**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

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**FORM 10-QSB**

** **
| **(Mark One)**                                                                                                                                    |                                                                                    |
|---------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------|
| **ý**                                                                                                                                        | **Quarterly report under Section 13  or 15 (d) of the Securities Exchange Act of 1934** |
|                                                                                                                                              |                                                                                    |
| **For the  quarterly period ended September 30, 2002**                                                                                            |
|                                                                                                                                              |                                                                                    |
| **o**                                                                                                                                             | **Transition report under Section 13  or 15 (d) of the Exchange Act**                   |
|                                                                                                                                              |                                                                                    |
| **For the Transition period  from          to        ** |
|                                                                                                                                              |                                                                                    |
| **Commission file number 0-29402**                                                                                                                |

 
| **ON  STAGE ENTERTAINMENT, INC****.**                                               |
|-------------------------------------------------------------------------------------|
| (Exact Name of Small Business Issuer as Specified in Its Charter)                   |
|                                                                                |   |   |
| **NEVADA**                                                                          |   | **88-0214292** |
| (State or Other Jurisdiction of Incorporation or Organization)                      |   | (IRS Employer Identification No.) |
|                                                                                |   |   |
| **4625 W. NEVSO DRIVE, LAS VEGAS,  NEVADA**                                         |   | **89103** |
| (Address of Principal Executive Offices)                                            |   | (Zip Code) |
|                                                                                |   |   |
| **(702) 253-1333**                                                                  |
| Issuer’s Telephone Number, Including Area Code                                 |
|                                                                                |
| (Former Name, Former Address and Former Fiscal Year, if Changed Since  Last Report) |

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

The number of sharesoutstanding of the issuer’s common stock, par value $0.01 per share, as ofNovember 12, 2002, was 11,307,930.

 

Transitional Small Business Disclosure Format (checkone):            Yes o     No  ý

 

 

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**ON STAGE ENTERTAINMENT, INC. AND SUBSIDIARIES**

 

**TABLE OF CONTENTS**

 
| **Part I. Financial  Information** |
|------------------------------------|
|                               | Item 1. | Consolidated  Financial Statements |
|                               | Balance sheets |
|                               | Statements of operations |
|                               | Statements of  cash flows |
|                               | Statements  of stockholders’ equity |
|                               | Notes to  financial statements |
|                               | Item  2. | Management’s  Discussion and Analysis Of Financial Condition and Results of Operations |
|                               | Item 3. | Controls and Procedures |
|                               |   |   |
| **Part II. Other Information**     |
|                               |   |   |
|                               | Item  1. | Legal  Proceedings |
|                               | Item  2. | Changes  in Securities and Use of Proceeds |
|                               | Item 3. | Defaults Upon  Senior Securities |
|                               | Item  4. | Submission  of Matters to a Vote of Security Holders |
|                               | Item  5. | Other  Information |
|                               | Item 6. | Exhibits and  Reports on Form 8-K |
|                               |   |   |
| Signatures                         |   |
| Certifications                     |   |

 

2

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This document containscertain forward-looking statements that are subject to risks anduncertainties.  Forward-looking statements include certain informationrelating to our potential new show openings, the potential markets for ourproductions, the expansion of existing and potential gaming and touristmarkets, exposure to various trends in the gaming industry, acquisition plansand the benefits anticipated from these acquisitions, business strategy,outstanding litigation matters and the available defenses, the seasonality ofour business, and liquidity issues, as well as information contained elsewherein this report where current statements are preceded by, followed by or includethe words “believes,” “expects,” “anticipates” or similar expressions. For these statements, we claim the protection of the safe harbor for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995.The forward-looking statements in this document are subject to risks anduncertainties that could cause the assumptions underlying the forward-lookingstatements and the actual results to differ materially from those expressed inor implied by the statements.

 

3

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**PART I.   FINANCIALINFORMATION**

 

**Item 1.     ConsolidatedFinancial Statements**

 

**On Stage Entertainment, Inc. and Subsidiaries**

**ConsolidatedBalance Sheets**

 
|                                                                                                                                                           |   | **September 30,  2002** |      | **December 31,  2001** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|------------------------|------------|
|                                                                                                                                                           |   | **(unaudited)**         |      |                   | ** ** |
| Assets                                                                                                                                                         |   |                    |      |                   |       |
| Current assets                                                                                                                                                 |   |                    |      |                   |       |
| Cash and cash equivalents                                                                                                                                      |   | $                       | 531,666   |                   | $          | 955,363 |   |
| Accounts receivable, net                                                                                                                                       |   | 636,477                 |      | 650,188                |       |
| Inventory                                                                                                                                                      |   | 102,933                 |      | 90,423                 |       |
| Deposits                                                                                                                                                       |   | 279,480                 |      | 223,601                |       |
| Prepaid and other assets                                                                                                                                       |   | 404,852                 |      | 343,307                |       |
| Due from shareholder                                                                                                                                           |   | 201,001                 |      | 203,318                |       |
|                                                                                                                                                           |   |                    |      |                   |       |
| Total current assets                                                                                                                                           |   | 2,156,409               |      | 2,466,200              |       |
|                                                                                                                                                           |   |                    |      |                   |       |
| Property, equipment and  leasehold improvements                                                                                                                |   | 6,438,696               |      | 7,081,925              |       |
| Less: Accumulated  depreciation and amortization                                                                                                               |   | (5,851,209              | )         | (6,070,919             | )          |
|                                                                                                                                                           |   |                    |      |                   |       |
| Property, equipment and  leasehold improvements, net                                                                                                           |   | 587,487                 |      | 1,011,006              |       |
|                                                                                                                                                           |   |                    |      |                   |       |
| Show rights, net of  accumulated amortization of $375,278 and $189,607                                                                                         |   | 3,180,636               |      | 3,366,307              |       |
|                                                                                                                                                           |   |                    |      |                   |       |
|  Total Assets                                                                                                                                             |   | $                       | 5,924,532 |                   | $          | 6,843,513 |   |
|                                                                                                                                                           |   |                    |      |                   |       |
| Liabilities, Convertible  Preferred Stock, and Stockholders’ Deficit                                                                                      |   |                    |      |                   |       |
| Current liabilities                                                                                                                                            |   |                    |      |                   |       |
| Accounts payable                                                                                                                                               |   | $                       | 478,908   |                   | $          | 205,223 |   |
| Accrued payroll and other  liabilities                                                                                                                         |   | 1,165,679               |      | 1,853,726              |       |
| Convertible debentures,  net of beneficial conversion                                                                                                          |   | 0                       |      | 143,353                |       |
| Short-term note                                                                                                                                                |   | 700,000                 |      | 0                      |       |
| Current maturities of  long-term debt                                                                                                                          |   | 379,347                 |      | 552,662                |       |
|  Total current  liabilities                                                                                                                               |   | 2,723,934               |      | 2,754,964              |       |
| Accrued dividends payable                                                                                                                                      |   | 1,592,000               |      | 758,000                |       |
| Total liabilities                                                                                                                                              |   | 4,315,934               |      | 3,512,964              |       |
|                                                                                                                                                           |   |                    |      |                   |       |
| Commitments and  contingencies                                                                                                                                 |   |                    |      |                   |       |
| Series A Convertible  Preferred Stock, par value $.01 per share, 10,000,000 shares authorized;  1,852,632 issued and outstanding, liquidation price $9,263,158 |   | 8,153,514               |      | 8,056,014              |       |
| Stockholders’ deficit                                                                                                                                     |   |                    |      |                   |       |
| Common stock; par value  $0.01 per share; authorized 100,000,000 shares; 11,307,930 shares issued and  outstanding                                             |   | 113,079                 |      | 113,079                |       |
| Additional paid-in capital                                                                                                                                     |   | 17,036,600              |      | 16,754,991             |       |
| Accumulated deficit                                                                                                                                            |   | (23,694,595             | )         | (21,593,535            | )          |
|  Total stockholders’  deficit                                                                                                                        |   | (6,544,916              | )         | (4,725,465             | )          |
| Total Liabilities,  Convertible Preferred Stock, and Stockholders’ Deficit                                                                                |   | $                       | 5,924,532 |                   | $          | 6,843,513 |   |

 

Seenotes to consolidated financial statements.

 

4

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**On Stage Entertainment, Inc. and Subsidiaries**

**Con****solidated Statements ofOperations**

 
|                                                 |   | **Three months ended September 30,** |      |
|------------------------------------------------------|--------|--------------------------------------|-----------|
|                                                 |   | **2002**                             |      | **2001** |   |
|                                                 |   | **(Unaudited)**                      |      | **(Unaudited)** |   |
| Net revenues                                         |   | $                                    | 7,120,879 |   | $ | 7,322,046 |   |
| Costs of revenues                                    |   | 5,466,433                            |      | 6,089,059 |   |
| Gross profit                                         |   | 1,654,446                            |      | 1,232,987 |   |
|                                                 |   |                                 |      |   |   |
| Operating expenses                                   |   |                                 |      |   |   |
| Selling, general and  administrative                 |   | 729,624                              |      | 751,236 |   |
| Depreciation and  amortization                       |   | 188,814                              |      | 256,152 |   |
| (Gain) loss on disposal of  assets                   |   | (1,498                               | )         | 0 |   |
| Total operating expenses                             |   | 916,940                              |      | 1,007,388 |   |
|                                                 |   |                                 |      |   |   |
| Operating profit                                     |   | 737,506                              |      | 225,599 |   |
| Interest expense, net                                |   | (34,413                              | )         | (41,782 | ) |
|                                                 |   |                                 |      |   |   |
| Income before income taxes                           |   | 703,093                              |      | 183,817 |   |
| Income taxes                                         |   | (2,159                               | )         | 0 |   |
|                                                 |   |                                 |      |   |   |
| Net income                                           |   | 700,934                              |      | 183,817 |   |
|                                                 |   |                                 |      |   |   |
| Deemed dividends for  preferred stock                |   | 0                                    |      | (1,000,000 | ) |
| Dividends accreted for  preferred stock              |   | (32,500                              | )         | (32,500 | ) |
| Dividends accrued for  preferred stock               |   | (278,000                             | )         | (258,000 | ) |
|                                                 |   |                                 |      |   |   |
| Net income (loss)  applicable to common shares       |   | $                                    | 390,434   |   | $ | (1,106,683 | ) |
|                                                 |   |                                 |      |   |   |
| Basic income (loss) per  common share                |   | $                                    | 0.03      |   | $ | (0.10 | ) |
|                                                 |   |                                 |      |   |   |
| Diluted income (loss) per  common share              |   | $                                    | 0.02      |   | $ | (0.10 | ) |
|                                                 |   |                                 |      |   |   |
| Basic average number of  common shares outstanding   |   | 11,307,930                           |      | 11,307,930 |   |
|                                                 |   |                                 |      |   |   |
| Diluted average number of  common shares outstanding |   | 29,834,256                           |      | 11,307,930 |   |
|                                                      |        |                                      |           |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

5

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|                                                           |   | **Nine months ended September 30,** |       |
|----------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                           |   | **2002**                            |       | **2001** |   |
|                                                           |   | **(Unaudited)**                     |       | **(Unaudited)** |   |
| Net revenues                                                   |   | $                                   | 18,281,668 |   | $ | 17,818,257 |   |
| Costs of revenues                                              |   | 16,205,704                          |       | 15,899,863 |   |
|                                                           |   |                                |       |   |   |
| Gross profit                                                   |   | 2,075,964                           |       | 1,918,394 |   |
|                                                           |   |                                |       |   |   |
| Operating expenses                                             |   |                                |       |   |   |
| Selling, general and  administrative                           |   | 2,200,212                           |       | 1,946,393 |   |
| Depreciation and  amortization                                 |   | 573,193                             |       | 800,951 |   |
| Loss on disposal of assets                                     |   | 62,706                              |       | 0 |   |
|                                                           |   |                                |       |   |   |
| Total operating expenses                                       |   | 2,836,111                           |       | 2,747,344 |   |
|                                                           |   |                                |       |   |   |
| Operating loss                                                 |   | (760,147                            | )          | (828,950 | ) |
| Interest expense, net                                          |   | (402,779                            | )          | (382,167 | ) |
|                                                           |   |                                |       |   |   |
| Loss before income taxes                                       |   | (1,162,926                          | )          | (1,211,117 | ) |
| Income taxes                                                   |   | (6,634                              | )          | 0 |   |
|                                                           |   |                                |       |   |   |
| Net loss                                                       |   | (1,169,560                          | )          | (1,211,117 | ) |
|                                                           |   |                                |       |   |   |
| Deemed dividends for  preferred stock                          |   | 0                                   |       | (4,014,905 | ) |
| Dividends accreted for  preferred stock                        |   | (97,500                             | )          | (65,000 | ) |
| Dividends accrued for  preferred stock                         |   | (834,000                            | )          | (480,000 | ) |
|                                                           |   |                                |       |   |   |
| Net loss applicable to  common shares                          |   | $                                   | (2,101,060 | ) | $ | (5,771,022 | ) |
|                                                           |   |                                |       |   |   |
| Basic and diluted loss per  common share                       |   | $                                   | (0.19      | ) | $ | (0.51 | ) |
|                                                           |   |                                |       |   |   |
| Basic and diluted average  number of common shares outstanding |   | 11,307,930                          |       | 11,307,930 |   |

 

Seenotes to consolidated financial statements.

 

6

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**On Stage Entertainment, Inc. and Subsidiaries**

**Consolidated Statements of Cash Flows**

 
|                                                                         |   | **Increase (Decrease) in Cash  and Cash Equivalents  Nine months ended September 30,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|------------|
|                                                                         |   | **2002**                                                                               |       | **2001** |   |
|                                                                         |   | **(Unaudited)**                                                                        |       | **(Unaudited)** |   |
| Cash flows from operating  activities                                        |   |                                                                                   |       |   |   |
| Net loss                                                                     |   | $                                                                                      | (1,169,560 | ) | $ | (1,211,117 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |   |                                                                                   |       |   |   |
| Depreciation and  amortization                                               |   | 573,193                                                                                |       | 800,951 |   |
| Amortization of beneficial  conversion                                       |   | 288,256                                                                                |       | 79,667 |   |
| Loss on disposal of  property, plant and equipment                           |   | 62,706                                                                                 |       | 0 |   |
|                                                                         |   |                                                                                   |       |   |   |
| Increase (decrease) in  operating assets and liabilities:                    |   |                                                                                   |       |   |   |
| Accounts receivable                                                          |   | 88,711                                                                                 |       | (198,251 | ) |
| Inventory                                                                    |   | (12,510                                                                                | )          | (37,684 | ) |
| Deposits                                                                     |   | (55,879                                                                                | )          | (81,298 | ) |
| Prepaid and other assets                                                     |   | (61,545                                                                                | )          | (158,274 | ) |
| Accounts payable and accrued  expenses                                       |   | 273,685                                                                                |       | (1,295,467 | ) |
| Accrued payroll and other  liabilities                                       |   | (688,047                                                                               | )          | 655,315 |   |
| Total adjustments                                                            |   | 468,570                                                                                |       | (235,041 | ) |
| Net cash used in operating  activities                                       |   | (700,990                                                                               | )          | (1,446,158 | ) |
| Cash flows from investing  activities                                        |   |                                                                                   |       |   |   |
| Advances on notes  receivable from officer                                   |   | 0                                                                                      |       | (173,811 | ) |
| Acquisition of show rights                                                   |   | 0                                                                                      |       | (250,000 | ) |
| Capital expenditures                                                         |   | (101,709                                                                               | )          | (592,175 | ) |
| Proceeds received from  note receivable from officer                         |   | 2,317                                                                                  |       | 0 |   |
| Net cash used in investing  activities                                       |   | (99,392                                                                                | )          | (1,015,986 | ) |
| Cash flows from financing  activities                                        |   |                                                                                   |       |   |   |
| Conversion of debentures                                                     |   | 0                                                                                      |       | 58,514 |   |
| Proceeds received from  convertible debentures                               |   | 0                                                                                      |       | 650,000 |   |
| Proceeds of issuing Series  A Convertible Preferred Stock                    |   | 0                                                                                      |       | 6,700,000 |   |
| Payment on long-term note                                                    |   | (173,315                                                                               | )          | (473,500 | ) |
| Payment on short-term  borrowing                                             |   | 0                                                                                      |       | (3,450,000 | ) |
| Payment on convertible  debenture                                            |   | (150,000                                                                               | )          | 0 |   |
| Proceeds received on  promissory notes                                       |   | 700,000                                                                                |       | 0 |   |
| Net cash provided by  financing activities                                   |   | 376,685                                                                                |       | 3,485,014 |   |
|                                                                         |   |                                                                                   |       |   |   |
| Net increase (decrease) in  cash and cash equivalents                        |   | (423,697                                                                               | )          | 1,022,870 |   |
| Cash and cash equivalents  at beginning of period                            |   | 955,363                                                                                |       | 517,353 |   |
|                                                                         |   |                                                                                   |       |   |   |
| Cash and cash equivalents  at end of period                                  |   | $                                                                                      | 531,666    |   | $ | 1,540,223 |   |

 

Seenotes to consolidated financial statements.

 

7

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**SupplementalSchedule of Non-Cash Investing and Financing Activities**

 

Accrueddividends on Series A Convertible Preferred Stock of $834,000 and $480,000 wereattributable to and recognized during the nine months ended September 30, 2002and 2001, respectively.

 

Accretionof dividends on Series A Convertible Preferred Stock was $97,500 and $65,000during the nine months ended September 30, 2002 and 2001, respectively.

 

OnMarch 25, 2002, the Company issued detachable warrants in conjunction with ashort-term promissory note resulting in a discount of $281,609.

 

On July 24, 2002, the Company exchanged assets with a net book value of$75,000 for a lease receivable.

 

Deemeddividends relating to the issuance of Series A Convertible Preferred Stock onMarch 13, 2001, was $4,014,905.

 

Issuance of $1,350,000 convertible debentures in 2001 resulted in abeneficial conversion of $87,975.

 

8

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**On Stage Entertainment, Inc. and Subsidiaries**

**Consolidated Statement of Stockholders’ Equity (Deficit)**

 
|                                                                         |   |       |   |   | ** ** | **Additional****Paid-in********Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total**  | ** **  |
|------------------------------------------------------------------------------|--------|------------|--------|--------|------------|------------------------------------------|------------|--------------------------|------------|------------|-------------|
| **Common  Stock**                                                            |
| **Shares**                                                                   |   | **Amount** |
|                                                                         |   |       |   |   |       |                                     |       |                     |       |       |        |
| Balance,  December 31, 2001                                                  |   | 11,307,930 |   | $      | 113,079    |                                     | $          | 16,754,991               |       | $          | (21,593,535 | ) | $ | (4,725,465 | ) |
| Dividends  accreted on Series A Convertible Preferred Stock                  |   | —     |   | — |       | —                                   |       | (32,500                  | )          | (32,500    | )           |
| Accrued  dividends on Series A Convertible Preferred Stock                   |   | —     |   | — |       | —                                   |       | (278,000                 | )          | (278,000   | )           |
| Detachable  warrants issued in conjunction with a short-term promissory note |   | —     |   | — |       | 281,609                                  |       | —                   |       | 281,609    |        |
| Net  loss                                                                    |   | —     |   | — |       | —                                   |       | (1,540,883               | )          | (1,540,883 | )           |
| Balance  March 31, 2002                                                      |   | 11,307,930 |   | $      | 113,079    |                                     | $          | 17,036,600               |       | $          | (23,444,918 | ) | $ | (6,295,239 | ) |
| Dividends  accreted on Series A Convertible Preferred Stock                  |   | —     |   | — |       | —                                   |       | (32,500                  | )          | (32,500    | )           |
| Accrued  dividends on Series A Convertible Preferred Stock                   |   | —     |   | — |       | —                                   |       | (278,000                 | )          | (278,000   | )           |
| Net  loss                                                                    |   | —     |   | — |       | —                                   |       | (329,611                 | )          | (329,611   | )           |
| Balance,  June 30, 2002                                                      |   | 11,307,930 |   | $      | 113,079    |                                     | $          | 17,036,600               |       | $          | (24,085,029 | ) | $ | (6,935,350 | ) |
| Dividends  accreted on Series A Convertible Preferred Stock                  |   | —     |   | — |       | —                                   |       | (32,500                  | )          | (32,500    | )           |
| Accrued  dividends on Series A Convertible Preferred Stock                   |   | —     |   | — |       | —                                   |       | (278,000                 | )          | (278,000   | )           |
| Net  income                                                                  |   | —     |   | — |       | —                                   |       | 700,934                  |       | 700,934    |        |
| Balance,  September 30, 2002                                                 |   | 11,307,930 |   | $      | 113,079    |                                     | $          | 17,036,600               |       | $          | (23,694,595 | ) | $ | (6,544,916 | ) |

 

See notes to consolidated financial statements.

 

9

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**On Stage Entertainment, Inc. and Subsidiaries**

**Notes to Consolidated Financial Statements**

**September 30, 2002**

 

**(1) Basisof Presentation**

 

The financial statementsincluded in this report include the accounts of On Stage Entertainment, Inc., apublicly traded Nevada corporation (the “Company” or “On Stage”) and itssubsidiaries: Legends in Concert, Inc., a Nevada corporation (“LIC”); On StageMarketing, Inc., a Nevada corporation (“Marketing”); On Stage Theaters, Inc., aNevada corporation (“Theaters”); Wild Bill’s California, Inc., a Nevadacorporation (“Wild Bills”); On Stage Merchandise, Inc., a Nevada corporation(“Merchandise”); On Stage Events, Inc., a Nevada corporation (“Events”); OnStage Casino Entertainment, Inc., a Nevada corporation (“Casinos”); On StageProductions, Inc., a Nevada corporation (“Productions”); On Stage TheatersNorth Myrtle Beach, Inc., a Nevada corporation (“North Myrtle”); On StageTheaters Surfside Beach, Inc., a Nevada corporation (“Surfside”); and CountryTonite Branson, LLC (“Country Tonite Branson”) (collectively, the“Subsidiaries”).

 

In the opinion of themanagement of On Stage and the Subsidiaries, the accompanying unauditedconsolidated financial statements include all normal adjustments considerednecessary to present fairly the financial position as of September 30, 2002,and the results of operations and cash flows for the nine months endedSeptember 30, 2002 and 2001. Interim results are not necessarily indicative ofthe results for the full year. The consolidated financial statements and notesare presented as permitted by Form 10-QSB and should be read in conjunctionwith Management’s Discussion and Analysis and audited consolidated financialstatements and notes included in our Form 10-KSB for the fiscal year endedDecember 31, 2001.

 

**(2)Liquidity**

** **

We havehistorically met our working capital requirements through a combination of cashflow from operations, equity and debt offerings, and traditional bankfinancing.  We anticipate, based on ourcurrent cash projections, that our current cash balance and anticipated cashflow from operations are sufficient to fund our ongoing operations through theend of January 2003.  Because a numberof our shows are dark in January and February, we are projecting a cash deficitduring those months.  If we are unableto secure additional financing to fund operations during our slow season (i.e.,first quarter 2003), we may have to defer and/or reduce certain operatingexpenditures.

 

**(3)Acquisition of Country Tonite**

 

In February 2001, On Stageacquired substantially all the assets of CRC of Branson, Inc. and CountryTonite Enterprises, Inc., which primarily consisted of all of their rights andtitle in and to Country Tonite, for a purchase price of $3,800,000. The assetsacquired were transferred to Country Tonite Branson.  Country Tonite is an award-winning theatrical production, whichhas been presented in Branson, Missouri and Pigeon Forge, Tennessee.

 

The acquisition has beenaccounted for as a purchase and, accordingly, the operating results of CountryTonite have been included in the consolidated financial statements of On Stagesince the date of acquisition. The show rights acquired (approximately$3,556,000) are being amortized on a straight-line basis over 15 years.

 

The following unaudited proforma consolidated results of operations for the nine months ended September30, 2001 assume the acquisition occurred as of January 1, 2000:

 
|                                 |   | **Nine months  ended  September 30, 2001** |       |
|--------------------------------------|--------|--------------------------------------------|------------|
| Net  revenues                        |   | $                                          | 17,818,257 | ** ** |
| Net  loss from continuing operations |   | (1,339,304                                 | )          |
| Loss per common share:               |   |                                       |       |
| Basic and diluted                    |   | (0.52                                      | )          |
|                                      |        |                                            |            |  |

 

10

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The unaudited results arenot necessarily indicative of the results that would have been obtained had theacquisition happened as of an earlier date, nor are they indicative of futureresults.

 

Country Tonite had norevenue for the month of January 2001, as the show was closed during theoff-season months.

 

**(4) Promissory Notes**

 

In March 2002, McCown De Leeuw & Co., Inc., a private equityinvestment firm (“MDC”), agreed to loan On Stage $1,300,000 in the form ofpromissory notes with detachable warrants to purchase shares of the Company’scommon stock.  Interest on the notes is payable at the rate of 15% perannum, compounded quarterly, and the warrants have an exercise price of $.50per share exercisable for a ten-year period.  The first loan, in theamount of $700,000, was funded on March 27, 2002 and was due and payable onJuly 1, 2002.  As of November 12, 2002,On Stage had not made this payment, nor had MDC taken any action with respectto the default. The promissory note provides, however, that MDC may, at itssole discretion, extend the maturity date to December 31, 2006.  We are currently in discussions with MDC to determinewhether, and to what extent, it intends to extend the maturity date. Inconnection with the $700,000 promissory note, MDC received warrants to purchase1,346,154 shares of the Company’s common stock.  Using the Black-Scholes pricing model, the warrants were valuedat $281,609 and recorded as a discount and amortized over the initialterm.  The discount was amortized infull as of June 30, 2002.  The fundswill be used (1) to reimburse MDC $250,000 of expenses incurred on behalf of OnStage, including but not limited to attorneys’ fees incurred in connection withthis promissory note, and (2) for working capital purposes within the ordinarycourse of business. The second loan, in the amount of $600,000, with warrantsto purchase 1,153,846 shares of the Company’s common stock, will be depositedin a separate bank account and may be withdrawn only for direct use inconnection with our participation and investment in a potential futureproject.  As of November 12, 2002, the$600,000 loan has not been drawn upon.

 

**(5) Income (loss) per share**

 

Statementof Financial Accounting Standard No. 128, Earnings per Share, provides for thecalculation of Basic and Diluted earnings per share. Basic earnings per shareincludes no dilution and is computed by dividing income available to commonshareholders by the weighted average number of common shares outstanding forthe period. Diluted earnings per share reflect the potential dilution ofsecurities that could share in the earnings of the entity, similar to fully dilutedearnings per share.

 

The following table presents a reconciliation of the numerators anddenominators of the basic and diluted EPS computations:

 
|                                                                                                       |   | **Three  months ended September 30, 2002** |    | **Nine  months ended September 30, 2002** |       |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------|-------------------------------------------|------------|
|                                                                                                       |   | **Income  (Numerator)**                    |    | **Shares  (Denominator)**                 |       | **Per  Share  Amount** |   | **Loss  (Numerator)** |   | **Shares  (Denominator)** |   | **Per  Share  Amount** |   |
| Basic earnings (loss) per share:                                                                           |   |                                       |    |                                      |       |   |   |   |   |   |   |   |   |
| Net income (loss) applicable to common  shares                                                             |   | $                                          | 390,434 |                                      | 11,307,930 |   | $ | (0.03 | ) | $ | (2,101,060 | ) | 11,307,930 |   | $ | (0.19 | ) |
| Effect of dilutive securities Convertible  preferred stock                                                 |   | 310,500                                    |    | 18,526,326                                |       |   |   | 0 |   | 0 |   |   |   |
| Dilutive earnings (loss) per share Net  income (loss) applicable to common shares plus assumed conversions |   | $                                          | 700,934 |                                      | 29,834,256 |   | $ | (0.02 | ) | $ | (2,101,060 | ) | 11,307,930 |   | $ | (0.19 | ) |

 

Forthe three and nine months ended September 30, 2002, potential dilutivesecurities representing 3,513,950 outstanding common stock options, and5,756,309 outstanding common stock warrants, are not included, since theireffect would be anti-dilutive.  For thenine months ended September 30, 2002, 1,852,632 shares of preferred stock,which are convertible into 18,526,326 shares of common stock, are not included,since their effect would be anti-dilutive. Furthermore, On Stage has preferred stock warrants which convert into2,800,000 shares of preferred stock which further convert into 28,000,000shares of common stock contingent upon On Stage achieving certain EBITDAlevels. These potentially dilutive securities are not included for the threeand nine months ended September 30, 2002, because the contingency has not beenmet.

 

For the three and nine months ended September 30, 2001, potentialdilutive securities representing 1,464,850 outstanding common stock options,4,410,155 outstanding common stock warrants, and 1,852,632 shares of preferredstock, which are convertible into 18,526,326 shares of common stock, are notincluded, since their effect would be anti-dilutive.  Furthermore, OnStage has preferred stock warrants which convert into 2,800,000 sharesof preferred stock which further convert into 28,000,000 shares of common stockcontingent upon On Stage achieving certain EBITDA levels.  These potentially dilutive securities arenot included, since the contingency has not been met.

 

11

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**(6) Commitments and contingencies**

 

InMarch 2002, On Stage received notice of a civil complaint filed in the SuperiorCourt of New Jersey — Law Division — Atlantic County on January 11, 2002, byformer employees of Bally’s Park Place, Inc., a former venue for one of ourfull time Legends productions, against Bally’s, On Stage and several Legendsperformers that we hire as independent contractors.  The complaint allegesviolations of the New Jersey Law Against Discrimination, retaliatorytermination by conspiracy, misconduct causing severe emotional distress,assault and battery, and loss of consortium, and seeks damages of $7,750,000,plus cost of attorneys’ fees.  AlthoughOn Stage has responded to the complaint, it is too early for management todetermine the probability of an unfavorable outcome and the range of possibleloss, if any. On Stage believes that the case is without merit with respect toitself, and intends to vigorously defend the action.

 

In July 2002, On Stage received notice of a civil complaint filed inthe Circuit Court of Taney County, Missouri by TCK, L.P., the landlord for thetheater in which On Stage presented its Legendsin Concert show in Branson from August 1997 through December 2001.  The complaint alleged breach of contract forfailure to pay a percentage of gross receipts and damage to property in excessof $200,000.  As of October 2, 2002, theproceedings in Missouri have been stayed pending binding arbitration in LasVegas, Nevada.  As of November 12, 2002,the former landlord has not yet filed with the American ArbitrationAssociation.  On Stage believes the caseis without merit and intends to vigorously defend the action.

 

**(7) RecentAccounting Pronouncements**

 

Statement of FinancialAccounting Standards No. 145, “Rescission of SFAS Statements No. 4, 44, and 64,Amendment of SFAS Statement No. 13, and Technical Corrections” (“SFAS 145”),updates, clarifies and simplifies existing accounting pronouncements.  SFAS 145 rescinds SFAS No. 4, “ReportingGains and Losses from Extinguishment of Debt.” SFAS 145 amends SFAS No. 13,“Accounting for Leases,” to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions.  Theprovisions of SFAS 145 related to SFAS No. 4 and SFAS No. 13 are effective forfiscal years beginning and transactions occurring after May 15, 2002,respectively.  It is anticipated thatthe financial impact of SFAS 145 will not have a material effect on theCompany.

 

Statement of FinancialAccounting Standards No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” (“SFAS 146”), requires the Company to recognize costsassociated with exit or disposal activities when they are incurred rather thanat the date of a commitment to an exit or disposal plan.  SFAS 146 replaces Emerging Issues Task Force(“EITF”) Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” The provisions of SFAS 146 are to be applied prospectively to exit ordisposal activities initiated after December 31, 2002.

 

**(8) Segmentinformation**

 

The following information ispresented in accordance with SFAS No. 131.

 

On Stage derives its netrevenues from five business units categorized by three reportable segments:

 

•      *Casinos.* The Casinos segment primarily sellslive theatrical productions to casinos for fixed fees.  The Casinos segment operates the Legendsshow at the Imperial Palace in Las Vegas, Nevada, and at the Claridge CasinoHotel in Atlantic City, New Jersey (previously operated at Bally’s Park Placein Atlantic City, New Jersey).

 

•      *Theaters.* The Theaters segment rents livetheaters and dinner theaters in urban and resort tourist locations.  The Theaters segment derives revenues fromticket sales along with food and beverage sales to patrons who attend the livetheatrical productions.

 

12

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•      *Events.* The Events business unit sells livetheatrical productions to commercial clients, which include corporations, themeand amusement parks, and cruise lines, for fixed fees.  Revenues generated from the Events businessunit are included in the Casinos segment.

 

•      *Merchandise.* The Merchandise business unit sellsmerchandise and souvenir photography products to patrons who attend theCasinos, Theaters, and Events productions. Revenues generated from the Merchandise business unit are included inthe Theaters segment.

 

•      *Production Services.* The Production Services segment sellstechnical equipment and services to commercial clients.  However, the Production Services segment’sprimary focus is to provide technical support for the Casinos and Theaterssegments and the Events and Merchandise business units.

 

In addition to thesebusiness units, On Stage reports corporate overhead costs through a separateunit, On Stage Entertainment (“OSE”).

 

The accounting policies ofthe reportable operating segments are the same as those described in theSummary of Accounting Policies contained in On Stage’s Annual Report on Form10-KSB for the fiscal year ended December 31, 2001.  Management evaluates the performance of its operating segmentsbased upon the profit or loss from operations.

 

On Stage’s reportablesegments include strategic business units because each business unit services adifferent market or performs a specialized function in support of a givenmarket.

 

The following table setsforth the segment profit/(loss) and asset information:

 
|                              |   | **For the quarter ended September 30, 2002** |      |
|-----------------------------------|--------|----------------------------------------------|-----------|
|                              |   | **Casinos**                                  |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidated** |   |
| Revenues from external  customers |   | $                                            | 1,652,641 |   | 2,500 |   | 5,465,738 |   | 0 |   | 7,120,879 |   |
| Interest (income) expense         |   | $                                            | (28       | ) | (834 | ) | (3,210 | ) | 38,485 |   | 34,413 |   |
| Depreciation and  amortization    |   | $                                            | 26,127    |   | 34,625 |   | 95,334 |   | 32,728 |   | 188,814 |   |
| Segment profit (loss)             |   | $                                            | 417,339   |   | (153,387 | ) | 1,210,351 |   | (773,369 | ) | 700,934 |   |
| Segment fixed assets              |   | $                                            | 2,837,129 |   | 1,295,758 |   | 1,154,320 |   | 1,151,489 |   | 6,438,696 |   |
| Additions to long-lived  assets   |   | $                                            | 25,083    |   | 535 |   | 7,517 |   | 1,814 |   | 34,949 |   |

 

13

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|                              |   | **For the quarter ended September 30, 2001** |      |
|-----------------------------------|--------|----------------------------------------------|-----------|
|                              |   | **Casinos**                                  |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidated** |   |
| Revenues from external  customers |   | $                                            | 1,832,690 |   | 2,900 |   | 5,486,456 |   | 0 |   | 7,322,046 |   |
| Interest expense                  |   | $                                            | 106       |   | 0 |   | 32,734 |   | 8,942 |   | 41,782 |   |
| Depreciation and  amortization    |   | $                                            | 79,315    |   | 18,632 |   | 126,506 |   | 31,699 |   | 256,152 |   |
| Segment profit (loss)             |   | $                                            | 548,895   |   | (233,456 | ) | 632,132 |   | (763,754 | ) | 183,817 |   |
| Segment fixed assets              |   | $                                            | 2,966,584 |   | 938,759 |   | 1,722,259 |   | 1,149,994 |   | 6,777,596 |   |
| Additions to long-lived  assets   |   | $                                            | (36,159   | ) | 75,726 |   | 77,597 |   | 15,899 |   | 133,063 |   |

 

14

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|                              |   | **For the nine months ended September 30, 2002** |      |
|-----------------------------------|--------|--------------------------------------------------|-----------|
|                              |   | **Casinos**                                      |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidated** |   |
| Revenues from external  customers |   | $                                                | 6,166,841 |   | 4,700 |   | 12,110,127 |   | 0 |   | 18,281,668 |   |
| Interest (income) expense         |   | $                                                | 268       |   | (834 | ) | 17,415 |   | 385,930 |   | 402,779 |   |
| Depreciation and  amortization    |   | $                                                | 76,190    |   | 104,718 |   | 293,439 |   | 98,846 |   | 573,193 |   |
| Segment profit (loss)             |   | $                                                | 1,241,446 |   | (448,188 | ) | 632,705 |   | (2,595,523 | ) | (1,169,560 | ) |
| Segment fixed assets              |   | $                                                | 2,837,129 |   | 1,295,758 |   | 1,154,320 |   | 1,151,489 |   | 6,438,696 |   |
| Additions to long-lived  assets   |   | $                                                | 78,919    |   | 4,931 |   | 13,242 |   | 4,617 |   | 101,709 |   |

 
|                              |   | **For the nine months ended September 30, 2001** |      |
|-----------------------------------|--------|--------------------------------------------------|-----------|
|                              |   | **Casinos**                                      |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidated** |   |
| Revenues from external  customers |   | $                                                | 5,381,743 |   | 7,120 |   | 12,429,394 |   | 0 |   | 17,818,257 |   |
| Interest expense                  |   | $                                                | 1,115     |   | 0 |   | 171,456 |   | 209,596 |   | 382,167 |   |
| Depreciation and  amortization    |   | $                                                | 278,013   |   | 75,216 |   | 316,234 |   | 131,488 |   | 800,951 |   |
| Segment profit (loss)             |   | $                                                | 1,608,895 |   | (751,576 | ) | 56,839 |   | (2,125,275 | ) | (1,211,117 | ) |
| Segment fixed assets              |   | $                                                | 2,966,584 |   | 938,759 |   | 1,722,259 |   | 1,149,994 |   | 6,777,596 |   |
| Additions to long-lived  assets   |   | $                                                | (1,139    | ) | 82,625 |   | 441,072 |   | 69,617 |   | 592,175 |   |

 

**(9)           BravoProduction**

 

On July 12, 2002, On Stagegave notice to Gordon Gaming Corporation (d/b/a Sahara Hotel and Casino) andCharo Entertainment, Inc., terminating its Performance Engagement Agreement andits Co-Production Agreement, respectively. As such, effective July 28, 2002, OnStage terminated its involvement in the production of Bravo at the Sahara Hoteland Casino in Las Vegas, Nevada.

 

On July 24, 2002, the Board of Directors agreed to allow John W.Stuart, Chairman and Founder, to take over the production of Bravo, personally,under his newly-formed corporation, John Stuart Productions, Inc., and workdirectly with the Sahara and Charo Entertainment, Inc. in this endeavor. Inaccordance with that agreement, (1) Mr. Stuart’s involvement with the productionof Bravo will take him away from his corporate duties at On Stage for no morethan six hours per week; (2) at any time, On Stage has the option to purchaseMr. Stuart’s interest in the production of Bravo for a sum equal to any cashinvestment plus any cash losses incurred by John Stuart Productions, Inc., butnot less than the fair market value at that time; (3) the agreement appliessolely to the production of Bravo at the Sahara; and (4) nothing in theagreement changes the terms of Mr. Stuart’s Employment Agreement dated October12, 2000, or his Non-Compete Agreement dated April 6, 2001.

 

On Stage negotiated a Lease Agreement with John Stuart Productions,Inc. to lease certain equipment, valued at $75,000, to John Stuart Productions,Inc. for use in the production of Bravo. The terms of lease call for a $10,000down payment and weekly payments of $1,250. The effective rate of interest is15%, and John Stuart Productions, Inc. will have the option to purchase theequipment at the end of lease for $1.

 

**(10)         Settlement with Former Officer**

 

In September 2002, On Stagereached a settlement agreement with its former President and Chief OperatingOfficer, David Hope, with respect to his Employment Agreement, dated March 1,1996, as amended on February 1, 1997, and on July 7, 1999. The terms of thatagreement include the following: (1) cash payments equaling $100,000, payable$25,000 at time of signing, $10,000 per month for seven months, and $5,000 inthe eighth month; (2) a consent judgment for $122,000 which can be exercisedonly in the event of a default in the payments; and (3) a mutual releasebetween On Stage and Mr. Hope.

 

**(11)         Convertible Debentures**

 

During late2000 and early 2001, On Stage raised $700,000 and $650,000, respectively, fromaccredited private investors to assist with meeting its capital requirements,paying for expenses associated with its restructuring, and making deposits forthe acquisition of Country Tonite and the live licensing rights forRipley’s.  This private placement wasissued in the form of convertible debentures. On September 1, 2001, $1,200,000 of the $1,350,000 in convertibledebentures were exchanged for Series A Preferred Stock. In December2001, the remaining debenture of $150,000 was extended to July 2002.  On August 5, 2002, On Stage paid off thedebenture in full with accrued and unpaid interest.

 

**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

This document containscertain forward-looking statements that are subject to risks and uncertainties.Forward-looking statements include certain information relating to ourpotential new show openings, the potential markets for our productions, theexpansion of existing and potential gaming and tourist markets, exposure tovarious trends in the gaming industry, acquisition plans and the benefitsanticipated from these

 

15

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acquisitions, businessstrategy, outstanding litigation matters and the available defenses, theseasonality of our business, and liquidity issues, as well as informationcontained elsewhere in this report where current statements are preceded by,followed by or include the words “believes,” “expects,” “anticipates” orsimilar expressions. For these statements, we claim the protection of the safeharbor for forward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995. The forward-looking statements in this documentare subject to risks and uncertainties that could cause the assumptions underlyingthe forward-looking statements and the actual results to differ materially fromthose expressed in or implied by the statements.

 

The most important factorsthat could prevent us from achieving our goals and cause the assumptionsunderlying the forward-looking statements and the actual results to differmaterially from those expressed in or implied by those forward-lookingstatements include the information provided under the heading “Description ofBusiness–Risk Factors” in Item 1 of our Annual Report on Form 10-KSB for theyear ended December 31, 2001, as well as the following:

 

•      The dependence on our flagship *Legends in Concert* production and ourprincipal production venues;

 

•      The ability to successfully produce and marketnew productions and to manage the growth associated with any new productions;

 

•      Risks associated with our acquisitionstrategy, including our ability to successfully identify, complete andintegrate strategic acquisitions;

 

•      The ability to meet our commitments and obtainalternative and additional financing on commercially reasonable terms;

 

•      The competitive nature of the leisure andentertainment industry and the ability to continue to distinguish our services;

 

•      Fluctuations in quarterly operating resultsand the highly seasonal nature of our business;

 

•      The ability to reproduce the performance,likeness and voice of various celebrities without infringing on the publicityrights of those celebrities or their estates, as well as our ability to protectour intellectual property rights;

 

•      The ability to successfully manage thelitigation pending against us and to avoid future litigation; and

 

•      The results of operations which depend onnumerous factors, including when our contracts begin and end, the timing andamount of new business we generate, our revenue mix, the timing and level ofadditional selling, general and administrative expense and the generalcompetitive conditions in the leisure and entertainment industry, as well asthe overall economy.

 

**CriticalAccounting Policies**

 

FinancialReporting Release No. 60, which was recently released by the Securities andExchange Commission (“SEC”), requires all companies to include a discussion ofcritical accounting policies or methods used in the preparation of financialstatements.  The Financial Statementsinclude a summary of the significant accounting policies and methods used inthe preparation of our Financial Statements. The following is a brief discussion of the more critical accountingpolicies and methods used by us.  Inaddition, Financial Reporting Release No. 61 was recently issued by the SEC torequire all companies to include a discussion to address, among other things,liquidity, off-balance sheet arrangements, contractual obligations andcommercial commitments.

 

16

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*Impairment of long-lived assets and valuation of intangible assets.* We assess the impairment of long-lived assetsand identifiable intangible assets whenever events or changes in circumstancesindicate that the carrying value may not be recoverable.  Factors we consider important which couldtrigger an impairment review include the following:

 

•      Significantunderperformance relative to expected historical or projected future operatingresults;

 

•      Significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business; and

 

•      Significantnegative industry or economic trends.

 

When wedetermine that the carrying value of intangible assets may not be recoverablebased upon the existence of one or more of the above indicators of impairment,we measure any impairment based on a projected discounted cash flow methodusing a discount rate determined by our management to be commensurate with therisk inherent in our current business model. We had intangible show rights that amounted to a net $3.2 million atSeptember 30, 2002.  Future events couldcause us to conclude that impairment indicators exist and that such intangibleassets are impaired.  Any resultingimpairment loss could have an adverse impact on our financial condition andresults of operations.

 

**RecentAccounting Pronouncements**

 

See RecentAccounting Pronouncements in Note 5 to the Unaudited Consolidated FinancialStatements.

 

**Results ofOperations**

 

The following tables setforth the results of operations for the reportable segments indicated:

 
|                                   |   | **For the quarter ended September 30, 2002** |      |
|----------------------------------------|--------|----------------------------------------------|-----------|
|                                   |   | **Casinos**                                  |      | **Production  Services** |   | **Theaters** |   | **Sub-Total  Operating  Divisions** |   | **OSE** |   | **Total  Consolidated** |   |
| Net revenues                           |   | $                                            | 1,652,641 |   | 2,500 |   | 5,465,738 |   | 7,120,879 |   | 0 |   | 7,120,879 |   |
| Cost of revenues                       |   | 1,191,185                                    |      | 119,087 |   | 4,156,161 |   | 5,466,433 |   | 0 |   | 5,466,433 |   |
|                                   |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)                    |   | 461,456                                      |      | (116,587 | ) | 1,309,577 |   | 1,654,446 |   | 0 |   | 1,654,446 |   |
| Selling, general &  administrative |   | 27,381                                       |      | 0 |   | 2,246 |   | 29,627 |   | 699,997 |   | 729,624 |   |
| Depreciation &  amortization       |   | 26,127                                       |      | 34,625 |   | 95,334 |   | 156,086 |   | 32,728 |   | 188,814 |   |
| (Gain) loss on disposal of  assets     |   | (9,363                                       | )         | 3,009 |   | 4,856 |   | (1,498 | ) | 0 |   | (1,498 | ) |
|                                   |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                |   | 417,311                                      |      | (154,221 | ) | 1,207,141 |   | 1,470,231 |   | (732,725 | ) | 737,506 |   |
| Interest (income) expense,  net        |   | (28                                          | )         | (834 | ) | (3,210 | ) | (4,072 | ) | 38,485 |   | 34,413 |   |
|                                   |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) before  income taxes |   | 417,339                                      |      | (153,387 | ) | 1,210,351 |   | 1,474,303 |   | (771,210 | ) | 703,093 |   |
| Income taxes                           |   | 0                                            |      | 0 |   | 0 |   | 0 |   | 2,159 |   | 2,159 |   |
|                                   |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                 |   | $                                            | 417,339   |   | (153,387 | ) | 1,210,351 |   | 1,474,303 |   | (773,369 | ) | 700,934 |   |

 

17

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|                                   |   | **For the quarter ended September 30, 2001** |      |
|----------------------------------------|--------|----------------------------------------------|-----------|
|                                   |   | **Casinos**                                  |      | **Production  Services** |   | **Theaters** |   | **Sub-Total  Operating  Segments** |   | **OSE** |   | **Total  Consolidated** |   |
| Net revenues                           |   | $                                            | 1,832,690 |   | 2,900 |   | 5,486,456 |   | 7,322,046 |   | 0 |   | 7,322,046 |   |
| Cost of revenues                       |   | 1,176,465                                    |      | 217,724 |   | 4,694,870 |   | 6,089,059 |   | 0 |   | 6,089,059 |   |
|                                   |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)                    |   | 656,225                                      |      | (214,824 | ) | 791,586 |   | 1,232,987 |   | 0 |   | 1,232,987 |   |
| Selling, general &  administrative |   | 27,909                                       |      | 0 |   | 214 |   | 28,123 |   | 723,113 |   | 751,236 |   |
| Depreciation &  amortization       |   | 79,315                                       |      | 18,632 |   | 126,506 |   | 224,453 |   | 31,699 |   | 256,152 |   |
|                                   |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                |   | 549,001                                      |      | (233,456 | ) | 664,866 |   | 980,411 |   | (754,812 | ) | 225,599 |   |
| Interest expense, net                  |   | (106                                         | )         | 0 |   | (32,734 | ) | (32,840 | ) | (8,942 | ) | (41,782 | ) |
|                                   |   |                                         |      |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                      |   | $                                            | 548,895   |   | (233,456 | ) | 632,132 |   | 947,571 |   | (763,754 | ) | 183,817 |   |

 
|                                   |   | **For the nine months ended September 30, 2002** |      |
|----------------------------------------|--------|--------------------------------------------------|-----------|
|                                   |   | **Casinos**                                      |      | **Production  Services** |   | **Theaters** |   | **Sub-Total  Operating  Divisions** |   | **OSE** |   | **Total  Consolidated** |   |
| Net revenues                           |   | $                                                | 6,166,841 |   | 4,700 |   | 12,110,127 |   | 18,281,668 |   | 0 |   | 18,281,668 |   |
| Cost of revenues                       |   | 4,779,301                                        |      | 346,495 |   | 11,079,908 |   | 16,205,704 |   | 0 |   | 16,205,704 |   |
|                                   |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)                    |   | 1,387,540                                        |      | (341,795 | ) | 1,030,219 |   | 2,075,964 |   | 0 |   | 2,075,964 |   |
| Selling, general &  administrative |   | 78,999                                           |      | 0 |   | 16,850 |   | 95,849 |   | 2,104,363 |   | 2,200,212 |   |
| Depreciation &  amortization       |   | 76,190                                           |      | 104,718 |   | 293,439 |   | 474,347 |   | 98,846 |   | 573,193 |   |
| (Gain) loss on disposal of  assets     |   | (9,363                                           | )         | 2,509 |   | 69,810 |   | 62,956 |   | (250 | ) | 62,706 |   |
|                                   |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                |   | 1,241,714                                        |      | (449,022 | ) | 650,120 |   | 1,442,812 |   | (2,202,959 | ) | (760,147 | ) |
| Interest expense, net                  |   | 268                                              |      | (834 | ) | 17,415 |   | 16,849 |   | 385,930 |   | 402,779 |   |
|                                   |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) before  income taxes |   | 1,241,446                                        |      | (448,188 | ) | 632,705 |   | 1,425,963 |   | (2,588,889 | ) | (1,162,926 | ) |
| Income taxes                           |   | 0                                                |      | 0 |   | 0 |   | 0 |   | 6,634 |   | 6,634 |   |
|                                   |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                      |   | $                                                | 1,241,446 |   | (448,188 | ) | 632,705 |   | 1,425,963 |   |   | (2,595,523 | ) | (1,169,560 | ) |
|                                        |        |                                                  |           |  |  |  |  |  |  |  |  |  |  |  |  |

 

18

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|                                   |   | **For the nine months ended September 30, 2001** |      |
|----------------------------------------|--------|--------------------------------------------------|-----------|
|                                   |   | **Casinos**                                      |      | **Production  Services** |   | **Theaters** |   | **Sub-Total  Operating  Segments** |   | **OSE** |   | **Total  Consolidated** |   |
| Net revenues                           |   | $                                                | 5,381,743 |   | 7,120 |   | 12,429,394 |   | 17,818,257 |   | 0 |   | 17,818,257 |   |
| Cost of revenues                       |   | 3,398,130                                        |      | 683,480 |   | 11,818,253 |   | 15,899,863 |   | 0 |   | 15,899,863 |   |
|                                   |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)                    |   | 1,983,613                                        |      | (676,360 | ) | 611,141 |   | 1,918,394 |   | 0 |   | 1,918,394 |   |
| Selling, general &  administrative |   | 95,590                                           |      | 0 |   | 66,612 |   | 162,202 |   | 1,784,191 |   | 1,946,393 |   |
| Depreciation &  amortization       |   | 278,013                                          |      | 75,216 |   | 316,234 |   | 669,463 |   | 131,488 |   | 800,951 |   |
|                                   |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                |   | 1,610,010                                        |      | (751,576 | ) | 228,295 |   | 1,086,729 |   | (1,915,679 | ) | (828,950 | ) |
| Interest expense, net                  |   | (1,115                                           | )         | 0 |   | (171,456 | ) | (172,571 | ) | (209,596 | ) | (382,167 | ) |
|                                   |   |                                             |      |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                      |   | $                                                | 1,608,895 |   | (751,576 | ) | 56,839 |   | 914,158 |   | (2,125,275 | ) | (1,211,117 | ) |
|                                        |        |                                                  |           |  |  |  |  |  |  |  |  |  |  |  |  |

 

**QuarterEnded September 30, 2002 versus Quarter Ended September 30, 2001**

 

***Net Revenues.*** Revenues were approximately $7,121,000 for the quarter ended September30, 2002 compared to $7,322,000 for the quarter ended September 30, 2001, adecrease of $201,000, or 2.7%.  Ourrevenue is derived from five business units (categorized by three reportablesegments): Casinos, Theaters, Events, Merchandise, and ProductionServices.  Revenues from Events areincluded in the Casinos segment. Revenues from Merchandise are included in the Theaters segment.

 

Casinos revenues wereapproximately $1,653,000 for the quarter ended September 30, 2002 compared to$1,833,000 for the quarter ended September 30, 2001, a decrease of $180,000 or9.8%.  This decrease was primarily attributableto fewer limited engagement productions.

 

Production Services revenueswere approximately $2,500 for the quarter ended September 30, 2002 compared to$2,900 for the quarter ended September 30, 2001, a decrease of $400.

 

Theaters revenues wereapproximately $5,466,000 for the quarter ended September 30, 2002 compared to$5,486,000 for the quarter ended September 30, 2001, a decrease of $20,000, or0.4%.

 

***Costs of Revenues.*** Total costs of revenues were approximately $5,466,000 for the quarterended September 30, 2002 compared to $6,089,000 for the quarter ended September30, 2001, a decrease of $623,000, or 10.2%. Costs of revenues decreased to 76.8% of net revenues for the quarterended September 30, 2002, as compared to 83.2% for the quarter ended September30, 2001.  This decrease in costs ofrevenues as a percentage of revenues was primarily attributable to better costcontrol measures implemented in the Production Services and Theaters segments.

 

19

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***Selling, General and Administrative.*** Selling, general and administrative costswere approximately $730,000 for the quarter ended September 30, 2002 ascompared to $751,000 for the quarter ended September 30, 2001, a decrease of$21,000, or 2.8%.  Selling, general andadministrative costs decreased slightly to 10.2% of net revenues for thequarter ended September 30, 2002, as compared to 10.3% for the quarter endedSeptember 30, 2001.

 

***Depreciation and Amortization.*** Depreciation and amortization for thequarter ended September 30, 2002 decreased by $67,000, or 26.3%, as compared tothe quarter ended September 30, 2001. This decrease was primarily attributable to having fewer depreciableassets.

 

***Operating Income (Loss).*** Operating income was approximately $738,000 for the quarter endedSeptember 30, 2002 compared to $226,000 for the quarter ended September 30,2001, an increase in operating income of $512,000.  The increase in operating income was primarily attributable toimproved margins in the Theaters segment, the discontinuation of the Ripleysproduction, and the cost control measures implemented in the ProductionServices segment.

 

***Interest Expense, Net.*** Interest expense for the quarter ended September 30, 2002 decreased by$7,000, as compared to the quarter ended September 30, 2001.  This decrease was primarily attributable tothe repayment of the short-term borrowing.

 

***Income Taxes.*** We have not accrued any federal income taxes for the quarter endedSeptember 30, 2002, because of net losses incurred year to date. Because we cannotdetermine that we are more likely than not to recognize the deferred taxassets, we have provided for a full allowance against the deferred tax assets.

 

**Nine MonthsEnded September 30, 2002 versus Nine Months Ended September 30, 2001**

 

***Net Revenues.*** Revenues were approximately $18,282,000 for the nine months endedSeptember 30, 2002 compared to $17,818,000 for the nine months ended September30, 2001, an increase of $464,000, or 2.6%. Our revenue is derived from five business units (categorized by threereportable segments): Casinos, Theaters, Events, Merchandise and ProductionServices.  Revenues from Events areincluded in the Casinos segment. Revenues from Merchandise are included in the Theaters segment.

 

Casinos revenues wereapproximately $6,167,000 for the nine months ended September 30, 2002 comparedto $5,382,000 for the nine months ended September 30, 2001, an increase of$785,000, or 14.6%.  This increase wasprimarily attributable to the addition of the Bravo show in Las Vegas, Nevada,which ran from November 2001 through July 2002, partially offset by decreasesat other Casino venues.

 

Production Services revenueswere $4,700 for the nine months ended September 30, 2002 compared to $7,120 forthe nine months ended September 30, 2001, a decrease of $2,420, or 34.0%.  This decrease was primarily attributable toa reduction in equipment rental revenues.

 

Theaters revenues wereapproximately $12,110,000 for the nine months ended September 30, 2002 comparedto $12,429,000 for the nine months ended September 30, 2001, a decrease of$319,000, or 2.6%.   This decreasewas primarily attributable to the discontinuation of the Ripleys production,which ran from May 2001 through September 2001, and the decline in show countsat our Wild Bills venue due to a decrease in overall tourism since theterrorist attacks of September 11, 2001, partially offset by increased showcounts at our Myrtle Beach Legends and Branson Legends venues.

 

***Costs of Revenues.*** Total costs of revenues were approximately $16,206,000 for the ninemonths ended September 30, 2002 compared to $15,900,000 for the nine monthsended September 30, 2001, an increase of $306,000, or 1.9%.  Costs of revenues decreased to 88.6% of netrevenues for the nine months ended September 30, 2002, as compared to 89.2% forthe nine months ended September 30, 2001. This decrease in costs of revenues as a percentage of revenues wasprimarily attributable to better cost control measures implemented in theProduction Services and Theaters segments.

 

***Selling, General and Administrative.***Selling, general and administrative costs were approximately $2,200,000 for thenine months ended September 30, 2002 as compared to $1,946,000 for the ninemonths ended September 30, 2001, anincrease of $254,000, or 13.1%.  Thisincrease in selling, general and administrative expenses was primarilyattributable to the inclusion of senior management salaries for a full ninemonths, and expense recognized in association with the settlement agreementwith our former president and chief operating officer.  Selling, general and administrative costsincreased to 12.0% of net revenues for the nine months ended September 30, 2002as compared to 10.9% for the nine months ended September 30, 2001.

 

***Depreciation and Amortization.*** Depreciation and amortization for the ninemonths ended September 30, 2002 decreased by $228,000, or 28.4%, as compared tothe nine months ended September 30, 2001. The decrease was primarilyattributable to having fewer depreciable assets.

 

20

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***Operating Loss.*** Operating loss was approximately $760,000 for the nine months endedSeptember 30, 2002 compared to an operating loss of $829,000 for the ninemonths ended September 30, 2001, a decrease in operating loss of $69,000, or8.3%.  This decrease in operating losswas primarily attributable to the increase in margins in the Theaters segmentand better cost control measures implemented in the Production Servicessegments, partially offset by a decrease in margins in the Casinos segment andthe expense recognized in association with the settlement agreement with ourformer president and chief operating officer.

 

***Interest Expense, Net.*** Interest expense for the nine months ended September 30, 2002increased by approximately $21,000, as compared to the nine months endedSeptember 30, 2001.  This increase wasprimarily attributable to the promissory note due to MDC, partially offset bythe decrease in interest expense due to the repayment of the short-termborrowing associated with the acquisition of Country Tonite and the conversionof debentures both of which occurred subsequent to March 31, 2001.

 

***Income Taxes.*** We have not accrued federal income taxes for the nine months endedSeptember 30, 2002.  Because we cannotdetermine that we are more likely than not to recognize the deferred taxassets, we have provided for a full allowance against the deferred tax assets.

 

**Seasonalityand Quarterly Results**

 

Our business has been, andis expected to remain, highly seasonal, with the majority of our revenue beinggenerated during the months of April through October.  Our Legends shows in Branson, Missouri and Myrtle Beach, SouthCarolina are dark in January, and our Country Tonite show in Branson, Missouri,is dark in January and February.  Partof our business strategy is to increase sales in tourist markets thatexperience their peak seasons from November through March, to offset thisseasonality in revenues.

 

The following table setsforth On Stage’s net revenue for each of the last seven quarters endedSeptember 30, 2002:

 

**Net Revenues**

**($ in thousands)**

 
| **Quarter  ended,** |   | **March 31** |   | **June 30** |   | **September 30** |   | **December 31** |   |   |
|---------------------|--------|--------------|--------|-------------|--------|------------------|--------|-----------------|--------|--------|
| Fiscal 2002         |   | $            | 4,538  |        | $      | 6,623            |   | $               | 7,121  |   | $ |   |   |
| Fiscal 2001         |   | $            | 4,026  |        | $      | 6,470            |   | $               | 7,322  |   | $ | 5,943 |   |
|                     |        |              |        |             |        |                  |        |                 |        |        |  |  |  |  |  |  |  |  |

 

**Liquidityand Capital Resources**

 

***General***

 

We have historically met ourworking capital requirements through a combination of cash flow fromoperations, equity and debt offerings, and traditional bank financing.  We anticipate, based on our current cashprojections, that our current cash balance and anticipated cash flow fromoperations are sufficient to fund our ongoing operations through the end ofJanuary, 2003.  Because a number of ourshows are dark in January and February, we are projecting a cash deficit duringthose months.  If we are unable tosecure additional financing to fund operations during our slow season (i.e.,first quarter 2003), we may have to defer and/or reduce certain operatingexpenditures.

 

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InFebruary 2001, we entered into an agreement with McCown De Leeuw & Co.,Inc., a private equity investment firm (“MDC”), under which MDC agreed toinvest up to $20 million in the form of convertible preferred securities. The terms of the agreement provide for funding in four tranches of $6.0million, $4.0 million, $5.0 million and $5.0 million.  The second andthird tranches are in the form of warrants exercisable over a 10-year period,at our option.  The fourth tranche is exercisable only after the thirdtranche has been funded.  The availability of funds is subject to thefollowing:

 

•       We must submit a noticeto our board that includes the proposed funding amount, which must be at least$2 million, and the specific growth or acquisition opportunity for which thefunds will be used;

•       We must have met the EBITDA budget approved by our board for theyear-to-date period; and

•       MDC must have earned a minimum annualized rate of return of 35% on itsfunded investment.

 

The convertible preferred stock has an annual dividend rate of 12%, ofwhich 10% is payable in cash and 2% is payable in kind. The convertiblepreferred stock has a liquidation preference of $5.00 per share and isconvertible into shares of common stock at a conversion price of $.50 or $.75per share depending on certain factors.  There is a mandatory redemptionprovision under certain circumstances, including a change of control.  Weare precluded from using the MDC investment to fund operating losses.  Thefirst $6 million investment was made in March 2001 and was used to fund newproductions. In August 2001, MDC funded its second investment byexercising warrants–per the terms of the prior MDC investment—for 400,000shares of Series A Convertible Preferred Stock in consideration of $2,000,000. At the time of MDC’s second investment, our financial performance failed tomeet the minimum EBITDA thresholds set forth in the agreement as a condition toMDC’s obligation to fund the second tranche of its investment.  However, MDC agreed to consummate the funding if we issued it a warrant topurchase an additional 400,000 shares of our Series A  Convertible Stockat an exercise price of $0.00001, exercisable for a 10-year period.  Thewarrant may only be exercised if we fail to meet our cumulative EBITDA targetsfor the 2002 and 2003 calendar years.  MDC’s $2,000,000 investment will beconvertible into either 4,000,000 shares of common stock, or, if we fail toachieve certain EBITDA targets, 8,000,000 shares of common stock.  We usedthe investment to fund the last $2,800,000 payment for the acquisition ofCountry Tonite due on July 31, 2001.

 

In March 2002, MDC agreed to loan On Stage $1,300,000 in the form ofpromissory notes with detachable warrants to purchase shares of the Company’scommon stock.  Interest on the notes is payable at the rate of 15% perannum, compounded quarterly, and the warrants have an exercise price of $.50per share exercisable for a ten-year period.  The first loan, in theamount of $700,000, was funded on March 27, 2002 and was due and payable onJuly 1, 2002.  As of November 12, 2002,On Stage had not made this payment, nor had MDC taken any action with respectto the default.  The promissory noteprovides, however, that MDC may, at its sole discretion, extend the maturitydate to December 31, 2006.  We arecurrently in discussions with MDC to determine whether, and to what extent, MDCintends to extend the maturity date. In connection with the $700,000 promissorynote, MDC received warrants to purchase 1,346,154 shares of common stock. Using the Black-Scholes pricing model, the warrants were valued at $281,609 andrecorded as a discount and amortized over the initial term.  The discount was amortized in full as ofSeptember 30, 2002.  The funds will be used (1) to reimburse MDC $250,000of expenses incurred on behalf of On Stage, including but not limited toattorney’s fees incurred in connection with this promissory note, and (2) forworking capital purposes within the ordinary course of business. The secondloan, in the amount of $600,000, with warrants to purchase 1,153,846 shares ofcommon stock, will be deposited in a separate bank account and may be withdrawnonly for direct use in connection with our participation and investment in apotential future project.

 

In May 1997, we entered into a Master Equipment Lease Agreement (“LeaseAgreement”) with First Security Bank of Nevada (“First Security”). Pursuant to that Lease Agreement, we entered into four leases for a total of$1,094,764.  In March 1998, we entered into a Business Loan Agreement withFirst Security with respect to a $1,000,000 promissory note.  The LeaseAgreement and the Business Loan Agreement contain various financial and othercovenants that we must meet.  As of April 1999, we were in default

 

22

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under the Lease Agreement and the Business Loan Agreement for failureto make required payments.  Subsequently, we entered into a LitigationForbearance Agreement (“Forbearance Agreement”) that contained a waiver for thenoncompliance as of October 2000.  Under the Forbearance Agreement, wewere required to make monthy payments of $50,000.  We are currently indefault under the Forbearance Agreement because our recent monthly paymentshave been only $28,000.  We are in the process of obtaining a waiver fromWells Fargo Bank (successor bank to First Security) for the prior payments andare negotiating to have the monthly payment reduced to $28,000.  As ofSeptember 30, 2002, the outstanding balance under the Lease Agreement and theBusiness Loan Agreement was approximately $379,000.

 

***Cash Flow***

 

For the nine months ended September 30, 2002, we had net cash used inoperations of approximately $701,000. As of September 30, 2002, we had approximately $532,000 in cash and cashequivalents.  The operating deficit forthe nine months ended September 30, 2002, was primarily attributable to the$1,170,000 loss, partially offset by depreciation and amortization.

 

For the nine months ended September 30, 2001, we had net cash used inoperations of approximately $1,446,000. As of September 30, 2001, we hadapproximately $1,540,000 in cash and cash equivalents. The operating deficitfor the nine months ended September 30, 2001, was primarily attributable to the$1,211,000 loss.

 

The net cash used in investing activities for the nine months endedSeptember 30, 2002 of approximately $99,000 was primarily attributable tocapital expenditures.  The net cash usedin investing activities for the nine months ended September 30, 2001 of$1,016,000 was attributable to the acquisition of show rights, the addition tocapital expenditures, and advances on a note receivable from an officer.

 

Net cash provided by financing activities for the nine months endedSeptember 30, 2002 of approximately $377,000, was primarily attributable to theproceeds from the issuance of promissory notes, partially offset by paymentsmade on the long-term note and repayment of the convertible debenture.  Net cash provided by financing activitiesfor the nine months ended September 30, 2001 of approximately $3,485,000, wasprimarily attributable to the proceeds from convertible debentures and proceedsfrom the issuance of Series A Convertible Preferred Stock, partially offset bypayments on both short-term and long-term debt.

 

***Working Capital***

 

At September 30, 2002, we had a working capital deficit ofapproximately $568,000 which resulted primarily from an increase in short-termdebt and a decrease in cash and cash equivalents.  At December 31, 2001, we had a working capital deficit ofapproximately $289,000.

 

 

#### **Item 3.    Controlsand Procedures**

(a)           Evaluationof Disclosure Controls and Procedures. The Company’s Chief Executive Officer and its Chief Financial Officer,after evaluating the effectiveness of the Company’s disclosure controls andprocedures (as defined in the Securities Exchange Act of 1934Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of thefiling date of this quarterly report on Form 10-Q (the “Evaluation Date”)),have concluded that as of the Evaluation Date, the Company’s disclosurecontrols and procedures were adequate and effective to ensure that materialinformation relating to the Company and its consolidated subsidiaries would bemade known to them by others within those entities, particularly during the periodin which this quarterly report on Form 10-Q was being prepared.

 

(b)           Changesin Internal Controls. There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect theCompany’s disclosure controls and procedures subsequent to the Evaluation Date,nor any significant deficiencies or material weaknesses in such disclosurecontrols and procedures requiring corrective actions.  As a result, no corrective actions were taken.

 

**PART II. OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

In March 2002, On Stage received notice of a civil complaint filed inthe Superior Court of New Jersey - Law Division - Atlantic County on January11, 2002, by former employees of Bally’s Park Place, Inc., a venue for one ofour full time Legends productions, against Bally’s, On Stage and severalLegends performers that we hire as independent contractors.  The complaintalleges violations of the New Jersey Law Against Discrimination, retaliatorytermination by conspiracy, misconduct causing severe emotional distress,assault and battery, and loss of consortium, and seeks damages of $7,750,000,plus cost of attorneys’ fees.  On Stage has responded to

thecomplaint, however it is too early for management to determine the probabilityof an unfavorable outcome and the range of possible loss, if any. On Stagebelieves that the case is without merit with respect to itself, and intends tovigorously defend the action.

 

23

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In July 2002, On Stage received notice of a civil complaint filed inthe Circuit Court of Taney County, Missouri by TCK, L.P., the landlord for thetheater in which On Stage presented its Legends in Concert show in Branson fromAugust 1997 through December 2001.  Thecomplaint alleged breach of contract for failure to pay a percentage of grossreceipts and damage to property in excess of $200,000.  As of October 2, 2002, the proceedings inMissouri have been stayed pending binding arbitration in Las Vegas,Nevada.  As of November 12, 2002, theformer landlord has not yet filed with the American ArbitrationAssociation.  On Stage believes the caseis without merit and intends to vigorously defend the action.

 

**Item 2.    Changes inSecurities and Use of Proceeds**

 

None.

 

**Item 3.    Defaults UponSenior Securities**

 

InMarch 2002, McCown De Leeuw & Co., Inc. a private equity investment firm(“MDC”), agreed to loan On Stage $1,300,000 in the form of promissory noteswith detachable warrants to purchase shares of the Company’s common stock. Interest on the notes is payable at the rate of 15% per annum, compoundedquarterly, and the warrants have an exercise price of $.50 per shareexercisable for a ten-year period.  The first loan, in the amount of$700,000, was funded on March 27, 2002 and was due and payable on July 1,2002.  As of November 12, 2002, On Stagehad not made this payment, nor had MDC taken any action with respect to thedefault. The promissory note provides, however, that MDC may, at its solediscretion, extend the maturity date to December 31, 2006.  We are currently in discussions with MDC todetermine whether, and to what extent, MDC intends to extend the maturity date.In connection with the $700,000 promissory note, MDC received warrants topurchase 1,346,154 shares of common stock. Using the Black-Scholes pricing model, the warrants were valued at$281,609 and recorded as a discount and amortized over the initial term.  The discount was amortized in full as ofSeptember 30, 2002.  The funds will beused (1) to reimburse MDC $250,000 of expenses incurred on behalf of On Stage,including but not limited to attorney’s fees incurred in connection with thispromissory note, and (2) for working capital purposes within the ordinarycourse of business. The second loan, in the amount of $600,000, with warrantsto purchase 1,153,846 shares of common stock, will be deposited in a separatebank account and may be withdrawn only for direct use in connection with ourparticipation and investment in a potential future project.

 

InMay 1997, we entered into a Master Equipment Lease Agreement (“LeaseAgreement”) with First Security Bank of Nevada (“First Security”). Pursuant to that Lease Agreement, we entered into four leases for a total of$1,094,764.  In March 1998, we entered into a Business Loan Agreement withFirst Security with respect to a $1,000,000 promissory note.  The LeaseAgreement and the Business Loan Agreement contain various financial and othercovenants that we must meet.  As of April 1999, we were in default under theLease Agreement and the Business Loan Agreement for failure to make requiredpayments.  Subsequently, we entered into a Litigation ForbearanceAgreement (“Forbearance Agreement”) that contained a waiver for thenoncompliance as of October 2000.  Under the Forbearance Agreement, wewere required to make monthly payments of $50,000.  We are currently indefault under the Forbearance Agreement because our recent monthly paymentshave been only $28,000.  We are in the process of obtaining a waiver fromWells Fargo Bank (successor bank to First Security) for the prior payments andare negotiating to have the monthly payment reduced to $28,000.  As ofSeptember 30, 2002, the outstanding balance under the Lease Agreement and theBusiness Loan Agreement was approximately $380,000.

 

**Item 4.    Submission ofMatters to a Vote of Security Holders.**

 

At the annual meeting ofstockholders on July 24, 2002, On Stage's seven directors were re-elected tothe Board of Directors.  There were18,531,804 votes for and no votes withheld, for each of John W. Stuart, TimothyJ. Parrott, Gregory J. McIntosh, Robert O. Hellman, Jr., Fred Ordower, John D.Weil and Sigmund Rogich.

 

The stockholders also voted toapprove the appointment of BDO Seidman, LLP as On Stage's independent auditorsfor the fiscal year ended December 31, 2002. The vote was 18,531,804 for, none against and none abstained.

 

24

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**Item 5.    Other Information**

 

EffectiveNovember 12, 2002, Margaret Ann Freman, On Stage’s Senior Vice President andChief Financial Officer, will resign from On Stage to pursue otheropportunities. John D. Weil, an executive of McCown De Leeuw & Co. and adirector of On Stage since September 2001, will serve as interim Senior VicePresident and Chief Financial Officer of On Stage.

 

**Item 6.    Exhibits andReports on Form 8-K**

 

(a)   Exhibits

99.1   Certification Pursuant to U.S.C. 1350, asadopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.

(b)   Reports on Form 8-K

No reports on Form 8-K were filed during the quarterly period endedSeptember 30, 2002.

 

25

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**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                    |   | ON STAGE ENTERTAINMENT,  INC.                        |
|-------------------------|--------|------------------------------------------------------|
|                    |   |                                                 |
|                    |   |                                                 |
| Date: November 12, 2002 | By:    | /s/ TIMOTHY J. PARROTT                               |   |
|                    |   | Timothy J. Parrott                                   |
|                    |   | *Chief  Executive Officer*                           |
|                    |   |                                                 |
|                    |   |                                                 |
| Date: November 12, 2002 | By:    | /s/ MARGARET ANN FREMAN                              |   |
|                    |   | Margaret Ann Freman                                  |
|                    |   | *Senior  Vice President and Chief Financial Officer* |

 

 

----

 

 

I, Timothy J. Parrott, certify that:

 

1.  Ihave reviewed this quarterly report on Form 10-QSB of On Stage Entertainment,Inc.;

 

2. Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure that materialinformation relation to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management or otheremployees who have a signigicant role in the registrant’s internal controls;and

 

A-1

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6. The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 

 
| Date:  November 12, 2002 |   | /s/ Timothy  J. Parrott                          |
|--------------------------|--------|--------------------------------------------------|
|                     |   |      Timothy J. Parrott      |
|                     |   |      Chief Executive Officer |

 

A-2

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I, Margaret Ann Freman, certify that:

 

1.  I have reviewed this quarterly report on Form 10-QSB of On StageEntertainment, Inc.;

 

2.  Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3.  Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport;

 

4.  The registrant’s other certifying officers and I are responsiblefor establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)  designed such disclosure controls and procedures to ensure thatmaterial information relation to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)  evaluated the effectiveness of the registrant’s disclosurecontrols and procedures as of a date within 90 days prior to the filing date ofthis quarterly report (the “Evaluation Date”); and

 

c)  presented in quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.  The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a)  all significant deficiencies in the design or operation ofinternal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b)  any fraud, whether or not material, that involves management orother employees who have a signigicant role in the registrant’s internalcontrols; and

 

A-1

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6.  The registrant’s other certifying officers and I have indicatedin this quarterly report whether or not there were significant changes ininternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of our most recent evaluation, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

 

 
| Date:  November 12, 2002 |   | /s/ Margaret  Ann Freman                         |
|--------------------------|--------|--------------------------------------------------|
|                     |   |      Margaret Ann Freman,    |
|                     |   |      Chief Financial Officer |

 

A-2

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