-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SvISlBq1cvEW/3WuUyRkS3M1xF6EH0Cm5XdqgSeCXo72iWA1yNqx0zj7AHCHNDK+ RXPrDDmHIB7WlLDbdAhjHw== 0000861058-98-000005.txt : 19980427 0000861058-98-000005.hdr.sgml : 19980427 ACCESSION NUMBER: 0000861058-98-000005 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19980424 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLASSIC RESTAURANTS INTERNATIONAL INC /CO/ CENTRAL INDEX KEY: 0000861058 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 841122431 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28704 FILM NUMBER: 98600497 BUSINESS ADDRESS: STREET 1: 3500 PARKWAY LANE STREET 2: SUITE 435 CITY: NORCROSS STATE: GA ZIP: 30071 BUSINESS PHONE: 7707299010 MAIL ADDRESS: STREET 1: 3500 PARKWAY LANE STREET 2: SUITE 435 CITY: NORCROSS STATE: GA ZIP: 30092 FORMER COMPANY: FORMER CONFORMED NAME: CLASSIC RESTAURANTS INC/CO DATE OF NAME CHANGE: 19960604 FORMER COMPANY: FORMER CONFORMED NAME: CASINOS INTERNATIONAL INC/CO DATE OF NAME CHANGE: 19960604 FORMER COMPANY: FORMER CONFORMED NAME: REGIONAL EQUITIES CORP DATE OF NAME CHANGE: 19930328 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] THE FISCAL YEAR ENDED JUNE 30, 1997 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number: 0-28704 CREATIVE RECYCLING TECHNOLOGIES, INC. (Name of small business issuer in its charter) GEORGIA 84-1122431 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3500 PARKWAY LANE, SUITE 435, NORCROSS, GA 30092 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (770) 729-9010 Securities registered under Section 12(b) of the Exchange Act: NONE Securities registered under Section 12(g) of the Exchange Act: Title of class: CLASS A COMMON STOCK, NO PAR VALUE Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes __ No X Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- KSB or any amendment to this Form 10-KSB.[ ] Issuer's revenues for its most recent fiscal year. $2,328,729 Aggregate market value of the voting stock held by non-affiliates of the registrant as of February 20, 1998: $1,150,078 Number of shares outstanding of registrant's Class A Common Stock, no par value: 9,947,553 Number of shares outstanding of registrant's Class B Common Stock, no par value: 200,000 as of February 20, 1998 Documents incorporated by reference: NONE PART I ITEM 1. DESCRIPTION OF BUSINESS. FORMATION AND INITIAL PUBLIC OFFERING Classic Restaurants International, Inc. (the "Company") was incorporated under the laws of the State of Georgia on April 10, 1998 as a wholly-owned subsidiary of Classic Restaurants International, Inc. ("Classic"). Classic was incorporated under the laws of the State of Colorado on August 3, 1989 under the name Regional Equities Corporation. At a special meeting of the shareholders of Classic held on April 13, 1998, the shareholders voted to a approve a merger of Classic with and into the Company for the purpose of changing Classic's state of incorporation. The merger became effective on April 14, 1998. As of the effective date of the merger, Classic ceased to exist as a separate legal entity, and the Company assumed, and became the owner of, all of the liabilities and assets of Classic by operation of law. Under the Agreement and Plan of Merger, common and preferred shareholders of Classic received, for each share of common or preferred stock which they owned in Classic, one share of common or preferred stock in the Company which has the same rights, preferences and limitations as the shares which they owned in Classic immediately before the effective date of the merger. All further references to the Company herein shall be deemed to be and include Classic. In May 1990, the Company completed an initial public offering of units consisting of its Class A Common Stock and three separate classes of warrants. All of the warrants issued in connection with the offering expired without any being exercised. Effective upon the close of trading on July 12, 1994, the Company effected a 1-for-10,000 reverse stock split of its Class A Common Stock. Effective on the close of trading on November 7, 1994, the Company effected a 10-for-1 forward stock split of its Class A and Class B Common Stock. In September 1995, the Company declared a 50% share dividend payable to the holders of record of its Class A and Class B Common Stock on October 13, 1995. All per share amounts herein have been adjusted to reflect the effects of the stock splits and the share dividend. GREAT AMERICAN RESORTS, INC. In April 1993, the Company entered into an agreement to merge with and into Great American Resorts, Inc. ("GAR"). In May 1994, the boards of directors of GAR and the Company both voted to terminate the merger agreement. In connection with the proposed merger with GAR, GAR paid a total of $12,763 (the "Option Price") to obtain irrevocable options to purchase a total of 67,260 shares of the Company's Class A Common Stock held by seven shareholders for a total price of $127,632 (the "Purchase Price"). Under the terms of the options, the Option Price was to be credited against the Purchase Price when the options were exercised. In early 1994, GAR exercised all of the options to acquire 67,260 shares of Class A Common Stock in the Company. In addition, GAR purchased additional shares of Class A Common Stock of the Company on the open market which resulted in GAR's owning approximately 78% of the Company's Class A Common Stock. GAR later sold some of its shares which it acquired on the open market. In addition, GAR acquired 7,500,000 shares of Class A Common Stock and 150,000 shares of Class B Common Stock of the Company in connection with the merger of a wholly-owned subsidiary of GAR with and into the Company in October 1994. See "Merger with Casinos International, Inc." below. Immediately prior to the share exchange with Classic Restaurants International, Inc. in January 1996, GAR owned 7,567,260 shares of Class A Common Stock (93.2% of the total outstanding) and 150,000 shares of Class B Common Stock (50% of the total outstanding). IRISH LAND TRANSACTION On August 21, 1994, the Company entered into a contract to purchase two tracts of land in Ireland from Caragh Holdings, Ltd. ("Caragh"), which the Company intended to develop into a resort. The contract provided that one tract of land would be purchased on or before December 31, 1994 for 27,500 Irish Pounds and 270,000 shares of Class A Common Stock, and the other tract of land would be purchased on or before December 31, 1996 for 150,000 Irish Pounds and 1,230,000 shares of Class A Common Stock. As an earnest money deposit, the Company issued all of the stock to the seller, but the seller was prohibited from selling the stock until the Company completed its purchase of the tract of land to which the stock related. In the event a tract of land was not purchased, the seller was obligated to return the stock to the Company, less 15,000 shares as liquidated damages in the event closing did not occur due to a default by the Company. In October 1994, the Company purchased the first tract of land under the contract for $334,800, consisting of $41,723 in cash and $293,077 in Class A Common Stock which was valued at the appraised value of the land. Thereafter, the Company assigned its rights in the first tract to GAR for $384,877, which consisted of the purchase price originally paid by the Company plus a fee of $50,077 to the Company as reimbursement for the time and expense incurred to purchase the land. In July 1995, the Company and Caragh entered into an agreement to terminate the contract to purchase the second tract of land. Under the agreement, as amended in September 1995, Caragh agreed to return 1,230,000 shares, of which 1,050,000 were returnable immediately while the remaining 180,000 shares were held by Caragh pursuant to an option to acquire said shares for $2.67 per share at any time until September 30, 1997. Caragh did not exercise any part of the option. MERGER WITH CASINOS INTERNATIONAL, INC. On September 13, 1994, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Casinos International, Inc., a Georgia corporation (" Casinos"), under which Georgia Casinos agreed to merge with and into the Company. The Merger Agreement was approved by the shareholders of the Company at a shareholders meeting held on September 30, 1994, and was consummated in October 1994. Under the Merger Agreement, all nondissenting holders of Class A Common Stock of Casinos were issued 1.5 shares of the Company's Class A Common Stock for each share of Class A Common Stock of Casinos. At the time of the merger, GAR held all 5,000,000 shares of Class A Common Stock of Casinos which were outstanding, and therefore GAR acquired 7,500,000 shares of the Company's Class A Common Stock in the merger. All nondissenting holders of Class B Common Stock of Casinos were issued 1.5 shares of the Company's Class B Common Stock for each share of Class B Common Stock of Casinos. At the time of the merger, there were 200,000 shares of Class B Common Stock of Casinos outstanding, 100,000 of which were held by Edward L Bates and 100,000 of which were held by GAR. As a consequence of the merger, GAR and Mr. Bates each acquired 150,000 shares of the Company's Class B Common Stock. Mr. Bates was an officer and director of GAR at the time of the merger. As part of the merger, the Company's shareholders also approved certain amendments to the Company's Articles of Incorporation. The amendments divided the Company's single class of common stock into two classes: Class A Common Stock, of which 1,800,000,000 shares are authorized for issuance, and Class B Common Stock, of which 200,000,000 shares are authorized for issuance. The Class A Common Stock and the Class B Common Stock have an equal right to receive the net assets of the Company upon dissolution and liquidation, but the Class A Common Stock has only one (1) vote per share, while the Class B Common Stock has forty (40) votes per share, on each matter voted upon by the shareholders, except to the extent state or federal law provides otherwise. In addition, to the extent there are any shares of Class B Common Stock outstanding, the holders thereof have the right to elect a majority of the board of directors of the Company. All of the Company's outstanding common stock before the amendment was considered Class A Common Stock after the amendment. The name of the Company was changed to Casinos International, Inc. CHEERS HOTEL AND CASINO On January 20, 1995, the Company, through a wholly-owned subsidiary (Great American Casinos, Inc., a Nevada corporation) purchased the Cheers Hotel and Casino (the "Cheers Hotel") in Reno, Nevada, from Baylocq Nevada Corp., a nonaffiliated entity. The Cheers Hotel is a ten-story, 113-room hotel, with a casino, cabaret, restaurant, and bar facilities, which is located in the downtown section of Reno, Nevada. The purchase price of the Cheers Hotel was $3,750,000 plus closing costs and prorations. A portion of the purchase price was paid by the assumption of an existing first mortgage loan held by American Federal Savings Bank against the Cheers Hotel in the amount of $1,944,804.12. The remainder of the purchase price was paid $750,00 in cash and by executing a note payable to the seller in the amount of $1,055,195.88, secured by a second mortgage on the Cheers Hotel. Contemporaneous with the purchase of the Cheers Hotel, the Company entered into a lease agreement with the seller under which the seller originally leased approximately 7,600 square feet of space in the Cheers Hotel for two years for use as a casino and cabaret. Effective July 1, 1995, the Company reached an agreement with the seller to eliminate the cabaret operations from the sublease and to reduce the monthly rent. SHARE EXCHANGE WITH CLASSIC RESTAURANTS AND SPINOFF Effective upon the close of business January 31, 1996, the Company acquired (the "Share Exchange") all of the issued and outstanding capital stock of Classic Restaurants International, Inc., a Florida corporation ("Classic- Florida"), in exchange for 2,173,665 restricted shares of the Company's Class A Common Stock and 200,000 restricted shares of the Company's Class B Common Stock. Classic-Florida now operates as a wholly-owned subsidiary of the Company. Simultaneous with the effectiveness of the Share Exchange, the Company transferred all of the issued and outstanding shares of common stock of Great American Casinos, Inc. to GAR. Great American Casinos, Inc. was a wholly- owned subsidiary of the Company. The sole asset of Great American Casinos, Inc. is the Cheers Hotel. The Company's common stock interest in Great American Casinos, Inc. constituted substantially all of its assets. The consideration for the transfer of the common stock of Great American Casinos, Inc. to GAR was (1) the return for cancellation by GAR and by former officers of the Company of all of their stock in the Company, which consisted of 7,578,075 shares of Class A Common Stock and 300,000 shares of Class B Common Stock; (2) the cancellation of any indebtedness owed by the Company to GAR, which was approximately $1,567,389 as of December 31, 1995; and (3) the mutual release of any claims between GAR and the Company. After the transfer of stock and assets described above and the Share Exchange (giving effect to the exercise of dissenters' rights), Classic-Florida's former shareholders and the Company's existing shareholders owned 2,173,665 shares (80.1%) and 538,967 shares (19.9%) of the Company's outstanding Class A Common Stock, respectively, and Classic-Florida's former principle shareholder owned 200,000 shares (100%) of the Company's outstanding Class B Common Stock. The Company filed an amendment to its Articles of Incorporation which changed its name to Classic Restaurants International, Inc. effective January 31, 1996. All of the Company's former officers and directors resigned. Officers and directors of Classic-Florida were appointed to fill the vacancies created by the resignations. There was no relationship between the Company and Classic-Florida prior to the Share Exchange. CLASSIC-FLORIDA Classic-Florida was organized under the laws of the State of Florida on April 7, 1992, for the purpose of developing and operating restaurants using a dinner theater concept. On December 1, 1992, Classic-Florida opened Musicana Supper Club in Boca Raton, Florida. Classic-Florida opened Musicana Dinner Theater in Clearwater, Florida on May 14, 1994. Classic-Florida also provides entertainment production services for a dinner theater in Naples, Florida. Management hopes to increase this line of business and provide entertainment production services for other restaurants and cruise lines. MUSICANA SUPPER CLUB OF BOCA RATON This restaurant, which opened on December 1, 1992, seats 270 persons and offers dinner and live entertainment for a price ranging from $21.95 to $31.95, depending upon the menu item ordered. The Company uses the concept of employing talented young professionals to perform musical reviews highlighting the works of famous composers and various eras of musical history. These performers also serve as waiters and waitresses. By using young performers and sticking to the musical review format, management believes that it can keep its overhead costs lower, as compared to using equity performers and using book reviews. Because the entertainers play a dual role as performers/waiters, the majority of their compensation comes from a portion of the service charge. The restaurant aspect of the business involves a menu offering a wide variety of dinner selections starting from $21.95. There is no cover charge for the show if customers dine at the restaurant. If customers come for the show only, there is a $15.00 plus tax and gratuity cover charge. All other revenues come from food and drink purchases. Musicana offers 8 performances per week. The show consists of two 40-minute acts, with dessert and coffee served during intermission. A live band, which includes piano, bass and drums, plays instrumental back-up for the shows and also plays before the show and during the intermission for listening and dancing. The performers also sing their favorite cabaret solos during the dinner hour and during intermission so there is entertainment happening throughout the entire evening. Each show is considered to be a "musical review" which saves the Company considerable money in royalty fees. Each show highlights the work of a famous composer, a Broadway show or a different era from the 1920's through the 1970's. Some of the shows in the Musicana Library include: "The Best Times: A Salute to the Music of Jerry Herman," "Tin Pan Alley," "Hooray for Hollywood," "The Fabulous Forties When Radio was King," "An Enchanted Evening with Rodgers and Hammerstein," "Celebrate Broadway," "Putting on the Ritz: The Music of Irving Berlin," and "Bourbon Street Parade." Most of the customers for Musicana are over 50 years of age. Management believes that it has carved a special niche in the market for this age group, as evidenced by the popularity of the restaurant since its opening. MUSICANA DINNER THEATER OF CLEARWATER This restaurant, which opened May 14, 1994, seats 370. Management believes that the location is easily accessible from the Tampa and St. Petersburg area. The operation in Clearwater is substantially the same as in Boca Raton. AA CORP. On February 27, 1998, the Company entered into an Agreement and Plan of Share Exchange with AA Corp. and its shareholders under which the Company agreed to acquire all of the issued and oustanding stock of AA Corp. for 500,000 shares of convertible preferred stock. Each share of convertible preferred stock is convertible into 200 shares of the Company's Class A Common Stock. In addition, the shareholder of AA Corp. also agreed to acquire all of the Company's issued and outstanding Class B Common Stock from James Robert Shaw for 120,000 shares of the convertible preferred stock. AA Corp. has developed a method for recycling used tires under which the tires would be broken down into carbon black and other recylceable components using microwaves. Effective upon execution of the Agreement, all outstanding shares of AA Corp. and all of the shares of convertible preferred stock to be issued under the Agreement were placed in escrow until certain conditions specified in the Agreement were satisfied or waived. Upon satisfaction or waiver of the conditions, the shares held in escrow will be released and the transactions contemplated by the Agreement consummated. The conditions which must be satisfied or waived before the Agreement is finally consummated include the condition that the Company change its name to Classic Holdings, Inc., that the Company implement a 1 for 20 reverse split of its common stock, that the Company settle its liabilities and preferred stock obligations, that the Company have no more than 1,000,000 shares of Class A Common Stock outstanding after implementing the reverse split and settling its liabilities and preferred stock obligations, that the shareholders of AA Corp. raise sufficient funds to develop a prototype recycling facility which is capable of recylcing tires in economically viable quantities. In the event closing does not occur, all consideration held in escrow will be returned to its original owner, Messrs. Pringle and Silber will resign from the Board of the Directors of the Company and neither party shall have any obligation to the other. Upon execution of the Agreement, the Company's Board of Directors was reconstituted to include Frank Pringle and Benjamin Silber. In addition, Mr. Pringle was designated chairman of the Board of Directors and co-President of the Company with Mr. Shaw. In the event closing occurs, Mr. Pringle will receive a signing bonus of 3,800,000 shares of Class B Common Stock and $19,000. Mr. Pringle's signing bonus and compensation are not expected to have a material impact on operations of the Company. FUTURE DEVELOPMENT While the Company has no current plans to open additional dinner theatres similar to the Musicana dinner theatres which it currently owns, the Company intends to pursue other opportunities in the restaurant industry. In particular, the Company is currently reviewing several acquisition opportunities in the restaurant industry. In addition, the Company is exploring the development of a proprietary Mexican themed casual dining concept. Finally, the Company has recently diversified into tire recycling by entering into an agreement to purchase AA Corp., which has developed an innovative process for recycling used tires. COMPETITION The restaurant business is highly competitive and is often affected by changes in the taste and eating habits of the public, local and national economic conditions affecting spending habits, and population and traffic patterns. The principal basis of competition in the industry is quality and price of the food products offered. Site selection, quality and speed of service, advertising, and the attractiveness of the facilities are also important. Management of the Company believes that the Company's dinner theater restaurant will be competitive in each of these respects. EMPLOYEES As of June 30, 1997 there were 62 employees of the Company of which 42 were full-time, including certain officers of the Company. ITEM 2. DESCRIPTION OF PROPERTY. The Company leases approximately 10,000 square feet of space at 2200 N.W. 2nd Avenue, Boca Raton, Florida pursuant to the terms of a five-year lease which originally expired in November 1997. The Company has signed a letter of intent with the landlord to renew the lease for an additional five year term beginning in November 1997; however, a formal lease agreement has not been executed and therefore the Company is occupying that space on a month to month basis. The monthly lease payment is $7,000. The Company leases approximately 12,000 square feet of space at the Bayside Bridge Plaza, Unit G, in Clearwater, Florida pursuant to the terms of a five- year, six-month lease which expires August 31, 1999. Rent for the first six months was waived. Rent is $6,000 for each of months 7 through 18, $6,500 for each of months 19 through 30, and $7,000 for each of months 31 through 66. The Company's executive offices are located at 3500 Parkway Lane, Suite 435, Norcross, Georgia. The Company is leasing approximately 938 square feet of office space for monthly rent of $1,521, pursuant to a five-year lease which expires October 1, 2001. ITEM 3. LEGAL PROCEEDINGS. In May 1997, Mark Shoom filed a lawsuit against the Company and James Robert Shaw to recover the principal, interest and attorney's fees due under a promissory note dated October 9, 1996 in the original principal amount of $80,000 payable by the Company and guaranteed personally by Mr. Shaw. In June 1997, the Company entered into a Settlement Agreement with Mr. Shoom under which the Company agreed to issue Mr. Shoom 114,737 shares of the Company's Class A Common Stock under Regulation S of the Securities and Exchange Commission. In addition, in the event Mr. Shoom receives net proceeds from the sale of said shares of less than $103,300, the Company is obligated to issue Mr. Shoom additional shares with a value, as determined from the bid price of said stock, equal to the difference between $103,300 and the net proceeds received. To date, the Company has not performed under the Settlement Agreement, in that the Company has not issued Mr. Shoom the initial 114,737 shares of Class A Common Stock. As a result of the Company's breach of the Settlement Agreement, Mr. Shoom, through his attorneys, has recently filed a motion for entry of a default judgment. The Company and Mr. Shaw have filed a motion to reopen the default, as well as an answer and counterclaim. The court recently denied Mr. Shoom's motion and granted the Company's motion to reopen the default. There is a substantial chance that the Company will be found liable to Mr. Shoom for some amount of money, the exact amount of which is unknown at this time. On December 9, 1997, Evelyn Kuntz served a writ of garnishment on the NationsBank, N.A. in collection of a default judgment which she had obtained against the Company in the amount of $46,376.31 on August 20, 1997. The writ of garnishment caused NationsBank to freeze the accounts of the Company and its wholly owned subsidiary, Classic Restaurants International, Inc., a Florida corporation. Mr. Kuntz's initial suit was filed to collect the balance due on a promissory note issued by the Company. On or about December 19, 1997, the Company and Ms. Kuntz entered into a Stipulation for Dissolution of Writ of Garnishment, Settlement Agreement and Order pursuant to which the parties agreed that the funds held by NationsBank on behalf of the Company would be turned over to Ms. Kuntz in partial satisfaction of the judgment and the funds held by NationsBank on behalf of Classic's subsidiary were released to the subsidiary. In addition, the Company agreed to make payments of $5,000 per month to Ms. Kuntz until the balance of the judgment was satisfied, and to issue Ms. Kuntz 125,000 shares of the Company's Class A Common Stock as collateral to secure the Company's remaining obligation to Mr. Kuntz. In return, Ms. Kuntz agreed to forebear from any further collection efforts as long as the Company was not in default under the terms of the Stipulation. The Company is in compliance with its monetary obligations under the Stipulation, and has issued the stock certificates to Ms. Kuntz as collateral under the Stipulation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock is traded on the over-the-counter market under the symbol "CRET". The range of high and low bid prices for each fiscal quarter for the last two fiscal years, as reported by the OTC Bulletin Board, and as adjusted to reflect all stock splits and dividends, is as follows:
BID PRICES 1995 FISCAL YEAR HIGH LOW 1996 FISCAL YEAR Quarter Ending 09/30/95............. $3.67 $3.33 Quarter Ending 12/31/95............. $5.25 $2.50 Quarter Ending 03/31/96............. $4.88 $4.00 Quarter Ending 06/30/96............. $4.75 $4.50 1997 FISCAL YEAR Quarter Ending 09/30/96............. $5.62 $2.87 Quarter Ending 12/31/96............. $4.00 $0.62 Quarter Ending 03/31/97............. $1.50 $0.75 Quarter Ending 06/30/97............. $1.69 $0.37
The last reported high and low bid prices for the Company's Class A Common Stock were both $0.25 as of February 20, 1998, as reported by the OTC Bulletin Board. The above quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions. As of February 20, 1998, there were 271 record holders of the Company's Class A Common Stock. During the last two fiscal years, no cash dividends have been declared on the Company's Common Stock. At the present time, the Company is prohibited from declaring dividends on its common stock under the terms of its Series A convertible preferred stock, Series B convertible preferred stock and Series C convertible preferred stock. During the quarter ended June 30, 1997, the Company sold the following securities without registration under the Securities Act of 1933 in reliance on the exemption contained in Section 4(2) and Regulation D promulagated thereunder: (1) On or about May 9, 1997, the Company sold 4,000 shares of Class A Common Stock for total consideration of $2,000 to an accredited investor. (2) On or about June 10, 1997, the Company sold 187,500 shares of Class A Common Stock for total consideration of $45,581.25 to an accredited investor. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. GENERAL The Share Exchange transaction has been accounted for as a recapitalization of Classic-Florida and the issuance of 538,967 shares of Class A Common Stock for the net assets of the Company and the forgiveness of the liability due to the Company by Classic-Florida. This method is similar to accounting for a reverse acquisition, and accordingly, the financial statements presented prior to the date of the Share Exchange are those of Classic-Florida. No adjustment of assets of either company to "fair value" has been made. Prior to the Share Exchange, the fiscal year end of Classic-Florida was December 31. It elected to change its fiscal year end to June 30 (that of the Company's). Accordingly, statements of operations and cash flows for the years ended December 31, 1994 and 1995 are presented, together with a statement for the six months ended June 30, 1996. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1997, the Company had a working capital deficiency of $552,829, as compared to a working capital deficiency of $976,147 at June 30, 1996. All of the capitalization of Classic-Florida has resulted from the sale of stock and loans from its principal shareholder, Crown Resources, Inc., a company controlled by the co-President of the Company. At present, the Company still remains dependent upon proceeds from the sale of stock and loans to provide sufficient cash to meet its needs. At June 30, 1996, $320,641 was owed to Crown Resources, Inc. During the year ended June 30, 1997, the Company issued 268,509 shares of Class A Common Stock to Crown Resourses, Inc. in satisfaction of indebtedness of $426,141. See Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In addition, at June 30, 1997, $333,614 was owed to various shareholders of the Company pursuant to promissory notes that either were in default or were past due. The Company continues to implement financial and accounting controls which have been successful in reducing the Company's operating losses. In addition, the Company is exploring alternatives for restructuring its debt and preferred stock obligations, which alternatives may include the exchange of existing debt or preferred stock for secured notes, the conversion of debt or preferred stock into common stock, and/or the disposition of its Clearwater operations. Due to the working capital deficiency as well as the operating losses described below, the notes to the financial statements express uncertainty about the Company's ability to continue as a going concern. See Note 2. BASIS OF PRESENTATION of the Notes to Consolidated Financial Statements. The Company proposes to obtain additional cash during the current fiscal year through the sale of its stock to provide sufficient liquidity for the Company's needs. RESULTS OF OPERATIONS For the year ended June 30, 1997, the Company had sales of $2,328,729, as compared to sales of $2,419,405 during the period from July 1, 1995 to June 30, 1996, a decrease of 3.7%. Operating expenses as a percentage of sales were 81%, as compared to 90.1% for the period from July 1, 1995 to June 30, 1996. The improvement in operating expenses is the result of restructuring personnel and pay schedules, and reductions in production costs. General and administrative expenses as a percentage of sales were 68% as compared to 35% for the period from July 1, 1995 to June 30, 1996 as the result of increased promotional expenses, consulting fees and acquisition activity of a nonrecurring nature. Management expects general and administrative expenses to be significantly lower in fiscal 1998 than in fiscal 1997. ITEM 7. FINANCIAL STATEMENTS. Please refer to pages beginning with page f-1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On July 1, 1996, the Company and its Board of Directors approved the engagement of Stark Tinter & Associates, LLC, of Englewood, Colorado, to audit the Company's financial statements. During the Company's two most recent fiscal years and the subsequent interim period preceding the engagement of this firm, the Company did not consult this firm regarding any of the matters identified in Item 304(a)(2) of Regulation S-K. Stark Tinter & Associates, LLC was selected by new management of the Company. As reported in the Form 8-K dated January 31, 1996, the Company experienced a change of control. The former accountants were Mitchell Finley and Company, P.C. The report of Mitchell Finley and Company, P.C. on the financial statements for the fiscal year ended June 30, 1995 contained an explanatory paragraph regarding the Company's ability to continue as a going concern. The decision to change accountants was approved by the Board of Directors on May 21, 1996. During the Company's two most recent fiscal years and the subsequent interim period preceding the resignation, there were no disagreements with Mitchell Finley and Company, P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Mitchell Finley and Company, P.C., would have caused it to make reference to the subject matter of the disagreements in connection with its report. Effective January 1, 1996, Mitchell Finley and Company, P.C. combined its practice with BDO Seidman LLP. In addition, the license of Mitchell Finley and Company, P.C. to practice accountancy with the Colorado Board expired on May 31, 1996. Accordingly, the firm can no longer practice under the name Mitchell, Finley & Company, P.C. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. The following table sets forth the names and ages of all directors and executive officers of the Company as of the date of this report, indicating all positions and offices with the Company held by each such person: NAME AGE POSITION James R. Shaw 43 co-President, Treasurer, and Director Frank Pringle 54 co-President, Chairman June Cuba 38 Vice President, Secretary and Director Ronald Lambert 55 Director Benjamin Silber 54 Director The holders of the Class B Common Stock have the right to elect a majority of the board of directors of the Company. Cumulative voting for directors is not permitted in either class of common stock. The term of office of directors of the Company ends at the next annual meeting of the Company's shareholders or when the successors are elected and qualify. The annual meeting of shareholders is specified in the Company's bylaws to be held on a date and at a time and place to be determined by resolution of the Board of Directors. The Company has tentatively scheduled the annual meeting for March 1998. The term of office of each officer of the Company ends at the next annual meeting of the Company's Board of Directors, expected to take place immediately after the next annual meeting of shareholders, or when his successor is elected and qualifies. Except as otherwise indicated below, no organization by which any officer or director previously has been employed is an affiliate, parent, or subsidiary of the Company. JAMES R. SHAW has been the President, Treasurer, and a director of the Company since February 1, 1996, and the President, Treasurer, and a director of Classic-Florida since December 1993. Mr. Shaw also served as a director of Classic-Florida from its inception to July 1992. He was the executive vice president, co-manager, and co-franchise owner of a Schneider Securities, Inc. office in Atlanta, Georgia, from April 1992 to February 1994. Schneider Securities, Inc. is a securities broker-dealer firm. From January 1990 to April 1992, he was the manager and franchise owner of a Pacific Southern Securities office in Atlanta, Georgia. From 1986 to January 1990, Mr. Shaw was a stockbroker with several other broker-dealer firms. He received a Bachelor of Music degree from Carson-Newman College in 1979 and a Master of Music degree from Southern Baptist Theological Seminary in 1986. RONALD LAMBERT has been a director of the Company since June 1997. Mr. Lambert is a licensed stockbroker. Mr. Lambert has been a stockbroker with Great American Financial Network, Inc. since June 1994. From April 1992 to May 1994, Mr. Lambert was a stockbroker with Schneider Securities, Inc. Prior to joining Schneider Securities, Inc., Mr. Lambert was a stockbroker with Pacific Southern Securities, Inc. JUNE CUBA has been the Vice President of the Company since August 18, 1997, the Secretary since January 28, 1998, and a director since February 27, 1998. Prior to joining the Company, Ms. Cuba was the office manager of Destiny Travel, a travel agency, from June 1994 to April 1997. From September 1993 to May 1994, Ms. Cuba was the accounting manager for World Technology, an airline reservations company where she was involved in the organization of its accounting department. From July 1987 to August 1993, Ms. Cuba was the accounting manager for HCI Travel, a travel agency. Ms. Cuba received a B.A. degree in business administration from Kennesaw State University in 1983. FRANK G. PRINGLE, co-President and Chairman of the Board of Directors of the Company as of February 27, 1998. Mr. Pringle has worked in the packaging industry since 1969 being initially employed by R.A. Jones. From 1971 through 1975, he was employed by Standard Knapp Packaging Machinery where his last position was as Regional Sales Manager. From 1975 to 1979, Mr. Pringle was employed as Sales Manager for Simplimatic Engineering Corporation. In 1979, Mr. Pringle purchased a part interest in Ambec Systems, serving as Vice President of Marketing and New Machine Development. At such time, he helped to developed a patented machine called "10" Conveyor. In 1981, Mr. Pringle left Ambec Systems and the packaging field due to a covenant not to compete and became involved in the ownership of health clubs, which continued until 1985 when he started Pringle Systems, a company that installed packaging equipment and manufactured conveyors and other packaging machinery. In 1990, Mr. Pringle organized R & D Innovators, Inc. and has been employed by such company to the present time as well as by EFTEK Corp., the parent company. Mr. Pringle holds a number of patents in the field of engineering. BENJAMIN SILBER has been a director of the Company since February 27, 1998. Mr. Silber is an attorney admitted to practice in the State of New Jersey since 1996. Mr. Silber was a partner in the firm of Silber & Neef for four years. Thereafter, he has maintained a law office as a sole practioner. Mr. Silber is a member of the Salem County Bar Association, State of New Jersey Bar Association and the American Bar Association. His practice is concentrated in the areas of real estate, landlord/tenant and commercial litigation. The Company does not have any standing audit, nominating, or compensation committees of the Board of Directors. During the fiscal year ended June 30, 1997, there were two formal meeting of the Board of Directors. James Robert Shaw and Caroline Anderson attended both meetings, and Daniel Howell did not attend either meeting. The Company currently does not provide the directors with any regular compensation for their services as directors. The Company reimburses the directors any out-of-pocket expenses which they incur in the performance of their duties. Jerry Carter resigned as a director as of February 13, 1997. Mr. Carter did not give the Company a reason for his resignation. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The Company's Class A Common Stock was registered under Section 12(g) of the Exchange Act on June 28, 1996, and thereby became subject to the reporting requirements of Section 16(a) on that date. Section 16(a) requires the Company's directors and executive officers, and holders of more than 10% of the Company's Common Stock, to file with the Securities and Exchange Commission ("SEC") intial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such officers, directors and 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based on its review of such forms it received, or written representations from reporting persons that no Forms 5 were required for such persons, the Company believes that, for fiscal 1997, all Section 16(a) filing requirements were satisfied on a timely basis with the exception of the following: James Robert Shaw did not file a Form 4s reporting sales 23,000 shares of Class A Common Stock on January 7, 1997, and 34,988 shares of Class A Common Stock on June 20, 1997, or Form 5 within 45 days of the end of the Company's fiscal year. On April 22, 1998, Mr. Shaw filed a Form 5 reporting the above sales. Ronald Lambert and Bailey Spears did not file a Form 3 upon their appointment as directors of the Company in June 1997 until April 21, 1998. Neither Messrs. Lambert nor Spears were required to file a Form 5 for 1997. June Cuba did not file a Form 3 upon her appointment as an officer of the Company in August 1997 until April 21, 1998. Ms. Cuba was not required to file a Form 5 for 1997. Neither Caroline P. Anderson nor Daniel Howell, who both resigned as directors and officers in June 1997, filed a Form 5 within 45 days of the end of the Company's fiscal year. However, the Company does not know if Ms. Anderson or Mr. Howell were required to file a Form 5. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth information for the current Chief Executive Officer ("CEO") of the Company, James R. Shaw from February 1, 1996 through June 30, 1997, and for a former CEO, Edward L. Bates, who served as such from October 1994 through January 31, 1996. No disclosure need be provided for any executive officer, other than the CEO, whose total annual salary and bonus for the last completed fiscal year did not exceed $100,000. Accordingly, no other executive officers of the Company are included in the table. SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation -------------------- ------------ Name and Other Principal Annual Position Year Salary Bonus Compensation - ----------- ---- ------ -------- ------------ ---------- James Shaw, 1997 $0 0 0 0 President 1996 $0 0 0 0 Edward Bates, 1996 $0 0 0 0 President
There are no outstanding stock options. During the year ended June 30, 1996, the Company loaned Mr. Shaw $33,893. During the year ended June 30, 1997, the Company loaned Mr. Shaw an additional $2,275. The loan is payable on demand, is not evidenced by a promissory note, and does not bear interest. There are no employment agreements with any of the Company's executive officers. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following section sets forth information regarding ownership of the Company's Class A Common Stock and Class B Common Stock as of February 20, 1998. Except as otherwise indicated in the footnotes, the Company believes that the beneficial owners of the securities listed in the tables, based on information furnished by such owners, have sole investment and voting power with respect to the shares of stock shown as beneficially owned by them. Security Ownership of Certain Beneficial Owners The following table sets forth each person known by the Company (other than management) to own beneficially more than 5% of the outstanding shares of either the Class A Common Stock or Class B Common Stock of the Company.
CLASS A COMMON STOCK CLASS B COMMON STOCK NUMBER OF PERCENT OF NUMBER OF PERCENT OF BENEFICIAL OWNER SHARES CLASS (1) SHARES CLASS (1) Voyager Select IPO 3,400,000 25.5% -- -- Fund, Ltd. (2) 129 Front Street Penthouse Suite Hamilton, HM12 Bermuda James Buford Salmon 1,650,923 16.6% -- -- 1525 Lakesite Drive Birmingham, AL 35285 Ronald E. Sauve 790,000 7.9% -- -- 1605 Singletary Albuquerque, NM 87112 H. Thomas Ferstl 648,000 6.5% -- -- 8761 State Street Millington, MI 48746 - --------------------------------------------------------------------------- (1) Based on 9,947,553 shares of Class A Common Stock and 200,000 shares of Class B Common Stock outstanding as of February 20, 1998. Where the persons listed on this table have the right to obtain additional shares of common stock within 60 days from February 20, 1998, these additional shares are deemed to be outstanding for the purpose of computing the percentage of class owned by such persons, but are not deemed to be outstanding for the purpose of computing the percentage of any other person. Class A Common Shares have 1 vote per share while Class B Common Shares have 40 votes per share. In addition, the Class B Common Shares have the right to elect the majority of the Board of Directors of the Company at all times. (2) Voyager Select IPO Fund, Ltd. holds 8 shares of Series A Convertible Preferred Stock, each of which is convertible into shares of Class A Common Stock at a conversion price equal to the lesser of the bid price of the Class A Common Stock as of the date of the subscription agreement or 60% of the average closing bid price of the Class A Common Stock for the three trading days preceeding the date of conversion. As of February 20, 1998, the shares of Series A Convertible Preferred Stock held by Voyager Select were convertible into 1,000,000 shares of Class A Common Stock. Voyager Select IPO Fund, Ltd. also holds 12 shares of Series C Convertible Preferred Stock, each of which is convertible into shares of Class A Common Stock at a conversion price equal to the bid price of the Class A Common Stock as of the date of conversion. As of February 20, 1998, the shares of Series C Convertible Preferred Stock held by Voyager Select were convertible into 2,400,000 shares of Class A Common Stock.
Security Ownership of Management The following table sets forth information regarding beneficial ownership of the Class A Common Stock and Class B Common Stock by each director, each executive officer, and by all directors and executive officers of the Company as a group.
CLASS A COMMON STOCK CLASS B COMMON STOCK NUMBER OF PERCENT OF NUMBER OF PERCENT OF BENEFICIAL OWNER SHARES CLASS (1) SHARES CLASS (1) James R. Shaw (2) 535,579 5.4% 200,000 100.0% June Cuba -- -- -- -- Ronald Lambert 1,000 0% -- -- Frank Pringle (3) 8,045 0% -- -- Benjamin Silber (4) 206,300 2% -- -- Officers and Directors 746,924 7.5% 200,000 100.0% as a group (5 persons) - ----------------------------------------------------------------------------- (1) Based on 9,947,553 shares of Class A Common Stock and 200,000 shares of Class B Common Stock outstanding as of February 20, 1998. Where the persons listed on this table have the right to obtain additional shares of common stock within 60 days from February 20, 1998, these additional shares are deemed to be outstanding for the purpose of computing the percentage of class owned by such persons, but are not deemed to be outstanding for the purpose of computing the percentage of any other person. (2) Includes 243,567 shares owned of record by Crown Resources, Inc., which is owned by Mr. Shaw, and 250,000 shares owned by Mr. Shaw and his wife, Carolyn Shaw, jointly. (3) Includes 8,045 shares of Class A Common Stock owned of record by Celia Pringle, who is the mother of Mr. Pringle. (4) Includes 4,000 shares of Class A Common Stock issuable upon conversion of 400 shares of Series B Convertible Preferred Stock owned by Mr. Silber.
On February 27, 1998, the Company entered into an Agreement and Plan of Share Exchange with AA Corp. and the Pringle Family Trust. See ITEM 1. DESCRIPTION OF BUSINESS - AA CORP. Under the Agreement, Frank G. Pringle and Benjamin Silber were appointed to the Board of Directors of the Company. In addition, Mr. Pringle was made Chairman and co-President of the Company. Consummation of the transactions contemplated by the Agreement are subject to the satisfaction or waiver of a number of conditions. In the event the transactions contemplated by the Agreement are not effectuated, then Messrs. Pringle and Silber are required to resign as officers and directors of the Company. In the event the transactions contemplated by the Agreement are effectuated, the Pringle Family Trust will obtain a controlling interest in the Company by the issuance of Series D Convertible Preferred Stock to the Pringle Family Trust and the acquisition of the Class B Common Stock from Mr. Shaw. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. From time to time, Crown Resources, Inc. has loaned funds to the Company. Crown Resources, Inc. is owned and controlled by James R. Shaw, the President, director, and principal shareholder of the Company. In September 1994, Crown Resources, Inc. was issued 93,750 shares of Class A Common Stock at a price of $3.20 per share as partial repayment of amounts due to Crown. At June 30, 1996, the Company owed Crown Resources, Inc. $320,641, which was unsecured and had no set interest rate or payment terms. During the year ended June 30, 1997, the balance due to Crown Resources, Inc. of $426,141 was converted into 268,509 shares of Class A Common Stock. As of June 30, 1997, the Company was not indebted to Crown Resources, Inc. To comply with Internal Revenue Service requirements and financial accounting standards, $10,000 of interest was accrued and charged to operations during 1996. At June 30, 1997, the Company owed $105,448 to stockholders pursuant to 8% convertible promissory notes due December 31, 1995. The notes are in default. Interest on the notes is due monthly and the notes are convertible at anytime into Class A Common Stock at $3.20 per share. Payment of the notes is guaranteed personally by the Company's president, James R. Shaw. On February 2, 1996, the Company borrowed $31,000 from a shareholder of the Company. The promissory note was due December 31, 1996, bears interest at 10%, and is personally guaranteed by Mr. Shaw. From April 1996 through May 1996, the Company borrowed an aggregate of $188,500 from various shareholders of the Company. The promissory notes are due at various times from July 1996 to November 1996 and bear interest at 18.25% per annum. Repayment of the notes is personally guaranteed by Mr. Shaw. The balance due on the notes as of June 30, 1997 was $78,500. During the year ended June 30, 1996, the Company loaned Mr. Shaw $33,893. During the year ended June 30, 1997, the Company loaned Mr. Shaw an additional $2,275. The loan is unsecured and does not have a set interest rate or payment terms. In addition, the Company has loaned Steven Shaw, who is the brother of Mr. Shaw, $3,032, and $33,603 to Crown Resources, Inc., which is owned by Mr. Shaw. The loans to Steven Shaw and Crown Resources, Inc. are unsecured and do not have a set interest rate or payment terms. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits:
REGULATION S-B NUMBER EXHIBIT 2.1 Agreement and Plan of Share Exchange among Casinos International, Inc., Great American Resorts, Inc. and Classic Restaurants International, Inc. dated June 30, 1995, as amended (1) 2.2 Agreement and Plan of Share Exchange among Classic Restaurants International, Inc., James Robert Shaw, AA Corp. and the Pringle Family Trust dated February 27, 1998 (2) 2.3 Agreement and Plan of Merger between Classic Restaurants International, Inc. and Creative Recycling Technologies, Inc. dated March 13, 1998 (3) 3.1 Articles of Incorporation (3) 3.2 Bylaws (3) 10.1 Lease for Boca Raton restaurant (4) 10.2 Lease for Clearwater restaurant (4) 10.3 Convertible promissory notes (4) 10.4 Promissory note to Carl Simpson (4) 10.5 18.25% Promissory notes (4) 10.6 Promissory Note to Voyager Select IPO Fund, Ltd. 10.7 Form of Convertible Debenture 11 Statement re: computation of per share earnings 16 Letter from Mitchell Finley and Company, P.C. re change in certifying accountant (4) 21 List of Subsidiaries 28 Financial Data Schedule - ------------------------------------------------------------------------- (1) Incorporated by reference to the Exhibits filed with the Company's Current Report on Form 8-K dated January 31, 1996, Commission File Number 033-33556-D. (2) Incorporated by reference to the Exhibits filed with the Company's Current Report on Form 8-K dated February 28, 1998, Commission File Number 0- 28704. (3) Incorporated by reference to the Exhibits filed with the Company's Current Report on Form 8-K dated April 14, 1998, Commission File Number 0- 28704. (4) Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996, Commission File Number 0-28704.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed during the last of the period covered by this report: Report dated May 14, 1997, reporting under Item 9 of the sale of 100,000 shares of Class A Common Stock under Regulation S for $82,000 pursuant to the exercise of a Common Stock Purchase Warrant. Report dated June 17, 1997, reporting under Items 5 and 9 of the Company's entry into a settlement agreement under which it agreed to issue 114,737 shares of Class A Common Stock in settlement of an obligation to a Canadian citizen; and under Items 5 and 6 of the resignation of Caroline P. Anderson and Daniel Howell from the Board of Directors and the appointment of Ronald Lambert and Bailey Spears to the vacant seats on the Board of Directors. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CREATIVE RECYCLING TECHNOLOGIES, INC. Dated: 4/13/98 By:/s/ James R. Shaw James R. Shaw, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Dated: 4/13/98 By:/s/ James Robert Shaw James Robert Shaw, Director and co-President Dated: 4/13/98 By:/s/ June Cuba June Cuba, Vice President and Director Dated: 4/13/98 By:/s/ Ronald Lambert Ronald Lambert, Director Dated: 4/13/98 By:/s/ Benjamin Silber Benjamin Silber, Director Dated: 4/13/98 By:/s/ Frank G. Pringle Frank G. Pringle, Chairman and co- President REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Classic Restaurants International, Inc. We have audited the accompanying balance sheets of Classic Restaurants International, Inc. as of June 30, 1997 and 1996, and the related statements of operations, stockholders' equity (deficiency), and cash flows for the year ended June 30, 1997 and the six months ended June 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Classic Restaurants International, Inc. as of June 30, 1997 and 1996, and the results of its operations, and its cash flows for the year ended June 30, 1997 and the six months ended June 30, 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As explained in Note 11 subsequent to November 25, 1997, the Company entered into an agreement to acquire all the outstanding stock of A.A. Corp. in a business combination accounted for as a pooling of interests. Stark Tinter & Associates, LLC Certified Public Accountants Englewood, Colorado November 25, 1997 Except for Note 11, dated March 4, 1998 [Letterhead of James Moore & Co., P.L.] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Classic Restaurants International, Inc.: We have audited the accompanying statement of operations, stockholders' equity (deficit) and cash flows of Classic Restaurants International, Inc. for the year ended December 31, 1995. These financial statements are the re- sponsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, Classic Restaurants International, Inc.'s results of operations and cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company incurred a net loss of $1,247,695 for 1995 and has incurred substantial net losses since inception. At December 31, 1995, current liabilities exceed current assets by $1,415,432 and total liabilities exceed total assets by $804,564. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence. James Moore & Co. Gainesville, Florida March 20, 1996 CLASSIC RESTAURANTS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
June 30, June 30, 1996 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 22,759 $ 36,656 Inventory 16,080 14,039 Prepaid expenses 13,945 - Due from officers and stockholders (Notes 4 and 10) 52,088 91,444 Other receivables 3,685 6,655 ---------- ---------- Total current assets 108,557 148,794 Property and equipment-net of accumulated Depreciation (Note 3) 476,935 348,801 Other assets: Intangibles net of accumulated amortization Of $7,167 and $10,707 22,833 21,501 Deposits 37,418 39,119 ----------- ---------- $ 645,743 $ 558,215 ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable $ 187,094 $ 184,394 Accrued expenses 151,019 119,169 Notes payable (Note 4) 338,448 333,614 Due to stockholder 320,641 - Advance banquet deposits 34,433 26,973 Deferred revenue 19,521 13,833 Deferred rent 33,548 26,640 ----------- ---------- Total current liabilities 1,084,704 701,623 ----------- ---------- Commitments and contingencies (Notes 5, 8, and 10) Stockholders' equity (deficiency)(Note 7): Common stock, Class A no par value, 1,800,000,000 shares authorized 3,018,592 and 4,384,116 shares issued and outstanding 2,563,157 3,814,880 Common stock, Class B no par value, 200,000,000 Shares authorized, 200,000 shares issued And outstanding 200 200 Preferred stock, Series A, convertible, stated value $25,000, 20 shares authorized, 14 shares issued and outstanding - 350,000 Preferred stock, Series B convertible, stated value $15, 12,000 shares authorized, 2,918 issued and outstanding - 43,770 Preferred stock, Series C, convertible, stated value $50,000, 12 shares authorized, no shares issued or outstanding - - Accumulated deficit (3,002,318) 4,352,258) ----------- ---------- Total stockholders' equity (deficiency) (438,961) (143,408) ----------- ---------- $ 645,743 $ 558,215
See accompanying notes to financial statements. CLASSIC RESTAURANTS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995, THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED JUNE 30, 1997
1995 1996 1997 ----------- ---------- ----------- Net sales $ 2,632,151 $ 1,372,352 $ 2,328,729 ----------- ---------- ----------- Operating expenses: Operating and maintenance 2,497,044 1,247,567 1,894,743 General and administrative 1,223,793 480,960 1,584,014 Depreciation and amortization 142,291 71,711 145,229 ----------- ------------ ------------ Total operating expenses 3,863,128 1,800,238 3,623,986 ----------- ------------ ------------ Loss from operations (1,230,977) (427,886) (1,295,257) ----------- ------------ ------------ Other income (expense): Other income - 300 7,945 Interest expense (16,718) (18,881) (62,628) (16,718) (18,581) (54,683) ----------- ------------ ------------ Net (loss) $(1,247,695) $ (446,467) $(1,349,940) ----------- ------------ ------------ Per share information: Weighted average shares Outstanding 2,042,036 2,799,791 3,525,714 ----------- ------------ ------------ ----------- ------------ ------------ Basic and diluted loss per share $ (0.61) $ (0.16) $ (0.38) ----------- ------------ ------------
See accompanying notes to financial statements. CLASSIC RESTAURANTS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995, THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED JUNE 30, 1997
1995 1996 1997 -------------------------------------- Cash flows from operating activities: Net loss $ (1,247,695) $ (446,467) $ (1,349,940) Adjustments to reconcile net loss To net cash provided by (used in) Operating activities: Depreciation and amortization 142,291 71,711 145,229 Common stock issued for services 225,000 150,000 440,951 Changes in assets and liabilities: (Increase) decrease in inventory 1,854 (109) 2,041 (Increase) decrease in prepaid expenses (12,507) (812) 13,945 (Increase) decrease in other receivables (3,605) 3,197 (2,970) (Increase) decrease in deposits (11,168) 10,180 (1,701) Increase (decrease) in accounts Payable and accrued expenses 230,859 (250,100) (34,550) Increase (decrease) in advance banquet deposits (891) 2,842 (7,460) Increase (decrease) in deferred revenue (14,602) (21,654) (5,688) Increase (decrease) in deferred rent (908) (2,454) (9,908) -------------------------------------- Total adjustments 556,323 (37,199) 539,889 -------------------------------------- Net cash (used in) operating activities (691,372) (483,666) (810,051) -------------------------------------- Cash flows from investing activities: Purchase of intangible assets - - (2,208) Purchase of fixed assets (5,436) (8,209) (13,555) -------------------------------------- Net cash (used in) investing activities (5,436) (8,209) (15,763) Cash flows from financing activities: Net proceeds from issuance of common stock 23,425 334,563 234,631 Net proceeds from issuance of preferred stock - - 543,770 Proceeds from notes payable 347,506 222,063 118,666 Payments on notes payable - - (123,500) Proceeds from due to stockholder 177,483 82,200 170,000 Repayments on due to stockholder (15,000) (108,470) (64,500) Repayments on due from officers and stockholders - 7,347 140,177 Advances to due from officers and stockholders (36,735) (7,700) (179,533) Increase (decrease) in bank overdraft 19,901 (35,035) - Refund of canceled stock (2,000) - - -------------------------------------- Net cash provided by financing Activities 714,580 494,968 839,711 -------------------------------------- Net increase in cash and cash equivalents 17,772 3,093 13,897 Beginning-cash and cash equivalents 1,894 19,666 22,759 Ending-cash and cash equivalents $ 19,666 $ 22,759 $ 36,656 --------------------------------------
See accompanying notes to financial statements. CLASSIC RESTAURANTS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE YEAR ENDED DECEMBER 31, 1995, THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED JUNE 30, 1997
1995 1996 1997 ------------- -------------- ------------ Supplemental cash flow information: Cash paid for: Interest $ 9,506 $ 8,881 $ - Income taxes $ - $ - $ - Non-cash investing and Financing Activities: Common stock issued for the cancellation of related party debt - $ - $ 426,141 Common stock issued in Reorganization - $ 327,507 $ - 12% Series A subordinated convertible redeemable debenture $ - $ - $ 9,666
Noncash investing and financing activities in the fiscal year ended June 30, 1997 consists of 12% Series A Senior Subordinated Convertible Redeemable Debentures purchased at 75% of the face amount of such Debentures, or $29,000. The Holder is entitled at anytime commencing 45 days after closing of the sale of such Debentures to convert any amount over $25,000 of the principal face amount of this Debenture then outstanding into shares of common stock, $0.001 par value per share, of the Company at a conversion price for each share of common stock equal to the lower of (1) 80% of the average closing bid price of the common stock for the business day immediately preceding the date of receipt by the Company of notice of conversion or (2) 80% of the average of the closing bid price of the common stock for the 5 business days immediately preceding the date of the subscription as reported by NASDAQ. The difference between the face value of $38,666 and the purchase price of $29,000 is accounted for as loan fee expense. See accompanying notes to financial statements.
CLASSIC RESTAURANTS INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIENCY) FOR THE YEAR ENDED DECEMBER 31, 1995, THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEAR ENDED JUNE 30, 1997 Preferred Preferred Common Stock Class A Common Stock Class B Stock Class A Stock Class B -------------------- -------------------- ---------------- ------------- Accumulated Shares Amount Shares Amount Shares Amount Shares Amount Deficit ------ ------ ------ ------ ------ ------ ------ ------ ----------- Balance December 31, 1994 1,810,715 $ 1,304,662 200,000 $ 200 - $ - - $ - $(1,308,156) Issuance of shares for cash 133,400 223,425 - - - - - - - Issuance of shares for no Consideration 5,050 - - - - - - - - Issuance of shares for Services 225,000 225,000 - - - - - - - Shares canceled (500) (2,000) - - - - - - - Net loss for the year - - - - - - - - (1,247,695) ----------------------------------------------------------------------------------------------- Balance December 31, 1995 2,173,665 1,751,087 200,000 200 - - - - (2,555,851) Shares issued for services 150,000 150,000 - - - - - - - Shares issued for cash 155,960 334,563 - - - - - - - Shares issued for Reorganization (Note 9) 538,967 327,507 - - - - - - - Net loss for the period - - - - - - - - (446,467) ----------------------------------------------------------------------------------------------- Balance June 30, 1996 3,018,592 2,563,157 200,000 200 - - - - (3,002,318) Shares issued for services 561,750 440,951 - - - - - - - Shares issued for cash 299,677 234,631 - - 20 500,000 2,918 43,770 - Shares issued in exchange for debt 268, 509 426,141 - - - - - - - Shares issued in conversion of Series A Preferred Stock 235,588 150,000 - - (6) (150,000) - - - Net loss for the year - - - - - - - - (1,349,940) ----------------------------------------------------------------------------------------------- Balance June 30, 1997 4,384,116 $ 3,814,880 200,000 $ 200 14 $350,000 2,918 $ 43,770 $(4,352,258)
[FN] See accompanying notes to financial statements NOTES OF FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: Organization: Classic Restaurants International, Inc. (the Company) was organized under the laws of the State of Florida on April 7, 1992, for the purpose of developing and operating restaurants using a dinner theater concept. On December 1, 1992, the Company opened Musicana Supper Club in Boca Raton, Florida. The Company opened Musicana Dinner Theater in Clearwater, Florida on May 14, 1994. The financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions have been eliminated in consolidation. Certain classifications from prior year financial statements have been changed to conform to the current period presentation. Property and equipment: Property and equipment consists primarily of restaurant equipment and leasehold improvements which are recorded at cost. Depreciation on restaurant equipment is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated using the straight-line method over the lesser of the term of the related lease or the estimated useful lives of the assets. Depreciation expense charged to operations was $140,291 for the year ended December 31, 1995, $70,878 for the six months ended June 30, 1996, and $141,689 for the year ended June 30, 1997. Periodically, management evaluates the estimated useful life of its property and equipment to determine whether intervening economic events and circumstances have affected the remaining useful lives. In light of the current conditions noted in Note 12, it is reasonably possible that the Company's estimate that it will recover the carrying amount of its property and equipment from future operations will change in the near term. Intangible assets and amortization: Intangible assets include amounts paid for the Musicana tradename and music library. Amortization is computed using the straight-line method over fifteen years. Amortization expense charged to operations was $2,000 for the year ended December 31, 1995, $1,000 for the six months ended June 30, 1996, and $3,540 for the year ended June 30, 1997. Deferred rent: The lease agreement for a restaurant building contains provisions for no initial monthly rent and for scheduled rent increases (see Note 8). The deferred rent amount represents the difference between amounts paid and rental expense computed on a straight-line basis over the entire lease term. Revenue recognition: Revenues are recognized in the period when the customer attends the dinner theater and receives the service. Revenues collected in advance are recorded as advance banquet deposits and deferred revenue. Inventory: Inventory is recorded at cost and consists of food and bar items. Cost is determined on the first-in, first-out (FIFO) method. Advertising: The Company expenses costs of advertising as incurred. The costs related to brochures and other printed materials are amortized over their estimated useful lives. Advertising costs charged to operations were $273,146, $46,904, and $76,872 during 1995, 1996, and 1997 respectively. Estimates: Management uses estimates and assumptions in preparing financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. 2. Basis of Presentation: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in recent years. In addition, the Company has used substantial amounts of working capital in its operations. Further, at June 30, 1996 and 1997, current liabilities exceed current assets by $976,147 and $650,738 and total liabilities exceed total assets by $440,177 and $241,317. These factors create an uncertainty about the Company's ability to continue as a going concern. Management is planning to raise additional equity capital by undertaking a private offering of its common stock under Regulation D of the Securities Act of 1933 and raising up to $5,000,000. Management also is currently working on increasing revenues and reducing expenses. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken to raise capital and improve operating results provide the opportunity for the Company to continue as a going concern. 3. Property and Equipment: Property and equipment consists of the following: June 30, June 30, 1996 1997 ---------- --------- Leasehold improvements $ 519,946 $ 520,746 Equipment 260,196 255,366 Furniture 22,694 34,051 --------- --------- 802,836 810,163 Less: Accumulated depreciation 325,901 461,362 --------- --------- $ 476,935 $ 348,801 4. Notes Payable-affiliates: Notes payable consist of the following: June 30, June 30, 1996 1997 -------- -------- 8% convertible promissory notes to stockholders, interest due monthly, principal due December 31, 1995. Convertible at anytime into Class A common stock at $3.20 per share by the holder. Payment of notes is guaranteed personally by the Company's president, unsecured (in default) $ 113,948 $ 105,448 14% promissory note due during December, 1996, guaranteed by the Company's president, unsecured (in default) 31,000 31,000 18.25% promissory notes due from July 1996 to November 1996, unsecured (in default) 188,500 78,500 3% promissory note due November 1996, secured by security interest in Class A Common Stock (in default) - 80,000 12% Series A Subordinated Convertible Redeemable Debenture, interest due quarterly, principal due June 30, 1998. Convertible at anytime after 45 days after closing of the Offering into common stock at a price equal to the lower of 80% of the average closing bid price for the business day immediately preceding date of receipt of notice to convert or 5 business days immediately preceding date of subscription, uncollateralized - 38,666 Non-interest bearing loan from a shareholder, due on demand, unsecured 5,000 - ---------- --------- $ 338,448 $ 333,614 The weighted average interest rate for short-term borrowings was approximately 13% at June 30, 1996 and June 30, 1997. During 1997, $36,083 of interest was accrued and charged to operations related to these notes. 5. Concentrations of Credit Risk: Significant concentrations of credit risk for all financial instruments owned by the Company as of June 30, 1996 and 1997 are as follows: The Company's deposits are comprised of amounts held by various lessors of real property for security, last month's rent and utilities. The Company has no policy requiring collateral or other security to support its deposits. The Company has short-term receivables due from three stockholders totaling $52,088 and $91,444 as of June 30, 1996 and June 30, 1997. These receivables are non-interest bearing and not collateralized. The Company's policy of requiring collateral or other security on loans made to officers or stockholders is determined on a case-by-case basis. 6. Income Taxes: Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classifications of the assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse. At June 30, 1997, the Company has a net operating loss carryforward totaling approximately $4,200,000 that may be offset against future taxable income through 2010. No tax benefit has been reported in the accompanying financial statements, because the Company believes there exists a possibility that the carryforward will expire unused. Accordingly, the tax benefit of the loss carryforward has been offset by a valuation allowance of the same amount. The expected tax benefit that would result from applying federal statutory tax rates to the pre-tax loss differs from amounts reported in the financial statements because of the increase in the valuation allowance. 7. Stockholders' Equity (Deficiency): During the fiscal year ended June 30, 1997, the Company issued 331,500 shares of its Class A common stock for cash of $234,831. During the fiscal year ended June 30, 1997, the Company issued 268,509 shares of its Class A common stock to retire related party debt of $426,141. During the fiscal year ended June 30, 1997, the Company issued 561,750 shares of its Class A common stock for services valued at $440,951. During the fiscal year ended June 30, 1997, the Company issued 150,000 shares of its Class A common stock in conversion of 6 shares of its Series A convertible preferred stock. At June 30, 1997, the Company has outstanding warrants to purchase 195,000 shares of the Company's Class A common stock, at a price equal to the lesser of $1.70 or 60% of the closing bid price of the Company's Class A common stock on the date of exercise. The warrants became exercisable in June 1997 and expire in October 1999. The Company's Series A convertible preferred stock has common stock voting rights and pays no dividends. The Series A convertible preferred stock is redeemable at the option of the Company 12 months after issuance at $25,000 per share. The conversion price is the lesser of the closing bid price of the Class A common stock on the date of the subscription agreement or 60% of the average closing bid price for a period of 3 trading days immediately preceding the date of conversion. The Company's Series B convertible preferred stock has voting rights and pays a dividend at a rate of 11.5%. The Series B convertible preferred stock is not redeemable by the Company. The conversion price is $1.50 per share. At June 30, 1997, dividends in arrears on the Series B convertible preferred stock was $3,118. The Company's Series C convertible preferred stock does not have common stock voting rights and are not entitled to receive dividends. The Series C convertible preferred stock is redeemable by the Company any time after issuance at a price of $50,000 per share. The conversion price is equal to the closing bid price on the conversion date. 8. Leases: The Company entered into a non-cancelable operating lease on a building in December 1993. The lease expires in August, 1999, with an option to renew for an additional five years. The lease provides that no rent is to be paid in the initial six months. Thereafter, the monthly rental amount will be $6,000, increasing to $6,500 and $7,000 in the nineteenth and thirty-first month of the lease, respectively. The Company is also responsible for its share of related property taxes and common area maintenance costs. The Company entered into a non-cancelable lease on office space in October 1996. The lease expires in September 2001. The rent is $1,524 per month for the first 12 months with annual increases of $39.month. The Company also leases certain office equipment under various operating leases. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of June 30, 1997, for the next five years and thereafter are as follows: Year ended June 30: 1998 $ 179,556 1999 118,003 2000 25,548 2001 24,316 2002 4,563 --------- Total $ 351,986 The Company also rents two apartments in Clearwater under one year operating leases effective through June 1998 for total monthly rentals of $1,130, and two apartments in Boca Raton under one year operating leases effective through October 1998 for total monthly rentals of $1,460. Rent expense was $256,922, $126,732 and $265,896 for the year ended June 30, 1995, for the six months ended June 30, 1996, and for the year ended June 30, 1997 respectively. 9. Related Party Transactions: During 1995, the Company's majority shareholder, Crown Resources, Inc., advanced the Company $177,483. During 1996, $31,270 was repaid, and during 1997 the balance was repaid. The balances due this shareholder at June 30, 1996 was $320,641, was unsecured and had no set interest or repayment terms. The balance due this shareholder $426,141 was converted into 268,509 shares of Class A common stock. (see Note 7). In addition, another shareholder, Caroline Anderson, made a $5,000 working capital advance to the Company during 1996 (see Note 4). This advance was repaid to the shareholder during 1997. During 1996, $10,000 of interest was accrued and charged to operations related to these advances. 10. Recapitalization: In June 1995, the Board of Directors of the Company entered into an agreement and plan of share exchange with two unrelated corporations, Casinos International, Inc. (Casinos) and Great American Resorts, Inc. The parties agreed that Casinos would acquire all of the issued and outstanding shares of common stock of the Company and the Company would become a wholly owned operating subsidiary of Casinos. The effective date of the agreement was January 31, 1996. At the effective date, the Company became a wholly owned subsidiary of Casinos, and Casinos changed its name to Classic Restaurants International, Inc. and the existing members of the Board of Directors of Casinos resigned and were replaced by existing members of the Board of Directors of the Company. On the effective date, Casinos issued shares of its Casinos common stock to all non-dissenting shareholders of the Company in exchange for all of the issued and outstanding Company stock at an exchange rate of: one share of Casino Class A common stock for each one share of Company Class A common stock; one share of Casino Class B common stock for each one share of Company Class B common stock; and one share of Casino Class A common stock for each one share of Company Class A preferred stock. Shareholders of the Company had the right to dissent from the share exchange provided in this agreement and to obtain payment for their shares. Pursuant to this agreement the shareholders of the Company received 2,173,665 shares of Class A common stock and 200,000 shares of Class B common stock in exchange for its issued and outstanding common and preferred shares. In addition, 538,967 shares of Class A common stock are held by the prior shareholders of Casinos. This transaction has been accounted for as a recapitalization of the Company and the issuance of 538,967 shares of Class A common stock for the net assets of Casinos and the forgiveness of the liability due to Casinos by the Company. 11. Commitments and Contingencies: In May 1997, Mark Shoom filed a lawsuit against the Company and James Robert Shaw to recover the principal, interest and attorney's fees due under a promissory note dated October 9, 1996 in the original principal amount of $80,000 payable by the Company and guaranteed personally by Mr. Shaw. . In June 1997, the Company entered into a Settlement Agreement with Mr. Shoom under which the Company agreed to issue Mr. Shoom 114,737 shares of the Company's Class A Common Stock under Regulation S of the Securities and Exchange Commission. In addition, in the event Mr. Shoom receives net proceeds from the sale of said shares of less than $103,300, the Company is obligated to issue Mr. Shoom additional shares with a value, as determined from the bid price of said stock, equal to the difference between $103,300 and the net proceeds received. To date, the Company has not performed under the Settlement Agreement, in that the Company has not issued Mr. Shoom the initial 114,737 shares of Class A Common Stock. As a result of the Company's breach of the Settlement Agreement, Mr. Shoom, through his attorneys, has recently filed a motion for entry of a default judgment. The Company and Mr. Shaw have filed a motion to reopen the default, as well as an answer and counterclaim. The court recently denied Mr. Shoom's motion and granted the Company's motion to reopen the default. There is a substantial chance that the Company will be found liable to Mr. Shoom for some amount of money, the exact amount of which is unknown at this time. 12. Subsequent events: On February 28, 1998 the Company entered into an Agreement and Plan of Share Exchange with AA Corp. and its shareholders (the "Agreement") under which the Company agreed to acquire all the issued and outstanding stock of AA Corp. for 500,000 shares of the Company's convertible preferred stock. Upon execution of the Agreement, the Company's Board of Directors was reconstituted to include Frank Pringle and Benjamin Silber. In addition, Mr. Pringle was designated Chairman of the Board of Directors and Co-President of the Company with Mr. Shaw. On December 9, 1997, Evelyn Kuntz served a writ of garnishment on the NationsBank, N.A. in collection of a default judgment which she had obtained against the Company in the amount of $46,376.31 on August 20, 1997. The writ of garnishment caused NationsBank to freeze the accounts of the Company and its wholly owned subsidiary, Classic Restaurants International, Inc., a Florida corporation. Mr. Kuntz's initial suit was filed to collect the balance due on a promissory note issued by the Company. On or about December 19, 1997, the Company and Ms. Kuntz entered into a Stipulation for Dissolution of Writ of Garnishment, Settlement Agreement and Order pursuant to which the parties agreed that the funds held by NationsBank on behalf of the Company would be turned over to Ms. Kuntz in partial satisfaction of the judgment and the funds held by NationsBank on behalf of Classic's subsidiary were released to the subsidiary. In addition, the Company agreed to make payments of $5,000 per month to Ms. Kuntz until the balance of the judgment was satisfied, and to issue Ms. Kuntz 125,000 shares of the Company's Class A Common Stock as collateral to secure the Company's remaining obligation to Mr. Kuntz. In return, Ms. Kuntz agreed to forebear from any further collection efforts as long as the Company was not in default under the terms of the Stipulation. The Company is in compliance with its monetary obligations under the Stipulation, and has issued Ms. Kuntz the shares of Class A Common Stock as collateral. EX-10.6 2 PROMISSORY NOTE TO VOYAGER SELECT IPO FUND, LTD. PROMISSORY NOTE $250,000.00 July 1, 1997 FOR VALUE RECEIVED, the undersigned Classic Restaurants International, Inc. ("Classic") hereby promises to pay to the order of Voyager Select IPO Fund, Ltd., a Bermuda corporation, or its assignee ("Payee"), at such place as Payee or any holder may from time to time designate, the principal sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000.00). The principal hereof and any unpaid accrued interest thereon shall be due and payable on July 1, 1998. Payment of all amounts due hereunder shall be made at the address of the Payee provided for in this Note. Classic further promises to pay interest at the rate of eight per cent (8%) per annum on the outstanding principal balance hereof. The accrued interest shall be payable in cash or common stock at the Payee's option. This Note has been issued pursuant to a Securities Purchase Agreement dated as of June 23, 1997 between Classic and the Payee (the "Agreement"), which contains representations and warranties and additional covenants of Classic with respect to this Note. THE PROVISIONS OF THE AGREEMENT ARE INCORPORATED HEREIN BY REFERENCE. Classic and all endorsers, guarantors and sureties hereof hereby severally waive diligence, demand, presentment, protect and notice of any kind, and assent to extensions of the time of payment, release, surrender or substitution of security, or forbearance or other indulgence, without notice. Classic may, at its option, at any time and from time to time, prepay all or any part of the principal balance of this Note, without penalty or premium, provided that concurrently with such prepayment Classic shall pay accrued interest, if any, on the principal so prepaid to the date of such prepayment. This Note may not be changed, modified or terminated orally, but only by agreement in writing signed by the party to be charged. In the event Payee or any holder hereof shall refer this Note to an attorney for collection, Classic agrees to pay, in addition to unpaid principal and interest, if any, all the costs and expenses incurred in attempting or effecting collection hereunder, including reasonable attorney's fees, whether or not suit is instituted. In the event of any litigation with respect to this Note, Classic waives the right to trial by jury and all rights of set off and rights to interpose counterclaims and cross-claims. Classic hereby irrevocably consents to the jurisdiction of the courts of the State of California in connection with any action or proceeding arising out of or relating to this Note. This Note shall be governed by California law, without reference to any choice of law principles thereof. CLASSIC RESTAURANTS INTERNATIONAL, INC. \s\ James R. Shaw By: James R. Shaw, President EX-10.7 3 FORM OF DEBENTURE AGREEMENT DEBENTURE THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES (AS DEFINED IN REGULATION S UNDER THE ACT) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE ACT) EXCEPT PURSUANT TO REGISTRATION UNDER THE ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS. No. _______ US $________ CLASSIC RESTAURANTS INTERNATIONAL, INC. 12% SERIES A SENIOR SUBORDINATED CONVERTIBLE REDEEMABLE DEBENTURE DUE JUNE 30, 1998 THIS DEBENTURE is one of a duly authorized issue of Debentures of Classic Restaurants International, Inc., a corporation duly organized and existing under the laws of __________ (the "Company") designated as its 12% Series A Senior Subordinated Convertible Redeemable Debentures Due June 30, 1998, in an aggregate principal face amount not exceeding One Million Three Hundred Thirty-Three Thousand Three Hundred Thirty-Three Dollars (U.S. $1,333,333) which Debentures are being purchased at 75% of the face amount of such Debentures. FOR VALUE RECEIVED, the Company promises to pay to _______________________ the registered holder hereof and its successors and assigns (the "Holder"), the principal face sum of ______________________________ Dollars (US $________) on June 30, 1998 (the "Maturity Date"), and to pay interest on the principal sum outstanding, at the rate of 12% per annum due and payable quarterly commencing _______________, 1997 pursuant to paragraph 4(b) herein. Accrual of interest shall commence on the date hereof and shall continue until payment in full of the outstanding principal sum has been made or duly provided for. The interest so payable will be paid to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Company regarding registration and transfers of the Debentures (the "Debenture Register"); provided, however, that the Company's obligation to a transferee of this Debenture arises only if such transfer, sale or other disposition is made in accordance with the terms and conditions of the Offshore Securities Subscription Agreement dated as of ____________, 1997 between the Company and ___________________ (the "Subscription Agreement"). The principal of, and interest (with the exception of the prepaid interest set forth in Section 4(b) herein) on, this Debenture are payable in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts, at the address last appearing on the Debenture Register of the Company as designated in writing by the Holder hereof from time to time. The Company will pay the outstanding principal due upon this Debenture before or on the Maturity Date, less any amounts required by law to be deducted or withheld, to the Holder of this Debenture no later than the tenth (10th) day prior to the Maturity Date by check or on the Maturity Date by wire transfer and addressed to such Holder at the last address appearing on the Debenture Register. The forwarding of such check or wire transfer shall constitute a payment of outstanding principal hereunder and shall satisfy and discharge the liability for principal on this Debenture to the extent of the sum represented by such check or wire transfer plus any amounts so deducted. Interest shall be payable in Common Stock (as defined below) pursuant to paragraph 4(b) herein. This Debenture is subject to the following additional provisions: 1. The Debentures are issuable in denominations of One Hundred Thousand Dollars (US$100,000) and integral multiples thereof. The Debentures are exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holders surrendering the same but not less than U.S. $25,000. No service charge will be made for such registration or transfer or exchange, except that transferee shall pay any tax or other governmental charges payable in connection therewith. 2. The Company shall be entitled to withhold from all payments of principal of, and interest on, this Debenture any amounts required to be withheld under the applicable provisions of the United States income tax or other applicable laws at the time of such payments. 3. This Debenture has been issued subject to investment representations of the original purchaser hereof and may be transferred or exchanged in the U.S. only in compliance with the Securities Act of 1933, as amended (the "Act") and applicable state securities laws. Prior to due presentment for transfer of this Debenture, the Company and any agent of the Company may treat the person in whose name this Debenture is duly registered on the Company's Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture be overdue, and neither the Company nor any such agent shall be affected or bound by notice to the contrary. Any holder of this Debenture, electing to exercise the right of conversion set forth in Section 4(a) hereof, in addition to the requirements set forth in Section 4(a), and any prospective transferee of this Debenture, is also required to give the Company (i) written confirmation that it is not a U.S. Person and the Debenture is not being converted on behalf of a U.S. Person ("Notice of Conversion") or (ii) an opinion of U.S. counsel to the effect that the Debenture and shares of common stock issuable upon conversion or transfer thereof have been registered under the 1933 Act or are exempt from such registration. In the event a Notice of Conversion or opinion of counsel is not provided the Holder hereof will not be entitled to exercise the right to convert or transfer the Debentures. 4. (a) The Holder of this Debenture is entitled, at its option, at any time commencing 45 days after closing of the Offering hereof to convert all or any amount over $25,000 of the principal face amount of this Debenture then outstanding into shares of common stock, $0.001 par value per share, of the Company (the "Common Stock"), at a conversion price for each share of Common Stock equal to the lower of (a) 80% of the average closing bid price of the Common Stock for the business day immediately preceding the date of receipt by the Company of notice of conversion or (b) 80% of the average of the closing bid price of the Common Stock for the 5 business days immediately preceding the date of subscription ("Conversion Shares") as reported by the National Association of Securities Dealers ("NASDAQ") Electronic Bulletin Board (the "Conversion Price"). If the number of resultant Conversion Shares would as a matter of law or pursuant to regulatory authority require the Company to seek shareholder approval of such issuance, the Company shall, as soon as practicable, take the necessary steps to seek such approval. If such approval is not received within 30 days then Company shall be required to redeem the Debenture pursuant to paragraph 4(c) herein. Such conversion shall be effectuated by surrendering the Debentures to be converted (with a copy, by facsimile or courier, to the Company) to the Company with the form of conversion notice attached hereto as Exhibit I, executed by the Holder of this Debenture evidencing such Holder's intention to convert this Debenture or a specified portion (as above provided) hereof, and accompanied by proper assignment hereof in blank. Accrued but unpaid interest shall be subject to conversion. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share. The transferee or issuee shall execute such investment representations or other documents as are respectively required by counsel in order to ascertain the available registration exemption. The date on which notice of conversion is given shall be deemed to be the date on which the Holder has delivered this Debenture, with the assignment and conversion notice duly executed, to the Company or, if earlier, the date set forth in such notice of conversion if the Debenture is received by the Company within five (5) business days thereafter. The transferee or issuee shall execute such investment representations or other documents as are reasonably required by counsel in order to ascertain the available registration exemption. (b) Interest at the rate of 12% per annum shall be payable in advance, monthly commencing __________________________, 1997. However, at Closing, the Company shall prepay the first 3 months interest by issuing in Common Stock of the Company as follows: Based on the closing bid prices of the Common Stock for the last 5 consecutive trading days prior to Closing ("Market Price") the Company shall issue to the Holder shares of Common Stock in an amount equal to the total monthly interest accrued and due divided by 80% of the Market Price (the "Interest Shares"). Common Stock issued pursuant hereto shall be issued pursuant to Regulation S in accordance with the terms of the Subscription Agreement. Thereafter, commencing 91 days after Closing the Company shall pay interest on a monthly basis in cash (or Common Stock, based on the above formula, at the Company's option). (c) At any time within 120 days the Company shall have the option to pay to the Holder 120% of the principal amount of the Debenture, in full, to the extent conversion has not occurred pursuant to paragraph 4(a) herein, or prepay pursuant to paragraph 9C herein or upon maturity if the Debenture is not converted, the Company shall give the Holder 5 days written notice and the Holder shall have the option to convert the Debenture or any part thereof into shares of Common Stock at a conversion price equal to the average of the closing bid price of the Common Stock for the 5 consecutive trading days prior to the date of such conversion or accept the cash repayment. Any shares issued pursuant to the options shall be issued pursuant to Regulation S or a Registration Statement. 5. No provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and interest on, this Debenture at the time, place, and rate, and in the coin currency, herein prescribed. 6. The Company hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, bringing of suit and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 7. The Company agrees to pay all costs and expenses, including reasonable attorneys' fees, which may be incurred by the Holder in collecting any amount due under this Debenture. 8. If one or more of the following described "Events of Default" shall occur and continue for 30 days unless a differed period is otherwise stated below: (a) The Company shall default in the payment of principal or interest on this Debenture; or (b) Any of the representations or warranties made by the Company herein, in the Subscription Agreement, or in any certificate or financial or other written statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Debenture or the Subscription Agreement shall be false or misleading in any material respect at the time made; or (c) The Company shall fail to perform or observe, in any material respect, any other covenant, term, provision, condition, agreement or obligation of the Company under this Debenture [and such failure shall continue uncured for a period of thirty (30) days after notice from the Holder of such failure]; or (d) The Company shall (1) become insolvent; (2) admit in writing its liability to pay its debts generally as they mature; (3) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (4) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; or (e) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) days after such appointment; or (f) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within thirty (30) days thereafter; or (g) Any money judgment, writ or warrant of attachment, or similar process, in excess of One Hundred Thousand ($100,000) Dollars in the aggregate shall be entered or filed against the Company or any of its properties or other assets and shall remain unpaid, unvacated, unbonded or unstayed for a period of fifteen (15) days or in any event later than five (5) days prior to the date of any proposed sale thereunder; or (h) Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within thirty (30) days after such instruction of the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding; or (i) The Company shall have its Common Stock delisted from the over-the-counter market. (j) The Company shall fail to issue the Common Stock pursuant to paragraph 4 herein and as permitted by then current SEC guidelines for this type of offering without a restrictive legend within 3 days of receipt by the Company of a facsimile copy of the Notice of Conversion. Then, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the Holder's sole discretion, the Holder may consider this Debenture immediately due and payable, without presentment, demand, protest or (further) notice of any kind (other than notice of acceleration), all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and the Holder may immediately, and without expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law. 9. (a) This Debenture represents a secured obligation of the Company pursuant to paragraph 9(b) herein. However, no recourse shall be had for the payment of the principal of, or the interest on, this Debenture, or for any claim based hereon, or otherwise in respect hereof, against any incorporator, shareholder, officer or director, as such, past, present or future, of the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. (b) Company shall contemporaneously with the issuance of this Debenture grant the Holder a pro rata lien against assets described in Exhibit B hereto having a value of not less than $1,000,000. 10. The Holder of this Debenture, by acceptance hereof, agrees that this Debenture is being acquired for investment and that such Holder will not offer, sell or otherwise dispose of this Debenture or the Shares of Common Stock issuable upon exercise thereof except under circumstances which will not result in a violation of the Act or any applicable state Blue Sky law or similar laws relating to the sale of securities. 11. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. 12. This Debenture and the agreements referred to in this Debenture constitute the full and entire understanding and agreement between the Company and the Holder with respect to the subject hereof. Neither this Debenture nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the Holder. 13. This Debenture shall be governed by and construed in accordance with the laws of New York. Holder hereby waives trial by jury and consents to exclusive jurisdiction and venue in the State of New York. 14. As set forth herein, the Company shall use all reasonable efforts to issue and deliver, within three business days after the Holder has fulfilled all conditions and submitted all necessary documents duly executed and in proper form required for conversion (the "Deadline"), to the Holder or any part receiving a Debenture by transfer from the Holder (together, a "Holder"), at the address of the Holder on the books of the Company, a certificate or certificates for the number of Shares of Common Stock to which the Holder shall be entitled. It is understood by both parties that such certificates comply with the then enacted SEC regulations governing this transaction. The Company understands that a delay in the issuance of the Shares of Common Stock beyond the Deadline could result in economic loss to the Holder. As compensation to the Holder for such loss, the Company agrees to pay liquidated damages to the Holder for late issuance of Shares upon conversion in accordance with the following schedule (where "No. Business Days Late" is defined as the number of business days beyond seven (7) business days from the date of receipt by the Company of a Notice of Conversion and the transfer agent of all necessary documentation duly executed and in proper form required for conversion, including the original Debenture to be converted, all in accordance with the Debenture, Subscription Agreement and the requirements of the transfer agent): Liquidated Damages per No. Business Days Late $100,000 of Debenture 1 $500 2 $1,000 3 $1,500 4 $2,000 5 $2,500 6 $3,000 7 $3,500 8 $4,000 9 $4,500 10 $5,000 10 $5,000 + $1,000 each Business Day Late beyond 10 days The Company shall pay the Holder any liquidated damages incurred under this Section by check upon the earlier to occur of (i) issuance of the Shares to the Holder or (ii) each monthly anniversary of the receipt of the Company of such Holder's Notice of Conversion. Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to issue and deliver shares of Common Stock to the Subscriber in accordance with the terms of the Debenture. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by an officer thereunto duly authorized. Dated:________________ Classic Restaurants International, Inc. By:__________________________ Title:_______________________ EXHIBIT I NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby irrevocably elects to convert $______________ of the above Debenture No. ___ into Shares of Common Stock of Classic Restaurants International, Inc. (the "Company") according to the conditions set forth in such Debenture, as of the date written below. The undersigned represents that it is not a U.S. Person as defined in Regulation S promulgated under the Securities Act of 1933, as amended, and is not converting the Debenture on behalf of any U.S. Person and the representations contained in the Subscription Agreement are true. If Shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Date of Conversion*_____________________ Applicable Conversion Price __________________ Signature__________________________________________________________ [Print Name of Holder and Title of Signer] Address:___________________________________________________________ ___________________________________________________________________ Medallion Signature Guaranty * This original Debenture and Notice of Conversion must be received by the Company by the fifth business date following the Date of Conversion. EX-11 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Not required because of the company's loss from operations. EX-21 5 LIST OF SUBSIDIARIES Exhibit 21 LIST OF SUBSIDIARIES The Company currently has two subsidiaries: 1. Classic Restaurants International, Inc. - a Florida corporation Doing business under the name Musicana Supper Club. 2. Musicana - Clearwater, Inc. - a Florida corporation Doing business under the name Musicana. EX-28 6 FDS [ARTICLE] 5 [MULTIPLIER] 1 [CURRENCY] U.S. DOLLARS [PERIOD-TYPE] YEAR [FISCAL-YEAR-END] JUN-30-1997 [PERIOD-END] JUN-30-1997 [EXCHANGE-RATE] 1 [CASH] 36,656 [SECURITIES] 0 [RECEIVABLES] 98,099 [ALLOWANCES] 0 [INVENTORY] 14,039 [CURRENT-ASSETS] 148,794 [PP&E] 810,163 [DEPRECIATION] 461,362 [TOTAL-ASSETS] 558,215 [CURRENT-LIABILITIES] 701,623 [BONDS] 0 [PREFERRED-MANDATORY] 0 [PREFERRED] 393,770 [COMMON] 3,815,080 [OTHER-SE] (4,352,258) [TOTAL-LIABILITY-AND-EQUITY] 558,215 [SALES] 0 [TOTAL-REVENUES] 2,328,729 [CGS] 0 [TOTAL-COSTS] 3,623,986 [OTHER-EXPENSES] 0 [LOSS-PROVISION] 0 [INTEREST-EXPENSE] 62,628 [INCOME-PRETAX] (1,349,940) [INCOME-TAX] 0 [INCOME-CONTINUING] (1,349,940) [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] (1,349,940) [EPS-PRIMARY] (.38) [EPS-DILUTED] (.38)
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