**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION****Washington, DC20549**

 

**FORM10-QSB**

 
| **ý** | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD  ENDED MARCH 31, 2002** |
|------------|---------------------------------------------------------------------------------------------------------------------------------------|

 

**OR**

 
| **o** | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------|

 

### **Commission FileNumber 0-29402**

** **

**ON STAGEENTERTAINMENT, INC.**

(ExactName of Small Business Issuer  as Specified in its Charter)

 
| **Nevada**                                                     |   | **88-0214292**        |
|----------------------------------------------------------------|--------|-----------------------|
| (State  or other jurisdiction of)                              |   | (IRS  Employer)       |
| (incorporation  or organization)                               |   | (Identification  No.) |
|                                                           |   |                  |
| **4625 W. Nevso Drive**                                        |
| **Las Vegas, NV 89103**                                        |
| **(702) 252-1333**                                             |
| (Address  of Principal Executive Offices and Telephone Number) |

 

Check whether the issuer: (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.   YES ý     NO o

 

As of May 10, 2002, On Stage had outstanding11,307,930 shares of common stock, par value $0.01 per share.

 

 

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

 

**TABLE OF CONTENTS**

 
| Part I   | Financial Information                                                                       |
|----------|---------------------------------------------------------------------------------------------|
|     |                                                                                        |
| Item 1.  | Balance Sheets                                                                              |
|     | Statements of  Operations                                                                   |
|     | Statements of  Cash Flows                                                                   |
|     | Statement  of Stockholders’ Equity                                                     |
|     | Notes to Financial  Statements                                                              |
|     |                                                                                        |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|     |                                                                                        |
| Part II  | Other Information                                                                           |
| Item 1.  | Legal  Proceedings                                                                          |
| Item 2.  | Changes  in Securities                                                                      |
| Item 4.  | Submission  of Matters to a Vote of Security Holders                                        |
| Item 6.  | Reports on Form 8-K                                                                         |

 

2

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This document contains certainforward-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 acquisitions, business strategy, outstanding litigationmatters and the available defenses, the seasonality of our business, andliquidity issues, as well as information contained elsewhere in this reportwhere current statements are preceded by, followed by or include the words“believes,” “expects,” “anticipates” or similar expressions. For thesestatements, 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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Item 1.  Consolidated FinancialStatements

 

On Stage Entertainment, Inc. and Subsidiaries

ConsolidatedBalance Sheets

 
|                                                                                                                                                           |   | **March 31,  2002** |          | **December 31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------------|------------------------|--------|
| Assets                                                                                                                                                         |   |                |          |                   |   |
| Current assets                                                                                                                                                 |   |                |          |                   |   |
| Cash and cash equivalents                                                                                                                                      |   | $                   |  741,421 |                   | $      | 955,363 |   |
| Accounts receivable, net                                                                                                                                       |   | 626,801             |          | 650,188                |   |
| Inventory                                                                                                                                                      |   | 84,969              |          | 90,423                 |   |
| Deposits                                                                                                                                                       |   | 241,410             |          | 223,601                |   |
| Prepaid and other assets                                                                                                                                       |   | 359,706             |          | 343,307                |   |
| Total current assets                                                                                                                                           |   | 2,054,307           |          | 2,262,882              |   |
| Property, equipment and  leasehold improvements                                                                                                                |   | 6,942,974           |          | 7,081,925              |   |
| Less:  Accumulated  depreciation and amortization                                                                                                         |   | (6,111,102          | )        | (6,070,919             | )      |
| Property, equipment and  leasehold improvements, net                                                                                                           |   | 831,872             |          | 1,011,006              |   |
| Due from officer                                                                                                                                               |   | 210,039             |          | 203,318                |   |
| Show rights, net of  accumulated amortization of $255,254 and $189,607                                                                                         |   | 3,300,660           |          | 3,366,307              |   |
| Total Assets                                                                                                                                                   |   | $                   | 6,396,878     |                   | $      | 6,843,513 |   |
| Liabilities, Convertible  Preferred Stock, and Stockholders’ Deficit                                                                                      |   |                |          |                   |   |
| Current liabilities                                                                                                                                            |   |                |          |                   |   |
| Accounts payable                                                                                                                                               |   | $                   | 547,132       |                   | $      | 205,223 |   |
| Accrued payroll and other liabilities                                                                                                                          |   | 1,978,264           |          | 1,853,726              |   |
| Convertible debentures, net of beneficial conversion                                                                                                           |   | 145,015             |          | 143,353                |   |
| Short-term note, net of discount                                                                                                                               |   | 418,391             |          | —                 |   |
| Current maturities of long-term debt                                                                                                                           |   | 478,801             |          | 552,662                |   |
| Total current liabilities                                                                                                                                      |   | 3,567,603           |          | 2,754,964              |   |
| Accrued dividends payable                                                                                                                                      |   | 1,036,000           |          | 758,000                |   |
| Total liabilities                                                                                                                                              |   | 4,603,603           |          | 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 |   | 8,088,514           |          | 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                                                                                                                                            |   | (23,444,918         | )        | (21,593,535            | )      |
| Total stockholders’  deficit                                                                                                                              |   | (6,295,239          | )        | (4,725,465             | )      |
| Total  Liabilities, Convertible Preferred Stock, and Stockholders’ Deficit                                                                                |   | $                   | 6,396,878     |                   | $      | 6,843,513 |   |
|                                                                                                                                                                |        |                     |               |                        |        |  |  |  |

 

See notes to consolidated financial statements.

 

4

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On Stage Entertainment, Inc. and Subsidiaries

Consolidated Statements of Operations

 
|                                                          |   | **Three months ended  March 31,** |             |
|---------------------------------------------------------------|--------|-----------------------------------|------------------|
|                                                          |   | **2002**                          |             | **2001** |   |
|                                                          |   | **(Unaudited)**                   |             | **(Unaudited)** |   |
| Net revenues                                                  |   | $                                 |  4,537,852  |   | $ |   4,026,295 |   |
| Costs of revenues                                             |   | 5,135,753                         |             | 4,114,262 |   |
| Gross loss                                                    |   | (597,901)                         |             | (87,967 | ) |
| Operating expenses                                            |   |                              |             |   |   |
| Selling, general and administrative                           |   | 649,638                           |             | 541,129 |   |
| Depreciation and amortization                                 |   | 193,746                           |             | 248,985 |   |
| Total operating expenses                                      |   | 843,384                           |             | 790,114 |   |
| Operating loss                                                |   | (1,441,285                        | )                | (878,081 | ) |
| Loss on disposal of assets                                    |   | 64,454                            |             | — |   |
| Interest expense, net                                         |   | 30,669                            |             | 139,763 |   |
| Loss before income taxes                                      |   | (1,536,408                        | )                | (1,017,844 | ) |
| Income taxes                                                  |   | 4,475                             |             | — |   |
| Net loss                                                      |   | (1,540,883                        | )           | (1,017,844 | ) |
|                                                          |   |                              |             |   |   |
| Deemed dividends for  preferred stock                         |   | —                            |             | (2,812,800 | ) |
| Dividends accreted for  preferred stock                       |   | (32,500                           | )                | — |   |
| Dividends accrued for  preferred stock                        |   | (278,000                          | )                | (30,000 | ) |
|                                                          |   |                              |             |   |   |
| Net loss applicable to  common shares                         |   | $                                 |  (1,851,383 | )  | $ |   (3,860,644 | ) |
|                                                          |   |                              |             |   |   |   |   |
| Basic and diluted loss per  common share                      |   | $                                 |  (0.16      | ) | $ |  (0.34 | ) |
| Basic and diluted average number of common shares outstanding |   | 11,307,930                        |             | 11,307,930 |   |
|                                                               |        |                                   |                  |  |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

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On Stage Entertainment, Inc. and Subsidiaries

ConsolidatedStatements of Cash Flows

 
|                                                                         |   | **Increase (Decrease) in Cash and  Cash Equivalents** |       |
|------------------------------------------------------------------------------|--------|-------------------------------------------------------|------------|
|                                                                         |   | **Three months ended  March 31,**                     |       |
|                                                                         |   | **2002**                                              |       | **2001** |   |
|                                                                         |   | **(Unaudited)**                                       |       | **(Unaudited)** |   |
| Cash flows  from operating activities                                        |   |                                                  |       |   |   |
| Net loss                                                                     |   | $                                                     | (1,540,883 | ) | $ | (1,017,844 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                                                  |       |   |   |
| Depreciation and amortization                                                |   | 193,746                                               |       | 248,985 |   |
| Amortization of beneficial conversion                                        |   | 1,662                                                 |       | 10,997 |   |
| Loss on disposal of property, plant and  equipment                           |   | 64,454                                                |       | — |   |
| Increase (decrease) in operating assets and  liabilities:                    |   |                                                  |       |   |   |
| Accounts receivable                                                          |   | 33,053                                                |       | 45,232 |   |
| Inventory                                                                    |   | 5,454                                                 |       | (12,090 | ) |
| Deposits                                                                     |   | (17,809                                               | )          | (31,021 | ) |
| Prepaid and other assets                                                     |   | (16,399                                               | )          | (64,979 | ) |
| Accounts payable and accrued expenses                                        |   | 341,910                                               |       | (461,383 | )  |
| Accrued payroll and other liabilities                                        |   | 124,538                                               |       | 99,931 |   |
| Total adjustments                                                            |   | 730,609                                               |       | (164,328 | ) |
| Net cash  used in operating activities                                       |   | (810,274                                              | )     | (1,182,172 | ) |
| Cash flows  from investing activities                                        |   |                                                  |       |   |   |
| Advances on notes receivable from officer                                    |   | (6,721                                                | )          | (15,000 | ) |
| Acquisition of show rights                                                   |   | —                                                |       | (250,000 | ) |
| Capital expenditures                                                         |   | (23,085                                               | )          | (75,478 | ) |
| Net cash  used in investing activities                                       |   | (29,806                                               | )          | (340,478 | ) |
|                                                                         |   |                                                  |       |   |   |
| Cash used in  financing activities                                           |   |                                                  |       |   |   |
| Proceeds received from convertible  debentures                               |   | —                                                |       | 650,000 |   |
| Proceeds of issuing Series A Convertible  Preferred Stock                    |   | —                                                |       | 4,700,000 |   |
| Payment on long-term note                                                    |   | (73,862                                               | )          | (151,500 | ) |
| Payment on short-term borrowing                                              |   | —                                                |       | (650,000 | ) |
| Proceeds received on promissory notes                                        |   | 700,000                                               |       | — |   |
| Net cash  provided by financing activities                                   |   | 626,138                                               |       | 4,548,500 |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | (213,942                                              | )     | 3,025,850 |   |
| Cash and  cash equivalents at beginning of period                            |   | 955,363                                               |       | 517,353 |   |
| Cash and  cash equivalents at end of period                                  |   | $                                                     | 741,421    |   | $ | 3,543,203 |   |
|                                                                              |        |                                                       |            |  |  |  |  |  |

 

See notes to consolidated financial statements.

 

6

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**Supplemental Schedule of Non-Cash Investing and FinancingActivities**

 

Accrued dividends on Series A ConvertiblePreferred Stock of $278,000 and $30,000 were attributable to and recognizedduring the quarters ended March 31, 2002 and 2001, respectively.

 

Accretion of dividends on Series AConvertible Preferred Stock was $32,500 during the quarter ended March 31,2002.

 

On March 25, 2002, the Company issueddetachable warrants in conjunction with a short-term promissory note resulting ina discount of $281,609.

 

Deemed dividends relating to the issuance ofSeries A Convertible Preferred Stock on March 13, 2001, was $2,812,800.

 

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On Stage Entertainment, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity (Deficit)

 
|                                                                         |   | **Common  Stock** |   |       |    | **Additional  Paid in** |   | **Accumulated** |   |       |        |
|------------------------------------------------------------------------------|--------|-------------------|--------|------------|---------|-------------------------|--------|-----------------|--------|------------|-------------|
|                                                                         |   | **Shares**        |   | **Amount** |    | **Capital**             |   | **Deficit**     |   | **Total**  |        |
| 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, 2001                                                       |   | 11,307,930        |   | $          | 113,079 |                    | $      | 17,036,600      |   | $          | (23,444,918 | ) | $ | (6,295,239 | ) |

 

See notes to consolidated financial statements.

 

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**On Stage Entertainment, Inc. andSubsidiariesNotes to Consolidated FinancialStatementsMarch 31, 2002**

**Basis ofPresentation**

 

The financial statements included in thisreport include the accounts of On Stage Entertainment, Inc., a publicly tradedNevada corporation (the “Company” or “On Stage”) and its subsidiaries: Legendsin Concert, Inc., a Nevada corporation (“LIC”); On Stage Marketing, Inc., aNevada corporation (“Marketing”); On Stage Theaters, Inc., a Nevada corporation(“Theaters”); Wild Bill’s California, Inc., a Nevada corporation (“WildBills”); On Stage Merchandise, Inc., a Nevada corporation (“Merchandise”); OnStage Events, Inc., a Nevada corporation (“Events”); On Stage CasinoEntertainment, Inc., a Nevada corporation (“Casino”); On Stage Productions,Inc., a Nevada corporation (“Productions”); On Stage Theaters North MyrtleBeach, Inc., a Nevada corporation (“North Myrtle”); On Stage Theaters SurfsideBeach, Inc., a Nevada corporation (“Surfside”); and Country Tonite Branson, LLC(“Country Tonite Branson”) (collectively, the “Subsidiaries”).

 

In the opinion of the management of On Stageand the Subsidiaries, the accompanying unaudited consolidated financialstatements include all normal adjustments considered necessary to presentfairly the financial position as of March 31, 2002, and the results ofoperations and cash flows for the three months ended March 31, 2002 and 2001.Interim results are not necessarily indicative of results for the full year. Theconsolidated financial statements and notes are presented as permitted by Form10-QSB and should be read in conjunction with Management’s Discussion andAnalysis and audited consolidated financial statements and notes theretoincluded in our Form 10-KSB for the fiscal year ended December 31, 2001.Certain reclassifications have been made for consistent presentation.

** **

**(1)Acquisition of Country Tonite**

 

In February 2001, On Stage acquiredsubstantially all the assets of CRC of Branson, Inc. and Country ToniteEnterprises, Inc. which primarily consisted of all their rights and title inand to Country Tonite, for a purchase price of $3,800,000. The assets acquiredwere transferred to Country Tonite Branson. Country Tonite is an award-winning theatrical production, which has beenpresented in Branson, Missouri and Pigeon Forge, Tennessee.

 

The acquisition has been accounted for as apurchase and, accordingly, the operating results of Country Tonite have beenincluded in the consolidated financial statements of On Stage since the date ofacquisition. The show rights acquired (approximately $3,556,000) are beingamortized on a straight-line basis over 15 years.

 

The following unaudited pro formaconsolidated results of operations for the quarter ended March 31, 2001 assumethe acquisition occurred as of January 1, 2000:

 
|                                |   | **Three Months Ended  March 31, 2001** |      |
|-------------------------------------|--------|----------------------------------------|-----------|
| Net revenues                        |   | $                                      | 4,026,295 |   |
| Net loss from continuing operations |   | (1,146,031                             | )         |
| Loss per common share:              |   |                                   |      |
| Basic and diluted                   |   | (0.35                                  | )         |
|                                     |        |                                        |           |  |

 

9

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The unaudited results are not necessarilyindicative of the results that would have been obtained had the acquisitionhappened as of an earlier date, nor are they indicative of future results.

 

Country Tonite had no revenue for the monthof January 2001, as the show was closed during the off-season months.

** **

**(2)Promissory Notes**

 

In March 2002, MDC agreed toloan On Stage $1,300,000 in the form of promissory notes with detachablewarrants to purchase shares of the Company’s common stock.  Interest on the notes is payable at the rateof 15% per annum, compounded quarterly, and the warrants have an exercise priceof $.50 per share exercisable for a ten-year period.  The first loan, in the amount of $700,000, was funded on March 27,2002 and is due and payable on July 1, 2002. MDC, at its sole discretion, can extend the maturity date to December31, 2006.  In connection with the$700,000 promissory note, MDC received warrants to purchase 1,346,154 shares ofcommon stock.  Using the Black Scholespricing model, the warrants have a value of $281,609, which is being treated asa discount on the note and is being amortized over the term.  The funds will be used (1) to reimburse MDC$250,000 of expenses incurred on behalf of On Stage, including but not limitedto attorney’s fees incurred in connection with this promissory note, and (2)for working 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.

** **

**(3) Lossper share**

 

Statement of Financial Accounting StandardNo. 128, Earnings per Share, provides for the calculation of Basic and Dilutedearnings per share. Basic earnings per share includes no dilution and iscomputed by dividing income available to common shareholders by the weightedaverage number of common shares outstanding for the period. Diluted earningsper share reflect the potential dilution of securities that could share in theearnings of the entity, similar to fully diluted earnings per share.

 

For the three months ended March 31, 2002,potential dilutive securities representing 1,623,950 outstanding common stockoptions, 5,756,309 outstanding common stock warrants, and 1,852,632 shares ofpreferred 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 stockwarrants which convert into 2,800,000 shares of preferred stock which furtherconvert into 28,000,000 shares of common stock contingent upon On Stageachieving certain EBITDA levels. These potentially dilutive securities are notincluded, since their effect would be anti-dilutive.

 

For the three months ended March 31, 2001,potential dilutive securities representing 1,464,850 outstanding common stockoptions, 4,410,155 outstanding common stock warrants, and 1,200,000 shares ofpreferred stock, which are convertible into 12,000,000 shares of common stock,are not included, since their effect would be anti-dilutive.  Furthermore, On Stage has preferred stockwarrants which convert into 2,800,000 shares of preferred stock which furtherconvert into 28,000,000 shares of common stock contingent upon On Stageachieving certain EBITDA levels. These potentially dilutive securities are notincluded, since their effect would be anti-dilutive.

** **

**(4) Commitmentsand contingencies**

 

In March 2002, On Stage received notice of acivil complaint filed in the Superior Court of New Jersey — Law Division —Atlantic County on January 11, 2002, by former employees of Bally’s Park Place,Inc., a venue for one of our full time Legends productions, against Bally’s, OnStage and several Legends performers that we hire as independentcontractors.  The complaint allegesviolations of the New Jersey Law Against Discrimination, retaliatorytermination by conspiracy, misconduct causing severe emotional 

 

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distress, assault and battery, and loss ofconsortium, and seeks damages of $7,750,000, plus cost of attorneys’ fees.  On Stage has not yet responded to thecomplaint and it is too early for management to determine the probability of anunfavorable outcome and the range of possible loss, if any. On Stage believesthat the case is without merit with respect to itself, and intends tovigorously defend the action.

** **

**(5) SegmentInformation**

 

The following information is presented inaccordance with SFAS No. 131.

 

On Stage derives its net revenues from fivebusiness units categorized by three reportable segments:

 

•      Casinos. The Casinossegment primarily sells live theatrical productions to casinos for fixed fees.The Casinos segment operates the Legends show at the Imperial Palace in LasVegas, Nevada, and at Bally’s Park Place in Atlantic City, New Jersey.

 

•      Theaters. The Theaterssegment rents live theaters and dinner theaters in urban and resort touristlocations. The Theaters segment derives revenues from ticket sales along withfood and beverages to patrons who attend the live theatrical productions.

 

•      Events. The Eventsbusiness unit sells live theatrical productions to commercial clients, whichinclude corporations, theme and amusement parks, and cruise lines, for fixedfees. Revenues generated from the Events business unit are included in theCasinos segment.

 

•      Merchandise. TheMerchandise business unit sells merchandise and souvenir photography productsto patrons who attend the Casinos, Theaters, and Events productions. Revenuesgenerated from the Merchandise business unit are included in the Theaterssegment.

 

•      Production Services. TheProduction Services segment sells technical equipment and services tocommercial clients. However, the Production Services segment’s primary focus isto provide technical support for the Casinos and Theaters segments and theEvents and Merchandise business units.

 

In addition to these business units, On Stagereports corporate overhead costs through a separate unit, On Stage Enterainment(“OSE”).

 

The accounting policies of the reportableoperating segments are the same as those described in the Summary of AccountingPolicies contained in On Stage’s Annual Report on Form 10-KSB for the fiscalyear ended December 31, 2001. Management evaluates the performance of itsoperating segments based upon the profit or loss from operations.

 

On Stage’s reportable segments include strategicbusiness units because each business unit services a different market orperforms a specialized function in support of a given market.

 

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The following table sets forth the segmentprofit/(loss) and asset information:

 
|                             |   | **For the three months ended March 30, 2002** |      |
|----------------------------------|--------|-----------------------------------------------|-----------|
|                             |   | **Casinos**                                   |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidated** |   |
| Revenues from external customers |   | $                                             | 2,460,403 |   | $ | 700 |   | $ | 2,076,749 |   | $ | — |   | $ | 4,537,852 |   |
| Interest expense                 |   | $                                             | 51        |   | $ | — |   | $ | 7,947 |   | $ | 22,671 |   | $ | 30,669 |   |
| Depreciation and amortization    |   | $                                             | 24,370    |   | $ | 34,531 |   | $ | 101,406 |   | $ | 33,439 |   | $ | 193,746 |   |
| Segment profit (loss)            |   | $                                             | 402,606   |   | $ | (148,175 | ) | $ | (1,114,723 | ) | $ | (680,591 | ) | $ | (1,540,883 | ) |
| Segment fixed assets             |   | $                                             | 2,999,211 |   | $ | 945,118 |   | $ | 1,850,804 |   | $ | 1,147,841 |   | $ | 6,942,974 |   |
| Additions to long lived assets   |   | $                                             | 17,219    |   | $ | — |   | $ | 4,691 |   | $ | 1,175 |   | $ | 23,085 |   |

 

 
|                              |   | **For the three months ended March 30, 2001** |      |
|-----------------------------------|--------|-----------------------------------------------|-----------|
|                              |   | **Casinos**                                   |      | **Production  Services** |   | **Theaters** |   | **OSE** |   | **Total  Consolidated** |   |
| Revenues  from external customers |   | $                                             | 1,818,024 |   | $ | 4,145 |   | $ | 2,204,126 |   | $ | — |   | $ | 4,026,295 |   |
| Interest expense                  |   | $                                             | 778       |   | $ | — |   | $ | 66,637 |   | $ | 72,348 |   | $ | 139,763 |   |
| Depreciation and  amortization    |   | $                                             | 99,978    |   | $ | 28,202 |   | $ | 71,376 |   | $ | 49,429 |   | $ | 248,985 |   |
| Segment profit (loss)             |   | $                                             | 496,018   |   | $ | (228,876 | ) | $ | (686,385 | ) | $ | (598,601 | ) | $ | (1,017,844 | ) |
| Segment fixed assets              |   | $                                             | 2,997,373 |   | $ | 856,598 |   | $ | 1,317,807 |   | $ | 1,090,000 |   | $ | 6,261,778 |   |
| Additions to long lived  assets   |   | $                                             | 28,474    |   | $ | 463 |   | $ | 36,620 |   | $ | 9,921 |   | $ | 75,478 |   |

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

This document contains certainforward-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 acquisitions, business strategy, outstanding litigationmatters and the available defenses, the seasonality of our business, andliquidity issues, as well as information contained elsewhere in this reportwhere current statements are preceded by, followed by or include the words“believes,” “expects,” “anticipates” or similar expressions. For thesestatements, 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.

 

The most important factors that could preventus from achieving our goals and cause the assumptions underlying theforward-looking statements and the actual results to differ materially fromthose expressed in or implied by those forward-looking statements include theinformation provided under the heading “Description of Business-Risk Factors”in Item 1 of our Annual Report on Form 10-KSB for the year ended December 31,2001, as well as the following:

 

•                       Dependence on our flagship *Legendsin Concert* production and our principal production venues;

 

•                       The ability to successfully produce and market new productions and tomanage the growth associated with any new productions;

 

•                       Risks associated with our acquisition strategy, including our abilityto successfully identify, complete and integrate strategic acquisitions;

 

•                       The ability to meet our commitments and obtain alternative andadditional financing on commercially reasonable terms;

 

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

 

•                       Fluctuations in quarterly operating results and the highly seasonalnature of our business;

 

•                       The ability to reproduce the performance, likeness and voice of variouscelebrities without infringing on the publicity rights of those celebrities ortheir estates, as well as our ability to protect our intellectual propertyrights;

 

•                       The ability to successfully manage the litigation pending against usand to avoid future litigation; and

 

•                       The results of operations which depend on numerous factors, includingwhen our contracts begin and end, the timing and amount of new business wegenerate, our revenue mix, the timing and level of additional selling, generaland administrative expense and the general competitive conditions in theleisure and entertainment industry, as well as the overall economy.

 

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**Results ofOperations**

 

The following tables set forth the results ofoperations for the reportable segments indicated:

 
|                                  |   | **For the quarter ended March 31, 2002** |      |
|---------------------------------------|--------|------------------------------------------|-----------|
|                                  |   | **Casinos**                              |      | **Production  Services** |   | **Theaters** |   | **Sub-Total  Operating  Segments** |   | **OSE** |   | **Total  Consolidated** |   |
| Net revenues                          |   | $                                        | 2,460,403 |   | $ | 700 |   | $ | 2,076,749 |   | $ | 4,537,852 |   | $ | — |   | $ | 4,537,852 |   |
| Cost of revenues                      |   | 2,003,583                                |      | 114,844 |   | 3,017,326 |   | 5,135,753 |   | — |   | 5,135,753 |   |
| Gross profit (loss)                   |   | 456,820                                  |      | (114,144 | ) | (940,577 | ) | (597,901 | ) | — |   | (597,901 | ) |
| Selling, general& administrative  |   | 29,793                                   |      | — |   | (161 | )  | 29,632 |   | 620,006 |   | 649,638 |   |
| Depreciation & amortization       |   | 24,370                                   |      | 34,531 |   | 101,406 |   | 160,307 |   | 33,439 |   | 193,746 |   |
| Operating income (loss)               |   | 402,657                                  |      | (148,675 | ) | (1,041,822 | ) | (787,840 | ) | (653,445 | ) | (1,441,285 | ) |
| Interest expense, net                 |   | 51                                       |      | — |   | 7,947 | )  | 7,998 |   | 22,671 |   | 30,669 |   |
| (Gain) loss on disposal of assets     |   | —                                   |      | (500 | ) | 64,954 |   | 64,454 |   | — |   | 64,454 |   |
| Net income (loss) before income taxes |   | 402,606                                  |      | (148,175 | ) | (1,114,723 | ) | (860,292 | ) | (676,116 | ) | (1,536,408 | ) |
| Income taxes                          |   | —                                   |      | — |   | — |   | — |   | 4,475 |   | 4,475 |   |
| Net Income (loss)                     |   | $                                        | 402,606   |   | $ | (148,175 | ) | $ | (1,114,723 | ) | $ | (860,292 | ) | $ | (680,591 | ) | $ | (1,540,883 | ) |

 

 
|                                  |   | **For the quarter ended March 31, 2001** |      |
|---------------------------------------|--------|------------------------------------------|-----------|
|                                  |   | **Casinos**                              |      | **Production  Services** |   | **Theaters** |   | **Sub-Total  Operating  Segments** |   | **OSE** |   | **Total  Consolidated** |   |
| Net revenue                           |   | $                                        | 1,818,024 |   | $ |  4,145 |   | $ | 2,204,126 |   | $ | 4,026,295 |   | $ | — |   | $ | 4,026,295 |   |
| Cost of revenues                      |   | 1,186,697                                |      | 204,819 |   | 2,722,746 |   | 4,114,262 |   | — |   | 4,114,262 |   |
| Gross profit (loss)                   |   | 631,327                                  |      | (200,674 | ) | (518,620 | ) | (87,967 | ) | — |   | (87,967 | ) |
| Selling, general & administrative |   |  

34,553                           |      | — |   | 29,752 |   | 64,305 |   | 476,824 |   | 541,129 |   |
| Depreciation & amortization       |   | 99,978                                   |      | 28,202 |   | 71,376 |   | 199,556 |   | 49,429 |   | 248,985 |   |
| Operating income (loss)               |   | 496,796                                  |      | (228,876 | ) | (619,748 | ) | (351,828 | ) | (526,253 | ) | (878,081 | ) |
| Interest expense, net                 |   | 778                                      |      | — |   | 66,637 |   | 67,415 |   | 72,348 |   | 139,763 |   |
| Net income (loss)                     |   | $                                        | 496,018   |   | (228,876 | ) | (686,385 | ) | (419,243 | ) | (598,601 | ) | (1,017,844 | ) |
|                                       |        |                                          |           |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**QuarterEnded March 31, 2002 versus Quarter Ended March 31, 2001**

*** ***

***Net Revenues***.Revenues were approximately $4,538,000 for the quarter ended March 31, 2002,compared to approximately $4,026,000 for the quarter ended March 31, 2001, anincrease of $512,000, or 12.7%. Our revenue is derived from five business units(categorized by three reportable segments): Casinos, Theaters, Events,Merchandise, and Production Services. Revenues from Events are included in the Casinos segment. Revenues fromMerchandise are included in the Theaters segment.

 

Casinos revenues were approximately$2,460,000 for the quarter ended March 31, 2002, compared to approximately$1,818,000 for the quarter ended March 31, 2001, an increase of $642,000, or35.3%. This increase was primarily attributable to the addition of the Bravoshow in Las Vegas, Nevada.

 

Production Services revenues were $700 forthe quarter ended March 31, 2002, compared to approximately $4,000 for thequarter ended March 31, 2001, a decrease of $3,300. The decrease was primarilyattributable to a reduction in equipment rental revenues.

 

Theaters revenues were approximately$2,077,000 for the quarter ended March 31, 2002, compared to approximately$2,204,000 for the quarter ended March 31, 2001, a decrease of $127,000, or5.8%. The decrease was primarily attributable to a decline in show counts atseveral venues due to a decrease in overall tourism during the first quarter of2002 as compared to the first quarter of 2001.

*** ***

***Costs of Revenues***. Total costs of revenues were approximately $5,136,000 for the quarterended March 31, 2002, compared to approximately $4,114,000 for the quarterended March 31, 2001, an increase of $1,022,000, or 24.8%. Costs of revenuesincreased to 113.2% of net revenues for the quarter ended March 31, 2002, ascompared to 102.2% for the quarter ended March 31, 2001. The increase in thecosts of revenues was primarily attributable to the inclusion of the CountryTonite operations for the full first quarter of 2002, and the addition of theBravo show.

*** ***

***Selling, General and Administrative****.** ***Selling,general and administrative costs were approximately $650,000 for the quarterended March 31, 2002, as compared to approximately $541,000 for the quarterended March 31, 2001, an increase of $109,000, or 20.1%. The increase in theselling, general and administrative costs was primarily attributable to theemployment of new senior management, and the salaries associated with thosepositions.  Selling, general andadministrative costs increased slightly to 14.3% of net revenues for the quarterended March 31, 2002, as compared to 13.4% for the quarter ended March 31,2001.

*** ***

***Depreciation and Amortization***. Depreciation and amortization for thequarter ended March 31, 2002, was approximately $194,000, as compared toapproximately $249,000 for the quarter ended March 31, 2001, a decrease of$55,000, or 22.1%. The decrease was primarily attributable to having fewerdepreciable assets.

*** ***

***Operating Income (Loss)***. Our operating loss was approximately $1,441,000 for the quarter endedMarch 31, 2002, compared to an operating loss of approximately $878,000 for thequarter ended March 31, 2001, an increase of $563,000, or 64.1%.  The increase in the operating loss wasprimarily attributable to the increase in the cost of revenues and the increasein selling, general and administrative costs, partially offset by the increasein revenues.

*** ***

***Interest Expense, Net***. Interest expense for the quarter ended March 31, 2002, wasapproximately $31,000, as compared to approximately $140,000 for the quarterended March 31, 2001, a decrease of $109,000, or 77.9%. The decrease wasprimarily due to the repayment of the short-term borrowing associated with theacquisition of Country Tonite and the conversion of debentures, both of whichoccurred subsequent to March 31, 2001.

 

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***Income Taxes***.We have not accrued any federal income tax for the quarter ended March 31,2002. At March 31, 2002, we had federal net operating loss carryforwards ofapproximately $17,641,996. Under Internal Revenue Code Section 382, certainsignificant changes in ownership that On Stage is currently undertaking mayrestrict the future utilization of these tax loss carryforwards. Because wecannot determine that it is more likely than not to recognize the deferred taxassets, we have provided a full valuation allowance on the deferred tax assets.

** **

**Seasonalityand Quarterly Results**

 

Our business has been, and is expected toremain, highly seasonal, with the majority of our revenue being generatedduring the months of April through October. Our Legends shows in Branson,Missouri, and Myrtle Beach, South Carolina, are dark in January, and ourCountry Tonite show in Branson, Missouri, is dark in January and February.  Part of our business strategy is to increasesales in tourist markets that experience their peak seasons from Novemberthrough March, so as to offset this seasonality in revenues.

 

The following table sets forth On Stage’s netrevenue for each of the last five quarters ended March 31, 2002:

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

 

**Liquidityand Capital Resources**

*** ***

***General***

 

We have historically met our working capitalrequirements through a combination of cash flow from operations, equity anddebt offerings and traditional bank financing. We anticipate, based on ourproposed plans and assumptions relating to our operations, that our currentcash, cash equivalent balances, anticipated revenue from operations and ourworking capital line are sufficient to fund our ongoing operations.

 

In February 2001, we entered into anagreement with McCown De Leeuw & Co., Inc., a private equity investmentfirm (“MDC”), under which MDC agreed to invest up to $20 million in the form ofconvertible preferred securities.  The terms of the agreement provide forfunding in four tranches of $6.0 million, $4.0 million, $5.0 million and $5.0million.  The second and third tranches are in the form of warrants exercisableover a 10-year period, at our option.  The fourth tranche is exercisableonly after the third tranche has been funded.  The availability of fundsis subject to the following:

 

•                    We must submit a notice to our board thatincludes the proposed funding amount, which must be at least $2 million, andthe specific growth or acquisition opportunity for which the funds will beused;

•                    We must have met the EBITDA budget approvedby our board for the year-to-date period; and

•                    MDC must have earned a minimum annualizedrate of return of 35% on its funded investment.

 

The convertible preferred stock has an annualdividend rate of 12%, of which 10% is payable in cash and 2% is payable inkind. The convertible preferred stock has a liquidation preference of $5.00 pershare and is convertible into shares of common stock at a conversion price of$.50 or $.75 per share depending on certain factors.  There is a mandatoryredemption provision under certain circumstances, including a 

 

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change of control.  We are precludedfrom using the MDC investment to fund operating losses.  The first $6million investment was made in March 2001 and was used to fund newproductions. In August 2001, MDC funded its second investment by exercisingwarrants—per the terms of the prior MDC investment—for 400,000 shares of SeriesA Convertible Preferred Stock in consideration of $2,000,000.  At the timeof MDC’s second investment, our financial performance failed to meet theminimum EBITDA thresholds set forth in the agreement as a condition to MDC’sobligation to fund the second tranche of its investment.   However,MDC agreed to consummate the funding if we issued it a warrant to purchase anadditional 400,000 shares of our Series A  Convertible Stock at anexercise price of $0.00001, exercisable for a 10-year period.  The warrantmay only be exercised if we fail to meet our cumulative EBITDA targets for the2002 and 2003 calendar years.  MDC’s $2,000,000 investment will be convertibleinto either 4,000,000 shares of common stock, or, if we fail to achieve certainEBITDA targets, 8,000,000 shares of common stock.  We used the investmentto fund the last $2,800,000 payment for the acquisition of Country Tonite dueon July 31, 2001.

 

In March 2002, MDC agreed toloan On Stage $1,300,000 in the form of promissory notes with detachablewarrants to purchase shares of the Company’s common stock.  Interest on the notes is payable at the rateof 15% per annum, compounded quarterly, and the warrants have an exercise priceof $.50 per share exercisable for a ten-year period.  The first loan, in the amount of $700,000, was funded on March27, 2002 and is due and payable on July 1, 2002.  MDC, at its sole discretion, can extend the maturity date toDecember 31, 2006.  In connection withthe $700,000 promissory note, MDC received warrants to purchase 1,346,154shares of common stock.  Using the BlackScholes pricing model, the warrants have a value of $281,609, which is beingtreated as a discount on the note and is being amortized over the term.  The funds will be used (1) to reimburse MDC$250,000 of expenses incurred on behalf of On Stage, including but not limitedto attorney’s fees incurred in connection with this promissory note, and (2)for working 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 aMaster Equipment Lease Agreement (“Lease Agreement”) with First Security Bankof Nevada (“First Security”).  Pursuantto that Lease Agreement, we entered into four leases for a total of$1,094,764.  In March 1998, we enteredinto a Business Loan Agreement with First Security with respect to a $1,000,000promissory note.  The Lease Agreementand the Business Loan Agreement contain various financial and other covenantsthat we must meet.  As of April 1999, wewere in default under the Lease Agreement and the Business Loan Agreement forfailure to make required payments. Subsequently, we entered into a Litigation Forbearance Agreement(“Forbearance Agreement”) that contained a waiver for the noncompliance as ofOctober 2000.  Under the ForbearanceAgreement, we were required to make monthy payments of $50,000.  We are currently in default under theForbearance Agreement because our recent monthly payments have been only$28,000.  We are in the process ofobtaining a waiver from Wells Fargo Bank (successor bank to First Security) forthe prior payments and are negotiating to have the monthly payment reduced to$28,000.  As of March 31, 2002, theoutstanding balance under the Lease Agreement and the Business Loan Agreementwas approximately $478,000.

*** ***

***Cash Flow***

 

For the three months ended March 31, 2002, OnStage had net cash used in operations of approximately $810,000. As of March31, 2002, On Stage had approximately $741,000 in cash and cash equivalents. Theoperating deficit for the quarter ended March 31, 2002, was primarilyattributable to a $1,541,000 loss, partially offset by an increase in accountspayable and accrued expenses.  For thethree months ended March 31, 2001, On Stage had net cash used in operations ofapproximately $1,182,000. As of March 31, 2001, On Stage had approximately$3,543,000 in cash and cash equivalents. The operating deficit for the quarterended March 31, 2001, was primarily attributable to a reduction in accountspayable and a $1,018,000 loss.

 

The net cash used in investing activities forthe three months ended March 31, 2002, of approximately $29,000 was primarilyattributable to capital expenditures. The net cash used in investing activities for the 

 

17

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three months ended March 31, 2001, ofapproximately $340,000 was primarily attributable to an advance on a notereceivable from a stockholder, capital expenditures and direct acquisitioncosts.

 

Net cash provided by financing activities forthe three months ended March 31, 2002, of approximately $626,000 was primarilyattributable to the proceeds from the issuance of promissory notes.  Net cash provided by financing activitiesfor the three months ended March 31, 2001, of approximately $4,549,000, wasprimarily attributable to the proceeds from convertible debentures and proceedsfrom issuance of the Series A Convertible Preferred Stock, partially offset bypayment on long-term debt.

*** ***

***Working Capital***

 

At March 31, 2002, we had a working capitaldeficit of approximately $1,513,000, which resulted primarily from an increasein short-term debt.  At March 31, 2001,we had a working capital deficit of approximately $2,517,000, which resultedprimarily from an increase in convertible debentures and short-term debt. Thisincrease was partially offset by an increase in cash and cash equivalents.

 

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**PART II.****OTHERINFORMATION**

**Item 1****. Legal Proceedings**

 

In March 2002, On Stage received notice of acivil complaint filed in the Superior Court of New Jersey — Law Division —Atlantic County on January 11, 2002, by former employees of Bally’s Park Place,Inc., a venue for one of our full time Legends productions, against Bally’s, OnStage and several Legends performers that we hire as independentcontractors.  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.  On Stagehas not yet responded to the complaint and 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.

** **

**Item 2****. Changes in Securities**

 

In March 2002, we issued warrants to purchase1,346,154 shares of our common stock to MDC in consideration of a $700,000loan.  The warrants have an exerciseprice of $0.50 per share and are exercisable for 10 years from the date ofissuance. The issuance was made in reliance on an exemption from registrationunder Section 4(2) of the Securities Act as an issuance not involving a publicoffering.

** **

**Item 3. Defaults Upon Senior Securities**

 

In May 1997, we entered into aMaster Equipment Lease Agreement (“Lease Agreement”) with First Security Bankof Nevada (“First Security”).  Pursuantto that Lease Agreement, we entered into four leases for a total of$1,094,764.  In March 1998, we enteredinto a Business Loan Agreement with First Security with respect to a $1,000,000promissory note.  The Lease Agreementand the Business Loan Agreement contain various financial and other covenantsthat we must meet.  As of April 1999, wewere in default under the Lease Agreement and the Business Loan Agreement forfailure to make required payments. Subsequently, we entered into a Litigation Forbearance Agreement(“Forbearance Agreement”) that contained a waiver for the noncompliance as ofOctober 2000.  Under the ForbearanceAgreement, we were required to make monthly payments of $50,000.  We are currently in default under the ForbearanceAgreement because our recent monthly payments have been only $28,000.  We are in the process of obtaining a waiverfrom Wells Fargo Bank (successor bank to First Security) for the prior paymentsand are negotiating to have the monthly payment reduced to $28,000.  As of March 31, 2002, the outstandingbalance under the Lease Agreement and the Business Loan Agreement wasapproximately $478,000.

 

**Item 4****. Submissionof Matters to a Vote of Security Holders**

 

None.

** **

**Item 5. Other Information**

 

None.

** **

**Item 6****. Exhibits & Reports on Form 8-K**

 

None.

 

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**SIGNATURE**

In accordance with the requirements of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                | ON STAGE  ENTERTAINMENT, INC. |
|---------------------|-------------------------------|
|                |                          |   |
|                |                          |   |
|                |                          |   |
| Date: May  13, 2002 |                          | By: /s/  Timothy J. Parrott |
|                |                          | Timothy J.  Parrott |
|                |                          | President  and Chief Executive Officer |
|                |                          |   |
|                |                          |   |
| Date: May  13, 2002 |                          | By: /s/  Margaret Ann Freman |
|                |                          | Margaret Ann  Freman |
|                |                          | Senior Vice  President and |
|                |                          | Chief  Financial Officer |

 

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