U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission File Number: 0-24058
WESTERN COUNTRY CLUBS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1131343
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1601 NW Expressway, Suite 1610
Oklahoma City, Oklahoma 73118
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (405) 848-0996
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for at
least the past 90 days. Yes [X] No [ ]
Shares of Common Stock, $.01 par value,
outstanding as of August 13, 1999 3,784,721
Traditional Small Business Disclosure Format: Yes [X] No [ ]
<PAGE>
WESTERN COUNTRY CLUBS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Condensed Balance Sheet - June 30, 1999
Consolidated Condensed Statements of Income -
For the Three Months and Six Months Ended June 30, 1999 and 1998
Consolidated Condensed Statements of Stockholders Equity -
For the Three Months and Six Months Ended June 30, 1999 and 1998
Consolidated Condensed Statements of Cash Flows -
For the Three Months and Six Months Ended June 30, 1999 and 1998
Notes to Consolidated Condensed Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Exhibits and Reports on Form 8-K
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash $ 178,057
Accounts receivable 48,690
Notes and loans receivable 775,148
Notes receivable from related parties 177,340
Inventories 86,209
Prepaid expenses 20,971
Deferred income taxes 102,000
-------------
Total Current Assets 1,388,415
PROPERTY AND EQUIPMENT, at cost
Land and improvements 77,010
Leasehold improvements 1,914,091
Equipment 676,133
Furniture and fixtures 417,984
-------------
3,085,218
Less accumulated depreciation (1,275,174)
-------------
NET PROPERTY AND EQUIPMENT 1,810,044
OTHER ASSETS:
Deferred income taxes 265,740
Goodwill, net of amortization 3,710
Deposits and other 152,993
Investments 86,589
-------------
Total other assets 509,032
Total Assets $ 3,707,491
=============
</TABLE>
See accompanying notes.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED BALANCE SHEET
(UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 295,405
Accrued expenses 337,718
Notes payable - related parties 58,730
Notes payable 657,836
-------------
Total current liabilities 1,349,689
-------------
Minority Interests 318,980
-------------
Stockholders' Equity
Preferred Stock (Note 2) 400,000
Common Stock, $.01 par value; 25,000,000 shares
authorized, 3,784,721 shares issued and outstanding 37,847
Additional paid in capital 4,398,239
Retained (deficit) (2,797,264)
-------------
Total stockholders' equity 2,038,822
-------------
Total liabilities and stockholders' equity $ 3,707,491
=============
</TABLE>
See accompanying notes.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Beverage and food sales $ 1,345,258 $ 731,983 $ 2,269,633 $ 1,560,165
Admission fees 401,185 307,095 763,012 648,585
Other revenues 136,925 105,698 235,685 198,076
Sale of partnership
interest (Note 3) -- -- -- 220,000
Gain on sale of assets (Note 3) -- -- 100,000 64,861
------------ ------------ ------------ ------------
TOTAL REVENUES 1,883,368 1,144,776 3,368,330 2,691,687
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of products and services 511,068 270,246 824,731 554,855
Depreciation and amortization 87,760 67,687 155,486 135,135
Interest 12,591 8,105 20,694 21,124
General and administrative expense 1,316,638 772,410 2,237,518 1,554,722
------------ ------------ ------------ ------------
TOTAL COSTS AND
EXPENSES 1,928,057 1,118,448 3,238,429 2,265,836
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE TAXES
AND MINORITY INTERESTS (44,689) 26,328 129,901 425,851
INCOME TAX PROVISION (BENEFIT) (15,194) -- 44,166 49,670
CHANGE IN VALUATION ALLOWANCE 15,194 -- (44,166) --
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
MINORITY INTERESTS (44,689) 26,328 129,901 376,181
MINORITY INTERESTS IN NET
(INCOME) LOSS OF
CONSOLIDATED SUBSIDIARIES 16,702 (3,449) 3,909 (28,262)
------------ ------------ ------------ ------------
NET INCOME (LOSS) (27,987) 22,879 133,810 347,919
============ ============ ============ ============
PREFERRED STOCK DIVIDEND -- (14,576) (3,204) (27,200)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (27,987) $ 8,303 $ 130,606 $ 320,719
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE $ Nil $ Nil $ .035 $ .087
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING 3,735,270 3,734,721 3,734,997 3,707,649
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE
ASSUMING DILUTION $ Nil $ Nil $ .032 $ .087
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - ASSUMING 3,735,270 3,734,721 4,121,227 3,707,649
============ ============ ============ ============
DILUTION
Nil --less than $.01 per share
</TABLE>
See acompanying notes.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- Preferred Paid-in Retained Stockholder's
Shares Amount Stock Capital (Deficit) Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 3,634,721 $ 36,347 $ -- $ 4,314,739 $ (3,147,227) $ 1,203,859
Preferred stock issued -- -- 560,000 -- -- 560,000
Common stock issued for
investment 100,000 1,000 -- 49,000 -- 50,000
Preferred stock dividends -- -- -- -- (27,200) (27,200)
Net income for the six months
ended June 30, 1998 -- -- -- -- 347,919 347,919
---------- ---------- ----------- ------------ ------------ ------------
Balance June 30, 1998 3,734,721 $ 37,347 $ 560,000 $ 4,363,739 $(2,826,508) $ 2,134,578
========== ========== =========== ============ ============ ============
Balance December 31, 1998 3,734,721 $ 37,347 $ 545,000 $ 4,363,739 $(2,927,870) $ 2,018,216
Preferred stock redemption -- -- (145,000) -- -- (145,000)
Preferred stock dividends -- -- -- -- (3,204) (3,204)
Issuance of common stock for
payment of debt 50,000 500 -- 34,500 -- 35,000
Net income for the six months
ended June 30, 1999 -- -- -- -- 133,810 133,810
---------- ---------- ----------- ------------ ------------- ------------
Balance June 30, 1999 3,784,721 $ 37,847 $ 400,000 $ 4,398,239 $ (2,797,264) $ 2,038,822
========== ========== =========== ============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 133,810 $ 347,919
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 155,486 135,135
Minority interest in earnings (loss) of subsidiaries (3,909) 28,262
Gain on sales of assets (100,000) (284,861)
Deferred tax provision -- 49,670
Changes in assets and liabilities:
Decrease in accounts receivable 19,113 2,516
(Increase) decrease in inventories (29,695) 4,964
(Increase) decrease in prepaid expenses 84,575 (6,070)
(Increase) in deposits and other assets (112,982) (14,577)
------------ ------------
Increase (decrease) in accounts payable 68,321 (55,229)
Increase (decrease) in accrued expenses 31,379 (21,467)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 246,098 186,262
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital advance for formation of subsidiary (29,189) --
Sale of assets -- 10,000
Receipts on notes receivable 153,090 26,245
Advances on notes receivable (34,000) (87,626)
Purchase of property and equipment (820,030) (7,351)
------------ ------------
NET CASH (USED) BY INVESTING ACTIVITIES (730,129) (58,732)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (169,119) (123,187)
Proceeds from issuance of notes payable 627,500 88,000
Dividends paid on preferred stock (3,204) (27,200)
Partnership distributions to minority interests (3,500) --
Minority interest investments in LLC's 150,000 --
Redemption of preferred stock (145,000) --
------------ ------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 456,677 (62,387)
------------ ------------
NET INCREASE (DECREASE) IN CASH (27,354) 65,143
CASH AT BEGINNING OF PERIOD 205,411 85,949
------------ ------------
CASH AT END OF PERIOD $ 178,057 $ 151,092
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid during the period $ 20,694 $ 8,030
============ ============
Income taxes paid during the period $ -- $ --
============ ============
</TABLE>
See accompanying notes.
<PAGE>
WESTERN COUNTRY CLUBS, INC.
NOTES TO CONSOLIDATED CONDENSED 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 June 30, 1999 and the results of operations
and cash flow for the three and six months ended June 30, 1999 and 1998. 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, 1998. The results of
operations for the three and six months ended June 30, 1999 and 1998 are not
necessarily indicative of the results to be expected for the full year.
Note 2
On January 1, 1998, two notes payable to a major stockholder totaling
$378,275 with accrued interest of $21,725 were converted to 40,000 shares of the
Company's Series A 10% cumulative convertible preferred stock. On February 18,
1998, a note payable of $160,000 was converted to 16,000 shares of the Company's
Series B 12% cumulative convertible preferred stock.
During February 1999, $145,000 of Series B preferred stock was redeemed at
face value. The Company issued 50,000 shares of common stock in payment for
$35,000 of professional fees effective June 30, 1999.
Note 3
Effective January 9, 1998, the Company sold its interest in a limited
partnership for $10,000 in cash and a $210,000 note. Due to extensive losses of
the partnership, the investment in the partnership had been reduced to zero in
1995. The sale resulted in a gain of $192,869, net of the tax effect of $27,131.
On February 6, 1998, the Company sold its Indianapolis club to a major
stockholder of the Company for a $600,000 note and the assumption of $490,426 of
long-term debt and $56,341 of accrued interest and taxes, less $13,000 to be
refunded to the buyer. The sale resulted in a gain of $43,890, net of the tax
effect of $7,999 and minority interests of $12,972.
During March 1999, the Company sold two notes receivable totaling $155,000
plus accrued interest thereon, (previously reserved 100%), for a $100,000 note
receivable due March 25, 2000, bearing interest at 6% per annum. This
transaction resulted in a gain of $100,000.
EXHIBIT 11
WESTERN COUNTRY CLUBS, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------------------------------- -----------------------------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income (loss) $ (27,987) $ 22,879 $ 133,810 $ 347,919
Dividends on preferred stock -- (14,576) (3,204) (27,200)
----------- ----------- ----------- -----------
Net income applicable to common stock $ (27,987) $ 8,303 $ 130,606 $ 320,719
=========== =========== =========== ===========
Shares used in computing basic earnings
per share 3,735,270 3,734,721 3,734,997 3,707,649
=========== =========== =========== ===========
Basic earnings per common share Nil Nil $ 0.035 $ 0.087
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Net income (loss) $ (27,987) $ 22,879 $ 133,810 $ 347,919
=========== =========== =========== ===========
Shares used in computing basic earnings
per share 3,735,270 3,734,721 3,734,997 3,707,649
Effect of shares issuable under:
Conversion of preferred stock * * 44,685 *
Common stock warrants under
treasury stock method * * 204,221 *
Common stock options under
treasury stock method * * 137,324 *
----------- ----------- ----------- -----------
Shares used in computing diluted earnings
per share 3,735,270 3,734,721 4,121,227 3,707,649
=========== =========== =========== ===========
Diluted earnings per common share Nil Nil $ 0.032 $ 0.087
=========== =========== =========== ===========
*Anti-dilutive
Nil - Less than $.01
</TABLE>
<PAGE>
PART 1 - Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-QSB under "Part I, Item 2. Management's
Discussion and Analysis" constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other facts which may cause the actual results, performance or
achievements of Western Country Clubs, Inc. (the "Company") and its nightclubs
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions;
competition; success of operating initiatives; development and operating costs;
advertising and promotional efforts; adverse publicity; customer appeal and
loyalty; availability, locations and terms of sites for the "Atomic Burrito"
concept; changes in business strategy or development plans; quality of
management; availability, terms and development of capital; business abilities
and judgment of personnel; availability of qualified personnel; food, labor and
employee benefit costs; changes in, or the failure to comply with, government
regulations; regional weather conditions; construction schedules; and other
factors. The use in this Form 10-QSB of such words as "believes," "anticipates,"
"expects," "intends," and similar expressions are intended to identify
forward-looking statements, but they are not the exclusive means of identifying
such statements. The success of the Company is dependent on the efforts of the
Company and its management and personnel and the manner in which they operate
and develop the Company's core business of nightclubs and restaurants.
The following discussion and analysis should be read in conjunction with
the Company's unaudited Consolidated Condensed Financial Statements and Notes
thereto appearing elsewhere in this Report.
General
The Company commenced operations in April 1993 with a country-western nightclub
in Indianapolis, Indiana (the "Indy Club"). In April 1994 the company opened a
nightclub in a suburb of St. Louis, Missouri (the "St. Louis Club"). The Company
financed these clubs through limited partnerships in which it was the general
partner. In May 1994 the Company completed its initial public offering of
securities and subsequently purchased the partners' interest in the St. Louis
Club and purchased and/or developed nightclubs in Tucson, Arizona and in
Atlanta, Georgia. Subsequently, all of these clubs except the St. Louis Club
were closed and sold due to a lack of profitability.
Today the Company's focus is on the development of its "Fresh-Mex" restaurant
concept, Atomic Burrito, which the Company began in 1998 through the efforts of
current management. The concept has been successful in the initial restaurants
which have been opened. The Company has also applied for trademark protection
from the United States Trademark and Patent Office, with no final determination
made as of June 30, 1999. As of that date, the Company has five (5) Atomic
Burrito restaurants in operation, three of which are "licensed" to third-party
owner/operators, and the other two being joint-ventures wherein the Company has
a 60% ownership interest. In addition, a sixth Atomic Burrito restaurant is
under construction in Houston, Texas, in which the Company will have a 50%
joint-venture ownership interest. The Company also currently operates two
country-western themed nightclubs known as "InCahoots" in St. Louis and in
Wichita, Kansas.
Current management came into control of the Company in September 1996 when then
President and largest shareholder Troy H. Lowrie entered into a Stock Purchase
Agreement whereby (i) Red River Concepts, Inc., a Delaware corporation ("Red
River"), or its designees would acquire in three installments 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, current Company
President, and Joe R. Love, current Company Board Chairman, both directors at
the time of Red River, were appointed to the Company's Board of Directors. The
change of control was completed in October 1996.
Subsequently, on December 16, 1996, new management acquired a nightclub in
Wichita, Kansas (the "Wichita Club") for 400,000 shares of the Company's Common
Stock and assumption of $150,000 in debt. The Wichita Club was owned in part by
entities affiliated with Blacketer and Love, directors of the Company. See Item
12, "Certain Relationships and Related Transactions."
In June 1998, the Company formed a subsidiary corporation, Atomic Burrito, Inc.
through which to develop its new restaurant concept. Subsequently, Atomic
Burrito, Inc. entered into license agreements for two "Atomic Burrito"
restaurants to be located in Stillwater and in Norman, Oklahoma, and entered
into a third license agreement for a restaurant in Longview, Washington. In
addition, in October 1998, the Company entered into a joint venture agreement
with New York Bagel Enterprises, Inc., ("New York Bagel") for the joint
development of "Atomic Burrito" restaurants. The agreement provides for New York
Bagel to contribute certain of its restaurant locations, including leases,
leasehold improvements and equipment for a 40% interest in the operation, while
the Company would contribute up to $150,000 for the remodel and conversion
costs, as well as for additional necessary equipment. The agreement also
provides for the joint development of a minimum of four and maximum of eight
"Atomic Burrito" restaurants over an 18 month period. The first Atomic Burrito
restaurant pursuant to this agreement opened in March 1999 in Tulsa, Oklahoma,
while the second restaurant opened in April 1999 in Wichita, Kansas.
The Company has also entered into a letter of intent which was announced
publicly on May 10, 1999, whereby the Company intends to acquire substantially
all of the assets of New York Bagel. However, many of the terms of the letter of
intent have been, or are anticipated to be, modified as a result of further
discussions between the Company and New York Bagel. The Company and New York
Bagel are in the process of negotiating the structure of the proposed
transaction, and the consummation of the transaction is subject to many
contingencies, including without limitation, negotiation and execution of a
definitive agreement, approval of the respective Boards of Directors of both
parties to the proposed transaction, approval of the shareholders of New York
Bagel, and completion of due diligence. At June 30, 1999, both companies were
continuing with due diligence and still in negotiations regarding certain terms
of the proposed transaction. There can be no assurance that the proposed
transaction will be consummated.
Liquidity and Capital Resources
As of June 30, 1999, the Company had cash of $178,057, which was generated from
operating activities, financing activities and investing activities. This amount
represents a decrease of $85,585 or 32% from cash at the end of the first
quarter of 1999, which resulted primarily from increased expenditures for the
construction of the Atomic Burrito restaurants in Wichita and in Houston during
the quarter, as well as continuing costs of developing the Atomic Burrito
concept and of hiring and training additional personnel for the future Atomic
Burrito restaurants.
At June 30, 1999, the Company's working capital position (current assets minus
current liabilities) was $38,726 compared to $173,168 at the end of the first
quarter of 1999. This decrease is primarily due to associated costs incurred in
the construction and opening of the Atomic Burrito restaurants in Wichita and
Houston during the quarter, as well as increased payables and short-term
liabilities which resulted therefrom. This is an expected condition due to the
continued construction and development of the Atomic Burrito restaurants, and
management does not believe this decrease in working capital position impairs
the Company's ability to continue its business in a normal course.
Property and equipment primarily consists of assets required for the operation
of the St. Louis and Wichita nightclubs, as well as the two Atomic Burrito joint
ventures in Tulsa and Wichita. Leasehold improvements totaled $1,914,091 at the
end of the quarter; furniture, fixtures and equipment totaled $1,094,087; and
land and improvements totaled $77,010. The furniture, fixtures and equipment
increased by $193,389 during the quarter, which was due primarily to the new
Atomic Burrito restaurants opened and/or under construction during the quarter.
The Company's total liabilities at June 30, 1999 totaled $1,349,689, a slight
increase of $2,035 from March 31, 1999. The total liabilities reflect accounts
payable, accrued expenses and notes payable. The notes payable of $657,836
primarily reflect the Company's borrowings from a bank to finance the
construction of the Tulsa and Houston Atomic Burrito restaurants, as well as
borrowings from a different bank to finance construction of the Wichita Atomic
Burrito restaurant. The Company continues to have no long term debt as of June
30, 1999. The combined total of accounts payable and accrued expenses are
$54,046 less than the total at March 31, 1999, indicative of the Company's
continued ability to pay its bills and expenses.
Based on the results of the second quarter of 1999, company management is
comfortable that the existing operations can adequately support the Company's
debt level and also support future endeavors.
Results of Operations - Quarter Ended June 30, 1999, Compared to
the Quarter Ended June 30, 1998
For the period ended June 30, 1999, total revenue of the Company increased by
$738,592 to $1,883,368 as compared to $1,144,776 for the prior years period.
This increase resulted primarily from the additional revenues generated by the
Tulsa and Wichita Atomic Burrito restaurants, both of which were open during the
quarter, as well as increased revenue from the two nightclubs. The increase in
revenue at the nightclubs is indicative of management's continued improvement of
the operations at the two nightclubs. While it is too early to judge the results
of the Atomic Burrito restaurants, both the Tulsa and Wichita restaurants have
generated revenue that met an/or exceeded management's expectations.
Total costs and expenses during the current period increased by $809,609 to
$1,928,057 as compared with $1,118,448 during the prior period, reflecting the
opening costs associated with the Atomic Burrito restaurants opened during the
quarter, as well as continuing costs of developing the Atomic Burrito concept
and costs of hiring and training additional personnel for the future Atomic
Burrito restaurants. Also, improved operations at the two nightclubs, resulting
in higher income, therefore also resulted in higher expenses at the nightclubs,
thus contributing to the higher total costs and expenses during the quarter.
The Company's net loss for the current period of ($27,987) is slightly less than
the Company's income of $22,879 for the same period a year ago. The primary
reasons for the loss during the quarter were the development costs of the Atomic
Burrito concept, start-up costs and pre-opening and opening expenses of the
Wichita Atomic Burrito restaurant, as well as training and other costs which
were charged during the quarter. Management does not believe that the loss is
material nor does it believe that it reflects any problem with the Company's
nightclub business or the future of the Atomic Burrito concept. Instead,
management believes that the Tulsa and Wichita Atomic Burrito restaurants will
contribute profits form their operations in the future quarters, and the
nightclubs continue to perform well. Management believes that the third quarter
of 1999 will see the Company return to profitability.
Results of Operations - Six Months Ended June 30, 1999 Compared to the Six
Months Ended June 30, 1998.
The Company's results for the first six months of 1999 generally reflect the two
newly opened Atomic Burrito restaurants as well as continued improved results
from the two nightclubs. Revenues for the period increased by $676,643 or 25% as
compared to the same period in 1998, totaling $3,368,330 compared to $2,691,687
for the same period last year. Total costs and expenses for the six months ended
June 30, 1999 also increased to $3,238,429 from $2,265,836 for the same period
in 1998, again reflecting the increased costs and expense of developing the
Atomic Burrito concept and the cost of opening the two Atomic Burrito
restaurants in Tulsa and Wichita, as well as construction of the Houston
restaurant.
The Company's income for the first six months of 1999 of $133,810 compared with
income in the same six months of 1998 of $347,919. This decrease in income can
be partly attributable to the sale in 1998 of a partnership interest owned by
the Company wherein a gain of $220,000 was recognized. Without that gain in
1998, the Company's income for 1999 would reflect a slight increase, again a
real positive trend since the Company had substantial expenses during the first
six months of 1999 in developing the Atomic Burrito concept, as well as in the
opening of the Tulsa and Wichita Atomic Burrito restaurants. These expenses,
many of which are non-recurring, should enable the Company to return to
profitability during the third and fourth quarters of 1999. Management believes
the results of the first six months of 1999 are indicative of the efforts
management has made to develop the Atomic Burrito concept, and management
believe these efforts will, in the future, allow the Company to be profitable.
In addition, management believes that the Atomic Burrito concept will continue
to be developed by the Company and will contribute to the overall profitability
of the Company in future years. The ability of the Company to raise additional
funds for expansion of the Atomic Burrito concept will determine the future
profitability of the Company, and management believes it will be successful in
its efforts to obtain financing for such expansion.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Special Note: Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" for additional factors relating to
such statements.
InCahoots Limited Partnership ("InCahoots"), owner of the Wichita Club, was
a party to a lawsuit claiming negligence on the owner/operator's part, which
action resulted in a jury award in the fall of 1997 in favor of the plaintiff in
the amount of $771,000 plus court costs, expenses and interest. Shortly
thereafter, the partnership's insurance carrier won a declaratory judgment
against the partnership declaring that the carrier was not obligated to provide
coverage against the plaintiff's claims. In February of 1998, the Company and
the partnership entered into an Agreement and "Covenant Not to Execute," whereby
InCahoots agreed to pay the plaintiff $166,808 over two years, plus 100,000
shares of the Company's common stock and 200,000 warrants to purchase the
Company's common stock in exchange for a covenant by the plaintiff not to
attempt collection of the judgment against InCahoots so long as the agreed
payments were made. The Agreement and Covenant allow the plaintiff to pursue
collection of the judgment against the insurance carrier. The Company recorded
settlement costs of $216,808 for the year ended December 31, 1997, to reflect
the impact of this Agreement.
The Company is involved in various other legal actions associated with the
normal conduct of its business operations. No other such actions involve known
material gain or loss contingencies not reflected in the consolidated financial
statements of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On March 31, 1999 at a specially called Meeting of the Shareholders of the
Company, the Shareholders approved a resolution allowing the Board of Directors
of the Company to effect a reverse split of the Company's common stock. The need
for such authority arose from concern of Company management regarding the
Company's ability to continue the listing of its Common Stock on the Nasdaq
SmallCap Market. Subsequent to the shareholder vote, the Company met all
requirements of Nasdaq SmallCap Market for continued listing and no action was
taken by the Company's Board of Directors. However, the authority granted the
Board of Directors to effect such a reverse split of the Company's Common Stock
extended through the end of calendar 1999. At the present time, the Company has
no plans to take any action pursuant to the authority granted by the
Shareholders. However, the Company's Board of Directors continues to monitor the
Company's listing status with Nasdaq SmallCap Market.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
August 13, 1999 Western Country Clubs, Inc.
/s/ James E. Blacketer
-------------------------
By: James E. Blacketer
President and Chief Financial Officer
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