000 shares of its $.01
par value stock at $1.00 per share for total proceeds of $110,000.
F-17
<PAGE>
(10) STOCKHOLDERS' EQUITY (CONTINUED)
On February 7, 1994, the Company commenced the sale of
200,000 shares of its $.01 par value common stock at $3.00 per share
pursuant to a private placement memorandum. The sale was on a
best-efforts basis with no minimum number of shares required to be sold
prior to closing of the offering. The offering was amended on February
16, 1994 to allow $250,000 in borrowings from investors at 10% annual
interest, payable from proceeds of the proposed public offering, and the
sale of 116,667 shares of the Company's common stock at $3.00 per share.
On March 1, 1994, the Company completed the offering raising a total of
$600,000. In connection with the $250,000 notes payable, the Company
granted two five-year options to purchase a total of 17,000 shares of the
Company's common stock at $2.50 per share. Upon the closing of the public
offering on May 9, 1994, the $250,000 notes payable, including interest
of $5,685, were paid from offering proceeds. During 1995, options to
purchase 7,000 shares of common stock at $2.50 per share were exercised,
resulting in net proceeds of $17,500 to the Company.
Common stock subject to rescission - The Company offered to
the purchasers of common stock in the December 1993 and February 1994
private placements the opportunity to rescind their investment in the
Company, upon the Company's filing of its registration statement with the
Securities and Exchange Commission. In the event the December and
February private offerings were integrated into the public offering, the
sales under the private offerings might be considered violations under
Section 5 of the Securities Act of 1933. In connection with the public
offering, 110,000 shares sold in December 1993 for $110,000 were
subsequently registered and sold in the public offering. Therefore, these
110,000 shares are no longer subject to rescission. As a result, the
Company had a potential liability to purchasers of $350,000 (116,667
shares). The liability expired February 28, 1995.
Public offering of stock - On May 9, 1994, the Company
completed a public offering of 460,000 shares of its common stock at
$5.25 per share, resulting in net proceeds of $1,930,061 after deducting
offering expenses of $484,939.
The underwriter received a discount of 10%, a
nonaccountable expense allowance of 3% of the gross proceeds of the
offering, and warrants to purchase 40,000 shares of common stock. The
warrants are exercisable at $6.30 per share commencing April 25, 1995
until April 25, 1999. The Company has granted the holders of the warrants
certain customary registration rights. As of December 31, 1996, none of
these warrants have been exercised.
Warrants granted - Effective July 1, 1994, the Company
granted warrants to purchase 60,000 shares of the Company's common stock
exercisable at $6.00 per share until June 30, 1999, in exchange for
consulting services to be performed over a one-year period. In addition,
stock appreciation rights were granted whereby the consultant could
purchase shares of common stock for $.01 per share representing the
increase in value of the 60,000 shares divided by the then market price
of the stock. Compensation will be recorded as the price of the Company's
stock exceeds the warrant exercise price.
Repurchase of common stock - In March 1995, the Company
repurchased 700,000 shares of its $.01 par value common stock from the
Company's president for $280,000 ($.40 per share). At the time of the
repurchase, the Company had valued the stock at $2.75 per share. The
transaction has been reflected in the statement of stockholders' equity
as the repurchase of the shares at $2.75 per share, allocated between
common stock and additional paid-in capital, and a capital contribution
of the difference between the $2.75 per share fair value and the $.40 per
share price paid. As Colorado law does not provide for treasury stock,
the repurchased shares of stock are treated as authorized but unissued
shares.
F-18
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY (CONTINUED)
Private placements of common stock - During June 1996, the
Company sold 95,200 shares of common stock at $2.50 per share resulting
in net proceeds of $238,000.
Stock compensation plan - In 1996, the Company established
a stock option compensation plan for employees and consultants. The
aggregate number of common shares as to which options and awards may be
granted shall not exceed 250,000, and the options and awards must be
granted within five years. At the time of grant, the Company will
determine the exercise price and the vesting period, which shall not
exceed five years.
During the quarter ended September 30, 1996, the Company
issued: (1) 10,000 shares of the Company's common stock to the Company's
president for services rendered and recorded compensation of $35,000; (2)
15,000 shares of the Company's common stock to a consultant as a
reduction of accounts payable of $46,666; (3) 10,000 shares of the
Company's common stock to a consultant for services valued at $35,000;
and (4) 45,000 shares of the Company's common stock and 145,000 options
to purchase the Company's common stock at $3.50 per share for three years
in exchange for the cancellation of 240,000 options to purchase the
Company's common stock at $2.50 per share. Each of the above issuances of
common stock was valued at $3.50 per share less the previously recorded
compensation where warrants were returned.
(11) INCOME TAXES
As of December 31, 1996 and 1995, the Company's deferred tax assets are as
follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Compensation element of stock options $ - $ 4,700
Tax over book basis of fixed assets 215,349 156,700
Impairment of long-lived assets 684,029 -
Leases with scheduled rent increases 52,921 35,600
Net operating loss carryforward 49,566 -
---------- ---------
1,001,865 197,000
Valuation allowance (668,244) -
---------- ---------
Net deferred tax asset 333,621 197,000
Current asset (244,287) (112,000)
---------- ---------
Long term asset $ 89,334 $ 85,000
========== =========
</TABLE>
Realization of the deferred tax asset is dependent upon the
Company generating sufficient future taxable income against which its
loss carryforward and loss from impairment of long-lived assets can be
offset. At December 31, 1995, management believed that it was more likely
than not that all of the deferred tax would be realized because income
before income taxes would have been $308,266 for the year then ended, if
it had not been for the losses incurred from the Atlanta Club (Note 14).
However, at December 31, 1996, management has determined that it is not
more likely than not that the Company will be able to realize all the tax
benefits from the net operating loss carryforward and impairment of
long-lived assets and has reduced the deferred tax asset by a valuation
allowance of $668,244.
F-19
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) INCOME TAXES (CONTINUED)
Deferred income taxes resulting from temporary differences
in the recognition of income and expense for tax and financial reporting
purposes are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Differences between book and tax
Compensation element of stock options $ (4,700) $(41,925)
Differences between book and tax depreciation 58,649 70,727
Impairment of long-lived assets 684,029 -
Leases with scheduled rent increases 17,321 21,198
Net operating loss carryforwards 49,566 -
--------- --------
804,865 50,000
Change in valuation allowance (668,244) -
--------- --------
Net deferred tax benefit $ 136,621 $ 50,000
========= ========
</TABLE>
The difference between the Company's effective income tax
rate and the United States statutory rate is reconciled below for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
United States statutory rate (34.0)% 34.0%
State income taxes, net of federal income tax benefit (cost) (3.0)% 4.8%
Increase in valuation allowance 31.1% -
Other (2.8)% 0.4%
------ ------
Total (8.7)% 39.2%
====== ======
</TABLE>
At December 31, 1996, the Company has a net operating loss
carryforward of approximately $131,000 which expires in 2011.
(12) CHANGE IN ACCOUNTING ESTIMATE
Effective October 1, 1995, the Company revised its estimate
of the useful lives of the leasehold improvements relating
to the Tucson club from 5 years to 15 years. This date coincided with the
completion of the renovation of the club. Effective January 1, 1995, the
covenant not to compete agreement was amended to cover a 15-year period
and the period for accruing the deferred lease obligation under the
Tucson club's lease, which contains escalating rental payments, was
extended to a 15-year period. The net effect of these changes was to
increase net income by $84,000 ($.03 per common share) for the year ended
December 31, 1995.
(13) GAIN ON EXTINGUISHMENT OF DEBT
During September 1996, the Company settled its outstanding
debt agreement arising from the Tucson covenant not to compete for
$300,000 in cash. The difference between the amount paid and the basis of
the obligation on the books has been recorded as an extraordinary gain of
$65,730, net of the related income tax effect of $39,776.
F-20
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) WRITE OFF OF INVESTMENT IN PARTNERSHIP
Due to significant on-going operating losses and negative
cash flow of the Atlanta Club, the Company wrote off its investment in
and the related loans to Cowboys Concert Hall/Atlanta, Ltd., the
partnership that owns the Atlanta club. The resulting loss of $274,621,
net of income taxes, is recorded in operations for the year ended
December 31, 1995.
(15) LEASE COMMITMENTS
On July 30, 1993, In Cahoots entered into a building lease
for club operations in Wichita, Kansas, with a 20% limited partner. The
lease term is ten years commencing October 15, 1993. In addition to
minimum rental payments of $12,500, In Cahoots is obligated to pay to the
landlord, as additional rent, a percentage of gross sales after
deductions for alcohol and sales taxes. The lease agreement contains two
five-year renewal options at the primary lease term rental rate (Note 9).
In December 1993, the Company entered into a building lease
for club operations in St. Louis, Missouri. The lease term is ten years
with two five-year renewal options. Minimum rent per month is $22,238 for
years one through five and $26,686 per month for years six through ten.
The lease requires a $25,000 security deposit, and is guaranteed by an
affiliated company.
On November 1, 1994, the Company assumed a building lease
for club operations in Tucson, Arizona. The remaining primary lease term
is 6.33 years with two five-year renewal options. Minimum rent per month
for the remainder of the lease term increases annually on the first of
March. Minimum payments through February 28, 1997, are $21,500 per month.
Minimum rent increases to $22,145 on March 1, 1997, $22,809 on March 1,
1998, $23,494 on March 4, 1999, and $24,198 on March 1, 2000. Also on
November 1, 1994, the Company entered into a property lease for parking
around the club in Tucson, Arizona. The lease term is four years with an
option to purchase. Minimum rent per month is $2,000 per month for years
one and two and escalates to $3,000 per month for the remaining term.
Rent expense for the years ended December 31, 1996 and 1995
amounted to $740,613 and $596,708, respectively.
The minimum annual commitments under the real estate leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ----------
<S> <C>
1997 $ 717,306
1998 719,240
1999 750,787
2000 759,204
2001 518,629
Thereafter 915,464
----------
Total $4,380,630
==========
</TABLE>
F-21
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) CONTINGENT LIABILITIES
In May 1995, the Company announced it had entered into a
letter agreement with Cowboys Entertainment, Inc. pursuant to which the
two companies agreed to continue discussions concerning a possible
acquisition by the Company of certain businesses and/or assets of Cowboys
Entertainment, Inc. In October 1995, the Company announced that it had
entered into an Agreement and Plan of Merger (the "Merger") with Newco, a
wholly owned subsidiary of the Company, and Cowboys pursuant to which
Newco would merge with Cowboys, with Cowboys as the surviving entity.
Simultaneously, the Company was to also offer to limited partners of
Cowboys Concert Hall - Arlington, Ltd. ("CCHA, Ltd."), a Texas limited
partnership, the opportunity to exchange their limited partnership
interests and notes, in the approximate amount of $514,022 for an
aggregate of 250,000 shares of the Company's common stock and new notes
in the aggregate amount of $840,000. The transaction was subject to the
approval of the shareholders of Cowboys and the limited partners of CCHA,
Ltd.
The Company filed a registration statement covering the
transactions on November 13, 1995, which included audited financial
statements of the Company, but did not include audited financial
statements of Cowboys or CCHA, Ltd., as required by applicable Securities
and Exchange Commission rules and regulations. Efforts by Cowboys to
retrieve or reconstruct the information necessary to perform the required
audits proved unsuccessful. As a result, the requirement that the
shareholders of Cowboys approve the Agreement and Merger by December 31,
1995 was not fulfilled, and the parties have not agreed to extend the
date for performance.
(17) LITIGATION
The Company is involved in various claims and legal
proceedings of a nature considered normal to its business, principally
personal injury claims resulting from incidents occurring on the premises
of the Company's nightclubs. While it is not feasible to predict or
determine the financial outcome of these proceedings, management does not
believe that they will result in a materially adverse effect on the
Company's financial position, results of operations or liquidity
(18) SUBSEQUENT EVENTS
On February 18, 1997, the Company entered into a line of
credit agreement that allows it to borrow up to $160,000. Through March
4, 1997, $140,000 has been drawn on this line. The debt carries a 12%
annual interest rate and is due within sixty days of the draw on the
line. There is also a 10% fee on the amounts borrowed which is due at the
time of the draw. The line is collateralized by property and the income
generated by said property. In addition, the Company will issue to the
lender warrants to purchase the Company's common stock for a three-year
period at a price of $2.00 per share. The warrants issued will be on the
basis of one warrant for every two dollars funded.
On February 4, 1997, the Company entered into a cessation
agreement which provided the terms for the resignation of one of its
directors. The shares held by this director will be sold at a reduced
price under the option agreement dated February 25, 1997.
In February 1997, the Company exchanged 114,800 of its
common stock and a note receivable for $55,000 to certain persons for
77,000 shares of common stock of Cowboys and warrants to purchase an
additional 77,000 Cowboys shares as part of a settlement with Cowboys.
F-22
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) SUBSEQUENT EVENTS (CONTINUED)
On March 15, 1997, the Company entered into a 51.5-month
lease agreement for an office building to serve as the corporate
headquarters in Oklahoma City, Oklahoma. From March 15, 1997 to August
31, 1998, the base rent will be $36,900 per year. From September 1, 1998
to January 31, 2000, the rent increases to $39,360 per year. From
February 1, 2000 to June 30, 2001, the base rent will be $41,820.
Management decided on March 15, 1997 to close its club in
Tucson, Arizona at the end of April 1997 due to its continuing operating
losses. Impairment of the long-lived assets of the Tucson club was
recorded as of December 31, 1996 (Note 7).
A note in the amount of $275,742 was due February 19, 1997.
As of the date of this report, the note had not been repaid. The
Company's intention is to repay the note with the proceeds from a public
offering (Note 8).
F-23
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
March 31, 1997
ASSETS
CURRENT ASSETS
Cash $ 154,152
Accounts receivable 55,081
Notes and loans receivable 100,000
Inventories 64,571
Prepaid expenses 96,266
Capitalized offering cost 208,991
Deferred income taxes 244,287
Refundable income taxes 4,181
--------------
TOTAL CURRENT ASSETS 927,529
--------------
PROPERTY AND EQUIPMENT, at cost
Land and improvements 298,286
Building and improvements 755,900
Leasehold improvements 2,116,885
Equipment 675,803
Furniture and fixtures 333,328
--------------
4,180,202
Less accumulated depreciation 1,202,727
--------------
NET PROPERTY AND EQUIPMENT 2,977,475
--------------
OTHER ASSETS
Deferred income taxes 89,334
Goodwill, net of amortization 152,724
Deposits and other 123,496
Investments (Note 2) 114,800
--------------
TOTAL OTHER ASSETS 480,354
--------------
TOTAL ASSETS $ 4,385,358
==============
See accompanying notes to consolidated condensed financial
statements.
F-24
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
March 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 248,010
Accrued expenses 408,858
Notes payable (Note 3) 415,742
Current portion of notes payable - related parties 299,266
Current portion of long-term debt 96,798
--------------
TOTAL CURRENT LIABILITIES 1,468,674
--------------
NOTES PAYABLE - RELATED PARTIES,
less current portion 52,399
LONG-TERM DEBT, less current portion 478,695
EQUITY INTEREST OF OTHER PARTNERS IN
CONSOLIDATED SUBSIDIARIES 276,399
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; 10,000,000 shares
authorized, none issued and outstanding -
Common stock, $.01 par value; 25,000,000 shares
authorized, 3,634,721 shares issued and outstanding 36,347
Additional paid-in capital 4,314,739
Retained earnings (deficit) (2,241,895)
--------------
TOTAL STOCKHOLDERS' EQUITY 2,109,191
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,385,358
==============
See accompanying notes to consolidated condensed financial
statements.
F-25
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
REVENUES
Beverage and food sales $ 1,476,812 $ 1,440,596
Admission fees and other revenues 628,073 697,132
--------------- ----------------
TOTAL REVENUES 2,104,885 2,137,728
--------------- ----------------
COSTS AND EXPENSES
Cost of products and services 773,167 620,898
Depreciation and amortization 116,475 159,831
Interest 29,651 37,490
General and administrative expenses 1,254,452 1,175,828
--------------- ----------------
TOTAL COSTS AND EXPENSES 2,173,745 1,994,047
--------------- ----------------
INCOME (LOSS) BEFORE TAXES AND
MINORITY INTEREST (68,860) 143,681
PROVISION FOR INCOME TAXES - 44,973
--------------- ----------------
INCOME (LOSS) BEFORE MINORITY INTEREST (68,860) 98,708
--------------- ----------------
OTHER PARTNERS' INTERESTS IN NET INCOME OF
OF CONSOLIDATED SUBSIDIARIES, NET OF
INCOME TAX BENEFIT OF $-0- (1997) AND
AND $2,073 (1996) 13,184 8,038
--------------- ----------------
NET INCOME (LOSS) $ (82,044) $ 90,670
=============== ================
NET INCOME (LOSS) PER COMMON SHARE $ (0.02) $ 0.03
=============== ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,587,525 3,085,000
=============== ================
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
F-26
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional Retained
----------------------------- Paid-in Earnings
Shares Amount Capital (Deficit)
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31,
1995 2,944,721 $ 29,447 $ 3,782,738 $ (243,557)
Common stock issued for 29,200 292 72,708 -
cash in private placement
Net income for the three
months ended March 31,
1996 90,670
-------------- ------------ ------------- -------------
Balance, March 31, 1996 2,973,921 $ 29,739 $ 3,855,446 $ (152,887)
============== ============ ============= =============
Balance, December 31,
1996 3,519,921 $ 35,199 $ 4,201,087 $ (2,159,851)
Common stock issued for
investment (Note 2) 114,800 1,148 113,652
Net loss for the three
months ended March 31,
1997 (82,044)
-------------- ------------ ------------- -------------
Balance, March 31, 1997 3,634,721 $ 36,347 $ 4,314,739 $ (2,241,895)
============== ============ ============= =============
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
F-27
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (82,044) $ 90,670
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 116,475 159,831
Minority interest in earnings of subsidiaries 13,184 10,111
Deferred tax provision - (31,000)
Increase in present value of liability
under noncompete agreement - 10,268
Changes in assets and liabilities
Increase in accounts receivable (10,345) (68,473)
Decrease in inventories 15,057 4,454
Increase in prepaid expenses (27,377) (61,552)
Decrease (increase) in refundable income taxes 3,088 (10,563)
Increase in capitalized offering costs (66,134) -
Decrease in accounts payable (77,812) (82,214)
Increase in income taxes payable - 73,900
Increase in accrued expenses 18,691 48,196
-------------- ---------------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES (97,217) 143,628
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of certificate of deposit 200,000 -
Acquisition of property and equipment (12,351) (2,580)
(Increase) decrease in deposits and other assets (16,318) 9,750
-------------- ---------------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 171,331 7,170
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 140,000 -
Proceeds from sale of common stock - 73,000
Partnership distributions to minority interests (2,500) (6,000)
Payments on notes payable (200,000) (341,970)
Payments on notes payable, related parties (27,714) 100,000
Payments on long-term debt (20,372) -
-------------- ---------------
NET CASH USED BY FINANCING
ACTIVITIES (110,586) (174,970)
NET DECREASE IN CASH (36,472) (24,172)
-------------- ---------------
CASH AT BEGINNING OF PERIOD 190,624 223,839
-------------- ---------------
CASH AT END OF PERIOD $ 154,152 $ 199,667
============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid during the period $ 42,630 $ 35,306
============== ===============
NONCASH FINANCING ACTIVITY
Issuance of common stock for investment $ 114,800 $ -
============== ===============
</TABLE>
See accompanying notes to consolidated condensed financial
statements.
F-28
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 In the opinion of Western Country Clubs, Inc. (the "Company"), the
accompanying unaudited consolidated condensed financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of March 31,
1997 and the results of operations and cash flows for the quarters
ended March 31, 1997 and March 31, 1996. These statements are
condensed and, therefore, do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. The statements should be read in
conjunction with the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996. The results of operations for the quarters
ended March 31, 1997 and March 31, 1996 are not necessarily indicative
of the results to be expected for the full year.
Note 2 On February 6, 1997, the Company exchanged 114,800 shares of its
common stock for 57,400 shares and 57,400 purchase warrants of the
stock of Cowboys Concert Hall Arlington, Inc. ("Cowboys"). The
individual shareholders of the Cowboys' stock had participated in a
private placement conducted by Cowboys in Fall 1995 to raise funds for
Cowboys to pay its expense in connection with a proposed merger
between Cowboys and the Company which did not occur.
Note 3 On February 18, 1997, the Company obtained a line of credit. The
Company may borrow up to $160,000 at an interest rate of 12% per
annum. The principal and interest were due on April 18, 1997 at which
time the line of credit was extended for an additional 60 days. The
Company pledged as collateral a third mortgage position on the Indy
Club property, an assignment of rents and leases related to the
property, a UCC-1 financing statement covering all the personal
property located thereon, and an assignment of the Company's 80%
partnership interest in the partnership which owns the Indy Club. The
Company also agreed to issue warrants to purchase its common stock at
a price of $2 per share. One warrant will be issued for every $2
borrowed. The Company has borrowed $140,000 as of March 31, 1997.
Note 4 On March 15, 1997, the Company entered into a 51.5-month lease
agreement for office space to serve as the corporate headquarters in
Oklahoma City, Oklahoma. From March 15, 1997 to August 31, 1998, the
base rent will be $36,900 per year. From September 1, 1998 to January
31, 2000, the rent increases to $39,360 per year. From February 1,
2000 to June 30, 2001, the base rent will be $41,820.
Note 5 On May 1, 1997, the Company sold the assets of the Tucson club. The
sales price was $325,000 which is to be received as follows: $100,000
shall be paid to the Company on May 3, 1997; $30,000 shall be paid to
the Company at the rate of $10,000 per month for the months of June,
July, and August; and $195,000 shall be paid to the Company in the
form of a promissory note bearing interest at 8% per annum payable
beginning November 1, 1997. The promissory note is secured by a
security interest in the assets purchased by the buyer.
The Company is liable for certain expenses related to the sale of the
Tuscon club, including approximately $93,400 for rent and property
taxes for the period May 1, 1997 through July 31, 1997.
F-29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
In Cahoots, Limited Partnership
We have audited the accompanying balance sheet of In Cahoots, Limited
Partnership as of December 31, 1994 and 1995, and the related statements of
income, partners' capital and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership'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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of In Cahoots, Limited Partnership
as of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
October 12, 1996
F-30
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
BALANCE SHEET
December 31, 1994 and 1995
ASSETS
------
1994 1995
-------- ------
Current assets:
Cash $ 42,972 $ 33,717
Accounts receivable (Note 2):
Credit cards 605 609
Other 270 6,514
Related parties (Note 5) 39,000 43,803
Inventories (Note 2) 38,682 31,587
Prepaid expenses 32,788 2,120
Pre-opening expenses, net of accumulated
amortization of $159,959 (1994) and
$174,501 (1995) 14,542 -
-------- --------
Total current assets 168,859 118,350
Property and equipment, at cost (Note 2):
Leasehold improvements 168,464 174,939
Parking lot improvements 54,579 73,297
Furniture, fixtures and equipment 260,463 262,963
-------- --------
483,506 511,199
Less accumulated depreciation
and amortization 43,851 94,521
-------- --------
Net property and equipment 439,655 416,678
-------- --------
$608,514 $535,028
======== ========
See accompanying notes.
F-31
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
BALANCE SHEET
December 31, 1994 and 1995
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
1994 1995
-------- --------
Current Liabilities:
Accounts payable $ 43,468 $ 41,674
Notes payable - related parties (Note 2) 50,000 50,000
Current portion of long-term note
payable (Note 2) 48,514 75,425
Note payable - bank (Note 2) 137,758 18,307
Payroll and payroll taxes payable 19,218 16,548
Sales and liquor taxes payable 22,837 16,216
Accrued property taxes payable 7,993 36,471
Accrued rent - related party (Note 3) 9,905 32,011
Accrued interest payable 4,967 12,089
-------- --------
Total current liabilities 344,660 298,741
Long-term debt (Note 2):
Notes payable - related parties 10,000 10,000
Note payable - bank, net of current
portion 149,094 73,501
-------- --------
Total long-term debt 159,094 83,501
Commitments (Note 3)
Partners' capital (Note 4):
General partner 1,048 1,528
Limited partners 103,712 151,258
-------- --------
Total partners' capital 104,760 152,786
-------- --------
$608,514 $535,028
======== ========
See accompanying notes.
F-32
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
INCOME STATEMENT
For the Years Ended December 31, 1994 and 1995
1994 1995
---------- ---------
Revenues:
Beverage and food sales $2,033,900 $1,616,741
Admission fees 718,712 735,881
Other revenues 59,164 67,133
---------- ----------
Total revenues 2,811,776 2,419,755
Costs and expenses:
Cost of products and services 879,494 811,945
Depreciation and amortization 203,810 65,212
Interest 43,460 46,002
Management fees - related party
(Note 5) 152,376 127,005
Rent - related party (Note 3) 164,052 157,011
General and administrative
expenses 1,144,824 1,104,554
---------- ----------
Total costs and expenses 2,588,016 2,311,729
---------- ----------
Net income $ 223,760 $ 108,026
========== ==========
See accompanying notes.
F-33
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
For the Years Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
General Limited
partner partners Total
------- -------- -----
<S> <C> <C> <C>
Balance at December 31, 1993 ........................ $ 10 $ 990 $ 1,000
Net income for the year ended
December 31, 1994 ................................ 2,238 221,522 223,760
Distributions to partners
(Note 4) ......................................... (1,200) (118,800) (120,000)
--------- --------- ---------
Balance at December 31, 1994 ........................ 1,048 103,712 104,760
Net income for the year
ended December 31, 1995 .......................... 1,080 106,946 108,026
Distributions to partners
(Note 4) ......................................... (600) (59,400) (60,000)
--------- --------- ---------
Balance at December 31, 1995 ........................ $ 1,528 $ 151,258 $ 152,786
========= ========= =========
</TABLE>
See accompanying notes.
F-34
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1994 and 1995
1994 1995
--------- -------
Cash flows from operating activities:
Net income $223,760 $108,026
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 203,810 65,212
Change in assets and liabilities:
Decrease (increase)in accounts
receivable 1,643 (6,248)
Decrease (increase) in inventories (38,682) 7,095
Decrease (increase) in prepaid
expenses (32,788) 30,668
Increase (decrease) in accounts
payable 43,468 (1,794)
Increase in accrued expenses 58,904 48,415
-------- --------
Total adjustments 236,355 143,348
-------- --------
Net cash provided by operating
activities 460,115 251,374
Cash flows from investing activities:
Acquisition of property and equipment (456,539) (27,693)
Increase in pre-opening expenses (87,197) -
Increase in accounts receivable -
related party (21,371) (4,803)
-------- --------
Net cash used in investing activities (565,107) (32,496)
Cash flows from financing activities:
Borrowings from related parties 175,000 1,000
Repayments of borrowings from related
parties (115,000) (1,000)
Borrowings from banks 359,794 -
Repayments of borrowings from banks (191,178) (168,133)
Distributions to partners (120,000) (60,000)
-------- --------
Net cash provided by (used in)
financing activities 108,616 (228,133)
-------- --------
Increase (decrease) in cash 3,624 (9,255)
Cash at beginning of period 39,348 42,972
--------- --------
Cash at end of period $ 42,972 $ 33,717
========= ========
Supplemental cash flow information:
Cash paid for interest $ 38,493 $ 38,880
======== ========
See accompanying notes.
F-35
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
1. Summary of significant accounting policies
- -----------------------------------------------
Organization:
The Partnership was organized in Kansas on June 15, 1992. The general
partner is Entertainment Wichita, Inc., a Kansas corporation. The
Partnership commenced operations in February 1994. The Partnership's
operations have consisted primarily of owning and operating a
"Country-Western" theme nightclub in Wichita, Kansas.
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.
Cash and cash equivalents:
For purposes of the statement of cash flows, the Partnership considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories:
Inventories consist of liquor, wine, beer and bar supplies. Inventories are
stated at the lower of cost (first-in, first-out method) or market.
Depreciation and amortization:
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the assets' estimated useful lives as
follows:
Years
Leasehold improvements 10
Parking lot improvements 10
Furniture, fixtures and equipment 10
Certain costs incurred before a nightclub is opened are capitalized as
pre-opening expenses and amortized over a 12 month period commencing the
first full month the nightclub begins operation.
Repairs and maintenance:
Normal costs incurred to repair and maintain fixed assets are charged to
operations as incurred. Repairs and betterments which extend the life of an
asset are capitalized and subsequently
F-36
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
1. Summary of significant accounting policies (continued)
- -----------------------------------------------------------
depreciated on a straight-line basis over the remaining useful life of the
asset. When assets are sold or retired, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss
is included in operations.
Fair value of financial instruments:
Cash, accounts receivable, accounts payable and accrued liabilities are
carried in the financial statements in amounts which approximate fair value
because of the short-term maturity of these instruments. Long-term debt is
carried in the financial statements in amounts which approximate fair value
because interest rates have not changed significantly after the debt was
incurred.
Advertising costs:
The Partnership expenses the costs of advertising as incurred.
During the years ended December 31, 1994 and 1995, the Partnership incurred
advertising costs of $112,805 and $85,408, respectively.
Income taxes:
No provision for income taxes has been provided for the Partnership since
the partners report their distributive share of income or loss in their
personal capacity.
Concentration of credit risk:
Financial instruments which potentially subject the Partnership to
concentrations of credit risk are primarily cash and temporary cash
investments. The Partnership places its cash investments in highly rated
financial institutions.
2. Notes payable
- ------------------
Short-term notes payable to bank consisted of the following at December 31,
1994 and 1995:
1994 1995
-------- ------
Note payable to bank, payable in monthly installments of $13,444, including
interest at 1% over the bank's base rate with the final balance due on
December 8, 1995, unsecured. As of December 31, 1995 this note was in
default but was paid in full during 1996 $137,758 $ 18,307
======== ========
F-37
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
2. Notes payable (continued)
- ------------------------------
Notes payable - related parties consists of the following at December 31,
1994 and 1995:
1994 1995
-------- ------
Notespayable - affiliates of limited partners, payable in monthly
installments of $5,000, including interest at 10%, secured by the
personal guarantee of the Company's president, these loans were in
default at December 31, 1995
$50,000 $50,000
======= =======
Notespayable - limited partners, in the original principal amount of
$50,000, payable on demand, including interest at 10%, unsecured, due
date
subsequently extended to July 28, 1997 $10,000 $10,000
======= =======
Long-term note payable - bank consists of the following at December 31,
1994 and 1995:
1994 1995
-------- ------
Note payable - bank, payable at the rate of $8,069 per month including
interest at 18%, secured by accounts receivable inventory and
furniture and
equipment $197,608 $148,926
Less current maturities (48,514) (75,425)
-------- --------
Amount due after one year $149,094 $ 73,501
======== ========
Maturities of long-term debt at December 31, 1995 are as follows for the
years ended December 31:
1996 $ 75,425
1997 83,501
--------
$158,926
========
3. Real estate leases
- -----------------------
On July 30, 1993, the Partnership entered into a building lease for club
operations in Wichita, Kansas with a 20% limited partner. The lease term is
ten years commencing October 15, 1993. In addition to minimum rental
payments the Partnership is obligated to pay to the landlord, as additional
rent, a percentage of gross sales after deductions for alcohol and sales
taxes. The lease agreement contains two five-year renewal options at the
primary lease term rental rate. For the year ended December 31, 1994 and
1995, the Partnership has incurred additional percentage rent expense of
$9,011 and $12,052 respectively.
F-38
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
Rent expense for the years ended December 31, 1994 and 1995 amounted to
$164,052 and $157,011, respectively, including percentage rent.
The minimum annual commitments under the real estate lease for the years
ended December 31, are as follows:
1996 $ 150,000
1997 150,000
1998 150,000
1999 150,000
2000 150,000
2001-2003 431,250
----------
$1,181,250
4. Capital contributions and distributions of the Partnership
- ---------------------------------------------------------------
During 1993, the general partner contributed capital of $10 and the limited
partners contributed capital of $990. Profits and losses are allocated 99%
to the limited partners' interests and 1% to the general partner. During
the years ended December 31, 1994 and 1995, the Partnership distributed
$120,000 and $60,000, respectively, to the partners.
5. Related party transactions
- -------------------------------
For the years ended December 31, 1994 and 1995, the Partnership paid
management fees to a company owned by relatives of the president of the
general partner amounting to $127,376 and $127,005, respectively, and an
additional $25,000 fee during 1994 for assistance in opening the club. At
December 31, 1994 and 1995, $24,000 and $28,803, respectively, had been
advanced to this related company.
During the year ended December 31, 1994, the Partnership provided training
services valued at $15,000 to the 20% limited partner who leases the club
to the Partnership. This amount has been reflected as a receivable at
December 31, 1994 and 1995. This amount is expected to be repaid upon the
payment by the Partnership of certain notes payable to companies related to
the 20% limited partner.
6. Litigation
- ---------------
A lawsuit has been brought against the Partnership for an alleged personal
injury sustained in 1994 at the club. The Partnership is currently
defending the action with defense costs being paid by the Partnership's
insurer. The Partnership's management believes that
F-39
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
6. Litigation (continued)
- ---------------------------
the financial exposure is minimal and in any event is covered by insurance.
While the Partnership's insurance company has verbally suggested to
Partnership's counsel that they may contest coverage in this matter, no
such action has been filed and the insuror continues to pay for
representation. Claims such as this are routine in the industry and
management believes that the ultimate resolution of this matter will not
materially affect the partnership's financial position.
F-40
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
BALANCE SHEET
September 30, 1995 and 1996
(Unaudited)
ASSETS
------
1995 1996
-------- --------
Current assets:
Cash $ 43,305 $ 45,812
Accounts receivable (Note 2):
Credit cards 197 531
Other 1,477 6,297
Related parties (Note 5) 40,790 39,000
Inventories (Note 2) 29,372 29,773
Prepaid expenses 4,027 6,633
Pre-opening expenses, net of
accumulated amortization of
$174,501 (1995) and $174,501 (1996) - -
-------- --------
Total current assets 119,168 128,046
Property and equipment, at cost (Note 2):
Leasehold improvements 174,939 176,536
Parking lot improvements 72,673 73,297
Furniture, fixtures and equipment 260,463 263,699
-------- --------
508,075 513,532
Less accumulated depreciation
and amortization 81,759 132,884
-------- --------
Net property and equipment 426,316 380,648
-------- --------
$545,484 $508,694
======== ========
See accompanying notes.
F-41
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
BALANCE SHEET
September 30, 1995 and 1996
(Unaudited)
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
1995 1996
-------- -------
Current Liabilities:
Accounts payable $ 43,974 $ 48,629
Notes payable - related parties
(Note 2) 50,000 50,000
Current portion of long-term debt
(Note 2) 60,159 95,292
Note payable - bank (Note 2) 49,469 -
Payroll and payroll taxes payable 9,281 6,218
Sales and liquor taxes payable 15,493 12,732
Accrued property taxes payable 10,794 29,378
Accrued rent - related party (Note 3) 32,010 17,000
Accrued interest payable 10,309 17,000
-------- --------
Total current liabilities 281,489 276,249
Long-term debt (Note 2):
Notes payable - related parties 10,000 -
Note payable - bank, net of current
portion 100,268 14,807
-------- --------
Total long-term debt 110,268 14,807
Commitments (Note 3)
Partners' capital (Note 4):
General partner 1,538 2,177
Limited partners 152,189 215,461
-------- -------
Total partners' capital 153,727 217,638
-------- -------
$545,484 $508,694
======== ========
See accompanying notes.
F-42
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
INCOME STATEMENT
For the Nine Months Ended September 30, 1995 and 1996
(Unaudited)
1995 1996
---------- --------
Revenues:
Beverage and food sales $1,276,176 $ 957,951
Admission fees 578,511 456,636
Other revenues 54,590 35,934
---------- ----------
Total revenues 1,909,277 1,450,521
Costs and expenses:
Cost of products and services 665,719 445,184
Depreciation and amortization 52,450 38,363
Interest 38,653 25,681
Management fees - related party
(Note 5) 101,483 73,685
Rent - related party (Note 3) 119,511 112,500
General and administrative
expenses 822,494 690,256
---------- ----------
Total costs and expenses 1,800,310 1,385,669
---------- ----------
Net income $ 108,967 $ 64,852
========== ==========
See accompanying notes.
F-43
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
For the Nine Months Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
General Limited
partner partners Total
------- -------- -----
<S> <C> <C> <C>
Balance at December 31, 1994 ........................ $ 1,048 $ 103,712 $ 104,760
Net income for the nine months
ended September 30, 1995 ......................... 1,090 107,877 108,967
Distributions to partners
(Note 4) ......................................... (600) (59,400) (60,000)
--------- --------- ---------
Balance at September 30, 1995 ....................... 1,538 152,189 153,727
Net loss for the three months ended
December 31, 1995 ................................ (10) (931) (941)
--------- --------- ---------
Balance at December 31, 1995 ........................ 1,528 151,258 152,786
Net income for the nine months ended
September 30, 1996 ............................... 649 64,203 64,852
--------- --------- ---------
Balance at September 30, 1996 ....................... $ 2,177 $ 215,461 $ 217,638
========= ========= =========
</TABLE>
See accompanying notes.
F-44
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1995 and 1996
(Unaudited)
1995 1996
--------- --------
Cash flows from operating activities:
Net income $108,967 $ 64,852
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 52,450 38,363
Change in assets and liabilities:
Decrease (increase)in accounts
receivable (799) 295
Decrease in inventories 9,310 1,814
Decrease (increase) in prepaid
expenses 28,761 (4,513)
Increase in accounts payable 506 6,955
Increase (decrease) in accrued
expenses 12,967 (31,007)
-------- --------
Total adjustments 103,195 11,907
-------- --------
Net cash provided by operating
activities 212,162 76,759
Cash flows from investing activities:
Acquisition of property and equipment (24,569) (2,333)
Decrease (increase) in accounts
receivable - related party (1,790) 4,803
-------- --------
Net cash provided by (used in)
investing activities (26,359) 2,470
Cash flows from financing activities:
Repayments of borrowings from banks (125,470) (67,134)
Distributions to partners (60,000) -
-------- --------
Net cash used in financing activities (185,470) (67,134)
-------- --------
Increase in cash 333 12,095
Cash at beginning of period 42,972 33,717
--------- --------
Cash at end of period $ 43,305 $ 45,812
========= ========
Supplemental cash flow information:
Cash paid for interest $ 33,311 $ 20,770
======== ========
See accompanying notes.
F-45
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1995 and 1996
1. Summary of significant accounting policies
- -----------------------------------------------
Organization:
The Partnership was organized in Kansas on June 15, 1992. The general
partner is Entertainment Wichita, Inc., a Kansas corporation. The
Partnership commenced operations in February 1994. The Partnership's
operations have consisted primarily of owning and operating a
"Country-Western" theme nightclub in Wichita, Kansas.
Basis of presentation:
The accompanying financial statements have been prepared by the
Partnership, without audit. In the opinion of management, the accompanying
unaudited financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary for a fair presentation of the
financial position as of September 30, 1995 and 1996, and the results of
operations and cash flows for the nine months ended September 30, 1995 and
1996.
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.
Cash and cash equivalents:
For purposes of the statement of cash flows, the Partnership considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories:
Inventories consist of liquor, wine, beer and bar supplies. Inventories are
stated at the lower of cost (first-in, first-out method) or market.
Depreciation and amortization:
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the assets' estimated useful lives as
follows:
Years
-----
Leasehold improvements 10
Parking lot improvements 10
Furniture, fixtures and equipment 10
F-46
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1995 and 1996
1. Summary of significant accounting policies (continued)
- -----------------------------------------------------------
Certain costs incurred before a nightclub is opened are capitalized as
pre-opening expenses and amortized over a 12 month period commencing the
first full month the nightclub begins operation.
Repairs and maintenance:
Normal costs incurred to repair and maintain fixed assets are charged to
operations as incurred. Repairs and betterments which extend the life of an
asset are capitalized and subsequently depreciated on a straight-line basis
over the remaining useful life of the asset. When assets are sold or
retired, the cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in operations.
Fair value of financial instruments:
Cash, accounts receivable, accounts payable and accrued liabilities are
carried in the financial statements in amounts which approximate fair value
because of the short-term maturity of these instruments. Long-term debt is
carried in the financial statements in amounts which approximate fair value
because interest rates have not changed significantly after the debt was
incurred.
Advertising costs:
The Partnership expenses the costs of advertising as incurred.
During the nine months ended September 30, 1995 and 1996, the Partnership
incurred advertising costs of $59,215 and $111,411, respectively.
Income taxes:
No provision for income taxes has been provided for the Partnership since
the partners report their distributive share of income or loss in their
personal capacity.
Concentration of credit risk:
Financial instruments which potentially subject the Partnership to
concentrations of credit risk are primarily cash and temporary cash
investments. The Partnership places its cash investments in highly rated
financial institutions.
2. Notes payable
- ------------------
Short-term notes payable to bank consisted of the following at September
30, 1995 and 1996:
F-47
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1995 and 1996
2. Notes payable (continued)
- ------------------------------
1995 1996
-------- -------
Note payable to bank, payable in monthly installments of $13,444, including
interest at 1% over the bank's base rate with the final balance due on
December 8, 1995, unsecured. As of December 31, 1995 this note was in
de-
fault but was paid in full during 1996 $49,469 $ -
======= ========
Notes payable - related parties consists of the following at September 30,
1995 and 1996:
1995 1996
-------- ------
Notespayable - affiliates of limited partners, payable in monthly
installments of $5,000, including interest at 10%, secured by the
personal guarantee of the Company's president, these loans were in
default at September 30, 1996
$50,000 $50,000
======= =======
Notespayable - limited partners, in the original principal amount of
$50,000, payable on demand, including interest at 10%, unsecured, due
date subsequently
extended to July 28, 1997 $10,000 $10,000
======= =======
Long-term note payable - bank consists of the following at September 30,
1995 and 1996:
1995 1996
-------- ------
Note payable - bank, payable at the rate of $8,069 per month including
interest at 18%, secured by accounts receivable
inventory and furniture and equipment $160,427 $100,099
Less current maturities (60,159) (85,292)
-------- --------
Amount due after one year $100,268 $ 14,807
======== ========
Maturities of long-term debt at September 30, 1996 are as follows for the
twelve month periods ended September 30:
1997 $ 95,292
1998 14,807
--------
$110,099
========
3. Real estate leases
- -----------------------
On July 30, 1993, the Partnership entered into a building lease for club
operations in Wichita, Kansas with a 20% Limited Partner. The lease term is
ten years commencing October 15, 1993. In addition to minimum rental
payments the Partnership is obligated to pay to
F-48
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1995 and 1996
3. Real estate leases (continued)
- -----------------------------------
the landlord, as additional rent, a percentage of gross sales after
deductions for alcohol and sales taxes. The lease agreement contains two
five-year renewal options at the primary lease term rental rate. For the
nine months ended September 30, 1995 and 1996, the Partnership has incurred
additional percentage rent expense of $6,711 and $0, respectively.
Rent expense for the nine months ended September 30, 1995 and 1996 amounted
to $119,511 and $112,500, respectively, including percentage rent.
The minimum annual commitments under the real estate lease for the twelve
month periods ended September 30, are as follows:
1997 $ 150,000
1998 150,000
1999 150,000
2000 150,000
2001 150,000
2002-2004 318,750
----------
$1,068,750
==========
4. Capital contributions and distributions of the Partnership
- ---------------------------------------------------------------
During 1993, the general partner contributed capital of $10 and the limited
partners contributed capital of $990. Profits and losses are allocated 99%
to the limited partners' interests and 1% to the general partner. During
the nine months ended September 30, 1995 and 1996 the Partnership
distributed $60,000 and $0, respectively, to the partners.
5. Related party transactions
- -------------------------------
For the nine months ended September 30, 1995 and 1996, the Partnership paid
management fees to a company owned by relatives of the general partner
amounting to $101,483 and $73,685, respectively. At September 30, 1995 and
1996, $25,790 and $24,000, respectively, had been advanced to this related
company.
During the year ended December 31, 1994, the Partnership provided training
services valued at $15,000 to the 20% limited partner who leases the club
to the Partnership. This amount has been reflected as a receivable at
September 30, 1995 and 1996. This amount is expected to be repaid upon the
payment by the Partnership of certain notes payable to companies related to
the 20% limited partner.
F-49
<PAGE>
IN CAHOOTS, LIMITED PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1995 and 1996
6. Litigation
- ---------------
A lawsuit has been brought against the Partnership for an alleged personal
injury sustained in 1994 at the club. The Partnership is currently
defending the action with defense costs being paid by the Partnership's
insurer. The Partnership's management believes that the financial exposure
is minimal and in any event is covered by insurance. While the
Partnership's insurance company has verbally suggested to Partnership's
counsel that they may contest coverage in this matter, no such action has
been filed and the insuror continues to pay for representation. Claims such
as this are routine in the industry and management believes that the
ultimate resolution of this matter will not materially affect the
partnership's financial position.
F-50
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Shareholders
Entertainment Wichita, Inc.
We have audited the accompanying balance sheet of Entertainment Wichita, Inc. as
of December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entertainment Wichita, Inc. as
of December 31, 1994 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
December 4, 1996
F-51
<PAGE>
ENTERTAINMENT WICHITA, INC.
BALANCE SHEET
December 31, 1994 and 1995
ASSETS
------
1994 1995
-------- -------
Current asset:
Cash $ 30 $ 224
Investment in limited partnership
(Note 2) 1,048 1,528
-------- --------
$ 1,078 $ 1,752
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 10 $ 10
Income taxes payable 406 142
-------- --------
Total current liabilities 416 152
Stockholders' equity (Note 3):
Common stock, $1 par value;
50,000 shares authorized,
3,200 shares issued and
outstanding 3,200 3,200
Additional paid-in capital 1,800 1,800
Less notes receivable from stockholders (4,500) -
Retained earnings (deficit) 162 (3,400)
-------- --------
Total stockholders' equity 662 1,600
-------- --------
$ 1,078 $ 1,752
======== ========
See accompanying notes.
F-52
<PAGE>
ENTERTAINMENT WICHITA, INC.
STATEMENT OF OPERATIONS
For the Years Ended December 31, 1994 and 1995
1994 1995
---------- -------
Equity in earnings of limited
partnership (Note 2) $ 2,238 $ 1,080
General and administrative expenses 1,170 4,500
---------- ----------
Income (loss) before income taxes 1,068 (3,420)
Provision for income taxes 406 142
---------- ----------
Net income (loss) $ 662 $ (3,562)
========== ==========
See accompanying notes.
F-53
<PAGE>
ENTERTAINMENT WICHITA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994 and 1995
<TABLE>
<CAPTION>
Additional Notes Retained
---------- ----- --------
Common Stock paid-in receivable earnings
------------ ------- ---------- --------
Shares Amount capital stockholders (deficit)
------ ------ ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ... 3,200 $ 3,200 $ 1,800 $(4,500) $ --
Net income for the year
ended December 31, 1994 ..... -- -- -- -- 662
Distributions made to
stockholders ................. -- -- -- -- (500)
------- ------- ------- ------- -------
Balance at December 31, 1994 ... 3,200 3,200 1,800 (4,500) 162
Cancellation of notes receivable
for services performed ...... -- -- -- 4,500 --
Net loss for the year ended
ended December 31, 1995 ..... -- -- -- -- (3,562)
------- ------- ------- ------- -------
Balance at December 31, 1995 ... 3,200 $ 3,200 $ 1,800 $ -- $(3,400)
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-54
<PAGE>
ENTERTAINMENT WICHITA, INC.
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1994 and 1995
1994 1995
--------- --------
Cash flows from operating activities:
Net income (loss) $ 662 $ (3,562)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Cancellation of notes receivable
for services performed - 4,500
Equity in earnings of limited
partnership (2,238) (1,080)
Change in assets and liabilities:
Increase in accounts payable 10 -
Increase (decrease) in accrued
expenses 406 (264)
------- --------
Total adjustments (1,822) 3,156
-------- --------
Net cash used in operating
activities (1,160) (406)
Cash flows from investing activities:
Investment in limited partnership (10) -
Distributions received from limited
partnership 1,200 600
-------- --------
Net cash provided by investing
activities 1,190 600
Cash flows from financing activities:
Proceeds from sale of common stock 500 -
Distributions to stockholders (500) -
--------- --------
Net cash provided by (used in)
financing activities - -
-------- --------
Increase in cash 30 194
Cash at beginning of period - 30
-------- --------
Cash at end of period $ 30 $ 224
======== ========
Supplemental cash flow information:
Cash paid for income taxes $ - $ 406
======== ========
See accompanying notes.
F-55
<PAGE>
ENTERTAINMENT WICHITA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
1. Summary of significant accounting policies
- -----------------------------------------------
Organization:
The Company was incorporated in Kansas on July 27, 1992. The Company is the
General Partner of In Cahoots, Limited Partnership. The Partnership
commenced operations in February 1994. The Partnership's operations have
consisted primarily of owning and operating a "Country-Western" theme
nightclub in Wichita, Kansas.
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.
Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Fair value of financial instruments:
Cash, accounts payable and accrued liabilities are carried in the financial
statements in amounts which approximate fair value because of the
short-term maturity of these instruments.
Investments:
Investments in partnerships, which the Company do not financially control,
are accounted for on the equity method until financial control is
established.
Income taxes:
Income taxes are provided based on earnings reported in the financial
statements. The Company follows Statement of Financial Accounting Standards
No. 109 whereby deferred income taxes are provided on temporary differences
between reported earnings and taxable income.
2. Investment of In Cahoots, Limited Partnership
- --------------------------------------------------
During 1994, the Company, as general partner, contributed capital of $10
and the limited partners contributed capital of $990 to In Cahoots, Limited
Partnership. Profits and losses are allocated 99% to the limited partners'
interests and 1% to the general partner.
F-56
<PAGE>
ENTERTAINMENT WICHITA, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1995
2. Investment of In Cahoots, Limited Partnership (continued)
- --------------------------------------------------------------
During the years ended December 31, 1994 and 1995, the Partnership
distributed $1,200 and $600, respectively, to the general partner.
3. Subsequent events
- ----------------------
Effective October 1, 1996, the Company's board of directors approved a 16
for 25 reverse stock split. All shares in the accompanying financial
statements have been adjusted to reflect the split.
Effective October 1, 1996, the Company issued 36,800 shares of its common
stock and assumed notes payable with an aggregate principal balance owed of
$150,000 in exchange for an additional 79% interest in the Partnership. On
December 16, 1996, 100% of the Company's common stock was acquired in a
merger transaction by Western Country Clubs, Inc. (Western) in exchange for
400,000 shares of common stock of Western. These transactions will be
accounted for as transactions between companies under common control and as
such all assets and liabilities of the Company and the Partnership will be
carried over at historic cost.
4. Litigation
- ---------------
A lawsuit has been brought against the Partnership for an alleged personal
injury sustained in 1994 at the club. The Partnership is currently
defending the action with defense costs being paid by the Partnership's
insurer. The Partnership's management believes that the financial exposure
is minimal and in any event is covered by insurance. While the
Partnership's insurance company has verbally suggested to Partnership's
counsel that they may contest coverage in this matter, no such action has
been filed and the insuror continues to pay for representation. Claims such
as this are routine in the industry and management believes that the
ultimate resolution of this matter will not materially affect the
partnership's financial position.
F-57
<PAGE>
ENTERTAINMENT WICHITA, INC.
BALANCE SHEET
September 30, 1995 and 1996
(Unaudited)
ASSETS
------
1995 1996
-------- -------
Current asset:
Cash $ 224 $ 224
Investment in limited partnership 1,538 2,177
-------- --------
$ 1,762 $ 2,401
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 10 $ 10
Income taxes payable 164 239
-------- --------
Total current liabilities 174 249
Stockholders' equity:
Common stock, $1 par value;
50,000 shares authorized,
3,200 shares issued and
outstanding 3,200 3,200
Additional paid-in capital 1,800 1,800
Less notes receivable from stockholders (4,500) -
Retained earnings (deficit) 1,088 (2,848)
-------- --------
Total stockholders' equity 1,588 2,152
-------- --------
$ 1,762 $ 2,401
======== ========
See accompanying notes.
F-58
<PAGE>
ENTERTAINMENT WICHITA, INC.
INCOME STATEMENT
For the Nine Months Ended September 30, 1995 and 1996
(Unaudited)
1995 1996
---------- --------
Equity in earnings of limited
partnership $ 1,090 $ 649
General and administrative expenses - -
---------- ----------
Income before income taxes 1,090 649
Provision for income taxes 164 97
----------- ----------
Net income $ 926 $ 552
=========== ==========
See accompanying notes.
F-59
<PAGE>
ENTERTAINMENT WICHITA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 1995 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Additional Notes Retained
---------- ----- --------
Common Stock paid-in receivable earnings
------------ ------- ---------- --------
Shares Amount capital stockholders (deficit)
------ ------ ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ... 3,200 $ 3,200 $ 1,800 $(4,500) $ 162
Net income for the nine months
ended September 30, 1995 .... -- -- -- -- 926
------- ------- ------- ------- -------
Balance at September 30, 1995 .. 3,200 3,200 1,800 (4,500) 1,088
Cancellation of notes receivable
for services performed ...... -- -- -- 4,500 --
Net income for the three months
ended December 31, 1995 ..... -- -- -- -- (4,488)
------- ------- ------- ------- -------
Balance at December 31, 1995 ... 3,200 3,200 1,800 -- (3,400)
Net income for the nine months
ended September 30, 1996 .... -- -- -- -- 552
------- ------- ------- ------- -------
Balance at September 30, 1996 .. 3,200 $ 3,200 $ 1,800 $ -- $(2,848)
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-60
<PAGE>
ENTERTAINMENT WICHITA, INC.
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1995 and 1996
(Unaudited)
1995 1996
--------- -------
Cash flows from operating activities:
Net income $ 926 $ 552
Adjustments to reconcile net income
to net cash used in operating
activities:
Equity in earnings of limited
partnership (1,090) (649)
Change in assets and liabilities:
Increase (decrease) in accrued
expenses (242) 97
-------- --------
Total adjustments (1,332) (552)
-------- --------
Net cash used in operating
activities (406) -
Cash flows from investing activities:
Distributions received from limited
partnership 600 -
-------- --------
Net cash provided by investing
activities 600 -
-------- --------
Increase in cash 194 -
Cash at beginning of period 30 224
--------- --------
Cash at end of period $ 224 $ 224
========= ========
Supplemental cash flow information:
Cash paid for income taxes $ 406 $ -
========= ========
See accompanying notes.
F-61
<PAGE>
ENTERTAINMENT WICHITA, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
September 30, 1995 and 1996
1. Summary of significant accounting policies
- ---------------------------------------------
Organization:
The Company was incorporated in Kansas on July 27, 1992. The Company is the
General Partner of In Cahoots, Limited Partnership. The Partnership
commenced operations in February 1994. The Partnership's operations have
consisted primarily of owning and operating a "Country-Western" theme
nightclub in Wichita, Kansas.
Basis of presentation:
The accompanying financial statements have been prepared by the Company,
without audit. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary for a fair presentation of the financial
position as of September 30, 1995 and 1996, and the results of operations
and cash flows for the nine months ended September 30, 1995 and 1996.
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.
Cash and cash equivalents:
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
Fair value of financial instruments:
Cash, accounts payable and accrued liabilities are carried in the financial
statements in amounts which approximate fair value because of the
short-term maturity of these instruments.
Investments:
Investments in partnerships, which the Company do not financially control,
are accounted for on the equity method until financial control is
established.
Income taxes:
Income taxes are provided based on earnings reported in the financial
statements. The Company follows Statement of Financial
F-62
<PAGE>
ENTERTAINMENT WICHITA, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
September 30, 1995 and 1996
1. Summary of significant accounting policies (continued)
- ---------------------------------------------------------
Accounting Standards No. 109 whereby deferred income taxes are provided on
temporary differences between reported earnings and taxable income.
2. Litigation
- -------------
A lawsuit has been brought against the Partnership for an alleged personal
injury sustained in 1994 at the club. The Partnership is currently
defending the action with defense costs being paid by the Partnership's
insurer. The Partnership's management believes that the financial exposure
is minimal and in any event is covered by insurance. While the
Partnership's insurance company has verbally suggested to Partnership's
counsel that they may contest coverage in this matter, no such action has
been filed and the insuror continues to pay for representation. Claims such
as this are routine in the industry and management believes that the
ultimate resolution of this matter will not materially affect the
partnership's financial position.
F-63
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representation in connection with this
offering other than those contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company, any Selling Shareholder or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities to which it relates or an offer to or
a solicitation of any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstance, create any implication that
there has been no change in the affairs of the Company since the date hereof or
that the information herein is correct as of any time subsequent to the date
hereof.
TABLE OF CONTENTS
PAGE
Additional Information 2
Prospectus Summary 3
Risk Factors 7
Use of Proceeds 12
Dividend Policy 13
Capitalization 14
Market for Common Stock 15
Unaudited Pro Forma Information 16
Management's Discussion and Analysis 21
Business 26
Management 32
Principal Shareholders 38
Certain Relationships and Related Transactions 40
Description Of Securities 41
Shares Eligible for Future Sale 44
Underwriting 45
Legal Matters 47
Experts 47
Index to Financial Statements F-1
Until , 1997 (25 days from the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
400,000 SHARES
Series A Cumulative
Convertible Redeemable Preferred Stock
1,200,000 Series A
Common Stock
Purchase Warrants
OFFERING PRICE
$12.00 PER SHARE
$0.125 PER WARRANT
Western
Country
Clubs, Inc.
Prospectus
NATIONAL
SECURITIES
Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
A. The Colorado Business Corporation Act (the "Act") allows indemnification of
directors, officers, employees and agents of the Company against liabilities
incurred in any proceeding in which an individual is made a party because he was
a director, officer, employee or agent of the Company if such person conducted
himself in good faith and reasonably believed his actions were in, or not
opposed to, the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. A person must be found to be entitled to indemnification under this
statutory standard by procedures designed to assure that disinterested members
of the Board of Directors have approved indemnification or that, absent the
ability to obtain sufficient numbers of disinterested directors, independent
counsel or shareholders have approved the indemnification based on a finding
that the person has met the standard. Indemnification is limited to reasonable
expenses. In addition, the Company's By-Laws provide that the Company shall have
the power to indemnify its officers, directors, employees and agents to the
extent permitted by the Act.
Specifically, the Act provides as follows:
"7-109-102. Authority to indemnify directors
(1) Except as provided in subsection (4) of this section, a
corporation may indemnify a person made a party to a proceeding because
the person is or was a director against liability incurred in the
proceeding if:
(a) The person conducted himself or herself in good faith;
and
(b) The person reasonably believed:
(I) In the case of conduct in an official capacity
with the corporation, that his or her conduct was in the corporation's
best interests; and
(II) In all other cases, that his or her conduct
was at least not opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had
no reasonable cause to believe his or her conduct was
unlawful.
(2) A director's conduct with respect to an employee benefit plan
for a purpose the director reasonably believed to be in the interests of
the participants in or beneficiaries of the plan is conduct that
satisfies the requirement of subparagraph (II) of paragraph (b) of
subsection (1) of this section. A director's conduct with respect to an
employee benefit plan for a purpose that the director did not reasonably
believe to be in the interests of the participants in or beneficiaries
of the plan shall be deemed not to satisfy the requirements of paragraph
(a) of subsection (1) of this section.
(3) The termination of a proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the director did not
meet the standard of conduct described in this section.
(4) A corporation may not indemnify a director under this
section:
II-1
<PAGE>
(a) In connection with a proceeding by or in the right of
the corporation in which the director was adjudged liable to the
corporation; or
(b) In connection with any other proceeding charging that
the director derived an improper personal benefit, whether or not
involving action in an official capacity, in which proceeding the
director was adjudged liable on the basis that he or she derived an
improper personal benefit.
(5) Indemnification permitted under this section in connection
with a proceeding by or in the right of the corporation is limited to
reasonable expenses incurred in connection with the proceeding.
7-109-103. Mandatory indemnification of directors
Unless limited by its articles of incorporation, a corporation
shall indemnify a person who was wholly successful, on the merits or
otherwise, in the defense of any proceeding to which the person was a
party because the person is or was a director, against reasonable
expenses incurred by him or her in connection with the proceeding.
7-109-105 Court-ordered indemnification of directors
(1) Unless otherwise provided in the articles of incorporation, a
director who is or was a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another
court of competent jurisdiction. On receipt of an application, the
court, after giving any notice the court considers necessary, may order
indemnification in the following manner:
(a) If it determines that the director is entitled to
mandatory indemnification under section 7-109-103, the court shall order
indemnification, in which case the court shall also order the
corporation to pay the director's reasonable expenses incurred to obtain
court-ordered indemnification.
(b) If it determines that the director is fairly and
reasonably entitled to indemnification in view of all the relevant
circumstances, whether or not the director met the standard of conduct
set forth in section 7-109-102(1) or was adjudged liable in the
circumstances described in section 7-109-102(4), the court may order
such indemnification as the court deems proper; except that the
indemnification with respect to any proceeding in which liability shall
have been adjudged in the circumstances described in section
7-109-102(4) is limited to reasonable expenses incurred in connection
with the proceeding and reasonable expenses incurred to obtain
court-ordered indemnification.
7-109-106. Determination and authorization of indemnification of
directors
(1) A corporation may not indemnify a director under section
7-109-102 unless authorized in the specific case after a determination
has been made that indemnification of the director is permissible in the
circumstances because the director has met the standard of conduct set
forth in section 7-109-102. A corporation shall not advance expenses to
a director under section 7-109-104 unless authorized in the specific
case after the written affirmation and undertaking required by section
7-109-104(1)(a) and (1)(b) are received and the determination required
by section 7-109-104(1)(c) has been made.
(2) The determinations required by subsection (1) of this section
shall be made:
II-2
<PAGE>
(a) By the board of directors by a majority vote of those
present at a meeting at which a quorum is present, and only those
directors not parties to the proceeding shall be counted in satisfying
the quorum; or
(b) If a quorum cannot be obtained, by a majority vote of
a committee of the board of directors designated by the board of
directors, which committee shall consist of two or more directors not
parties to the proceeding; except that directors who are parties to the
proceeding may participate in the designation of directors for the
committee.
(3) If a quorum cannot be obtained as contemplated in paragraph
(a) of subsection (2) of this section, and a committee cannot be
established under paragraph (b) of subsection (2) of this section, or,
even if a quorum is obtained or a committee is designated, if a majority
of the directors constituting such quorum or such committee so directs,
the determination required to be made by subsection (1)of this section
shall be made:
(a) By independent legal counsel selected by a vote of the
board of directors or the committee in the manner specified in paragraph
(a) or (b) of subsection (2) of this section or, if a quorum of the full
board cannot be obtained and a committee cannot be established, by
independent legal counsel selected by a majority vote of the full board
of directors; or
(b) By the shareholders.
(4) Authorization of indemnification and advance of expenses
shall be made in the same manner as the determination that
indemnification or advance of expenses is permissible; except that, if
the determination that indemnification or advance of expenses is
permissible is made by independent legal counsel, authorization of
indemnification and advance of expenses shall be made by the body that
selected such counsel.
7-109-107. Indemnification of officers, employees, fiduciaries, and
agents
(1) Unless otherwise provided in the articles of incorporation:
(a) An officer is entitled to mandatory indemnification
under section 7-109-103, and is entitled to apply for court-ordered
indemnification under section 7-109-105, in each case to the same extent
as a director;
(b) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent of the corporation to the same
extent as to a director; and
(c) A corporation may also indemnify and advance expenses
to an officer, employee, fiduciary, or agent who is not a director to a
greater extent, if not inconsistent with public policy, and if provided
for by its bylaws, general or specific action of its board of directors
or shareholders, or contract.
7-109-109. Limitation of indemnification of directors
(1) A provision treating a corporation's indemnification of, or
advance of expenses to, directors that is contained in its articles of
incorporation or bylaws, in a resolution of its shareholders or board of
directors, or in a contract, except an insurance policy, or otherwise,
is valid only to the extent the provision is not inconsistent with
sections 7-109-101 to 7-109-108. If the articles of incorporation limit
indemnification or advance of expenses, indemnification and advance of
expenses are valid only to the extent not inconsistent with the articles
of incorporation.
.
II-3
<PAGE>
(2) Sections 7-109-101 to 7-109-108 do not limit a corporation's
power to pay or reimburse expenses incurred by a director in connection
with an appearance as a witness in a proceeding at a time when he or she
has not been made a named defendant or respondent in the proceeding.
7-109-108. Insurance
A corporation may purchase and maintain insurance on behalf of a
person who is or was a director, officer, employee, fiduciary, or agent
of the corporation, or who, while a director, officer, employee,
fiduciary, or agent of the corporation, is or was serving at the request
of the corporation as a director, officer, partner, trustee, employee,
fiduciary, or agent of another domestic or foreign corporation or other
person or of an employee benefit plan, against liability asserted
against or incurred by the person in that capacity or arising from his
or her status as a director, officer, employee, fiduciary, or agent,
whether or not the corporation would have power to indemnify the person
against the same liability under section 7-109-102, 7-109-103, or
7-109-107. Any such insurance may be procured from any insurance company
designated by the board of directors, whether such insurance company is
formed under the laws of this state or any other jurisdiction of the
United States or elsewhere, including any insurance company in which the
corporation has an equity or any other interest through stock ownership
or otherwise.
7-109-110. Notice to shareholders of indemnification of director
If a corporation indemnifies or advances expenses to a director
under this article in connection with a proceeding by or in the right of
the corporation, the corporation shall give written notice of the
indemnification or advance to the shareholders with or before the notice
of the next shareholders' meeting. If the next shareholder action is
taken without a meeting at the instigation of the board of directors,
such notice shall be given to the shareholders at or before the time the
first shareholder signs a writing consenting to such action."
B. Article VI of the Registrant's Amended and Restated Articles of Incorporation
provides for the elimination of personal liability for monetary damages for the
breach of fiduciary duty as a director except for liability (i) resulting from a
breach of the director's duty of loyalty to the Registrant or its shareholders;
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) for approving payment of
distributions to shareholders to the extent that any such actions are illegal
under the Act; or (iv) for any transaction from which a director derives an
improper personal benefit. This Article further provides that the personal
liability of the Registrant's directors shall be eliminated or limited to the
fullest extent permitted by the Act.
C. The Underwriting Agreement between the Registrant and the Underwriters
provides that the Underwriters will indemnify and hold harmless the Registrant,
the directors of the Registrant, and each person, if any, who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, as
amended (the "1933 Act"), against any and all losses, claims, demands,
liabilities and expenses (including reasonable legal or other expenses) to which
it may become subject, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or in any Blue Sky Application or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, resulting from the use of written
information furnished to the Registrant by the Underwriters or any participating
dealer for use in the preparation of the Registration Statement or in any Blue
Sky Application.
Item 25. Other Expenses of Issuance and Distribution
II-4
<PAGE>
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered. All expenses are
estimated except the registration fee.
Registration and filing fee ........................... $ 4,237
NASD filing fee ....................................... 1,071
Printing . . . . . . . ................................ 40,000*
Accounting fees and expenses .......................... 65,000*
Legal fees and expenses ............................... 75,000*
Blue Sky fees and filing fees ......................... 15,000*
Transfer and Warrant Agent fees ....................... 5,000*
Miscellaneous ......................................... 24,692*
-------
Total ................................................. $ 230,000
=========
- -----------
* Estimated
Item 26. Recent Sales of Unregistered Securities
During the past three years, the Registrant has issued its securities to
the following persons for the cash or other consideration indicated in
transactions that were not registered under the 1933 Act.
A. In February, 1994, the Company sold 116,666 shares of its Common Stock to the
following persons for the consideration indicated:
Name No. of Shares Consideration
Van Baal Investment 5,000 $ 15,000
John Titello 4,333 $ 13,000
Merrill Roberts 3,000 $ 9,000
Kim E. Hensley 20,000 $ 60,000
Jerome Wilensky 5,000 $ 15,000
Ronn Reidel 3,000 $ 9,000
Roxie G. Malara 1,667 $ 5,000
Richard B. Cutforth 15,000 $ 45,000
Col. Henry Graham 7,500 $ 22,500
Ray Orman 16,666 $ 50,000
Dennis W. Hartley, IRA 10,000 $ 30,000
Joel Fennern 3,000 $ 9,000
Sylvia S. Hensley 3,000 $ 9,000
Shelia E. Crawford 3,500 $ 10,500
Charles R. Harrison 6,000 $ 18,000
T-Group, Inc. 10,000 $ 30,000
------- ---------
116,666 $350,000
======= ========
The Company claims the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D
adopted thereunder for the transactions described above. All of the purchasers
were either known to the Company's President, Troy H. Lowrie, or were referred
to the Company by a consultant to the Company. Based upon Mr. Lowrie's knowledge
of the purchasers and upon written representations made by the purchasers, the
Company believes each purchaser was capable of evaluating the merits and risks
of an investment in the Company's securities. All certificates were endorsed
with a legend restricting the sale or transfer of the securities except in
accordance with federal securities laws. No brokers or dealers received
compensation in connection with the sale of these shares.
B. In February, 1994, the Company issued promissory notes in the aggregate
amount of $250,000 to two persons. The notes bear interest at the rate of 10%
per annum and are demand notes. As further consideration for making the
II-5
<PAGE>
loans, the Company granted options to purchase an aggregate of 17,000 shares to
the lenders, exercisable over a five year period, at $2.50 per share. The
following sets forth the name and amount loaned by each lender:
Name Amount of Loan
Michael J. Skurich $100,000
Michele Freedman $150,000
The Company claims the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended. The Company provided each lender with
information concerning the Company, its business, properties, management and
financial condition, and each lender had the ability to understand the
information provided to such lender. The notes were repaid from the proceeds of
the Company's initial public offering in May 1994.
C. In February, 1994, the Company issued 25,000 shares to Merrill E. Roberts as
partial consideration for the exercise of an option to purchase 19% of his
limited partnership interest in WCC I, Ltd. The Company claims the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended. Mr. Roberts
was a prior business associate of the president of the Company, Troy H. Lowrie,
and had extended the Company an option to purchase substantially all of his
limited partnership interest in WCCI, Ltd. in consideration for the Company's
Common Stock. Based upon the Company's knowledge of Mr. Robert's business
acumen, and his understanding of the business of the Company and of WCCI, Ltd.,
the Company believes Mr. Roberts was capable of evaluating the merits and risks
of exchanging his limited partnership interest for stock of the Company.
D. In October, 1994, effective September 30, 1994, the Company issued 232,264
shares to limited partners of Western Country Club I, Ltd. ("WCC I, Ltd.") and
Western Country Club III, Ltd. ("WCC III, Ltd.") pursuant to an offer to limited
partners to exchange interests in WCC I, Ltd. for stock or cash and to purchase
all of the assets of WCC III, Ltd., as follows:
<TABLE>
<CAPTION>
Shares received Shares received
for Limited Partnership for Limited Partnership
Interests in Interests In
Name WCC I, Ltd. WCC III, Ltd.
<S> <C> <C>
Van Baal Investments, Ltd 19,429
Heimy, Ltd 6,476
Robert Spencer 9,714
Margaret Spencer 9,714
Ray Orman 25,600 19,429
John Titello 16,000 16,190
Looking Ahead, Inc. 16,190
James Woods 3,200 6,476
Merrill Roberts 9,714
Eric Peterson 3,200 6,476
Michael Ocello 1,619
Kevin Titello 6,400 1,619
Melvin Jennings 3,238
Vali Lowrie 16,000 12,952
ABDT Joint Venture 9,714
Harold Gorden 3,200 6,476
Syliva Hensley 3,238
------ -----
Totals 73,600 158,664
====== =======
</TABLE>
The Company claims the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D
adopted thereunder for the transactions described above. In addition to being
II-6
<PAGE>
investors in limited partnerships which owned the nightclubs operated by the
Company, most of the limited partners were also holders of the Company's Common
Stock (see A. and C. above). In addition, Eric Peterson was an officer of the
Company and Vali Lowrie was the sister of the president of the Company, Troy H.
Lowrie. Each of the limited partners had a pre-existing business relationship
with Western and most, if not all, also had and continue to have a personal
relationship with Mr. Lowrie. Based upon the information known to the Company,
and representations made by each of the limited partners, the Company believes
each was able to evaluate the risks and merits of exchanging their limited
partnership interest(s) for Common Stock and/or for cash. All certificates were
endorsed with a legend restricting the sale or transfer of the securities except
in accordance with federal securities laws. No brokers or dealers received
compensation in connection with the sale of these shares.
E. On March 15, 1995, the Company authorized the issuance of 15,000 shares to
Michelle James for public relations services rendered. The Company claims the
exemption provided by Section 4(2) of the Securities Act of 1933, as amended,
for the issuance of these shares. Ms. James consulting contract provided for her
compensation to be in shares of the Company's Common Stock, and therefore, the
Company believed she had the information and business acumen necessary to
evaluate the merits and risks of accepting payment for services in the form of
Common Stock.
F. In June, 1996, the Company conducted a private placement of Common Stock at a
price of $2.50 per share as follows:
Name No. of Shares Consideration
- ---- ------------- -------------
Richard B. Cutforth 8,200 $20,500
John M. Black 10,000 25,000
Joel O. Palmer 10,000 25,000
Sedco, Inc. 10,000 25,000
Stephen Douglas Sato 8,000 20,000
Howard J. Manetti 20,000 50,000
Joel Fennern 7,000 17,500
Kim E. Hensley 14,000 35,000
William Pallack 8,000 20,000
----- ------
95,200 $238,000
====== ========
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. Four of the investors had invested
previously in private placements of the Company's Common Stock and/or were
limited partners of one of the limited partnerships which owned the nightclubs,
three investors were known to the Company's then President and the remaining two
investors were referred to the Company by the Company's consultant. Based upon
information known to the Company, and upon the representations by the investors,
the Company believes each of the investors was able to evaluate the risks and
merits of an investment in the Company's Common Stock. No broker/dealers were
involved in the sale and no commissions were paid. All purchasers represented
that they purchased the securities for investment, and all certificates issued
to the purchasers were impressed with a restrictive legend advising that the
shares represented by the certificates may not be sold, transferred, pledged or
hypothecated without having first been registered or the availability of an
exemption from registration established. "Stop transfer" instructions were
placed against the transfer of these certificates by the Company's transfer
agent.
G. In July 1996, the Company granted options to acquire 145,000 shares to a
consultant to the Company. The options are exercisable at $3.50 per share for
three years. The Company also granted the consultant 45,000 shares of Common
Stock in exchange for the return to the Company of options to purchase 240,000
shares at $2.50 per share. The Company claims the exemption provided by Section
4(2) of the 1944 Act for these transactions as the recipient has been a
consultant to the Company since 1993, and therefore had access to the type of
information a registration would provide
II-7
<PAGE>
and the ability to evaluate such information. No broker/dealers were involved in
the sale and no commissions were paid.
H. In September, 1996, the Company offered certain holders of Cowboys Concert
Hall Arlington, Inc. ("Cowboys") common stock the opportunity to exchange their
shares of Cowboys common stock for shares of the Company on the basis of one
share of the Company's Common Stock for each Cowboy's share held and one share
of the Company's Common Stock for each Cowboy's warrant held. These individuals
had participated in a private placement conducted by Cowboys in Fall, 1995 to
raise funds for Cowboys to pay its expenses in connection with a proposed merger
between Cowboys and the Company which did not occur. Three of the investors had
previously purchased shares of the Company's Common Stock in private placements
conducted by the Company and/or were limited partners of one of the limited
partnerships. The remaining ten investors were business associates of the
president of the Company and/or the consultant to the Company. Based upon such
relationships, upon information known to the Company and representations made by
all purchasers, the Company believes that each investor was able to evaluate the
merits and risks of exchanging Cowboys shares for the Company's Common Stock.
These shares were issued in February, 1997.
<TABLE>
<CAPTION>
Name Number of Number of Number of
- ---- --------- --------- ---------
shares of Cowboys Shares of
--------- ------- ---------
Cowboys Warrants Western
------- -------- -------
<S> <C> <C> <C>
Van Baal Investments 10,000 10,000 20,000
John T. Titello 10,000 10,000 20,000
Henry R. Graham 4,000 4,000 8,000
H. N. C. Associates 2,000 2,000 4,000
H. Samuel Greenwalt ITR 5,000 5,000 10,000
Bear Stearns Sec Corp. Cust
Acrodyme Profit Sharing Trust 5,000 5,000 10,000
Robert J. Richmeier, Jr. 2,000 2,000 4,000
Lorence M. Colbert 2,000 2,000 4,000
Shelley B. Don 4,400 4,400 8,800
Richard A. Baker 2,000 2,000 4,000
Gregory A. Walda 5,000 5,000 10,000
Steven Feldman 2,000 2,000 4,000
Lear 171 Inc. 4,000 4,000 8,000
----- ----- -----
TOTAL 57,400 57,400 114,800
====== ====== =======
</TABLE>
I. In December, 1996, the Company acquired an 80% interest in InCahoots Limited
Partnership for 400,000 shares of Common Stock through a merger transaction with
Entertainment Wichita, Inc. ("EWI"), a Kansas corporation. As a result, EWI is
now 80% owned by the Company. EWI is the general partner and an 80% owner of
InCahoots, a country-western theme nightclub located in Wichita, Kansas. EWI is
owned 62.625% by Shane Investments, L.C., a corporation which is solely owned
and controlled by Joe Robert Love, Jr., the adult son of Joe R. Love, a Director
of the Company. The Company claims the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, for the issuance of the
400,000 shares. No broker/dealers were involved in the sale and no commissions
were paid. All purchasers represented that they purchased the securities for
investment, and all certificates issued to the purchasers were impressed with a
restrictive legend advising that the shares represented by the certificates may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an
II-8
<PAGE>
exemption from registration established. "Stop transfer" instructions were
placed against the transfer of these certificates by the Company's transfer
agent.
Item 27. Exhibits and Financial Schedules
The following is a complete list of exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
Exhibit
Number Description
------ -----------
1.1 Form of Underwriting Agreement.(9)
3.1 Articles of Incorporation, dated December 20, 1989.(1)
3.2 Amendment to Articles of Incorporation, dated November 30, 1993.(1)
3.3 Bylaws of Western Country Clubs, Inc.(1)
3.4 Amendment to Articles of Incorporation, dated June 13, 1997, setting
forth the rights and preferences of the Series A Preferred Stock.
4.1 Warrant and Registration Rights Agreement (Underwriters Warrant
Agreement) with form of warrants attached to purchase Series A Preferred
Stock and Series A Warrants.(9)
4.2 Form of Series A Common Stock Purchase Warrant Certificate.
4.3 Form of Series A Preferred Stock Certificate.
5.0 Opinion of Brenman Bromberg & Tenenbaum, P.C.
9.0 Voting Trust Agreement, dated as of September 20, 1996, between Red
River Concepts, Inc. and Troy H. Lowrie(7)
10.1 Lease Agreement, dated August 26, 1993, between Wal-Mart Stores, Inc.
and Western Country Clubs, Inc.(1)
10.2 License Agreement, dated January 20, 1993, between Western Country
Clubs, Inc. and Western Country Club I, Ltd.(1)
10.3 Option for Limited Partnership Interest, dated September 23, 1993,
between Western Country Clubs, Inc. and Merrill E. Roberts.(1)
10.4 Stock Option Agreement, dated December 16, 1993.(1)
10.5 Lease with Option to Purchase, dated December 26, 1993, between and
among Edward L. and Barbara L. Benshoof and Western Country Clubs,
Inc.(1)
10.6 Agreement to Purchase and Sale of Business and Assets, with exhibits,
dated November 1, 1994(2)
10.7 Bill of Sale, dated November 1, 1994, transferring Arizona Bar Liquor
License No. 06100208 to Western(2)
10.8 Amendment to Covenant Not to Compete, undated, between Western and
Clarence O. Bond, Jack E. McMurrough and Ada L. Bond(9)
II-9
<PAGE>
10.9 Agreement and Plan of Merger, dated October 10, 1995, between Western
Country Clubs, Inc., Western Newco, Inc. and Cowboys Concert Hall -
Arlington, Inc. (6)
10.10 Lease with Option to Purchase, dated October 14, 1992, between Expo
Bowl, Inc. and Texas of Indy, Inc.(1)
10.11 Guaranty of Lease with Option to Purchase, dated October 14, 1992, by
Troy H. Lowrie.(1)
10.12 First Amendment to Lease with Option to Purchase dated January 20, 1993,
between Expo Bowl, Inc. and Texas of Indy, Inc.(1)
10.13 Warranty Deed, dated February 28, 1993, in the name of Western Country
Club I, Ltd.(1)
10.14 State of Indiana, Certificate of Trade Mark Registration, dated August
18, 1993, in the name of Texas of Indy, Inc. for "A Little Bit of Texas"
and Design.(1)
10.15 Lease, dated April 2, 1993, between Texas of Indy, Inc. and Great
Western Boot Company.(1)
10.16 Operating Agreement, dated March 17, 1993, between Texas of Indy, Inc.
and Taco Bell Corp.(1)
10.17 Option Agreement, dated January 20, 1993, between and among Western
Country Club I, Ltd., Troy H. Lowrie and Merrill Roberts.(1)
10.18 Amended Limited Partnership Agreement of Western Country Club I, Ltd.(1)
10.19 Consulting Agreement, dated January 20, 1993, between Western Country
Club I, Ltd. and Texas of Indy, Inc.(1)
10.20 Security Agreement, dated March 18, 1993 between Western Country Club I,
Ltd. and Texas of Indy, Inc.(1)
10.21 Option to Purchase Assets, dated January 20, 1993, between Western
Country Club I, Ltd. and Texas of Indy, Inc.(1)
10.22 Promissory Note, dated January 31, 1994, from Western Country Club I,
Ltd. to Expo Bowl, Inc. in the amount of $150,000.(1)
10.23 Guaranty, dated January 31, 1994, of Promissory Note to Expo Bowl, Inc.
by Troy H. Lowrie.(1)
10.24 Promissory Note, dated January 31,1994, from Western Country Club I,
Ltd. to Dulaney National Bank.(1)
10.25 Articles of Incorporation, WCWW Acquisition Corporation, dated January
20, 1995.(4)
10.26 Interim Permit, dated February 9, 1995, from the Arizona Department of
Liquor Licenses and Control for the Wild Wild West nightclub.(5)
10.27 Stock Purchase Agreement, dated September 21, 1996, between and among
Troy H. Lowrie, Western Country Clubs, Inc. and Red River Concepts,
Inc.(7)
10.28 Lease Agreement, dated July 30, 1993, by and between Boots, Inc. and In
Cahoots Limited Partnership.(9)
10.29 Agreement and Plan of Merger, dated December 16, 1996, by and between
Western Country Clubs, Inc., Entertainment Wichita, Inc. and WCCI
Acquisition Corp.(8)
II-10
<PAGE>
10.30 Warrant Agreement, dated __________, 1997, between Western Country
Clubs, Inc. and American Securities Transfer & Trust, Inc.(9)
10.31 Amendment, dated November 26, 1996 to Stock Purchase Agreement, dated
September 20, 1996, by and among Troy H. Lowrie, Red River Concepts,
Inc. and/or its designees; Western Country Clubs, Inc. and C.H.
Financial Corporation.(9)
10.32 Cessation Agreement, dated February 4, 1997, between Troy H. Lowrie, Red
River Concepts, Inc., Western Country Clubs, Inc. and Jebco, L.L.C.(9)
10.33 Lease Agreement, dated February 25, 1997, between Prime Financial
Corporation and Western Country Clubs, Inc. (10)
10.34 Amendment to Stock Purchase Agreement and Cessation Agreement, dated
April 14, 1997, between Troy H. Lowrie, Red River Concepts, Inc. and
Western Country Clubs, Inc.(9)
10.35 Western Country Clubs, Inc. Omnibus Equity Compensation Plan .(9)
10.36 Agreement For the Purchase and Sale of Assets dated April 14, 1997
between Kirby Bond and Western Country Clubs, Inc.(9)
11.1 Computation of per share earnings 12-31-96.(9)
11.2 Computation of per share earnings 3-31-97.(9)
21 Subsidiaries of the Registrant(9)
23.1 Consent of Causey Demgen & Moore, Inc.
23.2 Consent of Brenman Bromberg & Tenenbaum, P.C. (included in Exhibit 5.0)
23.3 Consent of Gross, Collins & Cress, P.C.
23.4 Consent of American Business Capital Corporation.
- -------------
(1) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Registration Statement on Form SB-2, No. 33-72942.
(2) Incorporated by reference from Western's Current Report on Form 8-K,
dated November 1, 1994, attached as Exhibits 10.1 and 10.2 thereto.
(3) Incorporated by reference from Western's Annual Report on Form 10-KSB,
dated February 27, 1995, attached as Exhibit 21 thereto.
(4) Incorporated by reference from Western's Annual Report on Form 10-KSB,
dated February 27, 1995, attached as Exhibit 28.16 thereto.
(5) Incorporated by reference from Western's Annual Report on Form 10-KSB,
dated February 27, 1995, attached as Exhibit 28.17 thereto.
(6) Incorporated by reference from Western's Current Report on Form 8-K,
dated October 19, 1995, attached as Exhibit 10.1.
(7) Incorporated by reference from Western's Current Report on Form 8-K,
dated October 10, 1996, attached as Exhibit 9.
(8) Incorporated by reference from Western's Current Report on Form 8-K,
dated December 16, 1996, attached as Exhibit 2.
(9) Previously filed.
(10) Incorporated by reference from Western's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996, attached as Exhibit 10.30
thereto.
(11) To be filed by amendment.
II-11
<PAGE>
(b) Financial statement schedules have been omitted because they are not
required or the information is included in the financial statements and notes
thereto.
Item 28. Undertakings
The undersigned Registrant will:
(a)(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 in the registration statement; and (iii)
include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The undersigned Registrant will provide to the Underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "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 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 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.
II-12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Oklahoma, State of Oklahoma on June 13, 1997.
WESTERN COUNTRY CLUBS, INC.
By: /s/ James E. Blacketer
--------------------------
James E. Blacketer, President
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ James E. Blacketer President, Principal June 13, 1997
- ----------------------------
James E. Blacketer Executive Officer and
Director
/s/ Ted W. Strickland Principal Financial and June 13, 1997
- ----------------------------
Ted W. Strickland Accounting Officer, Treasurer
and Director
/s/ Joe R. Love Director June 13, 1997
- ----------------------------
Joe R. Love
Director June 13, 1997
John R. Ritter
II-13
ARTICLES OF AMENDMENT
to the
ARTICLES OF INCORPORATION
of
WESTERN COUNTRY CLUBS, INC.
Pursuant to Section 7-106-102 of the Colorado Business Corporation Act,
Western Country Clubs, Inc (the "Corporation") adopts the following Articles of
Amendment to its Articles of Incorporation:
1. The name of the corporation is Western Country Clubs, Inc.
2. The Articles of Incorporation hereby are amended to include Exhibit A
attached hereto, which designates a series of the Corporation's preferred stock
(the "Series A Cumulative Convertible Redeemable Preferred Stock") and sets
forth the preferences, limitations and relative rights of such preferred stock.
3. This Amendment was duly adopted by the Board of Directors on June 13,
1997.
On behalf of Western Country Clubs, Inc., James E. Blacketer, by his
signature set forth below, does hereby confirm, under penalties of perjury, that
the foregoing Articles of Amendment to the Articles of Incorporation of Western
Country Clubs, Inc. are a true and correct copy of said document.
WESTERN COUNTRY CLUBS, INC.
By: /s/ James E. Blacketer
James E. Blacketer, President
EXHIBIT A
RESOLVED, that a series of the class of authorized Preferred Stock of
the Corporation be hereby created, and that the designation and amount thereof
and the voting powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Cumulative Convertible Redeemable Preferred Stock" (the
"Series A Preferred Stock") and the number of shares constituting such series
shall be five hundred thousand (500,000).
Section 2. Dividends and Distributions. The holders of Series A
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, semi-annual
dividends payable in cash on the first banking day of each January and July in
each year (each such date being referred to as a "Dividend Payment Date") at the
rate of $.60 per share ($1.20 per share annually).
Such dividends shall be cumulative and the Corporation shall accrue an
amount equal to the dividend payable if and when dividends are not paid in full
on the Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. The Board of Directors may fix a record date for the determination of
holders of Series A Preferred Stock entitled to receive payment of a declared
dividend, which record date shall be no more than 60 days prior to the date
fixed for payment.
The Corporation shall have declared and paid in full or set apart for
payment dividends on the Series A Preferred Stock at the annual rate of $1.20
per share commencing upon issuance, less any cash dividends previously declared
and paid in full on the Series A Preferred Stock, before the Corporation may (A)
<PAGE>
pay dividends on, make any other distributions on, or redeem or purchase or
otherwise acquire for consideration any class of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for, or out of
the net cash proceeds from the sale of, other shares of any such junior stock,
(B) pay dividends on or make any other distributions on any stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are payable in
proportion to the total amounts to which the holders of all such shares are then
entitled, (C) redeem or purchase or otherwise acquire for consideration any
stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such parity stock in exchange for shares of any stock of the Corporation ranking
junior to the preferred stock, (D) purchase or otherwise acquire for
consideration any shares of the Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock except in accordance with
a purchase offer made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective Series And classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes. The Corporation shall not permit any subsidiary of
the Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could purchase such shares at
such time and in such manner.
In case the Corporation at any time or from time to time shall (A) issue
immediately exercisable rights or warrants to all holders of shares of its
Common Stock entitling them to subscribe for or purchase shares of its Common
Stock (or securities convertible into its Common Stock) at a price per share (or
having a conversion price per share) less than the Current Market Price per
share of Common Stock (as defined in Section 7) on the record date fixed for the
determination of shareholders entitled to receive such right or warrant, or (B)
declare, order, pay or make a dividend or other distribution (including, without
limitation, any distribution of other or additional stock or other securities or
property or rights or warrants to subscribe for securities of the Corporation or
any of its subsidiaries by way of dividend or spin-off, reclassification,
recapitalization or similar corporate rearrangement) on its Common Stock, other
than a dividend payable in cash or shares of the Corporation's Common Stock or
rights or warrants to subscribe for shares of the Corporation's Common Stock,
then the Board of Directors shall, at the same time or times, declare, order,
pay and make a dividend or other distribution on each share of Series A
Preferred Stock that is equivalent to such dividend or other distribution
declared, ordered, paid or made on each share of Common Stock, multiplied by the
number of shares of Common Stock into which a share of Series A Preferred Stock
would be convertible on the record date for such action.
Section 3. Voting Rights. The holders of Series A Preferred Stock shall
have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle its holder to
one vote for each share of Common Stock into which that share of Series A
Preferred Stock would be convertible on the record date;
(B) Except as otherwise provided herein or by law, the holders of Series
A Preferred Stock and the holders of Common Stock shall vote together as one
class on all matters submitted to a vote of the Corporation's shareholders;
(C) The consent of the holders of at least a majority of the outstanding
shares of the Series A Preferred Stock, voting separately as a single class, in
person or by proxy, either in writing without a meeting or at a special or
annual meeting of shareholders called for the purpose, shall be necessary to (i)
create, authorize, or issue any stock ranking on a parity with or senior to
(whether as to dividends, liquidations, dissolution, or winding up) the Series A
Preferred Stock; (ii) create, authorize, or issue any securities convertible
into, or warrants, options, or similar rights to acquire stock ranking on a
parity with or senior to (whether as to dividends, liquidation, dissolution, or
winding up) the Series A Preferred Stock; or (iii) amend the preferences and
rights of the Series A Preferred Stock, in any manner that would materially
alter the relative rights and preferences of the Series A Preferred Stock so as
to adversely affect holders thereof. Notwithstanding the foregoing or anything
<PAGE>
herein to the contrary, no approval by the holders of the Series A Preferred
Stock, voting as a class, shall be required for the approval of any amendment
that effects the division of the Series A Preferred Stock into a greater number
of shares or creates other series of Preferred Stock, which may be junior to the
Series A Preferred Stock.
Section 4. Reacquired Stock. Any shares of the Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
to be created by resolution or resolutions of the Board of Directors.
Section 5. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (A)
to the holders of stock ranking junior to the Series A Preferred Stock unless,
prior thereto, the holders of Series A Preferred Stock shall have received
$12.00 per share plus an amount equal to any declared but unpaid dividends
thereon, or (B) to the holders of stock ranking on a parity with the Series A
Preferred Stock, unless distributions are made ratably on the Series A Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up.
Neither the merger or consolidation or reorganization of this
Corporation with or into another corporation nor the sale, lease, or transfer of
all or substantially all the Corporation's assets shall be deemed to be a
liquidation, dissolution, or winding up within the meaning of this Section 5.
Section 6. Conversion. The Corporation shall have the right to convert
shares of Series A Preferred Stock pursuant to the following provisions:
(A) At any time and from time to time after the first anniversary of the
issuance of the Series A Preferred Stock, the Corporation shall have the right,
at its sole option and election, to convert the shares of the Series A Preferred
Stock, in whole or in part, and in the manner hereinafter set forth, into fully
paid and non-assessable shares of Common Stock of the Corporation. The number of
shares of Common Stock shall be determined by dividing (i) the liquidation
preference of each share of the Series A Preferred Stock plus all any declared
but unpaid dividends thereon, by (ii) the Closing Price per share of Common
Stock for last five Trading Days of the immediately preceding calendar quarter
discounted by 20% (as the capitalized terms are defined in Section 7). The
resulting product shall then be rounded to the nearest one-hundredth of a share
to produce the "Conversion Rate". The Board of Directors of the Corporation may
appropriately adjust the Conversion Rate in light of stock splits or
combinations or Section 7 events and may establish procedures by which this
conversion shall occur.
(B) If less than all of the Series A Preferred Stock at the time
outstanding are to be converted, the shares to be converted shall be converted
on a pro rata basis;
(C) Notice of any conversion of the Series A Preferred Stock shall be
mailed at least 30, but not more than 60, days prior to the date fixed for
conversion to each holder of Series A Preferred Stock, at such holder's address
as it appears on the books of the Corporation. To facilitate the conversion of
the Series A Preferred Stock, the Board of Directors may fix a record date for
the determination of holders of Series A Preferred Stock to be converted, or may
cause the transfer books of the Corporation to be closed for the transfer of the
Series A Preferred Stock, not more than 60 days prior to the date fixed for such
conversion;
(D) The Corporation shall not be required to issue fractional shares of
Common Stock upon conversion, but shall aggregate the number of fractional
shares otherwise issuable to a converting holder to maximize the number of whole
shares issuable, and shall pay any remaining fractional share in cash based on
the Current Market Price.
(E) The number of shares of Common Stock into which each share of the
Series A Preferred Stock is convertible shall be adjusted from time to time as
follows:
(i) In case the Corporation shall at any time or from time to
time declare or pay any dividend on its Common Stock payable in its
<PAGE>
Common Stock or effect a subdivision of the outstanding shares of its
Common Stock into a greater number of shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in its
Common Stock), then, and in each such case, the number of shares of
Common Stock into which each share of the Series A Preferred Stock is
convertible shall be adjusted so that the holder of each share thereof
shall be entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (a) the number of
shares of Common Stock into which such share was convertible immediately
prior to the occurrence of such event by (b) a fraction, the numerator
of which is the sum of (I) the number of shares of Common Stock into
which such share was convertible immediately prior to the occurrence of
such event plus (II) the number of shares of Common Stock which such
holder would have been entitled to receive in connection with the
occurrence of such event had such share been converted immediately prior
thereto, and the denominator of which is the number of shares of Common
Stock determined in accordance with clause (I) above. An adjustment made
pursuant to this subparagraph (E)(i) shall become effective (a) in the
case of any such dividend, immediately after the close of business on
the record date for the determination of holders of Common Stock
entitled to receive such dividend, or (b) in the case of any such
subdivision, at the close of business on the day immediately prior to
the day upon which such corporate action becomes effective;
(ii) In case the Corporation at any time or from time to time
shall combine or consolidate the outstanding shares of its Common Stock
into a lesser number of shares of Common Stock, by reclassification or
otherwise, then, and in each such case, the number of shares of Common
Stock into which each share of the Series A Preferred Stock is
convertible shall be adjusted so that the holder of each share thereof
shall be entitled to receive, upon the conversion thereof, the number of
shares of Common Stock determined by multiplying (a) the number of
shares of Common Stock into which such share was convertible immediately
prior to the occurrence of such event by (b) a fraction, the numerator
of which is the number of shares which the holder would have owned after
giving effect to such event had such share been converted immediately
prior to the occurrence of such event and the denominator of which is
the number of Common Shares into which such share was convertible
immediately prior to the occurrence of such event. An adjustment made
pursuant to this subparagraph (E)(ii) shall become effective at the
close of business on the day immediately prior to the day upon which
such corporate action becomes effective;
(F) If any adjustment in the number of shares of Common Stock into which
each share of the Series A Preferred Stock may be converted required pursuant to
this Section 6 would result is an increase or decrease of less than one percent
of the number of shares of Common Stock into which each share of the Series A
Preferred Stock is then convertible, the amount of any such adjustment shall be
carried forward and adjustment with respect thereto shall be made at the time of
and together with any subsequent adjustment which, together with such amount and
any other amount or amounts so carried forward, shall aggregate at least one
percent of the number of shares of Common Stock into which each share of the
Series A Preferred Stock is then convertible. All calculations under this
paragraph (D) shall be made to the nearest one-hundredth of a share;
(G) The notice of any conversion may be accompanied by a letter of
transmittal, which shall instruct the holder regarding the surrender of the
certificate or certificates representing the share of Series A Preferred Stock
to be converted and shall request the holder to provide the Corporation with
instructions regarding the name or names in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. As promptly
as practicable, the Corporation shall deliver or cause to be delivered (i)
certificates representing the number of validly issued, fully paid and
non-assessable shares of Common Stock of the Corporation to which the holder of
the Series A Preferred Stock so converted shall be entitled; or (ii) if less
than the full number of shares of the Series A Preferred Stock evidenced by the
surrendered certificate or certificates are being converted, a new certificate
or certificates, of like tenor, for the number of shares evidenced by such
surrendered certificate or certificates less the number of shares converted; and
(iii) payment for any fractional share. Such conversions shall be deemed to have
been made at the close of business on the date of giving of notice of
conversion, and the rights of the holder of the shares of the Series A Preferred
Stock to be converted shall cease except for the right to receive Common Stock
of the Corporation in accordance herewith, and the converting holder shall be
<PAGE>
treated for all purposes as having become the record holder of such Common Stock
of the Corporation at such time;
(H) The Corporation shall at all times reserve and keep available out of
its authorized Common Stock the full number of shares of Common Stock of the
Corporation issues upon the conversion of all outstanding shares of the Series A
Preferred Stock; and
(I) Shares of the Series A Preferred Stock may not be converted after
the close of business on the third business day preceding the date fixed for
redemption of such shares pursuant to Section 9.
Section 7. Adjustments For Consolidation, Merger, Etc. In case the
Corporation, (A) shall consolidate with or merge into any other person and shall
not be the continuing or surviving corporation of such consolidation or merger,
(B) shall permit any other person to consolidate with or merge into the
Corporation and the Corporation shall be the continuing or surviving person,
but, in connection with such consolidation or merger, the Common Stock shall be
changed into or exchanged for stock or other securities of any other person or
cash or any other property, (C) shall transfer all or substantially all of its
properties or its assets to any other person, or (D) shall effect a capital
reorganization or reclassification of the Common Stock (other than a capital
reorganization or reclassification resulting in the issue of additional shares
of Common Stock for which adjustment is provided in Section 6), then, and in
each such case, prior provisions shall be made so that each share of Series A
Preferred Stock then outstanding shall be converted into, or exchanged for, one
share of preferred stock (the "Substitute Preferred Stock") of the "Acquiring
Corporation" (as hereinafter defined) entitling the holder thereof to all of the
rights, powers, privileges and preferences with respect to the Acquiring
Corporation to which the holder of a share of Series A Preferred Stock is
entitled with respect to the Corporation, and being subject with respect to the
Acquiring Corporation to the qualifications, limitations and restrictions to
which a share of Series A Preferred Stock is subject with respect to the
Corporation, except that in lieu of and notwithstanding the provisions for
conversion set forth in Section 6, each share of Substitute Preferred Stock
shall be convertible at any time, at the option of the holder thereof, into the
number of shares of "Voting Common Stock" (as hereinafter defined) of the
Acquiring Corporation or, if the Acquiring Corporation shall not meet the
requirements of the proviso hereto, its "Parent" (as hereinafter defined),
subject to adjustments (subsequent to consummation of such transaction) as
nearly equivalent as possible to the adjustments provided for in Section 6 and
this Section 7, determined by multiplying the number of shares of Common Stock
into which each share of the Series A Preferred Stock was convertible
immediately prior to consummation of such transaction by a fraction, the
numerator of which is the "Acquisition Price" (as hereinafter defined) and the
denominator of which is the lesser of (a) the Current Market Price (as
hereinafter defined) per share of the Voting Common Stock of the Acquiring
Corporation or its Parent, as the case may be, on the date of such consummation
or (b) the Current Market Price per share of the Voting Common Stock of the
Acquiring Corporation or its Parent, as the case may be, on the date of such
conversion. Notwithstanding anything contained herein to the contrary, the
Corporation will not effect any of the transactions described in clauses (A)
through (D) above unless, prior to the consummation thereof, each corporation,
including this Corporation, which may be required to deliver any stock,
securities, cash or other property to the holders of shares of the Series A
Preferred Stock shall assume, by written instrument delivered to each transfer
agent of the Series A Preferred Stock, the obligation to deliver to such holder
such shares of stock, securities, cash or other property to which, in accordance
with the foregoing provisions, such holder may be entitled and each such
corporation shall have furnished to each such transfer agent an opinion of
counsel for such corporation, stating that such assumption agreement is legal,
valid and binding upon such corporation.
For purposes of this Section 7, the term "Voting Common Stock" with
respect to any corporation shall mean the common stock of such corporation
ordinarily entitled to elect a majority of the directors constituting the full
board of directors of such corporation; the term "Acquiring Corporation" shall
mean the continuing or surviving corporation of a consolidation or merger with
the Corporation (if other than the Corporation), the transferee of all or
substantially all of the properties and assets of this Corporation, the
corporation consolidating with or merging into the Corporation in a
consolidation or merger in which the Corporation is the continuing or surviving
person, but in connection with which the Common Stock of the Corporation is
changed into or exchanged for the stock or other securities of any other person
or cash or any other property, or, in case of a capital reorganization or
reclassification, the Corporation; the term "Parent" shall mean, as to any
Acquiring Corporation, any corporation which (i) controls the Acquiring
<PAGE>
Corporation directly or indirectly through one or more intermediaries, (ii) is
required to include the Acquiring Corporation in the consolidated financial
statements contained in such Parent's Annual Reports on Form 10-K and (iii) is
not itself included in the consolidated financial statements of any other person
(other than its consolidated subsidiaries); and the term "Acquisition Price"
shall mean, as applied to the Common Stock, the greatest of whichever of the
following are applicable: (1) the Current Market Price per share of Common Stock
on the date on which any transaction to which this Section 7 applies is
consummated; (2) if a purchase, tender or exchange offer is made by the
Acquiring Corporation (or by any of its Affiliates) to the holders of the Common
Stock and such offer is accepted by the holders of more than 50% of the
outstanding shares of Common Stock, the greater of (x) the price determined in
accordance with the provisions of the foregoing clause (1) of this definition
and (y) the Current Market Price per share of Common Stock on the date of
acceptance of such offer by the holders of more than 50% of the outstanding
shares of Common Stock; and (3) the highest price (in cash or Fair Market Value
of securities or other property) paid for a share of Common Stock of which the
Acquiring Person is the Beneficial Owner and acquired by the holder thereof
during the one year immediately preceding the Stock Acquisition Date or in the
transaction in which such Acquiring Person.
The term "Current Market Price" shall mean, as applied to any class of
stock on any date, the average of the daily "Closing Prices" (as hereinafter
defined) for the 20 consecutive "Trading Days" (as hereinafter defined)
immediately prior to the date in question; provided, however, that in the event
that the Current Market Price per share of Common Stock is determined during a
period following the announcement by the Corporation of a dividend or
distribution on its Common Stock payable in shares of its Common Stock or
securities convertible into shares of its Common Stock, and prior to the
expiration of twenty Trading Days after the ex-dividend date for such dividend
or distribution, then, and in each such case, the Current Market Price shall be
appropriately adjusted to reflect the Current Market Price per Common Stock
equivalent. The term "Closing Price" on any day shall mean the last sales price,
regular way, per share of such stock on such day, or, if no such sale takes
place on such day, the closing bid price, regular way, as reported in the
principal consolidated transaction reporting system with respect to securities
listed on the principal national securities exchange on which the shares of such
stock are listed or admitted to trading or, if the shares of such stock are not
listed or admitted to trading on any national securities exchange, the closing
bid price in the Nasdaq System. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which shares of such stock are
listed or admitted to trading is open for the transaction of business or, if the
shares of such stock are not listed or admitted to trading on any national
securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which
national banking institutions are not authorized or obligated by law or
executive order to close.
Section 8. Reports as to Adjustments. Whenever the number of shares of
Common Stock into which the shares of the Series A Preferred Stock are
convertible is adjusted as provided in Section 6, the Corporation shall promptly
compute such adjustment and furnish to each transfer agent for the Series A
Preferred Stock a certificate, signed by a principal financial officer of the
Corporation, setting forth the number of shares of Common Stock into which each
share of the Series A Preferred Stock is convertible as a result of such
adjustment, a brief statement of the facts requiring such adjustment and the
computation thereof and when such adjustment will become effective
Section 9. Redemption. The Corporation shall have the right to redeem
shares of Series A Preferred Stock pursuant to the following provisions:
(A) At any time and from time to time after the first anniversary of the
issuance of the Series A Preferred Stock, the Corporation shall have the right,
at its sole option and election, to redeem the shares of the Series A Preferred
Stock, in whole or in part, at a redemption price of $13.20 per share, plus an
amount equal to all declared but unpaid dividends thereon;
(B) If less than all of the Series A Preferred Stock at the time
outstanding are to be redeemed, the shares to be redeemed shall be redeemed on a
pro rata basis;
(C) Notice of any redemption of the Series A Preferred Stock shall be
mailed at least 30, but not more than 60, days prior to the date fixed for
redemption to each holder of Series A Preferred Stock to be redeemed, at such
holder's address as it appears on the books of the Corporation. In order to
facilitate the redemption of the Series A Preferred Stock, the Board of
Directors may fix a record date for the determination of holders of Series A
<PAGE>
Preferred Stock to be redeemed, or may cause the transfer books of the
Corporation to be closed for the transfer of the Series A Preferred Stock, not
more than 60 days prior to the date fixed for such redemption;
(D) On the redemption date specified in the notice given pursuant to
paragraph (C), the Corporation shall, and at any time after such notice shall
have been mailed and before such redemption date the Corporation may, deposit
for the pro rata benefit of the holders of the shares of the Series A Preferred
Stock so called for redemption the funds necessary for such redemption with a
bank or trust company. Any monies so deposited by the Corporation and unclaimed
at the end of five years from the date designated for such redemption shall
revert to the general fund of the Corporation. After such redemption, any such
bank or trust company shall, upon demand, pay over to the Corporation such
unclaimed amounts and thereupon such bank or trust company shall, upon demand,
pay over to the Corporation such unclaimed amounts and thereupon such bank or
trust company shall be relieved of all responsibility in respect thereto to such
holder and such holder shall look only to the Corporation for the payment of the
redemption price. In the event that monies are deposited pursuant to this
paragraph (D) in respect of shares of the Series A Preferred Stock that are
converted in accordance with the provisions of Section 6, such monies shall upon
such conversion, revert to the general funds of the Corporation and, upon
demand, such bank or trust company shall pay over to the Corporation such monies
and shall thereupon be relieved of all responsibility to the holders of such
shares in respect thereof. Any interest accrued on funds so deposited pursuant
to this paragraph (D) shall be paid from time to time to the Corporation for its
own account; and
(E) Upon the deposit of funds pursuant to paragraph (D) in respect of
shares of the Series A Preferred Stock called for redemption, notwithstanding
that any certificates for such shares shall not have been surrendered for
cancellation, the shares represented thereby shall no longer be deemed
outstanding, and all rights of the holders of the shares of the Series A
Preferred Stock called for redemption shall cease and terminate, excepting only
the right to receive the redemption price therefor and the right to convert such
shares into shares of Common Stock until the close of business on the third
business day preceding the redemption date, as provided in Section 6.
Section 10. Notices of Corporate Action. In the event of:
(A) Any taking by the Corporation by a record of the holders of its
Common Stock for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a dividend payable solely in cash or shares
of Common Stock) or other distribution, or any right or warrant to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right;
(B) Any capital reorganization, reclassification or recapitalization of
the Corporation (other than a subdivision or combination of the outstanding
shares of its Common Stock), any consolidation or merger involving the
Corporation and any other person (other than a consolidation or merger with a
wholly-owned subsidiary of the Corporation, provided that the Corporation is the
surviving or the continuing corporation and no change occurs in the Common
Stock), or any transfer of all or substantially all the assets of the
Corporation to any other person; or
(C) Any voluntary or involuntary dissolution, liquidation or winding up
of the Corporation;
then, and in each such case, the Corporation shall cause to be mailed to each
transfer agent for the shares of the Series A Preferred Stock and to the holders
of record of the outstanding shares of the Series A Preferred Stock, at least 20
days (or ten days in case of any event specified in clause (A) above) prior to
the applicable record or effective date hereinafter specified, a notice stating
(i) the date or expected date on which any such record is to be taken for the
purpose of such dividend, distribution or right and the amount and character of
such dividend, distribution or right or (ii) the date or expected date on which
any such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding up is to take place and
the time, if any such time is to be fixed, as of which the holders of record of
Common Stock shall be entitled to exchange their shares of Common Stock for the
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding up. Such notice shall also state whether
such transaction will result in any adjustment in the number of shares of Common
Stock into which shares of the Series A Preferred Stock are convertible and, if
so, shall state the new number of shares of Common Stock into which each share
<PAGE>
of the Series A Preferred Stock shall be convertible upon such adjustment and
when such adjustment will become effective. The failure to give any notice
required by this Section 9, or any defect therein, shall not affect the legality
or validity of any such action requiring such notice.
June 13, 1997
Western Country Clubs, Inc.
1601 N.W. Expressway, Suite 1610
Oklahoma City, OK 73118
Gentlemen:
Reference is made to the registration statement (the"Registration
Statement") on Form SB-2 relating to the proposed public offering by Western
Country Clubs, Inc. (the "Company") (Registration No. 333-21547) filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Registration Statement relates to (i) up to 460,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred Stock"), (ii) up to 2,300,000
shares of Common Stock into which the Series A Preferred Stock may be converted,
(iii) up to 1,380,000 Series A Common Stock Purchase Warrants (the "Warrants"),
(iv) up to 1,380,000 shares of Common Stock underlying the Warrants, (v) 350,000
shares of Common Stock being registered on behalf of certain shareholders of the
Company ("Selling Shareholders") and (v) warrants to be issued to National
Securities Corporation, the Representative of the Underwriters, and the shares
of Series A Preferred Stock and warrants underlying the Representative's
warrant. At your request, this opinion is being furnished to you for filing as
Exhibit 5 to the Registration Statement.
We have acted as counsel to the Company in connection with the
preparation of the Registration Statement relating to the proposed sale of
Series A Preferred Stock and Warrants by the Company and the proposed sale of
shares of Common Stock by the Selling Shareholders. In such capacity, we have
examined the originals or copies, certified or otherwise identified, of the
Articles of Incorporation, as restated and amended, and Bylaws, as amended, of
the Company, corporate records of the Company, including minute books of the
Company as furnished to us by the Company, certificates of public officials and
of representatives of the Company, statutes and other records, instruments and
documents pertaining to the Company as a basis for the opinions hereinafter
expressed. In giving such opinions, we have relied upon certificates of officers
of the Company with respect to the accuracy of the factual matters contained in
such certificates.
Based upon the foregoing and subject to the other qualifications and
limitations stated in this letter, we are of the opinion that:
(1) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of
Colorado;
<PAGE>
Western Country Clubs, Inc.
June 13, 1997
Page 2
(2) The Series A Preferred Stock and Warrants to be issued by the
Company pursuant to the Registration Statement have been duly
authorized. Upon payment of the price per share of Series A
Preferred Stock and price per Warrant set forth in the final
Prospectus, the shares of Series A Preferred Stock and Warrants
will be validly issued, fully paid and non-assessable.
(3) The shares of Common Stock to be sold by the Selling Shareholders
have been duly authorized and are validly issued, fully paid and
non-assessable.
(4) The shares of Common Stock to be issued to holders of the Series
A Preferred Stock, upon conversion of the Series A Preferred
Stock as stated in the Prospectus, will have been duly
authorized, validly issued, fully paid and non-assessable.
(4) The shares of Common Stock to be issued to holders of the
Warrants, upon exercise and payment of the exercise price stated
in the Warrants, will have been duly authorized, validly issued,
fully paid and non-assessable.
This opinion is a legal opinion and not an opinion as to matters of
fact. This opinion is limited to the laws of the State of Colorado and the
federal law of the United States of America, and to the matters stated herein.
This opinion is made as of the date hereof, and after the date hereof, we
undertake no, and disclaim any, obligation to advise you of any change in any
matters set forth herein, and we express no opinion as to the effect of any
subsequent course of dealing or conduct between the parties. This opinion is
furnished to you solely in connection with the transactions referred to herein,
and may not be relied on, quoted by or otherwise referred to by any other
person, firm or entity without our prior written consent.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
reference to our firm under "Legal Matters" in the Prospectus.
Very truly yours,
Enclosures
DEW/cg
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in the Registration Statement of Western Country Clubs,
Inc. on Form SB-2 of the following: (1) our report dated February 26, 1996
relating to the consolidated balance sheet of Western Country Clubs, Inc. and
Subsidiaries as of December 31, 1995 and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended, (2) our
report dated October 12, 1996 relating to the balance sheet of In Cahoots,
Limited Partnership as of December 31, 1994 and 1995 and the related statements
of income, partners' capital and cash flows for the years then ended and (3) our
report dated December 4, 1996, except for the third paragraph of Note 3 as to
which the date is December 16, 1996, relating to the balance sheet of
Entertainment Wichita, Inc. as of December 31, 1994 and 1995 and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. We also consent to the reference to us under the heading "Experts" in
such Prospectus.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
June 13, 1997
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in the Registration Statement of Western Country Clubs,
Inc. on Form SB-2 of our report dated March 8, 1997, relating to the balance
sheet of Western Country Clubs, Inc.as of December 31, 1996, and the related
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1996. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
Atlanta, Georgia /s/ Gross Collins + Cress, P.C.
June 13, 1997 Gross Collins + Cress, P.C.
CONSENT OF FINANCIAL CONSULTANT
American Business Capital Corporation consents to the use of it's name in the
Registration Statement of Western Country Clubs, Inc. on Form SB-2, and all
amendments thereto.
/s/ Mel James
June 12, 1997 Mel James, President
