FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
Commission File Number: 0-24058
WESTERN COUNTRY CLUBS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1131343
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1601 N.W. Expressway, Suite 1610
Oklahoma City, Oklahoma 73118
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 848-0996
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for at least the
past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Shares of Common Stock, $.01 par value, outstanding
as of August 11, 1997: 3,634,721
Traditional Small Business Disclosure Format: Yes [X] No [ ]
<PAGE>
WESTERN COUNTRY CLUBS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Condensed Balance Sheet - June 30, 1997 2 and 3
Consolidated Condensed Statements of Income -
For the Three Months and Six Months Ended
June 30, 1997 and 1996 4
Consolidated Condensed Statements of Stockholders' Equity -
For the Six Months Ended June 30, 1997 and 1996 5
Consolidated Condensed Statements of Cash Flows -
For the Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Condensed Financial Statements 7 - 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
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WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
June 30, 1997
ASSETS
CURRENT ASSETS
Cash $ 50,133
Accounts receivable 48,442
Notes and loans receivable, current portion 174,381
Inventories 57,810
Prepaid expenses 102,502
Capitalized offering cost 302,974
Deferred income taxes 244,287
----------
TOTAL CURRENT ASSETS 980,529
----------
PROPERTY AND EQUIPMENT, at cost
Land and improvements 298,286
Building and improvements 755,900
Leasehold improvements 2,115,964
Equipment 677,944
Furniture and fixtures 333,328
----------
4,181,422
Less accumulated depreciation 1,301,543
----------
NET PROPERTY AND EQUIPMENT 2,879,879
----------
OTHER ASSETS
Notes receivable, less current portion 144,227
Deferred income taxes 89,334
Goodwill, net of amortization 135,702
Deposits and other 85,402
Investments 114,800
----------
TOTAL OTHER ASSETS 569,465
----------
TOTAL ASSETS $4,429,873
==========
See accompanying notes to consolidated condensed financial statements.
2
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WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
June 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 372,047
Accrued expenses 279,224
Notes payable 465,742
Current portion of notes payable - related parties 213,406
Current portion of long-term debt 191,344
----------
TOTAL CURRENT LIABILITIES 1,521,763
NOTES PAYABLE - RELATED PARTIES,
less current portion 79,794
LONG-TERM DEBT, less current portion 462,772
----------
TOTAL LIABILITIES 2,064,329
----------
COMMITMENTS
EQUITY INTEREST OF OTHER PARTNERS IN
CONSOLIDATED SUBSIDIARIES 265,736
----------
STOCKHOLDERS' EQUITY
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) (2,251,278)
----------
TOTAL STOCKHOLDERS' EQUITY 2,099,808
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,429,873
==========
See accompanying notes to consolidated condensed financial statements.
3
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WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
REVENUES
Beverage and food sales $1,098,948 $1,105,189 $2,575,760 $2,545,785
Admission fees and other
revenues 672,198 653,097 1,340,271 1,350,229
---------- ---------- ---------- ----------
TOTAL REVENUES 1,771,146 1,758,286 3,916,031 3,896,014
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of products and
services 798,696 554,156 1,571,863 1,175,054
Depreciation and
amortization 116,917 152,833 233,392 312,664
Interest 39,069 39,311 68,720 76,801
General and administrative
expenses 1,095,809 1,078,865 2,390,261 2,254,693
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 2,050,491 1,825,165 4,264,236 3,819,212
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (279,345) (66,879) (348,205) 76,802
GAIN ON SALE OF ASSETS 261,800 - 261,800 -
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
INCOME TAX (EXPENSE)
BENEFIT AND MINORITY
INTEREST (17,545) (66,879) (86,405) 76,802
INCOME TAX (EXPENSE) BENEFIT - 15,022 - (29,951)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE
MINORITY INTEREST (17,545) (51,857) (86,405) 46,851
OTHER PARTNERS' INTERESTS IN
NET INCOME OF CONSOLIDATED
SUBSIDIARIES, NET OF INCOME
TAXES 8,162 (1,582) (5,022) (9,620)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (9,383) $ (53,439) $ (91,427) $ 37,231
========== ========== ========== ==========
NET INCOME (LOSS) PER
COMMON SHARE $ * $ (0.02) $ (0.03) $ 0.01
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,634,721 3,133,000 3,611,254 3,109,000
========== ========== ========== ==========
*Less than $.01 per share
See accompanying notes to consolidated condensed financial statements.
4
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WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Six Months Ended June 30, 1997 and 1996
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit)
--------- --------- ---------- -----------
Balance, December 31, 1995 2,944,721 $ 29,447 $3,782,738 $ (243,557)
Common stock issued for cash
in private placement 87,200 872 217,128 -
Net income for the six months
ended June 30, 1996 - - - 37,231
--------- --------- ---------- -----------
Balance, June 30, 1996 3,031,921 $ 30,319 $3,999,866 $ (206,326)
========= ========= ========== ===========
Balance, December 31, 1996 3,519,921 $ 35,199 $4,201,087 $(2,159,851)
Common stock issued for
investment 114,800 1,148 113,652 -
Net loss for the six
months ended June 30, 1997 - - - (91,427)
--------- --------- ---------- -----------
Balance, June 30, 1997 3,634,721 $ 36,347 $4,314,739 $(2,251,278)
========= ========= ========== ===========
See accompanying notes to consolidated condensed financial statements.
5
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WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, 1997 and 1996
1997 1996
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (91,427) $ 37,231
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities
Depreciation and amortization 233,392 312,664
Minority interest in earnings of
subsidiaries 5,022 15,771
Gain on sale of assets (261,800) -
Deferred tax provision - (62,000)
Increase in present value of liability
under noncompete agreement - 20,533
Changes in assets and liabilities,
net of effects of sales of assets
Increase in accounts receivable (3,706) (89,634)
Decrease in inventories 13,670 13,947
Increase in prepaid expenses (33,613) (23,002)
Decrease in income taxes receivable 7,269 51,559
Increase in capitalized offering costs (160,117) -
Increase in deposits (5,818) -
Increase (decrease) in accounts payable 46,225 (71,958)
Increase in income taxes payable - 85,100
Increase (decrease) in accrued expenses (46,075) 66,373
---------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (296,978) 356,584
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from redemption of a certificate
of deposit 200,000 -
Sale of assets 100,000 -
Receipts on notes receivable 9,392 -
Loans to related parties (3,000) -
Decrease in deposits and other assets - 9,750
Purchase of property and equipment (13,571) (16,227)
---------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 292,821 (6,477)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (200,000) (681,293)
Proceeds from issuance of notes payable 190,000 -
Payments on notes payable - related parties (86,179) -
Proceeds from issuance of notes payable -
related parties - 100,000
Payments on long-term debt (35,155) -
Proceeds from sale of common stock - 218,000
Partnership distributions to minority interests (5,000) (18,000)
---------- -----------
NET CASH USED BY FINANCING ACTIVITIES (136,334) (381,293)
---------- -----------
NET DECREASE IN CASH (140,491) (31,186)
CASH AT BEGINNING OF PERIOD 190,624 223,839
---------- -----------
CASH AT END OF PERIOD $ 50,133 $ 192,653
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period $ 71,102 $ 88,369
=========== ===========
Income taxes paid during the period $ - $ 104,971
=========== ===========
See accompanying notes to consolidated condensed financial statements.
6
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WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
For the Three Months and Six Months Ended June 30, 1997 and 1996
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 June 30, 1997, and the results of operations for the
three months and six months ended June 30, 1997 and June 30, 1996 and cash
flows for the six months ended June 30, 1997 and June 30, 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 six months ended June 30, 1997 and June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
Note 2
Deferred income taxes are reported using the liability method. Deferred
tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. During the second quarter, an increase in
deferred tax assets was offset by an increase in the valuation allowance.
Note 3
The Board of Directors has approved management's proposal to issue, in a public
offering, up to 400,000 shares of Series A Cumulative Convertible Redeemable
Preferred Stock ("Series A Preferred Stock") and up to 1,000,000 Redeemable
Series A Common Stock Purchase Warrants ("Warrants") together with up to 60,000
shares of Series A Preferred Stock and up to 150,000 Warrants if the
underwriters exercise all or any part of an over-allotment option to purchase.
The Board intends to approve the issuance of an additional 200,000 Warrants
along with another 30,000 Warrants for the underwriters. The proceeds from
such offering are to be used for remodeling and promotion of existing clubs,
the development or acquisition of new clubs, and working capital.
In connection with the aforementioned offer, the Company has authorized 500,000
shares of Preferred Stock as "Series A Cumulative Convertible Redeemable
Preferred Stock." Dividends are to be paid on the first banking day of January
and July of each year at the rate of $0.60 per share. Each share has a
liquidation value of $12 and receives one vote. The Company has the right to
convert all or a portion of the shares to Common Stock after one year from the
date of issuance. The Company also has the right to redeem any or all shares
after one year from the date of issuance at a price of $13.20 per share plus
unpaid dividends. The Company has reserved out of Common Stock the number of
shares that would be issued upon conversion of all outstanding shares of Series
A Preferred Stock.
The Company has also authorized the issuance of "Redeemable Series A Common
Stock Purchase Warrants." Up to 1,150,000 shares of Common Stock have been
reserved for issuance upon exercise of the Warrants. Pending the approval of
the issuance of additional Warrants described above, the Company intends to
reserve an additional 230,000 shares of Common Stock.
Note 4
The following is a schedule of noncash investing and financing activities:
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.
The Company sold the Tucson club in May 1997 for $325,000. Assets and
liabilities exchanged were as follows:
Working capital other than cash $(56,722)
Fixed assets, intangibles, and other assets 381,722
--------
Net assets exchanged 325,000
Less note receivable 225,000
--------
Cash proceeds on sale of club $100,000
========
The Company issued a note payable in May 1997 in the amount of $93,407 for
unpaid rent expenses of the Tucson club.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-QSB under Part I, "Item 2. Management's
Discussion and Analysis" constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other facts which may cause the actual results, performance
or achievements of Western Country Clubs, Inc. (the "Company") and its
nightclubs to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; competition; success of operating initiatives; development and
operating costs; advertising and promotional efforts; adverse publicity;
customer appeal and loyalty; availability, locations and terms of sites for
nightclub development; changes in business strategy or development plans;
quality of management; availability, terms and development of capital; business
abilities and judgment of personnel; availability of qualified personnel; food,
labor and employee benefit costs; changes in, or the failure to comply with
government regulations; regional weather conditions; construction schedules;
and other factors. The use in this Form 10-QSB of such words as "believes,"
"anticipates," "expects," "intends" and similar expressions are intended to
identify forward-looking statements, but they are not the exclusive means of
identifying such statements. The success of the Company is dependent on the
efforts of the Company and its management and personnel and the manner in which
they operate and develop clubs.
The following discussion and analysis should be read in conjunction with the
Company's unaudited Consolidated Condensed Financial Statements and Notes
thereto appearing elsewhere in this Report.
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 through 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 September 1996, Troy H. Lowrie, then President and the 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
Company's operations; and (iii) James E. Blacketer and Joe R. Love, officers of
Red River, were appointed to the Company's Board of Directors. The change in
control occurred in October 1996.
During the fourth quarter of 1996, the Company acquired a nightclub in Wichita,
Kansas (the "Wichita Club") for 400,000 shares of the Company's Common Stock
and assumption of $150,000 in debt.
In February 1997, the Company filed a registration statement for a public
offering of up to 460,000 shares of Preferred Stock at $12.00 and up to
1,380,000 warrants to purchase Common Stock (the "Public Offering"). If the
Public Offering is closed (expected September 1997), the Company will realize
net proceeds of approximately $4.0 million. New management intends to use
these proceeds to reduce debt, remodel and enhance existing clubs, and develop
and acquire additional clubs. Many factors could prevent the Public Offering
from closing, including the weakening of the financial markets for small
capitalization or hospitality industry equities or the inability of the Company
to attract investment or underwriting interest.
Due to declining performance and continuing operational losses at the Tucson
Club, management concluded that the assets thereof were impaired and were
written off as of December 31, 1996. 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.
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. During the second quarter 1997, the Company borrowed
$50,000 from two lenders to supplement its cash and received a down payment of
$100,000 from the sale of assets of the Tucson Club. Uses of cash included
repayment of notes payable of $73,248 ($58,465 to related parties on notes
outstanding and $14,783 on the Company's long-term debt), and $2,500 in
partnership distributions to minority interests. For the first six months of
1997, the Company received a total of $490,000: $200,000 in proceeds from
redemption of a certificate of deposit, $190,000 in borrowings, and $100,000
from the Tucson assets sale. Uses of cash included repayments of notes payable
of $321,334, investments in capital assets of $13,571, and partnership
distributions to minority interests of $5,000.
As of June 30, 1997, the Company had cash of $50,133 which was generated from
operating activities, financing activities and equity participation. Cash for
the quarter ended June 30, 1997 decreased $104,019 from cash of $154,152
reported at March 31, 1997. For the six months ended June 30, 1997, cash
decreased $140,491, from $190,624 to $50,133. Through June 30, 1997, the
Company generated a negative $296,978 in cash flow from operations compared to
positive cash flow from operations of $356,584 for the six months ended June
30, 1996. Major components of the decrease in cash flow for the first six
months of 1997 as compared to 1996 are as follows: $79,272 reduction in
depreciation expense, $112,448 decrease in accrued expenses, $160,117 expended
in costs related to the Public Offering, and $353,227 of net loss before gain
on sale of assets as compared to net income of $37,231 for 1996. The reduction
in depreciation expense and accrued expenses is attributable to the write-off
and subsequent sale of the Tucson Club assets and the elimination of future
rent escalation accruals. The reduction of net income from prior year levels
is primarily a result of incurring $270,475 more concert expenses than
concert revenue generated during the period. In an effort to stimulate sales,
the Company booked substantially more live concerts during the second quarter
of 1997 than had been offered in 1996. While the increased live concerts did
stimulate sales, the overall result of the increased number of concerts
negatively impacted both cash flow and net income.
At June 30, 1997, the Company's working capital position (current assets minus
current liabilities) was a negative $541,234, compared with a negative $533,633
at the end of 1996, or an additional $7,601 deficit. Major components of the
increase in the working capital deficit are the reduction in cash of $140,491,
the reduction in inventories of $21,818, and the increase in accounts payable
of $46,225; offset by the increase in notes receivable of $74,381, the increase
in capitalized offering costs of $160,117 and the reduction of $25,442 of
short-term notes payable and current portion of long-term debt used in the
Company's operations. 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.
Property and equipment are primarily made up of assets required to open and
operate the Indy, St. Louis and Wichita Clubs. Leasehold improvements total
$2,115,964; equipment, furniture and fixtures are $1,011,272; buildings and
improvements are $755,900; and land and improvements are $298,286.
The deferred income tax asset of $333,621 at June 30, 1997 is unchanged from
the amount reflected at December 31, 1996. Future realization of this asset is
dependent upon the generation of sufficient future taxable income against which
the tax loss carryforward and losses from the impairment of the Tucson assets
can be offset. The amount of the deferred income tax asset at June 30, 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).
Accounts payable at June 30, 1997, increased $46,225 as compared to amounts due
at December 31, 1996, in part due to additional payables related to the Public
Offering. Total liabilities decreased by $102,646 due to the decrease in notes
payable and long-term debt of the Company of $37,928 and decrease in accrued
expenses of $110,943 primarily resulting from reduced rent escalations,
partially offset by the increase in accounts payable. Long term liabilities
decreased by $12,486.
The Company has been 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 through 1997 and beyond. New management
expects to fund its growth strategy primarily with proceeds from the Public
Offering, which is expected to close in September 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, and management
believes that the Company will require an additional infusion of cash from
other sources to support existing operations for the foreseeable future.
Results of Operations - Quarter Ended June 30, 1997, Compared to the Quarter
Ended June 30, 1996
For the quarter ended June 30, 1997, total revenues of the Company increased by
$12,860 or 0.7% as compared to the quarter ended June 30, 1996. Beverage and
food sales decreased by $6,241 while admission fees and other revenues
increased by $19,101 or 2.9%. During late April 1997, the St. Louis Club was
suspended from selling alcoholic beverages for six business days due to two
incidents in which alcoholic beverages were inadvertently sold to minors. This
suspension resulted in lost sales to the Company. Although the Company cannot
accurately determine the amount of revenues lost due to this suspension, it
believes that the quarterly revenue increase would have been in the 4 to 6%
range had the suspension not occurred.
Total costs and expenses for the second quarter 1997, increased $225,326, or
12% over the second quarter 1996. Components of this increase are as follows:
depreciation and amortization decreased $35,916 as a result of the sale of the
Tucson Club, general and administrative expenses increased $16,944, and cost of
products and services increased $244,540 or 44%, primarily as a result of a
substantial increase in the number of live concerts offered by each club in an
effort to stimulate sales.
The Company operated three clubs during the second quarter 1996: the Indy
Club, the St. Louis Club and the Tucson Club. During the second quarter 1997,
the Company also operated the Wichita Club, but sold the Tucson Club. The Indy
Club reported sales of $461,964 and $542,906 for the second quarter 1997 and
1996, respectively, or a decline of 15%. Sales at the St. Louis Club were
$706,305 for the second quarter 1997 compared to $910,447 for 1996, a decline
of 22%. Sales for the Wichita Club were about the same for the period:
$468,850 for 1997 as compared to $467,211 a year ago. The Tucson Club recorded
quarterly sales of $91,446 before being sold on May 1, 1997. The Company
believes that the decline in sales at the Indy and St. Louis Clubs were due in
part to its conversion of these clubs to the entertainment format used in the
Wichita Club and to 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 improvement. The Company has
dedicated a portion of the proceeds of its pending Public Offering to the
remodeling and enhancement of the Indy and St. Louis Clubs through the addition
of new entertainment concepts. Management expects that these enhancements will
restore profitability to these clubs.
The Company sold the Tucson Club assets effective May 1, 1997, reporting a gain
on the sale in the amount of $261,800, and reached an agreement in principle to
settle its future rental obligations under the related lease. Under the
purchase and sale agreement, 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. The
buyer made the June payment but has not yet made the July or August payments as
required under the purchase and sale agreement due to disagreement over certain
offsets provided for in the agreement. The Company is currently pursuing
collection of these amounts and believes these amounts will be paid once the
disagreements have been resolved. 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 which
began accruing in 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 after the Public
Offering becomes effective and any accrued amounts in connection with the
settlement have been satisfied. The Company recorded a second quarter unit
level operating loss of $68,056 for the Tucson Club.
For the quarter ended June 30, 1997, the Company incurred a consolidated loss
of $9,383 compared to a consolidated loss of $53,439 for the quarter ended June
30, 1996. Excluding the gain on the sale of the Tucson Club assets, the
consolidated loss for the quarter would have been $271,183. Management
believes this additional loss over the second quarter 1996 results from its
increased number of live concerts and has reduced the number of live concerts
scheduled for the remainder of 1997. Additionally, the St. Louis Club
suspension also adversely affected second quarter operational results.
Management believes that, assuming completion of the Public Offering, the
Company can expand its number of operating locations which will ensure the
Company's success in future periods.
Results of Operations - Six Months Ended June 30, 1997, Compared to the Six
Months Ended June 30, 1996
For the six months ended June 30, 1997, total revenues increased 0.5% or
$20,017 over the comparable period in 1996. Beverage and food sales increased
$29,975 or 1.2% while admission fees and other revenues declined $9,958.
Total costs and expenses for the first six months of 1997 increased 11.7% or
$445,024 over the first six months of 1996. The largest component of this
increase was the cost of products and services which increased $396,809 or
33.8%. As discussed above, the Company substantially increased the number of
live concerts held at its clubs during the first six months of 1997 as compared
to 1996, and these concert expenses accounted for most of the increase in this
category. The Company is reducing the number of live concerts scheduled during
the third and fourth quarters of this year and believes it can control these
expenses while still positively impacting sales volumes. General and
administrative expenses increased $135,568 or 6%, most of which occurred during
the first quarter of the year as a result of new management's attempt to bring
the Club's operations up to its standards. This increase in general and
administrative expenses slowed dramatically in the second quarter to an
increase of only 1.6% and is expected to be at or below prior years levels
during the last six months of 1997. Depreciation and amortization expense
declined by $79,272 or 25% over the first six months of 1996 due to the sale of
the Tucson Club which had high levels of these expenses, and the Company
expects to continue to benefit from a reduction in this expense category in the
future.
The operating loss for the first six months of 1997 was $348,205 before partial
offset by the gain recorded on the sale of the Tucson Club's assets of $261,800
(see above for a detailed discussion of the Tucson Club sale). After the gain
on the sale of the Tucson Club's assets and adjustment for other partners'
interests in net income, the Company realized a net loss for the first six
months of 1997 of $91,427 or $.03 per share. This compares to a net gain of
$37,231 for the comparable period in 1996 or $.01 per share. <PAGE>
Part II
Item 1. Legal Proceedings
Special Note: Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See
Management Discussion and Analysis - Special Note Regarding Forward-Looking
Statements for additional factors relating to such statements.
The Company is a party to a proceeding titled Oelkers v. InCahoots Ltd.
Partnership (Case No. 96 C 695, Dist. Ct., Sedgwick Cnty, Kansas) in which the
plaintiff alleges that InCahoots 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 has also filed a declaratory judgment
action 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 the carrier's
claims and believes it will prevail, an unfavorable judgment in both of these
proceedings would have a material impact on the viability of the Wichita Club.
Management cannot accurately predict the outcome of the proceedings due to,
among other reasons, large variances in judicial and jury perceptions of case
facts and uncertainty in the scope of the insurance coverage.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) During the quarter ended June 30, 1997, the Company filed
no Reports on Form 8-K.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
August 14, 1997 Western Country Clubs, Inc.
By: /s/ James E. Blacketer
__________________________
James E. Blacketer
President
By: /s/ Ted W. Strickland
___________________________
Ted W. Strickland
Chief Financial Officer
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Apr-01-1997
<PERIOD-END> Jun-30-1997
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