As filed with the Securities and Exchange Commission on May 20, 1997
Registration No. 333-21547
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
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:
</TABLE>
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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<S> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------
Common Stock Underlying Series
A Warrants (3) 120,000 .15 18,000 5
- ----------------------------------------------------------------------------------------------------------
Total: $15,390,600 $4,664
==========================================================================================================
</TABLE>
(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
<PAGE>
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 MAY 20, 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 $________(120% of the bid price of the Company's Common Stocks quoted
on NASDAQ on the effective date) per share, subject to adjustment in certain
events, at any time prior to _________, 199_. The Warrants are subject to
redemption by the Company at $.125 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 $________(200% of the bid price for the
Company's Common Stock on the effective date) for a period of at least five
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 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.
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<CAPTION>
Underwriting Discounts
Price to Public and Commissions Proceeds to Company
<S> <C> <C> <C>
Per Share............................................ $12.00 $1.20 $10.80
Per Warrant.......................................... $0.125 $0.0125 $0.1125
Total................................................ $4,950,000 $495,000 $4,455,000
</TABLE>
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-accounting 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 Common 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 York
10048. 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 The
Company.
The Company's principal corporate offices are presently located at 1601
N.W. Expressway, Suite 1610, Oklahoma City, Oklahoma 73118 and its telephone
number is (405) 848-0996.
3
<PAGE>
THE OFFERING
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<CAPTION>
<S> <C>
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 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 Prefeered Stock.
Warrants.................................... Each Warrant entitles the holder to purchase one share of
Common Stock at $___(120% of the bid price of the
Company's Common Stock on the effective date of this
Prospectus) 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)
</TABLE>
4
<PAGE>
- --------------------
(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:
<TABLE>
<CAPTION>
Three Month Period
Years Ended December 31, Ended March 31
(unaudited)
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
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 $ (.65) $ (.07) (.02) .03
before extraordinary items
Weighted average common
shares outstanding: 3,035,079 3,030,383 3,587,525 3,085,000
</TABLE>
<TABLE>
<CAPTION>
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>
- ------------
(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, 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
7
<PAGE>
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.
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.
8
<PAGE>
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 may
be 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.
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
9
<PAGE>
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
10
<PAGE>
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 $4,076,500.
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
-------
$4,076,500
==========
- -------------
(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, 1997 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.
March 31, 1997
Pro Forma
Actual As Adjusted
------ -----------
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
========= =========
- -----------------
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.
1995 Fiscal Year High Bid Low Bid
- ---------------- -------- ---------
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
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) BEFORE EXTRAORDINARY (1,979,176) 32,530 - (1,946,646)
ITEM
GAIN ON EXTINGUISHMENT OF DEBT, net of income tax
provision of $39,776 65,730 - - 65,730
----------- ------------ ----------- -----------
NET INCOME (LOSS) $(1,913,446) $32,530 $ - $(1,880,916)
=========== ============ =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $(0.63) $0.08 $ - $(0.55)
=========== ============ =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,035,079 400,000 - 3,418,641
=========== ============ =========== ===========
</TABLE>
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 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 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,
impletmented 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.
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.
22
<PAGE>
During 1996 the 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.
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.
23
<PAGE>
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 a portion of the repair 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 $32,843 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
in 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 quarter 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 of 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 $453,477
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 of $39,474 or 8.1%, showing sales of $526,694 as compared to
$487,220 a year ago. 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 as a result of the 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 of
this Public Offering to the remodeling of these Clubs, which is expected to
restore profitability.
24
<PAGE>
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, 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 Much 31, 1996. This loss was primarily due to the operating loss
of the Tucson Club of 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 sold the assets
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
at the Indy Club on a regular basis, usually scheduled during the middle
26
<PAGE>
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, race track 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
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
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<PAGE>
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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<PAGE>
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.
29
<PAGE>
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.
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
30
<PAGE>
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. This agreement is 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.
In the opinion of the Company, any liability from such 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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<PAGE>
MANAGEMENT
The following table sets forth the names and positions of the directors,
executive officers and key employees of the Company:
<TABLE>
<CAPTION>
Officer
Name Age Position or Director Since
- ---- --- -------- -----------------
<S> <C> <C> <C>
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 and 1996
Director
Joe R. Love 58 Director 1996
John R. Ritter 39 Director 1997
</TABLE>
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.
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<PAGE>
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
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
Effective September 20, 1996, Red River Concepts, Inc., a Delaware
corporation ("Red River"), and Mr. Troy Lowrie, the Company's then President,
director and largest shareholder 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.
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.
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<PAGE>
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 sold
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 is 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.
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>
- -----------
(1) Represents proceeds from the sale of 10,000 shares of the Company's stock
issued as compensation during 1996.
34
<PAGE>
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 annual meeting of shareholders scheduled for
June 10, 1997. 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.
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.
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<PAGE>
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 acquiror 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
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
36
<PAGE>
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 theCompany 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.
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<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
38
<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. Mr. Blacketer disclaims
beneficial ownership of 152,000 shares owned by two adult sons.
(3) Reflects indirect beneficial ownership of shares owned directly by Red
River Concepts, Inc., a company of which Mr. Love serves a director. Mr.
Love disclaims beneficial ownership of shares owned by Shane Investments,
L.C., an entity controlled by an adult son, and 132,500 shares held by a
trust for the benefit of another adult son. 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.
39
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 WCC
I, 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.
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.
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 or in shares of Common Stock
(based on the average bid/ask during the ten trading days immediately preceding
the record date). 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, and each quarterly period
thereafter, 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.
41
<PAGE>
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.
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 $_______ (120% of the closing bid price of the
Company's Common Stock on the effective date of this Prospectus), 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 $________(200% of the closing bid price for the Company's Common Stock on
the effective date of this Prospectus) 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
42
<PAGE>
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
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 tradeable, 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.
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<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.
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
45
<PAGE>
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 and liquor license costs
are amortized over five years and goodwill is amortized over five to
fifteen years, the periods estimated by management to be benefitted.
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 loaned a total of $100,000. 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 and goodwill 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 remaining
obligations under the liability relating to 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
-------- ------
Notes payable - 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
======= =======
Notes payable - 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
<PAGE>
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
II-5
<PAGE>
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 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:
Shares received Shares received
for Limited Partnership for Limited Partnership
Interests in Interests In
Name WCC I, Ltd. WCC III, Ltd.
- ---- ----------- -------------
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
======= =======
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
II-6
<PAGE>
adopted thereunder for the transactions described above. In addition to being
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,
exercisable at $3.50 per share, and 45,000 shares of Common Stock to a
consultant to the Company in exchange for market advisory services rendered
since 1994 and the return to the Company of options to purchase 240,000 shares
exercisable 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 and the ability to evaluate such
II-7
<PAGE>
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
II-8
<PAGE>
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.
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
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 ________, 1997,(11)
setting forth the rights and preferences of the Series A
Preferred Stock.(11)
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.
4.2 Form of Series A Common Stock Purchase Warrant Certificate
(attachment to Exhibit 10.30)
5.0 Opinion of Brenman Bromberg & Tenenbaum, P.C.(11)
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.
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
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.
10.33 Lease Agreement, dated February 25, 1997, between Prime
Financial Corporation and Western Country Clubs, Inc. (10)
10.34 Second 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.
10.35 Western Country Clubs, Inc. Omnibus Equity Compensation Plan
10.36 Agreement For the Purchase and Sale of Assets dated April 14,
1997 between Kirby Bond and Western Country Clubs, Inc.
11.1 Computation of per share earnings 12-31-96
11.2 Computation of per share earnings 3-31-97
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.
- -------------
(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.
(b) Financial statement schedules have been omitted because they are not
required or the information is included in the financial statements and notes
thereto.
II-11
<PAGE>
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 May 20, 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 May 20, 1997
- ----------------------------
James E. Blacketer Executive Officer and
Director
/s/ Ted W. Strickland Principal Financial and May 20, 1997
- ----------------------------
Ted W. Strickland Accounting Officer,
Treasurer and Director
/s/ Joe R. Love Director May 20, 1997
- ------------------------------
Joe R. Love
Director May 20, 1997
- -------------------------------
John R. Ritter
II-13
400,000 Shares of Series A Cumulative Convertible Preferred Stock
and
1,200,000 Series A Redeemable Common Stock Purchase Warrants
WESTERN COUNTRY CLUBS, INC.
, 1997
UNDERWRITING AGREEMENT
NATIONAL SECURITIES CORPORATION
As Representative of the Several Underwriters
c/o National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Dear Sirs:
Western Country Clubs, Inc., a Colorado corporation (the "Company"),
proposes to issue and sell to you and the other underwriters named in Schedule I
hereto (collectively, the "Underwriters"), for whom National Securities
Corporation is acting as the managing underwriter and representative (the
"Representative"), in the respective amounts set forth opposite each
Underwriter's name in Schedule I hereto an aggregate of 400,000 shares of Series
A Cumulative Convertible Preferred Stock, $.10 par value, of the Company (the
"Preferred Stock") and 1,200,000 Series A Redeemable Common Stock Purchase
Warrants (individually, a "Warrant"), which entitles the holder thereof to
purchase one share of common stock, $ .01 par value, (the "Common Stock") at a
price of $____ per share, subject to certain conditions. The shares of Preferred
Stock, the Warrants, and the shares of Common Stock issuable upon exercise of
such Warrants, are collectively referred to herein as the "Underwritten
Securities." In addition, (i) the Company proposes to grant to the Underwriters
an option (the "Underwriters' Option") to purchase up to an aggregate of 60,000
additional shares of Preferred Stock and 180,000 additional Warrants solely to
cover over-allotments in the sale of the Underwritten Securities (such
additional shares of Preferred Stock and Warrants and the shares of Common Stock
issuable upon exercise of such Warrants, are collectively referred to herein as
the "Option Securities") and (ii) the Company proposes to sell to the
Underwriters the Underwriters' Warrants (described in Section 7 hereof) to
purchase 40,000 additional shares of Preferred Stock and 100,000 additional
Warrants (such Underwriters' Warrants and additional shares of Preferred Stock
and Warrants and the shares of Common Stock issuable upon exercise of such
Warrants, are collectively referred to herein as the "Underwriters'
Securities"). The Underwritten Securities, the Option Securities and the
Underwriters' Securities are collectively referred to herein as the
"Securities."
The terms which follow, when used in this Agreement, shall have the
meanings indicated. "Effective Date" shall mean each date that the Registration
Statement (as defined below) and any post-effective amendment or amendments
thereto became or become effective. "Execution Time" shall mean the date and
time that this Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus referred to in
Section 1(a) below with respect to the offering of the Securities, and any
preliminary prospectus included in the Registration Statement at the Effective
Date that omits Rule 430A Information (as defined below). Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the most
recent Preliminary Prospectus which predates or coincides with the Execution
Time. "Prospectus" shall mean the final prospectus with respect to the offering
of the Securities that contains the Rule 430A Information (as defined below).
"Registration Statement" shall mean the registration statement referred to in
Section 1(a) below, including exhibits and financial statements, in the form in
which it has or shall become effective and, in the event any post-effective
amendment thereto becomes effective prior to the Closing Date (as hereinafter
defined) or any settlement date pursuant to Section 3(b) hereof, shall also mean
such Registration Statement as so amended on such date. Such term shall include
Rule 430A Information (as defined below) deemed to be included therein at the
Effective Date as provided by Rule 430A. "Rule 424"and "Rule 430A" refer to such
rules under the Securities Act of 1933, as amended (the "Act"). "Rule 430A
Information" means information with respect to the Securities and the offering
<PAGE>
thereof permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, each Underwriter that:
(a) The Company meets the requirements for the use of Form
SB-2 under the Act and has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement, including a related preliminary
prospectus ("Preliminary Prospectus"), on Form SB-2 (Commission File
No.333-21547) (the "Registration Statement") for the registration under the Act
of the Securities. The Company may have filed one or more amendments thereto,
including related Preliminary Prospectuses, each of which has previously been
furnished to you. The Company will next file with the Commission either, prior
to effectiveness of such Registration Statement, a further amendment thereto
(including the form of Prospectus) or, after effectiveness of such Registration
Statement, a Prospectus in accordance with Rules 430A and 424(b)(1) or (4). As
filed, such amendment and form of Prospectus, or such Prospectus, shall include
all Rule 430A Information and, except to the extent the Representative shall
agree in writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific additional
information and other changes (beyond that contained in the latest Preliminary
Prospectus) as the Company has advised you in writing, prior to the Execution
Time, will be included or made therein.
(b) Each Preliminary Prospectus, at the time of filing
thereof, conformed in all material respects with the applicable requirements of
the Act and the rules and regulations thereunder and did not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If the Effective Date is prior to or simultaneous with the Execution
Time, (i) on the Effective Date, the Registration Statement conformed in all
material respects to the requirements of the Act and the rules and regulations
thereunder and did not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading and (ii) at the Execution Time,
the Registration Statement conforms, and at the time of filing of the Prospectus
pursuant to Rule 424(b), the Registration Statement and the Prospectus will
conform, in all material respects to the requirements of the Act and the rules
and regulations thereunder, and neither of such documents includes, or will
include, any untrue statement of a material fact or omits, or will omit, to
state a material fact required to be stated therein or necessary in order to
make the statements therein (and, in the case of the Prospectus, in the light of
the circumstances under which they were made) not misleading. If the Effective
Date is subsequent to the Execution Time, on the Effective Date, the
Registration Statement and the Prospectus will conform in all material respects
to the requirements of the Act and the rules and regulations thereunder, and
neither of such documents will contain any untrue statement of any material fact
or will omit to state any material fact required to be stated therein or
necessary to make the statements therein (and, in the case of the Prospectus, in
the light of the circumstances under which they were made) not misleading. The
two preceding sentences do not apply to statements in or omissions from the
Registration Statement or the Prospectus (or any supplements thereto) based upon
and in conformity with information furnished in writing to the Company by or on
behalf of any Underwriter through the Representative specifically for use in
connection with the preparation of the Registration Statement or the Prospectus
(or any supplements thereto).
(c) Except as set forth in the Prospectus, the Company has no
subsidiaries, and as of the Effective Date, will have no subsidiaries.
(d) The Company has been duly organized and is validly
existing as a Colorado corporation in good standing with full corporate power
and corporate authority to own its properties and conduct its business as
described in the Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction in which
it conducts its business or owns property and in which the failure, individually
or in the aggregate, to be so qualified would have a material adverse effect on
the properties, assets, operations, business or condition (financial or
otherwise) of the Company ("Material Adverse Effect").
(e) The Company does not own any shares of capital stock or
any other securities of any corporation or any equity interest in any firm,
partnership, association or other entity other than as described in the
Registration Statement.
<PAGE>
(f) The Company's equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material respects
to the description thereof contained in the Prospectus; all outstanding shares
of Common Stock, and the shares of Preferred Stock to be issued and sold
hereunder have been duly and validly authorized and issued and are, or will be
fully paid and nonassessable, and the certificates therefor are in valid and
sufficient form in accordance with the laws of the State of Colorado and the
Company's Bylaws; and, on the Closing Date (as defined in Section 3(a) hereof)
and any settlement date pursuant to Section 3(b) hereof, there will be, no
classes of stock outstanding except the Preferred Stock and Common Stock; all
outstanding options to purchase shares of Common Stock have been duly and
validly authorized and issued; except as described in the Prospectus, there are,
and, on the Closing Date and any settlement date pursuant to Section 3(b)
hereof, there will be, no options, warrants or rights to acquire, or debt
instruments convertible into or exchangeable for, or other agreements or
understandings to which the Company is a party, outstanding or in existence,
entitling any person to purchase or otherwise acquire shares of capital stock of
the Company; the issuance and sale of the Securities have been duly and validly
authorized and, when issued, delivered and paid for in accordance with the terms
hereof, the Securities will be fully paid and nonassessable and free from
preemptive rights, and will conform in all respects to the description thereof
contained in the Prospectus; the Warrants and Underwriters' Warrants will, when
issued, constitute valid and binding obligations of the Company enforceable in
accordance with their terms and the Company has reserved a sufficient number of
shares of Common Stock for issuance upon exercise thereof (including the
Warrants included in the Underwriters' Warrants); the Warrants and Underwriters'
Warrants will, when issued, possess the rights, privileges and characteristics
as represented in the exhibits to the Registration Statement and as described in
the Prospectus; and the Securities (other than the Underwriters' Warrants) have
been approved for listing on the Nasdaq Small Cap Market upon notice of issuance
thereof. Each offer and sale of securities of the Company referred to in Item 26
of Part II of the Registration Statement was effected in compliance with the Act
and the rules and regulations thereunder, and with all applicable state
securities and blue sky ("Blue Sky") laws.
(g) Other than as described in the Prospectus, there is no
pending or, to the best knowledge of the Company, threatened action, suit or
proceeding before any court or governmental agency, authority or body, domestic
or foreign, or any arbitrator involving the Company of a character required to
be disclosed in the Registration Statement or the Prospectus. There is no
contract or other document of a character required to be described in the
Registration Statement or Prospectus or to be filed as an exhibit that is not
described or filed as required.
(h) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as rights of indemnity and contribution hereunder may be limited by
public policy and except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and general principles of equity.
(i) The Company has full corporate power and authority to
enter into and perform its obligations under this Agreement and to issue, sell
and deliver the Securities in the manner provided in this Agreement. The Company
has taken all necessary corporate action to authorize the execution and delivery
of, and the performance of its obligations under, this Agreement.
(j) Neither the execution, delivery and performance of this
Agreement by the Company, the offering, issue and sale of the Securities, nor
the consummation of any other of the transactions contemplated herein, nor the
fulfillment of the terms hereof, will conflict with or result in a breach or
violation of, or constitute a default (or an event that with notice or lapse of
time, or both, would constitute a default) under, or result in the imposition of
a lien on any properties of the Company or an acceleration of indebtedness
pursuant to, the Articles of Incorporation or Bylaws of the Company, or any of
the terms of any indenture or other agreement or instrument to which the Company
is a party or by which the Company or any of its properties are bound, or any
federal, state or local law, rule, regulation of any court, governmental or
regulatory body, stock exchange or arbitrator having jurisdiction over the
Company or any of its assets. The Company is not (A) in violation of its
Articles of Incorporation or Bylaws or (B) in breach of or default under any of
the terms of any indenture or other agreement or instrument to which it is a
party or by which it or its properties are bound, which breach or default
described in this clause (B) would, individually or in the aggregate, have a
Material Adverse Effect.
<PAGE>
(k) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to it any shares
of capital stock in consequence of the issue and sale of the Securities, nor
does any person have preemptive rights, or rights of first refusal or other
rights to purchase any of the Securities. Except as referred to in the
Prospectus, no person holds a right to require or participate in a registration
under the Act of Common Stock or any other equity securities of the Company.
(l) The Company has not (i) taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to cause or result in, under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale or the Securities or (ii) effected any
sales of shares or securities that are required to be disclosed in response to
Item 26 of Part II of the Registration Statement (other than transactions
disclosed in response to Item 26 of Part II of the Registration Statement or the
Prospectus).
(m) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body is required
to be obtained or filed by or on behalf of the Company in connection with the
transactions contemplated herein, except such as may have been obtained or made
and registration of the Securities under the Act, and such as may be required
under the Blue Sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters.
(n) The accountants who have certified the financial
statements filed or to be filed with the Commission as part of the Registration
Statement are independent accountants as required by the Act.
(o) No stop order preventing or suspending the use of any
Preliminary Prospectus has been issued, and no proceedings for that purpose are
pending or, to the best knowledge of the Company, threatened or contemplated by
the Commission; no stop order suspending the sale of the Securities in any
jurisdiction has been issued and no proceedings for that purpose have been
instituted or, to the best knowledge of the Company, threatened or are
contemplated; and any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise) has
been complied with.
(p) The Company has not sustained since March 31, 1997 any
material loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, and, since the respective
dates as of which information is given in the Registration Statement and the
Prospectus, there have not been any material changes in the capital stock or
short-or long-term debt of the Company, or any material adverse change, or a
development known to the Company that could reasonably be expected to cause or
result in a material adverse change, in the general affairs, management,
financial position, stockholders' equity, results of operations or prospects of
the Company, other than as set forth in the Prospectus. Except as set forth in
the Prospectus, there exists no present condition or state of facts or
circumstances known to the Company (A) affecting its reserves or (B) involving
its business which the Company can now reasonably foresee would have a Material
Adverse Effect on the business of the Company, or which would prevent the
Company from conducting its business as described in the Prospectus in
essentially the same manner in which it has heretofore been conducted.
(q) The financial statements and the related notes of the
Company included in the Registration Statement and the Prospectus present fairly
the financial position, results of operations, cash flow and changes in
stockholders' equity of the Company at the dates and for the periods indicated,
subject in the case of the financial statements for interim periods, to normal
and recurring year-end adjustments. The financial Statement schedules included
in the Registration Statement present fairly the information required to be
stated therein. Such financial statements and schedules were prepared in
conformity with the Commission's rules and regulations and in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except as stated therein. The financial
information of the Company set forth in the Prospectus under the caption
"Management's Discussion and Analysis or Plan of Operations" fairly present, on
the basis stated in the Prospectus, the information included therein.
<PAGE>
(r) The Company owns or possesses, or has the right to use
pursuant to licenses, sublicenses, agreements, permissions or otherwise,
adequate patents, copyrights, trade names, trademarks, service marks, licenses
and other intellectual property rights necessary to carry on its business as
described in the Prospectus, and, except as set forth in the Prospectus, the
Company has not received any notice of either (i) default under any of the
foregoing or (ii) infringement of or conflict with asserted rights of others
with respect to, or challenge to the validity of, any of the foregoing which, in
the aggregate, if the subject of an unfavorable decision, ruling or finding,
could have a Material Adverse Effect, and the Company knows of no fact or
existing circumstance which could reasonably be anticipated to serve as the
basis for any such notice or any such default, infringement or conflict.
(s) The Company has filed all applications and has obtained
all permits, approvals, licenses, franchises, certificates and authorizations of
all federal, state, local or foreign governmental authorities ("Permits") as are
necessary to own its respective property and to conduct its business in the
manner now being conducted and as described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus, except where the lack of
ownership or possession of such Permits would not, individually or in the
aggregate, have a Material Adverse Effect on the Company; the Company has
fulfilled and performed all of its material obligations with respect to such
Permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or would result in any other
material impairment of the rights of the holder of any such Permit, subject in
each case to such qualification as may be set forth in the Prospectus, except
where such revocations, terminations or other impairments thereof would not,
individually or in the aggregate, have a Material Adverse Effect on the Company;
and, except as described in the Prospectus, none of such Permits contains any
restriction that is materially burdensome to the Company.
(t) Subject to such exceptions as are not material (A) the Company owns
all properties and assets described in the Registration Statement and the
Prospectus as being owned by it and (B) the Company has good title to all
properties and assets owned by it, free and clear of all liens, charges,
encumbrances and restrictions, except as otherwise disclosed in the Prospectus,
and except for (i) liens for taxes not yet due, (ii) mortgages and liens
securing debt reflected on the financial statements included in the Prospectus,
(iii) materialmen's, workmen's, vendor's and other similar liens incurred in the
ordinary course of business that are not delinquent and, individually or in the
aggregate, do not have a material adverse effect on the value of such properties
or assets to the Company, or on the use of such properties or assets by the
Company, in its respective businesses, and (iv) any other liens that,
individually or in the aggregate, are not likely to result in a Material Adverse
Effect. All leases to which the Company is a party and which are material to the
conduct of the business of the Company are valid and binding and no material
default by the Company has occurred and is continuing thereunder; and the
Company enjoys peaceful and undisturbed possession under all such material
leases to which it is a party as lessee.
(u) The books, records and accounts of the Company accurately
and fairly reflect, in reasonable detail, the transactions in and dispositions
of the assets of the Company. The system of internal accounting controls
maintained by the Company is sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) Except as set forth in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, the Company has not incurred any liabilities or obligations,
direct or contingent, or entered into any transactions, in each case, which are
likely to result in a Material Adverse Effect, and there has not been any
payment of or declaration to pay any dividends or any other distribution with
respect to the shares of the capital stock of the Company.
(w) The Company has obtained and delivered to the
Representative the written agreements, in substantially the form of Exhibit A
attached hereto, of each of the persons listed in Schedule III attached hereto,
restricting dispositions of shares of capital stock of the Company in accordance
with the provisions of Section 6 hereof and the terms contained in the Exhibit A
form applicable thereto.
<PAGE>
(x) The Company is in compliance in all material respects with
all applicable laws, rules and regulations, including, without limitation,
employment and employment practices, immigration, terms and conditions of
employment, health and safety of workers, customs and wages and hours, and is
not engaged in any unfair labor practice. No property of the Company has been
seized by any governmental agency or authority as a result of any violation by
the Company or any independent contractor of the Company of any provision of
law. There is no pending unfair labor practice complaint or charge filed with
any governmental agency against the Company. There is no labor strike, material
dispute, slow down or work stoppage actually pending or, to the best knowledge
of the Company, threatened against or affecting the Company; no grievance or
arbitration arising out of or under any collective bargaining agreement is
pending against the Company; no collective bargaining agreement which is binding
on the Company restricts the Company from relocating or closing any of its
operations; and the Company has not experienced any work stoppage or other labor
dispute at any time.
(y) The Company has accurately, properly and timely (giving
effect to any valid extensions of time) filed all federal, state , local and
foreign tax returns (including all schedules thereto) that are required to be
filed, and has paid all taxes and assessments shown thereon. All tax
deficiencies asserted or assessed against the Company by the Internal Revenue
Service ("IRS") or any other foreign or domestic taxing authority have been paid
or finally settled with no remaining amounts owed. Neither the IRS nor any other
foreign or domestic taxing authority has examined any tax returns of the
Company. The charges, accruals and reserves shown in the financial statements
included in the Prospectus in respect of taxes for all fiscal periods to date
are adequate, and nothing has occurred subsequent to the date of such financial
statements that makes such charges, accruals or reserves inadequate. The Company
is not aware of any proposal (whether oral or written) by any taxing authority
to adjust any tax return filed by the Company.
(z) Except as set forth in the Prospectus, there are no
outstanding loans, advances or guaranties of indebtedness by the Company to or
for the benefit of its affiliates, or any of its officers or directors, or any
of the members of the families of any of them, which are required to be
disclosed in the Registration Statement or the Prospectus.
(aa) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(bb) The Company has insurance of the types and in the amounts
that it reasonably believes is adequate for its business, including, but not
limited to, casualty and general liability insurance covering all real and
personal property owned or leased by the Company, as applicable, against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against.
(cc) The Company has not at any time (i) made any
contributions to any candidate for political office, or failed to disclose fully
any such contribution, in violation of law; (ii) made any payment to any state,
federal or foreign governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
allowed by all applicable laws; or (iii) violated, nor is it in violation of,
any provision of the Foreign Corrupt Practices Act of 1977.
(dd) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on behalf of the
Company, and the Registration Statement has been duly executed pursuant to such
authorization by and on behalf of the Company.
(ee) All documents delivered or to be delivered by the Company
or any of its directors or officers to the Underwriters, the Commission or any
state securities law administrator in connection with the issuance and sale of
the Securities were, on the dates on which they were delivered, and will be, on
the dates on which they are to be delivered, true, complete and correct in all
material respects.
(ff) With such exceptions as are not likely to result in a
Material Adverse Effect, the Company is in compliance with all federal, state,
foreign and local laws and regulations relating to pollution or protection of
human health or the environment ("Environmental Laws"), and the Company has not
received any notice or other communication alleging a currently pending
violation of any Environmental Laws. With such exceptions as are not likely to
result in a Material Adverse Effect, other than as set forth in the Prospectus,
to the Company's best knowledge, there are no past or present actions,
<PAGE>
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge or disposal of any chemicals,
pollutants, contaminants, wastes, toxic substances, petroleum and petroleum
products, that may result in the imposition of liability on the Company or any
claim against the Company or, to the Company's best knowledge, against any
person or entity whose liability for any claim the Company has or may have
assumed either contractually or by operation of law, and the Company has not
received any notice or other communication concerning any such claim against the
Company or such person or entity.
(gg) Except as described in the Prospectus, the Company does
not maintain, nor does any other person maintain on behalf of the Company, any
retirement, pension (whether deferred or non-deferred, defined contribution or
defined benefit) or money purchase plan or trust. There are no unfunded
liabilities of the Company with respect to any such plans or trusts that are not
accrued or otherwise reserved for on the Company's financial statements included
in the Registration Statement and the Prospectus.
(hh) Any certificates signed by an officer of the Company and
delivered to the Representative or the Underwriters shall also be deemed a
representation and warranty of the Company to the Underwriters as to the matters
covered thereby.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to issue and
sell to the Underwriters an aggregate of 400,000 shares of Preferred Stock and
1,000,000 Warrants. Each of the Underwriters agrees, severally and not jointly,
to purchase from the Company the number of shares of Preferred Stock and
Warrants set forth opposite its name in Schedule I hereto. The purchase price
for the Securities to be paid by the several Underwriters to the Company shall
be $____ per share of Preferred Stock and $____ per Warrant.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option (the "Underwriters' Option") to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 60,000 shares of Preferred
Stock and 150,000 Warrants at the purchase price of $____ per share of Preferred
Stock and $____ per Warrant for use solely in covering any over-allotments made
by the Representative for the account of the Underwriters in the sale and
distribution of the Underwritten Securities. The Underwriters' Option may be
exercised in whole or in part at any time on or before the 45th day after the
Effective Date upon written or telegraphic notice by the Representative to the
Company setting forth the number of shares of Preferred Stock and Warrants which
the several Underwriters are electing to purchase pursuant to the Underwriters'
Option and the settlement date and instructions as to the names and
denominations in which the Securities to be issued pursuant to the Underwriters'
Option are to be registered. Delivery of certificates for such shares of
Preferred Stock by the Company, and payment therefor to the Company, shall be
made as provided in Section 3 hereof. The number of shares of Preferred Stock
and Warrants to be so purchased by each Underwriter pursuant to the
Underwriters' Option shall be determined by multiplying the number of shares of
Preferred Stock and Warrants to be sold by the Company pursuant to the
Underwriters' Option, as exercised, by a fraction, the numerator of which is the
number of shares of Preferred Stock and Warrants to be purchased by such
Underwriter as set forth opposite its name in Schedule I and the denominator of
which is the total number of shares of Preferred Stock and Warrants to be
purchased by all of the Underwriters as set forth on Schedule I (subject to such
adjustments to eliminate any fractional shares of Preferred Stock and Warrants
purchases as the Representative in their discretion may make).
3. Delivery and Payment.
(a) Delivery of the certificates for the shares of Preferred
Stock and Warrants described in Sections 2(a) and, if the Underwriters' Option
described in Section 2(b) hereof is exercised on or before the third business
day prior to the Closing Date (as defined below), 2(b) hereof shall be made by
the Company through the facilities of the Depository Trust Company ("DTC"), and
payment therefor, shall be made at the office of the Company at 11:00 a.m.
Dallas, Texas time, on such date, not earlier than the fourth full business day
following the Effective Date of the Registration Statement, but not later than
twelve business days after such Effective Date, as you shall designate by at
least 48 hours' prior notice to the Company (such date, time of delivery and
<PAGE>
payment for such Securities being herein called the Closing Date). Delivery of
the certificates for such Securities to be purchased on the Closing Date shall
be made as provided in the preceding sentence for the respective accounts of the
several Underwriters against payment by the several Underwriters through the
Representative of the aggregate purchase price of such Securities being sold by
the Company, to or upon the order of the Company, by certified or official bank
check or checks drawn on or by a New York Clearing House bank and payable in
next day funds. Certificates for such Securities shall be registered in such
names and in such denominations as the Representative may request not less than
three full business days in advance of the Closing Date. The Company agrees to
have the certificates for the Securities to be purchased on the Closing Date
available at the office of the DTC, not later than 9:00 a.m. Dallas, Texas time
at least one business day prior to the Closing Date.
(b) If the Underwriters' Option is exercised after the third
business day prior to the Closing Date, the Company will deliver (at the expense
of the Company) on the date specified by the Representative (which shall not be
less than three business days after exercise of the Underwriters' Option),
certificates for the Securities described in Section 2(b) hereof in such names
and denominations as the Representative shall have requested against payment at
the office of the Company of the purchase price therefor, by certified or
official bank check or checks drawn on or by a New York Clearing House bank and
payable in next day funds. If settlement for such Securities occurs after the
Closing Date, the Company will deliver to the Representative on the settlement
date for such Securities, and the obligation of the Underwriters to purchase
such Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof. The
Company agrees to have the certificates for the Securities to be purchased after
the Closing Date available at the office of the DTC, not later than 9:00 a.m.
Dallas, Texas time at least one business day prior to the settlement date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements of the Company. The Company agrees with the several
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the Execution Time, to
become effective as promptly as possible. If the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will file the Prospectus,
properly completed, pursuant to Rule 424(b) within the time period prescribed
and will provide evidence satisfactory to the Representative of such timely
filing. The Company will promptly advise the Representative (i) when the
Registration Statement shall have become effective, (ii) when any post-effective
amendment thereto shall have become effective, (iii) of any request by the
Commission for any amendment or supplement of the Registration Statement or the
Prospectus or for any additional information with respect thereto, (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the receipt by the Company of any notification with
respect to the institution or threatening of any proceeding for that purpose,
and (v) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose. The Company
will use its best efforts to prevent the issuance of any such stop order or
suspension and, if issued, to obtain as soon as possible the withdrawal thereof.
The Company will not file any amendment to the Registration Statement or
supplement to the Prospectus without the prior consent of the Representative.
The Company will prepare and file with the Commission, promptly upon your
request, any amendment to the Registration Statement or supplement to the
Prospectus that you reasonably determine to be necessary or advisable in
connection with the distribution of the Securities by you, and will use its best
efforts to cause the same to become effective as promptly as possible. The
Company, at the Company's expense, shall keep the Registration Statement
effective and the information contained therein (including information contained
in the Prospectus) current during the conversion period of the Preferred Stock
and the term of the Warrants in accordance with the Act and the rules and
regulations thereunder. Without limiting the effect of the preceding sentence,
in the event any Underwriter is required to deliver a Prospectus in connection
with sales of any of the Securities at any time nine months or more after the
Effective Date, upon the written request of the Representative and at the
expense of the Company, the Company will prepare, file with the Commission and
deliver to such Underwriter as many copies as the Representative may request of
an amended or supplemented Prospectus complying with Section 10(a)(3) of the
Act.
<PAGE>
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if it otherwise shall be necessary to supplement the
Prospectus to comply with the Act or the rules or regulations thereunder, the
Company will promptly notify the Representative and prepare and file with the
Commission, subject to Section 5(a) hereof, a supplement that will correct such
statement or omission or a supplement that will effect such compliance.
(c) As soon as practicable (but not later than ____1998), the Company
will make generally available to its security holders and to the Representative
an earnings statement or statements (which need not be audited) of the Company
covering a period of at least twelve months after the Effective Date (but in no
event commencing later than 90 days after such date), which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 promulgated thereunder.
(d) The Company will furnish to each of you and counsel for the
Underwriters, without charge, three signed copies of the Registration Statement
and any amendments thereto (including exhibits thereto) and to each other
Underwriter a conformed copy of the Registration Statement and any amendments
thereto (without exhibits thereto) and, so long as delivery of a prospectus by
an Underwriter or dealer may be required by the Act, as many copies of the
Prospectus and each Preliminary Prospectus and any supplements thereto as the
Representative may reasonably request. The Company will furnish or cause to be
furnished to the Representative copies of all reports on Form SR required by
Rule 463 under the Act.
(e) The Company will take all actions necessary for the registration or
qualification of the Securities for sale under the laws of such jurisdictions
within the United State s and its territories as the Representative may
designate, will maintain such qualifications in effect so long as required for
the distribution of the Securities and will pay the fee of the National
Association of Securities Dealers, Inc. (the "NASD") in connection with its
review of the offering, provided that the Company shall not be required to
qualify as a foreign corporation or to consent to service of process under the
laws of any such jurisdiction (except service of process with respect to the
offering and sale of the Securities).
(f) The Company will apply the net proceeds from the offering received
by it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(g) The Company will (i) cause the Securities (other than the
Underwriters' Warrants) to be listed on the Nasdaq Small Cap Market, and (ii)
comply with all registration, filing and reporting requirements of the Exchange
Act and the Nasdaq Small Cap Market which may from time to time be applicable to
the Company, and (iii) file a report of sales and use of proceeds on Form SR as
required to be filed pursuant to Rule 463 under the Act from time to time.
(h) The Company will file promptly all documents required to be filed
with the Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act
subsequent to the Effective Date and during any period in which the Prospectus
is required to be delivered.
(i) During the five year period commencing on the date hereof, the
Company will furnish to its stockholders, as soon as practicable after the end
of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of earnings and will furnish to you and, upon request, to the other
Underwriters hereunder (i) concurrent with furnishing such annual and quarterly
reports to its stockholders, copies of such reports; (ii) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, the NASD, the Nasdaq Small Cap Market, or any other
securities exchange; (iii) every press release and every material news item or
article in respect of the Company or its affairs which was released or prepared
by the Company; and (iv) any additional information of a public nature
concerning the Company or its business that you may reasonably request. During
such five year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary that is not so consolidated.
(j) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for the Securities.
<PAGE>
(k) The Company will not, for a period of one year following the
Effective Date, without the prior written consent of the Representative, issue,
sell, contract to sell (including, without limitation, any short sale),
transfer, assign, pledge, encumber, hypothecate or grant any option to purchase
or otherwise dispose of, any capital stock, or any options, rights or warrants
to purchase any capital stock of the Company, or any securities or indebtedness
convertible into or exchangeable for shares of capital stock of the Company,
except for (i) sales of the Securities as contemplated by this Agreement, and
(ii) sales of Common Stock upon conversion of the Preferred Stock or upon the
Warrants or outstanding options described in the Prospectus.
(l) The Company has reserved and shall continue to reserve a sufficient
number of shares of Common Stock for issuance upon conversion of the Preferred
Stock and exercise of the Warrants (including the Warrants included in the
Underwriters' Warrants).
(m) The Company will not take, directly or indirectly, any action
designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the shares of Preferred Stock, the
Warrants, or the Common Stock to facilitate the sale or resale of such
Securities or that otherwise might reasonably be expected to violate the
provisions of Rule 10b-18 under the Exchange Act.
6. Conditions to the Obligations of the Underwriters. The obligations of the
Underwriters to purchase the shares of Preferred Stock and the Warrants
described in Sections 2(a) and 2(b) hereof shall be subject to (i) the accuracy
in all material respects of the representations and warranties on the part of
the Company contained herein as of the Execution Time, the Closing Date (except
that each of the representations and warranties of the Company, the breach or
violation of which is not qualified as to materiality, shall be true in all
respects) and (in the case of any shares of Preferred Stock and the Warrants
delivered after the Closing Date) any settlement date pursuant to Section 3(b)
hereof, (ii) the accuracy of the statements of the Company made in any
certificates delivered pursuant to the provisions hereof, (iii) the performance
in all material respects by the Company of their respective obligations
hereunder (except that each of the obligations of the Company, the violation of
which is not qualified as to materiality, shall be performed in all respects),
and (iv) the following additional conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under the
Act, such post-effective amendment shall become effective) not later than 5:00
p.m. Dallas, Texas time, on the execution date hereof or at such later date and
time as you may approve in writing and, at the Closing Date (and any settlement
date pursuant to Section 3(b) hereof), no stop order suspending the
effectiveness of the Registration Statement or any qualification in any
jurisdiction shall have been issued and no proceedings for that purpose shall
have been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the Registration Statement or Prospectus or
otherwise) shall have been complied with to the Representative's reasonable
satisfaction.
The Company shall have furnished to the Representative the opinion of Brenman,
Bromberg & Tenenbaum, P. C., Counsel for the Company, or other counsel
acceptable to the Underwriters addressed to the Underwriters and dated the
Closing Date (and any settlement date pursuant to Section 3(b) hereof), to the
effect that:
(i) The Registration Statement has become effective under the
Act; any required filing of the Prospectus or any supplements thereto pursuant
to Rule 424(b) has been made in the manner and within the time period required
by Rule 424(b); to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any qualification in any
jurisdiction has been issued and no proceedings for that purpose have been
instituted or threatened; the Registration Statement and the Prospectus (and any
amendments or supplements thereto) comply as to form in all material respects
<PAGE>
with the applicable requirements of the Act and the rules and regulations
thereunder (other than the financial statements and related schedules, as to
which such counsel need make no statement).
(ii) Except as set forth in the Prospectus, the Company has
no subsidiaries.
(iii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Colorado, with requisite corporate power and authority to own its properties and
conduct its business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of each
jurisdiction in which it conducts its business or owns property and in which the
failure, individually or in the aggregate, to be so qualified would have a
Material Adverse Effect. The Company has all necessary and material
authorizations, approvals, orders, licenses, certificates and permits of and
from all government regulatory officials and bodies, to own its properties and
conduct its business as described in the Prospectus, except where failure to
obtain such authorizations, approvals, orders, licenses, certificates or permits
would not have a Material Adverse Effect.
(iv) The Company does not own any shares of capital stock or
any other equity securities of any corporation or any equity interest in any
firm, partnership, association or other entity, other than as described in the
Prospectus.
(v) The Company has authorized and outstanding share
capitalization as set forth in the Prospectus; the capital stock of the Company
conforms in all material respects to the description thereof contained in the
Prospectus; all outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable and the certificates
therefor are in valid and sufficient form in accordance with the laws of the
State of Colorado and the Company's Bylaws; the Preferred Stock and the Warrants
have been duly and validly authorized and when issued will be fully paid and
nonassessable and the certificates therefor are in valid and sufficient form in
accordance with the laws of the State of Colorado and the Company's Bylaws;
there are no other classes of stock outstanding except Common Stock as described
in the Prospectus; all outstanding options to purchase shares of Common Stock
have been duly and validly authorized and issued; except as described in the
Prospectus, there are no options, warrants or rights to acquire, or debt
instruments convertible into or exchangeable for, or other agreements or
understandings to which the Company is a party, outstanding or in existence,
entitling any person to purchase or otherwise acquire any shares of capital
stock of the Company; the issuance and sale of the Securities have been duly and
validly authorized and, when issued and delivered and paid for in accordance
with the terms of this Agreement, the Securities will be fully paid and
nonassessable and free from preemptive rights, and will conform in all respects
to the description thereof contained in the Prospectus; the Preferred Stock,
Warrants and Underwriters' Warrants constitute valid and binding obligations of
the Company enforceable in accordance with their terms (subject to customary
bankruptcy and equitable remedy exceptions) and the Company has reserved a
sufficient number of shares of Common Stock for issuance upon exercise thereof
(including the Warrants included in the Underwriters' Warrants); the Preferred
Stock, Warrants and Underwriters' Warrants possess the rights, privileges and
characteristics as represented in the forms filed as exhibits to the
Registration Statement and as described in the Prospectus; and the Securities
(other than the Underwriters' Warrants) have been approved for listing on the
Nasdaq Small Cap Market upon notice of issuance thereof. Each offer and sale of
securities of the Company referred to in Item 26 of Part II of the Registration
Statement was effected in compliance with the Act and the rules and regulations
thereunder, and with all applicable state securities and blue sky ("Blue Sky")
laws.
(vi) Other than as described in the Prospectus, there is no
pending or, to the knowledge of such counsel, threatened action, suit or
proceeding before any court or governmental agency, authority or body, domestic
or foreign, or any arbitrator involving the Company of a character required to
be disclosed in the Registration Statement or the Prospectus that is not
adequately disclosed in the Prospectus, and, to the knowledge of such counsel,
there is no contract or other document of a character required to be described
in the Registration Statement or the Prospectus, or to be filed as an exhibit,
which is not described or filed as required.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes the legal, valid and binding agreement
and obligation of the Company enforceable against it in accordance with its
terms (subject to customary bankruptcy and equitable remedy exceptions, and
limitations under the Act as to the enforceability of indemnification
provisions).
(viii) The Company has requisite corporate power and authority
to enter into and perform its obligations under this Agreement and to issue,
sell and deliver the Securities to be sold by it in the manner provided in this
<PAGE>
Agreement. The Company has taken all necessary corporate action to authorize the
execution and delivery of, and the performance of its obligations under, this
Agreement.
(ix) Neither the execution, delivery and performance of this
Agreement by the Company, the offering, issue and sale of the Securities, nor
the consummation of any other of the transactions contemplated herein, nor the
fulfillment of the terms hereof, will conflict with or result in a breach or
violation of, or constitute a default (or an event that with notice or lapse of
time, or both, would constitute a default) under, or result in the imposition of
a lien on any properties of the Company or an acceleration of indebtedness
pursuant to, the Articles of Incorporation or Bylaws of the Company, or any of
the terms of any indenture or other agreement or instrument to which the Company
is a party or by which the Company or any of its properties are bound, or any
federal, state or local law, rule, regulation of any court, governmental or
regulatory body, stock exchange or arbitrator having jurisdiction over the
Company or any of its assets. The Company is not (A) in violation of its
Articles of Incorporation or Bylaws or (B) in breach of or default under any of
the terms of any indenture or other agreement or instrument to which it is a
party or by which it or its properties are bound, which breach or default
described in this clause (B) would, individually or in the aggregate, have a
Material Adverse Effect. Neither the offering, issue and sale of the Securities
nor the consummation of any other of the transactions contemplated herein, nor
the fulfillment of the terms hereof, will conflict with or result in a breach or
violation of, or constitute a default (or an event that with notice or lapse of
time, or both, would constitute a default) under, or result in the imposition of
a lien on any properties of the Company, or an acceleration of indebtedness
pursuant to, the Articles of Incorporation or Bylaws of the Company, or any of
the terms of any indenture or other agreement or instrument to which the Company
is a party or by which any of their respective properties are bound, or any law,
rule, regulation, court decree, judgment or other order of any court,
governmental or regulatory body, stock exchange or arbitrator having
jurisdiction over the Company or any of its assets. The Company is not (A) in
violation of its Articles of Incorporation or Bylaws or (B) in breach of or
default under any of the terms of any indenture or other agreement or instrument
to which it is a party or by which it or its properties are bound, which breach
or default described in this clause (B) would, individually or in the aggregate,
have a Material Adverse Effect.
(x) Except as disclosed in the Prospectus, no person has the
right, contractual or otherwise, to cause the Company to issue to it any shares
of capital stock in consequence of the issue and sale of the Securities to be
sold by the Company hereunder nor does any person have preemptive rights, or
rights of first refusal or other rights to purchase any of the Securities.
Except as referred to in the Prospectus, no person holds a right to require or
participate in a registration under the Act of Common Stock or any other equity
securities of the Company.
(xi) No consent, approval, authorization or order of, or
declaration or filing with, any court or governmental agency or body is required
to be obtained or filed by or on behalf of the Company in connection with the
transactions contemplated herein, except such as may have been obtained or made
and registration of the Securities under the Act, and such as may be required
under the Blue Sky laws of any jurisdiction.
(xii) The Company is not in violation of or default under any
judgment, ruling, decree or order or any statute, rule or regulation of any
court or other United States governmental agency or body, including any
applicable laws respecting employment, immigration and wages and hours, in each
case, where such violation or default could have a Material Adverse Effect. The
Company is not involved in any labor dispute nor, to the best knowledge of such
counsel, is any labor dispute threatened.
(xiii) The Company is not an investment company subject to
registration under the Investment Company Act of 1940, as amended.
(xiv) The preparation and the filing of the Registration
Statement with the Commission have been duly authorized by and on behalf of the
Company and the Registration Statement has been duly executed pursuant to such
authorization by and on behalf of the Company.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company
and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus were discussed and, although such counsel
is not passing upon and does not assume responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in the first three
<PAGE>
clauses of subparagraph (v) above), on the basis of the foregoing and on such
counsel's participation in the preparation of the Registration Statement and the
Prospectus, nothing has come to the attention of such counsel that causes such
counsel to believe that the Registration Statement, at the Effective Date and at
the Closing Date (and any settlement date pursuant to Section 3(b) hereof),
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or that the Prospectus, at the date of such Prospectus or
at the Closing Date (or any settlement date pursuant to Section 3(b) hereof), or
any amendment or supplement to the Prospectus, as of its respective date or as
of the Closing Date (or any settlement date pursuant to Section 3(b) hereof)
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
comment with respect to the financial statements and schedules and other
financial or statistical data included in the Registration Statement or
Prospectus).
References to the Prospectus in this Section 6(b) shall include any
amendments or supplements thereto.
(c) The Representative shall have received from Maurice J. Bates,
L.L.C., counsel for the Underwriters, an opinion dated the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), with respect to the issuance
and sale of the Securities, and with respect to the Registration Statement, the
Prospectus and other related matters as the Representative may reasonably
require, and the Company shall have furnished to such counsel such documents as
they may reasonably request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Representative a
certificate of the Company, signed by its President and Chief Executive Officer,
dated the Closing Date (and any settlement date pursuant to Section 3(b)
hereof), to the effect that each has carefully examined the Registration
Statement, the Prospectus (and any supplements thereto) and this Agreement, and,
after due inquiry, that:
(i) As of the Closing Date (and any settlement date pursuant
to Section 3(b) hereof), the statements made in the Registration Statement and
the Prospectus are true and correct and the Registration Statement and the
Prospectus do not contain any untrue statements of a material fact or omit to
State any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(ii) No order suspending the effectiveness of the Registration
Statement or the qualification or registration of the Securities under the
securities or Blue Sky laws of any jurisdiction is in effect and no proceeding
for such purpose is pending before or, to the knowledge of such officers,
threatened or contemplated by the Commission or the authorities of any such
jurisdiction; and any request for additional information with respect to the
Registration Statement or the Prospectus on the part of the staff of the
Commission or any such authorities brought to the attention of such officers has
been complied with to the satisfaction of the staff of the Commission or such
authorities.
(iii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (x) there has not been
any change in the capital stock or short- or long-term debt of the Company,
except as set forth in or contemplated by the Registration Statement and the
Prospectus, (y) there has not been any material adverse change in the business,
prospects, properties, management, results of operations or condition (financial
or otherwise) of the Company, whether or not arising from transactions in the
ordinary course of business, in each case, other than as set forth in or
contemplated by the Registration Statement and the Prospectus, and (z) the
Company has not sustained any material interference with its business or
properties from fire, explosion, flood or other casualty, whether or not covered
by insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree, which is not set forth in the Registration
Statement and the Prospectus.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has been no
litigation instituted against the Company or any of its respective officers or
directors, and since such dates there has been no proceeding instituted or, to
the best knowledge of such officers, threatened against the Company or any of
its officers or directors before any federal, state or county court, commission,
<PAGE>
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding could have a Material Adverse Effect.
(v) Each of the representations and warranties of the Company
in this Agreement is true and correct in all material respects on and as of the
Execution Time and the Closing Date (and any settlement date pursuant to Section
3(b) hereof) with the same effect as if made on and as of the Closing Date (and
any settlement date pursuant to Section 3(b) hereof).
(vi) Each of the covenants required in this Agreement to be
performed by the Company on or prior to the Closing Date (and any settlement
date pursuant to Section 3(b) hereof) has been duly, timely and fully performed
in all material respects, and each condition required herein to be complied with
by the Company on or prior to the Closing Date (and any settlement date pursuant
to Section 3(b) hereof) has been duly, timely and fully complied with in all
material respects.
(e) At the Execution Time and on the Closing Date (and any settlement
date pursuant to Section 3(b) hereof) Gross, Collins + Cress, P.C. shall have
furnished to the Representative letters, dated as of such dates, in form and
substance satisfactory to the Representative, confirming that they are
independent accountants within the meaning of the Act and the applicable rules
and regulations thereunder and stating in effect that:
(i) In their opinion, the audited financial statements of the
Company for the fiscal years ended December 31, 1995 and 1996, and the interim
unaudited statements for the three months ended March 31, 1997, compiled by the
Company and the notes to the financial statements and financial statement
schedules for those periods included in the Registration Statement and the
Prospectus, comply in form in all material respects with the applicable
accounting requirements of the Act and the applicable rules and regulations
thereunder.
(ii) On the basis of a reading of the latest unaudited
financial statements made available by the Company, carrying out certain
specified procedures (but not an examination in accordance with generally
accepted auditing standards), a reading of the minutes of the meetings of the
stockholders, directors and committees of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and accounting
matters of the Company, nothing came to their attention that caused them to
believe that with respect to the period subsequent to March 31, 1997, at a
specified date not more than five business days prior to the date of the letter,
(y) there were any changes in the short- or long-term debt or capital stock of
the Company, or decreases in net current assets, net assets or stockholders'
equity of the Company as compared with the amounts shown on the March 31, 1997
balance sheet included in the Registration Statement and the Prospectus, or (z)
there were any decreases in reserves, sales, net income or income from
operations, of the Company, as compared with the corresponding period in the
preceding year, except for changes or decreases which the Registration Statement
discloses have occurred or may occur and except for changes or decreases, set
forth in such letter, in which case (A) the letter shall be accompanied by an
explanation by the Company as to the significance thereof unless said
explanation is not deemed necessary by the Representative and (B) such changes
or decreases and the explanation thereof shall be acceptable to the
Representative, in its sole discretion.
(iii) They have performed certain other specified procedures
as a result of which they determined that all information of an accounting,
financial or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company) set forth in the Registration Statement and the Prospectus and
specified by you prior to the Execution Time, agrees with the accounting records
of the Company.
(iv) On the basis of a reading of the balance sheet as of
December 31, 1996 and the related unaudited balance sheet and statements of
operations for the three months ended March 31, 1997, and the procedures
specified by you prior to the Execution Time, nothing came to their attention
that caused them to believe that the above described balance sheet and
statements of operations had not been properly compiled on the bases described
in the notes thereto.
References to the Prospectus in this Section 6(e) shall
include any amendments or supplements thereto.
<PAGE>
The Representative shall have also received from Gross,
Collins & Cress, P.C. a letter to the Company stating that the Company's system
of internal accounting controls taken as a whole are sufficient to meet the
broad objectives of internal accounting control insofar as those objectives
pertain to the prevention or detection of errors or irregularities in amounts
that would be material to the financial statements of the Company.
(f) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall not have been (i)
any changes or decreases from those specified in the letters referred to in
Section 6(e) hereof which have been accepted by the Representative pursuant
thereto or (ii) any change in the properties, assets, results of operations,
business, capitalization, net worth, prospects, general affairs or condition
(financial or otherwise) of the Company the effect of which is, in the sole
judgment of the Representative, so material and adverse as to make it
impractical or inadvisable to proceed with the public offering or delivery of
the Securities as contemplated by the Registration Statement and the Prospectus.
(g) On or prior to the Effective Date, the Securities shall have been
approved for listing on the Nasdaq Small Cap Market.
(h) The Company shall not have sustained any uninsured substantial loss
as a result of fire, flood, accident or other calamity.
(i) The Company shall have furnished to the Representative a
certificate of the Secretary of the Company certifying as to certain information
and other matters as the Representative may reasonably request.
(j) The Company shall have furnished to the Representative such further
information, certificates and documents as the Representative may reasonably
request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in any respect when and as provided in this Agreement, or if any
of the opinions and certificates mentioned above or elsewhere in this Agreement
shall not be in all respects reasonably satisfactory in form and substance to
the Representative and its counsel, this Agreement and all obligations of the
Underwriters hereunder may be canceled at, or at any time prior to, the Closing
Date (or any settlement date, pursuant to Section 3(b) hereof), by the
Representative. Notice of such cancellation shall be given to the Company in
writing or by telephone, facsimile or telegraph confirmed in writing.
7. Fees and Expenses and Underwriters' Warrants. The Company agrees to pay
or cause to be paid the following:
(a) The fees, disbursements and expenses of its own counsel and
accountants in connection with the registration of the Securities under the Act
and all other expenses in connection with the preparation, printing and filing
of the Registration Statement, any Preliminary Prospectus, any Prospectus, and
any drafts thereof, and amendments and supplements thereto, and the mailing and
delivery of copies thereof to the Underwriters and dealers;
(b) All expenses in connection with the qualification of the Securities
for offering under state securities laws, including the fees and disbursements
of counsel for the Underwriters in connection with such qualification and in
connection with the Blue Sky Memorandum;
(c) All filing and other fees in connection with filing with the
NASD, and complying with applicable review requirements thereof;
(d) The cost of preparing and printing certificates for the
Securities;
(e) All expenses, taxes, fees and commissions, including, without
limitation, any and all fixed transfer duties, sellers' and buyers' stamp taxes
or duties on the purchase and sale of the Securities and stock exchange
brokerage and transaction levies with respect to the purchase and, if
applicable, the sale of the Securities (the latter to the extent paid and not
reimbursed) (i) incident to the sale and delivery by the Company of the
Securities to the Underwriters, and (ii) incident to the sale and delivery of
the Securities by the Underwriters to the initial purchasers thereof;
<PAGE>
(f) The costs and charges of any transfer agent and registrar;
(g) The fees and expenses in connection with the registration of the
Securities under the Securities Exchange Act and the qualification of the
Securities for listing on the Nasdaq Small Cap Market;
(h) The cost of printing, producing and distributing this Agreement,
the Agreement among Underwriters, the Selected Dealers Agreement, the related
syndication materials and the Preliminary and Final Blue Sky Memoranda;
(i) All travel expenses (including without limitation airfare and
hotel) of the Company's officers, directors and other representatives in
connection with the road show;
(j) A nonaccountable expense allowance of 3.0% of the gross proceeds
from the offering (including the Shares of Preferred Stock and the Warrants
described in Section 2(b) hereof) payable to the Representative, provided,
however, in the event that the offering is not consummated, the Representative
will be reimbursed only for its actual out of pocket expenses; and
(k) All other costs and expenses incident to the performance of the
Company's obligations hereunder.
In addition to the sums payable to the Representative as provided
elsewhere herein and in addition to the Underwriters' Option, the Underwriters
shall be entitled to receive, as partial compensation for their services,
warrants for the purchase of 40,000 Shares of Preferred Stock and 100,000
Warrants (the "Underwriters' Warrants"). The Underwriters' Warrants shall be
issued pursuant to the Warrant and Registration Rights Agreement (the
"Underwriters' Warrant Agreement") in the form of Exhibit B attached hereto and
shall be exercisable, in whole or in part, for a period of four years commencing
one year from the date of the Prospectus, at 120% of the public offering price
of the Shares of Preferred Stock and the Warrants set forth on the cover page of
the Prospectus. The Underwriters' Warrants, including the Warrants issuable upon
exercise thereof, shall be non-transferable for one year from the date of
issuance of the Underwriters' Warrants, except as provided in the Underwriters'
Warrant Agreement. The terms of the shares of Preferred Stock and the Warrants
subject to the Underwriters' Warrants shall be the same as the shares of
Preferred Stock and the Warrants sold to the public.
Without limiting in any respect the foregoing obligations of the
Company, which obligations shall survive any termination of this Agreement, if
the sale of the Securities provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 6 hereof
is not satisfied, because of any termination pursuant to Section 10 hereof, or
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein or comply in all material respects with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company agrees to reimburse the Underwriters, upon demand, for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities to the extent the amounts paid pursuant to Section
7(j) hereof are insufficient therefor.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter and each
person who controls any Underwriter within the meaning of the Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Act, the
Exchange Act or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in (i) Section 1 of
this Agreement, the Registration Statement, any Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or (ii) any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify the Securities under
the securities or Blue Sky laws thereof or filed with the Commission or any
securities association or securities exchange, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
<PAGE>
stated therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representative
specifically for use in the Registration Statement or Prospectus; provided
further, that with respect to any untrue statement or omission, or any alleged
untrue statement or omission, made in any Preliminary Prospectus, the indemnity
agreement contained in this Section 8 shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling any such Underwriter)
from whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Securities concerned to the extent that such untrue
statement or omission, or alleged untrue statement or omission, has been
corrected in the Prospectus and the failure to deliver the Prospectus was not a
result of the Company's failure to comply with its obligations under Sections
5(b) and 5(d) hereof. The indemnity agreement contained in this Section 8 will
be in addition to any liability which the Company may otherwise have. The
Company will not, without the prior written consent of each Underwriter, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not such Underwriter or any person who
controls such Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act is a party to such claim, action, suit or proceeding),
unless the settlement or compromise or consent includes an unconditional release
of such Underwriter and each such controlling person from all liability arising
out of such claim, action, suit or proceeding, satisfactory in form and
substance to the Representative.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who signs the Registration
Statement, and each person who controls the Company within the meaning of the
Act or the Exchange Act to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to written information
relating to such Underwriter furnished to the Company by or on behalf of such
Underwriter through the Representative specifically for use in the Registration
Statement or Prospectus. The Company acknowledges that the corporate names of
the Underwriters and the information under the heading "Underwriting" in the
Prospectus and in any Preliminary Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters. The
obligations of each Underwriter under this subsection (b) shall be in addition
to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, suit or proceeding, such indemnified
party will, if a claim in respect thereof is to be made against the indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall assume the defense
thereof, including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of all expenses; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party, unless such omission results in the forfeiture of
substantive rights or defenses by the indemnifying party. All such expenses
shall be paid by the indemnifying party as incurred by an indemnified party. Any
such indemnified party shall have the right to employ separate counsel in any
such action and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party has agreed to pay such fees and expenses or (ii) the
indemnifying party shall have failed promptly after notice by such indemnified
party to assume the defense of such action or proceeding and employ counsel
reasonably satisfactory to the indemnified party in any such action, suit or
proceeding or (iii) the named parties in any such action or proceeding
(including any impleaded parties) include both such indemnified party and the
indemnifying party, and such indemnified party shall have been advised by
<PAGE>
counsel that there is a conflict of interest on the part of counsel employed by
the indemnifying party to represent such indemnified party or there may be one
or more legal defenses available to such indemnified party which are different
from or additional to those available to the indemnifying party (in which case,
if such indemnified party notifies the indemnifying party in writing that it
elects to employ separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the defense of such action
or proceeding on behalf of the indemnified party or parties, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for all such indemnified parties, which firm shall be
designated in writing to the indemnifying party). Any such fees and expenses
payable by the indemnifying party shall be paid to or on behalf of the
indemnified party entitled thereto as incurred. An indemnifying party shall not
be liable for any settlement of any action or claim effected without its
consent, which shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in circumstances in
which the indemnification provided for in Section 8(a) or 8(b) is applicable in
accordance with its terms but is for any reason held by a court to be
unavailable from the indemnifying party on grounds of policy or otherwise, the
Company and the Underwriters shall contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) to which the Company and one
or more of the Underwriters may be subject (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Shares of
Preferred Stock and the Warrants or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above, but also the relative fault of the Company on the one hand and the
Underwriters on the other in connection with the statements or omissions that
resulted in such losses, claims, damages and liabilities, as well as any other
relevant equitable considerations; provided, however, that (x) in no case shall
any Underwriter (except as may be provided in the Agreement Among Underwriters
relating to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount applicable to the Shares of Preferred Stock
and the Warrants to be purchased by such Underwriter hereunder pursuant to this
Section 8 and (y) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Shares of Preferred Stock and the Warrants (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commission received by the Underwriters by reason of the sale of
Shares of Preferred Stock and the Warrants by the Company, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault of
the Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
by the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. For purposes of this Section 8, each person who controls
an Underwriter within the meaning of the Act shall have the same rights to
contribution as such Underwriter, and each person who controls the Company
within the meaning of the Act, each officer of the Company who shall have signed
the Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clause (y) of
this Section 8(d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties under this Section 8, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise.
9. Default by an Underwriter. If any one or more Underwriters shall fail to
purchase and pay for any of the shares of Preferred Stock or Warrants agreed to
be purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the number
of shares of Preferred Stock and Warrants set forth opposite their names in
Schedule I hereto bears to the aggregate number of shares of Preferred Stock and
Warrants set forth opposite the names of all the remaining Underwriters) the
shares of Preferred Stock and Warrants which the defaulting Underwriter or
Underwriters agreed but failed to purchase; provided, however, that if the
aggregate number of shares of Preferred Stock and Warrants which the defaulting
Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of
the aggregate number of shares of Preferred Stock and Warrants set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of such shares of
Preferred Stock and Warrants, and if such nondefaulting Underwriters do not
purchase all of such shares of Preferred Stock and Warrants, this Agreement will
terminate without liability to any non-defaulting Underwriter or the Company
except as otherwise provided in Section 7. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representative shall determine
<PAGE>
in order that the required changes in the Registration Statement and the
Prospectus or in any other documents or arrangements may be effected. Nothing
contained in this Agreement shall relieve any defaulting Underwriter of its
liability, if any, to the Company or any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the absolute
discretion of the Representative, by notice given to the Company prior to
delivery of and payment for the Securities, if prior to such time (a) a
suspension or material limitation in trading in securities generally on the New
York or Nasdaq Small Cap Market, the Nasdaq National Market, or a fall in the
Dow Jones Industrial Average of ten percent (10%) or more, (b) a banking
moratorium shall have been declared by federal, New York or Texas state
authorities, or (c) the United States shall have engaged in hostilities which
shall have resulted in the declaration, on or after the date hereof, of a
national emergency or war, or (d) a change in national or international
political, financial or economic conditions or national or international equity
markets shall have occurred, and with respect to events specified in clause (c)
or (d) hereof, if the effect of any such event is, in the reasonable judgment of
the Representative, so material and adverse to the issuer as to make it
impractical or inadvisable to proceed with the public offering or delivery of
the Securities due to the materially impaired investment quality of the
Securities as contemplated by the Registration Statement and the Prospectus.
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the Company,
its officers, and the Underwriters set forth in, referred to in, or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter, the Company, or any
of the officers, directors or controlling persons referred to in Section 8
hereof, and will survive delivery of and payment for the Securities. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and will be mailed, delivered, telegraphed or sent
by facsimile transmission and confirmed:
to the Representative at:
National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Attention: Robert A. Shuey, III
Facsimile No. (214) 987-2091
to the Company at:
Western Country Clubs, Inc.
1601 N. W. Expressway Suite 1610
Oklahoma City, OK 73118
Attention: James E. Blacketer
Facsimile No. (405) 848-0998
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers, directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Counterparts. This Agreement may be signed in one or more counterparts,
each of which shall be an original, with the same effect as if the signatures
thereon and hereon were on the same instrument.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas, without reference to conflict of
laws or principles thereunder. All disputes relating to this Underwriting
Agreement shall be tried before a court of Texas located in Dallas County, Texas
to the exclusion of all other courts that might have jurisdiction.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
Western Country Clubs, Inc.
By:
James E. Blacketer, President The foregoing Agreement is hereby
confirmed and accepted as of the date first above written.
National Securities Corporation
By:
Name:________________________________
Title:_________________________________
For themselves and the other several Underwriters in Schedule I to the foregoing
Agreement.
Warrant and Registration Rights Agreement
____, 1997
NATIONAL SECURITIES CORPORATION
As Representative of the Several Underwriters
c/o National Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Gentlemen:
Western Country Clubs Inc., a corporation organized under the laws the
State of Colorado (the "Company"), hereby agrees to sell to the several
underwriters (the "Underwriters") named in Schedule I to that certain
Underwriting Agreement (herein so called) of even date herewith by and among you
and the Company, and you hereby agree, as representative of the Underwriters,
that the Underwriters will purchase from the Company, at a purchase price of
$100.00, warrants (the "Underwriter Warrants") to purchase 40,000 shares of the
Company's Series A Cumulative Convertible Redeemable Preferred Stock (the
"Preferred Stock") and 120,000 Series A Redeemable Common Stock Purchase
Warrants (the "Warrants") issued in accordance with the terms of a warrant
agreement dated as of __________, 1997 between the Company and American
Securities Transfer and Trust, Inc. as Warrant Agent. The Underwriter Warrants
will be exercisable by the holders thereof as to all or any lesser number of
shares of Preferred Stock or Warrants covered thereby, at the Purchase Price per
share and per Warrant (as defined below) at any time and from time to time on
and after the first anniversary of the date hereof and ending at 5:00 p.m. on
the fifth anniversary of the date hereof.
1. DEFINITIONS.
As used herein the following terms, unless the context otherwise
requires, shall have for all purposes hereof the following meanings:
(a) The term " Common Stock " refers to the common stock of the Company
pursuant to the Articles of Incorporation of the Company, as amended.
(b) The term "Preferred Stock" refers to the Series A Cumulative
Convertible Redeemable Preferred Stock of the Company pursuant to the
Articles of Incorporation of the Company as amended.
(c) The term "Warrants" refers to the Series A Redeemable Common Stock
Purchase Warrants of the Company which entitle the holder thereof to
purchase one share of Common Stock of the Company anytime prior to
____________,2002, as authorized by the Board of Directors of the
Company, the terms of which are governed by a Warrant Agreement with
the Warrant Agent dated ____________, 1997
(d) The term "Other Securities" refers to any stock (other than the
Preferred Stock) and other securities of the Company or any other
person (corporate or otherwise) which the holders of the Underwriter
Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Underwriter Warrants, in lieu of or
in addition to Preferred Stock and Warrants, or which at any time
shall be issuable or shall have been issued in exchange for or in
replacement of Preferred Stock or Other Securities pursuant to Section
6 below or otherwise.
(e) The term "Purchase Price" refers to the purchase price of the
Underlying Preferred Stock and Underlying Warrants subject to this
Agreement. The Purchase Price shall equal 120% of the offering price
per share of Preferred Stock and per Warrant as set forth in the
Registration Statement. The Purchase Price is subject to adjustment as
provided in Section 6 below.
1
<PAGE>
(f) The term "Registration Statement" refers to the Registration Statement
on Form SB-2 (File No. 333-21547 filed by the Company with the
Securities and Exchange Commission (the "Commission") pursuant to the
Securities Act of 1933, as amended (the "Act").
(g) The term "Underlying Securities" refers to the Underlying Preferred
Stock and the Underlying Warrants.
(h) The term "Underlying Preferred Stock" refers to the Preferred Stock
issued or issuable upon the exercise, in whole or in part, of the
Underwriter Warrants.
(i) The term "Underlying Warrants" refers to the Warrants, which are
issued or issuable upon the exercise, in whole, or in part, of the
Underwriter Warrants.
(j) The term "Warrant Stock" refers to shares of Common Stock issued or
issuable upon the exercise of the Underlying Warrants.
The purchase and sale of the Underwriter Warrants shall take place, and the
purchase price therefore shall be paid by delivery of your check payable to the
Company on the Closing Date (as defined in the Underwriting Agreement).
2. REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to you as follows:
(a) Corporate Action. The Company has all requisite corporate power and
authority, and has taken all necessary corporate action, to execute
and deliver this Agreement, to issue and deliver the Underwriter
Warrants and certificates evidencing same, and to authorize and
reserve for issuance, and upon payment from time to time of the
Purchase Price to issue and deliver, the Underlying Preferred Stock,
the Underlying Warrants and the Warrant Stock.
(b) No Violation. Neither the execution nor delivery of this Agreement,
the consummation of the actions herein contemplated nor compliance
with the terms and provisions hereof will conflict with, or result in
a breach of, or constitute a default or an event permitting
acceleration under, any of the terms, provisions or conditions of the
Articles of Incorporation or Bylaws of the Company or any indenture,
mortgage, deed of trust, note, bank loan, credit agreement, franchise,
license, lease, permit, judgment, decree, order, statute, rule or
regulation or any other agreement, understanding or instrument to
which the Company is a party or by which it is bound.
3. COMPLIANCE WITH THE ACT.
(a) Transferability of Underwriter Warrants. You agree that the
Underwriter Warrants may not be transferred, sold, assigned or
hypothecated, except to (i) persons who are officers of you or any
successor of you; (ii) a successor to you in a merger or
consolidation; (iii) a purchaser of all or substantially all of your
assets; (iv) your shareholders in the event you are liquidated or
dissolved; (v) broker-dealers participating in the Company's public
offering, and (vi) persons who are officers or partners of such
participating broker-dealers.
(b) Registration of Underlying Preferred Stock and Underlying Warrants.
The Underlying Preferred Stock and Underlying Warrants issuable upon
the exercise of the Underwriter Warrants have been registered under
the Act. However, you agree not to make any sale or other disposition
of the Underlying Preferred Stock and Underlying Warrants, except
pursuant to a post-effective amendment to the Registration Statement
or a new registration statement which has become effective under the
Act, setting forth the terms of such offering, the underwriting
discount and the commissions and any other pertinent data with respect
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thereto, unless you have provided the Company with an opinion of
recognized counsel reasonably acceptable to the Company that such
registration is not required under the Act and applicable state
securities laws.
(c) Inclusion in Registration of Other Securities. If at any time after
the first anniversary of the effective date hereof but prior to the
fifth anniversary of the effective date hereof, the Company shall
propose the registration on an appropriate form under the Act of any
shares of Preferred Stock, Warrants or Other Securities (other than in
connection with a merger or acquisition or an employee benefit plan),
the Company shall at least 30 days prior to the filing of such
registration statement give you written notice of such proposed
registration and, upon written notice given to the Company within 10
business days after your receipt of such notice from the Company,
shall include or cause to be included in any such registration
statement all or such portion of the Underlying Securities and the
Warrant Stock as you may request, provided, however, that the Company
may at any time withdraw or cease proceeding with any such
registration if it shall at the same time withdraw or cease proceeding
with the registration of such Preferred Stock, Warrants, or such Other
Securities originally proposed to be registered.
Notwithstanding any provision of this Agreement to the contrary, if
any holder of any of the Underwriter Warrants exercises his
Underwriter Warrants but shall not have included all the Underlying
Securities or Warrant Stock in a registration statement which complies
with Section 10(a)(3) of the Act, which has been effective for at
least 30 calendar days following the exercise of the Underwriter
Warrants, the registration rights set forth in this Subsection 3(c)
shall be extended until such time as (i) the registration statement
has been effective for at least 30 calendar days, or (ii) in the
opinion of counsel satisfactory to you and the Company, registration
is not required under the Act or under applicable state laws for
resale of the Underlying Securities or Warrant Stock in the manner
proposed.
(d) Company's Obligations in Registration. In the event you timely elect
to participate in an offering by including your Underwriter Warrants,
the Underlying Securities or the Warrant Stock in a registration
statement pursuant to Subsection 3(c) above, the Company shall:
(i) Notify you as to the filing thereof and of all amendments or
supplements thereto filed prior to the effective date thereof;
(ii) Comply with all applicable rules and regulations of the
Commission;
(iii)Notify you immediately, and confirm the notice in writing, (1)
when the registration statement becomes effective, (2) of the
issuance by the Commission of any stop order or of the
initiation, or the threatening, of any proceedings for that
purpose, (3) of the receipt by the Company of any notification
with respect to the suspension of qualification of the Preferred
Stock, the Warrants or Warrant Stock for sale in any jurisdiction
or of the initiation, or the threatening, of any proceedings for
that purpose and (4) of the receipt of any comments, or requests
for additional information, from the Commission or any state
regulatory authority. If the Commission or any state regulatory
authority shall enter such a stop order or order suspending
qualification at any time, the Company will make every reasonable
effort to obtain the lifting of such order as promptly as
practicable.
(iv) During the time when a registration statement is required to be
delivered under the Act during the period required for the
distribution of the Underlying Securities or the Warrant Stock,
comply so far as it is able with all requirements imposed upon it
by the Act, as hereafter amended, and by the rules and
regulations promulgated thereunder, as from time to time in
force, so far as necessary to permit the continuance of sales of
the Underlying Securities and the Warrant Stock, as applicable.
If at any time when a registration statement relating to the
Underlying Securities or the Warrant Stock is required to be
delivered under the Act any event shall have occurred as a result
of which, in the opinion of counsel for the Company or your
counsel, the registration statement relating to the Underlying
Securities or the Warrant Stock as then amended or supplemented
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includes an untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it is necessary
at any time to amend such registration statement to comply with
the Act, the Company will promptly prepare and file with the
Commission an appropriate amendment or supplement (in form
satisfactory to you).
(v) Endeavor in good faith, in cooperation with you, at or prior to
the time the registration statement becomes effective, to qualify
the Underlying Securities and/or the Warrant Stock, as applicable
for offering and sale under the securities laws relating to the
offering or sale of the Underlying Securities and/or the Warrant
Stock, as applicable in such jurisdictions as you may reasonably
designate and to continue the qualifications in effect so long as
required for purposes of the sale of the Underlying Securities
and/or the Warrant Stock, as applicable; provided that no such
qualification shall be required in any jurisdiction where, as a
result thereof, the Company would be subject to service of
general process, or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such
qualification shall be effected, the Company will, unless you
agree that such action is not at the time necessary or advisable,
file and make such statements or reports at such times as are or
may reasonably be required by the laws of such jurisdiction. For
the purposes of this paragraph, "good faith" is defined as the
same standard of care and degree of effort as the Company will
use to qualify its securities other than the Underlying
Securities and the Warrant Stock.
(vi) Make generally available to its security holders as soon as
practicable, but not later than the first day of the eighteenth
full calendar month following the effective date of the
registration statement, an earnings statement (which need not be
certified by independent public or independent certified public
accountants unless required by the Act or the rules and
regulations promulgated thereunder, but which shall satisfy the
provisions of Section 11(a) of the Act) covering a period of at
least twelve months beginning after the effective date of the
registration statement.
(vii)After the effective date of such registration statement,
prepare, and promptly notify you of the proposed filing of, and
promptly file with the Commission, each and every amendment or
supplement thereto or to any registration statement forming a
part thereof as may be necessary to make any statements therein
not misleading in any material respect; provided that no such
amendment or supplement shall be filed if you shall object
thereto in writing promptly after being furnished a copy thereof.
(viii) Furnish to you, as soon as available, copies of any such
registration statement, including all preliminary or final
registration statements, or supplement or amendment prepared
pursuant thereto, all in such quantities as you may from time to
time reasonably request;
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(ix) Make such representations and warranties to any underwriter of
the Underlying Securities or the Warrant Stock, as applicable,
and use your best efforts to cause Company counsel to render such
usual and customary opinions to such underwriter, as such
underwriter may reasonably request; and
(x) Pay all costs and expenses incident to the performance of the
Company's obligations under Subsection 3 (c) above and under this
Subsection 3 (f), including without limitation the fees and
disbursements of Company auditors and legal counsel, of legal
counsel for you and of legal counsel responsible for qualifying
the Underlying Securities and/or the Warrant Stock under blue sky
laws, all filing fees and printing expenses, all expenses in
connection with the transfer and delivery of the Underlying
Securities and/or Warrant Stock, and all expenses in connection
with the qualification of the Underlying Securities and/or the
Warrant Stock under blue sky laws provided, however, that the
Company shall not be responsible for indemnity discounts and
commissions.
(e) Agreements by Warrant Holder. In connection with the filing of a
registration statement pursuant to Subsection 3(c) above, if you
participate in the offering of the Underlying Securities and/or
Warrant Stock by including securities owned by you, you agree:
(i) To furnish the Company all material information requested by the
Company concerning yourself and your holdings of securities of
the Company and the proposed method of sale or other disposition
of the Underlying Securities and/or Warrant Stock and such other
information and undertakings as shall be reasonably required in
connection with the preparation and filing of any such
registration statement covering all or a part of the Underlying
Securities and/or Warrant Stock and in order to ensure full
compliance with the Act; and
(ii)To cooperate in good faith with the Company and its underwriters,
if any, in connection with such registration, including placing
the shares of Underlying Securities and/or Warrant Stock to be
included in such registration statement in escrow or custody to
facilitate the sale and distribution thereof.
(f) Indemnification. The Company shall indemnify and hold harmless you and
each of the other Underwriters, each of your and their officers and
directors, and each person, if any, who respectively controls you or
any such Underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), against any loss, liability, claim, damage and
expense whatsoever (including but not limited to any and all expense
whatsoever reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any
claim whatsoever), joint or several, to which any of you or any such
Underwriter or such controlling person becomes subject, under the Act
or otherwise, insofar as such loss, liability, claim, damage and
expense (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in (i) a registration statement covering any Underlying
Security or Warrant Stock, in the prospectus contained therein, or in
an amendment or supplement thereto or (ii) in any application or other
document or communication (in this Subsection collectively called
"application") executed by or on behalf of the Company or based upon
written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Underlying Securities and/or
Warrant Stock under the securities laws thereof or filed with the
Commission, or arise out of or based upon 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
provided, however, that the Company shall not be obligated to
indemnify in any such case to the extent that any such loss, claim,
damage, expense or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission
made in reliance upon, and in conformity with, written information
respectively furnished by you or any such Underwriter or such
controlling person for use in the registration statement, or any
amendment or supplement thereto, or any application, as the case may
be.
If any action is brought against a person in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
person shall promptly notify the Company in writing of the institution of such
action and the Company shall assume the defense of the action, including the
employment of counsel (satisfactory to the indemnified person in its reasonable
judgment) and payment of expenses. The indemnified person shall have the right
to employ its or their own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of such indemnified person unless the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of the action or the Company shall not have
employed counsel to have charge of the defense of the action or the indemnified
person shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to the
Company (in which case the Company shall not have the right to direct the
defense of the action on behalf of the indemnified person), in any of which
events these fees and expenses shall be borne by the Company. Anything in this
paragraph to the contrary notwithstanding, the Company shall not be liable for
any settlement of any claim or action effected without its consent. The
Company's indemnity agreements contained in this Subsection shall remain in full
force and effect regardless of any investigation made by or on behalf of any
indemnified person, and shall survive any termination of this Agreement. The
Company agrees promptly to notify you of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the registration statement pursuant to Subsection 3(c) above.
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If you choose to include all or a part of the Underlying Securities or
Warrant Stock in a public offering pursuant to Subsection 3(c), then you agree
to indemnify and hold harmless the Company and each of its directors and
officers who have signed any such registration statement, and any underwriter
for the Company (as defined in the Act), and each person, if any, who controls
the Company or such underwriter within the meaning of the Act, to the same
extent as the indemnity by the Company in this Subsection 3(f) but only with
respect to statements or omissions, if any, made in such registration statement,
or any amendment or supplement thereto, or in any application in reliance upon,
and in conformity with, written information furnished by you to the Company for
use in the registration statement, or any amendment or supplement thereto, or
any application, as the case may be. In case any action shall be brought in
respect of which indemnity may be sought against you, you shall have the rights
and duties given to the Company, and the persons so indemnified shall have the
rights and duties given to you by the provisions of the first paragraph of this
Subsection.
The Company further agrees that, if the indemnity provisions of the
foregoing paragraphs are held to be unenforceable, any holder of an Underwriter
Warrant or controlling person of such a holder may recover contribution from the
Company in an amount which, when added to contributions such holder or
controlling person has theretofore received or concurrently receives from
officers and directors of the Company or controlling persons of the Company,
will reimburse such holder or controlling person for all losses, claims, damages
or liabilities and legal or other expenses; provided, however, that if the full
amount of the contribution specified in this Subsection 3(f) is not permitted by
law, then such holder or controlling person shall be entitled to contribution
from the Company and its officers, directors and controlling persons to the full
extent permitted by law.
4. EXERCISE OF UNDERWRITER WARRANTS; PARTIAL EXERCISE.
(a) Exercise in Full. Each Underwriter Warrant may be exercised in full by
the holder thereof by surrender of the related Warrant Certificate,
with the form of subscription at the end thereof duly executed by such
holder, to the Company at its principal office, accompanied by
payment, in cash or by certified or bank cashiers check payable to the
order of the Company, in the respective amount obtained by multiplying
the number of Underlying shares of Preferred Stock or Underlying
Warrants represented by the Warrant Certificate (after giving effect
to any adjustment therein as provided in Section 6 below) by the
Purchase Price per share of Preferred Stock or per Warrant.
(b) Partial Exercise. Each Underwriter Warrant may be exercised in part by
surrender of the related Warrant Certificate in the manner and at the
place provided in Subsection 4(a) above, accompanied by payment, in
cash or by certified or bank cashiers check payable to the order of
the Company, in the respective amount obtained by multiplying the
number of Underlying shares of Preferred Stock or Underlying Warrants
designated by the holder in the form of subscription attached to the
Warrant Certificate by the Purchase Price per share of Preferred Stock
or per Warrant (after giving effect to any adjustment therein as
provided in Section 6 below). Upon any such partial exercise, the
Company at its expense will forthwith issue and deliver to or upon the
order of the purchasing holder, a new Warrant Certificate or
Certificates of like tenor, in the name of the holder thereof or as
such holder (upon payment by such holder of any applicable transfer
taxes) may request calling in the aggregate for the purchase of the
number of shares of Preferred Stock or Warrants equal to the number of
such shares of Preferred Stock or Warrants called for on the face of
the original Warrant Certificate (after giving effect to any
adjustment therein as provided in Section 6 below) minus the number of
such shares of Preferred Stock or Warrants (after giving effect to
such adjustment) designated by the holder in the aforementioned form
of subscription.
(c) Company to Reaffirm Obligations. The Company will, at the time of any
exercise of any Underwriter Warrant, upon the request of the holder
thereof, acknowledge in writing its continuing obligation to afford to
such holder any rights (including without limitation any right to
registration of the Underlying Securities and Warrant Stock) to which
such holder shall continue to be entitled after such exercise in
accordance with the provisions of this Agreement; provided, however,
that if the holder of an Underwriter Warrant shall fail to make any
such request, such failure shall not affect the continuing obligation
of the Company to afford to such holder any such rights.
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5. DELIVERY OF CERTIFICATES, ETC., ON EXERCISE.
As soon as practicable after the exercise of any Underwriter Warrant in
full or in part, and in any event within twenty days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the purchasing holder
thereof, a certificate or certificates for the number of shares of Underlying
Preferred Stock or Underlying Warrants to which such holder shall be entitled
upon such exercise, plus in lieu of any fractional share or Warrant to which
such holder would otherwise be entitled, cash in an amount determined pursuant
to Section 7(g), together with any other stock or other securities and property
(including cash, where applicable) to which such holder is entitled upon such
exercise pursuant to Section 6 below or otherwise.
6. ANTI-DILUTION PROVISIONS.
The Underwriter Warrants are subject to the following terms and conditions
during the term thereof:
(a) Stock Distributions and Splits. In case (i) the outstanding shares of
Preferred Stock (or Other Securities) shall be subdivided into a
greater number of shares, or (ii) a dividend in Preferred Stock (or
Other Securities) shall be paid in respect of Preferred Stock (or
Other Securities), the Purchase Price per share of Preferred Stock in
effect immediately prior to such subdivision or at the record date of
such dividend or distribution shall simultaneously with the
effectiveness of such subdivision or immediately after the record date
of such dividend or distribution be proportionately reduced; and if
outstanding shares of Preferred Stock (or Other Securities) shall be
combined into a smaller number of shares thereof, the Purchase Price
per share of Preferred Stock in effect immediately prior to such
combination shall simultaneously with the effectiveness of such
combination be proportionately increased. Any dividend paid or
distributed on the Preferred Stock (or Other Securities) in stock or
any other securities convertible into shares of Preferred Stock (or
Other Securities) shall be treated as a dividend paid in Preferred
Stock (or Other Securities) to the extent that shares of Preferred
Stock (or Other Securities) are issuable upon the conversion thereof.
(b) Adjustments. Whenever the Purchase Price per share of Preferred Stock
is adjusted as provided in Subsection 6(a) above, the number of
Underlying shares of Preferred Stock purchasable upon exercise of the
Underwriter Warrants immediately prior to such Purchase Price
adjustment shall be adjusted, effective simultaneously with such
Purchase Price adjustment, to equal the product obtained (calculated
to the nearest full share) by multiplying such number of Underlying
shares of Preferred Stock by a fraction, the numerator of which is the
Purchase Price per share of Preferred Stock in effect immediately
prior to such Purchase Price adjustment and the denominator of which
is the Purchase Price per share of Preferred Stock in effect upon such
Purchase Price adjustment, which adjusted number of Underlying shares
of Preferred Stock shall thereupon be the number of Underlying shares
of Preferred Stock purchasable upon exercise of the Underwriter
Warrants until further adjusted as provided herein.
(c) Reorganizations. If any consolidation or merger of the Company with
another corporation, or the sale of all or substantially all of its
assets to another corporation, shall be effected in such a way that
holders of Preferred Stock or Underlying Preferred Stock shall be
entitled to receive stock, securities or assets with respect to or in
exchange for Preferred Stock or Underlying Preferred Stock, then, as a
condition of such consolidation, merger or sale, lawful and adequate
provisions shall be made whereby the holders of Underwriter Warrants
shall thereafter have the right to purchase and receive upon the basis
and upon the terms and conditions specified in this Agreement and in
lieu of the shares of Preferred Stock or Underlying Preferred Stock of
the Company immediately theretofore purchasable and receivable upon
the exercise of the Underwriter Warrants, such shares of stock,
securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of Preferred Stock or
Underlying Preferred Stock equal to the number of shares of such stock
immediately theretofore purchasable and receivable upon the exercise
of the rights represented by the Underwriter Warrants had such
consolidation, merger or sale not taken place, and in any such case,
appropriate provision shall be made with respect to the rights and
interests of the holders of Underwriter Warrants to the end that the
provisions hereof (including without limitation provisions for
adjustments of the Purchase Price and of the number of shares of
Preferred Stock purchasable and receivable upon the exercise of the
Underwriter Warrants) shall thereafter be applicable, as nearly as may
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be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise thereof (including an
immediate adjustment, by reason of such consolidation or merger, of
the Purchase Price to the value for the Preferred Stock or Underlying
Preferred Stock reflected by the terms of such consolidation or merger
if the value so reflected is less than the Purchase Price in effect
immediately prior to such consolidation or merger). In the event of a
merger or consolidation of the Company with or into another
corporation as a result of which the number of shares of common stock
of the surviving corporation is greater or lesser than the number of
shares of common stock of the Company outstanding immediately prior to
such merger or consolidation, assuming conversion of the Preferred
Stock, is issuable to holders of Preferred Stock or Underlying
Preferred Stock of the Company, then the Purchase Price in effect
immediately prior to such merger or consolidation shall be adjusted in
the same manner as though there were a subdivision or combination of
the outstanding shares of Preferred Stock or Underlying Preferred
Stock of the Company. The Company will not effect any such
consolidation, merger or sale, unless prior to the consummation
thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed and
mailed or delivered to the registered holder hereof at the last
address of such holder appearing on the books of the Company, the
obligation to deliver to such holder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, such holder
may be entitled to purchase. If a purchase, tender or exchange offer
is made to and accepted by the holders of more than 50% of the
outstanding shares of common stock of the Company, the Company shall
not effect any consolidation, merger or sale with the Person having
made such offer or with any Affiliate of such Person, unless prior to
the consummation of such consolidation, merger or sale the holders of
Underwriter Warrants shall have been given a reasonable opportunity to
then elect to receive upon the exercise of Underwriter Warrants either
the stock, securities or assets then issuable with respect to the
Preferred Stock or Underlying Preferred Stock of the Company or the
stock, securities or assets, or the equivalent issued to previous
holders of Preferred Stock in accordance with such offer. The term
"Person" as used in this subparagraph shall mean and include an
individual, a partnership, a corporation, a trust, a joint venture, an
unincorporated organization and a government or any department or
agency thereof. For the purposes of this subparagraph, an "Affiliate"
of any Person shall mean any Person directly or indirectly
controlling, controlled by or under direct or indirect common control
with, such other Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies
of such corporation, whether through the ownership of voting
securities, by contract or otherwise.
(d) Effect of Dissolution or Liquidation. In case the Company shall
dissolve or liquidate all or substantially all of its assets, all
rights under this Agreement shall terminate as of the date upon which
a certificate of dissolution or liquidation shall be filed with the
Secretary of the State of Colorado (or, if the Company theretofore
shall have been merged or consolidated with a corporation incorporated
under the laws of another state, the date. upon which action of
equivalent effect shall have been taken); provided, however, that (i)
no dissolution or liquidation shall affect the rights under Subsection
6(c) of any holder of an Underwriter Warrant, and (ii) if the
Company's Board of Directors shall propose to dissolve or liquidate
the Company, each holder of an Underwriter Warrant shall be given
written notice of such proposal at the earlier of (i) the time when
the Company's shareholders are first given notice of the proposal, or
(ii) the time when notice to the Company's shareholders is first
required.
(e) Notice of Change of Purchase Price. Whenever the Purchase Price per
share of Preferred Stock or per Warrant or the kind or amount of
securities purchasable under the Underwriter Warrants shall be
adjusted pursuant to any of the provisions of this Agreement, the
Company shall forthwith thereafter cause to be sent to each holder of
an Underwriter Warrant, a certificate setting forth the adjustments in
the Purchase Price per share of Preferred Stock or per Warrant and/or
in such number of shares of Preferred Stock or Warrants, and also
setting forth in detail the facts requiring such adjustments,
including without limitation a statement of the consideration received
or deemed to have been received by the Company for any additional
securities issued by it requiring such adjustment. In addition, the
Company at its expense shall within 90 days following the end of each
of its fiscal years during the term of this Agreement, and promptly
upon the reasonable request of any holder of an Underwriter Warrant in
connection with the exercise from time to time of all or any portion
of any Underwriter Warrant, cause independent certified public
accountants of recognized standing selected by the Company to compute
any such adjustment in accordance with the terms of the Underwriter
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Warrants and prepare a certificate setting forth such adjustment and
showing in detail the facts upon which such adjustment is based.
(f) Notice of a Record Date. In the event of (i) any taking by the Company
of a record of the holders of any class of securities for the purpose
of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend payable out of earned surplus of
the Company) or other distribution, or any right 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, (ii) any
transfer of all or substantially all of the assets of the Company to,
or consolidation or merger of the Company with or into, any other
person or (iii) any voluntary or involuntary dissolution or
liquidation of the Company, then and in each such event the Company
will mail or cause to be mailed to each holder of an Underwriter
Warrant a notice specifying not only the date on which any such record
is to be taken for the purpose of such dividend, distribution or right
and stating the amount and character of such dividend, distribution or
right, but also the date on which any such transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and
the time, if any, as of which the holders of record of Preferred Stock
(or Other Securities) shall be entitled to exchange their shares of
Preferred Stock (or other Securities) for securities or other property
deliverable upon such transfer, consolidation, merger, dissolution,
liquidation or winding-up. Such notice shall be mailed at least 20
days prior to the proposed record date therein specified.
7. FURTHER COVENANTS OF THE COMPANY.
(a) Reservation of Stock. The Company shall at all times reserve and keep
available, solely for issuance and delivery upon the exercise of the
Underwriter Warrants, all shares of the Underlying Preferred Stock,
Underlying Warrants and Warrant Stock from time to time issuable upon
the exercise of the Underwriter Warrants and Underlying Warrants and
shall take all necessary actions to ensure that the par value per
share, if any, of the Underlying Preferred Stock and Warrant Stock is,
at all times equal to or less than the then effective Purchase Price
per share of Preferred Stock or per Warrant attributable to each share
of Preferred Stock as the case may be.
(b) Title to shares of Preferred Stock and Warrants. All shares of
Underlying Preferred Stock and all Warrant Stock delivered upon the
exercise of the Underwriter Warrants and the Underlying Warrants shall
be validly issued, fully paid and nonaccessible; each holder of an
Underwriter Warrant shall receive good and marketable title to the
shares of Underlying Preferred Stock, the Underlying Warrants and the
Warrant Stock free and clear of all voting and other trust
arrangements, liens, encumbrances, equities and claims whatsoever; and
the Company shall have paid all taxes, if any, in respect of the
issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the Company at any
time shall list any Preferred Stock or Warrants on any national
securities exchange, the Company will, at its expense, simultaneously
list on such exchange, upon official notice of issuance upon the
exercise of the Underwriter Warrants, and maintain such listing of,
all Underlying Securities and all Warrant Stock from time to time
issuable upon the exercise of the Underwriter Warrants; and the
Company will so list on any national securities exchange, will so
register and will maintain such listing of, any Other Securities if
and at the time that any securities of like class or similar type
shall be listed on such national securities exchange by the Company.
(d) Exchange of Underwriter Warrants. Subject to Subsection 3(a) hereof,
upon surrender for exchange of any Warrant Certificate to the Company,
the Company at its expense will promptly issue and deliver to or upon
the order of the holder thereof a new Warrant Certificate or
certificates of like tenor, in the name of such holder or as such
holder (upon payment by such holder of any applicable transfer taxes)
may direct, calling in the aggregate for the purchase of the number of
shares of Preferred Stock or Warrants called for on the face or faces
of the Warrant Certificate or Certificates so surrendered.
(e) Replacement of Underwriter Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Warrant Certificate and, in the case of any such
loss, theft or destruction, upon delivery of an indemnity agreement
reasonably satisfactory in form and amount to the Company or, in the
case of any such mutilation, upon surrender and cancellation of such
9
<PAGE>
Warrant Certificate, the Company, at the expense of the holder of such
Underwriter Warrant will execute and deliver, in lieu thereof, a new
Warrant Certificate of like tenor.
(f) Reporting by the Company. The Company agrees that, if it files a
registration statement during the term of the Underwriter Warrants, it
will use its best efforts to keep current in the filing of all forms
and other materials which it may be required to file with the
appropriate regulatory authority pursuant to the Exchange Act, and all
other forms and reports required to be filed with any regulatory
authority having jurisdiction over the Company.
(g) Fractional Shares. No fractional shares of Underlying Preferred Stock,
Underlying Warrants or Warrant Stock are to be issued upon the
exercise of any Underwriter Warrant or Warrant, but the Company shall
pay a cash adjustment in respect of any fraction of a share which
would otherwise be issuable in an amount equal to the same fraction of
the highest market price per share of Underlying Preferred Stock or
Warrant Stock on the day of exercise, as determined by the Company.
(h) Reorganizations and Reclassifications. While any Underwriter Warrant
remains outstanding, the Company shall not effect any capital
reorganization of the Company, or any reclassification or
recapitalization of the capital stock of the Company; provided,
however, that the Company may re-incorporate in another state if such
re-incorporation does not involve a change in the capital structure of
the Company, and the Company may change the par value of the Preferred
Stock , subject to the anti-dilution provisions hereof.
8. OTHER HOLDERS
The Underwriter Warrants are issued upon the following terms, to all of
which each holder or owner thereof by the taking thereof consents and agrees as
follows: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Subsection 3(a) hereof, of an Underwriter Warrant properly
endorsed shall take such Underwriter Warrant subject to the provisions of
Subsection 3(a) hereof and thereupon shall be authorized to represent himself as
absolute owner thereof and, subject to the restrictions contained in this
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; (b) each prior
taker or owner waives and renounces all of his equities or rights in such
Underwriter Warrant in favor of each such permitted bona fide purchaser, and
each such permitted bona fide purchaser shall acquire absolute title thereto and
to all rights presented thereby; (c) until such time as the respective
Underwriter Warrant is transferred on the books of the Company, the Company may
treat the registered holder thereof as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary and (d) all references to
the word "you" in this Agreement shall be deemed to apply with equal effect to
any person to whom a Warrant Certificate or Certificates have been transferred
in accordance with the terms hereof, and where appropriate, to any person
holding shares of Preferred Stock or Warrants, Underlying Securities or Warrant
Stock.
9. MISCELLANEOUS.
All notices, certificates and other communications from or at the
request of the Company to the holder of any Underwriter Warrant shall be mailed
by first class, registered or certified mail, postage prepaid, to such address
as may have been furnished to the Company in writing by such holder, or, until
an address is so furnished, to the address of the last holder of such
Underwriter Warrant who has so furnished an address to the Company, except as
otherwise provided herein. This Agreement and any of the terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas. The headings in
this Agreement are for reference only and shall not limit or otherwise affect
any of the terms hereof. This Agreement, together with the forms of instruments
annexed hereto as Schedule I, constitutes the full and complete agreement of the
parties hereto with respect to the subject matter hereof.
10
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
on this _____ day of ______________, 1997, in Dallas, Texas, by its proper
corporate officers thereunto duly authorized.
Western Country Clubs Inc.
By:
James E. Blacketer President
The above Warrant and Registration Rights Agreement is confirmed this
_____ day of __________, 1997.
National Securities Corporation
By:
11
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SCHEDULE I
WESTERN COUNTRY CLUBS INC.
PREFERRED STOCK PURCHASE WARRANT
Certificate Evidencing Right to Purchase __________Shares
This is to certify that _________________________________
("_____________") or assigns, is entitled to purchase at any time or from time
to time after 9:00 A.M., Dallas, Texas time, on ____, 1998 and until 9:00 A.M.,
Dallas, Texas time, on _______________, 2002 up to the above referenced number
of shares of the Company's Series A Cumulative Convertible Redeemable Preferred
Stock (the "Shares"), of Western Country Clubs Inc., a corporation organized
under the laws of the State of Colorado, (the "Company"), for the consideration
specified in Subsection 1(e) of the Warrant and Registration Rights Agreement
dated _____________, 1997 between the Company and National Securities
Corporation, as representative of the several Underwriters (as defined therein)
(the "Warrant Agreement"), pursuant to which this Warrant is issued. All rights
of the holder of this Warrant are subject to the terms and provisions of the
Warrant Agreement, copies of which are available for inspection at the office of
the Company.
The Shares issuable upon the exercise of this Warrant have been
registered under the Securities Act of 1933, as amended (the "Act"). However,
except as provided in the Warrant Agreement, no distribution of this Warrant, or
the Shares issuable upon exercise of this Warrant may be made except pursuant to
(i) a post-effective amendment to the registration statement under the Act
covering the Warrant and the Shares, (ii) a new registration statement, or (iii)
an opinion of counsel, satisfactory to counsel for the Company, that an
exemption from registration under the Act is available.
Subject to the provisions of the Act and of the Warrant Agreement, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
offices of the Company, by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant, together with the Assignment hereof
duly endorsed. Until transfer of this Warrant on the books of the Company, the
Company may treat the registered holder hereof as the owner hereof for all
purposes.
Any Preferred Stock which is acquired pursuant to the exercise of this
Warrant shall be acquired in accordance with the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on this _____ day of ___________, 1997, in Dallas, Texas, by its
proper corporate officer's thereunto duly authorized.
Western Country Clubs Inc.
By:
James E. Blacketer, President
ATTEST:
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<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To Western Country Clubs Inc.:
The undersigned, the holder of the enclosed Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _________________ shares of Series A Preferred Stock (as
defined in the Warrant and Registration Rights Agreement to which the form of
this Subscription was attached) and herewith makes payment of $______________
therefor, and requests that the certificate or certificates for such shares of
Series A Preferred Stock be issued in the name of and delivered to the
undersigned.
Date: ______
_______________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
_______________________________
(Address)
Insert the number of shares of Series A Preferred Stock called for on the
face of the Warrant (or, in the case of a partial exercise, the portion thereof
as to which the Warrant is being exercised), in either case without making any
adjustment for additional shares of Series A Preferred Stock or Warrants or
other securities or property or cash which, pursuant to the adjustment
provisions of the Warrant, may be deliverable upon exercise.
13
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
_______________________________ the right represented by the enclosed Warrant to
purchase ________ shares of Series A Preferred Stock with full power of
substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in or in
part, of such right to purchase represented by the enclosed Warrant is permitted
by the terms of the Warrant and Registration Rights Agreement pursuant to which
the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant and Registration Rights Agreement and agrees to be
bound by the terms thereof with the same force and effect as if a signatory
thereto, including without limitation Section 3 thereof.
Date:_______
_______________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
_______________________________
(Address)
Signed in the presence of:
_______________________________
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SCHEDULE II
WESTERN COUNTRY CLUBS INC.
PURCHASE WARRANT
Certificate Evidencing Right to Purchase ________ Warrants
This is to certify that (" ") or assigns, is
entitled to purchase at any time or from time to time after 9:00 A.M., Dallas,
Texas time, on ,1998 and until 9:00 A.M., Dallas, Texas time, on , 2002 up to
the above referenced number of Series A Redeemable Common Stock Purchase
Warrants (the "Warrants"), of Western Country Clubs Inc., a corporation
organized under the laws of the State of Colorado, (the "Company"), for the
consideration specified in Subsection l (e) of the Warrant and Registration
Rights Agreement dated ,1997 between the Company and National Securities
Corporation, as representative of the several Underwriters (as defined therein)
(the "Warrant Agreement"), pursuant to which this Warrant is issued. All rights
of the holder of this Warrant are subject to the terms and provisions of the
Warrant Agreement, copies of which are available for inspection at the office of
the Company.
This Warrant and the Warrants issuable upon the exercise of this Warrant
have been registered under the Securities Act of 1933, as amended (the "Act").
However, except as provided in the Warrant Agreement no distribution of this
Warrant or the Warrants issuable upon exercise of this Warrant may be made
except pursuant to (i) a post-effected amendment to the registration statement
under the Act covering the Warrants and the Series A Preferred Stock, (ii) a new
registration statement, or (iii) an opinion of counsel, satisfactory to counsel
for the Company, that an exemption from registration under the Act is available.
Subject to the provisions of the Act and of the Warrant Agreement, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
offices of the Company, by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant, together with the Assignment hereof
duly endorsed. Until transfer of this Warrant on the books of the Company, the
Company may treat the registered holder hereof as the owner hereof for all
purposes.
Any Warrants, which are acquired pursuant to the exercise of this
Warrant, shall be acquired in accordance with the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on this, day of ,1997, in Dallas, Texas, by its proper
corporate officer's thereunto duly authorized.
Western Country Clubs Inc.
By:
James E. Blacketer, President
ATTEST:
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<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To Western Country Clubs Inc.:
The undersigned, the holder of the enclosed Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, Warrants (as defined in the Warrant and Registration Rights
Agreement to which the form of this Subscription was attached) and herewith
makes payment of $ therefor, and requests that the certificate or certificates
for such Warrants be issued in the name of and delivered to the undersigned.
Date:
Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
(Address)
Insert the number of Warrants called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the Warrant
is being exercised), in either case without making any adjustment for additional
Warrants or other securities or property or cash which, pursuant to the
adjustment provisions of the Warrant, may be deliverable upon exercise.
16
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
the right represented by the enclosed Warrant to purchase Warrants with full
power of substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in or in
part, of such right to purchase represented by the enclosed Warrant is permitted
by the terms of the Warrant and Registration Rights Agreement pursuant to which
the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant and Registration Rights Agreement and agrees to be
bound by the terms thereof with the same force and effect as if a signatory
thereto, including without limitation Section 3 thereof.
Date:_______
_______________________________
(Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
_______________________________
(Address)
Signed in the presence of-.
_______________________________
17
WARRANT AGREEMENT
----------------------------------------
WESTERN COUNTRY CLUBS, INC.
AND
AMERICAN SECURITIES TRANSFER & TRUST, INC.
Warrant Agent
______________, 1997
----------------------------------------
<PAGE>
THIS AGREEMENT (the "Agreement") is dated as of ______________, 1997,
between WESTERN COUNTRY CLUBS, INC., a Colorado corporation (the "Company"), and
AMERICAN SECURITIES TRANSFER & TRUST, INC., a Colorado corporation (the "Warrant
Agent").
WHEREAS, the Company proposes to offer to the public up to 460,000
shares of Series A Cumulative Convertible Redeemable Preferred Stock (the
"Series A Preferred Stock") and 1,380,000 Series A Common Stock Purchase
Warrants (the "Warrants"), each of which is exercisable to purchase shares of
Common Stock on the basis of one Warrant to purchase one share of Common Stock;
WHEREAS, upon exercise of the Representative's Purchase Option, the
Company further proposes to issue 120,000 warrants (the "National Warrants") to
National Securities Corporation ("National") or its designees;
WHEREAS, the Company desires to provide for issuance of warrant
certificates (the "Warrant Certificates") representing the Warrants and the
National Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, registration, transfer and exchange of Warrant Certificates and
exercise of the Warrants and the National Warrants,
NOW, THEREFORE, in consideration of the promises and the mutual
agreements hereinafter set forth, it is agreed that:
1. Warrants/Warrant Certificates. Each Warrant will entitle the
registered holder of such Warrant to purchase from the Company one share of
Common Stock at $______ per share (the "Exercise Price"). Each National Warrant
will entitle the registered holder of such National Warrant ("National Warrant
Holder") to
purchase from the Company one share of Common Stock at $______ per share (the
"National Exercise Price"). Hereinafter, unless the context indicates otherwise,
as used herein the words "Registered Warrant Holders" will mean the holders of
the Warrants and the National Warrants, the word "Warrants" will mean the
Warrants and the National Warrants and the words "Warrant Shares" will mean the
Company's securities issuable upon exercise of the Warrants. Unless changed
pursuant to Section 8 hereof, the Warrant Shares will consist of the Company's
Common Stock. A copy of the form of Warrant Certificate for the Warrants is
attached hereto as Exhibit A and a copy of the form of Warrant Certificate for
the National Warrants is attached hereto as Exhibit B.
Warrant Certificates representing the right to purchase Warrant
Shares shall be executed by the Company's President and attested to by the
Company's Secretary or Assistant Secretary and delivered to the Warrant
Agent upon execution of this Agreement. The Warrant Certificates shall be
distributed to the purchasers of Warrants in the Company's public
offering pursuant to Registration Statement No. 333-21547.
Subject to the provisions of Sections 3, 5, 6,7 and 8, the
Warrant Agent shall deliver Warrant Certificates in required whole number
denominations to Registered Holders in connection with any transfer or exchange
permitted under this Agreement. No Warrant Certificates shall be issued except
(i) Warrant Certificates initially issued hereunder, (ii) Warrant Certificates
issued on or after the initial issuance date, upon the exercise of any Warrants,
to evidence the unexercised Warrants held by the exercising Registered Holder,
and (iii) Warrant Certificates issued after the initial issuance date, upon any
transfer or exchange of Warrant Certificates or replacements of lost or
mutilated Warrant Certificates.
2. Form and Execution of Warrant Certificates. The Warrant
Certificates shall be substantially in the form attached as Exhibits A and B.
The Warrant Certificates shall be dated as of the date of their issuance,
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whether on initial issuance, transfer or exchange or in lieu of mutilated, lost,
stolen or destroyed Warrant Certificates.
Each such Warrant Certificate shall be numbered serially with the
letter "W" appearing on each Warrant Certificate.
The Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned. In
the event any officer of the Company who executed the Warrant Certificates shall
cease to be an officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature and delivery by the Warrant Agent, such
Warrant Certificates may be countersigned, issued and delivered by the Warrant
Agent with the same force and effect as though the person who signed such
Warrant Certificates had not ceased to be an officer of the Company.
3. Exercise. Subject to the provisions of Sections 4, 7 and 8, the
Warrants, when evidenced by a Warrant Certificate, may be exercised at a price
(the "Exercise Price") set forth in Section 1 hereof, on the basis of one
Warrant for one share of Common Stock in whole or in part at any time during the
period (the "Exercise Period") commencing on _______,1997, or earlier if so
determined by National (the "Initial Exercise Date") and terminating on
______________, 2002 (the "Expiration Date"), unless extended by a majority vote
of the Company's Board of Directors at its discretion. Notwithstanding the
foregoing, the National Warrants will be exercisable commencing on the date of
their issuance and terminating on the Expiration Date. The Company shall
promptly notify the Warrant Agent of any such extension of the Exercise Period
of the Warrants. A Warrant shall be deemed to have been exercised immediately
prior to the close of business on the date (the "Exercise Date") of the
surrender for exercise of the Warrant Certificate. The exercise form shall be
executed by the Registered Holder thereof or his attorney duly authorized in
writing and will be delivered together with payment to the Warrant Agent at 1825
Lawrence Street, Suite 444, Denver, CO 80202 (the "Corporate Office"), in cash
or by official bank or certified check, of an amount equal to the aggregate
Exercise Price, in lawful money of the United States of America.
Unless Warrant Shares may not be issued as provided herein, the
person entitled to receive the number of Warrant Shares deliverable on such
exercise shall be treated for all purposes as the holder of such Warrant Shares
as of the close of business on the Exercise Date. In addition, the Warrant Agent
shall also, at such time, verify that all of the conditions precedent to the
issuance of Warrant Shares set forth in Section 4 are satisfied as of the
Exercise Date. If any one of the conditions precedent set forth in Section 4 is
not satisfied as of the Exercise Date, the Warrant Agent shall request written
instructions from the Company as to whether to return the Warrant and Exercise
Price to the exercising Registered Holder or to hold the same until all such
conditions have been satisfied. The Company shall not be obligated to issue any
fractional share interests in Warrant Shares issuable or deliverable on the
exercise of any Warrant or scrip or cash therefor and such fractional shares
shall be of no value whatsoever. If more than one Warrant shall be exercised at
one time by the same Registered Holder, the number of full Warrant Shares which
shall be issuable on exercise thereof shall be computed on the basis of the
aggregate number of full Warrant Shares issuable on such exercise.
Within thirty days after the Exercise Date and in any event prior
to the pertinent Expiration Date, pursuant to a Stock Transfer Agreement between
the Company and theWarrant Agent, the Warrant Agent shall cause to be issued and
delivered to the person or persons entitled to receive the same, a certificate
or certificates for the number of Warrant Shares deliverable on such exercise.
No adjustment shall be made in respect of cash dividends on Warrant Shares
delivered on exercise of any Warrant. The Warrant Agent shall promptly notify
the Company in writing of any exercise and of the number of Warrant Shares
delivered and shall cause payment of an amount in cash equal to the Exercise
Price to be promptly made to the order of the Company.
Expenses incurred by the Warrant Agent while acting in the
capacity as Warrant Agent will be paid by the Company. These expenses, including
delivery of exercised share certificates to the shareholder, will be deducted
from the exercise fee submitted prior to distribution of funds to the Company.
A detailed accounting statement relating to the number of
Warrants exercised and the net amount of exercised funds remitted will be given
to the Company with the payment of each exercise amount. This will serve as an
interim accounting for the Company's use during the Exercise Period. A complete
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accounting will be made by the Warrant Agent to the Company concerning all
persons exercising Warrants, the number of Warrant Shares issued and the amounts
paid at the completion of the Exercise Period.
The Company may deem and treat the Registered Holder of the
Warrants at any time as the absolute owner thereof for all purposes, and the
Company shall not be affected by any notice to the contrary. The Warrants shall
not entitle the holder thereof to any of the rights of shareholders or to any
dividend declared on the Common Stock unless the holder shall have exercised the
Warrants and purchased the Warrant Shares prior to the record date fixed by the
Board of Directors of the Company for the determination of holders of Common
Stock entitled to such dividend or other right.
4. Reservation of Shares and Payment of Taxes. The Company
covenants that it will at all times reserve and have available from its
authorized Common Stock such number of Warrant Shares as shall then be issuable
on the exercise of all outstanding Warrants. The Company covenants that all
Warrant Shares which shall be so issuable shall be duly and validly issued,
fully paid and nonassessable, and free from all taxes, liens and charges with
respect to the issue thereof.
The Company and the Warrant Agent acknowledge that the Company
will be required, pursuant to the Securities Act of 1933, as amended (the
"Act"), to deliver to each Registered Holder, upon the exercise of Warrants and
delivery of Warrant Shares, a prospectus covering the issuance of the Warrant
Shares which meets the requirements of the Act, which prospectus must be a part
of an effective registration statement under the Act at the time that the
Warrants are exercised.
The Company agrees to use its best efforts to maintain, to the
extent required by the Act, a currently effective registration statement under
the Act covering the issuance of the Warrant Shares during the period the
Warrants are exercisable. The Company further agrees, from time to time, to
furnish the Warrant Agent with copies of the Company's prospectus to be
delivered to exercising Registered Holders, as set forth above. If any Warrant
Shares require any other registration with or approval of any government
authority under any federal or state law before such Warrant Shares may be
validly issued or delivered, then the Company covenants that it will in good
faith and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be. No Warrant Shares shall be issued unless and until
any such registration requirements have been satisfied.
The Company shall have the authority to suspend the exercise of
all Warrants, until such registration or approval shall have been obtained; but
all Warrants, the exercise of which are requested during any such suspension,
shall be exercisable at the Exercise Price. If any such period of suspension
continues past the Expiration Date, all Warrants, the exercise of which have
been requested on or prior to the Expiration Date, shall be exercisable upon the
removal of such suspension until the close of the business day immediately
following the expiration of such suspension.
The Registered Holder shall pay all documentary, stamp or similar
taxes and other government charges that may be imposed with respect of the
issuance of the Warrants, or the issuance, transfer or delivery of any Warrant
Shares on exercise of the Warrants. In the event the Warrant Shares are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate, no such delivery shall be made unless the person requesting the
same has paid to the Warrant Agent the amount of any such taxes or charges
incident thereto.
In the event the Warrant Agent ceases to also serve as the stock
transfer agent for the Company, the Warrant Agent is irrevocably authorized to
requisition the Company's new transfer agent from time to time for Certificates
of Warrant Shares required upon exercise of the Warrants, and the Company will
authorize such transfer agent to comply with all such requisitions. The Company
will file with the Warrant Agent a statement setting forth the name and address
of its new transfer agent, for shares of Common Stock or other capital stock
issuable upon exercise of the Warrants and of each successor transfer agent.
5. Registration of Transfer. Other than as provided below with
respect to the National Warrants, the Warrant Certificates may be transferred in
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whole or in part. Warrant Certificates to be exchanged shall be surrendered to
the Warrant Agent at its Corporate Office. The Company shall execute and the
Warrant Agent shall countersign, issue and deliver in exchange therefor the
Warrant Certificate or Certificates which the holder making the transfer shall
be entitled to receive.
The National Warrants may not be sold, transferred, assigned,
pledged, or hypothecated until __________, 1998 except to officers of National,
except to the underwriters of the Company's public offering pursuant to
Registration Statement No. 333-21547, and except by will or operation of law.
After such date, the National Warrants may be sold, transferred, assigned,
pledged, or hypothecated provided that any such transaction is in accordance
with the registration or exemption from registration provisions of the Act and
any applicable state securities laws. If the National Warrants are exercised by
___________, 1998, then any Warrant Shares acquired as a result of any such
exercise may not be sold, transferred, assigned, pledged, or hypothecated until
__________, 1998, except to officers of National, except to the underwriters of
the Company's public offering pursuant to Registration Statement No. 333-21547,
and except by will or operation of law.
The Warrant Agent shall keep transfer books at its Corporate
Office which shall register Warrant Certificates and the transfer thereof. On
due presentment for registration of transfer of any Warrant Certificate at such
office, the Company shall execute and the Warrant Agent shall issue and deliver
to the transferee or transferees a new Warrant Certificate or Certificates
representing an equal aggregate number of Warrants. All Warrant Certificates
presented for registration of transfer or exercise shall be duly endorsed or be
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company and the Warrant Agent. At the time of exercise, the
transfer fee shall be paid by the Holder. The Company may require payment of a
sum sufficient to cover any tax or other government charge that may be imposed
in connection therewith.
All Warrant Certificates so surrendered, or surrendered for
exercise, or for exchange in case of mutilated Warrant Certificates, shall be
promptly cancelled by the Warrant Agent and thereafter retained by the Warrant
Agent until termination of the agency created by this Agreement. Prior to due
presentment for registration of transfer thereof, the Company and the Warrant
Agent may treat the Registered Holder of any Warrant Certificate as the absolute
owner thereof (notwithstanding any notations of ownership or writing thereon
made by anyone other than the Company or the Warrant Agent), and the parties
hereto shall not be affected by any notice to the contrary.
6. Loss or Mutilation. On receipt by the Company and the Warrant Agent
of evidence satisfactory as to the ownership of and the loss, theft, destruction
or mutilation of any Warrant Certificate, the Company shall execute, and the
Warrant Agent shall countersign and deliver in lieu thereof, a new Warrant
Certificate representing an equal aggregate number of Warrants. In the case of
loss, theft or destruction of any Warrant Certificate, the individual requesting
issuance of a new Warrant Certificate shall be required to indemnify the Company
and Warrant Agent in an amount satisfactory to each of them. In the event a
Warrant Certificate is mutilated, such Certificate shall be surrendered and
cancelled by the Warrant Agent prior to delivery of a new Warrant Certificate.
Applicants for a new Warrant Certificate shall also comply with such other
regulations and pay such other reasonable charges as the Company may prescribe.
7. Redemption of Warrants. (a) Commencing on ____________, 1998, the
Warrants are subject to redemption by the Company at $.05 per Warrant on not
less than 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 $______
(200% of the closing bid price for the Company's Common Stock on the effective
date of Registration Statement No. 333-21547) 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, (i) if the Common Stock is listed on a
national securities exchange, is admitted to unlisted trading privileges on a
national securities exchange, or is quoted on a trading system of the National
Association of Securities Dealers, Inc. 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, but if no such sale has occurred on
such day or if the last sale price is not reported, then the average of the
closing bid prices for the Common Stock for such day on such exchange or system
shall be used; or (ii) if the Common Stock is not then traded on any such
exchange or system, then the average of the daily bid prices for the Company's
Common Stock reported by the National Quotation Bureau, Inc. each day shall be
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used if the Company's Common Stock is included in the National Quotation System.
The Warrants will be exercisable until the close of the business day preceding
the date fixed for redemption, if any. Notwithstanding the foregoing, the
Company will not be entitled to call any of the Warrants for redemption or
redeem any of the Warrants at a time when the Warrants are not exercisable
because the Company has not maintained a current registration statement as
described in Section 4 hereof. On the redemption date, the Warrant Holders of
record of redeemed Warrants shall be entitled to payment of the Redemption price
upon surrender of such redeemed Warrants to the Company at the principal office
of the Warrant Agent.
(b) Notice of redemption of any Warrants shall be given by mailing, by
registered or certified mail, return receipt requested, a copy of such notice to
all of the affected Warrant Holders of record as of two days prior to the
mailing date at their respective addresses appearing on the books or transfer
records of the Company or such other address designated in writing by the
Warrant Holder of record to the Warrant Agent not less than seventy-five (75)
days prior to the redemption date and shall be effective upon receipt.
(c) Notwithstanding any other provision of this Agreement, from and
after the redemption date, all rights of the affected Warrant Holders (except
the right to receive the Redemption Price) shall terminate, but only if (i) on
or prior to the redemption date the Company shall have irrevocably deposited
with the Warrant Agent, as paying agent, a sufficient amount to pay on the
redemption date the Redemption Price for all Warrants called for redemption and
(ii) the notice of redemption shall have stated the name and address of the
Warrant Agent and the intention of the Company to deposit such amount with the
Warrant Agent on or before the redemption date.
(d) The Warrant Agent shall pay to the Warrant Holders of record of
redeemed Warrants all monies received by the Warrant Agent for the redemption of
Warrants to which the Warrant Holders of record of such redeemed Warrants are
entitled under the provisions of this Agreement.
(e) Any amounts deposited with the Warrant Agent which are not required
for redemption of the Warrants may be withdrawn by the Company. Any amounts
deposited with the Warrant Agent which shall be unclaimed after six (6) months
after the redemption date may be withdrawn by the Company, and thereafter the
Warrant Holders of the Warrants called for redemption for which such funds were
deposited shall look solely to the Company for payment. The Company shall be
entitled to the interest , if any, on funds deposited with the Warrant Agent,
and the Warrant Holders of redeemed Warrants shall have no right to any such
interest.
(f) If the Company fails to make a sufficient deposit with the Warrant
Agent as provided above, the Warrant Holders of any Warrants called for
redemption may at the option of the Warrant Holder (i) by notice to the Company
declare the notice of redemption a nullity, or (ii) maintain an action against
the Company for the Redemption Price. If the Warrant Holder brings such an
action the Company will pay reasonable attorneys' fees of the Warrant Holder. If
the Warrant Holder fails to bring an action against the Company for Redemption
Price within ninety (90) days after the redemption date, the Warrant holder
shall be deemed to have elected to declare the notice of redemption to be a
nullity and such notice shall be without any force or effect.
8. Adjustment of Exercise Price and Warrant Shares. After each
adjustment of the Exercise Price pursuant to this Section 8, the number of
Warrant Shares purchasable upon the exercise of each Warrant shall be the number
receivable upon exercise thereof prior to such adjustment multiplied by a
fraction, the numerator of which shall be the original Exercise Price as defined
in Section 3 above and the denominator of which shall be such adjusted Exercise
Price. The Exercise Price shall be subject to adjustment as set forth below:
(a)(i)In case the Company shall hereafter (A) pay a dividend or
make a distribution on its Common Stock in shares of its capital stock (whether
shares of Common Stock or of capital stock of any other class), (B) subdivide
its outstanding shares of Common Stock, (C) combine its outstanding shares of
Common Stock into a smaller number of shares, or (D) issue by reclassification
of its shares of Common Stock any shares of capital stock of the Company, the
Exercise Price in effect immediately prior to such action shall be adjusted so
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that the Registered Holder of any Warrant thereafter exercised shall be entitled
to receive the number of shares of capital stock of the Company which he would
have owned immediately following such action had such Warrant been exercised
immediately prior thereto. An adjustment made pursuant to this subsection shall
become effective immediately after the record date in the case of a dividend and
shall become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of an adjustment
made pursuant to this subsection, the Registered Holder of any Warrant
thereafter exercised shall become entitled to receive shares of two or more
classes of capital stock of the Company, the Board of Directors (whose
determination shall be conclusive and shall be described in a statement filed
with the Warrant Agent) shall determine the allocation of the adjusted Exercise
Price between or among shares of such classes of capital stock.
(ii)In any case in which this Section 8(a) shall require that an
adjustment to the Exercise Price be made immediately following a record date,
the Company may elect to defer (but only until five business days following the
filing by the Company with the Warrant Agent of the certificate of independent
public accountants described in subsection (i) of Section 8(d)) issuing to the
holder of any Warrants exercised after such record date the shares of Common
Stock and other capital stock of the Company issuable upon such exercise over
and above the shares of Common Stock and other capital stock of the Company
issuable upon such exercise on the basis of the Exercise Price prior to
adjustment.
(iii) No adjustment in the Exercise Price shall be required to
be made unless such adjustment would require an increase or decrease of at least
$.05; provided, however, that any adjustments which by reason of this subsection
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this Section 8 shall be made
to the nearest cent or to the nearest one tenth of a share, as the case may be,
but in no event shall the Company be obligated to issue fractional shares upon
the exercise of any Warrant.
(b) In case of any reclassification or change of Warrant Shares
(other than a change in par value or from par value to no par value or from no
par value to par value or as a result of a subdivision or combination), or in
case of any consolidation or merger of the Company with or into another
corporation (other than a merger with a Subsidiary in which merger the Company
is the continuing corporation and which does not result in any reclassification
or change of the then Warrant Shares (other than a change in par value or from
par value to no par value or from no par value to par value) or in the case of
any sale or conveyance to another corporation of the property of the Company as
an entirety or substantially as an entirety, then, as a condition of such
reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
make lawful and adequate provision whereby the Registered Holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of Warrant Shares issuable upon exercise of
such Warrant immediately prior to such reclassification, change, consolidation,
merger, sale or conveyance and the Company or its successors shall forthwith
file at the Corporate Office of the Warrant Agent a statement setting forth such
provisions signed by (1) its Chairman of the Board or Vice Chairman of the Board
or President or a Vice President and (2) by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary evidencing such provisions.
Such provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Section
8(a). The above provisions of this Section 8(b) shall similarly apply to
successive reclassification and changes of Warrant Shares and to successive
consolidations, mergers, sales or conveyances.
(c) Before taking any action which could cause an adjustment
reducing the Exercise Price below the then par value of the Warrant Shares, the
Company will take any corporate action which may, in the opinion of its counsel,
be necessary in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares at such adjusted Exercise Price.
(d)(i)Upon any adjustment of the Exercise Price required to be
made pursuant to this Section 8, the Company within 30 days thereafter shall (A)
cause to be filed with the Warrant Agent a certificate of a firm of independent
accountants setting forth the Exercise Price after such adjustment and setting
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forth in reasonable detail the method of calculation and the facts upon which
such calculation is based, which certificate shall be conclusive evidence of the
correctness of such adjustment, and (B) cause to be mailed to each of the
Registered Holders of the Warrant Certificates written notice of such
adjustment. Where appropriate, such notice may be given in advance and included
as a part of the notice required to be mailed under the provisions of subsection
8(d)(ii).
(ii) In case at any time:
(A) The Company shall declare any dividend upon
its Common Stock payable otherwise than in cash; or
(B) The Company shall offer for subscription to
the holders of its Common Stock any additional shares of stock of any class or
any other securities convertible into shares of stock or any rights to subscribe
thereto; or
(C) There shall be any capital reorganization or
reclassification of the capital stock of the Company, or a sale of all or
substantially all of the shares of the assets of the Company, or a consolidation
or merger of the Company with another corporation (other than a merger with a
subsidiary in which merger the Company is the continuing corporation and which
does not result in any reclassification or change of the then Warrant Shares
issuable upon exercise of the Warrants other than a change in par value or from
par value to no par value or from no par value to par value); or
(D) There shall be a voluntary or involuntary
dissolution, liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall cause to be mailed to
each of the Registered Holders of the Warrant Certificates, at the earliest
practicable time (and, in any event, not less than 20 days before any record
date or other date set for definitive action), written notice of the date on
which the books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or such reorganization,
reclassification, sale, consolidation, merger, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also set
forth such facts as shall indicate the effect of such action (to the extent such
effect may be known at the date of such notice) on the Exercise Price and the
kind and amount of the shares of stock and other securities and property
deliverable upon exercise of the Warrants. Such notice shall also specify the
date as of which the holders of the Common Stock of record shall participate in
said dividend, distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, sale, consolidation, merger, dissolution,
liquidation or winding up, as the case may be (on which date, in the event of
voluntary or involuntary dissolution, liquidation or winding up of the Company,
the right to exercise the Warrants shall terminate).
(iii) Without limiting the obligation of the Company to provide
notice to the Registered Holders of the Warrant Certificates of corporate
actions hereunder, is agreed that failure of the Company to give notice shall
not invalidate such corporate action of the Company.
9. Reduction in Exercise Price at Company's Option. In addition to
any adjustments made to the Exercise Price pursuant to Section 8, the Company's
Board of Directors may, at its sole discretion, reduce the Exercise Price of the
Warrants in effect at any time either for the life of the Warrants or any
shorter period of time determined by the Company's Board of Directors. The
Company shall promptly notify the Warrant Agent and the Registered Holders of
any such reductions in the Exercise Price.
10. Duties, Compensation and Termination of Warrant Agent. The
Warrant Agent shall act hereunder as agent and in a ministerial capacity for the
Company, and its duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not, by issuing and delivering Warrant Certificates or by
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any other act hereunder, be deemed to make any representations as to the
validity, value or authorization of the Warrant Certificates or the Warrants
represented thereby or of the Warrant Shares or other property delivered on
exercise of any Warrant. The Warrant Agent shall not at any time be under any
duty or responsibility to any holder of the Warrant Certificates to make or
cause to be made any adjustment of the Exercise Price or to determine whether
any fact exists which may require any such adjustments.
The Warrant Agent shall not (i) be liable for any recital or
statement of fact contained herein or for any action taken or omitted by it in
reliance on any Warrant Certificate or other document or instrument believed by
it in good faith to be genuine and to have been signed or presented by the
proper party or parties, (ii) be responsible for any failure on the part of the
Company to comply with any of its covenants and obligations contained in this
Agreement except for its own negligence or willful misconduct, or (iii) be
liable for any act or omission in connection with this Agreement except for its
own negligence or willful misconduct.
The Company agrees to indemnify the Warrant Agent against any and
all losses, expenses and liabilities which the Warrant Agent may incur in
connection with the delivery of copies of the Company's prospectus to exercising
Registered Holders upon the exercise of any Warrants as set forth in Section 3.
The Warrant Agent may at any time consult with counsel
satisfactory to it (which may be counsel for the Company) and shall incur no
liability or responsibility for any action taken or omitted by it in good faith
in accordance with the opinion or advice of such counsel. Any notice, statement,
instruction, request, direction, order or demand of the Company shall be
sufficiently evidenced by an instrument signed by its President and attested by
its Secretary or Assistant Secretary. The Warrant Agent shall not be liable for
any action taken or omitted by it in accordance with such notice, statement,
instruction, request, order or demand.
The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse the Warrant Agent for
its reasonable expenses as per the fee schedule attached hereto as Exhibit C.
The Company further agrees to indemnify the Warrant Agent against any and all
losses, expenses and liabilities, including judgments, costs and counsel fees,
for any action taken or omitted by the Warrant Agent in the execution of its
duties and powers hereunder, excepting losses, expenses and liabilities arising
as a result of the Warrant Agent's negligence or willful misconduct.
The Warrant Agent may resign its duties or the Company may
terminate the Warrant Agent and the Warrant Agent shall be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result
of the Warrant Agent's own negligence or willful misconduct), on 30 days' prior
written notice to the other party. At least 15 days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate. On such resignation or termination the Company shall appoint a new
warrant agent. If the Company shall fail to make such appointment within a
period of 30 days after it has been notified in writing of the resignation by
the Warrant Agent, then the registered holder of any Warrant Certificate may
apply to any court of competent jurisdiction for the appointment of a new
warrant agent.
After acceptance in writing of an appointment of a new warrant
agent is received by the Company, such new warrant agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named herein as the Warrant Agent, without any further assurance,
conveyance, act or deed; provided, however, if it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed. The Company shall file a notice of appointment of a new
warrant agent with the resigning Warrant Agent and shall forthwith cause a copy
of such notice to be mailed to the Registered Holder of each Warrant
Certificate.
Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, or any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent shall be a successor Warrant Agent under this Agreement, provided
that such corporation is eligible for appointment as a successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
Warrant Agent shall promptly cause notice of its succession as Warrant Agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate. No further action shall be required for establishment and
authorization of such successor warrant agent.
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The Warrant Agent, its officers or directors and its subsidiaries
or affiliates may buy, hold or sell Warrants or other securities of the Company
and otherwise deal with the Company in the same manner and to the same extent
and with like effect as though it were not Warrant Agent. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company or
for any other legal entity.
11. Modification of Agreement. The Warrant Agent and the Company
may by supplemental agreement make any changes or corrections in this Agreement
(i) that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or mistake or error herein contained; or
(ii) that they may deem necessary or desirable and which shall not adversely
affect the interests of the holders of Warrant Certificates; provided, however,
this Agreement shall not otherwise be modified, supplemented or altered in any
respect except with the consent in writing of the Registered Holders of Warrant
Certificates representing not less than two-thirds of the Warrants outstanding.
Additionally, except as provided in Section 8, no change in the number or nature
of the Warrant Shares purchasable on exercise of a Warrant, increase in the
purchase price therefor, or the acceleration of the Expiration Date of a Warrant
shall be made without the consent in writing of the Registered Holder of the
Warrant Certificate representing such Warrant, other than such changes as are
specifically prescribed or allowed by this Agreement.
12. Notices. All notices, demands, elections, opinions or requests
(however characterized or described) required or authorized hereunder shall be
deemed given sufficiently if in writing and sent by registered or certified
mail, return receipt requested and postage prepaid, or by tested telex, telegram
or cable to, in the case of the Company:
Western Country Clubs, Inc.
1601 N.W. Expressway, Suite 1610
Oklahoma City, OK 73118
with a copy to:
Brenman Bromberg & Tenenbaum, P.C.
Mellon Financial Center
1775 Sherman Street
Suite 1001
Denver, Colorado 80203
and in the case of the Warrant Agent:
American Securities Transfer and Trust, Inc.
1825 Lawrence Street, Suite 444
Denver, CO 80202
and if to the Registered Holder of a Warrant Certificate, at the address of such
holder as set forth on the books maintained by the Warrant Agent.
13. Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of the Company, the Warrant Agent and their respective successors
and assigns, and the holders from time to time of Warrant Certificates. Nothing
in this Agreement is intended or shall be construed to confer upon any other
person any right, remedy or claim or to impose on any other person any duty,
liability or obligation.
14. Further Instruments. The parties shall execute and deliver any
and all such other instruments and shall take any and all other actions as may
be reasonably necessary to carry out the intention of this Agreement.
15. Severability. If any provision of this Agreement shall be held,
declared or pronounced void, voidable, invalid, unenforceable, or inoperative
for any reason by any court of competent jurisdiction, government authority or
otherwise, such holding, declaration or pronouncement shall not affect adversely
any other provision of this Agreement, which shall otherwise remain in full
force and effect and be enforced in accordance with its terms, and the effect of
such holding, declaration or pronouncement shall be limited to the territory or
jurisdiction in which made.
16. Waiver. All the rights and remedies of either party under this
Agreement are cumulative and not exclusive of any other rights and remedies as
provided by law. No delay or failure on the part of either party in the exercise
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of any right or remedy arising from a breach of this Agreement shall operate as
a waiver of any subsequent right or remedy arising from a subsequent breach of
this Agreement. The consent of any party where required hereunder to act or
occurrence shall not be deemed to be a consent to any other action or
occurrence.
17. General Provisions. This Agreement shall be construed and
enforced in accordance with, and governed by, the laws of the State of Colorado.
Except as otherwise expressly stated herein, time is of the essence in
performing hereunder. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, and this Agreement may not
be modified or amended or any term or provisions hereof waived or discharged
except in writing signed by the party against whom such amendment, modification,
waiver or discharge is sought to be enforced. The headings of this Agreement are
for convenience in reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WESTERN COUNTRY CLUBS, INC.
ATTEST:
____________________________ By_________________________________
Dominic W. Grimmett, Secretary James E. Blacketer, President
AMERICAN SECURITIES TRANSFER AND
TRUST, INC.
Warrant Agent
By_________________________________
Charles R. Harrison, President
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Exhibit A
WESTERN COUNTRY CLUBS, INC.
Incorporated Under the Laws of the State of Colorado
No. W- _____Series A Common Stock
Purchase Warrants
CUSIP 958054 11 6
CERTIFICATE FOR (See Reverse
SERIES A COMMON STOCK For Certain
PURCHASE WARRANTS Definitions)
This Warrant Certificate certifies that ___________________, or
registered assigns ("the Warrant Holder"), is the registered owner of the above
indicated number of Series A Common Stock Purchase Warrants (the "Warrants")
expiring on __________, 2002 (the "Expiration Date"). One Warrant entitles the
Warrant Holder to purchase one share of common stock ("Share") from Western
Country Clubs, Inc., a Colorado corporation (the "Company"), at a purchase price
of $____ (the "Exercise Price"), commencing on __________, 1997, and terminating
on the Expiration Date ("Exercise Period"), upon surrender of this Warrant
Certificate with the exercise form hereon duly completed and executed with
payment of the Exercise Price at the office of American Securities Transfer &
Trust, Inc. (the "Warrant Agent"), but only subject to the conditions set forth
herein and in a Warrant Agreement dated as of _________, 1997 (the "Warrant
Agreement") between the Company and the Warrant Agent. The Exercise Price, the
number of shares purchasable upon exercise of each Warrant, the number of
Warrants outstanding and the Expiration Date are subject to adjustments upon the
occurrence of certain events. The Warrant Holder may exercise all or any number
of Warrants. Reference hereby is made to the provisions on the reverse side of
this Warrant Certificate and to the provisions of the Warrant Agreement, all of
which are incorporated by reference in and made a part of this Warrant
Certificate and shall for all purposes have the same effect as though fully set
forth at this place.
Upon due presentment for transfer of this Warrant Certificate at the
office of the Warrant Agent, a new Warrant Certificate or Warrant Certificates
of like tenor and evidencing in the aggregate a like number of Warrants, subject
to any adjustments made in accordance with the provisions of the Warrant
Agreement, shall be issued to the transferee in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement, upon
payment of $_____ per Warrant Certificate and any tax or governmental charge
imposed in connection with such transfer.
The Warrant Holder of the Warrants evidenced by this Warrant Certificate
may exercise all or any whole number of such Warrants during the period and in
the manner stated hereon. The Exercise Price shall be payable in lawful money of
the United States of America and in cash or by
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certified or bank cashier's check or bank draft payable to the order of the
Company. If upon exercise of any Warrants evidenced by this Warrant Certificate
the number of Warrants exercised shall be less than the total number of Warrants
so evidenced, there shall be issued to the Warrant Holder a new Warrant
Certificate evidencing the number of Warrants not so exercised.
Subject to the following paragraph, no Warrant may be exercised after
5:00 p.m. Mountain Time on the Expiration Date and any Warrant not exercised by
such time shall become void, unless extended by the Company.
Commencing on the date the Warrants are separately tradeable and
transferable, the Warrants are subject to redemption by the Company at $.05 per
Warrant, at any time commencing ________, 1998 (twelve months from the date of
Registration Statement No. 333-21547) and at any time prior to their expiration,
on not less than 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 $______ (200% of the closing bid price for the Company's Common Stock on
the effective date of Registraiton Statement No. 333-21547) 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. During the 30-day period immediately
following the giving of such notice, the Warrant Holders shall have the right to
exercise the Warrants so held by them. Upon expiration of such 30-day period,
all rights of the Warrant Holders shall terminate, other than the rights to
receive the redemption price, without interest, and the right to receive the
redemption price shall itself expire on the Warrant Expiration Date.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its President and by its Secretary, each by a facsimile of his/her signature,
and has caused a facsimile of its corporate seal to be imprinted hereon.
Dated: ______________________
WESTERN COUNTRY CLUBS, INC.
_____________________________ By________________________________
Dominic W. Grimmitt, Secretary James E. Blacketer, President
AMERICAN SECURITIES TRANSFER &
TRUST, INC.
Warrant Agent
By_________________________________
Charles R. Harrison, President
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Form of Reverse Side of Warrant
This Warrant Certificate, when surrendered to the Warrant Agent at its
principal office by the Warrant Holder, in person or by attorney duly authorized
in writing, may be exchanged in the manner and subject to the limitations
provided in the Warrant Agreement, upon the payment of any tax or other
governmental charge imposed in connection with such exchange, for another
Warrant Certificate or Warrant Certificates of like tenor and evidencing a like
number of Warrants, subject to any adjustments made in accordance with the
provisions of the Warrant Agreement.
The Company and the Warrant Agent may deem and treat the registered
holder hereof as the absolute owner of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone) for all
proposes and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary. No Warrant Holder, as such, shall have any rights of a
holder of the Common Stock of the Company, either at law or at equity, and the
rights of the Warrant holder, as such, are limited to those rights expressly
provided in the Warrant Agreement and in the Warrant Certificate.
Under the Warrant Agreement the Exercise Price is subject to adjustment
if the Company shall effect any stock split or stock combination with respect to
the Common Stock. Any such adjustment of the Exercise Price will also result in
an adjustment of the number of shares of Common Stock purchasable upon exercise
of a Warrant or, if the Company should elect, an adjustment of each outstanding
Warrant into a different number of Warrants.
The Company shall not be required to issue fractions of Warrants upon
any such adjustment or to issue fractions of shares upon the exercise of any
Warrants upon any such adjustment, in accordance with the Warrant Agreement.
The Warrant Agreement is subject to amendment upon the approval of
holders of at least two-thirds of the outstanding Warrants as a group, except
that no such approval is required for the reduction of the Exercise Price or
extension of the Expiration Date. No amendment shall accelerate the Expiration
Date or increase the Exercise Price without the approval of all the holders of
all outstanding Warrants. A copy of the Warrant Agreement will be available at
all reasonable times at the office of the Warrant Agent for inspection by any
Warrant Holder. As a condition of such inspection, the Warrant Agent may require
any Warrant Holder to submit the Warrant Holder's Warrant Certificate for
inspection.
IMPORTANT: The Warrants represented by this Certificate may not be exercised by
a Warrant Holder unless at the time of exercise the underlying shares of Common
Stock are qualified for sale by registration or otherwise in the state where the
Warrant Holder resides or unless the issuance of the shares of Common Stock
would be exempt under the applicable state securities laws. Further, a
registration statement under the Securities Act of 1933, as amended, covering
the issuance of shares of Common Stock upon the exercise of this Warrant must be
in effect and current at the time of exercise unless the issuance of shares of
Common Stock upon any exercise is exempt from the registration requirements of
the Securities Act of 1933. Unless such registration statement is in effect and
current at the time of exercise, or unless such an exemption is available the
Company may decline to permit the exercise of this Warrant.
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TRANSFER FEE $_____ PER CERTIFICATE
WESTERN COUNTRY CLUBS, INC.
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT -
TEN ENT - as tenants by the entireties Custodian
---------------
JT TEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts
tenants in common to Minors Act _______
(State)
Additional abbreviations may also be used though not in the above list.
FORM OF ASSIGNMENT
(To Be Executed by the Registered Holder if the Registered Holder
Desires to Assign Series A Warrants Evidenced by the
Within Warrant Certificate)
FOR VALUE RECEIVED___________________ hereby sells, assigns and
transfers unto ____________________ Series A Warrants, evidenced by the within
Warrant Certificate, and does hereby irrevocably constitute and appoint ________
_______ Attorney to transfer the said Warrants evidenced by the within Warrant
Certificate on the books of the Company, with full power of substitution.
Dated: _________________ ________________________________
Signature
NOTICE: The above signature must correspond with the name as written upon the
face of the within Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
Signature Guaranteed: _________________________________________
-4-
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be Executed by the Holder if the Registered Holder Desires to
Exercise Warrants Evidenced by the Within Warrant Certificate)
To Western Country Clubs, Inc.:
The undersigned hereby irrevocably elects to exercise Series A Warrants,
evidenced by the within Warrant Certificate for, and to purchase thereunder,
full shares of Common Stock issuable upon exercise of said Warrants and delivery
of $ and any applicable taxes.
The undersigned requests that certificates for such shares be issued in
the name of:
PLEASE INSERT SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER
- ------------------------------- ---------------------------------
(Please print name and address)
- ------------------------------- ---------------------------------
- ------------------------------- ---------------------------------
If said number of Series A Warrants shall not be all the Warrants
evidenced by the within Warrant Certificate, the undersigned requests that a new
Warrant Certificate evidencing the Warrants not so exercised be issued in the
name of and delivered to:
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated: ____________________ Signature: __________________________
NOTICE: The above signature must correspond with the name as written upon the
face of the within Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever, or if signed by any
other person the Form of Assignment hereon must be duly executed and if
the certificate representing the shares or any Warrant Certificate
representing Warrants not exercised is to be registered in a name other
than that in which the within Warrant Certificate is registered, the
signature of the holder hereof must be guaranteed.
Signature Guaranteed: ____________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT TO S.E.C. RULE
17Ad-15.
-5-
<PAGE>
Exhibit B
WESTERN COUNTRY CLUBS INC.
PREFERRED STOCK PURCHASE WARRANT
Certificate Evidencing Right to Purchase __________Shares
This is to certify that _________________________________
("_____________") or assigns, is entitled to purchase at any time or from time
to time after 9:00 A.M., Dallas, Texas time, on ____, 1998 and until 9:00 A.M.,
Dallas, Texas time, on _______________, 2002 up to the above referenced number
of shares of the Company's Series A Cumulative Convertible Redeemable Preferred
Stock (the "Shares"), of Western Country Clubs Inc., a corporation organized
under the laws of the State of Colorado, (the "Company"), for the consideration
specified in Subsection 1(e) of the Warrant and Registration Rights Agreement
dated _____________, 1997 between the Company and National Securities
Corporation, as representative of the several Underwriters (as defined therein)
(the "Warrant Agreement"), pursuant to which this Warrant is issued. All rights
of the holder of this Warrant are subject to the terms and provisions of the
Warrant Agreement, copies of which are available for inspection at the office of
the Company.
The Shares issuable upon the exercise of this Warrant have been
registered under the Securities Act of 1933, as amended (the "Act"). However,
except as provided in the Warrant Agreement, no distribution of this Warrant, or
the Shares issuable upon exercise of this Warrant may be made except pursuant to
(i) a post-effective amendment to the registration statement under the Act
covering the Warrant and the Shares, (ii) a new registration statement, or (iii)
an opinion of counsel, satisfactory to counsel for the Company, that an
exemption from registration under the Act is available.
Subject to the provisions of the Act and of the Warrant Agreement, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
offices of the Company, by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant, together with the Assignment hereof
duly endorsed. Until transfer of this Warrant on the books of the Company, the
Company may treat the registered holder hereof as the owner hereof for all
purposes.
Any Preferred Stock which is acquired pursuant to the exercise of this
Warrant shall be acquired in accordance with the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on this _____ day of ___________, 1997, in Dallas, Texas, by its
proper corporate officer's thereunto duly authorized.
Western Country Clubs Inc.
By:
James E. Blacketer, President
ATTEST:
1
<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To Western Country Clubs Inc.:
The undersigned, the holder of the enclosed Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _________________ shares of Series A Preferred Stock (as
defined in the Warrant and Registration Rights Agreement to which the form of
this Subscription was attached) and herewith makes payment of $______________
therefor, and requests that the certificate or certificates for such shares of
Series A Preferred Stock be issued in the name of and delivered to the
undersigned.
Date:_____
__________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
__________________________
(Address)
__________________________
Insert the number of shares of Series A Preferred Stock called for on the
face of the Warrant (or, in the case of a partial exercise, the portion thereof
as to which the Warrant is being exercised), in either case without making any
adjustment for additional shares of Series A Preferred Stock or Warrants or
other securities or property or cash which, pursuant to the adjustment
provisions of the Warrant, may be deliverable upon exercise.
2
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
_______________________________ the right represented by the enclosed Warrant to
purchase ________ shares of Series A Preferred Stock with full power of
substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in or in
part, of such right to purchase represented by the enclosed Warrant is permitted
by the terms of the Warrant and Registration Rights Agreement pursuant to which
the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant and Registration Rights Agreement and agrees to be
bound by the terms thereof with the same force and effect as if a signatory
thereto, including without limitation Section 3 thereof.
Date:____
__________________________
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
__________________________
(Address)
Signed in the presence of:
__________________________
3
<PAGE>
Exhibit C
WESTERN COUNTRY CLUBS INC.
PURCHASE WARRANT
Certificate Evidencing Right to Purchase ________ Warrants
This is to certify that (" ") or assigns, is
entitled to purchase at any time or from time to time after 9:00 A.M., Dallas,
Texas time, on ,1998 and until 9:00 A.M., Dallas, Texas time, on , 2002 up to
the above referenced number of Series A Redeemable Common Stock Purchase
Warrants (the "Warrants"), of Western Country Clubs Inc., a corporation
organized under the laws of the State of Colorado, (the "Company"), for the
consideration specified in Subsection l (e) of the Warrant and Registration
Rights Agreement dated ,1997 between the Company and National Securities
Corporation, as representative of the several Underwriters (as defined therein)
(the "Warrant Agreement"), pursuant to which this Warrant is issued. All rights
of the holder of this Warrant are subject to the terms and provisions of the
Warrant Agreement, copies of which are available for inspection at the office of
the Company.
This Warrant and the Warrants issuable upon the exercise of this Warrant
have been registered under the Securities Act of 1933, as amended (the "Act").
However, except as provided in the Warrant Agreement no distribution of this
Warrant or the Warrants issuable upon exercise of this Warrant may be made
except pursuant to (i) a post-effected amendment to the registration statement
under the Act covering the Warrants and the Series A Preferred Stock, (ii) a new
registration statement, or (iii) an opinion of counsel, satisfactory to counsel
for the Company, that an exemption from registration under the Act is available.
Subject to the provisions of the Act and of the Warrant Agreement, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
offices of the Company, by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant, together with the Assignment hereof
duly endorsed. Until transfer of this Warrant on the books of the Company, the
Company may treat the registered holder hereof as the owner hereof for all
purposes.
Any Warrants, which are acquired pursuant to the exercise of this
Warrant, shall be acquired in accordance with the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
on this, day of ,1997, in Dallas, Texas, by its proper
corporate officer's thereunto duly authorized.
Western Country Clubs Inc.
By:
James E. Blacketer, President
ATTEST:
<PAGE>
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To Western Country Clubs Inc.:
The undersigned, the holder of the enclosed Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, Warrants (as defined in the Warrant and Registration Rights
Agreement to which the form of this Subscription was attached) and herewith
makes payment of $ therefor, and requests that the certificate or certificates
for such Warrants be issued in the name of and delivered to the undersigned.
Date:
Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
(Address)
Insert the number of Warrants called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the Warrant
is being exercised), in either case without making any adjustment for additional
Warrants or other securities or property or cash which, pursuant to the
adjustment provisions of the Warrant, may be deliverable upon exercise.
9
<PAGE>
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
the right represented by the enclosed Warrant to purchase Warrants with full
power of substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in or in
part, of such right to purchase represented by the enclosed Warrant is permitted
by the terms of the Warrant and Registration Rights Agreement pursuant to which
the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant and Registration Rights Agreement and agrees to be
bound by the terms thereof with the same force and effect as if a signatory
thereto, including without limitation Section 3 thereof.
Date:
(Signature must conform in all respects to name of holder as specified on
the face of the Warrant)
(Address)
Signed in the presence of-.
10
AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT TO STOCK PURCHASE AGREEMENT dated September 20,1996 is made
as of this 26th day of November, 1996 by and among Troy H. Lowrie ("Seller");
Red River Concepts, Inc. a Delaware corporation, and/or its designees consisting
of Roger D. and Davina S. Lockhart, John W. Ritter, Connie Simon, Davina S.
Lockhart and Donna Murray-Muenzler (collectively the "Purchaser"); Western
Country Clubs, Inc., a Colorado corporation ("WCCI"), and, C.H. Financial
Corporation, an Oklahoma corporation ("CHFC").
WHEREAS, Seller, Purchaser and WCCI entered into a Stock Purchase
Agreement dated September 20, 1996 (the "Agreement") pursuant to which Purchaser
contracted to purchase from Seller 1,300,000 shares of common stock, $.01 par
value (the "Shares"), of WCCI, upon the terms and subject to the conditions
therein set forth a copy of which is attached hereto; and,
WHEREAS, the Second Closing of the Third Shares (as defined in the
Agreement) did not occur as required on or before November 15, 1996 because
Purchaser did not purchase said shares; and,
WHEREAS, Purchaser, CHFC and Seller desire to extend the Second Closing
in accordance with the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. ARTICLE I, Section 1.01 (b) Second Closing. of the Agreement is
amended as follows:
(b) Second Closing. At the second closing (the "Second
Closing"), Seller shall sell and transfer to Purchaser and CHFC and Purchaser
and CHFC shall purchase from Seller three hundred thousand (300,000) Shares (the
"Third Shares") at $1.00 per share or $300,000 payable in cash together with
interest at the rate of ten percent (10%) per annum from November 15, 1996 to
the occurrence of the Second Closing. The Second Closing shall take place at the
office of Brenman Key & Bromberg, P.C., 1775 Sherman Street, Suite 1001, Denver,
Colorado 80203 on or before February 15, 1997. At the Second Closing, the
Purchaser and/or CHFC shall deliver to Seller $300,000 for the Third Shares in
immediately available federal funds by wire transfer or by cashier's check, and
Seller shall deliver to Purchaser and CHFC a stock certificate(s) representing
the Third Shares, duly endorsed for transfer. The obligation of Purchaser and
CHFC to purchase the Third Shares is joint and several.
2. All of the remaining provisions of the Agreement are hereby restated
with respect to CHFC as a Purchaser under the Agreement including, but not
limited to, Article III Representations and Warranties of the Purchaser and
Article IV Conditions to Seller's Obligations.
3. CHFC shall execute and deliver to Seller the Guaranty attached
hereto as Exhibit A and made a part hereof.
4. Purchaser and CHFC hereby acknowledge that neither has any
claim to assert against Seller for not purchasing the Third Shares.
5. Notices. All notices, requests, demands and other communications
which are required or may be given under this Agreement shall be in writing and
shall be delivered by personal delivery, by overnight courier or by registered
or certified mail, postage prepaid, to the parties as set forth in the Agreement
and to CHFC as follows:
C.H. Financial Corporation
1601 NW Expressway, Suite 1910
Oklahoma City, OK 73118
Attention: Joe R. Love, President
<PAGE>
with a copy to:
John Hudson, Attorney
1601 NW Expressway, Suite 1910
Oklahoma City, OK 73118
All notices shall be effective upon delivery. Rejection or other refusal to
accept delivery of notice or the inability to deliver because of change of
address as to which no notice was given hereunder shall be deemed to be receipt
of the notice sent.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
RED RIVER CONCEPTS, INC.
By:/s/ James E. Blacketer /s/ Troy H. Lowrie
----------------------------------------------- -------------------------
James E. Blacketer, President Troy H. Lowrie
WESTERN COUNTRY CLUBS, INC.
By:/s/ James E. Blacketer
-----------------------------------------------
James E. Blacketer, President
Designees:
------------------------------------------------
Roger D. and Davina S. Lockhart, JTWROS
------------------------------------------------
John W. Ritter
------------------------------------------------
Connie Simon for Hanifen, Imhoff, Custodian
for IRA/SEP for the Benefit of Roger D. Lockhart
------------------------------------------------
Davina S. Lockhart
/s/ Donna Murray-Muenzler
------------------------------------------------
Donna Murray-Muenzler
C.H. FINANCIAL CORPORATION
By:/s/ Joe R. Love
---------------------------------------------
CESSATION AGREEMENT
This Agreement made this February 4, 1997, by and between Troy H. Lowrie, a
Colorado resident ("Lowrie"), Red River Concepts, Inc., a Delaware corporation
("Red River"), Western Country Clubs, Inc., a Colorado corporation ("WCCI"),
and Jebco, L.L.C., an Oklahoma limited liability company ("Jebco").
RECITALS
A. Lowrie and WCCI wish to provide for the cessation of
Lowrie's service as a director of WCCI and for the settlement of obligations
arising from their former relationships.
B. The parties desire to amend (i) that Stock Purchase
Agreement dated September 1996, as amended November 1996, between and among them
and (ii) those instruments provided for in the Stock Purchase Agreement.
C. Jebco desires to purchase and Lowrie desires to sell
certain shares of the common stock of WCCI held by Lowrie and to divest other
shares.
The parties agree as follows:
TERMS AND CONDITIONS
1. Resignation. Lowrie hereby resigns as a director of WCCI effective as of the
date of this Agreement, and further resigns from any and all offices that he
may have in any subsidiary or affiliated entity.
2. Indemnification.
(a) WCCI shall indemnify and hold harmless Lowrie from and against any
and all losses, claims, demands, costs, damages, liabilities, joint and
several, expenses of any nature (including attorneys' fees and
disbursements), judgments, fines, settlements, penalties and other
expenses actually and reasonably incurred by the Lowrie in connection
with any and all claims, demands, actions, suits, or proceedings,
civil, criminal, administrative or investigative, in which the Lowrie
may be involved, or threatened to be involved, as a party or otherwise,
by reason of the fact that Lowrie is or was a director or officer of
WCCI or is or was an employee or agent of WCCI, arising out of or
incidental to the business of WCCI, provided: (i) Lowrie's conduct did
not constitute willful misconduct or recklessness, (ii) the action is
not based on breach of his duty of loyalty, (iii) Lowrie acted in good
faith and in a manner he reasonably believed to be in or not opposed
to, the best interests of WCCI and within the scope of Lowrie's
authority and (iv) with respect to a criminal action or proceeding,
Lowrie had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere, or its
equivalent, shall not, in and of itself, create a presumption or
otherwise constitute evidence that Lowrie acted in a manner contrary to
that specified above.
(b) Lowrie shall notify WCCI within 45 days of the assertion of any
purported third-party claim or discovery of any fact upon which Lowrie
intends to base a claim for indemnification; provided, however, that
<PAGE>
the failure of Lowrie to so notify WCCI shall not relieve WCCI from any
liability under this Agreement to Lowrie with respect to such claim
unless such WCCI is prejudiced or damaged by the failure to receive
timely notice. In the event of any purported third-party claim, WCCI,
at its option, may assume (with legal counsel reasonably acceptable to
Lowrie) the defense of any claim, demand, lawsuit or other proceeding
brought against Lowrie, which claim, demand, lawsuit or other
proceeding may give rise to the indemnity obligation of WCCI under this
Section, and may assert any defense of WCCI or Lowrie; provided,
however, that Lowrie shall have the right at his own expense to
participate jointly with WCCI in the defense of any purported
third-party claim, demand, lawsuit or other proceeding in connection
with which Lowrie claims indemnification. Notwithstanding the right of
Lowrie so to participate, WCCI shall have the sole right to settle or
otherwise dispose of such purported third-party claim, demand, lawsuit
or other proceeding on such terms as WCCI, in its sole discretion,
shall deem appropriate with respect to any issue involved in such
claim, demand, lawsuit or other proceeding as to which (i) WCCI shall
have acknowledged the obligation to indemnify Lowrie or (ii) Lowrie
shall have declined so to participate,
(c) Notwithstanding anything herein to the contrary, WCCI shall have no
obligation to indemnify Lowrie, and such obligation of WCCI to
indemnify Lowrie shall expire and terminate, unless such WCCI shall
have received written notice of such claim for indemnity prior to the
close of business on the expiration of two years after the date of this
Agreement.
(d) The indemnification obligations of WCCI set forth in this Agreement
shall be limited to indemnification for actual damages suffered and
shall not include incidental, consequential, special or indirect
damages, and any indemnification payments may be set off against
amounts owed to WCCI by Lowrie.
(e) In addition to the rights of indemnification provided above, WCCI
shall indemnify and hold harmless Lowrie from liability on (i) amounts
due Dunlaney National Bank, Marshall, Illinois, relating to the Indy
Club; (ii) amounts due Colonial Bank, Denver, Colorado, relating to the
Tucson Club; (iii) all guaranties of debt reflected on WCCI's September
30, 1996 balance sheet; and (iv) purchase money amounts due on the
Tucson condominium provided that Lowrie duly convey proper title, free
and clear of all other liens and encumbrances, on or before February
28, 1997. Lowrie shall indemnify and hold harmless WCCI from liability
on the Indy condominium and WCCI releases any and all claim to title
thereto. WCCI will use its best efforts to remove Lowrie as signatory
on any of the above instruments and to restore any personal collateral
pledge thereto.
3. Share Divestiture. On May 15, 1997, Lowrie shall sell and transfer to Jebco
90,000 shares of the common stock of WCCI (the "Shares") in exchange for a
promissory note in the amount of $75,000 due in two semi-annual installments
with interest at 8% per year. Lowrie shall immediately duly endorse the
certificate or certificates evidencing the Shares to Jebco, and tender a copy of
the duly endorsed certificate to Jebco. Lowrie shall further divest the
remainder of his shares of the common stock of WCCI to persons or entities
unaffiliated with WCCI on or before May 15, 1997.
4. Letter Agreement With Robert R. Spencer. Simultaneously with the date of this
Agreement, Lowrie shall enter into a binding and enforceable letter agreement
with Robert Spencer in the form attached as Exhibit B. The letter agreement
shall provide for the transfer by Lowrie of up to 13,000 shares of WCCI common
stock and for Spencer's release of claims against Lowrie and WCCI.
5. Amendment of Stock Purchase Agreement and Promissory Note Terms. Lowrie and
Red River agree that the interest due date on the $800,000 promissory note given
under the above-referenced Stock Purchase Agreement shall be changed to become
payable on the earlier of June 1, 1997, or the effective date of a Form SB-2
registration statement filed by WCCI and covering shares of WCCI convertible
preferred stock. Lowrie and Red River also agree to extend the Second Closing to
April 15, 1997. These changes shall not alter any guaranties given in connection
with the promissory note.
6. Entire Agreement. This Agreement, including the Exhibits and other writings
referred to herein or delivered pursuant hereto, constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings, both written and oral,
with respect to the subject matter.
<PAGE>
7. Amendments and Waiver. This Agreement may be amended, superseded, canceled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by the parties or, in the case of a waiver, by the party
waiving compliance. No delay on the part of either party in exercising any
right, power or privilege hereunder shall operate as a waiver, nor shall any
waiver on the part of either party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise or the exercise of any other such right, power or privilege.
8. Governing Law. The parties agree that Oklahoma law shall govern the terms of
this Agreement.
9. Binding Effect; Assignment; No Third Party Benefit.
(a) This Agreement and all its provisions shall be binding upon and
inure to the benefit of the parties and their respective successors and
permitted assigns; provided, however, that neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned
by the parties (by operation of law or otherwise) without the prior
written consent of the other parties.
(b) Nothing in this Agreement, express or implied, is intended to or
shall confer upon any person other than the parties any rights,
benefits or remedies of any nature whatsoever under or by reason of
this Agreement.
10. Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
The parties so agree as of the date first above written.
WCCI: Western Country Clubs, Inc.
By:/s/ James E. Blacketer
----------------------
(Vice) President
Red River: Red River Concepts, Inc.
By:/s/ James E. Blacketer
----------------------
(Vice) President
Jebco: Jebco, L.L.C.
/s/James E. Blacketer
---------------------
Manager
Lowrie: /s/ TROY H. LOWRIE
------------------------
Troy H. Lowrie
SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT
AND
CESSATION AGREEMENT
This Agreement, made and entered into this 14th day of April, 1997, by
and between Troy H. Lowrie ("Lowrie"), Red River Concepts, Inc., ("Red River"),
a Delaware corporation, Western Country Clubs, Inc., ("WCCI"), a Colorado
corporation, Jebco, L.L.C. ("Jebco"), John Michael Love Trust, ("JML Trust"), a
qualified subchapter S Trust, and L A F, A Limited Partnership ("LAF").
Witnesseth:
Whereas, Red River and Lowrie desire to amend that Stock Purchase
Agreement dated September 20, 1996, as amended November 26, 1996, and as amended
February 4, 1997; and
Whereas, Lowrie and WCCI desire to make certain agreements concerning
certain debts owed by WCCI to Lowrie; and
Whereas, Jebco, JML Trust, and LAF desire to purchase shares of WCCI
stock from Lowrie;
Now therefore, the parties hereto have agreed with each other as
follows:
1. Upon execution of this Agreement, Red River, Lowrie, and WCCI agree
to amend the Stock Purchase Agreement dated September 20, 1996, and amended on
November 26, 1996, and on February 4, 1997, to change the purchase price for the
800,000 shares of WCCI common stock already purchased by Red River under the
Agreement and to change the purchase price for the 300,000 shares of WCCI common
stock to be purchased under the Agreement, all as set forth hereinafter:
A. The new purchase price for the 800,000 shares of WCCI common
stock previously purchased by Red River shall be $400,000,
consisting of $100,000 paid in cash and $300,000 to be paid by a
promissory note in the amount of $300,000, payable to Lowrie,
bearing interest at the rate of ten percent per annum, with the
entire balance of principal and interest due on July 14, 1997.
The $800,000 note dated September 20, 1996, previously owed by
Red River, which constituted the original purchase price of the
800,000 shares, shall be canceled and rendered null and void and
Lowrie agrees to return the original $800,000 note to Red River.
B. 132,500 shares shall be purchased by JML Trust for $66,250, all
paid in cash upon execution hereof.
C. 30,000 shares shall be purchased by Jebco for $15,000, all paid
in cash upon execution hereof.
D. 137,500 shares shall be purchased by LAF for $68,750, all paid in
cash upon execution hereof.
2. As collateral for the above mentioned $300,000 note, Red River agrees
to pledge 550,000 shares of its WCCI common stock presently pledged to an
$800,000 note, and Lowrie agrees to keep 550,000 shares of WCCI stock as
collateral for the $300,000 note, and Lowrie agrees to deliver to Red River the
250,000 remaining shares.
3. Lowrie and Red River agree to cancel any obligations Red River may
have had in the original Stock Purchase Agreement regarding purchase of shares
of "Third Shares", and also agree to cancel the Voting Trust previously entered
into between Lowrie and Red River.
4. WCCI previously on February 4, 1997, in the Cessation Agreement
executed on that date, agreed to indemnify Lowrie from any liability on certain
obligations that Lowrie had either guaranteed or had collateralized on behalf of
WCCI. In that connection, the parties agree to modify the provisions of
paragraph 2(e) of the Cessation Agreement as follows:
WCCI agrees to pay in full the balance and accrued interest owed to
Colonial Bank, which balance is $278,116.60 as of the date hereof, and the
<PAGE>
entire balance and accrued interest owed to Lowrie by WCCI by virtue of a
$100,000 loan made to WCCI, which balance is $106,176.78 as of the date hereof,
from the proceeds of the SB2 offering of WCCI preferred convertible stock. In
the event that said offering has not closed and the proceeds therefrom received
by WCCI by June 1, 1997, then WCCI agrees to begin on June 1, 1997, making
payments to Colonial Bank of $10,000 per month and pay the entire balance on
December 31, 1997, and agrees to pay to Lowrie on the $100,000 loan the sum of
$3,000 per month and pay the entire balance on December 31, 1997. WCCI agrees to
remain liable under the indemnity agreement to Lowrie, and the said paragraph
2(e) of the Cessation Agreement shall otherwise remain unchanged.
5. This Agreement, including the exhibits and other documents referred
to herein or delivered pursuant hereto, constitutes the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, with respect to the subject matter hereof.
The terms and conditions of the original Stock Purchase Agreement and the
Cessation Agreement, as amended, shall, unless modified herein, remain
unchanged.
6. The parties agree that Colorado law shall govern the terms of this
Agreement.
7. This Agreement and all of its terms and provisions contained herein
shall be binding upon and inure to the benefit of the parties and their
respective successors and assigns. It is agreed that neither this Agreement, nor
any of the rights, interests or obligations contained herein shall be assigned
by the parties without the prior written consent of the parties.
Witness our hands the day and year first above written.
Agreed to: C.H. Financial Corporation
By: /s/Joe R. Love
--------------------------------
Joe R. Love, President
Red River Concepts, Inc.
By: /s/ James E. Blacketer
--------------------------------
James E. Blacketer, President
Western Country Clubs, Inc.
By: /s/ James E. Blacketer
--------------------------------
James E. Blacketer, President
By: /s/ Troy H. Lowrie
--------------------------------
Troy H. Lowrie
JEBCO, L.L.C.
By: /s/ Jeb Edward Blacketer
--------------------------------
Jeb Edward Blacketer, Manager
L A F, A Limited Partnership
General Partner:
New World Properties, Inc.
By: /s/ Daniel J. Fioroni
--------------------------------
Daniel J. Fioroni, President
John Michael Love Trust
By: /s/ Jay Charles Johnston
--------------------------------
Jay Charles Johnston, Trustee
WESTERN COUNTRY CLUBS, INC.
OMNIBUS EQUITY COMPENSATION PLAN
1. Establishment and Purpose of the Plan. Western Country Clubs, Inc.
creates its Omnibus Equity Compensation Plan for the purpose of joining capable
and experienced people and entities to the Company's business purposes. The Plan
shall fulfill its purpose by compensating them with equity-based awards, whose
value is connected to the continued growth and profitability of the Company and
whose characteristics of ownership fosters a mutual interest with the Company's
shareholders.
2. Definitions.
(a) Affiliate: Any entity in which the Company has a
substantial direct or indirect interest, as determined by the Committee.
(b) Agent: An Employee, person, or entity performing services for
or selling goods to the Company or transacting business by or through its names,
or an employee of such person or entity.
(c) Award: A compensation grant related to the Company's
equity, including Director Options, Restricted Stock, Options, Stock
Appreciation Rights, and any Equity-Based Award.
(d) Awardee: An Agent to whom an Award is made.
(e) Board of Directors: The Board of Directors of the Company.
(f) Common Stock: The common stock of the Company, par value
$.01 a share, or such other class or kind of shares or other securities as may
be applicable under Section 11.
(g) Company: Western Country Clubs, Inc., a Colorado corporation,
or any successor to substantially all its business, and any entity owned in
whole or in part by it, if the context requires or permits.
(h) Committee: The Compensation Committee of the Board of
Directors, or such other committee designated by the Board of Directors,
designated to administer the Plan under Section 4.
(i) Director Options: Non-Qualified Options awarded under
Section 7 of the Plan.
(j) Employee: A full-time managerial, administrative, or
professional person employed by the Company, including an officer or director
who is such an employee.
(k) Equity-Based Award. An award by the Committee under
Section 10 of the Plan.
(1) Fair Market Value. If the Common Stock is traded on the
over-the-counter market, the mean between the highest closing bid and lowest
closing asked prices for a share of the Common Stock as reported by the National
Association of Securities Dealers Automated Quotation System, or if not reported
by that system, the mean between the closing bid and asked prices as quoted by a
source designated by the Committee; if the Common Stock is listed on a national
or regional stock exchange, the closing sales price per share on such exchange;
or if the Common Stock is neither traded in the over-the-counter market nor
listed on an exchange, the per share value determined in good faith by the
Committee. The Committee may in its discretion average the Fair Market Value
over a period of time, may utilize a fair market value formula required by
Federal tax or securities laws, or may modify this definition in such ways as it
deems appropriate and consistent with the purposes of the Plan.
(m) Incentive Stock Option: Any Option which meets the
requirements of an incentive stock option as defined in Section 422A of the U.S.
Internal Revenue Code of 1986, as amended, or any statutory provision that may
replace such Section, other than an Option which states that it is not an
Incentive Stock Option.
(n) Non-Qualified Option: Any Option which is not an Incentive
Stock Option.
(o) Options: Any option or options granted from time to time
under the Plan other than Director Options.
<PAGE>
(p) Plan: Western Country Clubs, Inc. Omnibus Equity
Compensation Plan herein set forth, as the same may from time to time be
amended.
(q) Restricted Stock: Common Stock awarded by the Committee
under Section 8 of the Plan.
(r) Stock Appreciation Rights: Rights awarded by the Committee
under Section 9 of the Plan.
3. Eligibility. Any Agent is eligible to receive an Award, provided
that a director of the Company who is a member of the Committee or who is not
an Employee shall be eligible to receive only Director Options or Restricted
Stock as permitted under Sections 7 and 8 of the Plan.
4. Plan Administration.
(a) Administrator: The Plan shall be administered by the
Committee.
(b) Administrative Powers: The Committee shall have full power to
interpret and administer the Plan and full authority to act in selecting the
Agents or class of Agents to whom Awards will be granted, in determining the
type and amount of Award to be granted to each Agent or class of Agent, the
terms and conditions of Awards granted under the Plan and the terms of
agreements which will be entered into with Awardees. The Committee shall have
the power to make regulations for carrying out the Plan, and to make changes in
such regulations as they from time to time deem proper. Any interpretation by
the Committee of the terms and provisions of the Plan and the administration
thereof, and all action taken by the Committee, shall be final, binding, and
conclusive on the Company, its shareholders, Affiliates, all Agents, their
respective legal representatives, successors, and assigns and upon all other
persons claiming under or through any of them. As to the selection of and grants
of awards to Awardees who are not subject to Sections 16(a) and 16(b) of the
Act, the Committee may delegate any or all of its responsibilities to
appropriate Employees of the Company.
(c) Administration Liability: Members of the Board of Directors,
members of the Committee, or Employees acting under the Plan shall incur no
liability except for gross negligence or willful misconduct in the performance
of their duties.
5. Shares Subject to Grant.
(a) Subject to adjustment as provided in Section 11, the total
number of shares of Common Stock which the Company may grant under the Plan
shall be five percent of the total shares outstanding from time to time;
provided, however, that no more than one hundred eighty thousand (180,000)
shares of Common Stock shall be available for the grant of Incentive Stock
Options under the Plan. Any shares issued by the Company through the assumption
or substitution of outstanding grants from an acquired company shall not reduce
the shares available for grants under the Plan. Any shares issued hereunder may
consist, in whole or in part, of authorized and unissued shares or treasury
shares (if any). If any shares necessary to an Award are forfeited or the Award
otherwise terminates without the issuance of shares, the shares subject to such
Award, to the extent of any such forfeiture or termination, shall again be
available for grant under the Plan.
6. Option Rules and Conditions. The grant of Options shall be upon
the following rules and conditions:
(a) Options and Grants: Options shall be evidenced by Option
agreements. The agreements shall conform to the requirements of the Plan, and
may contain such other provisions (including restrictions upon the exercise of
the Option, and provisions for the protection of Options in the event of
mergers, consolidations, dissolutions, and liquidations) as the Committee shall
deem advisable.
(b) Option Price: The price at which Common Stock may be
purchased upon exercise of an Option shall be determined by the Committee in
accordance with its rules, or, in their absence, by the Committee's discretion.
2
<PAGE>
(c) Terms of Options: The Option agreements shall specify when an
Option may be exercisable and the terms and conditions applicable in the event
of the Awardee's termination of employment during the Option's term.
(d) Incentive Stock Option: Each provision of the Plan and each
Option agreement relating to an Incentive Stock Option shall be construed so
that each Incentive Stock Option shall be an incentive stock option as defined
in Section 422A of the Internal Revenue Code of 1986, as amended, or any
statutory provision that may replace such Section, and any provisions thereof
that cannot be so construed shall be disregarded. In no event may an Awardee be
granted Incentive Stock Options which do not comply with such grant and vesting
limitations as may be prescribed by Section 422A(b)(7) of the Internal Revenue
Code of 1986 as amended, or any successor section or limitation and any
implementing regulations.
(e) Payment of Option Price: The Option price of the shares of
Common Stock for which an Option shall be exercised shall be paid in full in
cash at the time of the exercise or, with the consent of the Committee, in whole
or in part in other consideration. An Awardee shall have no rights of a
shareholder with respect to any shares of Common Stock subject to an Option
unless and until a stock certificate for such shares shall have been issued to
him or her.
7. Director Options Rules and Conditions. Each incumbent director shall
receive at the Plan's effective date, and thereafter, each director who is not
an incumbent director shall receive upon his election and qualification (subject
to paragraph (a) below) Non-Qualified Options to purchase shares of Common Stock
equal to three tenths of one percent (0.3%) of the total number of the
outstanding shares of Common Stock. The grant is further subject to the
following rules and conditions:
(a) Director Option Grants: Director Options shall be evidenced
by a Director Option agreement providing for the grant as of the effective date
of the Plan or the date of the director's election and qualification, as the
case may be, provided that the Committee (excluding the director, if he or she
is a member) may defer the grant for up to six months from such date. The
agreements shall conform to the requirements of the Plan and may contain such
other provisions (including methods of option exercises and provisions for
protection of the Director Options in the event of mergers, consolidations,
dissolutions, and liquidations) as the Committee shall deem advisable.
(b) Director Option Price: The Committee shall determine the
exercise price of a Director Option, provided that the exercise price shall be
not less than the lowest Fair Market Value of the Common Stock at date of grant.
(c) Terms of Director Options: The Director Option agreements
shall specify when a Director Option may be exercisable and the terms and
conditions applicable in the event of the director's termination of service
during the Director Option's term.
(d) Payment of Director Option Price: The price of the shares of
Common Stock for which a Director Option shall be exercised shall be paid in
full in cash at the time of the exercise or, with the consent of the Committee
(excluding the exercising director, if he or she is a member), in whole or in
part in other consideration including Common Stock or Restricted Stock valued at
Fair Market Value. A director shall have no voting rights with respect to any
shares of Common Stock subject to Director Options unless and until a stock
certificate for such shares shall have been issued to him or her, but may have
such other rights and privileges as the Committee provides in the Director
Option Agreement.
(e) Further Restrictions. The Committee may restrict the
Director Option agreements so that the Plan will qualify for exemption from
the provisions of Section 16(b) of the Act.
(f) Exclusivity. The Director Options shall not be the
exclusive means by which the Company may compensate its directors.
8. Restricted Stock Rules and Conditions. The grant of Restricted
Stock shall be upon the following rules and conditions:
(a) Restricted Stock Grants: Restricted Stock shall be evidenced
by Restricted Stock agreements. The agreements shall conform to the requirements
3
<PAGE>
of the Plan and may contain such other provisions (including provisions for the
protection of Restricted Stock in the event of mergers, consolidations,
dissolutions, and liquidations, affecting either the agreement or the stock
issued thereunder) as the Committee shall deem advisable.
(b) Issuance of Restricted Stock: Upon determination of the
number of shares of Restricted Stock to be granted to an Awardee, the Committee
shall direct that a certificate representing the number of shares of Common
Stock be issued to the Awardee with the Awardee as the registered owner. The
certificate representing such shares shall either be legended to restrict the
sale, transfer, assignment, pledge, or other encumbrances during the restricted
period or deposited by the Awardee, together with a stock power endorsed in
blank, with the Company.
(c) Dividends and Voting Rights: During the restricted
period the Awardee shall have the right to receive dividends from and to vote
the shares of Restricted Stock.
(d) Delivery: The Restricted Stock agreement shall specify the
duration of the restricted period and the performance and/or employment
conditions under which the Restricted Stock may be forfeited to the Company. At
the end of the restricted period the restrictions imposed hereunder shall lapse
with respect to the number of shares of Restricted Stock as determined by the
Committee, and the legend may be removed or the shares delivered, as the case
may be, with respect to such number. The Committee may, in its sole discretion,
modify or accelerate the vesting of shares of Restricted Stock.
(e) Directors' Restricted Stock. Directors may receive, in lieu
of some or all of their authorized cash compensation, Restricted Stock awards
having a value not greater than the cash foregone, with the Committee's consent
(excluding the electing director, if he or she is a member). The awards shall
have such terms and conditions as the Committee shall determine in its
discretion.
9. Stock Appreciation Rights. The grant of Stock Appreciation Rights
("SARs") shall be subject to the following rules and conditions:
(a) Stock Appreciation Right Grants: Stock Appreciation Rights
are rights to receive a payment in cash, Common Stock, Restricted Stock, or
other Equity-Based Awards as selected by the Committee. These rights, which are
determined by the appreciation in Common Stock, shall be evidenced by Stock
Appreciation Rights agreements. Such agreements shall conform to the
requirements of the Plan and may contain such other provisions as the Committee
shall deem advisable. SARs may be granted in tandem with all or a portion of a
related Option under the Plan ("Tandem SARs"), or may be granted separately
("Freestanding SARs"). Tandem SARs may be granted either at the time of the
grant of the option or at any time thereafter during the term of the option and
shall be capable of being exercised only to the extent that the related stock
option is capable of being exercised. If held by an Awardee subject to Section
16(b) of the Act, Freestanding SARs shall not be exercisable within the first
six months of its grant, or in the case of Tandem SARs, within the first six
months of the grant of the related Option.
(b) SAR Price: The exercise price of a Tandem SAR shall be the
option price under the related Option. The exercise price of a Freestanding SAR
shall be determined by the Committee. Notwithstanding the foregoing, the
Committee may unilaterally limit the appreciation in value of the Common Stock
attributable to the SAR at any time prior to its exercise.
(c) Exercise of SARs: Tandem SARs and Freestanding SARs shall
entitle the Awardee to receive a payment equal to the excess of the fair market
value of the shares of Common Stock covered by the SARs on the date of exercise
over the exercise price of the SARs or such lesser amount as determined by the
Committee. Such payment may be in cash, in shares of Common Stock, or Restricted
Stock, or any combination, as the Committee shall determine. Upon exercise of
Tandem SARs as to some or all of the shares covered by the grant, the related
Option shall be cancelled automatically to the extent of the number of shares
covered by such exercise. Conversely, if the related Option is exercised as to
some or all of the shares covered by the grant, the related Tandem SARs, if any,
shall be cancelled automatically to the extent of the number of shares covered
by the Option exercise. To the extent an SAR (or the related Option) has not
been exercised on its expiration, it will be exercised automatically and paid in
the form determined by the Committee.
4
<PAGE>
(d) Terms of SARs: SARs shall be subject to the terms and other
conditions imposed by Rule 16(b)-3 of the Act, if the SARs are granted to an
Awardee who is subject to Section 16(b) of the Act. SARs shall also be subject
to such other terms and conditions not inconsistent with the Plan as shall be
determined by the Committee.
10. Equity-Based Awards. The grant of Equity-Based Awards shall
be upon the following rules and regulations:
(a) Equity-Based Awards: The Committee may grant awards which are
valued, in whole or in part, by reference to or otherwise based on the Common
Stock. All grants shall be evidenced by written agreements which conform to the
requirements of the Plan and may contain such other provisions as the Committee
shall deem advisable.
(b) In Conjunction With Other Awards: Any Equity Based Award may
be granted alone, in addition to, or in tandem with Restricted Stock, Options,
SARs, or other Equity-Based Awards as the Committee may determine.
11. Adjustments Upon Changes in Capitalization. In the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation or any other change in the corporate structure of
the Company affecting Common Stock, or a sale by the Company of all or part of
its assets, or any distribution to shareholders other than a normal cash
dividend, the Board of Directors shall make appropriate adjustment in the number
and kind of shares authorized by the Plan and any adjustments to outstanding
Awards as it determines appropriate. No fractional shares of Common Stock shall
be issued pursuant to such an adjustment, however, and the Fair Market Value of
any fractional shares resulting from adjustments pursuant to this section shall
be paid in cash to the Awardee.
12. Effective Date; Termination and Amendment. The Plan shall become
effective on April 18, 1997, subject to shareholder approval. The Plan shall
remain in full force and effect until terminated by the Board of Directors, who
shall have the power to amend, suspend or terminate the Plan at any time.
13. Forfeiture. Awards may be forfeited if the Awardee terminates his or
her employment or contractual relationship with the Company or an Affiliate for
any reason other than death or retirement, except that the Committee shall have
the authority to provide for the Award's continuation in whole or in part
whenever it shall determine that such continuation is in the best interests of
the Company. Awards may furthermore be forfeited by an Awardee if the Committee
determines that the Awardee has at any time engaged in any activity harmful to
the interest of or in competition with the Company or Affiliates or accepts
employment with a competitor.
14. Transferability. Unless otherwise restricted in the Award agreement,
an Awardee may assign or transfer an Award to any relative or spouse, or any
relative of such spouse, provided such relative is no further removed than the
fourth degree; to any trust or estate in which the Awardee, relative, spouse, or
combination thereof have a beneficial interest of 10% or more; to any
corporation or other organization in which the Awardee, relative, spouse, or
combination thereof have a beneficial interest of 10% or more; or to any other
person or entity if the Committee permits.
15. Beneficiary Upon Awardee's Death. An Awardee's Award shall be
transferable at his or her death to the beneficiary designated by the Awardee on
forms prescribed by and filed with the Committee. Upon the death of an Awardee,
such beneficiary shall succeed to the rights of the Awardee. If no such
designation of a beneficiary has been made, the Awardee's Awards shall succeed
to his or her legal representative and shall be transferable by will or pursuant
to the laws of descent and distribution.
16. Incorporation of Existing Plans. The Company's existing equity-based
compensation plans -- the 1994 and 1995 Stock Option Plans, and all existing
stock option agreements -- shall be incorporated into this Plan and made a part
of it and be considered subject and entitled to all of its obligations and
privileges, as if such plans had been originally adopted and made under this
Plan. Approval by the Company's shareholders of this Plan shall presume their
approval of all incorporated plans.
5
<PAGE>
17. General Provisions.
(a) Nothing contained in the Plan, or in any Award granted
pursuant to the Plan, shall confer upon any Employee any right of continued
employment by the Company or Affiliate, nor alter the right of the Company or
Affiliate to terminate the Employee's employment at any time with or without
cause.
(b) For purposes of this Plan, transfer of employment between the
Company and its Subsidiaries and Affiliates shall not be deemed termination of
employment.
(c) Nothing in this Plan, or in any Award granted pursuant to
this Plan, shall confer upon any non-Employee Agent any right of continued
relationship with the Company or Affiliate, or alter the relationship between
them, including any right of the Company or Affiliate to terminate its
relationship with the non-Employee Agent.
(d) Appropriate provision may be made for all taxes required to
be withheld in connection with any Award, the exercise thereof and the transfer
of shares of Common Stock in respect of any Federal, state, or local withholding
taxes whether domestic or foreign. In the case of the payment of Awards in the
form of Common Stock, the Company shall have the right to retain the number of
shares of Common Stock whose fair market value equals the amount to be withheld.
(e) If any day on or before which action under the Plan must be
taken falls on a Saturday, Sunday or legal holiday, such action may be taken on
the next succeeding day not a Saturday, Sunday or legal holiday.
(f) Without amending the Plan, awards may be granted to Agents
who are foreign nationals or employed outside the United States or both, on such
terms and conditions different from those specified in the Plan as may, in the
judgment of the Committee, be necessary or desirable to further the purpose of
the Plan.
(g) To the extent that Federal laws (such as the Securities
Exchange Act of 1934, the Internal Revenue Code of 1986, or the Employee
Retirement Income Security Act of 1974) do not otherwise control, the Plan and
all determinations made and actions taken pursuant hereto shall be governed by
the law of Oklahoma and construed accordingly.
(h) The Committee may amend or substitute any outstanding Awards
to the extent it deems appropriate. Such amendment or substitution may be
unilateral by the Company, provided that Award substitutions shall be for
comparable value.
(i) The Committee may defer or permit an Awardee to defer the
receipt of consideration under an Award pursuant to such rules as the Committee
may promulgate or as provided in an Award agreement. The Committee may provide
in Award agreements for the receipt of interest, dividends, or other
consideration which would have been received on the Common Stock underlying or
tied to the Award.
(j) Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(l)(a) The restrictions and limitations applicable to any
Director Options, Options, Restricted Stock, and other Equity-Based Awards, in
each case to the extent not already vested under the Plan, shall lapse and such
shares and awards shall be deemed fully vested;
(l)(b) Any SARs outstanding for at least six months and any
Director Options and Options awarded under the Plan not previously exercisable
and vested shall become fully exercisable and vested;
(l)(c) The value of all outstanding Director Options, Options,
SARs, Restricted Stock, and other Equity-Based Awards, in each case to the
extent vested, shall unless otherwise determined by the Committee in its sole
discretion at or after grant but prior to any Change in Control, be cashed out
on the basis determined by the Committee as of the date such Change in Control
is determined to have occurred or such other date as the Committee may determine
prior to the Change in Control.
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<PAGE>
(2) Definition: "Change in Control" shall mean a change in
control of the Company of a nature that would be required to be reported in
response to Item 5(f) of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Company is then subject to such reporting requirement; provided that,
without limitation, a Change in Control shall be deemed to have occurred if (A)
any individual, partnership, firm, corporation, association, trust,
unincorporated organization, or other entity, or any syndicate or group deemed
to be a person under Section 14(d)(2) of the Act, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the
Act), directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the company's then outstanding securities
entitled to vote in the election of directors of the Company; or (B) during any
period of two (2) consecutive years (not including any period prior to the
execution of this Plan), individuals who at the beginning of such period
constitute the Board of Directors and any new directors, whose election by the
Board of Directors or nomination for election by the Company's shareholders was
approved by a vote of at least three quarters (3/4) of the directors then still
in office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved, cease for any
reason to constitute a majority thereof. A change in control shall not be deemed
to be a Change in Control for purposes of this Plan if the Board of Directors
has approved such change in control prior to either (i) the occurrence of any of
the events described in the foregoing clauses (A) and (B), or (ii) the
commencement by any person other than the Company of a tender offer for the
Common Stock.
7
AGREEMENT FOR PURCHASE AND SALE OF ASSETS
This AGREEMENT FOR PURCHASE AND SALE OF ASSETS, hereafter referred to
as the "Agreement", is made this _______ day of May, 1997, by and between Kirby
Bond, a single man, hereafter referred to as "Buyer", and Western Country Clubs,
Inc., a Colorado corporation, hereafter referred to as "Seller".
RECITALS:
A. WHEREAS, Seller is the owner of the issued and outstanding
stock of WCWW Acquisition Corporation, an Arizona corporation, which is the
owner of the following:
1. that certain State of Arizona Bar License, number 06100208,
hereafter referred to as the "License", and
2. the furniture, fixtures and equipment used with the License, as
set forth on the attached Equipment List.
The items listed as 1 and 2 of this paragraph A are hereafter referred to as the
"Assets".
B. WHEREAS, Seller desires to sell the Assets to Buyer and Buyer
desires to purchase the Assets from Seller on the terms and subject to the
conditions of this Agreement, and
C. WHEREAS, Seller is also the tenant of the following:
1. that certain real property located at 4385 West Ina Road,
Marana, Arizona leased from 4385 W. Ina Partners which is used for the operation
of the Business, hereafter referred to as the "Ina Partners Lease".
2. that certain real property located at 7045 North Camino
Martin leased from Buckaroos, Inc., a New Mexico corporation, which is used to
provide parking space for the patrons of the Business, hereafter referred to as
the "Buckaroos Parking Lease".
D. WHEREAS, the parties agree that Buyer shall obtain a new lease
from 4385 W. Ina Partners for the property at 4385 West Ina Road, Marana,
Arizona, and
E. WHEREAS, Seller desires to assign to Buyer the Buckaroos Parking
Lease.
TERMS AND CONDITIONS:
In consideration of the mutual covenants, agreements, representations,
and warranties contained in this Agreement, the parties agree as follows:
ARTICLE ONE
PURCHASE AND SALE OF ASSETS
1.01 Sale of Assets. Subject to the terms and conditions set forth in
this Agreement Seller agrees to sell, convey, transfer, assign, and deliver to
Buyer, and Buyer agrees to purchase from Seller, the Assets described in
paragraph A.
1.02 Consideration. As full payment for the sale of the Assets from
Seller to Buyer, Buyer shall pay to Seller the amount of Three Hundred
Twenty-five Thousand Dollars ($325,000.00) as follows:
(a) One Hundred Thousand Dollars ($100,000.00), which
shall be paid to Seller on May 3, 1997.
<PAGE>
(b) Thirty Thousand Dollars ($30,000.00), which shall be paid
to Seller at the rate of Ten Thousand Dollars ($10,000.00) per
month for the months of June, July and August 1997.
(c) One Hundred Ninety-five Thousand Dollars ($195,000-00) by
a Promissory Note payable to Seller, with interest at the
annual rate of eight per cent (8%) calculated from October 1,
1997, with monthly payments in the amount of Seven Thousand
Five Hundred Dollars ($7,500.00), beginning November 1, 1997,
all principal and interest due and payable at the end of
twenty-four months from October 1, 1997.
The purchase price of Three Hundred Twenty-five Thousand Dollars ($325,000.00)
shall be allocated as follows:
Equipment $290,000.00
License $35,000.00
The foregoing allocations shall be binding upon the parties. Seller and Buyer
shall utilize the allocations for federal and state tax reporting requirements.
1.03 Security Interest. To secure his performance due under the
Promissory Note, Buyer shall grant to Seller a Security Interest in the Assets.
Buyer shall document the Security Interest in the form of a Security Agreement.
Buyer shall also execute an appropriate UCC Financing statement for filing with
the Arizona Secretary of State and Statement of Legal or Equitable Interest for
filing with the Arizona Department of Liquor Licenses and Control.
ARTICLE TWO
LEASE
2.01 Lease. Buyer is responsible to enter into a new lease with 4385
W. Ina Partners for the lease of the property at 4385 West Ina Road, Marana,
Arizona. Seller shall assign to Buyer its obligations under the Buckaroos
Parking Lease.
ARTICLE THREE
3.01 Resolution of Consulting Agreement. The parties agree to resolve
on terms mutually agreeable the Consulting Agreement previously made in
1994 between Seller and Buyer.
ARTICLE FOUR
Buyer's Legal Entity
4.01 Entity. Buyer may establish a corporation, limited liability
company or other entity to take title to the Assets and to be the Tenant under
the Lease to be made with 4385 W. Ina Partners and to be the Assignee of the
Buckaroos Parking Lease.
ARTICLE FIVE
EXCLUSIONS AND CONDITIONS
5.01 Tradename. The tradenames of the Business, "Stampede" and
"Acapulco Joe's", including any and all goodwill associated therewith are
specifically excluded from the Assets being sold hereunder from Seller to Buyer.
No property other than the Assets are being sold under this Agreement.
<PAGE>
5.02 Seller's Liabilities. Seller shall be responsible for all
liabilities incurred prior to May 3, 1997, the date for Transfer of Possession.
on or before Transfer of Possession, Seller shall terminate any contracts or
agreements affecting the Assets being sold hereunder. Buyer shall not be
responsible for any liability incurred by Seller prior to Closing. Buyer shall
assume no liabilities owed by Seller. If Seller refuses to discharge a liability
owed by it and if Buyer is required to satisfy an obligation owed by Seller
after Seller's refusal to pay the same, then Buyer may offset any payments made
out of any monies owed from Buyer to Seller under the Promissory Note. This
provision shall survive the Closing of this Agreement.
5.03 Inspection. Buyer may inspect and approve the Assets and
the Premises, including the items comprising the Equipment List.
5.04 Risk of Loss or Damage. Until the Transfer of Possession, all
risk of loss or damage to the Assets or the Premises shall be Seller's
responsibility. Buyer shall assume all risk of loss or damage to the Assets or
the Premises following the Transfer of Possession.
5.06 Continuity of Business operations. From the execution of this
agreement until the Transfer of Possession, Seller agrees to continue to operate
the Business in its usual and customary course. Seller agrees to conduct its
Business in accordance with sound and prudent business practices.
5.07 Seller's Employees. Any agreements, contracts or other
understandings made between Seller and its employees shall remain the obligation
of Seller. Upon its execution of this Agreement, Seller shall inform its
employees of the sale of the Business hereunder. Buyer shall have no obligations
of any kind to Seller's employees. At his sole discretion, Buyer may elect to
retain none, some or all of Seller's employees.
ARTICLE SIX
REPRESENTATIONS AND WARRANTIES OF-SELLER
6.01 Condition of Assets. Seller represents that it may lawfully
transfer the License to Buyer. Seller makes no warranty or guarantee with regard
to the condition of the items on the Equipment List and Buyer is acquiring the
Assets in their "WHERE IS-AS IS" condition.
6.02 Title. Seller is the owner, beneficially and of record, of all
the Assets. This provision shall survive the Closing of this Agreement.
6.03 Other Property. The Equipment List to be prepared and attached to
this Agreement is a complete and accurate schedule describing, and specifying
the location of all equipment, furniture, and trade fixtures owned by, in the
possession of, or used by Seller in connection with its business.
6.04 Real Property. Nothing in this Agreement purports to convey
any interest, by lease, deed or any other instrument, in the property at 4385
West Ina Road, Marana, Arizona. Buyer acknowledges that he will be required to
obtain a new lease.
6.05 Compliance with Laws. To the best of its knowledge, Seller has
complied with, and is not in violation of, applicable federal, state or local
statutes, laws, and regulations (including, without limitation, any applicable
building, zoning, or other law, ordinance, or regulation) affecting the Assets,
the property at 4385 West Ina Road, Marana, Arizona or the operation of its
Business. Seller further warrants that the Business is or will be in full
compliance with all applicable laws, rules and any other regulations affecting
the Business until the Closing. This provision shall survive the Closing of this
Agreement.
6.06 Litigation. There is no suit, action, arbitration, or legal,
administrative, or other proceeding, or governmental investigation pending, to
the best of Seller's knowledge, threatened, against or affecting Seller or its
<PAGE>
Business or the Assets. Seller is not in default with respect to any order,
writ, injunction, or decree of any federal, state, local, or foreign court,
department, agency, or instrumentality.
ARTICLE SEVEN
OBLIGATIONS BEFORE CLOSING
7.01 Access to Assets. Buyer and his counsel, accountants, and other
representatives shall have full access during normal business hours to inspect
any or all of the Assets.
7.02 Information. Buyer and his counsel, accountants, and other
representatives shall be provided with any information requested from Seller
pertaining to the triple net expenses of the property at 4385 West Ina Road,
Marana, Arizona, including real property taxes, fire insurance and maintenance.
7.03 Insurance - Until the date for Transfer of Possession, Seller will
continue to carry and maintain its existing policies of insurance. Seller agrees
to provide Buyer with copies of existing insurance policies so that Buyer may
elect whether to continue or to substitute carriers.
7.04 Permits and Certificates. Until the date for Transfer of
Possession, Seller shall maintain and keep current all permits, licenses and
certificates required in connection with the operation of the Business or the
occupancy of the Premises.
ARTICLE EIGHT
BUYER'S OBLIGATIONS BEFORE CLOSING
8.01 Confidentiality. Buyer agrees that, unless and until the Closing
has been consummated, Buyer, his employees and other representatives will hold
in strict confidence and will not use to the detriment of Seller any data or
information obtained in connection with this agreement with respect to Seller's
Business, the Assets or the property at 4385 West Ina Road, Marana, Arizona.
ARTICLE NINE
CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
9.01 Buyer's Warranties. All representations and warranties by Buyer
contained in this Agreement or in any written statement delivered by Buyer under
this Agreement shall be true on and as of the closing as though such
representations and warranties were made on and as of that date.
9.02 Buyer's Performance Buyer shall have paid the sum of one Hundred
Thirty Thousand Dollars ($130,000.00) in the manner provided herein and shall
have given to Seller a Promissory Note in the amount of One Hundred Ninety-five
Thousand Dollars ($195,000.00) payable in the manner specified in this
Agreement.
ARTICLE TEN
TRANSFER OF POSSESSION
10.01 Seller's obligations. On the date for Transfer of Possession,
Seller shall deliver or cause to be delivered to Buyer:
(a) A bill of sale for the items set forth in the Equipment
List.
(b) All keys needed or required to operate the items set
forth on the Equipment List.
<PAGE>
(c) An assignment of the Lease for the Buckaroos Parking
Lease.
(d) Physical possession to the Premises, including all keys
to all doors.
(e) Any and all permits, licenses and certificates
required by any governmental agency which are
necessary for Buyer to operate a bar business.
10.02 Buyer's Obligations. On the date for Transfer of Possession,
Buyer shall deliver or cause to be delivered to Seller:
(a) A cashier's check in the amount of One Hundred Thousand
Dollars ($100,000.00).
(b) A Promissory Note in the amount of One Hundred
Ninety-five Thousand Dollars ($195,000.00) payable
in the manner specified in this Agreement.
(c) An assignment of the Buckaroos Parking Lease.
10-03 Transfer of-Possession. "Transfer of Possession" shall occur
on or before May 3, 1997, at a time to be mutually agreed upon by the parties
hereto.
ARTICLE ELEVEN
MISCELLANEOUS
11.01 Additional Acts or Documents. Buyer and Seller agree to execute
and deliver any other additional documents as may be necessary to complete the
transactions contemplated by this Agreement.
11.02 Broker. Buyer and Seller represent and warrant that neither of
them has retained the services of any broker or agent in connection with the
transaction contemplated by this Agreement to whom any compensation, fee or
commission would be owing. In the event any party hereto has retained the
services of an agent or broker to whom any compensation, fee or commission is or
becomes owing, the party retaining such services shall be solely responsible to
pay any amount owing to such agent or broker in arranging the transaction
contemplated by this Agreement.
11.03 Expense. The parties shall each pay one-half of the costs and
expenses incurred or to be incurred by it in negotiation and preparing this
Agreement and in closing and carrying out the transactions contemplated by this
Agreement.
11-04 Headings. The subject headings of the Sections and Subsections of
this Agreement are included for purposes of convenience only, and shall not
affect the construction or interpretation of any of its provisions.
11.05 Modification and Waiver. This Agreement constitutes the entire
agreement between parties pertaining to the subject matter contained in it and
supersedes all prior and contemporaneous agreements, representations, and
understandings of the parties. No supplement, modification, or amendment of this
Agreement shall be binding unless executed in writing by all the parties. No
waiver of any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provisions, whether or not similar, nor shall
any waiver constitute a continuing waiver. No waiver shall be binding unless
executed in writing by the party making the waiver.
11.06 Counterparts. This Agreement may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instruments.
11.07 Rights of Parties. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reasons of
this Agreement on any persons other than the parties to it and their respective
<PAGE>
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over against any party to this Agreement.
11.08 Assignment. This Agreement shall be binding on and shall inure to
the benefit of the parties thereto and their respective heirs, legal
representatives, successors, and assigns.
11.09 Specific Performance. The parties agree that the obligations owed
under this Agreement are unique. If either party should default in its
obligations under this Agreement, the parties acknowledge that it would be
extremely impracticable to measure the other party's resulting damages.
Accordingly, in addition to any other rights or remedies available at law, the
non-defaulting party may sue the party claimed to be in default in equity for
specific performance. Each party expressly waives the defense that a remedy in
money damages should be adequate for the other party in this transaction.
11.10 Notices. All notices, requests, demands, and other communications
under this Agreement shall be in writing and shall be deemed to have been duly
given on the date of service if served personally on the party to whom notice is
to be given, or on the third day after mailing, if mailed to the party to whom
notice is to be given, by first class mail, registered or certified, postage
prepaid, and properly addressed as follows:
To Seller at:
1601 N.W. Expressway, Suite 1610 Oklahoma City, Oklahoma 73118
To Buyer at:
Kirby Bond
C/o Rockin' Rodeo
3745 Rosedale Highway
Bakersfield, California 93308
Any party may change its address for purposes of this Section by giving the
other parties written notice of the new address in the manner set forth above.
11.11 Governing @w. This Agreement shall be construed in accordance
with and governed by the laws of the State of Arizona and the parties hereto
submit to the jurisdiction of the courts of the State of Arizona in the event
any action or dispute arising herefrom.
11.12 Time. Time is of the essence of this agreement and each and
every provision herein.
IN WITNESS WELEREOF, the parties to this Agreement have duly executed
it on the day and year first above written.
BUYER SELLER:
Western Country Clubs, Inc.
/s/Kirby Bone By /s/ James E. Blacketer
- ------------- -------------------------
Kirby Bone James E. Blacketer
President
Western Country Clubs, Inc.
Calculation of Earnings per Share
December 31, 1996
BASIC EARNINGS (LOSS) PER SHARE:
<TABLE>
<CAPTION>
Weighted
Shares Days Average
Date Outstanding Outstanding Shares
---- ----------- ----------- ------
<S> <C> <C> <C> <C>
Common Shares Outstanding at December 31, 1995 ......... 12/31/95 2,944,721 365 2,944,721
Common Stock issued for cash in private placement ...... 07/30/96 87,200 154 36,791
Common Stock issued for cash in private placement ...... 07/30/96 8,000 154 3,375
Common Stock issued pursuant to stock compensation plan 07/30/96 80,000 154 3,375
Common Stock issued in acquisition of Kansas corporation 12/16/96 400, 000 15 16,438
---- --- -- ------
Shares Outstanding at December 31, 1996 3,519,921 3,035,079
========= =========
Loss before Extraordinary item (1,979,176)
Extraordinary item 65,730
------
Net earnings (loss) (1,913,446)
==========
Loss before Extraordinary item ($0.65)
Extraordinary item $0.02
-----
Basic earnings (loss) per share ($0.63)
=======
</TABLE>
PRIMARY EARNINGS (LOSS) PER SHARE:
INCLUSION OF THESE SECURITIES WOULD BE ANTIDULTIVE
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
THERE ARE NO SECURITIES IN THE COMPUTATION OF FULLY DILUTE EPS
Western Country Clubs, Inc.
Calculation of Earnings per Share
March 31, 1997
BASIC EARNINGS (LOSS) PER SHARE:
<TABLE>
<CAPTION>
Weighted
Shares Days Average
Date Outstanding Outstanding Shares
---- ----------- ----------- ------
<S> <C> <C> <C> <C>
Common Shares Outstanding at December 31, 1996 ......... 12/31/96 3,519,921 90 3,519,921
Common Stock issued for stock of Cowboys Inc ........... 02/06/97 114,800 53 67,604
-------- -- ------
Shares Outstanding at March 31, 1997 3,634,721 3,587,525
========= =========
Net earnings (loss) (82,044)
========
Basic earnings (loss) per share ($0.02)
=======
</TABLE>
PRIMARY EARNINGS (LOSS) PER SHARE:
INCLUSION OF THESE SECURITIES WOULD BE ANTIDULTIVE
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
THERE ARE NO SECURITIES IN THE COMPUTATION OF FULLY DILUTE EPS
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.
May 20, 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.
May 20, 1997 Gross Collins + Cress, P.C.
