FORM 10QSB
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 September 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 November 9, 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 - September 30, 1997 2 - 3
Consolidated Condensed Statements of Income -
For the Three Months and Nine Months Ended September 30,
1997 and 1996 4
Consolidated Condensed Statements of Stockholders' Equity -
For the Nine Months Ended September 30, 1997 and 1996 5
Consolidated Condensed Statements of Cash Flows -
For the Nine Months Ended September 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
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
September 30, 1997
ASSETS
CURRENT ASSETS
Cash $ 79,092
Accounts receivable 57,587
Notes and loans receivable, current portion 173,519
Inventories 56,372
Prepaid expenses 65,011
Capitalized offering cost 334,873
Deferred income taxes 244,287
----------
TOTAL CURRENT ASSETS 1,010,741
----------
PROPERTY AND EQUIPMENT, at cost
Land and improvements 298,286
Building and improvements 755,900
Leasehold improvements 2,117,724
Equipment 677,944
Furniture and fixtures 334,867
----------
4,184,721
Less accumulated depreciation 1,400,223
----------
NET PROPERTY AND EQUIPMENT 2,784,498
----------
OTHER ASSETS
Notes receivable, less current portion 124,481
Deferred income taxes 89,334
Goodwill, net of amortization 118,679
Deposits and other 85,058
Investments 114,800
----------
TOTAL OTHER ASSETS 532,352
----------
TOTAL ASSETS $4,327,591
==========
See accompanying notes to consolidated condensed financial statements.
2
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
September 30, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 361,195
Accrued expenses 305,308
Notes payable 180,000
Current portion of notes payable - related parties 334,483
Current portion of long-term debt 238,889
----------
TOTAL CURRENT LIABILITIES 1,419,875
NOTES PAYABLE - RELATED PARTIES,
less current portion 195,354
LONG-TERM DEBT, less current portion 430,441
----------
TOTAL LIABILITIES 2,045,670
----------
COMMITMENTS
EQUITY INTEREST OF OTHER PARTNERS IN
CONSOLIDATED SUBSIDIARIES 251,822
----------
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) (2,320,987)
----------
TOTAL STOCKHOLDERS' EQUITY 2,030,099
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,327,591
==========
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------- ----------- ---------- ----------
REVENUES
Beverage and food sales $ 934,215 $ 998,600 $3,509,975 $3,544,385
Admission fees and other
revenues 613,003 616,856 1,953,274 1,967,085
---------- ---------- ---------- ----------
TOTAL REVENUES 1,547,218 1,615,456 5,463,249 5,511,470
---------- ---------- ---------- ----------
COSTS AND EXPENSES
Cost of products and services 519,674 448,419 2,091,537 1,623,473
Depreciation and amortization 116,780 152,832 350,172 465,496
Interest 33,633 32,624 102,353 109,425
General and administrative
expenses 905,849 1,135,878 3,296,110 3,390,571
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 1,575,936 1,769,753 5,840,172 5,588,965
---------- ---------- ---------- ----------
OPERATING LOSS (28,718) (154,297) (376,923) (77,495)
GAIN ON SALE OF ASSETS - - 210,645 -
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAX
BENEFIT AND MINORITY
INTEREST (28,718) (154,297) (166,278) (77,495)
INCOME TAX BENEFIT - 56,432 - 26,481
---------- ---------- ---------- ----------
LOSS BEFORE MINORITY
INTEREST (28,718) (97,865) (166,278) (51,014)
OTHER PARTNERS' INTERESTS IN
NET INCOME OF CONSOLIDATED
SUBSIDIARIES, NET OF INCOME
TAXES 10,164 (6,908) 5,142 (16,528)
---------- ---------- ---------- ----------
NET LOSS BEFORE
EXTRAORDINARY ITEM $ (18,554) $(104,773) $ (161,136) $ (67,542)
---------- --------- ---------- ----------
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT,
NET OF INCOME TAXES - 67,587 - 67,587
---------- --------- ---------- ----------
NET INCOME (LOSS) $ (18,554) $ (37,186) $ (161,136) $ 45
========== =========== =========== ==========
Loss per share before
extraordinary item $ * $ (0.03) $ (0.04) $ (0.02)
Extraordinary gain - 0.02 - 0.02
---------- --------- ---------- ----------
NET INCOME (LOSS) PER COMMON
SHARE $ * $ (0.01) $ (0.04) $ *
========== =========== =========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 3,634,721 3,131,000 3,619,162 3,136,000
========== ========== ========== ==========
*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 Nine Months Ended September 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 95,200 952 237,048 -
Common stock issued pursuant
to stock compensation plan
for services rendered 80,000 800 164,200 -
Net income for the nine months
ended September 30, 1996 - - - 45
Balance, September 30, 1996 3,119,921 $ 31,199 $4,183,986 $ (243,512)
========= ========= ========== ===========
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 nine
months ended September 30, 1997 - - - (161,136)
--------- --------- ---------- -----------
Balance, September 30, 1997 3,634,721 $ 36,347 $4,314,739 $(2,320,987)
========= ========= ========== ===========
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended September 30, 1997 and 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(161,136) $ 45
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
Depreciation and amortization 350,172 465,496
Minority interest in earnings of subsidiaries (5,142) 25,866
Gain on sale of assets (210,645) -
Gain on extinguishment of debt - (105,506)
Deferred tax provision - (93,000)
Increase in present value of liability
under noncompete agreement - 30,800
Common stock issued for services - 165,000
Changes in assets and liabilities, net of
effects of sales of assets
Increase in accounts receivable (12,851) (69,238)
Decrease in inventories 15,108 12,268
Decrease (increase) in prepaid expenses 3,878 (3,036)
Decrease in income taxes receivable 7,269 50,145
Increase in capitalized offering costs (192,016) -
Increase in deposits (7,419) -
Increase (decrease) in accounts payable 35,373 (63,933)
Increase in income taxes payable - 94,400
Increase (decrease) in accrued expenses (3,743) 94,001
--------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (181,152) 603,308
--------- -----------
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 (16,870) (29,494)
--------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 289,522 (19,744)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable (210,000) (1,099,526)
Proceeds from issuance of notes payable 190,000 169,032
Payments on notes payable - related parties (127,818) -
Proceeds from issuance of notes payable -
related parties - 100,000
Payments on long-term debt (64,334) -
Proceeds from sale of common stock - 238,000
Partnership distributions to minority interests (7,750) (28,400)
---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (219,902) (620,894)
---------- ----------
NET DECREASE IN CASH (111,532) (37,330)
CASH AT BEGINNING OF PERIOD 190,624 223,839
---------- ----------
CASH AT END OF PERIOD $ 79,092 $ 186,509
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period $ 103,915 $ 122,960
========== ==========
Income taxes paid during the period $ - $ 104,971
========== ==========
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANICAL STATEMENTS
(UNAUDITED)
For the Three Months and Nine Months Ended September 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 September 30, 1997, the results of operations for the
three months and nine months ended September 30, 1997 and September 30, 1996,
and cash flows for the nine months ended September 30, 1997 and September 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 nine months ended September 30, 1997
and September 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 third quarter, an increase in deferred tax
assets was offset by an increase in the valuation allowance.
Note 3
The Company has terminated its agreement with the underwriter to offer
securities to the public due to non-performance by the underwriter. The
offering has not closed, and the Company is currently seeking a new
underwriter. The Company expects to receive approximately $4 million from the
offering upon closing. However, upon determination of a failed offering, the
Company's costs associated with the offering of $334,873 as of September 30,
1997 would be charged to operations.
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. In September 1997, upon finalization
of the agreement to sell the Tucson club, this note was reissued in the amount
of $133,000, and a second note was issued in the amount of $4,800.
Note 5
InCahoots Limited Partnership (the "Partnership"), owner of the Wichita Club,
is a party to a proceeding titled Oelkers v. InCahoots Ltd. Partnership which
was filed in Kansas District Court. A subsidiary of the Company owns 80% of
the Partnership. On September 23, 1997 the Court found in favor of the
plaintiff (Oelkers) and awarded compensatory damages in the amount of $771,000
plus costs, expenses, and interest. The Partnership's insurer was granted a
motion for summary judgment relieving it from responsibility for the damages.
The Partnership filed an appeal to this summary judgement on November 10, 1997
and intends to appeal the original suit. The Partnership is currently
negotiating a settlement with Oelkers to limit its exposure in the matter. No
agreement has been reached, and the amount of loss is indeterminable at this
time. Accordingly, no provision for the related expense has been provided for
in the financial statements. If the Partnership is not successful in reaching
a settlement, it may take alternative action to protect its assets including
the filing for protection under the U.S. Bankruptcy Code.
7
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WESTERN COUNTRY CLUBS, INC.
Note 6
In September 1997, the sale of the Tucson club was finalized. Upon
finalization of the agreement, the gain related to the sale of the club was
reduced by $51,155 to $210,645. This adjustment relates to a transaction which
took place during the second quarter, and as such the second quarter income has
been adjusted. The effect of this adjustment on second quarter income is as
follows: no change in operating income, an increase in the net loss from $9,383
to $60,538, and an increase in the net loss per share from less than $.01 per
share to $.02 per share.
Note 7
On November 8, 1997, the Company executed a letter of intent to sell the
Indianapolis (Indy) club to International Entertainment Consultants, Inc.,
which is controlled by Troy Lowrie, the former president and former largest
shareholder of the Company. The purchase price is $1.25 million which is to be
paid through the assumption of Indy's mortgages of approximately $492,000, the
satisfaction of a $390,000 note due Mr. Lowrie, and surrendering of $350,000
worth of the Company's common stock held by Mr. Lowrie and other shareholders.
If the sale is completed as proposed, the Company would realize a loss on the
sale of approximately $130,000. If both parties approve the transaction, the
sale is expected to close before the end of 1997.<PAGE>
Part I
8
<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 began business 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"). Due to
nonperformance by the underwriter, the Public Offering has not closed and the
Company has terminated the underwriting agreement with the underwriter.
Currently, the Company is seeking a new underwriter but it is unknown whether
the Company will be able to engage a new underwriter who can complete the
offering. If the Public Offering is closed, the Company expects to realize net
proceeds of approximately $4.0 million, which management intends to use to
reduce debt, remodel and enhance existing clubs, and develop and acquire
additional clubs. However, many factors could prevent the Public Offering from
being completed, including the weakening of the financial markets for small
capitalization or hospitality industry equities or, as mentioned above, the
inability of the Company to attract investment or underwriting interest.
9
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WESTERN COUNTRY CLUBS, INC.
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 during August 1997 completed an agreement to settle the
leasehold obligations. Details of the sale and lease settlement are described
more fully below.
The Company recently entered into a letter of intent to sell the Indy Club to
International Entertainment Consultants, Inc. ("IEC"), a company controlled by
Troy Lowrie who is the former President and former largest shareholder of the
Company. The Indy Club is owned by a limited partnership of which the Company
is the general partner and 80% interest holder. The agreement provides that
IEC will purchase the assets of the club for $1,250,000 to be paid through the
assumption of the first and second mortgage on the Indy real estate in the
approximate amount of $492,000, forgiveness of $390,000 of debt currently owed
by the company to Mr. Lowrie personally, and common stock of the Company in the
amount of $350,000. The agreement is subject to the approval of the Company's
Board, IEC obtaining appropriate financing, and approval of the transfer of the
club's liquor license. If the sale is completed as proposed, the Company would
realize a loss on the sale of approximately $130,000. If approved by the
Company's Board, the transaction is expected to close prior to the end of 1997.
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 third quarter 1997, the Company did not
acquire additional funds through borrowings or other sources to enhance its
working capital. Uses of cash included repayment of notes payable of $80,818
($41,639 to related parties on notes outstanding, and $39,179 on the Company's
current and long-term debt), and $2,750 in partnership distributions to
minority interests. For the first nine 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 $402,152, investments in
capital assets of $16,870, and partnership distributions to minority interests
of $7,750.
As of September 30, 1997, the Company had cash of $79,092 which was generated
from operating activities, financing activities and equity participation. Cash
for the quarter ended September 30, 1997 increased $28,959 from cash of $50,133
reported at June 30, 1997. For the nine months ended September 30, 1997, cash
decreased $111,532, from $190,624 to $79,092. Through September 30, 1997, the
Company generated a negative $181,152 in cash flow from operations compared to
positive cash flow from operations of $603,308 for the nine months ended
September 30, 1996. Major components of the decrease in cash flow for the
first nine months of 1997 as compared to 1996 are as follows: $115,324
reduction in depreciation and amortization expense, $97,744 decrease in accrued
expenses, $192,016 expended in costs related to the Public Offering, and a
decrease in operating income of $299,428. 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
attributable to incurring $450,298 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 and third quarters 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. The Company has drastically
reduced the number of live concerts scheduled during the fourth quarter of 1997
and believes it will be able to sustain revenue levels while better controlling
concert expenses.
At September 30, 1997, the Company's working capital position (current assets
minus current liabilities) was a negative $409,134 compared with a negative
$533,633 at the end of 1996, or an improvement of $124,499. Major components
of the increase in working capital are the reduction in cash of $111,532, the
reduction in inventories of $23,256, and the increase in accounts payable of
$35,373; offset by the increase in notes receivable of $73,519, the increase in
capitalized offering costs of $192,016, the reduction of accrued expenses of
$84,859, and the reduction of $153,916 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.
10
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WESTERN COUNTRY CLUBS, INC.
Property and equipment are primarily made up of assets required to open and
operate the Indy, St. Louis and Wichita Clubs. Leasehold improvements total
$2,117,724; equipment, furniture and fixtures are $1,012,811; buildings and
improvements are $755,900; and land and improvements are $298,286.
The deferred income tax asset of $333,621 at September 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
September 30, 1997 does not include $865,840 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
unreserved deferred income tax asset within the carryforward period (15 years).
Accounts payable at September 30, 1997, increased $35,373 as compared to
amounts due at December 31, 1996, in part due to additional payables related to
the Public Offering. Total liabilities decreased by $121,305 due to the
decrease in notes payable and long-term debt of the Company of $71,819 and
decrease in accrued expenses of $84,859 primarily resulting from reduced rent
escalations, partially offset by the increase in accounts payable. Long-term
liabilities increased by $70,743.
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. Management
expects to fund its growth strategy primarily with proceeds from the Public
Offering, if it can be completed. If it cannot be completed, management is
considering financing near-term potential expansion opportunities through the
use of a debt offering. 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
either the Public Offering or a debt 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 September 30, 1997, Compared to the
Quarter Ended September 30, 1996
For the quarter ended September 30, 1997, total revenues of the Company
decreased by $68,238 or 4.2% as compared to the quarter ended September 30,
1996. Beverage and food sales decreased by $64,385 or 6.5% while admission
fees and other revenues decreased by a nominal $3,853.
Total costs and expenses for the third quarter 1997, decreased $193,817, or 11%
as compared to the third quarter 1996. Components of the decrease are as
follows: depreciation and amortization decreased $36,052 as a result of the
sale of the Tucson Club, general and administrative expenses decreased $230,029
or 20% as a result of the elimination of high levels of these expenses in
Tucson and the efforts of management to further control this segment of
expense, and cost of products and services increased $71,255 or 16%, primarily
as a result of an increase in the number of live concerts offered by each club
in an effort to stimulate sales.
The Company operated three clubs during the third quarter 1996: the Indy Club,
the St. Louis Club and the Tucson Club. During the third quarter 1997, the
Company operated the Indy Club, the St. Louis Club and the Wichita Club. The
Indy Club reported sales of $286,435 and 460,972 for the third quarter 1997
and 1996, respectively, or a decline of 38%. Sales at the St. Louis Club
were $752,528 for the third quarter 1997 compared to $798,435 for 1996, or a
decrease of 6%. Sales for the Wichita Club were consistent for the third
quarter of this year as compared to last year: $492,312 for 1997 as compared
to $495,875 for 1996. Management is disappointed with the sales decline
experienced by the Indy Club during the third quarter and believes it is
primarily due to the age of the club, its need for remodeling and
enhancements, and, to a lesser extent, its location. Management hopes to
complete the Public Offering or a debt offering during the fourth quarter
which will provide the funds necessary to renovate the club.
11
<PAGE>
WESTERN COUNTRY CLUBS, INC.
The Company sold the Tucson Club assets effective May 1, 1997, reporting a gain
on the sale during the second quarter 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, $30,000 to be paid in cash during June through August 1997 subject
to certain offsets, and the balance of $195,000 to be paid by promissory note
having monthly payments of $7,500 beginning on November 1, 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 completed on September 19, 1997, the Company is obligated for
rent, property taxes and other expenses through September 15, 1997 in the
amount of $133,000. The Company has issued a promissory note for that amount
bearing interest at ten percent per year and payable in monthly installments
of $7,500 beginning November 1, 1997, with the balance due no later than June
1, 1999. The Company's security deposit of $24,000 was transferred to the
benefit of the new lessee. This final settlement agreement resulted in a
$51,155 reduction of the gain on the sale of the Tucson Club from $261,800
previously reported in the second quarter to $210,645.
For the quarter ended September 30, 1997, the Company incurred a consolidated
loss of $18,554 compared to a consolidated loss of $37,186 for the quarter
ended September 30, 1996. For comparative purposes, the consolidated loss for
the third quarter of 1996 was $104,773 before benefit of an extraordinary gain
of $67,587. Management is encouraged by this improvement in the third quarter
and believes that, assuming completion of the Public Offering or a debt
offering, the Company can expand its number of operating locations which will
ensure the Company's success in future periods.
Results of Operations - Nine Months Ended September 30, 1997, Compared to
the Nine Months Ended September 30, 1996
For the nine months ended September 30, 1997, total revenues decreased a
nominal 0.8% or $48,221 over the comparable period in 1996. Sales for the
period were $5,463,249 in 1997 as compared to $5,511,470 during the same period
in 1996. Beverage and food sales decreased $34,410 or 1.0% while admission
fees and other revenues declined $13,811 or 0.7%.
Total costs and expenses for the first nine months of 1997 increased 4.5% or
$251,207 over the first nine months of 1996. This increase is directly
attributable to the cost of products and services which increased $468,064 or
28.8% during that period. As discussed above, the Company substantially
increased the number of live concerts held at its clubs during the second and
third quarters of 1997 as compared to 1996, and these concert expenses
accounted for all of the increase in this category as each of the other expense
components decreased during the period as compared to a year ago. The Company
has reduced the number of live concerts scheduled during the fourth quarter and
believes it can control these expenses while still positively impacting sales
volumes. General and administrative expenses decreased $94,461 or 2.8% as a
result of management's attempt to control this expense classification. As
discussed above, general and administrative expenses decreased 20% during the
third quarter as compared to a year ago, more than offsetting the earlier
increases of 6.7% and 1.6% in this category, respectively, during the first and
second quarters of 1997. Additionally, general and administrative expense
levels are expected to remain below prior years' levels during the last quarter
of 1997. Depreciation and amortization expense declined by $115,324 or 25%
over the first nine 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 nine months of 1997 was $376,923 before
partial offset by the gain recorded on the sale of the Tucson Club's assets of
$210,645 (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 nine months of 1997 of $161,136 or $.04 per share. This compares to a
net income of $45 after benefit of $67,587 from an extraordinary gain for the
comparable period in 1996 or less than $.01 per share.
12
<PAGE>
WESTERN COUNTRY CLUBS, INC.
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.
InCahoots Limited Partnership (the "Partnership"), owner of the Wichita Club,
was 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 alleged
that the Partnership was responsible for personal injuries sustained when she
was knocked down in an incident involving two patrons. A subsidiary of the
Company is the general partner of the Partnership. On September 23, 1997, a
judgment was entered in Kansas District Court in favor of the plaintiff
awarding her compensatory damages in the amount of $771,000 plus costs,
expenses and interest. The Wichita Club's insurer had filed a declaratory
judgment action in Federal Court in the Western District of Oklahoma asserting
that the basis of Oelker's claim was an assault and battery and that its policy
excluded coverage for liability arising out of an assault and battery. The
Partnership defended the declaratory judgment action believing that Oelker's
injury did not arise out of an assault and battery. On October 10, 1997, the
Federal Court granted the insurer's motion for summary judgment holding that
the carrier was not obligated to provide coverage for Oelker's damages. The
Partnership filed an appeal on November 10, 1997 in the summary judgment action
and also intends to appeal the Wichita suit. Additionally, Oelkers has filed a
garnishment action in Kansas against the insurer believing that the insurer has
liability for the Wichita judgment even though it prevailed in the summary
judgment action in Oklahoma. The Company is currently negotiating with Oelkers
in an attempt to reach a settlement which will limit the Partnership's exposure
in the matter regardless of whether Oelkers can prevail against the insurer in
Kansas. Oelkers has agreed to defer any garnishment or other collection action
until December 15, 1997 to facilitate settlement discussions. However, no
agreement has yet been reached and it is indeterminable what expense the
Partnership will ultimately bear as a result of these actions. Accordingly,
no provision for expenses related to the Oelkers action has been provided for
in the financial statements. If the Partnership is not successful in its
settlement discussions, it may pursue different courses of action to protect
its assets and business which would include the filing for protection under the
U.S. Bankruptcy Code. Such a filing would increase the Club's operating
expense, could diminish sales, and could affect the management fees that the
Company receives as contract manager of the Club.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) During the quarter ended September 30, 1997, the Company filed
no Reports on Form 8-K.
13
<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.
November 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
14
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<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
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