As filed with the Securities and Exchange Commission on July [ ], 1996
Registration No. 33-72490-LA
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
Post-Effective Amendment No. 1
to Form SB-2
Registration Statement
Under
The Securities Act of 1933
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AMERICAN CINEMASTORES INC.
(Name of small business issuer as specified in its charter)
Delaware 2541 95-4374952
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification
Incorporation or Classification Number)
Organization) Number)
Suite 400
1543 7th Street
Santa Monica, California 90401
(310) 394-6444
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive
offices)
Steve Natale, President
American CinemaStores, Inc.
Suite 400
1543 7th Street
Santa Monica, California 90401
(310) 394-6444
(Name, address, including zip code, and telephone
number, including area code of agent for service)
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Copies to:
Gary A. Schonwald, Esq.
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Telephone: (212) 885-5522
Telecopier: (212) 885-5001
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: |X|
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
Pursuant to Rule 416, there are also being registered hereby such additional
indeterminate shares of Common Stock as may be issuable by reason of stock
splits, stock dividends and similar adjustments as set forth in the provisions
of the Redeemable Warrants.
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<PAGE>
American CinemaStores, Inc.
FORM SB-2
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K, showing the location in the
Prospectus of the information required by Part I of Form S-3.
FORM SB-2 ITEM LOCATION
NUMBER AND CAPTION IN PROSPECTUS
------------------ -------------
1. Front of Registration
Statement and Outside
Front Cover Page of
Prospectus. . . . . . . . . . . . . Facing Page and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside
Back Cover Pages of
Prospectus. . . . . . . . . . . . . Inside Front Cover Page and
Back Cover Page of
Prospectus
3. Summary Information and Risk
Factors . . . . . . . . . . . . . . Prospectus Summary;
Risk Factors
4. Use of Proceeds . . . . . . . . . . Prospectus Summary;
Use of Proceeds
5. Determination of
Offering Price. . . . . . . . . . . Front Cover Page of
Prospectus; Risk Factors
6. Dilution. . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders. . . . . . Not Applicable
8. Plan of Distribution. . . . . . . . Front Cover Page of
Prospectus; Prospectus Summary;
The Exercise Offer; Plan of
Solicitation; Risk Factors
9. Legal Proceedings . . . . . . . . . Business
10. Directors, Executive Officers,
Promoters and Control Persons . . . Risk Factors; Management; Principal
Stockholders; Certain Transactions
11. Security Ownership of Certain
Beneficial Owners and Management. . Management; Principal Stockholders;
Certain Transactions
12. Description of Securities . . . . . Dividend Policy; Description of
Securities
13. Interest of Named Experts
and Counsel . . . . . . . . . . . . Not Applicable
14. Disclosure of Commission
Position on Indemnification
for Securities Act Liabilities . . Indemnification
15. Organization Within Last Five Years Certain Transactions; Management
16. Description of Business . . . . . . Business; Prospectus Summary; Risk
Factors; Management's Discussion and
Analysis
17. Management's Discussion and
Analysis or Plan of Operation . . . Management's Discussion and Analysis
18. Description of Property . . . . . . Business
19. Certain Relationships and
Related Transactions . . . . . . . Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters . . . . Price Range of Securities; Description
of Securities; Outside Front Page
of Prospectus; Prospectus Summary
Management; Risk Factors
21. Executive Compensation. . . . . . . Management
22. Financial Statements. . . . . . . . Summary Financial Information; Selected
Financial Information; Pro Forma
Condensed Combined Financial
Statements; Financial Statements
23. Changes in and Disagreement
with Accountants on Accounting
and Financial Disclosure. . . . . . Not Applicable
<PAGE>
PROSPECTUS
AMERICAN CINEMASTORES INC.
OFFER TO REDUCE THE EXERCISE PRICE OF REDEEMABLE WARRANTS TO $3.00
To Holders Of
THE COMPANY'S REDEEMABLE WARRANTS
For Exercise Before
[ ], 1996
The offer will expire on [ ], 1996
at 5:00 p.m., New York City Time
unless extended. Withdrawal rights will also expire at
5:00 p.m., New York City Time, on [ ], 1996
[30 days from the date of this Prospectus].
American CinemaStores Inc. (the "Company") hereby offers (the "Exercise
Offer"), to the holders (the "Holders") of the Company's redeemable warrants
(the "Redeemable Warrants") to purchase common stock, par value $.001 per share
(the "Common Stock"), of the Company who exercise their Redeemable Warrants
pursuant to the Exercise Offer, to reduce the exercise price of Redeemable
Warrants to $[____] (from $6.00) for each Redeemable Warrant so exercised, in
each case if and only if a Holder exercises his or her Redeemable Warrants prior
to 5:00 pm., New York City time, on [ ], 1996, [30 days from the date of this
Prospectus], unless the Exercise Offer is extended by the Company as described
herein (such date, or the date to which the Exercise Offer is extended, being
referred to as the "Expiration Date"). Each Redeemable Warrant entitles the
holder to purchase two shares of Common Stock at any time until March 13, 1998.
The Company will accept for exercise any and all Redeemable Warrants duly
exercised pursuant to the Exercise Offer. There are 2,612,500 Redeemable
Warrants outstanding and the Exercise Offer applies to all outstanding
Redeemable Warrants. Effective after the Expiration Date, a Holder will continue
to have the right to exercise his or her Redeemable Warrants (in accordance with
the terms thereof) at the re-set exercise price of $6.00 for each Redeemable
Warrant.
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THE SECURITIES OFFERED HEREBY ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND
SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS" ON PAGES [ ] TO [ ].
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS
OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY
OF THE INFORMATION IN THIS DOCUMENT. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
The 2,612,500 outstanding Redeemable Warrants and the 5,225,000 shares of
Common Stock underlying such Redeemable Warrants are registered pursuant to a
registration statement (which first became effective on March 14, 1994), as
amended by a post-effective amendment thereto, of which this Prospectus forms a
part. The Common Stock and the Redeemable Warrants are listed on the SmallCap
Market of the NASDAQ Stock Market, Inc. ("NASDAQ") under the respective symbols:
ACSI and ACSIW. On July 15, 1996, according to NASDAQ, the closing sale prices
of the Common Stock and Redeemable Warrants were $2.00 and $0.63, respectively.
See "Price Range of Securities" and "Description of Securities."
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Soliciting Agent:
THE BOSTON GROUP, L.P.
<PAGE>
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IMPORTANT
Any Holder desiring to exercise all or any portion of his or her Redeemable
Warrants should either (1) complete and sign the subscription form on the
reverse side of the Holder's Redeemable Warrant certificate(s) and mail or
deliver such certificate(s), together with a certified or bank check payable to
"American CinemaStores, Inc." in the amount of $[____] for each Redeemable
Warrant exercised in the Exercise Offer and any other required documents to
Continental Stock Transfer & Trust Company (the "Warrant Agent") or mail or
deliver such Redeemable Warrant Certificates, any other required documents and
pay such exercise price by wire transfer to the Warrant Agent for the benefit of
the Company, or follow the procedure for book-entry exercise set forth under the
caption "The Exercise Offer -- Procedures for Exercising Redeemable Warrants --
Book Entry Exercise," or (2) request the Holder's broker, dealer, commercial
bank, trust company or other nominee to effect the transaction for him or her. A
Holder having Redeemable Warrants registered in the name of a broker, dealer,
commercial bank, trust company or other nominee must contact that person or firm
if such Holder desires to exercise such Redeemable Warrants. Holders who desire
to exercise Redeemable Warrants and whose certificates for such Redeemable
Warrants are not immediately available should exercise such Redeemable Warrants
by following the procedures for guaranteed delivery set forth under the caption
"The Exercise Offer - Procedures for Exercising Redeemable Warrants - Guaranteed
Delivery."
The terms of the Exercise Offer were determined by negotiation between the
Company and The Boston Group, L.P. (the "Agent"), which will act as the
Company's soliciting agent and receive a fee of 4% of the exercise price of each
Redeemable Warrant exercised during the Exercise Offer with respect to the first
1,000,000 Redeemable Warrants so exercised and 5% of the exercise price of each
Redeemable Warrant exercised during the Exercise Offer in excess of the first
1,000,000 Redeemable Warrants so exercised.
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE MAKING OF THE
EXERCISE OFFER. HOWEVER, NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS
MAKES ANY RECOMMENDATION TO ANY HOLDER AS TO WHETHER TO EXERCISE REDEEMABLE
WARRANTS PURSUANT TO THE EXERCISE OFFER. EACH HOLDER MUST MAKE HIS OR HER OWN
DECISION, AFTER READING THIS PROSPECTUS, AS TO WHETHER TO EXERCISE
HIS OR HER REDEEMABLE WARRANTS AND, IF SO, HOW MANY
REDEEMABLE WARRANTS TO EXERCISE.
Questions and requests for assistance or for additional copies of this
Prospectus may be directed to the Warrant Agent at its address and telephone
number set forth on the back cover of this Prospectus.
----------
This Prospectus also relates to 5,225,000 shares of Common Stock issuable
upon exercise of the Company's outstanding Redeemable Warrants at an exercise
price of $6.00, subject to adjustment, at any time after the Expiration Date of
the Exercise Offer and until 5:00 p.m., New York City time on March 13, 1998,
the expiration date of the Redeemable Warrants. Upon exercise of each Redeemable
Warrant, the Company will issue two shares of Common Stock, subject to
adjustment. The Redeemable Warrants become subject to redemption by the Company
at a redemption price of $0.05 per Redeemable Warrant on 30 days' written
notice, provided the closing bid price of the Common Stock averages $3.50 or
more for any 20 consecutive trading days within a period of 30 trading days
ending on the fifth trading day prior to the date of the notice of redemption.
See "Description of Securities - Redeemable Warrants."
The date of this Prospectus is [ ], 1996
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<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
New York, New York 10048. Copies of such material can also be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission in Washington, D.C., a
registration statement on Form SB-2 and one or more post-effective amendments
with respect thereto (the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement, including the exhibits and financial statements and
schedules, if any, filed therewith or incorporated therein by reference.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or incorporated herein by reference, each statement being
qualified in its entirety by such reference. The Registration Statement,
including the exhibits thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of any and all
parts thereof may be obtained from such office after payment of the fees
prescribed by the Commission.
THE COMPANY AND THE AGENT INTEND TO REQUEST THE STAFF OF THE COMMISSION TO
CONCUR IN THE VIEW THAT THE AGENT MAY ENGAGE IN PASSIVE MARKET MAKING ACTIVITIES
IN THE REDEEMABLE WARRANTS AND THE COMMON STOCK ON NASDAQ CONSISTENT WITH
APPLICABLE REGULATIONS UNDER THE EXCHANGE ACT, INCLUDING RULE 10B-6A. IF SUCH
CONCURRENCE IS RECEIVED, THE AGENT MAY ENGAGE IN PASSIVE MARKET MAKING. SEE "THE
OFFER - PASSIVE MARKET MAKING."
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<PAGE>
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. EACH
PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS
OTHERWISE INDICATED, ALL SHARE AND PER SHARE INFORMATION IN THIS PROSPECTUS
GIVES EFFECT TO A 2-FOR-1 STOCK DIVIDEND EFFECTED IN AUGUST 1994.
The Company
From May 1993, when the Company commenced operations, through May 31, 1996,
the Company was engaged in the operation of retail mini-stores offering
movie-related merchandise, such as apparel, posters, toys, compact discs and
cassette tapes of movie sound tracks, and other items. Initially, the Company's
mini-stores were located in the lobbies of movie theaters located in California,
Florida, New Jersey and New York. Beginning in July 1994, the Company also
opened temporary mini-stores in regional shopping malls offering merchandise
similar to that offered by the theater lobby mini-stores. Because mini-store
operations did not generate the revenues and profits necessary to successfully
operate the Company, during the 13 month period ended May 31, 1996, the Company
discontinued retail operations.
During negotiations with the operators of various regional shopping malls,
the Company identified a market for fixtures for shopping malls and retail
stores (e.g., temporary retail stores, carts, kiosks, mall directory units and
other items). After investigation and analysis of this business opportunity, the
Company organized Sierra Fixture and Design, Inc. ("Sierra") in March 1995, as a
wholly-owned subsidiary to design, arrange for the manufacture of, market and
sell shopping mall and retail store fixtures to operators and developers of
regional shopping malls and operators of retail outlets. Sierra, located in
Newport Beach, California, delivered its first significant order of retail carts
in August 1995. To broaden its operating base, the Company has agreed to acquire
the operations of two privately held companies engaged in the business of
designing and producing value-added garments and other textile products (such as
beach and golf towels) for sale to distributors in the advertising specialty
industry and to retailers of souvenir and novelty products. The companies
proposed to be acquired add value to "blank" (undecorated) garments, such as
t-shirts, sweatshirts and jackets, and to blank towels, by decorating them with
logos, names or messages of the advertisers or other customers of the
advertising specialty distributors with whom such companies do business and the
graphic designs required by their retail customers. The consummation of such
acquisitions by the Company is dependent on and is subject to the satisfaction
of a number of conditions, including the Company's receipt of net proceeds from
exercises of the Redeemable Warrants in an amount sufficient to fund certain
payments in connection with such acquisitions (approximately $3.5 million).
There can be no assurance that such conditions will be satisfied or if such
acquisitions are successfully consummated, that such acquired businesses will
generate significant revenues or any net income. See "Risk Factors," "The
Mergers" and "Business."
The Company was incorporated in Delaware in June 1992 under the name
American CinemaSounds Inc. and changed its name to American CinemaStores Inc. in
April 1993. Unless the context otherwise requires, all references in this
Prospectus to the Company include the Company and its wholly-owned subsidiary
Sierra. The Company's executive offices are located at Suite 400, 1534 7th
Street, Santa Monica, California 90401, and its telephone number is (310)
394-6444.
The Mergers
Parties to the Mergers. The Company has entered into Agreements and Plans
of Merger dated as of June 19, 1996 (the "Merger Agreements") (a) with ASCI/SPI
Acquisition Corp., a wholly-owned subsidiary of the Company (the "Superior
Merger Sub"), Superior/Panoramic Hand Prints Inc. ("Superior"), Robert J. Strem,
individually ("Strem"), and Robert J. Strem and Janet C. Strem, as trustees of
the Strem Family 1993 Trust under trust agreement dated November 9, 1993 (the
"Strem Trust"), and (b) with JJI/ASCI Acquisition Corp., a wholly-owned
subsidiary of the Company (the "JJC Merger Sub," and together with the Superior
Merger Sub, the "Merger Subs"), Just Jackets Corporation ("JJC," and together
with Superior, the "Target Companies"), the Strem Trust, Strem, Bruce Sacks,
individually ("Sacks," and together with Strem, the "Principals") and Bruce
Sacks and Sharon Sacks, as trustees of The Bruce and Sharon Sacks Family Trust
under a trust agreement dated April 13, 1990 (the "Sacks Trust," and together
with the Strem Trust, the "Target Company Stockholders"). Pursuant to, and upon
the terms and conditions of the Merger Agreements, at the Effective Time (as
defined below), each of the Target Companies will be merged with and into the
Merger Subs, Superior with and into Superior Merger Sub and JJC with and into
JJC Merger Sub (the "Mergers"), and all outstanding shares of the capital stock
of the
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<PAGE>
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Target Companies will automatically be converted into the right to receive an
aggregate of $2.04 million (the "Cash Consideration") and 1,025,000 shares of
Common Stock (the "Share Consideration," and together with the Cash
Consideration, the "Merger Consideration"). At the closing of the Mergers, the
Target Company Stockholders will receive 1,025,000 shares of Common Stock,
constituting approximately 7.8% of the then outstanding shares of Common Stock*.
The Company and the Merger Subs are hereinafter sometimes referred to
collectively as the "Company Parties," and individually as a "Company Party."
The Target Companies, the Target Company Stockholders and the Principals are
hereinafter sometimes referred to collectively as the "Target Company Parties,"
and individually, as a "Target Company Party."
The Effective Time. The Mergers will be effective as of the date and time
of the filing of agreements of merger with the Secretary of State of California
(the "Effective Time") in accordance with the California General Corporation
Law. The Merger Agreements provide that such filings will be made as promptly as
practicable following satisfaction of, or waiver of compliance with, the
conditions precedent set forth in the Merger Agreements.
Conditions to the Mergers. The respective obligations of the Company
Parties, on the one hand, and the Target Company Parties, on the other, to
consummate the Mergers, are subject to the satisfaction or waiver of certain
conditions, including the absence of any injunction or other legal restraint in
connection with either of the Mergers which in the judgment of the Company or
the Target Company Stockholders makes it inadvisable to proceed with the
Mergers. The obligation of the Company Parties to consummate the Mergers is
subject to the satisfaction or waiver of certain additional conditions,
including the accuracy of the representations and warranties of the Principals
and the Target Company Stockholders set forth in the Merger Agreements, the
completion by the Company of an equity financing resulting in sufficient net
proceeds to fund the Cash Consideration and provide working capital of at least
$1,000,000 for the Merger Subs (the "Equity Financing"), and the absence of
material adverse change in the financial or business condition of the Target
Companies. The obligation of the Target Company Parties to consummate the
Mergers is subject to the satisfaction or waiver of certain additional
conditions, including that the closing bid price per share of the Common Stock
on the last trading date prior to the Effective Date shall be at least $2.65.
Termination; Fees and Expenses. The Merger Agreements may be terminated
prior to the Effective Time on certain grounds, including the following: (a) by
the Company Parties, on the one hand, or by the Target Company Parties, on the
other, if (i) subject to an exception, the Mergers are not consummated by August
31, 1996, unless extended by the parties to the Merger Agreement in writing, or
(ii) an order or decree permanently restraining a Merger is issued, or (iii) the
terminating parties have reasonably determined that a Merger is inadvisable or
impractical by reason of the initiation or threat of material litigation against
the Company or a Target Company, or (iv) the terminating parties have determined
that, subject to certain exceptions, since December 31, 1995, there has been a
material adverse change in the business, assets or financial condition of the
Company (in the case of the Target Company Parties as terminating parties) or a
Target Company (in the case of the Company Parties as terminating parties), or
(b) by the Company Parties thereto, as to a breach of a material provision of a
Merger Agreement which is not timely remedied, and by the Target Company Parties
thereto, as to a similar unremedied breach by a Company Party thereto, of a
material provision of the Merger Agreement to which such breaching person is a
party.
In certain circumstances, including termination of the Merger Agreements on
certain bases, the Company will be obligated to pay or reimburse the Target
Company Parties for actual costs (including professional fees) and
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* Assuming the exercise of all of the outstanding Redeemable Warrants, but no
exercise of the Agent's Warrants, if and when issued, and outstanding
options granted under the Company's 1993 Stock Option Plan.
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expenses incurred by the Target Company Parties in connection with the Mergers,
in addition to other rights the Target Company Parties may have. In certain
circumstances, upon the termination of the Merger Agreements, the Target
Companies will be obligated to pay or reimburse the Company Parties for actual
costs (including professional fees) incurred by the Company Parties in
connection with the Mergers, in addition to other rights the Company Parties may
have.
Certain Agreements of the Parties. The Company has agreed (a) to take
reasonable action to cause the following to occur: at the closing under the
Merger Agreements, amend the Company's by-laws to increase the number of
directors constituting the Company's board of directors from two to five, effect
the resignation of Mr. Gill Champion (currently Chairman of the Board of
Directors and Chief Executive Officer of the Company) as a director, and
nominate and cause to be elected as directors to fill the vacancies on the board
of directors so created, Strem, a designee of the Agent and two other persons
jointly designated by Strem and Steve Natale, the Company's President
("Natale"); (b) to enter into an extension of the existing employment with
Natale and enter into employment agreements with the Principals and Christopher
J. Ebert ("Ebert"), the Company's Chief Financial Officer; and (c) after one
year from the Effective Time, at the request of the Strem Trust, to register
under the Securities Act up to 200,000 shares of Common Stock, and grant certain
"piggyback" registration rights to the Sacks Trust with respect to up to 25,000
shares of Common Stock, constituting the Share Consideration. Natale will agree
with the Company not to sell 750,000 shares of Common Stock for a period of one
year from the Effective Time and the Strem Trust will agree not to sell an
aggregate of 1,000,000 shares for the same period.
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<PAGE>
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The Exercise Offer
Securities Offered.................... 5,255,000 shares of Common Stock
underlying 2,612,500 Redeemable
Warrants.
Expiration Date....................... The Exercise Offer expires at 5:00 p.m.,
New York City time, on [ ], 1996, unless
extended by the Company. The "Expiration
Date" is the original expiration date of
the Exercise Offer or as that date may
be extended. See "The Exercise Offer -
Exercise Terms".
Redeemable Warrant Exercise Price
During Exercise Offer................. Each Redeemable Warrant entitles a
Holder to purchase two shares of Common
Stock at a price of $[____] ($[____] per
share) until the Expiration Date.
Common Stock Outstanding
Prior to Exercise Offer............. 6,892,638 shares (1)
After the Exercise Offer............ 13,142,638 shares (1)(2)
Redeemable Warrants Outstanding
Prior to Exercise Offer............. 2,612,500
After the Exercise Offer............ (3)
Closing Sale Price Prior to
Announcement of Exercise Offer
( , 1996):..................... Common Stock: $[ ]
Redeemable Warrants: $[ ]
Current Closing Price................. Common Stock $[ ]
Redeemable Warrants $[ ]
Method of Exercising.................. To exercise Redeemable Warrants, Holders
must follow the procedures under "The
Exercise Offer - Procedures for
Exercising Redeemable Warrants."
Warrant Agent......................... Continental Stock Transfer & Trust
Company
19th Floor Two Broadway
New York, New York 10004
(212) 509-4000, ext. 253.
Soliciting Agent...................... The Boston Group, L.P.,
30th Floor
2049 Century Park East
Los Angeles, California 90067
(310) 843-9007.
Warrant Solicitation Fee.............. The Company will be required to pay the
Agent a fee of 4% of the gross
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<PAGE>
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proceeds received from the first
1,000,000 exercises of Redeemable
Warrants during the Exercise Offer and
5% of the gross proceeds of exercises
of Redeemable Warrants during the
Exercise Offer in excess of 1,000,000.(1)
Use of Proceeds:................... If net proceeds are $3,500,000 or more,
such net proceeds will be used to pay
the costs of acquisition of the Target
Companies and to provide $1,000,000 of
working capital to the Target Companies.
If the net proceeds to the Company are
less than $3.5 million and the Mergers
are not consummated, the proceeds will
be used to pay transaction costs
incurred in connection with the Mergers
and the balance, if any, will be used to
pay operating expenses and to provide
working capital to Sierra. See "Use of
Proceeds" and "Management's Discussion
and Analysis of Financial Condition and
Results of Operations." (1)
Other Offering
Securities Offered................. 5,225,000 shares underlying
2,612,500 Redeemable Warrants
Redeemable Warrant Exercise Price
After Exercise Offer............. After the Expiration Date, each
Redeemable Warrant entitles a Holder to
purchase two shares of Common Stock at a
price of $6.00 ($3.00 per share),
subject to adjustment, and is
exercisable until March 13, 1998.
Common Stock Outstanding:
Prior to the Offering:........... 6,892,638 shares (1)
After the Offering............... 12,117,638 shares (1)(4)
Use of Proceeds:................... The net proceeds will be utilized to
implement the Company's restructuring
plan, including expansion of Sierra's
operations and payment of the costs
associated with identification of new
acquisition candidates.
NASDAQ Symbols:
Common Stock..................... ACSI
Redeemable Warrants.............. ACSIW
Risk Factors....................... The securities offered hereby involve a
high degree of risk. See "Risk Factors."(1)
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(1) Excludes (a) 5,225,000 shares of Common Stock issuable upon exercise of
outstanding Redeemable Warrants; (b) 1,025,000 shares of Common Stock
issuable upon consummation of the Mergers; (c) 500,000 shares of Common
Stock issuable upon exercise of the Agent's Warrants, if and when issued,
and (d) 800,000 shares issuable upon exercise of options granted and
available for grant under the Company's 1993 Stock Option Plan, as amended.
- --------------------------------------------------------------------------------
-8-
<PAGE>
- --------------------------------------------------------------------------------
(2) Assumes the issuance of 5,225,000 shares of Common Stock, the maximum
number of shares issuable upon the exercise of the maximum number of
Redeemable Warrants under the terms of the Exercise Offer and the issuance
of 1,025,000 shares of Common Stock upon consummation of the Mergers; but
excludes the securities listed in (b), (c) and (d) of footnote (1) above.
(3) If 100%, 75% and 50% of the Redeemable Warrants are exercised during the
Exercise Offer, -0-, 653,125 and 1,306,250 Redeemable Warrants,
respectively, would remain outstanding after the Exercise Offer.
(4) Assumes the issuance of 5,225,000 share of Common Stock upon the exercise
of all outstanding Redeemable Warrants (including all Redeemable Warrants
exercised pursuant to the Exercise Offer) and that the Mergers have not
been consummated.
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
audited and unaudited historical consolidated financial statements of the
Company; audited and unaudited historical financial statements of the Target
Companies; and unaudited pro forma condensed combined financial statements of
the Company and the Target Companies, giving effect to the Mergers (in the case
of the pro forma statements of operations, at the beginning of the respective
periods, and in the case of the pro forma balance sheets), at the respective
dates of such balance sheets, all of which appears elsewhere in this Prospectus.
The unaudited pro forma and equivalent pro forma per share data of the Company
and the Target Companies is presented for illustrative purposes only and is not
necessarily indicative of operating results or financial position of either the
Company or the Target Companies that would have occurred had the Mergers been
consummated on the indicated dates, nor is such data necessarily indicative of
future operating results or financial position.
- --------------------------------------------------------------------------------
-9-
<PAGE>
<TABLE>
AMERICAN CINEMASTORES SUMMARY AUDITED AND UNAUDITED HISTORICAL FINANCIAL DATA
Statements of Operations Data:
<CAPTION>
Year Ended May 31, Eleven Months Ended
--------------------------------- --------------------------------------
1995 1994 April 30, 1996 April 30, 1995
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales............................ $ 14,418 $ -- $ 792,503 $ --
Gross profit ....................... 7,610 -- 357,254 --
Net loss:
From continuing
operations....................... (309,443) (521,898) (1,148,775) (1,010,950)
From discontinued
operations....................... (1,946,404) (715,227) (1,001,689) (745,672)
------------ ------------- ------------- -------------
Net loss............................. $(2,255,847) $(1,237,125) $(2,150,464) $(1,756,622)
=========== =========== =========== ===========
Net loss per share:
From continuing
operations....................... $ (0.05) $ (0.15) $ (0.17) $ (0.17)
From discontinued operations..... (0.31) (0.20) (0.14) (0.12)
----------- ----------- ----------- -----------
Net loss per share................... $ (0.36) $ (0.35) $ (0.31) $ (0.29)
=========== =========== =========== ===========
Weighted average common
shares outstanding............... 6,185,790 3,574,253 6,892,638 6,120,622
</TABLE>
<TABLE>
<CAPTION>
Summary Balance Sheet Data:
May 31, 1995 April 30, 1996
------------ ----------------------------------------------------------------------
Pro forma as
Actual Pro forma (1)(3) adjusted (2)(3)
---------- ---------------- ---------------
<S> <C> <C> <C> <C>
Working capital................... $2,915,979 $1,019,259 $7,746,759 $ 5,460,070
Total assets...................... 3,701,764 1,402,790 8,130,290 14,462,769
Total liabilities................. 235,121 86,610 86,610 4,266,589
Stockholders' equity.............. 3,466,643 1,316,180 8,043,680 10,196,180
</TABLE>
(1) Adjusted to give effect to the sale of 5,225,000 shares of Common Stock
offered hereby upon exercise of 2,612,500 Redeemable Warrants, after deducting
estimated offering and selling expenses (in the amount of $1,110,000 through
July 31, 1996), and initially allocating the estimated proceeds of approximately
$6,727,500 to cash. See "Capitalization," "Description of Securities" and "Use
of Proceeds."
(2) Adjusted to give effect to the issuance of 1,025,000 shares of common stock,
issuable upon consummation of the mergers and the sale of 5,225,000 shares of
Common Stock offered hereby upon exercise of 2,612,500 Redeemable Warrants. See
"Capitalization", "Description of Securities" and "Use of Proceeds".
(3) Does not include (a) 500,000 shares of Common Stock to be reserved for
issuance upon exercise of the Agent's Warrants, if and when issued; and (b)
800,000 shares of Common Stock received for issuance upon exercise of options
granted and available for grant under the Company 1993 Stock Option Plan, as
admended. See "Management -- Stock Option Plan".
-10-
<PAGE>
<TABLE>
SUPERIOR SUMMARY AUDITED AND UNAUDITED HISTORICAL FINANCIAL DATA
Statements of Operations Data:
<CAPTION>
Year Ended December 31
------------------------------------- Eleven Months Ended
1995 1994 June 30, 1996
------------ ----------- -------------
<S> <C> <C> <C>
Net sales.............................. $ 8,457,526 $ 8,615,565 $ 8,292,721
Gross profit........................... 2,354,243 2,377,448 2,775,289
Net income ............................ 136,995 75,823 150,595
</TABLE>
Summary Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Working capital (deficiency)......... $ (235,114) $ (250,632)
Total assets......................... 2,791,748 4,236,010
Long term debt
(including current portion)........ 593,652 534,518
Total liabilities.................... 2,484,468 3,754,921
Stockholders' equity................. 307,280 481,089
</TABLE>
<TABLE>
JJC SUMMARY UNAUDITED HISTORICAL FINANCIAL DATA
Unaudited Statements of Operations Data:
<CAPTION>
Year Ended December 31
----------------------------------------- Eleven Months Ended
1995 1994 June 30, 1996
------------- ----------- -------------
<S> <C> <C> <C>
Net sales.............................. $1,247,525 $1,284,295 $1,439,231
Gross profit........................... 412,664 302,842 503,477
Net income (loss)...................... (1,279) 37,285 53,417
</TABLE>
Unaudited Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
<S> <C> <C>
Working capital ..................... $ 13,361 $ 3,943
Total assets......................... 448,875 448,851
Total liabilities.................... 440,257 425,058
Stockholders' equity................. 8,618 23,793
</TABLE>
-11-
<PAGE>
AMERICAN CINEMASTORES AND TARGET COMPANIES
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Unaudited Pro Forma Combined Statements of Income Data:
Year Ended Eleven Months Ended
May 31, 1995(2) April 30, 1996(1)
--------------- -----------------
Sales ............................ $ 9,719.469 $ 10,524,455
Gross profit ..................... 2,774,517 3,636,020
Net loss from:
Continuing Operations .......... (452,902) (1,200,673)
Discontinued Operations ........ (1,946,404) (1,001,689)
------------ ------------
Net loss ......................... $ (2,399,306) $ (2,202,362)
============ ============
Net Loss Per Share from:
Continuing Operations .......... $ (0.04) $ (0.09)
Discontinued Operations ........ (0.16) (0.08)
------------ ------------
Net loss per share ............... $ (0.20) $ (0.17)
============ ============
Weighted average common
shares outstanding ............ 12,434,957(3) 13,142,638(3)
Summary Unaudited Pro Forma Combined Balance Sheet Data:
April 30, 1996*
---------------
Working capital .................. $ 5,460,070
Total assets .................. 14,462,769
Total liabilities .................. 4,266,589
Stockholders' equity ............... 10,196,180
- -----------
* Combines data as at April 30, 1996 for the Company with data as at June 30,
1996 for the Target Companies.
HISTORICAL AND UNAUDITED PRO FORMA PER SHARE DATA
Historical Pro Forma
---------- ---------
Net Loss per Common Share:
Eleven months ended April 30, 1996(1)
From Continuing Operations $ (0.17) $ (0.09)
From Discontinued Operations (0.14) (0.08)
------- -------
Net Loss Per Common Stare $ (0.31) $ (0.17)
======= =======
Year ended May 31, 1995 (2)
From Continuing Operations $ (0.05) $ (0.04)
From Discontinued Operations (0.31) (0.16)
------- -------
Net Loss Per Common Share $ (0.36) $ (0.20)
======= =======
Book Value per Common Share:
April 30, 1996 $ 0.19 $ 0.78
- -----------
(1) Data for the eleven months ended April 30, 1996 for the Company combined
with data for the eleven months ended June 30, 1996 for the Target
Companies.
(2) Data for the fiscal year ended May 31, 1995 for the Company combined with
data for the fiscal year ended December 31, 1995 for the Target Companies.
(3) Assumes issuance of 1,025,000 share of Common Stock upon consummation of
the Mergers.
-12-
<PAGE>
RISK FACTORS
The securities offered hereby involve a high degree of risk, including, but
not necessarily limited to, the risk factors described below. Each prospective
investor should carefully consider the following risk factors before making an
investment decision. Prospective investors should consult with their own legal,
tax and financial advisors. This Prospectus contains forward-looking statements.
The Company's actual results may differ materially from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors".
1. History of Significant Losses; Plan of Operation; Uncertainty of Future
Profitability. The Company has incurred substantial losses every year since its
inception. For the fiscal years ended May 31, 1993, 1994 and 1995, the Company
incurred losses of $150,829, $1,237,125 and $2,255,847, respectively, on sales
of $-0-, $156,898 and $841,146, respectively. For the eleven months ended April
30, 1996, the Company incurred a net loss of $2,150,464, of which $901,689
represents a loss from discontinued retail operations (including $457,393
representing the write-off of fixed assets associated with closures of the
Company's mini-stores), on sales of $792,503 from continuing operations and
$590,795 from discontinued operations. From inception (June 2, 1993) through
April 30, 1996, the Company had cumulative negative cash flow of approximately
$5,500,000. There can be no assurance that these trends will not continue.
The Company is attempting to increase its revenues and attain profitability
through the implementation of a restructuring plan involving consummation of the
Mergers, discontinuance of retail operations, reduction of operating expenses
and expansion of its shopping mall and retail fixtures business. The future
success of the Company is dependent on its ability to implement its
restructuring plan. The Company has a limited operating history upon which an
evaluation of its prospects in connection with its mall and retail fixtures
business may be made and such prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in connection with the
establishment of a new business or product and the competitive environment in
which the Company operates.
The Company anticipates that it will continue to incur operating expenses
which could be substantial. These expenses could result in continuing and
significant operating losses for the foreseeable future, until such time, if
ever, as the Company is able to attain adequate sales levels. Given the startup
nature of its operations, the lack of experience and expertise of its current
executive management regarding the business of Sierra and the businesses of the
Target Companies and the other risk factors included in this Prospectus, there
can be no assurance that the Company will be able to successfully implement its
restructuring plan (including the consummation of the Mergers and the
integration of the businesses of the Company and the Target Companies), that
such operations will generate significant revenues, or that the Company will
achieve and maintain profitable operations over any extended period of time.
2. Risk of Cash Business. Due to the Company's limited revenues and
continuing losses, it does not anticipate that it will be able to enter into a
revolving credit or similar financing arrangements with an institutional or
other lender, other than through the Merger Subs pursuant to their assumption of
the liabilities of the Target Companies at the Effective Time of the Mergers and
possible renewal of such current facilities thereafter. Moreover, the Company
anticipates that many of its suppliers and contractors will continue to require
cash payments prior to supplying goods or rendering services to it, although the
Company has been able to arrange for credit with some of such suppliers and
contractors. If the Company does not generate and collect revenues in a timely
manner, its ability to pay its suppliers and contractors would be severely
curtailed. Inability to procure needed supplies and services would have a
material adverse effect on the Company, and could require the Company to further
limit or cease operations. See "Risk Factors - Dependence on Third Party
Suppliers and Contractors."
3. Need for Mergers; Dependence on Offering Proceeds; Possible Need for
Additional Financing. Notwithstanding the discontinuance of the Company's retail
operations, implementation of the Company's restructuring plan, involving
consummation of the Mergers and expansion of its shopping mall and retail
fixtures business, will require a significant amount of cash. The Company is
currently utilizing the remaining net proceeds of its 1994 public offering
(approximately $300,000), together with cash generated by its shopping mall and
retail fixtures business, to pay operating expenses. The amount of cash
generated by Sierra's operations is currently insufficient to satisfy the cash
requirements of the Company on a consolidated basis, or to achieve net income,
on a consolidated basis. The Company believes that the combination of its
existing operations with those of the
-13-
<PAGE>
Target Companies and the management experience of the Principals, offers the
Company the opportunity to increase its revenues and, over time, to achieve
profitability. There can be no assurance, however, that the Mergers will be
consummated or, if consummated, that the Company will be able to successfully
integrate the operations of the Target Companies with its existing operations or
be able, when required, to provide financing to support such combined
operations. Moreover, there can be no assurance that such combined operations
will ever generate sufficient revenues to cover cost of sales and operating
expenses (including debt service or from alternative financing options, if any)
to permit the Company and its subsidiaries, on a consolidated basis, to
"break-even" or achieve profitable operations.
The Company is dependent on the net proceeds of this offering, together
with the remaining net proceeds of its 1994 public offering and cash generated
by Sierra, to consummate the Mergers, to provide working capital for the
businesses to be acquired or, in the event the Mergers are not consummated, to
implement its plan to expand the operations of Sierra. The Merger Agreements
provide that the Company Parties are not obligated to consummate the Mergers
unless the Company successfully completes the Equity Financing (i.e., the
Company raises sufficient funds pursuant to the Exercise Offer and/or a private
placement of securities to fund the Cash Consideration and provide $1 million to
the Merger Subs for use as working capital. There can be no assurance that a
sufficient number of Holders will elect to exercise their Redeemable Warrants
pursuant to the Exercise Offer to enable the Company to raise the required
amount of net proceeds. If the Company is unable to raise sufficient net
proceeds pursuant to the Exercise Offer to permit it to consummate the Mergers,
the Mergers may not be consummated and the Company would apply any net proceeds
so raised to pay transaction costs in connection with the unconsummated Mergers
and the balance to pay operating costs, provide working capital for Sierra and
to finance the Company's efforts to identify other acquisition candidates. See
"Use of Proceeds."
Even if the Company is able to raise sufficient funds through the exercise
of the Redeemable Warrants pursuant to the Exercise Offer to consummate the
Mergers and provide $1 million of working capital to the Merger Subs, there can
be no assurance that any funds provided to the Merger Subs and/or Sierra to be
used as working capital will be sufficient to satisfy the working capital needs
of such operations. The working capital requirements of the Target Companies are
currently funded under revolving credit facilities provided to the Target
Companies by a bank. The amounts outstanding under these facilities aggregate
approximately $1.6 million as of the date of this Prospectus. Such indebtedness
is secured by security interests in favor of such bank in substantially all of
the assets of the Target Companies. As a result of the Mergers, the Merger Subs
will automatically become liable for all of the obligations of the Target
Companies, including the $1.6 million owing to such bank. While the Company
believes, based on discussions with such bank, that such bank will provide
revolving credit facilities to the Merger Subs, such bank could determine to
withdraw such facilities and demand payment of such indebtedness. In such case,
to avoid foreclosure of the bank's security interest in the assets acquired by
the Merger Subs from the Target Companies, the Company would be required to
apply the funds otherwise intended to fund working capital requirements of the
Merger Subs and Sierra to reduce or fully pay the indebtedness owing to the
bank. In such event, the Company would be required to seek additional funds
through a public or private equity or debt financing. If the Company is required
to seek additional funds through public or private equity financing, such action
may result in dilution of the then existing stockholders of the Company. There
can be no assurance that the Company will be able to obtain additional financing
when needed on favorable terms or on any terms. Failure of the Company to obtain
financing on terms acceptable to it, or at all, could prevent implementation of
the Company's restructuring plan and force the Company to further limit its
business activities or cease operations. See "Use of Proceeds."
4. Risks Associated with Acquisition of The Target Companies. The Company,
in the course of its due diligence review of the Target Companies, has
identified the following risk factors inherent in and affecting the business of
the Target Companies. Due to the Company's limited resources, there can be no
assurance that it has identified all of the risks associated with the ownership
and operation of the Target Companies. In this connection, Strem and the Strem
Trust, in respect of Superior, have indemnified the Company and the Superior
Merger Sub, and the Principals and the Target Company Stockholders have, in
respect of JJC, indemnified the Company and the JJC Merger Sub, against loss and
liability for claims suffered or incurred by the Company and the applicable
Merger Sub which may arise out of a material misrepresentation of fact or a
breach of warranty by Strem and the Strem Trust, concerning Superior, or the
Principals and the Target Company Stockholders, concerning JJC, in the
applicable Merger Agreement.
-14-
<PAGE>
However, recovery of losses from the indemnitors is limited (a) under the Merger
Agreement as to Superior, to losses in excess of $50,000, and not in excess of
the portion of the Merger Consideration applicable to Superior, with the first
$100,000 to be paid in cash and losses in excess of $100,000 to be paid 40% in
cash and 60% by the return of shares of Common Stock constituting the portion of
the Share Consideration applicable to Superior, and (b) under the Merger
Agreement as to JJC, to losses in excess of $5,000 and not in excess of the
portion of the Merger Consideration applicable to JJC, with the first $10,000 to
be in cash and losses in excess of $10,000 to be paid 40% in cash and 60% by the
return of shares of Common Stock constituting the portion of the Share
Consideration applicable to JJC. In addition, the Company has incurred and
expects to incur significant transaction costs related to the Mergers, including
financing, legal and accounting expenses (currently estimated to be $1,110,000.
Such amount is only a preliminary estimate and, therefore, subject to change.
There can be no assurance that subsequent to the Merger, the Company will not
incur charges to reflect costs associated with the Mergers or that the
anticipated benefits of the Mergers will outweigh such costs.
A. Lack of Certain Audited Financial Statements.
The Commission's financial statement disclosure standards with respect to a
significant business acquisition to be accounted for as purchase which is
probable to occur requires the presentation of an audited balance sheet as at
the end of the most recent fiscal year of the business to be acquired and
audited statements of income, cash flows and changes in stockholders' equity for
the business to be acquired for each of the two fiscal years preceding the date
of such balance sheet.
While this Prospectus contains the required audited financial statements
for Superior's most recently completed fiscal year (the year ended December 31,
1995), it does not contain the required financial statements (i.e., statements
of income, cash flows and changes in stockholders' equity for the year ended
December 31, 1994) because Superior's auditors have advised that it would not be
feasible to audit such financial statements. Accordingly, Holders will not have
the benefit of two years of audited financial statements in making their
decision as to whether to exercise their Redeemable Warrants in response to the
Exercise Offer. In addition, the Company will not have the benefit of two years
of audited financial statements in determining the advisability of proceeding
with the acquisition of Superior.
The staff of the Commission, by a letter dated April 17, 1996, has informed
the Company that although the staff will not waive the Commission's requirements
for two years of audited financial statements of Superior, the staff will not
recommend any action against the Company which is based solely on the Company's
failure to file the audited historical financial statements of Superior required
by the Commission's form of Current Report on Form-8K. The staff has also
informed the Company that until it has filed audited financial statements
reporting on Superior's operations (or reporting on the Company's operations
which include the operations of the acquired business) for a time span equal to
the periods for which audited financial statements of Superior are required to
be filed, and the pro-forma financial information required by the Commission's
Regulation S-B, registration statements filed under the Securities Act (and
post-effective amendments to such registration statements) will not be declared
effective by the Commission, except that such restriction will not apply to (a)
offerings on sales of securities upon conversion of outstanding convertible
securities or upon the exercise of outstanding warrants or rights, (b) dividend
or exercise reinvestment plans; (c) employee benefit plans; (d) transactions
involving secondary offerings; or (e) sales of securities pursuant to Rule 144
under the Securities Act. Accordingly, the contemplated acquisition of the
Target Companies by the Company has the temporary effect of limiting the
Company's ability to raise debt or equity capital by means of a public offering
of securities, other than as expressly permitted.
B. Reliance on Revolving Credit and Equipment Financing.
The businesses of the Target Companies are capital intensive. The Target
Companies are currently dependent on revolving credit facilities provided by a
bank to finance their working capital needs. Borrowings under such revolving
credit facilities are secured by security interests in all of the assets of the
Target Companies. Moreover, the ability of the Target Companies to effectively
compete is directly related to Superior's ability to acquire and operate
state-of-the-art production equipment. Approximately 93% of Superior's fixed
assets consist of production equipment. Accordingly, Superior is dependent on
its ability to obtain purchase money financing at such times as it needs to
replace or upgrade production equipment.
As of December 31, 1995, Superior was not in compliance with certain
financial covenants contained in the credit agreement pertaining to its
revolving credit facility. While the bank which extended such credit facility
has waived such covenant violations as of December 31, 1995, Superior is
currently not in compliance with such financial covenants (based on Superior's
unaudited balance sheet as at June 30, 1996). Noncompliance with such financial
covenants subjects Superior to the risk that the bank may terminate the
revolving credit facility and accelerate the maturity of Superior's indebtedness
to the bank. Termination of such credit facility and acceleration of Superior's
indebtedness to such bank subsequent to the Mergers would have a material
adverse effect on the Company's operations unless Superior were able to obtain a
credit commitment from a new lender on acceptable terms. In the past, Superior
has typically been able to successfully renegotiate their credit facility with
the bank. If Superior were unable to refinance such indebtedness, Superior might
be required to seek protection from its creditors under the federal Bankruptcy
Code.
JJC's credit facility, which expired on May 1, 1996, was recently renewed
by the bank, and currently expires on August 31, 1996. Indebtedness under the
Superior credit facility matures on October 1, 1996. Although the Target
Companies have been able to obtain renewals of their credit facilities in the
past, there can be no assurance that such bank will continue its lending
arrangements with the Target Companies. If such bank were to demand payment of
its loans to the Target Companies, the Target Companies would be materially and
adversely affected if new credit facilities were not in place at or prior to the
time for payment demanded by such bank. In addition, the Target Companies would
be materially and adversely affected if Superior was not able to obtain purchase
money financing to permit it to acquire production equipment deemed necessary by
it to maintain its competitive position.
C. Dependence Upon Certain Personnel.
The success of the Target Companies is dependent upon the management
skills, services and experience of Strem, in his capacity as President of the
Target Companies, the success of JJC is dependent upon the management skills,
services and experience of Sacks, in his capacity as an officer and principal
management employee of JJC. The loss of Strem's services would have a material
adverse effect on the Target Companies and the loss of the Sacks' services would
have a material adverse effect on JJC. Pursuant to the proposed employment
agreement between the Principals and the Company (or the Merger Sub which will
employ such Principal), the Company (or such Merger Sub) proposes to obtain
"key-man" life insurance in the amount of $1 million on the life of each
Principal.
-15-
<PAGE>
Neither of the Target Companies employs any sales personnel in connection
with their sales activities in the souvenir supply market and are dependent on
the efforts of an independent sales representative who is compensated on a
commission basis based on orders received and accepted by the Target Companies.
There can be no assurance that such sales representative applies substantial
efforts or resources to sell products of the Target Companies to the souvenir
supply market. Similarly, the Target Companies are dependent on the efforts of
Superior's four person graphic art and design department to support the design
efforts of internal sales personnel and the independent sales representative of
the Target Companies when working with customers and to create new product
designs for the Target Companies. The Target Companies have informed the Company
that they do not anticipate encountering significant difficulties in replacing
such sales representative if his engagement should be terminated or in replacing
any employee in its graphic art and design department whose employment by
Superior is terminated. However, failure or delay in engaging an adequate
replacement or replacements, in either instance, could have an adverse effect on
operations of the Target Companies.
D. Dependence on the Advertising Specialty and Souvenir Supply Markets.
For the fiscal years ended December 31, 1994 and 1995, approximately 85%
and 75%, respectively, of combined net sales of the Target Companies were to
customers in the advertising specialty markets and the balance of combined net
sales in each year were to customers in the souvenir supply market. Accordingly,
the business of the Target Companies is dependent on the status of these
markets. Since advertising specialty and souvenir products may be classified as
discretionary purchases on the part of commercial advertisers and consumers,
recessionary economic conditions would have the effect of causing the customers
of advertising specialty distributors to reduce their advertising budgets and of
inhibiting consumers from traveling to tourist attractions at which souvenir
items are sold or from purchasing souvenir items at such locations. Decreases in
the purchases of such products by end users would adversely affect the operating
results of the Target Companies.
-16-
<PAGE>
E. Dependence on Key Customers.
The Target Companies derived approximately 25% of their recurring combined
net sales in fiscal 1995 from two customers. Approximately 13% of the recurring
sales are from Jack Nadel and 12% of recurring sales are received from Idea Man.
While sales volume has varied significantly, and may vary significantly in the
future, sales to their 10 largest customers (based on recurring sales) remained
relatively constant over the four years ended December 31, 1995. While the
Target Companies are continuing to sell to such customers, and do not anticipate
significant reductions in sales to such customers, a material reduction in
purchases by such customers would have an adverse impact on operating results of
the Target Companies.
F. Dependence on Third Party Suppliers.
The Company purchases its inventory requirements of blank garments and
towels from a small number of large textile mills located in the southeastern
part of the United States. Although multiple sources are available for such
blank textiles, the Target Companies may use only one source of supply in a
particular season. The Target Companies do not have long-term supply agreements
with their suppliers. The Target Companies believe that they have good
relationships with such suppliers. However, a supplier could terminate its
relationship with a Target Company at any time and without a specified reason.
The Target Companies believe they have a good relationship with their suppliers
and do not anticipate difficulty in obtaining necessary inventory. In such
event, the Target Companies would seek to identify one or more suppliers from
whom they could obtain timely deliveries of blank products in sufficient
quantities and at acceptable prices to satisfy customer requirements. Delays in
identifying alternative sources of supply and in obtaining sufficient quantities
of blank products from new suppliers could have a material adverse effect on the
operations of the Target Company experiencing such delays.
G. Inadequacy of Manufacturing Facilities.
Superior's production facilities are currently operating on a 24 hour per
day, three-shift basis. While the Target Companies are currently processing
their order backlogs on a timely basis, in order to effectively increase
revenues, reduce production costs and increase profitability of the Target
Companies (i.e., increase revenues and profitability), Superior must acquire
and/or improve larger facilities and acquire additional screenprinting and
embroidery equipment. The Company estimates that it must raise approximately $2
million to finance such capital expenditures. There can be no assurance that the
Company will be able to raise the necessary funds to finance such expansion. The
Company's inability to finance such expansion could have a material adverse
effect on the Company's revenues and result in increased operating losses. See
"Use of Proceeds."
H. Competition.
The advertising specialty and souvenir supply industries in which the
Target Companies are engaged are characterized by intense competition. The
Target Companies believe that their bases of competition are product offerings,
prices, quality of products and customer service (including design service).
Competitors of the Target Companies are national and local silkscreen
printing and embroidery firms, some of which manufacture the blank garments and
other textiles they decorate. Firms having their own manufacturing facilities
may have a competitive advantage over the Target Companies with respect to the
cost of their product offerings. Some of such competitors have substantially
greater financial and other resources than the Target Companies. Although the
Target Companies believe they compete effectively on the basis of the broad
array of products they offer, product quality, pricing and customer service
(including design service and timely delivery), there can be no assurance that
the Target Companies will be able to compete effectively against existing and
future competitors.
I. Seasonality.
The Target Companies have regularly experienced substantial fluctuations in
their quarter to quarter operating results due to the seasonal nature of their
business. Sales are usually highest in the spring and summer months, begin to
decline in the fall and do not begin to increase again until March of the
following year. Unanticipated events during peak sales season, including delays
in securing adequate supplies, or significant decreases in sales during the peak
selling season could result in losses which would not be easily reversed before
the following fiscal year.
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5. Uncertainty of Market Acceptance; Dependence on Third Party Marketing
and Sales Efforts. While the Company anticipates continued acceptance of its
shopping mall and retail fixture designs (involving, among other things, new
concepts in retail cart merchandising and computer touch screen technology for
mall directories), there can be no assurance that these new designs will achieve
acceptance and thereby generate sufficient revenues to offset losses generated
by the Company's other operations. Moreover, only Christopher D. Kelly, Sierra's
President, has had experience in designing, marketing and selling mall and
retail fixtures.
The Company does not employ any marketing or sales personnel in connection
with its mall and retail fixtures. The Company is dependent upon the efforts of
Mr. Kelly and third party independent sales representatives to market and sell
its products. Such sales representatives receive commissions from the Company
based on orders solicited by such representatives and accepted by the Company.
There can be no assurance that the Company's sales representatives will apply
substantial efforts or resources to sales of the Company's products. The Company
does not anticipate encountering significant difficulties locating and engaging
other sales representatives if any of the representatives currently engaged by
the Company terminate their relationship with the Company. However, failure or
delay in engaging replacement sales representatives could adversely affect the
Company's operations.
6. Dependence Upon Seasonal Sales Trend in the Retail Industry. Retail
sales in shopping malls are usually highest during the summer months and during
the Christmas season of each year. It is anticipated that revenues during these
periods, especially, to Sierra, will be disproportionately higher than revenues
during other periods. Additionally, unfavorable economic conditions may affect
shoppers and their buying perspectives. Such adverse economic conditions,
especially those occurring during the usually favorable Christmas season and
summer period, would adversely impact the budgetary considerations of shopping
mall owners and retailers and could lead to a reduction of purchases of carts,
mall directory units and other fixtures provided by the Company.
7. Dependence on Third-Party Suppliers and Contractors. The Company does
not own or operate any manufacturing facilities. The Company is entirely
dependent upon third parties for the construction and installation of mall and
retail fixtures designed by it. As of the date of this Prospectus, the Company
has not entered into any long term agreements with suppliers of inventory. There
can be no assurance that the Company will be able to enter into agreements with
any of its suppliers on terms favorable to it, or at all. Since the Company has
no long term agreements with its suppliers, any of these companies could
terminate their relationship with the Company at any time. In addition,
manufacturers of the Company's mall and retail fixtures have limited capacity
and may not, in all instances, have the capability to satisfy the Company's
manufacturing requirements. Although the Company believes, based on its
experience, that it will be able to obtain manufacturing services in sufficient
quantities and at acceptable prices to manufacture mall fixtures, its inability
to contract for reasonable manufacturing costs from third-party suppliers on
terms which the Company deems favorable would have a material adverse effect on
the Company's operations.
As of the date of this Prospectus, the Company is paying a majority of its
manufacturers in cash and has made limited arrangements to receive credit from
other manufacturers and suppliers of inventory. The Company believes, based on
its experience, that it will be able to enter into agreements to construct and
install mall and retail fixtures at prices and on time schedules consistent with
the Company's estimates; however, the Company's inability to consummate such
agreements or the failure of any contractor to comply with the terms thereof
could have a material adverse effect on the Company's operations.
8. Dependence Upon Key Personnel; Need for Additional Qualified Personnel.
If the Mergers are effected, the success of the Company will be largely
dependent upon the efforts of Steve Natale, currently President and Chief
Operating Officer, Christopher J. Ebert, Chief Financial Officer, and Robert J.
Strem as president of the Superior Merger Sub. If the Mergers are not effected,
the success of the Company will be largely dependent upon the efforts of Messrs.
Natale and Ebert and Christopher D. Kelly, President of Sierra. Although the
Company currently has an employment agreement with Steve Natale, which expires
in March 1997, and upon consummation of the Mergers, will be entering employment
agreements with Messrs. Ebert, Strem and Sacks, and a new employment agreement
with Steve Natale, and the Company has obtained "key-man" life insurance in the
amount of $1,000,000 on the life of Mr. Natale, the loss of the services of Mr.
Natale, Mr. Ebert or Mr. Kelly, or if the Mergers are effected, Mr. Strem, would
have a material adverse effect on the Company. Although prior to joining the
Company, Mr. Ebert served as chief financial officer of an international
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manufacturing company and a public company, neither Mr. Ebert nor Mr. Natale
have experience in operating and managing businesses of the type currently or
proposed to be operated by the Company. The successful operation of the
Company's businesses is also dependent on the Company's ability to hire, when
needed, and retain qualified personnel. There can be no assurance that the
Company will be able to hire or retain such necessary personnel.
9. Competition. The shopping mall and retail fixtures business, in which
the Company is engaged through Sierra, is highly competitive. The Company
believes that it effectively competes in the mall and retail fixtures market on
the basis of the design services offered by Sierra, which involve new concepts
in retail merchandising. The Company believes, based on its general knowledge of
the mall and retail fixtures business in the United States, that its principal
competitors are T.L. Horton and Creations of Dallas and that most of its
competitors have in-house manufacturing and installation operations. The
Company, on the other hand, is dependent on third party manufacturers for the
construction and installation of its mall and retail fixtures. This could prove
to be a competitive disadvantage if at the time the Company is seeking to place
an order with a manufacturer, such manufacturer does not have the manufacturing
capacity to process the Company's order. In such event, the customer would
probably cancel its order by reason of the Company's inability to satisfy
shipping dates for the fixtures. The prices of mall fixtures sold by competitors
may be less than the prices of similar fixtures sold by the Company and such
price competition may have a material adverse effect on the Company's revenues
and its ability to effectively compete with such other companies. Moreover, even
if the Company is able to profitably operate its mall and retail fixtures
business, it can be expected that the Company will thereafter face even more
aggressive price competition from its competitors. See "Risk Factors -
Dependence on Third Party Suppliers and Manufacturers."
There are no legal barriers to entry into the business operated by the
Company, and, as practical matter, no financial barriers, either. There are
usually no proprietary rights which can be protected from competition by
patents, copyrights or similar intellectual property protections. Many of the
Company's current and potential competitors have significantly greater
financial, manufacturing, marketing and personnel and other resources than the
Company. Accordingly, there can be no assurance that the Company will be able to
successfully compete against such existing and potential competitors.
10. Control of the Company. As of the date of this Prospectus, the current
executive officers and directors of the Company, in the aggregate, own 1,476,605
shares of Common Stock, approximately 21.4% of the Common Stock. As a result, it
is anticipated that these individuals will be in a position to materially
influence, if not control, the outcome of all matters requiring stockholder
approval in connection with the Mergers, including the election of directors. If
the Mergers are effected, the Strem Trust will be the beneficial owner of
1,000,000 shares of Common Stock, constituting approximately 7.6% of the issued
and outstanding Common Stock (assuming exercise of all Redeemable Warrants and
issuance of the Share Consideration, but excluding exercise of the Agent's
Warrants and options granted and available for grant under the Company's 1993
Stock Option Plan) and the Strem Trust and Mr. Natale will be in a position to
materially influence, if not control, the outcome of all matters requiring
stockholder approval, including the election of directors.
11. Possible Adverse Effect of the Exercise Offer on the Market for the
Common Stock and Redeemable Warrants. The Company has several market makers for
the Common Stock and the Redeemable Warrants (together, the "Securities") and
the Agent is a significant market maker. During the Exercise Offer,
the Agent may have to cease making a market in the Securities. The Company and
the Agent intend to ask the staff of the Commission to concur in the view that
the Agent may engage in passive market making activities in the Securities on
the NASDAQ SmallCap Market consistent with applicable regulations under the
Exchange Act, including provisions of Rule 10b-6A. If such concurrence is
received, of which there can be no assurance, the Agent may engage in passive
market making. Passive market making pursuant to Rule 10b-6A consists of
displaying bids on the SmallCap Market limited by the bid prices of market
makers not connected with the Exercise Offer and purchases limited by such
prices and effected in response to order flow. The volume of net purchases by a
passive market maker on each day is limited. Passive market making may stabilize
the market price of Common Stock or the Redeemable Warrants at a level above
that which might otherwise prevail and, if commenced, may be discontinued at any
time. If during the term of the Exercise Offer, the Agent has to cease making a
market in the Securities or can act only as a passive market maker in the
Securities, the market for the Company's Securities could be adversely effected.
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While there is no minimum number of Redeemable Warrants that must remain
outstanding after the Exercise Offer for continued listing of the Redeemable
Warrants on the SmallCap Market, if enough Redeemable Warrants are exercised
pursuant to the Exercise Offer, the currently limited market for the Redeemable
Warrants could be materially and adversely affected, resulting in the lack of a
viable market for the remaining Redeemable Warrants, which would have a material
adverse effect on the liquidity of the Redeemable Warrants. The Company will not
seek to delist the Redeemable Warrants from the SmallCap Market.
12. Possible Volatility of Common Stock and Redeemable Warrant Prices. The
trading prices of the Common Stock and the Redeemable Warrants (the
"Securities") may respond to quarterly variations in operating results and other
events or factors, including, but not limited to, the sale or attempted sale of
a large amount of the Securities into the market. In addition, the stock market
has experienced extreme price and volume fluctuations in recent years,
particularly in the securities of smaller companies. These fluctuations have had
a substantial effect on the market prices of many companies, often unrelated to
the operating performance of the specific companies, and similar events in the
future may adversely affect the market prices of the Securities.
13. Limitations on Use of Net Operating Loss Carry Forwards. As of May 31,
1995, the Company had net operating loss carry forwards of approximately $3.3
million, in respect of future federal income taxes, and approximately $1.6
million, in respect of future California franchise taxes, which expire in the
years 2008 to 2010, but may be utilized in the interim period until expiration.
The Company's use of its net operating loss carry forwards to offset taxable
income in any period subsequent to the consummation of its 1994 public offering
may be subject to certain annual limitations as a result of an "ownership
change" (as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, and the Treasury Regulations promulgated thereunder), which may have
occurred as a result of the consummation of such public offering and certain
other transactions that occurred prior and subsequent thereto. If one or more
"ownership changes" is deemed to have occurred, there can be no assurance as to
the specific amount of net operating loss carry forwards available in any
post-change year since the calculation is based upon a fact-dependent formula.
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based upon available evidence, that some portion or all
of the deferred tax asset will not be realized. In management's opinion it can
not be determined if it is more likely than not if the Company will generate
sufficient taxable income before the year 2012, two years after all net
operating loss carry forwards expire, to utilize all of the Company's deferred
tax asset. The valuation allowance has been recognized for the full amount of
the deferred tax asset of $4.9 million.
14. Shares Eligible for Future Sale; Registration Rights of Certain
Stockholders. Of the 6,892,628 shares of Common Stock outstanding as of the date
of this Prospectus, 1,476,605 shares are "restricted securities" (as that term
is defined under Rule 144 promulgated under the Securities Act), all of which
restricted securities are subject to the restriction contained in the lock-up
agreement described below, are eligible for resale under Rule 144. Such
1,476,605 shares are held by Messrs. Steve Natale and Gill Champion, who are,
respectively, the President and the Chairman of the Board of the Company. Upon
the consummation of the Mergers, the Company will issue an aggregate of
1,025,000 shares of Common Stock to the Target Company Stockholders, of which
1,000,000 shares will be issued to the Strem Trust. Such shares will become
eligible for resale under Rule 144 commencing 25 months following the closing of
the Mergers. At the closing date of the Mergers, Mr. Natale and the Strem Trust
will enter a "lock-up" agreement which provides that Mr. Natale, as to 750,000
shares of Common Stock, and the Strem Trust, as to 1,000,000 shares of Common
Stock, will not, directly or indirectly, sell, transfer, assign or otherwise
dispose (either pursuant to Rule 144 or otherwise) any of such shares for a
period of 12 months from the Effective Time. The Company in 1993 granted Messrs.
Natale and Champion and certain other persons who no longer hold shares of
Common Stock certain registration rights which currently cover the 1,476,605
shares of Common Stock owned by Messrs. Natale and Champion. In addition, the
Company has granted registration rights to the Strem Trust, with respect to an
aggregate of 200,000 shares of Common Stock, and to the Sacks Trust with respect
to an aggregate of 25,000 shares of Common Stock. Neither Mr. Natale nor the
Strem Trust, with respect to the shares subject to the "lockup" agreement, may
exercise their registration rights until at least 12 months after the Effective
Time of the Mergers.
Under Rule 144, a person who has held restricted securities for a period of
two years may, every three months, sell, in ordinary brokerage transactions or
in transactions directly with a market maker, an amount equal to the greater of
1% of the Company's then-outstanding common stock or the average weekly trading
volume during the four calendar weeks prior to such sale. Rule 144 also permits
the sale of shares without any quantity
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limitations by a person who is not an affiliate of the Company and has satisfied
a three-year holding period. Sales in the future of restricted securities under
Rule 144 or pursuant to any registration statement that may be filed with
respect to the shares of Common Stock currently outstanding or issuable upon
consummation of the Mergers may depress the price of the Common Stock in any
market on which such security is traded. See "Principal Stockholders," "Certain
Transactions" and "Shares Eligible for Future Sale."
Subject to the Company having a current prospectus covering the shares of
Common Stock underlying the outstanding Redeemable Warrants (the "Warrant
Shares"), the outstanding Redeemable Warrants entitle the holders of such
Redeemable Warrants to purchase up to an aggregate of 5,225,000 Warrant Shares
(based on the exercise during the 1995 fiscal year of 37,500 Redeemable
Warrants, of which 30,000 Redeemable Warrants may have been exercised at a time
when the prospectus intended to cover such exercises may not have been current)
at any time prior to 5:00 p.m., New York City time, on March 13, 1998. The
outstanding Redeemable Warrants, and, if exercised, the shares of Common Stock
issuable upon the exercise of Redeemable Warrants, which are not subject to Rule
144, may be sold at any time by the holders thereof or their transferees. Sales
of either the Redeemable Warrants or the underlying shares of Common Stock, or
even the existence of the right to exercise such Redeemable Warrants, may
depress the price of the Common Stock or the Redeemable Warrants in any market
in which such securities are traded. See "Description of Securities."
In connection with the Exercise Offer, if exercises of the Redeemable
Warrants during the Exercise Offer result in gross proceeds to the Company in
excess of $3.5 million, the Company will sell to the Agent, for nominal
consideration, the Agent's Warrants to purchase up to 500,000 shares of Common
Stock, at an exercise price of $2.05 per share. The Company has agreed that,
under certain circumstances, it will register under Federal and state securities
laws the shares issuable upon exercise of the Agent's Warrants. The exercise of
any registration rights could involve substantial expense to the Company at a
time when it could not afford such expenditures and may adversely affect the
terms upon which the Company may obtain additional financing. See "Plan of
Solicitation".
In addition, in the event that any holder of warrants issued by the Company
exercises its warrants, the percentage of ownership of the Company by persons
who invest hereunder will be diluted and any sales of the securities acquired
thereby might have an adverse effect on the market price of the Common Stock and
Redeemable Warrants.
The Company has reserved 800,000 shares of Common Stock for issuance to key
employees, officers, directors and consultants pursuant to the Company's 1993
Stock Option Plan. As of the date of this Prospectus 425,000 options have been
granted pursuant to the 1993 Stock Option Plan, all of which options are
currently exercisable. In the event that these or any other stock options
granted pursuant to the 1993 Stock Option Plan are exercised, dilution of the
percentage ownership of Common Stock owned by the public investors will occur;
in addition, sales of Common Stock issuable upon options granted pursuant to the
1993 Stock Option Plan, or even the potential of such sales, may adversely
affect the market price of the Common Stock. See "Management - Stock Option
Plan."
15. Current Prospectus and State Registration Required to Exercise
Redeemable Warrants. The Redeemable Warrants are not exercisable unless, at the
time of exercise, the Company has a current prospectus covering the shares of
Common Stock issuable upon exercise of the Redeemable Warrants and such shares
have been registered or qualified or are deemed to be exempt under the
securities or "blue sky" laws of the state of residence of the exercising holder
of the Redeemable Warrants. Although the Company has undertaken to use its best
efforts to continue to maintain the effectiveness of the registration and
qualification of all the shares of Common Stock issuable upon exercise of the
Redeemable Warrants and to maintain a current prospectus relating thereto until
the expiration of the Redeemable Warrants, there is no assurance that it will be
able to do so. The value of the Redeemable Warrants may be greatly reduced if a
prospectus covering the Common Stock issuable upon the exercise of the
Redeemable Warrants is not kept current or if such Common Stock is not qualified
or exempt from qualification in the states in which the holders of the
Redeemable Warrants then reside.
Investors residing in jurisdictions in which shares underlying the
Redeemable Warrants are not qualified or not exempt under the securities laws of
such jurisdictions during the period in which the Redeemable Warrants are
exercisable, may have purchased Redeemable Warrants in the secondary market, or
holders of the Redeemable Warrants may have moved to jurisdictions in which the
Common Stock underlying the Redeemable
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Warrants are not registered or qualified. In such cases, the Company would not
be able to issue shares of Common Stock to such persons desiring to exercise
their Redeemable Warrants unless and until such shares could be qualified for
sale in the jurisdictions in which such persons reside, or an exemption from
such qualification exists in such jurisdictions. Such persons would have no
choice but to attempt to sell their Redeemable Warrants in a jurisdiction where
such sales are permissible or allow such Redeemable Warrants to expire
unexercised.
16. Authorization of Preferred Stock. The Company's Certificate of
Incorporation authorizes the issuance of "blank check" preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Company's board of directors is
empowered, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Common Stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. Although the Company has no present intention to issue any shares of
its preferred stock, there can be no assurance that the Company will not do so
in the future.
17. Delaware Anti-Takeover Law. The Company, a Delaware corporation, is
subject to the General Corporation Law of the State of Delaware, including
Section 203, an anti-takeover law enacted in 1988. In general, the law prohibits
a public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless: (i)
prior to such date, the board of directors approved the business combination; or
(ii) upon becoming an interested stockholder, the stockholder then owns at least
85% of the voting securities, as defined in Section 203; or (iii) subsequent to
such date, the business combination is approved by both the board of directors
and the stockholders. "Business combination" is defined to include mergers,
asset sales and certain other transactions with an "interested stockholder." An
"interested stockholder" is defined as a person who, together with affiliates
and associates, owns (or, within the prior three years, did own) 15% or more of
a corporation's voting stock. Although Section 203 permits the Company to elect
not to be governed by its provisions, to date, the Company has not made this
election. As a result of the application of Section 203, potential acquirors of
the Company may be discouraged from attempting to effect an acquisition
transaction with the Company, thereby possibly depriving holders of the
Company's securities of certain opportunities to sell or otherwise dispose of
such securities at above-market prices pursuant to such transactions.
18. No Preemptive Rights; Possible Dilutive Event. The holders of Common
Stock do not have any subscription, redemption or conversion rights, nor do they
have any preemptive or other rights to acquire or subscribe for additional,
unissued or treasury shares. Accordingly, if the Company were to elect to sell
additional shares of Common Stock, or securities convertible into or exercisable
to purchase shares of Common Stock, persons who acquired Common Stock have no
right to purchase additional shares, and as a result, their percentage equity
interest in the Company would be diluted.
19. No Dividends. To date, the Company has not paid any cash dividends on
its Common Stock and does not expect to declare or pay any such dividends in the
foreseeable future.
20. Requirements for Continued Listing on NASDAQ; Risk of Low Priced
Securities. The Common Stock and the Redeemable Warrants are listed on the
NASDAQ Small Cap Market (the "Small Cap Market"). For continued listing, an
issuer must, among other things, maintain at least $2,000,000 in total assets, a
$200,000 market value of the public float, and at least $1,000,000 in total
capital and surplus. In addition, continued listing requires a minimum of two
market makers and a minimum bid price of $1.00 per share; provided, however, if
the bid price per share falls below such minimum bid price, the issuer will
remain eligible for continued listing if the market value of the public float is
at least $1,000,000 and the Company has at least $2,000,000 in capital and
surplus. NASDAQ has informed the Company that it did not satisfy the
requirements for continued listing on the SmallCap Market because its total
assets at February 29, 1996 were less than $2,000,000. The Company has
subsequently filed with NASDAQ pro forma financial statements, giving effect to
the Mergers, demonstrating that the SmallCap Market listing requirements will be
satisfied when and if the Mergers are consummated. The Company believes that, on
an interim basis, it has satisfied the concerns of NASDAQ. It is anticipated
that if the Company's securities are delisted, trading, if any, in such
securities would be conducted in the over-the-counter market on the National
Association of Securities Dealers, Inc. OTC Electronic Bulletin Board
established for securities that do not meet the NASDAQ listing requirements or
quoted
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in what are commonly referred to as the "pink sheets." As a result, an
investor may find it more difficult to dispose of, or to obtain accurate price
quotations and volume information concerning, the Securities.
Moreover, if the Common Stock and Redeemable Warrants are delisted from the
Small Cap Market because trading price of the Common Stock is less than $1.00
per share, such securities might be subject to the low priced security or
so-called "penny stock" rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as investors with a net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with a spouse). For any transaction involving a penny stock, unless
exempt, the rules require, among other things, the delivery, prior to the
transaction, of a disclosure schedule required by the Securities and Exchange
Commission relating to the penny stock market. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
Although the Company believes that the Common Stock and Redeemable Warrants
will not be defined as a penny stock due to their listing on The NASDAQ Small
Cap Market, in the event such securities subsequently become characterized as a
penny stock, the market liquidity for such securities could be severely
affected. In such an event, the regulations relating to penny stocks could limit
the ability of broker-dealers to sell such securities and, thus, the ability of
purchasers in this offering to sell their shares of Common Stock in the
secondary market.
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THE EXERCISE OFFER
The Redeemable Warrants
The Redeemable Warrants are subject to a Warrant Agreement (the "Warrant
Agreement") between the Company and Continental Stock Transfer & Trust Company,
as Warrant Agent (the "Warrant Agent"). Pursuant to the terms of the Warrant
Agreement, the Redeemable Warrants (as adjusted for a 2-for-1 stock dividend
effected in August 1994) are exercisable for two shares of Common Stock (the
"Warrant Shares") at an exercise price of $6.00, subject to adjustment, at any
time until March 13, 1998. See "Description of Securities - Redeemable
Warrants."
THE COMPANY IS HEREBY OFFERING, TO HOLDERS WHO EXERCISE THEIR REDEEMABLE
WARRANTS PURSUANT TO THE EXERCISE OFFER TO REDUCE THE EXERCISE PRICE OF
REDEEMABLE WARRANTS TO $[____] (FROM $6.00) FOR EACH REDEEMABLE WARRANT SO
EXERCISED, IF AND ONLY IF A HOLDER EXERCISES HIS OR HER REDEEMABLE WARRANTS
PRIOR TO THE EXPIRATION DATE (AS HEREINAFTER DEFINED).
Terms of the Exercise Offer
Upon the terms and subject to the conditions of the Exercise Offer, the
Company will accept exercises for any and all Redeemable Warrants that are
validly exercised in accordance with the terms of the Exercise Offer from the
date of this Prospectus and prior to the Expiration Date (as hereinafter
defined) and not withdrawn in accordance with the procedures set forth under
"The Exercise Offer - Withdrawal Rights." As used in the Exercise Offer, the
term "Expiration Date" means 5:00 p.m., New York City time, on [_________], 1996
[30 days from the date of this Prospectus]; provided, however, that if the
Company, in its sole discretion, has extended the period of time during which
the Exercise Offer will be open, the term "Expiration Date" means the latest
time and date on which the Exercise Offer, as so extended, will expire.
The Company reserves the right, in its sole discretion, at any time and
from time to time, to extend the period of time during which the Exercise Offer
is open by giving oral or written notice of such extension to the Warrant Agent.
There can be no assurance that the Company will exercise its right to extend the
Exercise Offer. If the Company decides, in its sole discretion, to decrease the
number of Redeemable Warrants exercisable in the Exercise Offer or to increase
or decrease the $[____] exercise price applicable in the Exercise Offer and, at
the time that notice of such increase or decrease is first published, sent or
given to holders of Redeemable Warrants in the manner specified below, the
Exercise Offer is scheduled to expire at any time earlier than the 10th business
day from the date that such notice is first so published, sent or given, the
Exercise Offer will be extended until the expiration of such period of 10
business days.
The Company also expressly reserves the right to (i) delay the acceptance
of exercises of any Redeemable Warrants not theretofore accepted for exercise in
order to comply in whole or in part with applicable law, (ii) terminate the
Exercise Offer and not accept for exercise any Redeemable Warrants not
theretofore accepted for exercise upon the occurrence of any of the conditions
specified under "The Exercise Offer - Certain Conditions of the Exercise Offer,"
and (iii) amend the Exercise Offer in any respect at any time and from time to
time.
Any extension, delay, termination or amendment will be followed as promptly
as practicable by public announcement thereof, such announcement in the case of
an extension to be issued no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. For purposes
of the Exercise Offer, a "business day" means any day, other than a Saturday,
Sunday or Federal holiday, on which the principal office of the Commission in
Washington, D.C. is scheduled to be open for business and consists of the time
period from 12:01 a.m. through 12:00 midnight, New York City time. Without
limiting the manner in which the Company may choose to make any public
announcement, except as provided by applicable law (including Rule 13e-4(e)(2)
under the Securities Exchange Act of 1934, as amended), the Company shall have
no obligation to publish, advertise or otherwise communicate any such public
announcement, other than by issuing a release to the Dow Jones News Service.
The Company confirms that if it makes a material change in the terms of the
Exercise Offer or the information concerning the Exercise Offer, or if it waives
a material condition of the Exercise Offer, the
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Company will extend the Exercise Offer to the extent required by Rules
13e-4(d)(2) and 13e-4(e)(2) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which require that the minimum period during which
an offer must remain open (to allow for adequate dissemination to Holders and
Holder response) following material changes in the terms of the Exercise Offer
or information concerning the Exercise Offer, other than a change in percentage
of securities exercisable or the $[____] exercise price applicable in the
Exercise Offer, will depend upon the facts and circumstances, including the
relative materiality of the terms or information. The Company confirms that its
reservation of the right to delay issuance to Holders of the Warrant Shares in
respect of exercise of Redeemable Warrants which it has accepted for exercise is
limited by Rule 13e-4(f)(5) under the Exchange Act, which requires that an
issuer pay the consideration offered or return the exercised securities promptly
after the termination or withdrawal of the Exercise Offer.
Acceptance for Payment; Payment of Purchase Price
Upon the terms and subject to the conditions of the Exercise Offer
(including if the Exercise Offer is extended or amended, the terms and
conditions of the Exercise Offer as so extended or amended), the Company will
accept for exercise any and all Redeemable Warrants validly exercised prior to
the Expiration Date and not withdrawn, as soon as practicable after the
Expiration Date. In all cases, acceptance of exercises of Redeemable Warrants
pursuant to the Exercise Offer will only be made, and the Warrant Shares will
only be issued, after timely receipt by the Warrant Agent of (i) certificates
for such Redeemable Warrants with the subscription form on the reverse side of
such certificates properly completed and executed (with any required signature
guarantees) or confirmation (a "Book-Entry Confirmation") of such Redeemable
Warrants in the Warrant Agent's account at The Depository Trust Company ("DTC"),
the Pacific Securities Depository Trust Company ("PSDTC") or the Philadelphia
Depository Trust Company ("Philadep") (DTC, PSDTC and Philadep being sometimes
collectively referred to as the "Book-Entry Transfer Facilities" or individually
referred to as a "Book-Entry Transfer Facility") pursuant to the procedure set
forth under the caption "The Exchange Offer - Procedures for Exercising
Redeemable Warrants - Book-Entry Exercise," (with any required signature
guarantees), (iii) a certified or bank check payable to "American CinemaStores
Inc." in the amount of $[____] for each Redeemable Warrant exercised in the
Exercise Offer (or payment of the aggregate exercise price by wire transfer to
the Warrant Agent for the benefit of the Company), and (iv) any other required
documents.
For purposes of the Exercise Offer, the Company shall be deemed to have
accepted for exercise Redeemable Warrants as, if and when the Company gives oral
or written notice to the Warrant Agent, as agent for the exercising Holders, of
the Company's acceptance for exercise of such Redeemable Warrants pursuant to
the Exercise Offer. Subject to the terms and conditions of the Exercise Offer,
issuance of the Warrant Shares with respect to Redeemable Warrants accepted for
exercise pursuant to the Exercise Offer will be made by the Warrant Agent, which
will act as agent for the exercising Holders for the purpose of receiving such
securities from the Company and transmitting such securities to exercising
Holders. If any exercised Redeemable Warrants are not accepted for exercise for
any reason, or if certificates are submitted for more Redeemable Warrants than
are exercised, then certificates for such Redeemable Warrants not accepted for
exercise or not exercised will be returned (or, in the case of Redeemable
Warrants exercised by book-entry transfer into the Warrant Agent's account at a
Book-Entry Transfer Facility, such Redeemable Warrants will be credited to an
account maintained at such Book-Entry Transfer Facility), without expense to the
exercising Holder, as soon as practicable after the expiration or termination of
the Exercise Offer.
If, prior to the Expiration Date, the Company shall increase or decrease
the $[____] exercise price applicable in the Exercise Offer, the Company will
make applicable the increased or decreased exercise price in respect of all
Holders whose Redeemable Warrants are accepted for exercise pursuant to the
Exercise Offer.
Procedures for Exercising Redeemable Warrants
The acceptance by a Holder of the Exercise Offer pursuant to one of the
procedures described below will constitute an agreement by such Holder and the
Company in accordance with the terms and conditions of the Exercise Offer set
forth in this Prospectus.
Valid Exercise. Except as stated below, for Redeemable Warrants to be
validly exercised pursuant to the Exercise Offer, the subscription form on the
reverse side of each certificate representing Redeemable Warrants must be
properly completed and signed exactly as the name of the registered owner
appears on such certificates (with any required signature guarantees), together
with a certified or bank check payable to
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<PAGE>
"American CinemaStores Inc." in the amount of $3.00 for each Redeemable Warrant
exercised in the Exercise Offer (or payment of the aggregate exercise price by
wire transfer to the Warrant Agent for the benefit of the Company) and any other
required documents or prior to the Expiration Date must be received by the
Warrant Agent at its address set forth herein, and such Redeemable Warrants must
be delivered pursuant to the procedure for book-entry transfer set forth below
and a Book-Entry Confirmation of receipt of such Redeemable Warrants must be
received by the Warrant Agent, in each case prior to the Expiration Date.
Holders who are unable to comply with the foregoing procedures prior to the
Expiration Date may exercise Redeemable Warrants pursuant to the guaranteed
delivery procedures set forth below.
In order for an exercising Holder to participate in the Exercise Offer,
Redeemable Warrants must be validly exercised prior to the Expiration Date,
which is currently 5:00 p.m., New York City time, on [ ], 1996. [30 days from
the date of this Prospectus].
Book-Entry Exercise. The Warrant Agent will establish accounts with respect
to the Redeemable Warrants at each of the Book-Entry Transfer Facilities for
purposes of the Exercise Offer, within two business days after the date of this
Prospectus, and any financial institution that is a participant in a Book-Entry
Transfer Facility system may make book-entry exercises of Redeemable Warrants by
causing the Book-Entry Transfer Facility to exercise such Redeemable Warrants in
the Warrant Agent's account at such Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedures for such exercise. However,
although exercise of Redeemable Warrants may be effected through book-entry at a
Book-Entry Transfer Facility, the certificates for Redeemable Warrants being
exercised, with the subscription forms on the reverse side thereof properly
completed and duly executed (with any required signature guarantees), together
with a certified or bank check payable to "American CinemaStores Inc." in the
amount of $[____] for each Redeemable Warrant so exercised in the Exercise Offer
(or payment of the aggregate exercise price by wire transfer to the Warrant
Agent for the benefit of the Company) and any other required documents, must, in
any case, be transmitted to and received by the Warrant Agent at its address set
forth herein prior to the Expiration Date, or exercising Holders must comply
with the guaranteed delivery procedures set forth below. Delivery of such
documents to a Book-Entry Transfer Facility in accordance with such Book-Entry
Transfer Facility's procedures does not constitute delivery to the Warrant
Agent.
Signature Guarantees. Signatures on all Warrant Certificates must be
guaranteed by a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or by a
bank, credit union, savings association or other entity which is a member in
good standing of the Securities Transfer Agent's Medallion Program
(collectively, "Eligible Institutions") unless the Redeemable Warrants exercised
thereby are exercised (i) by a registered Holder of such Redeemable Warrants
(which term shall include any participant in a Book-Entry Transfer Facility
whose name appears on a security position listing as the owner), or (ii) for the
account of an Eligible Institution. If the certificates are registered in the
name of a person other than the signatory to the subscription form, or if
payment is to be made, or Redeemable Warrants not exercised or not accepted for
exercise are to be issued to a person other than the registered Holder, then the
transfer form on the reverse side of the Redeemable Warrant certificates must be
endorsed or accompanied by appropriate transfer powers, in either case signed
exactly as the names of the registered Holder appears on the certificates, and
the signatures on the certificates or transfer powers must be guaranteed as
described above.
Guaranteed Delivery. If a Holder desires to exercise Redeemable Warrants
pursuant to the Exercise Offer and certificates for such Redeemable Warrants are
not immediately available, or the procedure for book-entry transfer cannot be
completed on a timely basis, or time will not permit all required documents to
reach the Warrant Agent prior to the Expiration Date, such Redeemable Warrants
may, nevertheless, be exercised if all of the following conditions are met:
(1) such exercise is made by or through an Eligible Institution;
(2) a properly completed and duly executed notice of guaranteed delivery is
delivered to the Warrant Agent in the manner provided below and received by the
Warrant Agent prior to the Expiration Date, which Notice shall set forth the
name and address of the holder of the Redeemable Warrants and the number of
Redeemable Warrants being exercised, state that the exercise is being made
thereby and guaranteeing that within five New York Stock Exchange trading days
after the Expiration Date, the Redeemable Warrants and the certified or official
bank check will be deposited or the wire transfer, will be effected, by the
Eligible Institution with the Warrant Agent; and
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<PAGE>
(3) the certificates for all exercised Redeemable Warrants in proper form
for exercise (or Book-Entry Confirmation of exercise of such Redeemable Warrants
in the Warrant Agent's account at a Book-Entry Transfer Facility as described
above), with the subscription form on reverse side of such certificates duly
completed and duly executed, a certified or bank check payable to "American
CinemaStores Inc." in the amount of $[____] per Redeemable Warrant so exercised
in the Exercise Offer (or payment of the aggregate exercise price by wire
transfer to the Warrant Agent for the benefit of the Company) and any other
required documents, are received by the Warrant Agent within five New York Stock
Exchange trading days after the date of execution of the Notice of Guaranteed
Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by telegram, facsimile transmission or mail to the Warrant Agent and must
include a guarantee by an Eligible Institution. In all cases, issuance of the
Warrant Shares in respect of Redeemable Warrants accepted for exercise will be
made only after timely receipt by the Warrant Agent of (1) certificates for such
Redeemable Warrants with the subscription form on the reverse side thereof duly
completed and executed (with any required signature guarantees) (or Book-Entry
Confirmation of exercise of such Redeemable Warrants in the Warrant Agent's
account at a Book-Entry Transfer Facility as described above), (2) a certified
or bank check payable to "American CinemaStores Inc." in the amount of $[____]
for each Redeemable Warrant so exercised in the Exercise Offer, and (3) any
other required documents.
The method of delivery of all documents, including certificates for
Redeemable Warrants, is at the election and risk of the exercising Holder. If
delivery is by mail, registered, or certified or express mail, with return
receipt requested, properly insured, is recommended and sufficient time should
be allowed to ensure timely delivery.
Other Requirements. All questions with respect to the validity, form,
eligibility (including time of receipt) and acceptance for tender and exercise
of Redeemable Warrants will be determined by the Company, in its sole and
absolute discretion, which determination will be final and binding. The Company
reserves the absolute right to reject any and all exercises of Redeemable
Warrants which it determines not to be in proper form, or the acceptance or
exercise of which would, in the opinion of the Company's counsel, be unlawful.
The Company also reserves the absolute right to waive any defect or irregularity
in the exercise of Redeemable Warrants. Neither the Company, the Agent or any
other person will be under any duty to give notification of any defects or
irregularities in exercise, nor will they incur any liability for failure to
give such notification. The exercise of Redeemable Warrants will not be deemed
to have been properly made until any irregularities have been waived by, or
cured to the satisfaction of, the Company. The Company's reasonable
interpretation of the terms and conditions of the Offer will be final and
binding.
It is a violation of Section 10(b) of the Exchange Act and Rule 10b-4
thereunder for a person to exercise Redeemable Warrants for his own account
unless the person so exercising such Redeemable Warrants owns such securities.
Section 10(b) and Rule 10b-4 provide a similar restriction applicable to the
exercise or guarantee of an exercise on behalf of another person. The exercise
of Redeemable Warrants to the Company pursuant to any of the procedures
described in the Offer will constitute an agreement between the exercising
holders of Redeemable Warrants and the Company upon the terms and subject to the
conditions of the Exercise Offer, including the tendering and exercising
holder's representations that: (1) such person owns the Redeemable Warrants
being exercised within the meaning of Rule 10b-4 and (2) the exercise of such
Redeemable Warrants complies with Rule 10b-4.
If, on or after the date of this Prospectus, the Company should split,
combine or otherwise change the Common Stock or Redeemable Warrants, or shall
disclose that it has taken any such action, or if there shall occur any
antidilution adjustment pursuant to the terms of the Redeemable Warrants or
other adjustment affecting the exercise price or the number of Warrant Shares
issuable upon exercise of the Redeemable Warrants, then, without prejudice to
the Company's rights set forth under "The Exercise Offer-- Terms of the Exercise
Offer" and "The Exercise Offer--Certain Conditions of the Exercise Offer," the
Company, in its sole discretion, may make such adjustments in the exercise
price, the amount and nature of the securities issuable upon exercise thereof
and other terms of the Exercise Offer as it deems appropriate to reflect such
split, combination or other change.
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<PAGE>
Withdrawal Rights
Redeemable Warrants exercised pursuant to the Exercise Offer may be
withdrawn subject to the procedures described below, at any time before the
Expiration Date. Thereafter, such exercises are irrevocable, except that they
may be withdrawn after the expiration of 40 business days from the date of
commencement of the Exercise Offer, unless theretofore accepted by the Company
for tender and exercise as provided herein. If the Company extends the Exercise
Offer, or is delayed in its acceptance of Redeemable Warrants for exercise, or
is unable to accept Redeemable Warrants for exercise pursuant to the Exercise
Offer for any reason, then, without prejudice to the Company's rights under the
Exercise Offer, the Warrant Agent may, on behalf of the Company, retain all
Redeemable Warrants exercised, and such Redeemable Warrants may not be
withdrawn, except to the extent exercising holders are entitled to withdrawal
rights as set forth herein.
To be effective, (i) notice of withdrawal must be written and sent by hand,
courier or mail, or transmitted by telegraph or facsimile transmission; (ii) be
timely received by the Warrant Agent at its address set forth herein before the
Warrant Agent receives notice of acceptance by the Company of the Redeemable
Warrants; (iii) specify the name of the person who exercised the Redeemable
Warrants; (iv) if the Redeemable Warrants have been deposited with or otherwise
identified to the Warrant Agent, contain the description of the Redeemable
Warrants to be withdrawn and indicate the certificate numbers shown on the
certificates representing such Redeemable Warrants; and (v) be executed by the
registered holder of the Redeemable Warrants being exercised in the same manner
as the name of such registered holder appears on the certificates representing
such Redeemable Warrants or be accompanied by evidence satisfactory to the
Company that the person withdrawing the exercise pursuant to the Exercise Offer
has succeeded to the beneficial ownership of such Redeemable Warrants. Any
Redeemable Warrants properly withdrawn will thereafter be deemed not to have
been validly exercised for purposes of the Offer. However, withdrawn Redeemable
Warrants may be re-tendered and re-exercised at any time prior to the Expiration
Date.
No interest will be paid on any amount returned to a Holder pursuant to a
proper withdrawal or otherwise, regardless of any delay in the Offer.
All questions with respect to the validity, form and eligibility (including
time of receipt) of notices of withdrawal will be determined by the Company, in
its sole and absolute discretion, which determination will be final and binding.
None of the Company, the Warrant Agent, the Agent or any other person will be
under any duty to give notification of any defects or irregularities in any
notice of withdrawal or incur any liability for failure to give such
notification.
Certain Conditions of the Exercise Offer
Notwithstanding any other provision of the Exercise Offer, the Company
shall not be required to accept for exercise any Redeemable Warrants exercised,
or may terminate the Exercise Offer, or may delay the acceptance for exercise of
Redeemable Warrants pursuant to the Exercise Offer, if at any time on or after
[_______] [the date the Exercise Offer is first announced] and before the
acceptance for exercise of any such Redeemable Warrants or the payment therefor
any one or more of the following shall occur:
(a) there shall have occurred (i) any general suspension of, or
general limitation on prices for, or trading in, securities on the NASDAQ
SmallCap Market, (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation (whether or not mandatory) by any governmental agency or
authority on, or any other event that adversely affects, the extension of
credit by banks or other financial institutions, (iii) a material change in
United States or any other currency exchange rates or a suspension of or
limitation on the markets therefor, (iv) a commencement of a war, armed
hostilities or other similar international calamity directly or indirectly
involving the United States, or (v) in the case of any of the foregoing
existing at the time or the commencement of the Exercise Offer, a material
acceleration or worsening thereof; or
(b) any change (or development involving a prospective change) shall
have occurred or been threatened in the business, properties, assets,
financial condition, operations, results of operation or prospects of the
Company that is or may be materially adverse to the Company, or the Company
shall have become aware of any fact that is or may be materially adverse
with respect to the value of the Redeemable Warrants; or
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<PAGE>
(c) there shall have been threatened or instituted or there shall be
pending any action, proceeding, order, decree or injunction by or before
any court, government or governmental agency or other regulatory or
administrative authority, domestic or foreign, that (i) challenges the
exercise of Redeemable Warrants pursuant to the Exercise Offer or otherwise
relates in any manner to the Exercise Offer, (ii) otherwise could
materially adversely affect the business, properties, assets, stock
ownership, liabilities, financial condition, operations, results of
operations or prospects of the Company, or (iii) in the case of any of the
foregoing existing at the time of the commencement of the Exercise Offer,
any development shall have occurred that the Company, in its sole judgment,
determines to be adverse; or
(d) any action shall have been taken or any statute, rule, regulation
or order shall have been proposed, enacted, promulgated, enforced or deemed
to be applicable to the Exercise Offer by any court, government or
governmental agency or other regulatory or administrative authority,
domestic or foreign, which would or might prohibit, restrict or delay
consummation of the Exercise Offer or materially impair the contemplated
benefits to the Company of the Exercise Offer; or
(e) other than the transactions contemplated by the Merger Agreements,
a tender or exchange offer with respect to some or all of the Redeemable
Warrants and/or Common Stock, or a merger or acquisition proposal for the
Company, shall have been proposed, announced or made by any group or
person, or the Company shall enter into any agreement with respect to a
merger, other business combination, disposition of assets other than in the
ordinary course of business or issuance of securities with any person;
which, in the sole and absolute judgment of the Company in any such case, and
regardless of the circumstances (including any action by the Company) giving
rise to any such condition, makes it inadvisable to proceed with the Exercise
Offer or with such acceptance for exercise.
All the foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
such condition (including any action or inaction by the Company) or may be
waived by the Company in whole or in part at any time and from time to time in
its sole discretion. The failure by the Company at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such right and each
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time. Any determination by the Company concerning the events
described herein will be final and binding.
Warrant Agent
The Warrant Agent is Continental Stock Transfer and Trust Company. The
Warrant Agent's telephone number is (212) 509-1400 ext. 253 and its telecopier
number for facsimile transmission is (212) 509-5150. The address to which
Redeemable Warrant certificates and payments of the exercise price of the
Redeemable Warrants should be mailed or delivered is: 2 Broadway, 19th Floor,
New York, New York 10004. See the back cover page of this Prospectus for more
information concerning contacting the Warrant Agent.
Fees and Expenses
The Warrant Agent will receive reasonable and customary compensation for
its services and will be reimbursed for certain out-of-pocket expenses estimated
to total $[5,000]. The Company has entered into a Warrant Solicitation Agreement
with the Agent pursuant to which the Agent will act as the exclusive
solicitation agent for the Company in the Exercise Offer and will receive a fee
of (1) four percent (4%) of the exercise price paid upon each exercise of a
Redeemable Warrant during the Exercise Offer with respect to the first 1 million
Redeemable Warrants so exercised, and (2) five (5%) of the exercise price paid
upon each exercise of a Redeemable Warrant during the Exercise Offer with
respect to exercises in excess of 1 million Redeemable Warrants, subject to the
Agent's compliance with applicable laws and regulations and the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The Company has also
agreed
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to reimburse the Agent for its reasonable out-of-pocket expenses, other than
fees and disbursements of counsel for the Agent, in connection with the Exercise
Offer. See "Plan of Solicitation."
Rule 10b-6 under the Exchange Act may prohibit the Agent from engaging in
any market making activities with regard to the Company's securities for the
period from nine business days (or such other applicable period as Rule 10b-6
may provide) prior to any solicitation by the Agent of the exercise of the
Redeemable Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the Agent
may have to receive a fee for the exercise of the Redeemable Warrants following
such solicitation. As a result, the Agent may be unable to provide a market for
the Company's securities during the Exercise Offer.
Except as set forth above, the Company will not reimburse any broker,
dealer or other person for soliciting exercises of the Redeemable Warrants
pursuant to the Exercise Offer. The Company will also reimburse brokerage houses
and other custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses in forwarding copies of this Prospectus to the beneficial
owners of the Redeemable Warrants held in their names or in forwarding tenders
for their customers.
The expenses of making the Exercise Offer to be incurred by the Company are
estimated at approximately $1,110,000, assuming all of the outstanding
Redeemable Warrants are exercised.
Passive Market Making. The Company and the Agent intend to request the
Staff of the Commission to concur in the view that the Agent may engage in
passive market making activities in the Redeemable Warrants and the Common Stock
on the SmallCap Market consistent with applicable regulations under the Exchange
Act, including provisions of Rule 10b-6A under the Exchange Act. If such
concurrence is received, the Agent may engage in passive market making. Passive
market making pursuant to Rule 10b-6A under the Exchange Act consists of
displaying bids on the SmallCap Market limited by the bid prices of market
makers not connected with the Offer and purchases limited by such prices and
effected in response to order flow. The volume of net purchases by a passive
market maker on each day is limited. Passive market making may stabilize the
market price of Common Stock or the Redeemable Warrants at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time. The Agent is a significant market maker for the Securities and the failure
to be able to be a market maker or even engaging in passive market making could
adversely affect the market for the Securities.
Transfer Taxes. The Company will pay transfer taxes, if any, applicable to
the transfer to it and the exercise of Redeemable Warrants under the Exercise
Offer, but only from the registered holders thereof, and applicable to issuance
of the underlying Common Stock.
Recent Transactions. There have been no transactions in the Redeemable
Warrants or the underlying Common Stock that were effected during the past 40
business days by the Company or by any officer, director or controlling person
of the Company.
Subsequent Purchase of Redeemable Warrants and Common Stock. While the
Company has no obligation to do so, it reserves the right, after the expiration
of the Offer, to make subsequent offers to acquire Redeemable Warrants or
purchase Redeemable Warrants directly from the holders of Redeemable Warrants or
the Company's Common Stock, or to reduce the exercise price of the Redeemable
Warrants on such terms and conditions as may then be specified, although no such
purchases of Redeemable Warrants or of Common Stock or changes will be made by
the Company, or its affiliates, within 10 business days after the Expiration
Date.
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<PAGE>
USE OF PROCEEDS
Assuming that all Holders of the Redeemable Warrants elect to exercise such
Redeemable Warrants, the net proceeds to the Company from the sale of the Common
Stock offered hereby are estimated to be $6,727,500, after deducting expenses of
this offering currently estimated to be $1,110,000 (including solicitation fees
payable to the Agent).
Assuming the Mergers are effected, the Company anticipates that the
estimated net proceeds from the exercise of the Redeemable Warrants will be
initially allocated as follows:
<TABLE>
<CAPTION>
Approximate
Percentage of
Application of Net Proceeds Amount Net Proceeds
--------------------------- ------ ------------
<S> <C> <C>
Acquisition Costs....................... $2,040,000(1) 30.0%
Expansion Program....................... 2,000,000(2) 30.0%
Working Capital.......................... 2,687,500(3) 40.0%
--------- -----
Total Net Proceeds $6,727,500 100.0%
========== ======
</TABLE>
(1) The $2.04 million will be used to fund the Cash Consideration payable under
the Merger Agreements.
(2) Following the Effective Time of the Mergers, the Company proposes to
commence the implementation of a plan designed to expand the operations of
the Merger Subs. Of the $2,000,000, up to $900,000 would be used to acquire
or improve three existing facilities, including relocation of the Merger
Subs from the existing facilities of the Target Companies to a facility of
approximately 50,000 square feet, and the acquisition of additional
screenprinting and embroidery equipment. Implementation of the plan is
expected to take approximately 36 months.
(3) $1,000,000 of this amount will be used, pursuant to the terms of the Merger
Agreements, to fund working capital requirements of the Merger Subs.
Working capital will be used, among other things, to fund operating
expenses (rent, inventory purchases, salaries and accounts receivable).
Depending on requirements of the acquired businesses, the Company may
decide to repay up to $1.6 million of indebtedness to a bank and
anticipates that it will need to hire additional management and sales
personnel and expend additional amounts to support and promote the acquired
businesses. Advertising, travel and salary costs associated with expanded
selling efforts and the hiring of additional management personnel are
expected to be between $250,000 and $300,000 per year.
If the Mergers are not affected, the estimated net proceeds from the
exercise of the Redeemable Warrants after payment of transaction costs incurred
in connection with the proposed Mergers, will be added to working capital for
general corporate purposes, including expansion of the Company's shopping mall
and retail fixtures business and the cost of identifying and investigating
potential acquisition candidates.
Assuming the Mergers are affected, the Company anticipates that the net
proceeds of this offering, together with projected cash flows from operations,
will be sufficient to fund the Company's contemplated cash requirements for the
12 months following the Effective Time. If the Mergers are not effected, the
Company anticipates that the net proceeds, together with projected cash flows
from operations, will be sufficient to fund the Company's anticipated cash
requirements for the next 12 months. While the initial allocation of the net
proceeds of this offering, as set forth above, represents the Company's best
estimate of its future financing needs, the amounts actually expended may vary
significantly from the specific allocation of the net proceeds set forth above,
depending on numerous factors. The Company, therefore, reserves the right to
reallocate the net proceeds of this offering among the various categories set
forth above as it, in its sole discretion, deems necessary and advisable.
Pending application, the net proceeds of this offering will be invested
principally in U.S. government securities, short term certificates of deposit,
money market funds or other similar interest-bearing investments.
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PRICE RANGE OF SECURITIES
The Company's Common Stock and Redeemable Warrants have traded on the
NASDAQ Small Cap Market under the symbols ACSI and ACSIW, respectively, since
March 14, 1994.
The following table sets forth quarterly inter-dealer bid prices of the
Company's Common Stock and Redeemable Warrants as reported by NASDAQ after March
14, 1994. These quotations are inter-dealer prices, without retail mark-up,
mark-down, or commission and may not represent actual transactions. In August
1994, the Company distributed to holders of its outstanding Common Stock a
dividend of one share of Common Stock for each share of Common Stock outstanding
on August 1, 1994. To adjust for such stock dividend, after August 1, 1994, each
Redeemable Warrant became exercisable for two shares of Common Stock at the same
exercise price theretofore applicable to a single share of Common Stock. The
closing bid prices of the Common Stock and Redeemable Warrants on August 1, 1994
were $4.00 and $3.00, respectively.
The market prices for the Common Stock and the Redeemable Warrants have been
subject to significant volatility and trading in the Company's Common Stock and
Redeemable Warrants has been limited. Trading on the SmallCap Market is
principally through only one market maker. The following prices are, therefore,
not necessarily indicative of the actual value of the Company's Common Stock and
Redeemable Warrants.
<TABLE>
<CAPTION>
Bid Prices of Bid Prices of
Common Stock Redeemable Warrants
Year Ended May 31, 1994 High Low High Low
---- --- ---- ---
<S> <C> <C> <C>
Fourth Quarter (from March 14, 1994).................... $7.00 $6.75 $2.63 $2.25
Year Ended May 31, 1995
First Quarter:
From June 1 through July 31, 1994........................ 8.25 8.00 3.00 2.50
From August 1 through August 31, 1994.................... 5.50 3.38 4.50 3.75
Second Quarter............................................. 5.00 3.13 3.75 3.13
Third Quarter.............................................. 4.88 2.25 3.25 1.38
Fourth Quarter............................................. 2.63 0.88 1.44 1.00
Year Ended May 31, 1996
First Quarter.............................................. 2.81 2.69 1.25 1.00
Second Quarter............................................. 2.13 2.00 0.56 0.44
Third Quarter.............................................. 3.19 2.75 0.88 0.67
Fourth Quarter.............................................. 2.84 2.50 0.63 0.56
- --------------
</TABLE>
On July 15, 1996, the high and low bid prices, as reported by NASDAQ, for
the Common Stock were $2.25 and $2.00, respectively, and for the Redeemable
Warrants, were $0.66 and $0.63, respectively. On such date, there were 450
record holders of the Common Stock and 41 record holders of Redeemable Warrants.
-32-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at April
30, 1996 and as adjusted to give effect to the exercise of 2,612,500 Redeemable
Warrants pursuant to the Exercise Offer and the application of the estimated net
proceeds therefrom.
<TABLE>
<CAPTION>
April 30, 1996
Pro forma
Actual Pro forma(1)(2) as adjusted (3)(4)
-------------- -------------- ------------------
<S> <C> <C> <C>
Stockholders' equity
Preferred Stock, $.01 par value, 5,000,000 shares authorized; $ - $ - $ -
none issued........................................................
Common Stock, $.001 par value; 15,000,000 shares authorized; 6,892 12,118 13,142
6,892,638 shares issued and outstanding, actual, 12,117,638
shares issued and outstanding, as adjusted, 13,142,638 shares
issued and outstanding, pro forma .................................
Additional paid-in capital........................................... 7,103,552 13,825,826 15,977,302
Accumulated deficit.................................................. (5,794,264) (5,794,264) (5,794,264)
-------------- --------------- ---------------
Total stockholders' equity $ 1,316,180 $ 8,043,680 $ 10,196,180
============== =============== ===============
- ----------------
</TABLE>
(1) Gives effect to the exercise of the Redeemable Warrants, the receipt of
the estimated net proceeds therefrom of $6,727,500. There can be no
assurance that any of the Redeemable Warrants will be exercised or that the
Mergers will be consummated.
(2) Does not include (a) 1,025,000 shares of Common Stock issuable upon
consummation of mergers; (b) 500,000 shares of Common Stock to be reserved
for issuance upon exercise of the Agent's Warrants, if and when issued; and
(c) 800,000 shares of Common Stock reserved for issuance upon exercise of
options granted and available for grant under the Company's 1993 Stock
Option Plan, as amended. See "Management - Stock Option Plan."
(3) Gives effect to the exercise of the Redeemable Warrants, the receipt of the
estimated net proceeds therefrom of $6,727,500 and the issuance of the
Share Consideration to the Target Company Stockholders. There can be no
assurance that any of the Redeemable Warrants will be exercised or that the
Mergers will be consummated.
(4) Does not include (a) 500,000 shares of Common Stock to be reserved for
issuance upon exercise of the Agent's Warrants, if and when issued; and (b)
800,000 shares of Common Stock reserved for issuance upon exercise of
options granted and available for grant under the Company's 1993 Stock
Option Plan as amended - See "Management - Stock Option Plan."
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical consolidated financial
data for the Company, selected historical financial data for the Target
Companies and selected pro forma combined financial data for the Company and the
Target Companies, giving effect to the Mergers (in the case of the pro forma
statements of operations, at the beginning of the respective periods, and in the
case of the pro forma balance sheets, at the respective dates of such balance
sheets). Such financial data should be read in conjunction with the Company's
audited consolidated financial statements for the fiscal years ended May 31,
1995 and 1994 and unaudited consolidated financial statements for the eleven
months ended April 30, 1996 and April 30, 1995, including the notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations relating to the Company; with Superior's audited financial statements
for the fiscal year ended December 31, 1995, including the notes thereto,
unaudited financial statements for the fiscal year ended December 31, 1994,
unaudited financial statements for the eleven months ended June 30, 1996 and
June 30, 1995, and Management's Discussion and Analysis of Financial Condition
and Results of Operations relating to Superior; and the unaudited pro forma
condensed combined financial statements of the Company and the Target Companies,
including the notes thereto; all of which appear elsewhere in this Prospectus.
In the opinion of the Company's management, the accompanying unaudited financial
information for the eleven months ended April 30, 1996 and April 30, 1995
contains all adjustments (consisting only of normal recurring accruals)
necessary to present fairly such information. Interim results are not
necessarily indicative of results for a full year. The unaudited pro forma data
of the Company and the Target Companies are presented for illustrative purposes
only and are not necessarily indicative of operating results or financial
position of either the Company or the Target
-33-
<PAGE>
Companies that would have occurred had the Mergers been consummated on the
indicated dates, nor is such data necessarily indicative of future operating
results or financial position. See "Risk Factors-Risks Associated with
Acquisition of the Target Companies - Lack of Certain Audit Financial
Statements," for information as to the lack of certain audited financial
statements for Superior which are required by the Commission's financial
statement disclosure standards for acquired businesses.
-34-
<PAGE>
American CinemaStores Inc. Statements of Operations Data:
<TABLE>
<CAPTION>
Year Ended May 31, Eleven Months Ended
-------------------------------- -----------------------------------
1995 1994 April 30, 1996 April 30, 1995
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales .................................. $ 14,418 $ -- $ 792,503 $ --
Gross profit (loss) ........................ 7,610 -- 357,254 --
Net loss:
From continuing operations ............... (309,443) (521,898) (1,148,775) (1,010,950)
From discontinued
operations ............................... (1,946,404) (715,227) (1,001,689) (745,672)
----------- ----------- ----------- -----------
Net loss ................................... $(2,255,847) $(1,237,125) $(2,150,464) $(1,756,622)
=========== =========== =========== ===========
Net loss per share:
From continuing operations ............... $ (0.05) $ (0.15) $ (0.17) $ (0.17)
From discontinued
operations ............................... (0.31) (0.20) (0.14) (0.12)
----------- ----------- ----------- -----------
Net loss per share ......................... $ (0.36) $ (0.35) $ (0.31) $ (0.29)
=========== =========== =========== ===========
Weighted average
common shares outstanding ................ 6,185,790 3,574,253 6,892,638 6,120,622
</TABLE>
American CinemaStores Inc. Summary Balance Sheet Data:
<TABLE>
<CAPTION>
April 30, 1996
------------------------------------------------------
Proforma as
May 31, 1995 Actual Proforma (1)(3) adjusted (2)(3)
------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Working capital........... $ 2,915,979 $1,019,259 $7,746,759 $ 5,460,070
Total assets.............. 3,701,764 1,402,790 8,130,290 14,462,769
Total liabilities......... 235,121 86,610 86,610 4,266,589
Stockholders' equity...... 3,466,643 1,316,180 8,043,680 10,196,180
</TABLE>
(1) Adjusted to give effect to the sale of 5,225,000 shares of Common Stock
offered hereby upon exercise of 2,612,500 Redeemable Warrants, after deducting
estimated offering and selling expenses (in the amount of $1,110,000 through
July 31, 1996), and initially allocating the estimated proceeds of approximately
$6,727,500 to cash. See "Capitalization," "Description of Securities" and "Use
of Proceeds."
(2) Adjusted to give effect to the issuance of 1,025,000 shares of common stock,
issuable upon consummation of the mergers and the sale of 5,225,000 shares of
Common Stock offered hereby upon exercise of 2,612,500 redeemable Warrants. See
"Capitalization", "Description of Securities" and "Use of Proceeds".
(3) Does not include (a) 500,000 shares of Common Stock to be reserved for
issuance upon exercise of the Agent's Warrants, if and when issued; and (b)
800,000 shares of Common Stock received for issuance upon exercise of options
granted and available for grant under the Company 1993 Stock Option Plan, as
admended. See "Management -- Stock Option Plan".
-35-
<PAGE>
Superior/Panoramic Hand Prints Inc. Statements of Operations Data:
Year Ended December 31,
--------------------------- Eleven Months Ended
1995 1994 June 30, 1996
---------- ---------- -------------
Net sales ............... $8,457,526 $8,615,565 $8,292,721
Gross profit ............ 2,354,243 2,377,448 2,775,289
Net income .............. 136,995 75,823 150,595
Superior/Panoramic Hand Prints Inc. Summary Balance Sheet Data:
December 31, 1995 June 30, 1996
----------------- -------------
Working capital (deficiency). $ (235,114) $ (250,632)
Total assets .............. 2,791,748 4,236,010
Long term debt
(including current portion) 593,652 534,518
Total liabilities............ 2,484,468 3,754,921
Stockholders' equity......... 307,280 481,089
Just Jackets Corporation Unaudited Statements of Operations Data:
Year Ended December 31,
--------------------------- Eleven Months Ended
1995 1994 June 30, 1996
---------- ---------- -------------
Net sales ............... $1,247,525 $1,284,295 $1,439,231
Gross profit ............ 412,664 302,842 503,477
Net income (loss)........ (1,279) 37,285 53,417
Just Jackets Corporation Summary Unaudited Balance Sheet Data:
December 31, 1995 June 30, 1996
----------------- -------------
Working capital ............. $ 13,361 $ 3,943
Total assets .............. 448,875 448,851
Total liabilities............ 440,257 425,058
Stockholders' equity......... 8,618 23,793
-36-
<PAGE>
AMERICAN CINEMASTORES AND TARGET COMPANIES
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Unaudited Pro Forma Combined Statements of Income Data:
Year Ended Eleven Months Ended
May 31, 1995(2) April 30, 1996(1)
--------------- -----------------
(unaudited) (unaudited)
Sales ............................ $ 9,719,469 $ 10,524,455
Gross profit ..................... 2,774,517 3,636,020
Net loss from:
Continuing Operations .......... (452,902) (1,200,673)
Discontinued Operations ........ (1,946,404) (1,001,689)
------------ ------------
Net loss ......................... $ (2,399,306) $ (2,202,362)
============ ============
Net Loss Per Share from:
Continuing Operations .......... $ (0.04) $ (0.09)
Discontinued Operations ........ (0.16) (0.08)
------------ ------------
Net loss per share ............... $ (0.20) $ (0.17)
============ ============
Weighted average common
shares outstanding ............. 12,434,957(3) 13,142,638(3)
- -----------
(1) Data for the eleven months ended April 30, 1996 for the Company combined
with data for the eleven months ended June 30, 1996 for the Target
Companies.
(2) Data for the fiscal year ended May 31, 1995 for the Company combined with
data for the fiscal year ended December 31, 1995 for the Target Companies.
(3) Assumes issuance of 1,025,000 share of Common Stock upon consummation of
the Mergers.
Summary Unaudited Pro Forma Combined Balance Sheet Data:
April 30, 1996*
---------------
Working capital .................... $ 5,460,070
Total assets ..................... 14,462,769
Total liabilities................... 4,266,589
Stockholders' equity ............... 10,196,180
- -----------
* Combines data as at April 30, 1996 for the Company with data as at June 30,
1996 for the Target Companies.
-37-
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following pro forma condensed combined financial statements assume
business combinations among the Company and the Target Companies accounted for
as a purchase. The pro forma condensed combined financial statements are based
on the respective historical financial statements and the notes thereto of the
Company and the Target Companies, the historical financial statements of the
Company and Superior, which are included elsewhere on this Prospectus. The pro
forma condensed combined balance sheet combines the Company's April 30, 1996
historical balance sheet with the historical balance sheets of the Target
Companies as at June 30, 1996, assuming that the Effective Time was April 30,
1996. The pro forma condensed combined statements of income combine the
Company's historical statements of operation for the fiscal year ended May 31,
1995 and for the eleven months ended April 30, 1996 with the corresponding
historical statements of operations of the Target Companies for the fiscal year
ended December 31, 1995 and the eleven months ended June 30, 1996, assuming that
the Mergers were effective on the first day of each of the fiscal year ended May
31, 1995 and the eleven months ended April 30, 1996.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred had the Mergers become effective as of the beginning of
the periods presented, nor is it necessarily indicative of future operating
results or financial position.
The pro forma condensed combined financial statements do not reflect any
sales attrition, cost savings or synergies which may result from the Mergers.
The pro forma condensed combined financial statements should be read in
conjunction with the historical financial statements of the Company and the
historical financial statements of the Target Companies included elsewhere in
this Prospectus.
Comparative Per Share Data
Set forth below are net loss and book value per share of Common Stock data
of the Company on an historical and pro forma basis. The Company pro forma
combined data was derived by combining financial information of the Company and
the Target Companies after giving effect to the Mergers. The information set
forth below should be read in conjunction with the historical financial
statements of the Company and the Superior and the unaudited pro forma condensed
combined financial statements which appear elsewhere in the Prospectus.
<TABLE>
<CAPTION>
Eleven Months
Year Ended Ended
May 31, 1995 April 30, 1996
------------ --------------
<S> <C> <C>
American CinemaStores, Inc. Per Share of Common Stock:
Net loss ...................................................... $ (0.36) $ (0.31)
Net book value ................................................ $ 0.56 $ 0.19
American CinemaStores, Inc. Unaudited Pro Forma Combined
Per Share of Common Stock
Net loss ...................................................... $ (0.20) $ (0.17)
Net book value ................................................ $ -- $ 0.78
</TABLE>
-38-
<PAGE>
<TABLE>
American CinemaStores, Inc., Superior/Panoramic Hand Prints Inc. and Just Jackets Corporation
Unaudited Pro Forma Condensed Combined Balance Sheets
April 30, 1996 for American CinemaStores, Inc.
and
June 30, 1996 for Superior/Panoramic Hand Prints Inc. and Just Jackets Corporation
<CAPTION>
American Pro Forma
CinemaStores Superior JJC Adjustments(1)(2) Combined
------------ ---------- -------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ................... $ 596,459 $ -- $ -- $4,687,500(7) $ 5,283,959
Accounts receivable (net) ................... 381,646 1,596,794 289,651 -- 2,268,091
Inventory (net) ............................. 124,685 1,589,558 131,850 -- 1,846,093
Prepaid and other ........................... 3,079 4,987 7,500 -- 15,566
---------- ---------- -------- ---------- ----------
Total current assets .......................... 1,105,869 3,191,339 429,001 4,687,500 9,413,709
Property, plant and equipment (net) ........... 106,158 1,002,319 14,350 250,000(3) 1,372,827
Goodwill ...................................... -- -- -- 3,437,618(4) 3,437,618
Other assets .................................. 190,763 42,352 5,500 -- 238,615
---------- ---------- -------- ---------- -----------
Total assets .................................. $1,402,790 $4,236,010 $448,851 $8,375,118 $14,462,769
========== ========== ======== ========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable ......................... $ 57,697 $1,673,879 $176,817 -- $ 1,908,393
Accrued liabilities ...................... 28,913 11,455 2,100 -- 42,468
Notes payable, bank ...................... -- 1,535,069 246,141 -- 1,781,210
Current portion of long term debt ........ -- 221,568 -- -- 221,568
----------- ---------- -------- ----------- -----------
Total current liabilities .................. 86,610 3,441,971 425,058 -- 3,953,639
Long term debt ............................. -- 312,950 -- -- 312,950
Stockholders' equity
Preferred stock .......................... -- -- -- -- --
Common Stock ............................. 6,892 1,700 5,000 (450)(8) 13,142
Additional paid in capital ............... 7,103,552 224,900 -- 8,648,850 (9) 15,977,302
Retained earnings (deficit) .............. (5,794,264) 254,489 18,793 (273,282)(10) (5,794,264)
----------- ---------- -------- ----------- -----------
Total stockholders' equity ................. 1,316,180 481,089 23,793 8,375,118 10,196,180
----------- ---------- -------- ----------- -----------
Total liabilities and stockholders'
equity ..................................... $ 1,402,790 $4,236,010 $448,851 $ 8,375,118 $14,462,769
=========== ========== ======== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
-39-
<PAGE>
<TABLE>
American CinemaStores, Inc., Superior/Panoramic Hand Prints Inc., and Just Jackets Corporation
Unaudited Pro Forma Condensed Combined Statements of Operations
For The Eleven Months Ended
April 30, 1996 for American CinemaStores, Inc.
and
June 30, 1996 for Superior/Panoramic Hand Prints Inc. and Just Jackets Corporation
<CAPTION>
American Pro Forma
CinemaStores Superior Just Jackets Adjustments(1)(2) Combined
------------ ------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Net Sales ..................................... $ 792,503 $ 8,292,721 $1,439,231 $ -- $ 10,524,455
Cost of Sales ................................. 435,249 5,517,432 935,754 -- 6,888,435
----------- ------------ ---------- --------- ------------
Gross Profit .................................. 357,254 2,775,289 503,477 -- 3,636,020
Selling, general and administrative
expenses .................................... 1,587,037 2,488,478 430,995 255,910(5) 4,762,420
----------- ------------ ---------- --------- ------------
Income (loss) from continuing
operations .................................. (1,229,783) 286,811 72,482 (255,910) (1,126,400)
Interest expense (income) ..................... (81,008) 136,216 19,065 -- 74,273
----------- ------------ ---------- --------- ------------
Net income (loss):
From continuing operations .................. (1,148,775) 150,595 53,417 (255,910) (1,200,673)
From discontinued operations ................ (1,001,689) -- -- -- $ (1,001,689)
----------- ------------ ---------- --------- ------------
Net income (loss) ............................. $(2,150,464) $ 150,595 $ 53,417 $(255,910) $ (2,202,362)
=========== ============ ========== ========= ============
Net loss per share:
From continuing operations .................. $ (0.17) $ (0.09)
From discontinued operations ................ (0.14) (0.08)
----------- ------------
Net loss per share ............................ $ (0.31) $ (0.17)
=========== ============
Weighted average common
shares outstanding ........................ 6,892,638 13,142,638
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
-40-
<PAGE>
<TABLE>
<CAPTION>
American CinemaStores, Inc., Superior/Panoramic Hand Prints Inc. and Just Jackets Corporation
Unaudited Pro Forma Condensed Combined Statements of Operations
For The Fiscal Year Ended
May 31, 1995 for American CinemaStores, Inc.
and
December 31, 1995 for Superior/Panoramic Hand Prints Inc. and Just Jackets Corporation
American Pro Forma
CinemaStores Superior Just Jackets Adjustments(1)(2) Combined
------------ -------- ------------ ----------------- --------
<S> <C> <C> <C> <C> <C>
Net Sales ............................... $ 14,418 $8,457,526 $ 1,247,525 $ -- $ 9,719,469
Cost of Sales ........................... 6,808 6,103,283 834,861 -- 6,944,952
----------- ---------- ----------- ---------- ------------
Gross Profit ............................ 7,610 2,354,243 412,664 -- 2,774,517
Selling, general and
administrative expenses ............... 477,818 2,078,892 392,941 279,175(6) 3,228,826
----------- ---------- ----------- ---------- ------------
Income (loss) from
continuing operations ................. (470,208) 275,351 19,723 (279,175) (454,309)
Interest expense (income) ............... (160,765) 138,356 21,002 -- (1,407)
----------- ---------- ----------- ---------- ------------
Income (loss):
From continuing operations ............ (309,443) 136,995 (1,279) (279,175) (452,902)
From discontinued operations .......... (1,946,404) -- -- -- (1,946,404)
----------- ---------- ----------- ---------- ------------
Net income (loss) ....................... $(2,255,847) $ 136,995 $ (1,279) $ (279,175) $ (2,399,306)
=========== ========== =========== ========== ============
Net loss per share:
From continuing operations ............ $ (0.05) $ (0.04)
From discontinued operations .......... (0.31) (0.16)
----------- ------------
Net loss per share ...................... $ (0.36) $ (0.20)
=========== ============
Weighted average common
shares outstanding ................... 6,185,790 12,434,957
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
-41-
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
1. Bases of Presentation. The pro forma condensed combined historical
financial statements are based on the assumptions that (a) an aggregate of
5,225,000 shares of Common Stock were issued upon exercise of all outstanding
Redeemable Warrants at an exercise price of $[ ] per Redeemable Warrant ($1.50
per share) and (b) the Mergers were effected and in connection therewith,
1,025,000 shares of Common Stock and $2,040,000, constituting the Merger
Consideration, were distributed to the Target Company Stockholders, in exchange
for all of the outstanding capital stock of the Target Companies, pursuant to
the terms of the Merger Agreements.
2. Federal Income Tax Status of the Target Companies. The Target Company
Stockholders have elected under Subchapter S of the Internal Revenue Code of
1986, as amended, to include the income of the Target Company or Companies of
which they are stockholders as their own for income tax purposes. For pro forma
purposes, the Target Companies have been treated as C-corporations. Considering
the consolidated tax loss of the Company, no taxes have been provided for.
3. Property, Plant and Equipment - Pro Forma Adjustment. There may be a
revaluation of fixed assets whereby a higher valuation for such assets will be
established.
4. Goodwill - Pro Forma Adjustment. An analysis of the components of goodwill is
being made to determine the appropriate asset accounts to which such components
should be allocated. The resulting amount of goodwill will be amortized over a
period of 15 years.
5. Selling, General and Administrative Expenses - Pro Forma Adjustment (Eleven
Months Ended April 30, 1996). Records eleven months of goodwill amortization
based upon a 15 year amortization and includes eleven months of fixed assets
depreciation based upon increased revaluation and a seven year life.
6. Selling, General and Administrative Expenses - Pro Forma Adjustment (Fiscal
Year Ended May 31, 1995). Assumes amortization of goodwill or depreciation of
increased value of fixed assets over a period of 12 months.
7. Cash and cash equivalents. Pro Forma Adjustment. The increase in cash for the
combined company is as result of the offering proceeds of $6,727,500, net of
offering costs of approximately $1,110,000, less the $2,040,000 cash
consideration paid to the Target Company Stockholders per the Merger agreement.
8. Common Stock. Pro Forma Adjustment. The amount consist of (1) 5,525,000
shares issued in the assumed exercise of all outstanding Redeemable Warrants and
(2) 1,025,000 shares issued upon the assumed effecting of the Merger, less the
elimination of the Target Companies' common stock upon combination.
9. Additional Paid in Caption. Pro Forma Adjustment. The amount consist of (1)
5,225,000 shares issued in the assumed exercise of all outstanding Redeemable
Warrants and (2) 1,025,000 shares issued upon the assumed effecting of the
Merger, less the elimination of the Target Companies' additional paid in capital
upon combination.
10. Retained Earning (Deficit). Pro Forma Adjustment. The amount consists of the
elimination of the Target Companies' retained earning upon combination.
-42-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
From inception through May 31, 1996, the Company incurred significant
losses in connection with implementation of its plans to operate mini-retail
stores in movie theater lobbies and shopping malls. The Company, having
determined that its retailing concepts were not viable, discontinued all retail
operations as of May 31, 1996. Since current revenue levels are not sufficient
to attain profitability, the Company has been attempting to increase revenues
and cash flow and attain profitability through implementation of a restructuring
plan involving the discontinuance of retail operations and reduction of
operating expenses, consummation of the Mergers and expansion of its shopping
mall and retail fixtures business.
The Company's cash requirements continue to be significant and the Company
has been utilizing the proceeds of its 1994 public offering, together with its
limited operating revenues, to pay operating expenses. Such expenses include
expenditures necessary to support the operations of its shopping mall and retail
fixtures business, salaries of, and employee benefits for, its executive,
administrative and marketing personnel, rent and utilities.
The first step in the implementation of the Company's restructuring has
been the discontinuance of its retail operations. Although such termination has
reduced the Company's revenues, it has also significantly reduced operating
expenses. With the discontinuance of retail operations, the Company is devoting
a significant portion of its capital resources to the support of its shopping
mall and retail fixtures business, which is conducted through Sierra. In light
of Sierra's low overhead (when considered as a separate business unit), the
Company is currently seeking to determine the most efficient means to increase
Sierra's revenues. The final step in the implementation of the restructuring
plan has been the identification of the Target Companies by the Company as
suitable acquisition candidates. The Company has entered into the Merger
Agreements with the Target Companies pursuant to which it is obligated to raise
at least $3.5 million pursuant to a private placement or public offering of
securities to provide funds for payment of the Cash Consideration and to provide
at least $1 million of working capital to the Merger Subs following the
Effective Time. Up to $3 million of the net proceeds of this offering have been
allocated to such purposes. In connection with the Mergers, the Company will be
assuming up to $1.6 million of institutional indebtedness of the Target
Companies.
The Company is currently maintaining its rights under certain license
agreements which give the Company the right to market and distribute garments
and other textiles imprinted with graphic images associated with a television
series currently in production and a television cartoon series not currently in
production. However, the Company has decided not to exploit such rights at this
time and instead to concentrate its efforts on consummating the Mergers and
expanding Sierra's operations.
The following discussion should be read in conjunction with the Company's
audited consolidated financial statements for its fiscal years ended May 31,
1995 and 1994, respectively, including the notes thereto; its unaudited
consolidated financial statements for the eleven months ended April 30, 1996 and
April 30, 1995, including the notes thereto; the audited and unaudited financial
statements of Superior for its fiscal year ended December 31, 1995 and for the
eleven months ended June 30, 1996, including the notes thereto; and the
unaudited pro forma condensed combined financial statements for the fiscal year
ended May 31, 1995 and for the eleven months ended June 30, 1996, including the
notes thereto, all of which appear elsewhere in this Prospectus.
Results of Operations - The Company
Eleven Months Ended April 30, 1996 Compared to the Eleven Months Ended
April 30, 1995
Net Sales - Net sales from continuing operations for the eleven months
ended April 30, 1996 were $792,503. There were no sales from continuing
operations for the eleven months ended April 30, 1995. Net sales from continuing
operations consisted of sales generated by Sierra and limited licensed product
operations. If sales of $590,611 from the discontinued retail operations were
included in the net sales for the eleven months ended April 30, 1996, net sales
for such period would have been $1,383,114, as compared to net sales from all
operations of $710,188 for the eleven months ended April 30, 1995. This increase
is primarily attributable to sales generated by Sierra.
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Gross Profit - Gross profit from continuing operations for the eleven
months ended April 30, 1996 was $357,254, or 45.1% of net sales. There were no
sales from continuing operations for the eleven months ended April 30, 1995.
Gross profit from continuing operations is primarily attributable to net sales
generated by Sierra. Sierra's cost of sales is generally 60% of net sales,
whereas cost of goods sold from the discontinued retail operations were
approximately 90% of net sales. If the gross profit of $64,000 from discontinued
retail operations were included in the net sales for the eleven months ended
April 30, 1996, gross profit for such period would have been $421,254 (or 30%),
as compared to gross profit from all operations of $151,655, or 21%, for the
eleven months ended April 30, 1995. The reason for the improved gross profit is
primarily the result of Sierra's lower cost of sales.
Selling, general and administrative expenses - Selling expenses relating to
continuing operations for the eleven months ended April 30, 1996 were $18,000,
which consisted of commissions paid to outside sales personnel for Sierra. There
were no selling expenses attributable to continuing operations for the eleven
months ended April 30, 1995. Selling expenses from discontinued operations for
the eleven months ended April 30, 1995 were $828,455. Selling expenses from
discontinued operations for the eleven month period ended April 30, 1996 were
approximately $1,000,000. Included in selling expenses from discontinued
operations for the eleven months ended April 30, 1996, is $457,393, representing
the write-off of fixed assets associated with discontinued retail operations.
The write-off occurred in the fiscal quarter ended November 30, 1995.
General and administrative expenses relating to operations for the eleven
months ended April 30, 1996 were $1,518,864, as compared to $1,183,103 for the
eleven months ended April 30, 1995. The reason for such increase was higher
office rent expense and rent for additional warehouse space to store fixtures
from closed retail stores and, as the Company began to aggressively investigate
possible merger candidates, legal, audit and appraisal fees associated with
pre-acquisition due diligence.
Interest Income - Interest received from cash investments declined by
$44,705 during the eleven months ended April 30, 1996, as compared to the eleven
months ended April 30, 1995. The reason for this decrease in interest income is
the result of cash being used for working capital and consequently having
decreasing amounts of cash available for investment.
Net Loss - The Company incurred a net loss from all operations for the
eleven months ended April 30, 1996 of $2,150,464, or $.31 per share. There was a
net loss of $1,148,775, or $0.17 per share, from continuing operations and a net
loss of $1,001,689 or $0.14 per share from discontinued operations. Such loss
includes the write-off of fixed assets referred to above. The net loss incurred
for the eleven months ended April 30, 1995 was $1,756,622, or $.29 per share.
Fiscal Year Ended May 31, 1995 Compared to Fiscal Year Ended May 31, 1994
Net Sales - Net sales from continuing operations for the year ended May 31,
1995, attributable solely to Sierra, were $14,418. There were no sales from
continuing operations for fiscal 1994. Sales from discontinued retail operations
for the fiscal year ended May 31, 1995 were $826,728, as compared to sales of
$156,898 from discontinued retail operations for fiscal 1994. The increase was
attributable to expansion of the mini-store program in shopping mall and theater
locations which had been in operation for up to 12 months. In fiscal 1994, no
stores were operational for a 12 month period.
Gross Profit - Gross profit from continuing operations for the fiscal year
ended May 31, 1995 was $7,610 (52.8% of net sales). There were no sales from
continuing operations in fiscal 1994. This relatively high gross profit is
attributable to two sales by Sierra of smaller units which have a higher gross
margin. Usual gross margins for Sierra are approximately 40%. Gross profit from
discontinued retail operations was $95,595 (11.6% of net sales), as compared to
a negative gross profit of $10,186 in fiscal 1994. Cost of sales consists of the
cost of product for resale, shipping costs and inventory shrinkage amounts. The
increase in gross profit from discontinued operations is largely attributable to
increased sales volume when compared to fiscal 1994. Included in the fiscal 1995
cost of sales, is the booking an additional $80,000 reserve for obsolete
inventory
Selling, General and Administrative Expenses - Selling, general and
administrative expenses ("SGA Expenses") from continuing operations for the
fiscal year ended May 31, 1995 were $477,818. There were no
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SGA Expenses attributable to continuing operations in fiscal 1994. The general
and administrative expenses from continuing operations for fiscal 1995 relate
to costs associated with operations, as well as start-up and management costs
associated with Sierra. SGA Expenses attributable to discontinued operations for
fiscal 1995 were $1,891,117, as compared to $705,041 for fiscal 1994. This
increase is largely the result of expenses related to expanded retail operations
and staffing levels to accommodate such expanded operations. In the fiscal year
ended May 31, 1994, staffing levels including retail operations, did not
approach the level (up to 100 employees) experienced during fiscal 1995.
Net Loss - The Company had a net loss from continuing operations for the
year ended May 31, 1995 of $309,443 or $0.05 per share. Such loss is primarily
attributable to start-up expenses for Sierra and the licensed product
operations. The net loss from discontinued operations for the fiscal year ended
May 31, 1995 was $1,946,404 or $0.31 per share, as compared to a net loss from
discontinued operations for fiscal 1994 of $715,227 or $0.20 per share. The net
loss for fiscal 1995 included a write-off of fixed assets in the amount of
$457,393 related to the closure of three Florida and two California mini-stores.
The net loss from continuing and discontinued operations for the fiscal year
ended May 31, 1995 was $2,255,847 or $0.36 per share.
The Company provides a valuation allowance for deferred tax assets when it
is more likely than not, based upon available evidence, that some portion or all
of the deferred tax asset will not be realized. In management's opinion, it can
not be determined if it is more likely than not if the Company will generate
sufficient taxable income before the year 2012, two years after all net
operating loss carry forwards expire, to utilize all of the Company's deferred
tax asset. The valuation allowance has been recognized for the full amount of
the deferred tax asset of $4.9 million.
Liquidity and Capital Resources - The Company
Historically, the Company's primary cash requirements have been to support
retail operations. The Company has relied on the proceeds of its 1994 public
offering of Common Stock and cash flow from retail operations to fund its
working capital requirements. As of May 31, 1996, the Company had discontinued
all retail operations.
At April 30, 1996, the Company had working capital of approximately
$1,019,259, as compared to working capital of $2,915,979 at May 31, 1995. The
decrease in working capital was primarily attributable to inventory write-downs
and a loss related to discontinued retail operations and continuing operations.
Net cash used in operating activities was $1,551,716 for the eleven months
ended April 30, 1996, as compared to net cash used in operating activities of
$1,098,364 for the eleven months ended April 30, 1995. The increase in cash used
in operating activities was primarily attributable to the net loss from
continuing operations and an increase of $429,000 in accounts receivable.
As a result of the discontinuance of retail operations, the Company has
been devoting its resources to support the operations of Sierra and to
completing its due diligence investigation of the Target Companies, negotiation
of the Merger Agreements and implementation of its plan to raise funds to
finance the acquisition of the Target Companies and provide working capital to
the Merger Subs subsequent to the Effective Time.
The Company is dependent on, and intends to use the net proceeds from
exercise of the Redeemable Warrants tendered pursuant to the Exercise Offer to
finance the consummation of the Mergers and to provide the initial working
capital for the Merger Subs following the Effective Time. The Company
anticipates, based on currently proposed plans and assumptions, relating to its
operations (including costs associated with, and the timetable for, the
Mergers), that such net proceeds, together with projected cash flows from
operations, will be sufficient to fund the Company's contemplated cash
requirements for the 12 months following the Effective Time. If the Mergers are
not effected, the Company anticipates that the net proceeds, together with
projected cash flows from operations, will be sufficient to fund the Company's
anticipated cash requirements for the next 12 months. There can be no assurance
that the Company will receive sufficient proceeds from the exercise of the
Redeemable Warrants pursuant to the Exercise Offer to permit the Company to
distribute the Cash Consideration to the Target Company Stockholders following
the Effective Time and provide $1 million of working capital for the Merger
Subs. To the extent that the net proceeds of such exercises are not sufficient
to make such distribution and provide the working capital for the Merger Subs,
the Target Company Parties will have the right to terminate the Merger
Agreements and the Company will be obligated to reimburse the Target Company
Parties for costs and expenses
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incurred by them in negotiating and complying with the Merger Agreements
(currently estimated to be $100,000).
If the Mergers are not consummated for any reason, then, to the extent the
net proceeds of exercise pursuant to the Offer are insufficient to support
operations which will generate meaningful revenues or achieve profitable
operations, such deficiency will have a material adverse effect on the Company
and may require the Company to significantly curtail its operations. Moreover,
expansion of the Company's continuing operations may require capital resources
substantially greater than the net proceeds that may be provided by exercises of
the Redeemable Warrants pursuant to the Offer, or otherwise currently available
to the Company. The Company has no current arrangements with respect to, or
sources of, additional financing.
Seasonality and Inflation
It is anticipated that revenues generated during the summer months and the
Christmas season will be disproportionately higher than revenues during other
periods based on the pattern of retail stores in shopping malls. Accordingly,
results of operations for one quarter may not necessarily be indicative of
results of operations for subsequent quarters.
During the past few years, inflation in the United States has been
relatively stable. Should the U.S. economy again experience double-digit
inflation rates, as was the case in the past, the Company's revenues may be
adversely affected due to reduced net sales and higher expenses.
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
("SFAS 121") issued by the Financial Accounting Standards Board ("FASB"), is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption of SFAS 121 to have a
material effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), issued by the FASB, is effective for specific
transactions entered into after December 15, 1995, while the disclosure
requirements of SFAS 123 are effective for financial statements for fiscal
years beginning no later than December 15, 1995. The new standard establishes a
fair value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from nonemployees in
exchange for equity instruments. At the present time, the Company has not
determined if it will change its accounting policy for stock based compensation
or only provide the required financial statement disclosures. As such, the
impact on the Company's financial position and results of operations is
currently unknown. The Company does not expect adoption of SFAS 123 to have a
material effect on its financial position or results of operations.
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The following information regarding the Target Companies has been provided
by the Target Companies:
Results of Operations - Superior
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items reflected in Superior's audited income
statement for fiscal year ended December 31, 1995 ("Fiscal 1995") and its
unaudited income statement for its fiscal year ended December 31, 1994 ("Fiscal
1994").
Percentages of Net Sales
Year to Year Changes
Fiscal Year Ended December 31, (1994 to 1995)
------------------------------ -----------------
1995 1994
----- ----
Net Sales 100.0% 100.0% -- %
Cost of goods sold 72.2 72.4 (.2)
Gross profit 27.8 27.6 .2
Selling, general and
administrative expenses 24.6 25.6 (1.0)
Income from operations 3.2 2.0 1.2
Interest expense 1.6 1.1 (.5)
Net income 1.6 0.9 .7
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended
December 31, 1994
Net Sales - Net sales for Fiscal 1995 decreased 1.8% to $8,457,526 from
$8,615,565 for Fiscal 1994. This decrease was attributable to Superior being
more selective and no longer accepting certain low margin orders.
Gross Profit - Gross profit for Fiscal 1995 was $2,354,243, as compared to
$2,377,448 for Fiscal 1994. Gross profit for Fiscal 1995, as a percentage of net
sales, increased by .2% when compared to Fiscal 1994. This increase in gross
profit is primarily attributable to selective order taking as discussed in "Net
Sales" above. Additionally, Superior experienced higher depreciation levels in
Fiscal 1995 as a result of the additional manufacturing equipment purchased
during the year.
Selling, General, and Administrative Expenses - Selling, general and
administrative expenses for Fiscal 1995 were $2,078,892, as compared to
$2,204,297 in Fiscal 1994. Selling, general, and administrative expenses for
Fiscal 1995, as a percentage of net sales, decreased 5.69% when compared to
Fiscal 1994. This decrease is primarily attributable to improved management cost
containment practices and a reduction in overall selling expenses and
commissions, due to the lower volume of sales in Fiscal 1995.
Interest Expense - Interest expense increased 44.3%, or $97,308, to $140,404
between Fiscal 1994 and Fiscal 1995. This increase is due primarily to
additional borrowing against Superior's credit facility as the result of an
increased accounts receivable borrowing base. There was also a slight decrease
in sales in Fiscal 1995 which also contributed to increase of interest expense
as a percent of net sales.
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Liquidity and Capital Resources - Superior
Superior maintains a substantial inventory of "blank" textiles (garments
and towels) to assure prompt delivery of finished goods to its customers. The
relatively constant level of revenues has allowed Superior to reduce its level
of inventory. Net cash provided by operating activities of Superior for the
eleven months ended June 30, 1996 was $3,724. Cash provided by operating
activities of Superior was primarily used for capital lease installment payments
related to capital expenditures for equipment.
To date, Superior has satisfied its working capital needs by utilizing
bank revolving credit facilities and cash provided by operating activities. As
of June 30, 1996, Superior had borrowed $1,249,674 under its credit facility.
Advances under Superior's credit facility are based upon specific percentages of
inventory and accounts receivable deemed eligible by the bank.
Superior's revolving credit facility is limited to the lesser of (a)
$1,250,000 and (b) 80% of eligible accounts receivable and 30% of eligible
inventory (not to exceed $350,000). Borrowings under the facility bear interest
at 2.25% above the bank's prime rate (currently 8.25% per annum). Borrowings
under the facility are secured by a
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security interest in substantially all of Superior's assets, and are guaranteed
by Strem. Superior is required to comply with certain financial covenants under
the credit agreement between the bank and Superior pertaining to tangible net
worth, minimum working capital, ratio of total debt to tangible net worth, debt
service ratio and capital expenditures. At December 31, 1995, Superior was not
in compliance with certain of such covenants. However, the bank has waived, as
of December 31, 1995, all such covenant violations. However, at June 30, 1996,
Superior was not in compliance with such covenants. Superior's failure to comply
with such covenants gives the bank the right to terminate the credit facility,
accelerate the maturity of existing indebtedness and to foreclose its security
interest in Superior's assets. Any action by the bank would have a material
adverse effect on Superior, unless Superior were able to arrange for alternative
financing, of which there can be no assurance. See "Risk Factors - Risks
Associated with Acquisition of Target Companies - Reliance on Revolving Credit
and Equipment Financing."
Superior finances the cost of equipment used in its operations primarily
under capital leases with various equipment leasing and finance companies, which
are equivalent to installment purchase obligations. At June 30, 1996, the
aggregate amount of equipment purchase obligations was $365,768. The aggregate
amount of monthly installments under capital leases as of June 30, 1996 was
$22,124, including interest at rates from 5% to 15.9%.
Other than the acquisition of a silk screening machine by Superior for
approximately $100,000, Superior does not anticipate any significant increase in
their capital expenditures during the fiscal year ending December 31, 1996.
However, if the Mergers are consummated and the Company realizes sufficient net
proceeds from exercises of Redeemable Warrants during the Exercise Offer, the
Company intends to implement a program to expand the production facilities of
Superior. See "Use of Proceeds". The Target Companies anticipate that borrowings
under their credit facilities, together with net cash provided by operating
activities, will be sufficient to fund operations for the next 12 months.
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BUSINESS
A. The Company
General
From May 1993, when the Company commenced operations, through May 31, 1996,
the Company was engaged in the operation of retail mini-stores offering
movie-related merchandise, such as apparel, posters, toys, compact discs and
cassette tapes of movie sound tracks, and other items. Initially, the Company's
mini-stores were located in the lobbies of movie theaters located in California,
Florida, New Jersey and New York. Beginning in July 1994, the Company also
opened temporary mini-stores in regional shopping malls offering merchandise
similar to that offered by the theater lobby mini-stores. Because mini-store
operations did not generate the revenues and profits necessary to successfully
operate the Company, in the period May 1995 through May 1996, the Company
discontinued all retail operations.
During negotiations with the operators of various regional shopping malls,
the Company identified a market for fixtures for shopping malls and retail
stores (e.g., temporary retail stores, carts, kiosks, mall directory units and
other items). After investigation and analysis of this business opportunity, the
Company organized Sierra Fixture and Design, Inc. ("Sierra") in March 1995, as a
wholly-owned subsidiary to design, arrange for the manufacture of, market and
distribute mall fixtures to operators and developers of regional shopping malls.
Sierra delivered its first significant order of carts in August 1995. The
Company also acquired rights to reproduce on garments, such as t-shirts and
sweat shirts, certain graphic images associated with certain television programs
in production or proposed to be produced, under license agreements with the
owners of such rights and to market and distribute such products. However, the
Company has decided not to pursue this opportunity, and to concentrate its
efforts on consummating the Mergers and expanding Sierra's business.
Operations of Sierra
Sierra, which commenced operations on March 1, 1995, is engaged in the
design, marketing and installation of fixtures used in retail shopping malls and
stores and mall service operations. Such fixtures consist of temporary retail
units, kiosks, carts and barricade units, some of which incorporate state of the
art electronics, computers and 3-dimensional technologies (e.g., touch video
screens in mall directory units). Sierra has a standard product line of
approximately 30 items and also offers custom design services. Sierra does not
maintain an inventory of retail fixtures, except for five mobile units used for
sales demonstrations. Standard, as well as custom units, are produced for
customers solely on a "job order" basis, which means that units are produced
only against firm purchase orders received from customers which have been
accepted by Sierra in each instance.
The Shopping Mall and Retail Fixtures Market
The shopping mall and retail fixture market is highly fragmented. Suppliers
of shopping mall and retail store fixtures range from small closely-held local
firms to corporations having national markets. Most suppliers operate on a local
or regional basis. The portion of the market serviced by Sierra consist of
regional operators of shopping malls and developers of shopping malls on a
regional and national basis. The Company believes, based on its knowledge of the
industry, that the potential national market for its products is approximately
$150 million. Generally, the Company's products are marketed locally to
individual malls. The purchase decision is typically made by mall employees in
the marketing or temporary leasing department of the mall's management. In some
instances, however, management from the corporate office of a multi-mall
developer, such as The Hahn Company or General Growth Properties, will acquire a
number of units for distribution throughout their mall network. Customers in the
mall market have highly specialized needs. Accordingly, the suppliers in this
market, including Sierra, must often customize their products to meet specific
needs of the customer.
Marketing and Sales
Sierra maintains a showroom at its offices in Newport Beach, California at
which it displays some of its products as well as drawings covering its product
line of approximately 30 items. Sierra's marketing and sales programs are
implemented by its president, Christopher D. Kelly, and four independent sales
representatives. The sales representatives receive commission income from Sierra
based solely on orders solicited by them which have been accepted by Sierra.
None of such sales representatives is engaged by Sierra on an exclusive basis or
devotes substantially all of his or her time to selling Sierra's products. Sales
efforts involve visits to customers, attendance at trade shows throughout the
United States, particularly those sponsored by the International Council of
Shopping Centers, and visits by customer representatives to Sierra's showroom.
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Mr. Kelly and Sierra's independent sales representatives, supported by
Sierra's one-person design department, develop retail merchandising and
advertising units tailored to the customer's specific needs. Products range from
permanent mall fixtures and information centers to mobile carts, customized to a
specific theme, color scheme or presentation purpose for the mall developer or
store operator.
Sierra's merchandising strategy is to offer a broad line of conventional
fixtures as well as custom designed fixtures so as to permit "one-stop" shopping
for its customers. When a custom design is required, Sierra's graphic art person
can usually produce a visual presentation of the product for customer approval
within five business days. The Company believes that Sierra has developed strong
customer relationships with large mall developers, such as General Growth
Properties and The Hahn Company that have large budgets to support modernization
of their mall fixtures. These relationships allow Sierra to identify and develop
other customer relationships and to respond to customer requirements in the
early stages of a merchandising or on-site advertising program.
During the 15 month period ended May 31, 1996, Sierra sold units to 10
customers, including General Growth Properties, The Hahn Company and The Walt
Disney Company, and had net sales of approximately $750,000 and little or no net
income from operations. Of such number of customers, the Walt Disney Company,
with 50%, and General Growth Properties, with 20%, accounted for 70% of such
revenues. Accordingly, the loss of either of such customers would have a
material adverse effect on the Company's mall and retail fixtures business.
The Company believes that conventional forms of on-site retail
merchandising and advertising units are rapidly evolving into forms utilizing
interactive video and other state of the art technologies and that such products
represent a low cost alternative to traditional retailing concepts which can be
used by mall developers and retailers to deliver specific messages to targeted
recipients. While the Company anticipates continued market acceptance of
Sierra's retail fixture designs, there can be no assurance that such designs
will achieve broad market acceptance by mall developers and retailers and
thereby generate sufficient revenues to permit the Company to achieve profitable
operating results.
Product Development
Sierra's graphic designer and its president are involved in new product
development by assessing existing products and seeking to create "new looks"
through innovate design and artwork and providing samples and prototypes of new
styles and designs to customers in response to customer requirements. The design
of a new product can take from a few hours to several weeks depending on the
nature of the product and the number of units to be sold.
Production
Sierra is entirely dependent on third party manufacturers to supply the
finished products necessary to fulfill outstanding customer orders. All of the
manufacturers with whom Sierra does business are located in Southern California.
As of the date of this Prospectus, Sierra has no long-term agreements with any
of its manufacturers and there can be no assurance it would be able to enter
into any such agreements on terms favorable to it or on any terms. While the
Company believes that Sierra has good relationships with its manufacturers,
Sierra is subject to the risk that a manufacturer may terminate its relationship
with Sierra at any time or that an order may be received by it at a time when
its manufacturers are working at full capacity. In such case, the Company may
not be in a position to accept the order or risk cancellation of the order
because of its inability to make shipment on a timely basis.
The Company believes, based on its experience, that in the event a
manufacturer terminates its relationship with Sierra, or refuses to accept an
order from Sierra, it will be able to obtain alternative sources of supply that
will provide finished products in sufficient quantities, on a timely basis and
at acceptable prices to enable Sierra to satisfy customer requirements.
Seasonality
Sierra's business is seasonal. Sales are highest in the spring and summer
months. Mall and retail operators attempt to have all of their retail
merchandising units in place and tested prior to the onset of the Christmas
holiday season. Sales usually begin to decline in the fall of the year and do
not resurge until about March of the following year.
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Backlog
As of the date of this Prospectus, Sierra has a backlog of firm orders of
approximately $400,000. Substantially the entire backlog consists of
merchandising units being produced for The Walt Disney Company, which will be
shipped during the current fiscal year. As of May 31, 1995, Sierra had a backlog
of approximately $300,000, consisting of merchandising units which were shipped
during the first quarter of the fiscal year ended May 31, 1996.
Competition
The shopping mall and retail fixtures business is extremely competitive.
The primary bases for competition are delivery, price, quality, customer
service, design and customization capabilities and product offerings. The
Company believes that competes effectively on the basis of quality products,
customer service, pricing and timely delivery. Although pricing is important,
the Company believes that product quality and timely delivery are almost of
equal importance. The Company believes that Sierra's relationships with its
suppliers permit it to meet customer demand for quality and timely delivery
while being price competitive. The Company believes, based on Sierra's knowledge
of the shopping mall and retail fixtures industry in the United States, that its
principal competitors are T.L. Horton, Creations of Dallas and Wagon Sellers.
Each of these competitors has their own manufacturing facility and some of the
competitors may have more capital resources than Sierra. The prices of products
sold by competitors may be less than the prices of similar merchandise sold by
Sierra, and such price competition may have a material adverse effect on the
revenues of the Company as well as its ability to effectively compete with other
such companies.
There are no legal barriers to entry into the shopping mall and retail
fixtures business and, as a practical matter, no financial barriers either. Some
of the Company's competitors have substantially greater financial and other
resources. There are usually no proprietary rights which can be protected from
competition by patents, copyrights, or similar intellectual property. There can
be no assurance that Sierra will continue to be able to effectively compete
against existing and future competitors.
Properties
The Company currently leases approximately 3,000 square feet of office
space in Santa Monica, California. The lease has a term of 36 months and a
monthly rental of $8,260 per month. If the Mergers are consummated, the Company
intends to terminate its existing lease or sublease the space and move its
executive offices to the office space currently leased by The Target Companies.
The Company does not anticipate incurring any significant expenses regarding a
sublease arrangement or with its relocation. If the Mergers are not consummated,
the Company intends to terminate the current office lease and seek office space
at a more economical rental in the Los Angeles area. The Company believes that
suitable alternative space is available in the Los Angeles area on terms
acceptable to the Company. See "Business - The Target Companies - Properties."
Sierra currently leases approximately 1,500 square feet of office and
showroom space in Newport Beach, California at a monthly rental of $1,200. Such
lease expires in June 1999.
Employees
As of the date of this Prospectus, the Company had 7 employees, two of whom
are executives, three of whom are administrative/clerical employees, one of whom
manages Sierra's operations and one of whom constitutes Sierra's design
department. As of the closing date of the Mergers, Gill Champion, the Company's
Chief Executive Officer, has agreed to resign as an officer and director of the
Company and is not included in the aforementioned employee listing. See
"Management - Employment and Termination Agreements."
The following information regarding the Target Companies have been provided
by the Target Companies:
The Target Companies
General
The Target Companies design and produce value-added garments and other
textile products, such as beach and golf towels, for sale to distributors in the
advertising specialty industry and to retailers of souvenir and novelty
products. The Target Companies add value to blank or plain textile products,
such as t-shirts, sweatshirts, jackets, and towels, by decorating them with the
logos, names or messages of the advertisers or other customers of the
advertising specialty distributors with whom the Target Companies do business
and the graphic designs required by their retail customers. JJC also
manufactures leather, leather and fabric and fabric only jackets and sells such
apparel to such distributors and retail outlets. Superior was established in
1982 by Mr. Strem and JJC was established in 1993 by the Principals.
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The Target Companies decorate blank garments and other textile products
with graphic designs primarily by means of screenprinting and embroidery. The
Target Companies believe they have a reputation in the advertising specialty
industry for producing high quality graphic images on the garments they supply,
coupled with the ability to produce and deliver their value added products
within short time frames. Superior maintains an internal graphic arts and design
department of four persons and state of the art imprinting and embroidery
equipment to meet the needs of customers of the Target Companies.
The Advertising Specialty and Souvenir Market
The advertising specialty industry is highly fragmented. According to the
Advertising Specialty Institute, there are more than 13,000 distributors of
advertising specialty products in the United States. Distributors tend to be
closely-held entities with local or regional focus, ranging from one person, one
product entities to companies, such as the Target Companies, which maintain
showrooms to assist customers in selecting from an array of products. Many of
the larger distributors also manufacture products used in the advertising
specialty industry. The Target Companies believe that as conventional forms of
advertising become more expensive, advertisers will increasingly seek
alternative methods of promotion. Advertising specialty products and programs
generally represent a lower cost alternative to more traditional advertising and
can be utilized by advertisers to deliver specific messages to targeted
recipients.
The souvenir and novelty market consists of individual retail outlets
located in hotels, airports and at tourist attractions, including, commercial
attractions such as Opryland, Graceland and the Empire State Building.
Marketing and Sales
The Target Companies maintain a showroom at their offices in North
Hollywood, California, in which they display their product lines of
approximately 100 items. Each of the Target Companies has its own sales and
customer service personnel to service the advertising specialty customers and
each engages an independent sales representative to sell products to the retail
souvenir market. The sales representative is compensated on a commission basis
based on orders generated by him and accepted by the Target Companies. Marketing
and sales efforts for the Target Companies are led by the Principals, and
involve visits to customers by sales personnel or the Principals, utilizing a
catalog depicting a selection of the more than 100 products available from the
Target Companies, telephone solicitations, attendance at trade shows and visits
by customer representatives to the showroom.
Products are sold regionally and nationally to more than 1,000 advertising
specialty distributors. For the fiscal years ended December 31, 1994 and 1995,
sales to the advertising specialty market accounted for approximately 85% and
75%, respectively, of combined net sales of the Target Companies. Products are
sold nationally to more than 100 retail souvenir outlets.
Products sold to advertising specialty distributors are usually resold by
such distributors to end users, for whose accounts orders for such products were
placed with the Target Companies. Such products are used by the end users for
product promotions, employee incentive programs, customer gifts and advertising
campaigns. Customers of the Target Companies sell to end users in the
manufacturing, financial services, broadcasting, consumer products and
communications industries.
Marketing and sales efforts of the Target Companies emphasize the
development and maintenance of close relationships with advertising specialty
distributors by means of the regular presentation of samples of new products in
response to customer requirements. The Target Companies believe that they have
developed strong relationships with large distributors, such as Jack Nadel, Idea
Man and Ha-Lo Industries, Inc., many of which have customers with large
advertising budgets and that such relationships allow the Target Companies to
identify new business opportunities and to react to the end user's requirements
in the early stages of the end user's market program.
Internal sales personnel and the independent sales representative for the
Target Companies assist their customers by developing innovative advertising
specialty and souvenir products tailored to meet the specific needs of each
customer. When an advertising specialty or souvenir concept is designed,
Superior's internal graphic design and art department has the capability to
produce a visual presentation of a product for customer approval in one day. The
Target Companies utilize this capability to attract new customers and to
increase the volume of business from existing customers.
The Target Companies derived approximately 25% of their combined net sales
in fiscal 1995 from two customers. Of these two customers, one accounted for
approximately 13%, and the other accounted for approximately 12% of net sales.
While the Target Companies do not have sales contracts with any customers, the
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Target Companies have been able to maintain and increase sales volume by being
responsive to their customers' needs. The customer base of the Target Companies
has been relatively stable, and while there has been variation from year to year
in sales to individual customers, 80% to 90% of aggregate combined sales of the
Target Companies have been to the same group of customers for the last three
years.
During the three years ended December 31, 1995, Superior's net sales have
remained relatively constant, fluctuating between $8,635,685 for the fiscal year
ended December 31, 1993 to $8,457,526 for the fiscal year ended December 31,
1995. Superior believes that operational efficiency has improved during such
three year period leading to reduced expenses and increased profitability. JJC,
which commenced operations in 1993, has had net sales for each of the last two
fiscal years of approximately $1.2 million.
Production and Suppliers
The Target Companies' products are produced in the plant operated by
Superior at North Hollywood, California by applying graphic designs, mostly
through screenprinting or embroidery, to blank garments and other textile
products, such as beach and golf towels. "Blank" garments or towels are finished
goods that do not bear any design or decoration. Substantially all of Superior's
"blanks" consist of items of cotton or cotton-blended fabrics to which Superior
applies designs by means of screenprinting, embroidery or applique to add value.
"Blanks" utilized by JJC consist of leather, leather and fabric and fabric only
jackets to which JJC applies designs, usually by embroidery. JJC also fabricates
jackets consisting of the same materials as the blank jackets to which it
applies decoration. Such jackets are also sold unadorned and decorated to the
advertising specialty and retail souvenir markets.
Blank garments and other textiles are shipped to the facilities of the
Target Corporations in North Hollywood, California, where they are kept in
inventory until decorated. The Target Companies decorate blank goods solely in
response to specific purchase orders for the goods received from a customer and
accepted by the applicable Target Company. The Target Companies allow the return
of defective products only. Historically, returns have been less than 5% of
combined sales of the Target Companies and write downs of obsolete inventory
less than 5%.
Blank cotton and cotton blend t-shirts, sweatshirts, jackets, other
garments and towels are manufactured by large and small mills, mostly in the
southeastern part of the United States. Significant suppliers of these goods to
the Target Companies include Fieldcrest Cannon for beach towels, Dundee and
Westpoint Stevens for towels, Hanes and Allstyle for t-shirts and Fruit of the
Loom for golf and sweat shirts. The other raw materials utilized by the Target
Companies are inks, paints and pigments, which are utilized by Superior in its
screenprinting operations, and thread utilized by the Target Companies in their
embroidery operations. Superior purchases its supplies of inks, paints and
pigments from two national suppliers, Parmelle and Nazdar, and the Target
Companies purchase their thread supplies from two national suppliers, Salas and
Madeira.
The Target Companies do not have any long term agreements with any of their
suppliers. Historically, the Target Companies have not experienced material
delays in obtaining needed supplies of raw materials, including blank garments
and towels. Although a supplier could terminate its relationship with a Target
Company at any time, the Target Companies believe, based on their experience,
that there are alternate sources of supply available, both domestic and foreign,
from whom they would be able to obtain timely deliveries of raw materials in
sufficient quantities and at acceptable prices to produce finished goods to
satisfy customer requirements. However, delays in identifying alternative
sources of supply and in obtaining sufficient quantities of raw materials from
the new sources could have a material adverse effect on the operations of the
Target Company experiencing the delay.
Backlog
At June 30, 1996, the Target Companies had a combined backlog of firm
orders of approximately $1,000,000, substantially all of which had been placed
with Superior, which orders are expected to be shipped during Superior's current
fiscal year. At December 31, 1995, the Target Companies had a combined backlog
of firm orders of approximately $750,000, substantially all of which had been
placed with Superior.
Seasonality
The business of the Target Companies is seasonal. Sales are highest in the
spring and summer months. Sales usually begin to decline in the fall, by reason
of the reduction in tourism and industry sponsored promotional events usually
experienced during the fall and winter months, and do not begin to increase
until March of the following year.
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<PAGE>
Competition
The advertising specialty and souvenir supply industries in which the
Target Companies are engaged are characterized by intense competition. In
addition, there are no legal barriers to entry into the businesses in which the
Target Companies are engaged. The Target Companies believe that the bases of
competition in such industries are product offerings, prices, quality of
products, design capabilities and customer service.
The competitors of the Target Companies are national and local silk screen
printing and embroidery firms, some of which manufacture the garments and other
goods they decorate. Such manufacturers may enjoy a competitive advantage over
the Target Companies with respect to the cost of their product offerings. Some
of such competitors may have substantially greater financial and other resources
than the Target Companies. The Target Companies believe that their principal
competitors are Professional Towel, Dunbrook and a number of small silk screen
printing firms.
The Target Companies believe they compete effectively on the basis of the
broad array of the products they offer, the quality of such products, pricing
and customer service (including design service and timely delivery). Some of the
competitors may have more capital resources than the Target Companies. However,
there can be no assurance that the Target Companies will be able to continue to
compete effectively against existing and potential competitors.
Employees
As of May 31, 1996, the Target Companies had 105 employees, of which four
are executive employees, nine are engaged in sales, marketing and clerical
functions, 10 are engaged in the management of production, shipping and
receiving activities, four comprise the graphic design and art department, and
the balance are general production employees. The Target Companies currently
operate on a 24 hour per day, three-shift basis. None of the employees of the
Target Companies is covered by a collective bargaining agreement. The Target
Companies believe that their relations with employees are satisfactory.
Properties
The Target Companies lease approximately 30,000 square feet of office,
manufacturing and warehouse space in North Hollywood, California, at a monthly
rental of approximately $13,500 under four leases, three of which expire on
April 30, 1998 and one of which expires on December 31, 1997. Superior
owns or leases production equipment, such as manual and semiautomatic
presses and multi-headed embroidery machines, as well as general office
equipment.
THE MERGER AGREEMENTS
The following is a summary of the Merger Agreements:
General.
The Merger Agreements set forth the terms and conditions upon and subject
to which the Mergers are to be effected. If the conditions contained in the
Merger Agreements are satisfied or waived, the Target Companies will merge with
and into the Merger Subs, the separate corporate existence of each of the Target
Companies will cease, and the Merger Subs will continue as the surviving
corporations, operating as wholly-owned subsidiaries of the Company. The Mergers
will become effective at the time that agreements of merger are filed with the
California Secretary of State under the California General Corporation Law.
At the Effective Time, the shares of capital stock of the Target Companies
outstanding immediately prior to the Effective Time will automatically be
converted into the right to receive the Merger Consideration.
Conditions to the Mergers. The respective obligations of the Company Parties, on
the one hand, and the Target Company Parties, on the other, to consummate the
Mergers are subject to the following conditions, among others:
(a) other than the filing of agreements of merger with the California
Secretary of State and certain consents to the Merger by certain creditors and
lessors of the Target Companies, all third party and governmental consents,
waivers and approvals required for consummation of the Mergers, shall have been
obtained and be in full force and effect;
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<PAGE>
(b) no order of a court or other governmental authority which restrains or
prohibits the consummation of the Mergers shall be in effect, and no action,
investigation or proceeding shall have been commenced or threatened in which
relief is or will be sought (i) to restrain or prohibit the Mergers, (ii) to
change the terms thereof or to obtain damages in relation to the Mergers, and
which in the judgment of the Company or the Target Company Stockholders makes
the consummation of the Mergers inadvisable;
(c) Strem shall have entered into an employment agreements with the Company
and Sacks shall have entered into an employment agreement with the JJC Merger
Sub;
(d) the Mergers shall have been consummated on or prior to August 31, 1996,
or such later dates as the parties to the Merger Agreements shall have agreed to
in writing.
The obligation of the Company Parties to consummate the Mergers is subject
to the satisfaction of the following conditions, among others, and the failure
to satisfy any such condition may be waived by the appropriate Company Parties:
(a) the representations and warranties of the Target Company Parties in the
Merger Agreements shall have been true in all material respects when made and as
of the closing date of the Mergers, the covenants and conditions to be performed
by the Target Company Parties under the Merger Agreements at or prior to such
closing date shall have been performed in all material respects;
(b) since the date of the Merger Agreements, there shall have been no
material adverse change in the financial or business condition of the Target
Companies;
(c) the Strem Trust shall have agreed with the Company not to sell
1,000,000 of the shares of Common Stock for a period of one year from the
Effective Time;
(d) the Company shall have received and be satisfied with Superior's
audited financial statements for the year ended December 31, 1995;
(e) the Company shall have successfully completed the Equity Financing;
(f) Superior and Strem shall have concluded arrangements to
relocate the executive offices of the Company Parties to the offices currently
occupied by the Target Companies in North Hollywood, California; and
(g) Strem shall have obtained waivers by the bank that provides credit
facilities to the Target Companies as to any defaults in complying with the
credit agreements with such bank, and the Principals shall have indemnified the
Company Parties against loss or liability resulting from material undisclosed
defaults by Superior under credit and financing agreements to be assumed by
Superior Merger Sub.
The obligation of the Company Parties to consummate the Mergers is subject
to the satisfaction of the following conditions, among others, and the failure
to satisfy any such condition may be waived by the appropriate Target Company
Party:
(a) the representations and warranties of the Company Parties in the Merger
Agreements shall have been true in all material respects when made and as of the
closing date of the Mergers, the covenants and conditions to be performed by the
Target Company Parties under the Merger Agreements at or prior to the closing
date of the Mergers shall have been duly performed in all mutual respects;
(b) the Company and the Strem Trust shall have entered into a registration
rights agreement with respect to 200,000 of the shares constituting the Share
Consideration and the Company and the Sacks Trust shall have entered into a
registration rights agreement with respect to 25,000 of the shares constituting
the Share Consideration;
(c) the matters referred to under certain "Certain Agreements of the
Parties" below as to amendment of the Company's by-laws and the composition of
the Company's board of directors shall have been effected;
(d) the Company shall have delivered to the Principals original guaranties
and/or releases from liability under guaranties given by the Principals, and or
their respective spouses, to certain creditors of Superior and/or the Company
shall have indemnified the Principals and their respective spouses, subject to
certain limitations, against liability under any guaranty which has not been so
returned or released;
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<PAGE>
(e) Natale, shall have agreed with the Company not to sell an aggregate of
750,000 shares of Common Stock for a period of one year from the Effective Time;
(f) Gill Champion shall have resigned as an officer and director of the
Company; and
(g) the closing bid price per share of the Common Stock, as reported by
NASDAQ, on the last trading date prior to the Effective Time shall be at least
$2.65.
Representations, Warranties and Covenants.
The Merger Agreements contain various representations and warranties of the
Company Parties, on the one hand, and the Principals and the Target Company
Stockholders, on the other. The representations of the Principals and the Target
Company Stockholders relate to information concerning the legal and financial
status of the Target Companies, their businesses, properties and obligations and
the accuracy and completeness of information supplied. The representations of
the Company Parties, in general, cover the same topics as those covered by the
representations of the Principals and the Target Company Stockholders and also
cover filings made by the Company with the Commission and the legal status of
the Share Consideration, when issued.
The Merger Agreements contain covenants by the Target Company Parties that
pending the Effective Time, the business and affairs of the Target Companies
will be conducted only in the ordinary course and that the Target Companies will
not engage in certain transactions which might materially affect their business,
operations and/or financial condition.
The Merger Agreements also contain covenants of the Company Parties and of
the Target Company Parties regarding employee benefit matters; indemnification;
reasonable efforts to successfully consummate the Mergers; notices in connection
with the Mergers; access to records; public announcements and tax matters.
Confidentiality and Noncompetition. Pursuant to the terms of the employment
agreements to be entered into by each Principal with the Company and/or the
Merger Sub of which each Principal will be an officer each has agreed that
during the period of his employment and for the Restricted Period (as defined
below), not to (a) use or disclose confidential information relating to business
practices of the Company Parties, or (b) except for certain permitted interests,
engage, have an interest in or render service to, any business which competes
with the business activities of the Company or the Merger Sub which employs such
Principal in any of the areas in which the Company is engaged in business during
the Principal's period of employment or on the date of termination of the
Principal employment, or (c) take any action which constitutes an interference
with or a disruption of the operations of the Company or the Merger Sub which
employs such Principal. "Restricted Period" means, in the case of Strem, the two
year period, and, in the case of Sacks, means the six months, in either case,
following the earlier of the last day of the employment term and the date of
termination of employment, if a Principal voluntarily terminates his employment
or the Company terminates such employer for cause. In addition, each employment
agreement prohibits the Principals during the employment term and thereafter
from misappropriating trade secrets and from disparaging the reputation of the
Company or the Merger Sub by which he was employed.
No Solicitation. The Target Company Parties have agreed that prior to the
earlier of the Effective Time or the termination of the Merger Agreements, none
of them will, directly or indirectly, solicit, initiate or encourage, or take
any other action to facilitate, the submission of proposals or offers, or
participate in any negotiations or furnish information to any person, relating
to the acquisition or purchase of any portion of the Target Companies' assets
(other than in the ordinary course of business) or any equity interest in, or
business combination involving, either of the Target Companies
Termination; Fees and Expenses. The Merger Agreements may be terminated
prior to the Effective Time (a) by the consent of the respective boards of
directors of the Company Parties and the Target Companies, the Target Company
Stockholders and the Principals, or (b) by the Company Parties, on the one hand,
or by the Target Company Parties, on the other, if (i) the Mergers are not
consummated on or before August 31, 1996 (except if the failure of the Effective
Time to occur on or prior to such date is caused by or results from a default by
a terminating party under the Merger Agreement to which it is a party), or (ii)
a court or other governmental authority issues an order or decree permanently
restraining a Merger, or (iii) the terminating parties determine that a Merger
is inadvisable or impractical by reason of the initiation or threat of material
litigation against the Company or a Target Company, or (iv) the terminating
parties determine that there has been a material adverse change since December
31, 1995 in business, assets or financial condition of the Company (in the case
of the Target Company Parties as terminating parties) or either of the Target
Companies (in the case of the Company Parties as terminating parties) (except
that neither the writeoff of assets related to terminated retail operations of
the Company nor the payment by the Company
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of certain fees related to the Merger will constitute a material adverse
change), or (c) by the Company Parties, as to a material breach by a Target
Company Party, and by the Target Company Parties, as to a breach by a Company
Party, of a material provision of the Merger Agreement to which such breaching
person is a party if such breach is not cured within a 10 day period following
the giving of a demand to cure such breach.
Upon the consummation of the Merger and in the event the Merger Agreement
is terminated by reason of (a) the Company's failure to complete the Equity
Financing, (b) the breach by a Company Party of a Merger Agreement, or (c) the
Company's arbitrary refusal to proceed with the Merger notwithstanding the
satisfaction by the Target Company Parties of all conditions to be satisfied by
them and the satisfaction of all conditions to be satisfied by the Company
Parties and/or the waiver of such conditions by the Target Company Parties, the
Company will be obligated to pay or reimburse the Target Company Parties for
actual costs (including professional fees) and expenses incurred by the Target
Company Parties in connection with the Mergers, in addition to other rights the
Target Company Parties may have. In certain circumstances, upon the termination
of the Merger Agreements, the Target Companies are obligated to pay or reimburse
the Company Parties for actual costs (including professional fees) incurred by
the Company Parties in connection with the Mergers, in addition to other rights
the Company may have.
Certain Agreements of the Parties. Pursuant to the Merger Agreements, (a)
the Company Parties have agreed (a) to take reasonable action to cause the
following to occur: at the closing under the Merger Agreements, amend the
Company's by-laws to increase the number of directors constituting the Company's
board of directors from two to five, effect the resignation of Mr. Gill Champion
(currently Chairman of the Board and Chief Executive Officer of the Company) as
a director, and nominate and cause to be elected as directors and Chief
Executive Officer to fill the vacancies on the Board of Directors so created,
Strem, a designee of the Agent and two persons designated by Strem and Natale,
the Company's President; (b) Strem has agreed to enter into a three year
employment agreement with the Company and the Superior Merger Sub; (c) Sacks has
agreed to enter a one-year employment agreement with the JJC Merger Sub; and (d)
the Company has agreed that, after one year from the Effective Time, at the
request of the Strem Trust, it will, at its expense, register up to 200,000
shares of the Company's Common Stock held by the Strem Trust under the
Securities Act. The Company anticipates that the Strem Trust will request such
registration. Subject to certain limitations, the Company has also agreed to
include such shares in any appropriate registration statement filed by the
Company. Mr. Natale will agree with the Company not to sell an aggregate of
750,000 shares of Common Stock for a period of one year from the Effective Time
and the Strem Trust will agree not to sell an aggregate of 1,000,000 shares for
the same period.
The foregoing is a summary of certain provisions of the Merger Agreements
and does not purport to be a complete statement of the terms, conditions and
provisions of the Merger Agreements. Copies of the Merger Agreements are on file
with the Commission as exhibits to the Registration Statement of which this
Prospectus forms a part.
58
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MANAGEMENT
Directors, Executive Officers and Significant Employees
The directors and executive officers of the Company, a nominee for election
as a director and a significant employee of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gill Champion* 54 Chairman of the Board of Directors, Chief Executive Officer and
Secretary
Steve Natale 41 President, Chief Operating Officer, Treasurer and a Director
Robert J. Strem 43 Nominee for Director
Christopher J. Ebert 45 Chief Financial Officer and Assistant Secretary
Christopher D. Kelly 50 President of Sierra
</TABLE>
- ---------------
* Mr. Champion has agreed to resign from all positions with the Company at the
Effective Time of the Mergers.
Gill Champion has served as Chairman of the Board of Directors and
Secretary of the Company since the Company's inception in June 1992 and as its
Chief Executive Officer since October 1993. Mr. Champion served as Treasurer of
the Company from June 1993 to October 1993. From February 1992 to June 1992, he
was self-employed and engaged in developing the mini-store retail concept which
constituted the Company's initial business. From June 1989 to January 1992, Mr.
Champion was Chairman of the Board and Chief Executive Officer of, and then a
consultant to, Movie Music, Inc., a corporation created for the purpose of
developing kiosks for retail sales.
Steve Natale has served as President and a director of the Company since
June 1992 and Chief Operating Officer and Treasurer since October 1993. From
October 1992 to May 1992, he served as Vice President, Creative Services, for
JRS Records, a record company. From May 1988 to October 1991, Mr. Natale was
self-employed and engaged in developing the mini-store retail concept which
constituted the Company's initial business. Mr. Natale received an Associate of
Arts degree from Boston State College in 1974 and attended Boston College from
1974 to 1976.
Robert J. Strem has served as President and a director of the Target
Companies since their inception (1982, in the case of Superior and 1993, in the
case of JJC). Pursuant to the terms of the Merger Agreements, he is to be
elected to the Board of Directors at the time of closing. He received a Bachelor
of Science degree in Communications, Radio and Television from California State
University at Northridge.
Christopher J. Ebert has served as Chief Financial Officer of the Company
since September 1994. From May 1994 to September 1994, he served as Controller
of the Company. From December 1992 to April 1994, Mr. Ebert served as Director
of Finance and Accounting for the Virginia Department of Alcoholic Beverage
Control and from November 1988 to December 1992, Treasurer and Chief Financial
Officer for Trio-Tech International, a manufacturer of semi-conductor test
equipment. Mr. Ebert received bachelor degrees in accounting and finance and a
Master of Business Administration degree from Marquette University.
Christopher D. Kelly has served as President of Sierra since March 1995.
From 1987 to February 1995, Mr. Kelly served as a Vice-President of Mesa Verde
Fixture and Design, Inc., a shopping mall fixture and design manufacturing
company, which he co-founded. From 1969 to 1986, Mr. Kelly owned and operated
Rax Unlimited, a manufacturer of mall and retail store fixtures. Mr. Kelly
received a bachelor's degree in advertising and a master of business
administration from Woodbury University.
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All directors hold office until the next annual meeting of stockholders and
until their successors have been elected and qualified, subject to death,
resignation or removal from office prior to such time. The Merger Agreements
provide that Mr. Champion's resignation as a director and Mr. Strem's election
as a director of the Company are conditions to the obligation of the Target
Companies to consummate the Mergers. Mr. Champion has entered into an agreement
with the Company pursuant to which he has agreed to resign from all positions
with the Company. Pursuant to the Merger Agreements, the Company Parties have
agreed to take reasonable action to cause the following to occur at the closing
under the Merger Agreements, (a) amend the Company's by-laws to increase the
number of directors constituting the Company's board of directors from two to
five; (b) effect the resignation of Mr. Gill Champion as a director, and
nominate and cause to be elected as directors to fill such newly created
vacancies, Strem, the Agent's designee and two other persons to be designated by
Strem and Natale. In addition, for so long as the Agent holds voting securities
or has rights in respect of the Company, if so requested by the Agent, the
Company will take action to cause the election of a designee of the Agent as a
director of the Company or, at the Agent's option, permit an observer to attend
meetings of the Board of Directors and stockholders. Messrs. Champion and Natale
have agreed to vote their shares of Common Stock in favor of Strem. The Agent
has not yet exercised its right to designate a nominee for director.
Executive Compensation
The following table discloses for the fiscal years ended May 31, 1996, 1995 and
1994, compensation for Mr. Gill Champion, the person that served as Chief
Executive Officer during the fiscal year ended May 31, 1996, and Mr. Steve
Natale, the only other executive officer of the Company whose annual
compensation exceeded $100,000 during such fiscal year. Messrs. Champion and
Natale (the "Named Executives") receive no additional compensation for serving
on the Board of Directors.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation
<S> <C> <C> <C> <C>
Name and Other Annual
Principal Fiscal Salary Compensation
Position Year ($) ($)*
- --------- ------ ------ --------
Gill Champion, 1996 126,875 7,657
Chief Executive 1995 125,000 7,657
Officer 1994 125,000 7,657
Steve Natale, 1996 101,500 5,796
President and 1995 100,000 5,796
Chief Operating 1994 100,000 5,055
Officer
</TABLE>
(*) The amounts reported in this column represent the annual amount paid as an
allowance for leasing and insuring an automobile for the named individual
and for reimbursement of automobile costs.
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The following table sets forth information with respect to stock options held by
the Named Executives at May 31, 1996. No stock options were granted by the
Company to or were exercised by the Named Executives, during the fiscal year
ended May 31, 1996.
<TABLE>
<CAPTION>
Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at May 31, 1996 at May 31, 1996
----------------------- -------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gill Champion 60,000* -0- $-0- -0-
Steve Natale 140,000* -0- -0- -0-
</TABLE>
*Incentive stock options granted under the Company's 1993 Stock Option Plan
which became exercisable after one year from their date of grant and, in the
case of Mr. Champion, expire 30 days after the date of termination of his
employment with the Company, effective as of the Effective Time and, in the case
of Mr. Natale, expire four years from the date such options became exercisable
or 30 days after termination of his employment by the Company.
Options are "in-the-money" if the fair market value of the Common Stock exceeds
the exercise price. At May 31, 1996, the closing bid price per share of the
Common Stock as reported by NASDAQ was $2.50. No options were in the money as of
May 31, 1996.
Employment and Termination Agreements
Mr. Natale, the Company's President, is employed under an employment
agreement which expires in March 1997, if either party gives the other notice of
termination at least 30 days prior to the expiration date (otherwise, the
employment term will expire March 1998). Under such agreement, Mr. Natale
currently receives base compensation at the annual rate of $101,500 subject to
annual increases based on changes in the consumer price index.
If the Mergers are consummated, Robert J. Strem, as President of the
Superior Merger Sub will enter into three-year employment agreement with the
Company, Christopher J. Ebert, the Company's Chief Financial Officer will enter
a two-year employment agreement with the Company, and Bruce Sacks will enter
into a one-year employment agreement with the JJC Merger Sub, and the Company
will guarantee the performance of the JJC Merger Sub under such employment
agreement, and Mr. Natale's existing employment agreement will be extended to
expense on the third anniversary of the Effective Time.
Except for base compensation arrangements and the employment term of Mr.
Sacks, the provisions of such employment agreements will be substantially
similar. The Company will agree to pay Mr. Strem base compensation at the annual
rate of $165,000, subject to annual increases or bonuses at the discretion of
the Company's Board of Directors. The JJC Merger Sub will agree to compensate
Mr. Sacks at the annual rate of $110,000 and the Company will agree to
compensate Messrs. Natale and Ebert at $125,000 and $110,000, respectively,
subject to increases and bonuses at the discretion of the Company's Board of
Directors. Under the employment agreements, an executive will be entitled to
terminate his employment for "good reason" (which includes a "change of control"
as defined in such employment agreements, limitation of an executive's powers or
removal of an executive from, or failure to elect an executive to, his then
current office), and the Company may terminate an executive's employment for
"cause" (as defined in such employment agreements). Upon termination of an
executive's employment by the Company (other by reason of death, disability or
for cause), or upon termination of the employment term by an executive for "good
reason" or by reason of the employer's breach of the employment agreement, the
employer is required to pay base compensation to the executive for a period
equal to the unexpired balance of the contract term.
The employment agreements will provide that each executive will be entitled
to all benefits provided to executives of the Company, to the use of an
automobile, (including reimbursement of expenses related to the operation and
maintenance thereof), and four weeks paid vacation (three weeks in the case of
Mr. Sacks). Such proposed employment agreements are substantially similar to the
terms of Mr. Natale's current employment agreement with the Company.
Mr. Natale's current employment agreement and each proposed employment
agreement provides for non-disclosure by an executive, during his employment
term and, thereafter, of information deemed by the Company to be confidential
and for non-
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competition with the Company in the continental United States for one year
following the date of termination (but not expiration) of his employment term.
Mr. Champion has agreed, pursuant to that letter agreement dated June 25,
1996 with the Company (the "Letter Agreement") to resign as director and
Chairman of the Board as well as the Chief Executive Officer of the Company,
effective as of the Effective Time. Under the terms of the Letter Agreement,
Champion has agreed to cooperate fully with the Company and its officers to
effect the Mergers. The Company has agreed to pay Champion in a lump sum at the
Effective Time his total unpaid salary and unpaid employment benefits through
March 15, 1997, (the expiration date of Mr. Champion's term). If the Mergers had
occurred on June 15, 1996, the payment to Champion would have aggregated
$116,938.94. The actual lump sum amount to be paid at the Effective Time will be
reduced by the total amounts of salary and benefits paid by the Company to
Champion prior to the Effective Time, at which time the remainder shall be
payable in a lump sum amount. The Company also agreed to maintain in full force
and effect its currently existing Director and Officer Liability Policy with
respect to Champion.
The Company and Champion also agreed to release one another from any and
all liability relating to the termination of Champion as an officer and director
of the Company.
Directors' Compensation
Directors receive no cash compensation for serving on the Board. However,
non-employee directors are eligible to be granted non-statutory stock options
under the Company's 1993 Stock Option Plan. Nonstatutory stock options may be
granted for up to 10 years from the date of grant at such exercise prices as the
Board of Directors may determine. There are no non-employee directors currently
serving on the Board of Directors.
Stock Option Plan
The Company adopted a 1993 Stock Option Plan (the "Plan"). The Plan, as
amended, provides that 800,000 shares of the Company's Common Stock are reserved
for issuance upon exercise of options to acquire Common Stock granted
thereunder, subject to adjustment for stock dividends and splits, reverse stock
splits and other like changes in the Company's capitalization. The purpose of
the Plan is to assist the Company in attracting and retaining qualified persons
to serve as employees, directors and consultants of the Company.
The Plan is administered by the Board of Directors, but the Board may
appoint a committee (the "Committee") consisting of two non-employee directors
to administer the Plan. In general, the Board of Directors or the Committee (the
"Administrator") will select the persons to whom options will be granted and
will determine, subject to the terms of the Plan, the number, exercise period
and other provisions of such options. Options granted under the Plan will become
exercisable at such times as may be determined by the Administrator.
Options granted under the Plan may be either incentive stock options
("ISOs") (as defined in the Internal Revenue Code of 1986, as amended), or
non-ISOs. ISOs may only be granted to persons who are employees of the Company,
including employees who are directors of the Company. Non-ISOs may be granted to
any person, including, but not limited to, employees of the Company, independent
agents and consultants, whom the Administrator selects. The Administrator
determines the exercise price of options granted under the Plan, provided that,
in the case of ISOs, such price may not be less than 100% (110% in the case of
ISOs granted to holders of 10% of the voting power of the Company's stock) of
the fair market value (as defined in the Plan) of the Common Stock on the date
of grant. The aggregate fair market value (determined at the time of option
grant) of shares with respect to which ISOs become exercisable for the first
time in any year cannot exceed $100,000.
Options generally vest over a four-year period, at the discretion of the
Administrator. In addition, outstanding options vest upon the occurrence of
certain transactions, including certain mergers and other business combinations.
The term of each option may be not more than 10 years (five years in the case of
ISOs granted to holders of 10% of the voting power of the Company's stock) from
the date of grant. ISOs generally terminate upon an optionee's termination of
employment with the Company, for any reason other than death or disability. Upon
exercise of an option, the exercise price may be paid to the Company in cash or
in shares of Common Stock (based upon the market value of the shares so
surrendered).
As of the date of this Prospectus, there are outstanding options under the
Plan to purchase an aggregate of 425,000 shares of Common Stock, including
options granted during the fiscal year ended May 31, 1995 to Messrs. Natale,
Champion and Ebert to purchase 60,000, 140,000 and 15,000 shares of Common
Stock, respectively, at an exercise price of $2.50 and options granted to Mr.
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Ebert during the fiscal year ended May 31, 1996 to purchase 200,000 shares of
Common Stock at an exercise price of $2.50. Because the grant of options under
the Plan is discretionary, the Company cannot now determine the number of
options to be granted in the future to such persons or to all officers and
directors as a group.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 30, 1996,
with respect to beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to be a beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) the Named Executives, (iii) each person
nominated for election as a director, and (iv) all directors and executive
officers as a group. Unless otherwise noted, the Company believes that all of
the persons named in the above table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
Name and Address Amount and Nature of % of Beneficial
of Beneficial Owner Beneficial Ownership Ownership
- ------------------- -------------------- ---------
Steve Natale(1) 1,277,345(2) 18.2
Gill Champion(1) 399,256(2) 5.7
Robert J. Strem(3) -0- (4) -0-(4)
All officers and directors
as a group (three
persons) 1,891,601(5) 25.9
(1) The address for each of Messrs. Champion and Natale is c/o American
CinemaStores Inc., 1543 7th Street, Santa Monica, California 90401.
(2) Includes for Mr. Natale 140,000 shares issuable upon exercise of
immediately exercisable options, and for Mr. Champion, 60,000 shares of
Common Stock issuable upon the exercise of immediately exercisable options.
(3) Mr Strem's address is 5715 Ridgebrook Drive, Agoura Hills, CA
91301.
(4) Upon the consummation of the Mergers, the Company will issue to the Strem
Trust, of which Mr. Strem and his spouse are trustees, $1,000,000 shares of
Common Stock.
(5) In addition to the options held by Messrs. Champion and Natale, includes
215,000 shares of Common Stock exercisable upon exercise of immediately
exercisable options held by an executive officer of the Company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who beneficially own more than 10
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Commission. Executive
officers, directors and greater than 10 percent owners are required by certain
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on the Company's review of the copies of such forms received
by it, the Company believes that during the year ended May 31, 1996, filing
requirements applicable to its executive officers, directors and 10%
stockholders of Common Stock were complied with.
CERTAIN TRANSACTIONS
In June 1992, the Company issued 1,346,116 shares of Common Stock to Steve
Natale, its President, Chief Operating Officer Treasurer and a director, for
$975, and 517,738 shares of Common Stock to Gill Champion, its Chairman of the
Board, Chief Executive Officer, Secretary and a director, for $375.
In April 1993, the Company entered into a registration rights agreement
with all eight of its then current stockholders, including Messrs. Natale and
Champion, under which the Company granted to its stockholders the right to
request, on two occasions during the five-year period ending in April 1998, that
the Company register for sale under the Securities Act of 1933, as amended, the
shares of Common Stock owned by such stockholders, provided that the Company is
then eligible to use registration Form S-3. Such stockholders were also granted,
for a period currently in
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effect and expiring in April 2000, certain piggyback registration rights with
respect the shares of Common Stock owned by them during a period expiring in
April 2000. Of such eight persons, only Messrs. Natale and Champion still hold
shares of Common Stock.
In November 1993, the Company sold 1,208 shares of Common Stock to
Natale and 518 shares of Common Stock to Gill Champion, at a price of $.005 per
share.
In November 1993, certain affiliates of A.S Goldmen & Co., Inc., one of
the underwriters of the Company's 1994 public offering of Common Stock, sold to
Natale an aggregate of 140,000 shares of Common Stock and to Gill Champion an
aggregate of 60,000 shares of Common Stock, at a price of $.005 per share.
See "Management - Employment and Termination Agreements" for information as
to the terms of existing and proposed employment agreements between the Company
and its executive officers and a termination agreement with Gill Champion, the
Company's Chairman of the Board and Chief Executive Officer.
See "Management - Executive Compensation" and "Privileged Stockholders" as
to options granted to certain executive officers of the Company under the
Company's 1993 Stock Option Plan.
See "The Mergers" as to the lock-up agreement to be entered by Mr. Natale
with the Company and the Target Company Shareholders at the closing of the
Mergers.
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 15,000,000 shares of Common Stock, $.001
par value per share, and 5,000,000 shares of Preferred Stock, $.001 par value
per share. As of the date of this Prospectus, there are 6,892,638 shares of
Common Stock and no shares of Preferred Stock outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having liquidation preference over the Common Stock. Holders of shares of Common
Stock, as such, have no conversion, preemptive or other subscription rights, and
there are no redemption or sinking fund provisions applicable to the Common
Stock. All of the outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby, when issued against the consideration set forth in
this Prospectus, will be, fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
$.01 par value, in one or more series and to fix the designations, rights,
preferences, privileges, qualifications, limitations and restrictions thereof,
including dividend rights and rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, at the discretion of
the Board of Directors without any vote or action by the stockholders. Any
preferred stock issued by the Company could adversely affect the voting power or
other rights of the holders of the Common Stock. The preferred stock could be
utilized under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. The Company has no present
intention to issue any shares of preferred stock.
Redeemable Warrants
The following is a brief summary of certain provisions of the Redeemable
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Warrant Agreement, as
amended (the "Warrant Agreement"), between the Company and the Warrant Agent. A
copy of the Warrant Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
Subject to the terms of the Exercise Offer, each Redeemable Warrant
entitles the holder thereof to purchase, at any time from the date of this
Prospectus through March 13, 1998, two shares of Common Stock at a price of
$_____ ($_____ per share) Exercise Offer and $3.00 thereafter, subject to
adjustment in accordance with the anti-dilution and other provisions referred to
below.
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The Redeemable Warrants are subject to redemption by the Company, at any
time, at a price of $.05 per Redeemable Warrant if the average closing bid price
of the Common Stock equals or exceeds $3.50 per share (subject to adjustment)
for any 20 consecutive trading days within a period of 30 trading days ending on
the fifth trading day prior to the date of the notice of redemption. If the
Redeemable Warrants were redeemed prior to their exercise, the holders thereof
would lose the benefit of the difference between the market price and the
underlying Common Stock as of such date and the exercise price of such
Redeemable Warrants, as well as any possible future price appreciation in the
Common Stock.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the Redeemable Warrants are subject to adjustment upon the
occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications on or of the Common Stock and issuances of
shares of Common Stock for a consideration less than the exercise price of the
Redeemable Warrants. Additionally, an adjustment would be made in the case of a
reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation or sale of all or substantially all of
the assets of the Company in order to enable holders of Redeemable Warrants to
acquire the kind and number of shares of stock or other securities or property
receivable in such event by a holder of the number of shares that might
otherwise have been purchased upon the exercise of the Redeemable Warrant. No
adjustments will be made unless such adjustment would require an increase or
decrease of at least $.10 or more in such exercise price. No adjustment to the
exercise price of the shares subject to the Redeemable Warrants will be made for
dividends (other than stock dividends), if any, paid on the Common Stock.
The Redeemable Warrants may be exercised upon surrender of the warrant
certificate on or prior to the expiration date at the offices of the Warrant
Agent, with the exercise form on the reverse side of the certificate completed
and executed as indicated, accompanied by full payment of the exercise price (by
certified check payable to the Company) to the Warrant Agent for the number of
Redeemable Warrants being exercised. The holders of Redeemable Warrants do not
have the rights or privileges of holders of Common Stock.
Transfer Agent and Warrant Agent
Continental Stock Transfer & Trust Company serves as transfer agent and
registrar for the Common Stock and as Warrant Agent for the Redeemable Warrants.
INDEMNIFICATION
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following: (i) breaches of the
director's duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not made in good faith or which involve intentional misconduct of
knowing violations of law; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of the Delaware General Corporation Law; or
(iv) any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the ability of
the corporation or its stockholders to obtain injunctive relief, specific
performance or other equitable relief against directors.
Article Nine of the Company's Certificate of Incorporation and the
Company's By-laws provide that all persons who the Company is empowered to
indemnify pursuant to the provisions of Section 145 of the General Corporation
law of the State of Delaware (or any similar provision or provisions of
applicable law at the time in effect), shall be indemnified by the Company to
the full extent permitted thereby. The foregoing right of indemnification is not
deemed to be exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
Article Ten of the Company's Certificate of Incorporation provides that no
director of the Company will be personally liable to the Company or its
stockholders for any monetary damages for breaches of fiduciary duty of loyalty
to the Company or its stockholders' (ii) for acts or omissions not in good faith
or which involve intentional
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misconduct or a knowing violation of law; (iii) under Section 174 of the
General Corporation of Law of the state of Delaware; or (iv) for any
transaction from which the director derived an improper personal
benefit.
Section 7 of the Underwriting Agreement dated March 14, 1994 among the
Company and the underwriters of the Company's initial public offering provides
for indemnification of the Company's officers, directors and control persons.
Insofar as indemnification for liabilities under the Act may be permitted
to directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 6,892,628 shares of Common Stock outstanding as of the date of this
Prospectus 1,476,605 shares are "restricted securities" (as that term is defined
under Rule 144 promulgated under the Securities Act) and, subject to the
restriction contained in the lock-up agreement described below, are eligible for
resale under Rule 144. Such shares are held by Messrs. Steve Natale and Gill
Champion, who are, respectively, the President and the Chairman of the Board of
the Company. Upon the consummation of the Mergers, the Company will issue an
aggregate of 1,025,000 shares of Common Stock to the Target Company
Stockholders, of which 1,000,000 shares will be issued to the Strem Trust. Such
shares will become eligible for resale under Rule 144 commencing 25 months
following the closing of the Mergers. At the closing date of the Mergers, Mr.
Natale and the Strem Trust will enter a "lock-up" agreement which provides that
Mr. Natale, as to 750,000 shares of Common Stock, and the Strem Trust, as to
1,000,000 shares of Common Stock, will not, directly or indirectly, sell,
transfer, assign or otherwise dispose (pursuant to Rule 144 or otherwise) any of
such shares for a period of 12 months from the Effective Time. In 1993, the
Company granted Messrs. Natale and Champion and certain other persons who no
longer hold shares of Common Stock certain registration rights which currently
cover the 1,476,605 shares of Common Stock owned by Messrs. Natale and Champion.
In addition, the Company has granted registration rights to the Strem Trust,
with respect to an aggregate of 200,000 shares of Common Stock, and to the Sacks
Trust with respect to an aggregate of 25,000 shares of Common Stock. Neither Mr.
Natale nor the Strem Trust, with respect to the shares subject to the "lockup"
agreement, may exercise their registration rights until at least 12 months after
the Effective Time of the Mergers.
Under Rule 144, a person who has held restricted securities for a period of
two years may, every three months, sell, in ordinary brokerage transactions or
in transactions directly with a market maker, an amount equal to the greater of
1% of the Company's then-outstanding common stock or the average weekly trading
volume during the four calendar weeks prior to such sale. Rule 144 also permits
the sale of shares without any quantity limitations by a person who is not an
affiliate of the Company and has satisfied a three-year holding period. Sales in
the future of restricted securities under Rule 144 or pursuant to any
registration statement that may be filed with respect to the shares of Common
Stock currently outstanding or issuable upon consummation of the Mergers may
depress the price of the Common Stock in any market on which such security is
traded. See "Principal Stockholders," "Certain Transactions" and "Shares
Eligible for Future Sale."
Subject to the Company having a current prospectus covering the shares of
Common Stock underlying the outstanding Redeemable Warrants (the "Warrant
Shares"), the outstanding Redeemable Warrants entitle the holders of such
Redeemable Warrants to purchase up to an aggregate of 5,225,000 Warrant Shares
(based on the exercise during the 1995 fiscal year of 37,500 Redeemable Warrants
of which 30,000 may have been exercised at a time when the prospectus intended
to cover such exercises may not have been current) at any time prior to 5:00
p.m., New York City time, on March 13, 1998. The outstanding Redeemable
Warrants, and, if exercised, the shares of Common Stock issuable upon the
exercise of Redeemable Warrants, which are not subject to Rule 144, may be sold
at any time by the holders thereof or their transferees. Sales of either the
Redeemable Warrants or the underlying shares of Common Stock, or even the
existence of the right to exercise such Redeemable Warrants, may depress the
price of the Common Stock or the Redeemable Warrants in any market in which such
securities are traded. See "Description of Securities."
In connection with the Exercise Offer, if the Company receives an aggregate
of $3.5 million of proceeds from exercise of Redeemable Warrants during the
Exercise Period, the Company will sell to the Agent, for nominal consideration,
the Agent's Warrants to purchase up to 500,000 shares of Common Stock. The
Company has agreed that, under certain circumstances, it will register under
Federal and state securities laws the shares issuable upon exercise of the
Agent's Warrants. The exercise of any registration rights could involve
substantial expense to the Company at a time when it could not afford such
expenditures and may adversely affect the terms upon which the Company may
obtain additional financing.
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In addition, in the event that any holder of warrants issued by the Company
exercises its warrants, the percentage of ownership of the Company by persons
who invest hereunder will be diluted and any sales of the securities acquired
thereby might have an adverse effect on the market price of the Common Stock and
Redeemable Warrants.
The Company has reserved 800,000 shares of Common Stock for issuance to key
employees, officers, directors and consultants pursuant to the Company's 1993
Stock Option Plan. As of the date of this Prospectus 425,000 options have been
granted pursuant to the 1993 Stock Option Plan, all of which options are
currently exercisable. In the event that these or any other stock options
granted pursuant to the 1993 Stock Option Plan are exercised, dilution of the
percentage ownership of Common Stock owned by the public investors will occur;
in addition, sales of Common Stock issuable upon options granted pursuant to the
1993 Stock Option Plan, or even the potential of such sales, may adversely
affect the market price of the Common Stock. See "Management - Stock Option
Plan."
The Company is unable to predict the effect that any subsequent sales of
the Company's securities, whether by its existing stockholders, the Strem Trust
or the Agent, under Rule 144 or otherwise, may have on the then-prevailing
market price of the Common Stock, although such sales could have a depressive
effect on such market price.
PLAN OF SOLICITATION
The Company has entered into a Warrant Solicitation Agreement with the
Agent pursuant to which the Agent will act as the exclusive solicitation agent
for the Company in the Exercise Offer and will receive a fee (a) 4% of the
exercise price paid upon each exercise of a Redeemable Warrant during the
Exercise Offer with respect to the first 1,000,000 Redeemable Warrants
exercised, and (b) 5% of the exercise price paid upon each exercise of a
Redeemable Warrant, during the Exercise Period with respect to exercises of
Redeemable Warrants in excess of one million, subject to the Agent's compliance
with applicable laws and regulations and the rules of the NASD. The Company has
agreed that if the Company receive gross proceeds from the exercise of
Redeemable Warrants pursuant to the Exercise Offer in excess of $3.5 million,
the Company will issue and sell to the Agent, for nominal consideration,
warrants (the "Agent's Warrants) to purchase up to 500,000 shares of Common
Stock at an initial exercise price of $2.05 per share, subject to adjustment
under certain circumstances. The Agent's Warrants are exercisable during a four
year period commencing one year from the closing date of the Mergers and the
Agent's Warrants and the underlying Common Stock are not transferable for a
period of 3 years from the closing date of the Mergers, except to certain
employees of the Agent. The Agent's Warrants will include a provision permitting
the Agent and its designees to elect a cashless exercise and will grant certain
"piggy-back" registration rights to the holders of the Agent's Warrants.
The Company has also agreed to indemnify the Agent against certain
liabilities including liabilities under the Securities Act and to reimburse the
Agent for its reasonable out-of-pocket expenses in connection with Exercise
Offer.
The Company has agreed to pay the Agent an aggregate of $200,000 for
services rendered by the Agent in connection with the Mergers, of which $100,000
has been paid and the balance is payable at the closing of the Mergers.
The Company has agreed that the Agent shall be entitled to have an observer
attend meetings of the Board of Directors and stockholders of the Company and
that, in addition, for so long as the Agent owns voting securities of the
Company or has rights in relation to the Company, it will take action to cause
one person designated by the Agent to be elected to the Board of Directors. At
the date of this Prospectus, the Agent had not designated a nominee for election
as a director.
As of June 30, 1996, there were four market makers in the Company's
securities. Rule 10b-6 may prohibit the Agent from engaging in any market making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by the Agent of the exercise of Redeemable Warrants until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right that the Agent may have to receive fees
for the exercise of the Redeemable Warrants. As a result the Agent may be unable
to provide a market for the Company's securities during certain periods while
the Redeemable Warrants are exercisable. See "The Exchange Offer - Passive
Market Making."
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The foregoing is a summary of certain provisions of the Warrant
Solicitation Agreement and does not purport to be a complete statement of terms
and conditions. Copies of the Warrant Solicitation Agreement described above are
on file with the Commission as exhibits to the registration statement of which
this Prospectus forms a part.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Tenzer Greenblatt LLP, New York, New York.
EXPERTS
The financial statements of the Company for its fiscal years ended May 31,
1994 and 1995 included in this Prospectus and Registration Statement have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the periods set forth in their report and which appear elsewhere
herein and in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Superior for its fiscal year December 31, 1995
included in this Prospectus and the Registration Statement have been audited by
Singer Lewak Greenbaum & Goldstein LLP, independent certified public
accountants, to the extent and for the period set forth in their report
appearing elsewhere herein, and are set forth herein in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a registration statement (the
"Registration Statement"), under the Act with respect to the securities offered
by this Prospectus. This Prospectus, filed as part of such Registration
Statement, does not contain all of the information set forth in, or annexed as
exhibits to, the Registration Statement, certain portions of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and this offering, reference is
made to the Registration Statement, including the exhibits filed therewith,
which may be inspected without charge at the Office of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement may
be obtained from the Commission at its principal office upon payment of
prescribed fees. Statements contained in this Prospectus as to the contents of
any contract or other document are not necessarily complete and, where the
contract or other document has been filed as an exhibit to the Registration
Statement, each statement is qualified in all respects by reference to the
applicable document filed with the Commission.
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INDEX TO FINANCIAL STATEMENTS
Financial Statements of The Company Page No.
Report of BDO Seidman, LLP -- Independent Certified Public
Accountants F-2
Consolidated Balance Sheets -- May 31, 1994 and 1995 and
April 30, 1996 (unaudited) F-3-F-4
Consolidated Statements of Operations--
For the years ended May 31, 1994 and 1995 and the eleven months
ended April 30, 1995 and April 30, 1996 (unaudited) F-5
Consolidated Statements of Changes in Stockholders' Equity
For the years ended May 31, 1994 and 1995 and the eleven months
ended April 30, 1995 and April 30, 1996 (unaudited) F-6
Consolidated Statements of Cash Flows--
For the years ended May 31, 1994 and 1995 and the eleven months
ended April 30, 1995 and April 30, 1996 (unaudited) F-7-F-8
Summary of Significant Accounting Policies F-9-F-11
Notes to Consolidated Financial Statements F-12-F-15
Financial Statements of the Superior
Report of Singer, Lewak, Greenbaum and Goldstein-- Independent
Certified Public Accountants F-16
Balance Sheet -- December 31, 1995 F-17
Income Statement -- For the year ended December 31, 1995 F-18
Statement of Stockholder's Equity -- For the year ended
December 31, 1995 F-19
Statement of Cash Flows -- For the year ended December 31, 1995 F-20
Supplemental Cash Flow Information F-20
Notes To Financial Statements F-21-F-25
Balance Sheet-- June 30, 1996 (unaudited) F-26
Income Statement -- For the eleven months ended June 30, 1996
(unaudited) F-27
Statement of Stockholder's Equity --
For the eleven months ended June 30, 1996 (unaudited) F-28
Statement of Cash Flows -- For the eleven months
ended June 30, 1996 (unaudited) F-29
Supplemental Cash Flow Information F-29
Notes to Financial Statements F-30-F-33
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
American CinemaStores, Inc.
We have audited the accompanying consolidated balance sheets of American
CinemaStores, Inc. and subsidiary as of May 31, 1994 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American CinemaStores, Inc. and subsidiary as of May 31, 1994 and 1995 and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
July 27, 1995, except for Note 7
which is as of June 7, 1996
F-2
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
----------------------- April 30,
1994 1995 1996
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,138,166 $ 618,369 $ 596,459
Marketable securities 1,000,000 2,134,193 --
Accounts receivable -- 23,317 381,646
Inventory 79,019 347,445 124,685
Prepaid and other 39,779 27,776 3,079
---------- ---------- ----------
Total current assets 5,256,964 3,151,100 1,105,869
---------- ---------- ----------
Property and equipment:
Office furnishings and equipment 19,996 132,942 151,306
Automobiles 17,326 17,326 17,326
Leasehold improvements 2,398 5,338 5,338
---------- ---------- ----------
39,720 155,606 173,970
Less accumulated depreciation 2,009 20,153 67,812
---------- ---------- ----------
Property and equipment, net 37,711 135,453 106,158
---------- ---------- ----------
Net assets of discontinued operations (Note 7) 264,842 395,206 --
Deposits and other -- 20,005 165,003
Product licenses -- -- 25,760
---------- ---------- ----------
$5,559,517 $3,701,764 $1,402,790
========== ========== ==========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31,
-------------------------- April 30,
1994 1995 1996
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 62,027 $ 167,621 $ 86,610
Deferred revenue -- 67,500 --
----------- ----------- -----------
Total current liabilities 62,027 235,121 86,610
----------- ----------- -----------
Commitments and contingency (Note 4)
Stockholders' equity (Notes 1, 2 and 3)
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued -- -- --
Common stock, $.001 par value, 15,000,000
shares authorized, 6,095,168, 6,892,638
and 6,892,638 issued and outstanding at
May 31, 1994 and 1995 and April 30, 1996 6,095 6,892 6,892
Additional paid-in capital 6,879,349 7,103,552 7,103,552
Accumulated deficit (1,387,954) (3,643,801) (5,794,264)
----------- ----------- -----------
Total stockholders' equity 5,497,490 3,466,643 1,316,180
----------- ----------- -----------
$ 5,559,517 $ 3,701,764 $ 1,402,790
=========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eleven months ended
Year ended May 31,
-------------------------- April 30, April 30,
1994 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Sales $ -- $ 14,418 $ -- $ 792,503
Cost of sales -- 6,808 -- 435,249
----------- ----------- ----------- -----------
Gross profit -- 7,610 -- 357,254
----------- ----------- ----------- -----------
Selling, general and
administrative expenses -- 477,818 1,136,663 1,587,037
----------- ----------- ----------- -----------
Operating loss from
continuing operations -- (470,208) (1,136,663) (1,229,783)
----------- ----------- ----------- -----------
Other income (expense)
Interest income 33,665 160,765 125,713 81,008
Interest expense (555,563) -- -- --
----------- ----------- ----------- -----------
Total other income
(expense) (521,898) 160,765 125,713 81,008
----------- ----------- ----------- -----------
Loss from continuing operations (521,898) (309,443) (1,010,950) (1,148,775)
Loss from discontinued
operations (Note 7) (715,227) (1,946,404) (745,672) (1,001,689)
----------- ----------- ----------- -----------
Net loss $(1,237,125) $(2,255,847) $(1,756,622) $(2,150,464)
=========== =========== =========== ===========
Net loss per common stock share:
Loss from continuing operations $ (.15) $ (.05) $ (.17) $ (.17)
Loss from discontinued operations (.20) (.31) (.12) (.14)
----------- ----------- ----------- -----------
Net loss per share $ (.35) $ (.36) $ (.29) $ (.31)
=========== =========== =========== ===========
Weighted average common stock
shares outstanding 3,574,253 6,185,790 6,120,622 6,892,638
=========== =========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
-------------------------- Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficiency)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1993 3,417,066 $ 3,417 $ 78,558 $ (150,829) $ (68,854)
Retirement of common
stock (Note 2) (543,624) (544) 544 -- --
Issuance of common stock
for cash (Note 2) 1,726 2 7 -- 9
Issuance of common stock
and warrants pursuant to
initial public offering
(Note 1) 3,220,000 3,220 6,800,240 -- 6,803,460
Net loss -- -- -- (1,237,125) (1,237,125)
----------- ----------- ----------- ----------- -----------
Balance, May 31, 1994 6,095,168 6,095 6,879,349 (1,387,954) 5,497,490
Issuance of common stock
upon exercise of warrants
(Note 2) 75,000 75 224,925 -- 225,000
Issuance of common stock
upon exercise of warrants
(Note 2) 722,470 722 (722) -- --
Net loss -- -- -- (2,255,847) (2,255,847)
----------- ----------- ----------- ----------- -----------
Balance, May 31, 1995 6,892,638 6,892 7,103,552 (3,643,801) 3,466,643
Net loss for eleven months
ended April 30, 1996
(unaudited) (2,150,464) (2,150,464)
----------- ----------- ----------- ----------- -----------
Balance, April 30,
1996 (unaudited) 6,892,638 $ 6,892 $ 7,103,552 $(5,794,265) $ 1,316,179
=========== =========== =========== =========== ===========
</TABLE>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Eleven months ended
Year ended May 31, --------------------------
-------------------------- April 30, April 30,
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Loss from continuing operations $ (521,898) $ (309,443) $(1,010,950) $(1,148,775)
Adjustments to reconcile net loss
from continuing operations to net
cash used in operating activities:
Depreciation and amortization 286,219 70,802 82,315 (8,422)
Allowance for uncollectible accounts -- -- -- 70,644
Increase (decrease) from changes in:
Accounts receivable -- (23,317) (6,213) (428,973)
Inventory (32,432) (268,426) (341,851) 222,760
Prepaids and other (32,929) (8,002) (24,581) 7,319
Accounts payable and accrued
expenses 62,027 105,594 202,916 (81,010)
Deferred revenue -- 67,500 -- (67,500)
Accrued interest (17,000) -- -- --
----------- ----------- ----------- -----------
Net cash used in continuing
operating activities (256,013) (365,292) (1,098,364) (1,433,957)
----------- ----------- ----------- -----------
Loss from discontinued operations (715,227) (1,946,404) (745,672) (1,001,689)
Write-off of fixed assets (Note 7) -- 136,813 -- 457,393
----------- ----------- ----------- -----------
Net cash used in operating
activities (971,240) (2,174,883) (1,844,036) (1,978,253)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Net Investment activity in marketable (1,000,000) (1,134,193) (1,322,545) 2,134,192
securities
Acquisition of property and equipment (257,823) (435,721) (411,603) (24,469)
Acquisition expenditures -- -- -- (153,379)
----------- ----------- ----------- -----------
Net cash used in investing
activities (1,257,823) (1,569,914) (1,734,148) 1,956,344
----------- ----------- ----------- -----------
</TABLE>
F-7
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Eleven months ended
Year ended May 31, --------------------------
-------------------------- April 30, April 30,
1994 1995 1995 1996
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of common
stock 6,568,867 225,000 209,400 --
Proceeds from issuance of warrants 234,602 -- -- --
Repayment of notes payable (1,470,000) -- -- --
----------- ----------- ----------- -----------
Net cash provided by financing
activities 5,333,469 225,000 209,400 --
----------- ----------- ----------- -----------
Net increase (decrease) cash 3,104,406 (3,519,797) (3,368,784) (21,909)
Cash and cash equivalents,
at beginning of period 1,033,760 4,138,166 4,138,166 618,368
----------- ----------- ----------- -----------
Cash and cash equivalents,
at end of period $ 4,138,166 $ 618,369 $ 769,382 $ 596,459
=========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 302,463 $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
Supplemental schedule of noncash
investing and financing activities:
In May 1995, pursuant to an agreement, a warrant holder executed a cashless
exercise of 724,832 warrants for the Company's common stock in exchange for
the surrender and cancellation of 2,362 shares of common stock obtained in
the exercise.
On August 17, 1993, pursuant to an agreement, a former officer voluntarily
surrendered to the Company 543,624 shares of the Company's common stock
held by him. The common stock was subsequently retired by the Company. (see
Note 3).
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
F-8
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Information with Respect to April 30, 1995 and April 30, 1996 is
unaudited)
DESCRIPTION OF BUSINESS AND BASIS OF CONSOLIDATION
American CinemaStores, Inc. (the Company) was incorporated on June 2, 1992.
Principal business operations commenced on May 28, 1993. The Company is engaged
in the installation and operation of mini- stores in movie theatre lobbies and
regional malls from which the Company sells movie related products including
clothing, posters, and toys as well as compact discs of movie soundtracks and
other popular music recordings. The Company also sells certain top selling movie
and music videos.
In the year ended May 31, 1995, the Company established a wholly-owned
subsidiary, Sierra Fixture and Design, Inc. to construct and sell small kiosks,
display booths and other portable store fixtures for use in mall stores.
In November 1995, the Company decided to discontinue all of its retail
operations. See Note 7.
The accompanying consolidated financial statements include the accounts of
American Cinema Stores, Inc. and subsidiary. All significant intercompany
transactions and balances have been eliminated in consolidation.
BASIS OF PRESENTATION
The unaudited interim financial statements for the eleven month periods ended
April 30, 1995 and April 30, 1996 included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of the Company, reflect
all adjustments (consisting only of normal recurring adjustments) and
disclosures which are necessary for a fair presentation. The results of
operations for the eleven month period ended April 30, 1996 is not necessarily
indicative of the results for the full year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company's marketable securities consist of United States Government Treasury
Bills that mature in six months and are stated at cost which approximates
market.
F-9
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Information with Respect to April 30, 1995 and April 30, 1996 is
unaudited)
INVENTORY
Inventory is stated at the lower of cost (first-in/first-out) or market.
Inventory consists solely of purchased goods ready for sale.
EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is being provided on a
straight line basis over the estimated useful lives of the related assets which
range from three to ten years.
REVENUE RECOGNITION POLICY
The Company recognizes revenue at the time products are delivered to customers.
INCOME TAXES
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), Accounting for Income Taxes. SFAS 109
employs an asset and liability approach in accounting for income taxes, the
objective of which is to recognize the amounts of current and deferred tax
payable at the date of the financial statements using the provisions of enacted
tax laws.
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-10
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Information with Respect to April 30, 1995 and April 30, 1996 is
unaudited)
LOSS PER SHARE
Loss per share is based on the weighted average number of shares common stock
outstanding during the period using a treasury stock method, after giving effect
to the stock dividend described in Note 2.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is
effective for financial statements for fiscal years beginning after December 15,
1995. The new standard establishes new guidelines regarding when impairment
losses on long-lived assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how impairment losses
should be measured. The Company does not expect adoption to have a material
effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting
Standards Board (FASB) is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning no later than
December 15, 1995. The new standard establishes a fair value method of
accounting for stock-based compensation plans and for transactions in which an
entity acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide the
required financial statement disclosures. As such, the impact on the Company's
financial position and results of operations is currently unknown. The Company
does not expect adoption to have a material effect on its financial position or
results of operations.
F-11
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with Respect to April 30, 1995 and April 30, 1996 is
unaudited)
NOTE 1 -- INITIAL PUBLIC OFFERING
On March 21, 1994, the Company completed an initial public offering of 1,400,000
shares of its common stock at $5.00 per share (2,800,000 shares at $2.50 per
share as adjusted for the stock dividend described in Note 2) and 1,000,000
redeemable warrants to purchase its common stock at $.25 per redeemable warrant
(2,000,000 redeemable warrants at $.125 per redeemable warrant as adjusted for
the stock dividend described in Note 2) for gross proceeds of $7,250,000. The
redeemable warrants are exercisable for two shares of common stock at any time
until March 13, 1998 at an exercise price of $6.00 per share ($3.00 per share as
adjusted for the stock dividend described in Note 2).
In May 1994, the Company's underwriter exercised its over-allotment option and
the Company issued an additional 210,000 shares of its common stock at $5.00 per
share and 150,000 redeemable warrants at $.25 per redeemable warrant (420,000
shares at $2.50 per share and 300,000 redeemable warrants at $.125 per
redeemable warrant as adjusted for the stock dividend described in Note 2).
The Company received net proceeds of $6,803,460 after payment of the
underwriter's commission and expense allowance and other expenses from the
offering (including the over-allotment).
In May 1993, the Company issued convertible warrants to subscribers for $30,000
which entitled the holders to purchase an aggregate of 1,500,000 shares
(3,000,000 as adjusted for the stock dividend described in Note 2) of the
Company's common stock at $.50 per share. These warrants were automatically
converted into redeemable warrants at the closing date of the initial public
offering and, in May 1994, 1,500,000 redeemable warrants and 1,500,000 shares
((3,000,000 redeemable warrants and 3,000,000 shares as adjusted for the stock
dividend described in Note 2) of the Company's common stock underlying the
redeemable warrants were registered by the Company on behalf of the convertible
warrant holders.
Commencing six months from the close of the offering, September 21, 1994, and up
until their expiration date, the redeemable warrants will be subject to
redemption, at the Company's option, at $.05 per redeemable warrant if the
average closing bid price of the common stock equals or exceeds $3.50 per share
for any 20 consecutive trading days within a period of 30 trading days ending on
the fifth day prior to the date of the notice of redemption.
F-12
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Information with Respect to April 30, 1995 and April 30, 1996 is
unaudited)
NOTE 2 -- OTHER CAPITAL TRANSACTIONS
In April 1993, the Company entered into a registration rights agreement (the
"Agreement") with all of its then current stockholders. In the Agreement, the
Company granted to its stockholders the right to request, on two occasions
during a five year period ending in April 1998, that the Company register the
shares of common stock owned by the stockholders, provided that the Company is
then eligible to use Securities and Exchange Commission Form S-3, which requires
that, among other things, the Company has been a public reporting company for at
least twelve months. The Company's stockholders were also granted certain
piggyback registration rights with respect to the shares of common stock owned
by them during the period commencing twelve months after the consummation of the
proposed public offering and ending seven years after the date of the Agreement.
The Company also entered into a similarly worded registration rights agreement
with the theatre to whom a warrant to purchase the Company's common stock was
issued, as described below.
On August 17, 1993, pursuant to an agreement, an officer agreed to terminate his
relationship with the Company and to voluntarily surrender to the Company
543,624 shares of the Company's common stock held by him. The shares were
subsequently retired by the Company.
On July 19, 1994, the Board of Directors unanimously approved the declaration of
a stock dividend of one share of common stock for each share of common stock
issued and outstanding effective as of August 1, 1994. The stockholder equity
accounts, all per share data, and all applicable disclosures in the notes to the
financial statements, except as otherwise indicated, have been retroactively
adjusted to reflect the stock dividend.
During the year ended May 31, 1995, the Company issued 75,000 shares of its
common stock upon exercise of warrants by warrant holders at $3 per share,
resulting in total proceeds of $225,000 to the Company.
On April 8, 1993, the Company issued a warrant for $100 to purchase 724,832
shares of the Company's common stock at $.0055 per share. The warrant was issued
to one of the theaters with which the Company has an agreement to operate a
mini-store and was exercisable for period of five years. In April 1995, the
Company entered into an amended agreement with the warrant holder allowing the
warrant holder a cashless exercise of the 724,832 warrants in exchange for the
surrender and cancellation of 2,362 shares of the Company's common stock
obtained in the exercise. The warrant was exercised in May 1995.
F-13
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Information with Respect to April 30, 1995 and April 30, 1996 is
unaudited)
NOTE 3 -- STOCK OPTION PLAN
The Company adopted a Stock Option Plan (the "Plan") for officer, employees,
directors, and consultants of the Company or its subsidiaries, if any, which
Plan became effective on November 16, 1993. The Plan authorizes the granting of
stock options to purchase an aggregate of not more than 300,000 shares of the
Company's common stock. As of May 31, 1995, options for 225,000 shares have been
granted, and accordingly, options to purchase 75,000 shares are available for
grant under the Plan. The options granted to the Company's officers can be
exercised at any time during a four year period commencing in November 1994 at
an exercise price of $2.50 per share. The options granted are fully vested.
On July 18, 1994, the Company granted to an officer and a key employee options
to purchase a total of 20,000 shares of the Company's stock at an exercise price
of $2.50 per share. The options are exercisable for a period of four years
beginning July 18, 1995.
On January 17, 1995, the Company granted to the same officer options to purchase
a total of 5,000 shares of the Company's stock at an exercise price of $2.50 per
share. The options are exercisable for a period of four years beginning January
17, 1996.
NOTE 4 -- COMMITMENTS AND CONTINGENCY
The Company has entered into agreements with various theatres allowing the
Company to install and operate its mini-stores in the theatres' lobby. As
consideration for the usage of space, the theatres receive the greater of a
percentage of gross proceeds from sales, usually 5-8%, or a minimum specified
amount, currently $750 to $1,250 per month. As of May 31, 1995, the Company was
operating mini-stores in nine theatres. The agreements expire through May 1996.
The Company leases warehouse space in Los Angeles, California on a
month-to-month basis and has entered into a three-year lease agreement for its
corporate office expiring in February 14, 1998. Minimum future payments for the
corporate office for the month ended May 31, 1996 and for the years ending 1997
and 1998 are $8,735,$104,820 and $78,615.
Rent expense for the years ended May 31, 1994 and 1995 amounted to $71,305 and
$175,739 and for the eleven months ended April 30, 1995 and April 30, 1996
amounted to $155,542 and $249,109.
The Company entered into employment agreements with two of its officers which
were effective on March 21, 1994 and are for a term of three years. The
agreements provide for aggregate base salaries of $125,000 and $100,000 per year
to be paid to the officers, with increases in the second and third years based
on the increases, if any, in the consumer price index. The agreements also
provide for the officers to receive perquisites including the use of an
automobile and life insurance.
In May 1995, the Company entered into an agreement to construct and sell 40
carts to a mall project for a total of $335,000. The Company received a $167,500
advance from the customer, with the remaining balance to be received in
installments through September 1997. The amount was recognized as revenue upon
completion and delivery of the carts during the eleven months ended April 30,
1996.
F-14
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information with Respect to April 30, 1995 and April 30, 1996 is
unaudited)
NOTE 5 -- INCOME TAXES
The components of deferred tax assets are as follows:
Years Ended May 31, Eleven Months
-------------------------- Ended
1994 1995 April 30, 1996
----------- ----------- -----------
Deferred tax assets:
Accounts receivable reserve $ -- $ -- $ 28,470
Accrued vacation -- 7,000 6,177
Inventory reserve 25,450 62,700 13,326
Net operating loss carryforwards 450,230 1,276,404 2,124,629
----------- ----------- -----------
Net deferred tax assets 475,680 1,346,104 2,172,602
Valuation allowance (475,680) (1,346,104) (2,172,602)
----------- ----------- -----------
Total $ -- $ -- $ --
=========== =========== ===========
Due to management not being able to conclude that it is more likely than not
that the deferred tax asset will be realized, a valuation allowance has been
recorded for the full amount.
For federal income tax purposes, the Company has federal net operating loss
carryforwards of $5,497,000 and state net operating loss carryforwards of
$2,748,000 at April 30, 1996. These carryforwards expire in the years 2008 to
2010.
NOTE 6 -- FOURTH QUARTER ADJUSTMENTS AND TRANSACTIONS
During the fourth quarter of the year ended May 31, 1995, the Company recorded
adjustments in the amounts of $80,000 and $136,813 relating to an increase in
the inventory reserve and to a loss on disposition of idle fixed assets. The
adjustment increased net loss by $216,813, or $0.04 per share for that quarter.
NOTE 7 -- DISCONTINUED OPERATIONS
During November, 1995, the Company decided to terminate all of its retail
operations by the end of the fiscal year, May 31, 1996. This includes both
theatre lobby mini-stores as well as the mini-stores in regional malls. This
decision is the result of the retail operation's continued lack of
profitability. The regional mall stores remained open through the Christmas
season. Two of the more profitable stores will remain open through the remainder
of the fiscal year ending May 31, 1996 to liquidate inventory. The Company
considers the fixed assets associated with the retail operation impaired and
therefore these fixed assets were written off during the quarter ended November
30, 1995. The net book value of these fixed assets at November 30, 1995 was
$457,393 and is included in the reported loss of discontinued operations of
$883,930 for the eleven months ended April 30, 1996.
F-15
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Superior/Panoramic Hand Prints, Inc.
We have audited the balance sheet of Superior/Panoramic Hand Prints, Inc. as of
December 31, 1995, and the related income statement, statement of stockholder's
equity, and statement of cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Superior/Panoramic Hand Prints,
Inc. as of December 31, 1995, and the results of its operations and its cash
flows the year then ended December 31, 1995, in conformity with generally
accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 18, 1996
F-16
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
BALANCE SHEET
December 31, 1995
ASSETS (note 4)
Current assets
Accounts receivable ...................................... $ 830,878
Inventories .............................................. 969,312
Advance to stockholder/officer (note 6) .................. 20,000
Prepaid expenses and other current assets ................ 57,080
----------
Total current assets .............................. 1,877,270
Machinery and equipment, net (notes 2 and 3) ................. 886,489
Deposits ..................................................... 27,989
----------
$2,791,748
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt (note 3) ............... $ 221,568
Line of credit-- bank (note 4) ........................... 847,225
Bank overdraft ........................................... 120,723
Accounts payable ......................................... 847,525
Accrued expenses ......................................... 75,343
----------
Total current liabilities ......................... 2,112,384
Long-term debt (note 3) ...................................... 372,084
Commitments and contingencies (note 5)
Stockholder's equity
Common stock, $1 par value, 10,000 shares
authorized, 1,700 issued and outstanding ............... 1,700
Additional paid-in capital ............................... 224,900
Retained Earnings ........................................ 80,680
----------
Total stockholder's equity ........................ 307,280
----------
Total Liabilities and Stockholder's Equity ........ $2,791,748
==========
F-17
See accompanying summary of significant accounting policies and notes to
the financial statements.
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
INCOME STATEMENT
Year ended December 31, 1995
Net sales (note 6) ......................................... $ 8,457,526
Cost of goods sold ......................................... 6,103,283
-----------
Gross profit ............................................... 2,354,243
Selling, general and administrative expenses ............... 2,078,892
-----------
Income from operations ..................................... 275,351
Other income (expense)
Other income ........................................... 2,048
Interest ............................................... (140,404)
-----------
(138,356)
-----------
Net income ................................................. $ 136,995
===========
See accompanying summary of significant accounting policies and notes to
the financial statements.
F-18
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
STATEMENT OF STOCKHOLDER'S EQUITY
Year ended December 31, 1995
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-In (Accumulated
Shares Amount Capital Deficit) Total
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994,
as previously reported .................. 1,700 $ 1,700 $ 170,000 $ 416,923 $ 588,623
Cumulative effect on prior years
of retroactive restatement for
accounting change (note 7) .............. 182,037 182,037
Prior period adjustments (note 7) .......... (655,275) (655,275)
--------- --------- --------- --------- ---------
Balance, December 31, 1994,
as restated ............................. 1,700 1,700 170,000 (56,315) 115,385
Capital contributions ...................... 54,900 54,900
Net income ................................. 136,995 136,995
--------- --------- --------- --------- ---------
Balance, December 31, 1995 ................. 1,700 $ 1,700 $ 224,900 $ 80,680 $ 307,280
========= ========= ========= ========= =========
</TABLE>
See accompanying Summary of significant accounting policies and
notes to consolidated financial statements.
F-19
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
STATEMENT OF CASH FLOWS
Year Ended December 31, 1995
Cash flows from operating activities:
Net income $ 136,995
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 151,378
(Increase) decrease in:
Accounts receivable (78,244)
Inventories 7,660
Prepaid expenses and other current assets (37,553)
Deposits 9,250
Increase in:
Accounts payable 106,050
Accrued expenses 31,110
---------
Net cash provided by operating activities 326,646
---------
Cash flows from investing activities:
Decrease in due from stockholder (20,000)
Purchase of machinery and equipment (36,574)
---------
Net cash used in investing activities: (56,574)
---------
Cash flows from financing activities:
Net increase in line of credit 3,094
Decrease in book overdraft (67,716)
Payments on capitalized leases payable (185,350)
Capital contributions 54,900
Payments on note payable (75,000)
---------
Net cash used in financing activities (270,072)
---------
Net decrease in cash and cash equivalents 0
Cash and cash equivalents, beginning of year 0
---------
Cash and cash equivalents, end of year $ 0
=========
Supplemental Cash Flow Information
Interest paid during the year was $140,404.
No amounts were paid for income taxes during the year.
Non Cash Investing and Financing Activities
The Company acquired $388,327 of machinery and equipment through capitalized
lease obligations.
See accompanying summary of significant accounting policies and notes to
consolidated financial statements.
F-20
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
The Company is primarily engaged in the reproduction and distribution of
custom logos on various types of merchandise on a job order basis.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. At December
31, 1995, the Company had uncollateralized receivables with two customers
which comprised approximately 9% of the Company's accounts receivable.
During the year ended December 31, 1995, sales to these customers were
approximately 18% of the Company's net sales. The Company requires no
collateral from its customers and performs ongoing credit evaluations of its
customers' financial condition.
Inventory
Inventory is stated at the lower of cost or market, cost generally being
determined on a first-in, first-out basis. Inventory primarily consist of
raw materials.
Machinery and Equipment
Machinery and equipment is stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of five to ten
years.
Leasehold improvements are amortized on the straight-line method over the
term of the lease or estimated useful life, whichever is shorter.
Expenditures for maintenance and repairs are charged to operations as
incurred, while renewals and betterments are capitalized.
Equipment Under Capital Leases
The Company capitalizes certain equipment under lease obligations which, by
their terms, are equivalent to installment purchases.
F-21
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Standards
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of" ("SFAS 121") issued by the Financial Accounting Standards Board
("FASB"), is effective for financial statements for fiscal years beginning
after December 15, 1995. The new standard establishes new guidelines
regarding when impairment losses on long-lived assets, which include plant
and equipment, and certain identifiable intangible assets, should be
recognized and how impairment losses should be measured. The Company does
not expect adoption of SFAS 121 to have a material effect on its financial
position or results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), issued by the FASB, is
effective for specific transactions entered into after December 15, 1995,
while the disclosure requirements of SFAS No. 123 are effective for
financial statements for fiscal years beginning no later than December 15,
1995. The new standard establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity
acquires goods or services from nonemployees in exchange for equity
instruments. At the present time, the Company has not determined if it will
change its accounting policy for stock based compensation or only provide
the required financial statement disclosures. As such, the impact on the
Company's financial position and results of operations is currently
unknown. The Company does not expect adoption of SFAS 123 to have a
material effect on its financial position or results of operations.
F-22
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company has elected to be taxed as an S Corporation, whereby the entire
federal and California taxable income or loss of the Company is reportable
by the stockholders. The Company will not be responsible for federal income
taxes or California franchise tax in excess of the minimum tax, but will
incur a 1.5% California surtax.
NOTE 2 -- MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following:
Machinery and equipment (including $709,819
for capitalized leases) ................................. $1,474,845
Office furniture and fixtures .............................. 74,814
Leasehold improvements ..................................... 36,446
Automobiles ................................................ 4,254
----------
1,590,359
Less accumulated depreciation (including
$129,234 for capitalized leases) ......................... 703,870
----------
$ 886,489
==========
NOTE 3 -- LONG-TERM DEBT
Long-term debt consisted of the following:
Note payable-- bank (A) .................................... $ 206,250
Capitalized lease obligations (B) .......................... 387,402
----------
593,652
Current portion ............................................ 221,568
----------
Long-term portion .......................................... $ 372,084
==========
(A) The note payable -- bank is collateralized by certain equipment. The
note is due in monthly principal payments of $6,250, plus interest at
2.25% above the prime interest rate per annum. The interest rate at
December 31, 1995 was 10.75% per annum.
(B) The capitalized lease obligations are collateralized by certain
equipment. The capitalized lease obligations are currently payable in
aggregate monthly installments of $22,124, including interest at
rates ranging from 5% to 15.9% per annum.
F-23
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
NOTE 3 -- LONG-TERM DEBT (continued)
The following is a schedule, by years, of payments under capital lease
obligations and future maturities of long-term debt:
Year Ending Capitalized Long-Term
December 31, Leases Debt
------------ -------- --------
1996 $176,977 $ 75,000
1997 123,971 75,000
1998 55,322 56,250
1999 55,322
2000 41,492
-------- --------
Total payments 453,084 206,250
Less amount representing interest 65,682 0
-------- --------
Present value of payments $387,402 $206,250
======== ========
NOTE 4 -- LINE OF CREDIT
The Company has available a line of credit with total borrowing not to
exceed $1,250,000 including a $200,000 letter of credit commitment and
subject to the Company's compliance of specific financial covenants required
by the lender. The line of credit expires October 1996. The borrowing base
is limited to the sum of 80% of eligible accounts receivable plus 25% (not
to exceed $300,000) of eligible inventory. Interest is at 2.25% above the
prime rate. The interest rate at December 31, 1995 was 10.75% per annum. The
line of credit is secured by all assets of the Company and personally
guaranteed by the shareholders of the Company.
At December 31, 1995, the Company is not in compliance with all financial
covenants. The bank has waived the covenant violations as of
December 31, 1995.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities for its corporate offices and factory
under long-term lease agreements. Minimum annual rental commitments under
these leases are as follows:
Year Ending
December 31,
------------
1996 $174,000
1997 130,000
1998 22,000
--------
$326,000
========
Rent expense was $162,361 for the year ended December 31, 1995.
F-24
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
NOTE 6 -- RELATED PARTY TRANSACTIONS
Sales
The Company manufactures for an affiliated entity, of which the sole
stockholder of the Company is a principal stockholder of such affiliated
entity. Sales to the entity were $44,125 for the year ended December 31,
1995.
Advance to Officer
The amount due from an officer is due on demand and is non-interest-bearing.
NOTE 7 -- PRIOR PERIOD ADJUSTMENTS
Change in Accounting Policy
The accompanying financial statements have been retroactively restated for
the effects of changing the Company's method for depreciating its fixed
assets. The Company changed from income tax accelerated methods previously
used to the straight-line method.
Prior Period Adjustment
Retained earnings at the beginning of 1995 has been adjusted to correct an
error in the valuation of inventory and cutoff of accounts payable. The
effect of the adjustments was to reduce beginning retained earnings by
$655,275.
NOTE 8 -- SIGNIFICANT SALES TO CUSTOMERS
During the period ended December 31, 1995, Superior derived approximately
25% of its recurring sales from two customers. Aprroximately 13% of the
sales received were from Jack Nadel and 12% of recurring sales were from
Idea Man.
F-25
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
BALANCE SHEET
(unaudited)
Eleven Months Ended June 30, 1996
Assets (Note 4)
Current Assets
Accounts receivable 1,596,794
Inventories 1,589,558
Prepaid and other current assets 4,987
----------
Total Current Assets 3,191,339
Property, plant and equipment (Notes 2 & 3) 1,002,319
Deposits 42,352
----------
Total Assets $4,236,010
==========
Liabilities and Stockholder's Equity
Current Liabilities
Line of credit bank 1,249,674
Bank Overdraft 285,395
Accounts payable 1,673,879
Accrued liabilities 11,455
Current portion, long term debt 221,568
----------
Total current liabilities 3,441,971
Long term debt 312,950
Commitment and contingencies (Note 5)
Stockholders' equity
Common stock 1,700
Additional paid in capital 224,900
Retained earnings 254,489
----------
Total Stockholders' Equity 481,089
----------
Total Liabilities and Stockholders' Equity $4,236,010
==========
See accompanying summary of significant accounting
policies and notes to the financial statements.
F-26
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
INCOME STATEMENT
(Unaudited)
Eleven Months Ended June 30, 1996
Net Sales $8,292,721
Cost of goods sold 5,517,432
----------
Gross profit 2,775,289
Selling, general and administrative expenses 2,488,478
----------
Income from operations 286,811
Other interest expense 136,216
----------
Net income $ 150,595
==========
See accompanying summary of significant accounting
policies and notes to the financial statements.
F-27
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(unaudited)
Eleven Months Ended June 30, 1996
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-In Retained
Shares Amount Capital Earnings Total
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, August 1, 1995 1,700 $ 1,700 $224,900 $103,894 $330,494
Net Income -- -- -- $150,595 $150,595
-------- -------- -------- -------- --------
Balance, June 30, 1996 1,700 $ 1,700 $224,900 $254,489 $481,089
======== ======== ======== ======== ========
</TABLE>
See accompanying Summary of significant accounting policies
and notes to the financial statements.
F-28
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS INC.
STATEMENT OF CASH FLOWS
(unaudited)
Eleven Months Ended June 30, 1996
Cash flows from operating activities:
Net income $ 150,595
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 142,211
(Increase) decrease in:
Accounts receivable (367,115)
Inventories (234,990)
Prepaid expenses and other current assets 16,788
Increase in:
Accounts payable 1,025,543
Accrued expenses (729,308)
---------
Net cash provided by operating activities 3,724
---------
Cash flows from investing activities:
Decrease in due from stockholder 20,000
Purchase of machinery and equipment (181,830)
---------
Net cash used in investing activities: (161,830)
---------
Cash flows from financing activities:
Net increase in line of credit 289,153
Increase in bank overdraft 129,493
Payments on capitalized leases payable (191,790)
Payments on note payable (68,750)
---------
Net cash provided by financing activities 158,106
---------
Net decrease in cash and cash equivalents 0
Cash and cash equivalents, August 1, 1995 0
---------
Cash and cash equivalents, June 30, 1996 $ 0
=========
Supplemental Cash Flow Information
Interest paid during the year was $136,216.
No amounts were paid for income taxes during the year.
Non Cash Investing and Financing Activities
The Company acquired $338,327 of machinery and equipment through capitalized
lease obligations.
F-29
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ELEVEN MONTHS ENDED JUNE 30, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
The Company is primarily engaged in the reproduction and distribution of
custom logos on various types of merchandise on a job order basis.
Basis of Presentation
The unaudited interim financial statements for the eleven month period ended
June 30, 1996 have been prpared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission and, in the
opinion of the Company, reflect all adjustments (consisting only of normal
recurring adjustments) and disclosures which are necessary for a fair
presentation. The results of operations for the eleven month period ended June
30, 1996 is not necessarily indicative of the results for a full year.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. At June 30, 1996,
the Company had uncollateralized receivables with two customers which comprised
approximately 9% of the Company's accounts receivable. During the eleven months
ended June 30, 1996, sales to these customers were approximately 18% of the
Company's net sales. The Company requires no collateral from its customers and
performs ongoing credit evaluations of its customers' financial condition.
Inventory
Inventory is stated at the lower of cost or market, cost generally being
determined on a first-in, first-out basis. Inventory primarily consist of raw
materials.
Machinery and Equipment
Machinery and equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of five to ten years.
Leasehold improvements are amortized on the straight-line method over the term
of the lease or estimated useful life, whichever is shorter.
Expenditures for maintenance and repairs are charged to operations as incurred,
while renewals and betterments are capitalized.
Equipment Under Capital Leases
The Company capitalizes certain equipment under lease obligations which, by
their terms, are equivalent to installment purchases.
F-30
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ELEVEN MONTHS ENDED JUNE 30, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company has elected to be taxed as an S Corporation, whereby the entire
federal and California taxable income or loss of the Company is reportable
by the stockholders. The Company will not be responsible for federal income
taxes or California franchise tax in excess of the minimum tax, but will
incur a 1.5% California surtax.
NOTE 2 -- MACHINERY AND EQUIPMENT
Machinery and equipment consist of the following:
Machinery and equipment (including $709,819
for capitalized leases) $1,655,292
Office furniture and fixtures 74,814
Leasehold improvements 36,446
Automobiles 4,254
----------
1,770,806
Less accumulated depreciation 768,487
----------
1,002,319
NOTE 3 -- LONG-TERM DEBT
Long-term debt consisted of the following:
Payable-- bank (A) $ 168,750
Capitalized lease obligations (B) 365,768
----------
534,518
Current portion 221,568
----------
Long-term portion $ 312,950
==========
(A) Payable to bank is collateralized by certain equipment. The note is
due in monthly principal payments of $6,250, plus interest at 2.25%
above the prime interest rate per annum. The interest rate at
December 31, 1995 was 10.75% per annum.
(B) The capitalized lease obligations are collateralized by certain
equipment. The capitalized lease obligations are currently payable in
aggregate monthly installments of $22,124, including interest at
rates ranging from 5% to 15.9% per annum.
F-31
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ELEVEN MONTHS ENDED JUNE 30, 1996
NOTE 3 -- LONG-TERM DEBT (continued)
The following is a schedule, by years, of payments under capital lease
obligations and future maturities of long-term debt:
Year Ending Capitalized Long-Term
December 31, Leases Debt
------------ -------- --------
1996 (six months) $130,302 $ 37,500
1997 123,971 75,000
1998 55,322 56,250
1999 55,322
2000 41,492
-------- --------
Total payments 406,382 168,750
Less amount representing interest 40,682 0
-------- --------
Present value of payments $365,768 $168,750
======== ========
NOTE 4 -- LINE OF CREDIT
The Company has available a line of credit with total borrowing not to
exceed $1,250,000 including a $200,000 letter of credit commitment and
subject to the Company's compliance of specific financial covenants required
by the lender. The line of credit expires October 1996. The borrowing base
is limited to the sum of 80% of eligible accounts receivable plus 25% (not
to exceed $300,000) of eligible inventory. Interest is at 2.25% above the
prime rate. The interest rate at December 31, 1995 was 10.75% per annum. The
line of credit is secured by all assets of the Company and personally
guaranteed by the shareholders of the Company.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities for its corporate offices and factory
under long-term lease agreements. Minimum annual rental commitments under
these leases are as follows:
Year Ending
December 31,
------------
1996 (six months) $ 87,000
1997 130,000
1998 22,000
--------
$239,000
========
Rent expense was $154,650 for the eleven months ended June 30, 1996.
F-32
<PAGE>
SUPERIOR/PANORAMIC HAND PRINTS, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
ELEVEN MONTHS ENDED JUNE 30, 1996
NOTE 6 -- RELATED PARTY TRANSACTIONS
Sales
The Company manufactures for an affiliated entity, of which the sole
stockholders of the Company is a principal stockholder of such affiliated
entity. There were no sales to the entity for the eleven months ended June
1996.
F-33
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by the Company, the Selling
Stockholders or any Underwriter. This Prospectus does not constitute an offer to
sell or the solicitation of an offer to buy and security other than the Common
Stock offered by this Prospectus, or an offer to sell or a solicitation of an
offer to buy any security by any person in any jurisdiction in which such offer
or solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, imply that the
information in this Prospectus is correct as of any time subsequent to the date
of this Prospectus.
-----------------
TABLE OF CONTENTS
Page
----
Available Information................................................
Prospectus Summary...................................................
Risk Factors.........................................................
Exercise Offer.......................................................
Use of Proceeds......................................................
Capitalization.......................................................
Selected Financial Information.......................................
Pro Form Financial Statement.........................................
Management's Discussion and Analysis.................................
Business.............................................................
Management...........................................................
Principal Stockholders...............................................
Certain Transactions.................................................
Description of Securities............................................
Indemnification .....................................................
Plan of Distribution.................................................
Legal Matters........................................................
Experts..............................................................
Index to Financial Statements........................................
================================================================================
================================================================================
AMERICAN CINEMASTORES, INC.
PROSPECTUS
[ ], 1996
Certificates for Redeemable Warrants, with the subscription forms thereon duly
completed and executed, payment of the exercise price for such Redeemable
Warrants and any other required documents should be sent or delivered by the
Holders thereof or his broker, commercial bank, trust company or other nominees
to the Warrant Agent as follows:
By Mail or Overnight Courier:
Continental Stock Transfer & Trust Company
19th Floor
2 Broadway
New York, New York 10004
Attention: Corporate Trust Department
By Hand:
Continental Stock Transfer & Trust Company
19th Floor
2 Broadway
New York, New York 10004
Attention: Corporate Trust Department
Telephone: (212) 509-4000, Ext. 253
By Facsimile: (212) 509-5150
Wire Transfer Instructions:
ABA No.:
Re: Account No.:
================================================================================
THE BOSTON GROUP, L.P.
Solicitation Agent
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
provides for the indemnification of officers and directors under certain
circumstances against expenses incurred in successfully defending against a
claim and authorizes Delaware corporations to indemnify their officers and
directors under certain circumstances against expenses and liabilities incurred
in legal proceedings involving such persons because of their being or having
been an officer or director.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit director's liability to the corporation and its stockholders for
monetary damages arising out of certain alleged breaches of their fiduciary
duty. Section 102(b)(7) provides that no such limitation of liability may affect
a director's liability with respect to any of the following: (i) breaches of the
director's duty of loyalty to the corporation or its stockholders; (ii) acts or
omissions not made in good faith or which involve intentional misconduct of
knowing violations of law; (iii) liability for dividends paid or stock
repurchased or redeemed in violation of the Delaware General Corporation Law; or
(iv) any transaction from which the director derived an improper personal
benefit. Section 102(b)(7) does not authorize any limitation on the ability of
the corporation or its stockholders to obtain injunctive relief, specific
performance or other equitable relief against directors.
Article Nine of the Company's Certificate of Incorporation and the
Company's By-laws provide that all persons who the Company is empowered to
indemnify pursuant to the provisions of Section 145 of the General Corporation
law of the State of Delaware (or any similar provision or provisions of
applicable law at the time in effect), shall be indemnified by the Company to
the full extent permitted thereby. The foregoing right of indemnification shall
not be deemed to be exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
Article Ten of the Company's Certificate of Incorporation provides that no
director of the Company shall be personally liable to the Company or its
stockholders for any monetary damages for breaches of fiduciary duty of loyalty
to the Company or its stockholders' (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing -violation of law; (iii)
under Section 174 of the General Corporation of Law of the state of Delaware; or
(iv) for any transaction from which the director derived an improper personal
benefit.
Section 7 of the Underwriting Agreement dated March 14, 1994 among the
Company, A.S. Goldman, Inc. and Shoenberg, Hieber Inc. provides for the
indemnification of the Company's officers, directors and control persons under
certain circumstances.
Item 25. Other Expenses of Issuance and Distribution
Expenses payable by Registrant in connection with the issuance and
distribution of the securities being registered (estimated, except in the case
of the registration fee) are as follows:
SEC registration fee .............................. $5,842.76*
NASDAQ filing fees ................................ **
Warrant Agent's fees and expenses ................. 5,000
Reproduction ...................................... 10,000
Legal fees and expenses ........................... 150,000
Accounting fees and expenses ...................... 50,000
Blue Sky fees and expenses (including counsel fees) 10,000
Miscellaneous expenses ............................ 10,000
---------
Total ............................................. $ **
=========
* Previously paid
** To be completed by amendment
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Since July 1, 1993, the Company has sold or issued the following
unregistered securities: Unless otherwise indicated, all share and per share
information gives effect to a stock dividend of one share of Common Stock for
each share of Common Stock outstanding on August 1, 1994, which was effected in
August 1994.
In November 1993, the Company sold 1,208 shares of Common Stock to Steven
Natale for $.005 per share and 518 shares of Common Stock to Gill Champion for
$.005 per share.
In August 1994, the Company distributed to holders of record of its Common
Stock on August 1, 1994, a stock dividend of one share of Common Stock for each
share of Common Stock issued and outstanding on that date. Accordingly, the
Company issued to such holders an aggregate of [ ] shares of Common Stock to
such holders.
From the effective date of the Company's 1993 Stock Option Plan in November
1993 through June 30, 1996, the Company has granted to officers and key
employees of the Company, options to purchase an aggregate of 425,000 shares of
Common Stock at exercise price of $2.50 per share. Such options, when granted,
were exercisable over a period of four years. Options to purchase an aggregate
of [ ] shares of Common Stock are currently outstanding.
In May 1995, the Company issued an aggregate of 724,832 shares of Common
Stock upon exercise of warrants issued to the holder thereof in April 1993. In
connection with such exercise, the Company accepted for cancellation in exchange
for such warrants, 2,362 shares of Common Stock obtained by such holder upon
exercise of the warrants.
During the fiscal year ended May 31, 1995, the Company may have issued up
to 60,000 shares of Common Stock upon the exercise of Redeemable Warrants, at
times when the prospectus intended to cover such exercises was not current.
Except for up to 60,000 shares of Common Stock issued upon exercise of
Redeemable Warrants, the securities issued in the above transactions were not
subject to registration under the Securities Act of 1933, as amended (the
"Securities Act"), because either no sale of securities was involved (in the
case of the distribution of the stock dividend described above), or because the
transaction was exempt from registration under Section 4(2) of the Securities
Act.
II-2
<PAGE>
Item 27. Exhibits
(a) Exhibits
Exhibit No. Description
----------- -----------
1.1 Form of Underwriting Agreement. (1)
1.2 Form of Warrant Solicitation Agreement.*
2.1 Agreement and Plan of Merger, dated as of June
19, 1996, by and among the Company, its
subsidiary, Superior, Strem and the Superior
Stockholder (the "Superior Merger Agreement"). (2)
2.2 Omitted Schedules and Exhibits of the Superior
Merger Agreement.
2.3 Agreement and Plan of Merger, dated as of June
19, 1996, by and among the Company, its
subsidiary, JJC, the Target Company
Stockholders, and the Principals (the "JJC Merger
Agreement").(2)
2.4 Omitted Schedules and Exhibits of the JJC Merger
Agreement.
2.5 Amendment No. 1 to Superior Merger Agreement.
2.6 Amendment No. 1 to JJC Merger Agreement.
3.1 Certificate of Incorporation of the Company, as
amended.(1)
3.2 By-Laws of the Company.(1)
4.1 Specimen Common Stock Certificate.(1)
4.2 Form of Warrant Agreement between the Company
and Continental Stock Transfer & Trust Company,
including form of Redeemable Warrant.(1)
4.3 Letter amendment to Warrant Agreement between the Company
and the Warrant Agent.
4.4 Form of Underwriters' Warrant Agreement,
including form of Underwriters' Warrant.(1)
4.5 Form of Officer's Certificate authorizing adjustment of
Purchase Price of Warrant.
5.1 Opinion of Tenzer & Greenblatt, LLP as to the
legality of the securities being offered.
10.1 Employment Agreement, dated November 19, 1993,
between the Company and Steven Natale.(1)
10.2 Employment Agreement, dated November 19, 1993,
between the Company and Gill Champion.(1)
10.3 Letter Agreement, dated June 25, 1996, with Gill
Champion regarding termination of his
employment agreement.
10.4 Confidentiality Agreement, dated as of March __, 1996,
among the Company, JJC, Superior and the Principals.
10.5 Form of Employment Agreement between the Company and
Robert J. Strem.
10.6 Form of Employment Agreement between the Company
and Bruce Sacks.
10.7 Form of Employment Agreement between the Company and
Christopher J. Ebert.
10.8 Form of Registration Rights Agreement, dated April 8,
1993, between the Company and the stockholders
of the Company listed on the signature page
thereto.(1)
10.9 Form of Registration Rights Agreement between the
Company and the Superior Stockholder.(2)
10.10 Form of Registration Rights Agreement between the Company
and the Target Company Stockholders.(2)
II-3
<PAGE>
Exhibit No. Description
----------- -----------
10.11 Form of Cross-Indemnification Agreement among the
Company and each of Strem and Janet Strem.(2)
10.12 Form of Cross-Indemnification Agreement among the
Company and each of Strem, Janet Strem, Sacks and
Sharon Sacks.(2)
10.13 Form of Lock-up Agreement by and among Natale,
the Superior Stockholder and the Company.(2)
10.14 1993 Stock Option Plan.(1)
10.15 Amendment to 1993 Stock Option Plan.*
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Singer, Lewak, Greenbaum & Goldstein,
LLP.
23.3 Consent of Tenzer & Greenblatt, LLP (included in
Exhibit 5).
24.1 Power of Attorney (see signature page of
Registration Statement on Form SB-2 filed on
December 3, 1993).
27.1 Financial Data Schedule.
- ----------
* To be supplied by amendment.
(1) Previously supplied in the Company's Registration Statement on
Form SB-2 filed December 3, 1993 (Registration No. 33-72490-LA).
(2) Incorporated by reference to the Company's Current Report on Form 8-K
filed June 28, 1996.
II-4
<PAGE>
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows:
(a) To file, during any period in which the registrant offers or
sells securities, a post-effective amendment(s) to this
Registration Statement:
(1) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(2) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the Registration Statement; and
(3) To include any additional or changed material information
with respect to the plan of distribution;
(b) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering;
(c) The registrant will provide to the underwriters at the closing
specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; and
(d) For determining liability under the Securities Act, the
registrant will treat each post-effective amendment as a new
registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona
fide offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 22, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this Post- Effective
Amendment No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica, State of
California, on the 22th day of June, 1996.
AMERICAN CINEMASTORES, INC.
By: /s/ Steve Natale
-------------------------------------
Steve Natale, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated:
Signature Title Date
--------- ----- ----
/s/ Steve Natale President, Chief June 22, 1996
- --------------------- Operating Officer,
Steve Natale Treasurer (principal
accounting officer)
and Director
/s/ * Chairman of the Board, June 22, 1996
- ---------------------- Chief Executive Officer,
Gill Champion Secretary and Director
/s/ Christopher Ebert Chief Financial Officer June 22, 1996
- ---------------------- (principal financial
Christopher Ebert officer)
By: /s/ Steve Natale
- ----------------------
Steve Natale, as
Attorney-in-fact pursuant
to power of attorney
previously filed
Exhibit 2.2
LIST OF OMITTED SCHEDULES/EXHIBITS
TO SUPERIOR MERGER AGREEMENT
Except as otherwise indicated herein, the list identifies schedules and
exhibits annexed to the Merger Agreement but omitted from this filing. In
accordance with Regulation S-X, Item 601, copies of any such schedule or exhibit
will be furnished to the Securities and Exchange Commission upon request.
Exhibit/Schedule Brief Description
- ---------------- -----------------
Exhibit 1.2 Agreement of Merger
Exhibit 1.4(a) Articles of Incorporation
Exhibit 1.4(b) By-Laws of Subsidiary
Exhibit 2.7(a) Draft Audit Financial Statements
Exhibit 2.7(b) Audited Financial Statements
Exhibit 6.1(h) Opinion of Sheppard, Mullin, Richter &
Hampton LLP
Exhibit 6.2(d) Opinion of Tenzer Greenblatt LLP
Schedule 2.6 Conflicts
Schedule 2.8 Personal Guaranties
Schedule 2.10 Properties
Schedule 2.13 Litigation
Schedule 2.17 Insurance
Schedule 2.18 Banks; Power of Attorneys
Schedule 2.19 Employee Agreements
Schedule 2.21 Distributorships/Franchises
Schedule 2.22 Contracts
Schedule 2.23 Customers/Suppliers
Schedule 2.25 Approvals and Consents
Schedule 3.1 Jurisdictions
Schedule 3.2 Subsidiaries
Schedule 3.4 Capitalization
Schedule 3.6 ASCI Conflicts
Schedule 3.12 Properties
Schedule 3.15 Trademarks
Schedule 3.17 Insurance
Schedule 3.18 Banks; Power of Attorneys
Schedule 3.19 Employee Agreements
Schedule 3.20 Business Matters
Schedule 3.21 Contracts
Schedule 3.22 Approvals and Consents
Exhibit 2.4
LIST OF OMITTED SCHEDULES/EXHIBITS
TO JJC MERGER AGREEMENT
Except as otherwise indicated herein, the list identifies schedules and
exhibits annexed to the Merger Agreement but omitted from this filing. In
accordance with Regulation S-X, Item 601, copies of any such schedule or exhibit
will be furnished to the Securities and Exchange Commission upon request.
Exhibit/Schedule Brief Description
- ---------------- -----------------
Exhibit 1.2 Agreement of Merger
Exhibit 1.4(a) Articles of Incorporation
Exhibit 1.4(b) By-Laws
Exhibit 2.7 JJC Financial Statements
Exhibit 6.1(g) Opinion of Sheppard, Mullin, Richter &
Hampton LLP
Exhibit 6.2(d) Opinion of Tenzer Greenblatt LLP
Schedule 2.6 Conflicts
Schedule 2.8 Personal Guaranties
Schedule 2.10 Properties
Schedule 2.13 Litigation
Schedule 2.17 Insurance
Schedule 2.18 Banks; Power of Attorneys
Schedule 2.19 Employee Agreements
Schedule 2.21 Distributorships/Franchises
Schedule 2.22 Contracts
Schedule 2.23 Customers/Suppliers
Schedule 2.25 Approvals and Consents
Schedule 3.1 Jurisdictions
Schedule 3.2 Subsidiaries
Schedule 3.4 Capitalization
Schedule 3.6 JJC Conflicts
Schedule 3.12 Properties
Schedule 3.15 Trademarks
Schedule 3.17 Insurance
Schedule 3.18 Banks; Power of Attorneys
Schedule 3.19 Employee Agreements
Schedule 3.20 Business Matters
Schedule 3.21 Contracts
Schedule 3.22 Approvals and Consents
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
1. Each of the undersigned are the only parties to that certain Agreement and
Plan of Merger dated as of June 19, 1996, among (a) American CinemaStores,
Inc., (b) ASCI/SPI Acquisition Corp., (c) Superior/Panoramic Hand Prints
Inc., (d) Robert J. Strem, and (e) Robert J. Strem and Janet C. Strem, as
Trustees of the Strem Family 1993 Trust U/T/A 11/9/93 (the "Agreement").
2. Each of the undersigned hereby agrees that the Agreement is hereby amended
as follows:
"In each of Sections 5.14, 6.1(k), 6.2(g), 7 (paragraph 1), and
9.1(b)(i) of the Agreement, the date "July 31, 1996" is deleted and
replaced with the date "August 31, 1996."
3. The Agreement, as so amended by this Amendment No. 1, remains in full force
and effect.
Dated: July __, 1996
AMERICAN CINEMASTORES, INC.
By: /s/ Steve Natale
------------------------------
Steve Natale, President
ASCI/SPI ACQUISITION CORP.
By: /s/ Steve Natale
------------------------------
Steve Natale, President
SUPERIOR/PANORAMIC HAND PRINTS INC.
By: Robert J. Strem
------------------------------
Robert J. Strem, President
THE STREM FAMILY 1993 TRUST
U/T/A 11/9/93
By: Robert J. Strem
------------------------------
Robert J. Strem, Trustee
By: Janet C. Strem
------------------------------
Janet C. Strem, Trustee
By: Robert J. Strem
------------------------------
Robert J. Strem
AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
1. Each of the undersigned are the only parties to that certain Agreement and
Plan of Merger dated as of June 19, 1996, among (a) American CinemaStores,
Inc., (b) JJI/ASCI Acquisition Corp., (c) Just Jackets Corporation, (d)
Robert J. Strem, (e) Robert J. Strem and Janet C. Strem, as Trustees of the
Strem Family 1993 Trust U/T/A 11/9/93, (f) Bruce Sacks, and (g) Bruce Sacks
and Sharon Sacks, as Trustees of the Bruce and Sharon Sacks Family
Trust -- 1990 U/T/A 4/13/90 (the "Agreement").
2. Each of the undersigned hereby agrees that the Agreement is hereby amended
as follows:
"In each of Sections 5.13, 6.1(j), 6.2(g), 7 (paragraph 1), and
8.1(b)(i) of the Agreement, the date "July 31, 1996" is deleted and
replaced with the date "August 31, 1996."
3. The Agreement, as so amended by this Amendment No. 1, remains in full force
and effect.
Dated: July __, 1996
AMERICAN CINEMASTORES, INC.
By: /s/ Steve Natale
------------------------------
Steve Natale, President
JJI/ASCI ACQUISITION CORP.
By: /s/ Steve Natale
------------------------------
Steve Natale, President
JUST JACKETS CORPORATION
By: Robert J. Strem
------------------------------
Robert J. Strem, President
THE STREM FAMILY 1993 TRUST
U/T/A 11/9/93
By: Robert J. Strem
------------------------------
Robert J. Strem, Trustee
By: Janet C. Strem
------------------------------
Janet C. Strem, Trustee
By: Robert J. Strem
------------------------------
Robert J. Strem
THE BRUCE AND SHARON SACKS FAMILY
TRUST -- 1990 U/T/A 4/13/90
By: Bruce Sacks
------------------------------
Bruce Sacks, Trustee
By: Sharon Sacks
------------------------------
Sharon Sacks, Trustee
By: Bruce Sacks
------------------------------
Bruce Sacks
[LOGO]
AMERICAN
CINEMASTORES, INC.
March 12, 1996
Mr. Stuart Winkler
Vice President
A.S. Goldmen & Co., Inc.
45 Broadway
New York, New York 10006
Dear Stuart:
As you know, American CinemaStores, Inc. ("CinemaStores") is explorinq the
possibility of issuing additional equity or debt securities in connection with
its anticipated financing activities.
We would like to ask for your cooperation in connection with CinemaStore's
future financing activities. Our lawyers have indicated that there are certain
provisions in the Underwriting Agreement among CinemaStores, A.S. Goldmen & Co.,
Inc. ("Goldmen") and Shoenberg, Hieber Inc. ("Shoenberg"), dated March 14, 1994
(the "Underwriting Agreement") and in the Warrant Agreement between CinemaStores
and Continental Stock Transfer & Trust Company dated as of March 14, 1994 (the
"Warrant Agreement") that could raise issues in CinemaStore's future financing
activities.
We request A.S. Goldmen's agreement, by signing below, to the amendment of
the Underwriting Agreement to delete the following sections of the Underwriting
Agreement:
1. Section 4(q), which provides as follows:
"For a period of five (5) years from the Closing Date, the Company shall
furnish to the Underwriters at the Company's sole expense, daily
consolidated transfer sheets relating to the Common Stock and the
Redeemable Warrants."
2. Section 4(w), which provides as follows:
"For a period of five (5) years after the effective date of the
RegistratiOn Statement, the Company shall cause one (1) individual selected
by Goldmen, to be elected to the Board of Directors of the Company (the
"Board"), it requested by Goldmen. In the event Goldmen shall not have
designated such individual at the time of any meeting of the Board or such
person
1543 7th Street, Suite 400, Santa Monica, CA 90401
Phone (310) 394-6444 Fax (310) 394-3464
<PAGE>
has not been elected or is unavailable to serve, the Company shall notify
Goldmen of each meeting of the Board, provided that such attendee agrees to
maintain the confidentiality of any information transmitted at such
meeting. An individual selected by Goldmen and reasonably acceptable to the
Company shall be permitted to attend all meetings of the Board and to
receive all notices and other correspondence and communications sent by the
Company to members of the Board, provided that such attendee agrees to
maintain the confidentiality of any information transmitted at such
meeting. The Company further agrees to provide its outside Directors with
compensation as deemed appropriate and customary for similar companies. The
Company shall reimburse Goldmen's designee for his or her out-of-pocket
expenses reasonably incurred in connection with his or her attendance of
the Board meetings."
3. Section 4(x), which provides as follows:
"Commencing one year from the date hereof, the Company shall pay Goldmen a
commission equal to four percent (4%) of the exercise price of the
Redeemable Warrants, payable on the date of the exercise thereof on terms
provided in the Warrant Agreement. The Company will not solicit the
exercise of the Redeemable Warrants other than through Goldmen."
4. Section 4(y), which provides as follows:
"For a period of five (5) years after the effective date of the
Registration Statement the Company shall, at the Company's sole expense,
(i) provide the Underwriters, at either of the Underwriter's request, with
a Blue-Sky "Trading Survey" for secondary sales of the Company's securities
prepared by counsel to the Company, and (ii) take all necessary and
appropriate actions to further qualify the Company's securities in all
jurisdictions of the United States in order to permit secondary sales of
such securities pursuant to the Blue-Sky laws of those jurisdictions,
provided that such jurisdictions do not require the Company to qualify as a
foreign corporation or to file a general consent to service of process. In
the event that the Company does not comply with the provisions of this
subsection (y), the Company authorizes Underwriters' Counsel to take all
necessary and appropriate actions to comply with the provisions of this
subsection (y), at the Company's sole expense, payable in advance."
In the Warrant Agreement, we request that A.S. Goldmen agree, by signing
below, that this letter will constitute its written consent, pursuant to Section
11 of the Warrant Agreement,
<PAGE>
to any modification, amendment or supplement of the Warrant Agreement that
CinemaStore may enter into with the Warrant Agent, Continental Stock Transfer &
Trust Company, and to the amendment of the Warrant Agreement to delete Section
4(b) (payment of commissions to Goldmen on exercise of Redeemable Warrants),
Section 9(c)(iv) (notification to holders that Goldmen is the Company's
exclusive warrant solicitation agent), 9(f) (procedures in a redemption) and the
last sentence of Section 11 (consent of Goldmen to modifications of Warrant
Agreement).
If the foregoing is acceptable, please sign where indicated below and
return a copy to me at your earliest convenience.
Please call me if you have any questions. Thank you again for your help.
Sincerely,
/s/ Steven Natale
-----------------------------------
Steven Natale
President and Chief Operating
Officer
For good and valuable
consideration, confirmed
and accepted as of the date
first above written:
A.S. GOLDMEN & CO., INC.,
For itself and as the
representative of
Shoenberg, Hieber Inc.
By: /s/ Stuart Winkler
----------------------
Stuart Winkler
Vice President
AMERICAN CINEMASTORES INC.
OFFICER'S CERTIFICATE
The undersigned, Steven Natale, President of American CinemaStores Inc., a
Delaware corporation (the "Company"), pursuant to Section 8(e) of the Warrant
Agreement dated as of March 14, 1994 (the "Warrant Agreement"), as amended,
between the Company and Continental Stock Transfer & Trust Company, a New York
corporation (the "Warrant Agent"), and the Company, HEREBY CERTIFIES AS FOLLOWS:
(i) the adjusted Purchase Price (as defined in the Warrant Agreement) of
each redeemable warrant ("Warrant") is $[____] pursuant to the Exercise Offer
set forth in the Prospectus dated [________________] 1996, a copy of which is
attached hereto;
(ii) after such adjustment, each Warrant shall be exercisable for two (2)
shares of the Company's common stock, par value, $.001 per share;
(iii) the Company is adjusting the price of the Warrants in order to enable
the holders of the Warrants to exercise their Warrants at a price comparable to
the fair market value of the underlying Shares.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this ___
day of [______], 1996.
------------------------------
Name: Steven Natale
Title: President
July __, 1996
American CinemaStores, Inc.
1543 7th Street, Suite 400
Santa Monica, CA 90401
Gentlemen:
You have requested our opinion with respect to the offer and sale by you,
American CinemaStores, Inc., a Delaware corporation (the "Company"), pursuant to
a Post-Effective Amendment No. 1 to the Registration Statement (the "First
Amended Registration Statement") on Form SB-2 under the Securities Act of 1933,
as amended (the "Act"), of up to 5,225,000 shares (the "Shares") of Common
Stock, par value $.001 per share, of the Company, issuable upon exercise of
redeemable warrants (the "Warrants") issued by the Company, which Shares are
registered pursuant to a registration statement, which became effective March
14, 1994.
We have examined originals, or copies certified or otherwise identified to
our satisfaction, of such documents and corporate and public records as we deem
necessary as a basis for the opinion hereinafter expressed. With respect to such
examination, we have assumed the genuineness of all signatures appearing on all
documents presented to us as originals, and the conformity to the originals of
all documents presented to us as conformed or reproduced copies. Where factual
matters relevant to such opinion were not independently established, we have
relied upon certificates of executive officers and responsible employees and
agents of the Company.
Based upon the foregoing, it is our opinion that the Shares have been duly
and validly authorized and when sold, paid for and issued as contemplated by the
First Amended Registration Statement and the Plan Options will be duly and
validly issued and fully paid and nonassessable.
<PAGE>
American CinemaStores, Inc.
July __, 1996
Page 2
We hereby consent to the use of this opinion as Exhibit 5 to the First
Amended Registration Statement, and to the use of our name as your counsel in
connection with the First Amended Registration Statement and in the Prospectus
forming a part thereof. In giving this consent, we do not thereby concede that
we come within the categories of persons whose consent is required by the Act or
the General Rules and Regulations promulgated thereunder.
Very truly yours,
/s/ Tenzer Greenblatt LLP
TENZER GREENBLATT LLP
American CinemaStores, Inc.
1543 7th Street, Suite 400
Santa Monica, CA 90401
June 25, 1996
Mr. Gill Champion
9880 Vidor Drive, Unit 303
Los Angeles, CA 90035
Re: Settlement Agreement between Gill Champion and American
CinemaStores, Inc.
Dear Mr. Champion:
You and American CinemaStores, Inc. (the "Company") have agreed to terms
regarding your termination as an officer and director of the Company, effective
as of the closing of the proposed merger between wholly-owned subsidiaries of
the Company and each of Superior/Panoramic Hand Prints Inc. and Just Jackets
Corporation (the "Mergers"), upon the terms and conditions hereinafter set
forth. The following shall therefore constitute our complete understanding and
agreement with respect to the settlement of any disputes between You and the
Company in this regard.
1. If the Mergers had occurred on June 15, 1996, You and the Company
previously had agreed that the following sums would be payable to You between
June 15, 1996 and March 15, 1997, the day your employment contract of November
19, 1993 would have expired under its own terms:
a. Salary (S10,417/mo. @ 9 mos.) ...................... $ 93,753.00
b. 1996 Vacation Time (4 wks) ......................... 10,417.00
c. Automobile
Lease Payments ($520.68/mo. @ 9 mos.) ............ 4,686.12
Insurance ($14l.98/mo. @ 9 mos.) ................. 1,277.82
Registration ..................................... 490.00
d. Health Insurance ($350.00/mo. @ 9 mos.) ............ 3,150.00
e. Life Insurance ($1055.00 qrtly @ 3 qtrs.) .......... 3,165.00
------------
TOTAL SUM: $ 116,938.94
============
In the event that the Mergers occur prior to March 15, 1997, then You are
entitled on the day the Mergers take effect (the "Effective Date") to the
difference between (i) the total sum ($116,938.94) and (ii) the amount of any of
the above payments already paid to You or on your behalf by the Company. By way
of example, if the Effective Date were August 31, 1996, You would be entitled to
collect $93,376.28 ($116,938.94 minus $23,562.66), which payment would
constitute the full and complete satisfaction of the Company's obligations.
<PAGE>
Mr. Champion
June 25, 1996
Page 2
2. For and in consideration of the aggregate payment to You following the
consummation of the Merger (as determined pursuant to paragraph 1 above), You
hereby agree, effective immediately:
a. To discontinue the use of your office and to cease conducting any
business at the Company's offices and from using any of the
Company's credit cards, vouchers, or similar such items having
been extended by the Company to its employees.
b. To cooperate fully with the Company and its officers and
representatives and to execute promptly such documents as are
delivered to You and to take such actions as are authorized by
the President of the Company in order to effect the Merger
heretofore approved by the Company; it being understood and
agreed to by You that, effective immediately, You shall take no
steps to interfere, directly or indirectly, with the business
operations of the Company including, without limitation, the
consummation of the Merger.
c. To deliver to the Company any and all confidential material (and
any other property of the Company except as otherwise agreed to
in writing by You and the Company) in your possession, without
retaining copies or duplications thereof; it being understood and
agreed to by You that all files, records, documents, information,
data and similar items relating to the business of the Company or
the proposed Mergers, whether prepared by You or otherwise, and
coming into your possession during the course of your employment
with the Company, remain the exclusive property of the Company.
d. To tender your letter of resignation as Chief Executive Officer
of the Company as well as director and Chairman of the board of
directors of the Company, effective as of the Effective Date,
which letter of resignation shall be held in escrow by counsel
for You, Roger Howard, Esq., for subsequent delivery against
receipt of payment of any sums payable to You from the Company as
of the Effective Date. Upon delivery of the letter of resignation
from escrow, your employment contract shall terminate and become
null and void and without further effect except as otherwise
provided in such agreement including, without limitation, your
covenants not to compete or to disclose Confidential Information
(as therein defined). Nothing stated herein shall, however,
relieve You of your fiduciary duties and obligations to the
Company in your capacity as a director and officer of the Company
prior to the Effective Date.
3. Subsequent to the Effective Date, the Company shall maintain in full
force and effect its currently existing Director and Officer Liability Policy
with respect to You and such other indemnity provisions consistent with Delaware
corporation law.
<PAGE>
Mr. Champion
June 25, 1996
Page 3
4. As of the Effective Date, You may, at your sole cost and expense, elect
to continue your existing health and dental coverage by exercising your rights
under COBRA, in which event the Company shall cooperate fully with You in
continuing such coverage so long as (and only to the extent that) You timely pay
the appropriate monthly payment (e.g. $350.00 for the existing coverage) to the
Company no later than the 15th day of each month with respect to health coverage
for the next succeeding month. For example, payment for insurance coverage for
October would be payable by You to the Company on or before September 15th.
5. The Company shall take such steps as legally possible, working with your
legal counsel, to release from its restrictive legend the common stock held by
You for more than three years in accordance with Rule 144, as promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
6. As of the Effective Date, You and the Company agree to release and
discharge, fully and forever, one another (as well as the officers, directors,
employees, agents, successors and assigns of the Company) from any and all
suits, claims, causes of action and demands in law or equity, that either You or
the Company ever had, now have, or hereafter may have, by reason of any matter,
cause or claims relating in any way to your employment relationship or the
termination of your employment relationship with the Company, including but not
limited to, any claims arising under any federal, state or local laws or
ordinances and any common law claims under tort or contract; it being understood
and agreed that neither You nor the Company, or any person acting on behalf of
You or the Company, will file, or permit to be filed, any action for legal or
equitable relief, including damages and injunctive, declaratory, monetary or
other relief, involving any matter occurring at any time or related in any way
to your employment relationship or the termination of your employment
relationship with the Company or involving any continuing effects of any acts or
practices that may have arisen or occurred during your employment relationship
or the termination of your employment relationship with the Company, other than
the covenants and obligations contained in this agreement.
7. Upon your failure to perform, satisfy or comply with the covenants
contained herein, the Company may, in addition to any other remedies available
to the Company under the laws of the State of California, suspend or eliminate
payments to You hereunder until resolution of your defaults. Likewise, any
failure by the Company to satisfy its obligations to You hereunder shall
constitute a breach by the Company of this agreement.
8. No failure or delay by the Company in exercising any right, power or
privilege contained herein shall operate as a waiver thereof to preclude any
other or further exercise thereof or the exercise of any other such right, power
or privilege.
9. Any violation of the covenants agreed to and contained herein will
result in irreparable damage to the Company, and, for purposes of enforcement of
the covenants and obligations contained in this settlement agreement, the
parties agree that the Company may obtain injunctive and other equitable relief
for any breach or threatened breach thereof, in addition to any other remedies
available to the Company under the laws of the State of California. You shall
not contest injunctive or equitable relief by reason of the adequacy of any
remedy at law.
<PAGE>
Mr. Champion
June 25, 1996
Page 4
10. This agreement is made under, and shall be governed and construed in
accordance with the laws of the State of California. You and the Company
irrevocably consent to the exclusive jurisdiction of the state and federal
courts located in the State of California in any action to which they are
parties.
By executing a copy of this letter, which letter may be signed in
counterpart and constitutes the agreement between the parties hereto in
connection with the subject matter of this letter, You hereby agree to the
statements, terms and covenants contained herein and bind yourself and your
personal representatives to the same, acknowledging that: (1) your execution
hereof is a voluntary act in connection with the settlement of disputes with the
Company, (2) You have read and understood all of the terms of this letter and
such other documents relating to your employment by the Company, including
without limitation your employment contract and your stock option agreement, (3)
You have had an opportunity to consult or confer with individuals of your own
choice who are not associated with the Company, including legal counsel, with
respect to these documents, and (4) You have signed this letter of your own free
will in exchange for the consideration to be given to You, as more particularly
set forth hereinabove, which You hereby further acknowledge as adequate and
satisfactory.
Sincerely,
AMERICAN CINEMASTORES, INC.
By: /s/ Steve Natale
-------------------------------------
Steve Natale, President
AGREED AND CONSENTED TO AS OF
THE 25th DAY OF JUNE, 1996 BY:
/s/ GILL CHAMPION
- --------------------
GILL CHAMPION
March __, 1996
American CinemaStores, Inc.
1543 7th Street
Suite 400
Los Angeles, CA 90401
Attn: Mr. Steven Natale
Gentlemen:
In connection with the letter of intent dated February 13, 1996 (the "LOI")
entered into by American CinemaStores, Inc. ("ACSI"), Superior-Panoramic Hand
Prints, Inc. ("Superior"), Just Jackets, Inc. ("JJI"), Messrs. Robert Strem,
Bruce Sacks and Steven Natale and The Boston Group, LLP pertaining to the
potential acquisition by ACSI, through subsidiaries to be formed by ACSI, of
Superior and JJI (the "Transaction"), each of ASCI, on the one hand, and
Superior and JJI, on the other, desire to be given immediate access to the
facilities, key management, employees, books and records of the other party or
parties, as applicable during normal business hours to conduct a due diligence
investigation of such party or parties. However, each of ACSI, Superior and JJI
(collectively, the "Constituent Parties") desires that information, whether
written or oral (collectively, the "Evaluation Material") which either has been
disclosed by the Disclosing Party to the Recipient or any of the Recipient's
Representatives (all as hereinafter defined in this Agreement) prior to the date
of this Agreement or will, on or after the date of this Agreement, be furnished
or made available to a Constituent Party or any of its officers, employees,
agents or representatives, including attorneys, accountants and financial
advisors (collectively called "Representatives"), in the course of or in
connection with any such due diligence investigation in connection with the
Transaction be treated confidentially. As used in the immediately preceding
sentence, "oral information" shall mean information orally disclosed by the
Disclosing Party or any of its Representatives to the Recipient or any of its
Representatives as to which a written memorandum setting forth such information
is sent to the Recipient by the
<PAGE>
Disclosing Party within ten business days after such information is first
disclosed to the Recipient or any of its Representatives by the Disclosing Party
or any of its Representatives. The term "Evaluation Material" includes all
analyses, compilations, studies or other documents prepared by a Constituent
Party or any of its Representatives which contain or are based upon (in whole or
in part) any information which is furnished or made available to such
Constituent Party by the other Constituent Party subject to such due diligence
investigation (the "Disclosing Party") or by any of the Disclosing Party's
Representatives; but such term does not include information which the receiving
Constituent Party (the "Recipient") can demonstrate (i) is or becomes generally
available to the public, other than as a result of a disclosure by the Recipient
or any of its Representatives, (ii) is or becomes available to the Recipient or
any of its Representatives on a nonconfidential basis from a source (other than
the Disclosing Party or any of its Representatives) which had the lawful right
to disclose such information or is independently developed by the Recipient,
(iii) was available to the Recipient on a non-confidential basis prior to its
first disclosure to the Recipient or any of its Representatives in connection
with the Transaction, or (iv) is required to be disclosed pursuant to law or the
order or other legal process of a court or other governmental authority (so long
as the Disclosing Party is given adequate advance notice and a reasonable
opportunity to take appropriate steps to maintain the confidentiality thereof).
1. Each Constituent Party agrees (a) that, except as expressly permitted
hereby, Evaluation Material disclosed to such Constituent Party by a Disclosing
Party will (i) be kept confidential by it and its Representatives, and, will not
be disclosed by it or any of its Representatives in any manner whatsoever, in
whole or in part, and (ii) not be used by such Constituent Party or any of its
Representatives for any purpose other than the evaluation of the Transaction;
and (b) to transmit Evaluation Material received from the Disclosing Party only
to those of its Representatives who need to know such information for the
purpose of evaluating the Transaction and who shall (i) be advised by such
Constituent Party of this Agreement, and (ii) agree with such Constituent Party
to be bound by the provisions hereof. Each Constituent Party agrees that it
shall be responsible for any breach of this Agreement by any of its
Representatives.
2. Each of Superior and JJI agrees that for the period from the date of the
LOI until the earlier of (i) the date of the consummation of the acquisition of
Superior and JJI by ASCI and (ii) the date of the termination of negotiations of
the Transaction, neither Superior, nor JJI or any of their respective
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<PAGE>
Representatives, will directly or indirectly (a) sell or purchase any securities
of ACSI or (b) communicate any material non-public information of or concerning
ACSI to any other person under circumstances in which it is reasonably
foreseeable that such person is likely to purchase or sell such securities.
3. Without the prior written consent of ASCI, each of Superior and JJI
agrees that (a) it will not, and will direct its Representatives not to,
disclose to any person (other than a person authorized hereunder) the fact that
the Constituent Parties are engaged in any discussions relating to the
Transaction, or any of the terms, conditions or other facts with respect to the
Transaction, including the status thereof, and (b) all public announcements with
respect to the Transaction will be made solely by ACSI. The term "person", as
used in this Agreement, shall be broadly interpreted to include, without
limitation, any corporation, company, partnership, other entity or individual.
4. ASCI agrees that it will furnish Superior, JJI and Messrs. Strem and
Sacks with copies of proposed news releases pertaining to the Transaction prior
to their release to the public.
5. Each Constituent Party agrees to keep a record of Evaluation Material
which is furnished or made available to it, and of the location thereof. In the
event that the Transaction is not consummated for any reason or if the
Disclosing Party sends a written notice to the Recipient terminating
negotiations as to the Transaction and requesting return of all Evaluation
Materials furnished by the Disclosing Party, such Recipient will promptly
deliver to the Disclosing Party such Evaluation Material and all copies thereof,
except for that portion of the Evaluation Material which consists of analyses,
compilations, studies or other documents prepared by such Recipient or any of
its Representatives, without retaining any copies thereof. That portion of
Evaluation Material which consists of analyses, compilations, studies or other
documents prepared by a Recipient or its Representatives shall be held by such
Recipient and kept confidential and subject to the terms of this Agreement, or
destroyed at the request of the Disclosing Party.
6. Each Constituent Party will endeavor to include in Evaluation Material
disclosed by it information which is known to such Disclosing Party and which
such Disclosing Party believes to be relevant for the purpose of the Recipient's
evaluation, but such Disclosing Party makes no representation or warranty as to
the accuracy or completeness of such Evaluation Material.
7. All disputes arising under this Agreement that
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<PAGE>
cannot be amicably resolved shall be settled by binding arbitration before the
American Arbitration Association in the City of Los Angeles, California, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof; provided, however, that if equitable relief is sought (including
injunctive relief) by a party hereto for a breach of this Agreement, then the
non-breaching party may, in its sole discretion, enforce such rights or seek
such equitable relief by court action. The arbitration shall proceed in
accordance with the rules of commercial arbitration of the American Arbitration
Association at the time in effect except that the parties shall select a single
arbitrator to hear and determine any such dispute. The arbitrator shall not have
the power to amend this Agreement in any respect.
8. No failure or delay by a Constituent Party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power or privilege hereunder. Each
Constituent Party hereby acknowledges and agrees that (a) a Disclosing Party
would be irreparably injured in the event of a breach of any obligations under
this Agreement of the Recipient and its Representatives, (b) monetary damages
would not be an adequate remedy for any such breach, and (c) the Disclosing
Party shall be entitled to equitable relief (including injunction and specific
performance), in addition to any other remedies which it may have, in the event
of any such breach, without bond, security or the proof of actual damages.
9. This Agreement (i) may only be modified by a written instrument which is
executed by the Constituent Parties, and, to the extent it affects Section 2,
Messrs Strem and Sacks, (ii) sets forth the entire agreement with respect to the
subject matter hereof, and (iii) shall be governed by the laws of the State of
California applicable to contracts made and to be wholly performed therein.
10. Each Constituent Party agrees that unless and until a definitive
agreement among the Constituent Parties with respect to a Transaction has been
executed and delivered, no Constituent Party will be under any obligation of any
kind whatsoever with respect to the Transaction by virtue of this Agreement or
any written or oral expression with respect to the Transaction, except, in the
case of this Agreement, for the matters specifically agreed to herein, and
except as otherwise set forth in the LOI.
11. In the event of any dispute arising out of the subject matter of this
Agreement, the prevailing party shall
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<PAGE>
recover, in addition to any other damages assessed, its reasonable attorney'
fees and costs incurred in litigating, arbitrating, or otherwise settling or
resolving such dispute.
If the foregoing properly reflects our understanding, please sign and
return one copy of this Agreement, which will comprise a valid and binding
agreement on the part of each of us.
Very truly yours,
Superior-Panoramic Hand Prints, Inc.
By: /s/ Robert Strem
----------------------------------
Name: Robert Strem
Title: President
Address: 7330 Varna Avenue
North Hollywood, CA 91650
Just Jackets, Inc.
By: /s/ Robert Strem
----------------------------------
Name: Robert Strem
Title: President
Address: 7330 Varna Avenue
North Hollywood, CA 91650
Agreed to and Accepted as of
the date first above written:
American CinemaStores, Inc.
By: /s/ Steve Natale
------------------------------
Name: Steve Natale
Title: President
The undersigned agrees to be bound by and comply with the provisions of
Section 2 of the above letter agreement.
/s/ Robert Strem
- ---------------------------------
Robert Strem
/s/ Bruce Sacks
- ---------------------------------
Bruce Sacks
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of _________________, 1996, between American
CinemaStores, Inc., a Delaware corporation (the "Employer" or the "Company"),
and Robert J. Strem (the "Employee").
W I T N E S S E T H :
WHEREAS, the Employee served as President and director of
Superior/Panoramic Hand Prints Inc. (the "Prior Company"), which Prior Company
has been acquired by, and merged as a going concern with and into ASCI/SPI
Acquisition Corp., the wholly-owned subsidiary of the Company, which is now
called Superior/Panoramic Hand Prints Inc. (the "Subsidiary"), pursuant to an
Agreement and Plan of Merger, dated June ___, 1996, by and among the Employee,
the Prior Company, the shareholder of the Prior Company, the Company and the
Subsidiary (the "Merger Agreement"); and
WHEREAS, the parties acknowledge that the Employee is intimately familiar
with the business operations of the Prior Company; and
WHEREAS, the parties further acknowledge that retention of the Employee's
services by the Company is a condition of the Merger Agreement and the Employer
desires to employ the Employee to insure a smooth transition of the business of
the Prior Company, as a going concern, to the Subsidiary; and
WHEREAS, the Employer desires to employ Employee as President of the
Subsidiary on the terms and conditions hereinafter set forth and the Employee is
willing to accept such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual cove- nants and agreements
hereinafter set forth, and intending to be legally bound hereby, the Employer
and the Employee hereby agree as follows:
1. Term. Employer hereby agrees to employ Employee, and Employee hereby
agrees to serve Employer on the terms and conditions herein provided for a three
(3) year period (the "Employment Term") commencing effective as of the date of
this Agreement (the "Effective Date") and terminating on the third anniversary
of the Effective Date unless sooner terminated as hereinafter provided.
<PAGE>
2. Employee Duties.
(a) During the term of this Agreement, the Employee shall have the duties
and responsibilities of each of the President of the Subsidiary and of the
Co-Chief Executive Officer of the Company, reporting to the Chairman of the
Board of Directors of the Employer (the "Board"). It is understood that such
duties and responsibilities shall be reasonably related to the Employee's
position as President.
(b) The Employee shall devote substantially all of his business time,
attention, knowledge and skills faithfully, diligently and to the best of his
ability, in furtherance of the business and activities of the Company and its
subsidiaries. The principal place of performance by the Employee of his duties
hereunder shall be in the counties of Ventura or Los Angeles, although the
Employee may be required to travel outside of the area where the Subsidiary's
principal executive offices are located in connection with the business of the
Subsidiary.
3. Compensation.
(a) During the term of this Agreement, the Employer shall pay the Employee
a salary (the "Salary") at a rate of $165,000 per annum, payable in equal
installments bi-weekly, or at such other times as may mutually be agreed upon
between the Employer and the Employee. Such Salary may be increased from time to
time at the discretion of the Board.
(b) In addition to the Salary, the Employer shall provide Employee with an
automobile, together with automobile insurance in accordance with the then
current Company's policy with respect to Subsidiary; provided, however, that the
Company shall not be obligated for lease payments on such automobile in excess
of $650 per month. Employer shall reimburse Employee for all expenses of
maintaining and operating such automobile upon the presentation of appropriate
vouchers and/or receipts.
(c) In addition to the Salary, the Employee may receive such cash bonuses
as may from time to time be awarded to him by the Board at its discretion during
or in respect of his employment hereunder. Such bonuses shall be at least
comparable to those received by other executives of the Company and its
subsidiaries.
4. Benefits.
(a) During the Employment Term, the Employee shall receive or participate
in benefits and benefit plans substantially similar and comparable to those
benefits and benefit plans currently offered to Employee by the Prior Company,
including, but not limited to, the existing disability policy ("Disability
Policy") with respect to Employee and the medical
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<PAGE>
benefits provided by the Prior Company, as well as comparable benefits and
benefit plans that may be offered to other executives of the Company and its
subsidiaries and for which the Employee is eligible, including, without
limitation, health and disability insurance and four (4) weeks vacation. Such
vacation may be taken in the Employee's discretion with the prior approval of
the Employer, and at such time or times as are not inconsistent with the
reasonable business needs of the Subsidiary and Company.
(b) During the Employment Term, the Employer shall provide the Employee the
number of paid holidays, personal days off and sick leave days with respect to
each calendar year in accordance with the then current Company's policy.
5. Employee Expenses Incident to Performance of Service. The Company shall
promptly reimburse all travel and other expenses reasonably incurred by the
Employee and incident to his rendering of services hereunder during the
Employment Term. Any such expenses, in excess of $5,000 at any single time, must
be preapproved by the Chairman of the Board. All submissions for reimbursement
made by Employee shall include appropriate receipts for any such expenses.
6. Termination. Employer shall have the right to Terminate Employee's
employment under this Agreement only in the following circumstances:
6.1. Death. The Employee's employment under this Agreement shall terminate
immediately upon the date of his death.
6.2. Disability. If, as a result of the Employee's incapacity due to
"Disability" (as herein defined), the Employee shall have been absent from his
duties under this Agreement for 120 calendar days during any calendar year, the
Employer may terminate the Employee's employment under this Agreement.
"Disability" shall be defined either (i) as such term is defined by any
Disability Policy, in which case said term shall be construed in accordance and
pursuant to the provisions thereof or (ii) if no Disability Policy is in effect
on the date that Employee becomes disabled, as the inability of Employee,by
reason of physical illness or injury or mental illness, substantially to perform
his usual duties as an employee of the Company, in which case the Board and the
Employee shall determine whether the Employee is disabled and when such
Disability commenced and ended. In making any such determination, the parties
may rely upon the opinion of a physician who is jointly selected by the Board
and the Employee. If the Board and the Employee are unable to agree as to the
existence of a disability, such determination shall be made by arbitration in
the State of
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<PAGE>
California under the rules and auspices of the American Arbitration
Association before a panel of three (3) physicians.
6.3. Cause. The Employer may terminate the Employee's employment under this
Agreement for Cause. For purposes of this Agreement, the Employer shall have
"Cause" to terminate the Employee's employment under this Agreement upon (a) the
willful and continued failure by the Employee to substantially perform his
duties under this Agreement (other than any such failure resulting from the
Employee's Disability) after demand for substantial performance is delivered by
the Employer, in writing, specifically identifying the manner in which the
Employer believes the Employee has not substantially performed his duties and
the Employee fails to perform as required within 15 business days after such
demand is made, (b) the willful criminal misconduct by Employee (including
embezzlement, fraud, harassment of employees) which is materially injurious to
the Employer, monetarily or otherwise or (c) the conviction of the Employee of a
serious felony which is injurious to the Employer, monetarily or otherwise. No
act, or failure to act, on Employee's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interest of Employer.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for cause unless and until there has been delivered to Employee a
copy of a resolution, duly adopted by the affirmative vote of not less than a
majority of the entire membership of the Board at a meeting of the Board called
and held for such purpose (after reasonable notice to Employee and an
opportunity for him, together with his counsel, to be heard before the Board),
finding that, in the good faith opinion of the Board, Executive conducted, or
failed to conduct, himself in a manner set forth above, and specifying the
particulars thereof in detail.
6.4. Termination by Employee. Employee may terminate his employment
hereunder for "Good Reason". For purposes of this Agreement, "Good Reason" shall
mean (i) a Change in Control (as hereinafter defined) of Employer, or (ii) any
limitation of his powers, or (iii) any removal of Employee, as, or any failure
to re-elect Employee as, President of the Subsidiary, except in connection with
termination of Employee's employment for Cause or Disability. For purposes of
this Agreement, a "Change in Control" of Employer shall be deemed to have
occurred if (i) any "Person" (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")), other than Employer or
any group of which it is a member, is or become the "beneficial owner" (as
defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of
securities of Employer representing twenty-five percent (25%) or more of the
combined voting power of Employer's then outstanding securities. Upon such
termination by Employee, Employer shall pay Employee his salary through the end
of the three year term of
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<PAGE>
this Agreement in a lump sum upon the date of Termination, all other amounts to
which Employee is entitled, including, without limitation, expense reimbursement
amounts accrued to the date of Termination and Employer shall maintain in effect
all benefits during the balance of such three year period. In such case,
Employee shall not be required to mitigate the amount of any payment provided
for in this section.
7. Notice of Termination.
Any termination of the Employee's employment by the Employer or by the
Employee (other than termination by reason of the Employee's death) shall be
communicated by written Notice of Termination to the other party of this
Agreement.
8. Date of Termination.
The "Date of Termination" shall mean (a) if the Employee's employment is
terminated by his death, the date of his death, (b) if the Employee's employment
is terminated pursuant to Section 6.2 above, the date on which the Notice of
Termination is given, (c) if the Employee's employment is terminated pursuant to
Section 6.3 above, the date specified on the Notice of Termination after the
expiration of any cure periods and (d) if Employee terminates his employment
pursuant to Section 6.4 above, the date specified in Employee's Notice of
Termination.
9. Life Insurance and Disability Insurance.
(a) The Company may, at its sole option, secure a key- man term life
insurance policy, in the face amount of $1,000,000, on the Employee's life, (the
"Life Policy"). The Company shall obtain a Disability Policy for Employee as
provided for in Section 4(a) (the Disability Policy and the Life Policy are
hereinafter on occasion referred to as the "Insurance Policies").
(b) With respect to any Insurance Policies, subject to Section 4 above,
Employer shall pay all premiums and take all action necessary to maintain such
policies in full force and effect in accordance with the then Company's policy
with respect to Subsidiary and so long as Employee is employed by the Company
and not in default of any of his obligations or responsibilities hereunder.
(c) Employer shall be the owner and exercise all the rights of ownership
with respect to any Life Policy procured hereunder. Employer shall also be the
beneficiary of any such Life Policy.
(d) Employer shall be the owner, exercising all the rights of ownership,
with respect to any Disability Policy procured hereunder; provided, however,
that the beneficiary under
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<PAGE>
any such Disability Policy shall be as identified by Employee from time to time.
Employer shall take such steps as necessary to make the Disability Policy
payable to the person(s) and in the manner so designated by Employee.
(e) With respect to any Life Policy procured for Employee hereunder,
Employer shall be the owner and exercise all the rights of ownership. Employer
shall also be the beneficiary of any such Life Policy.
(f) Employee hereby agrees to cooperate fully with Employee with respect to
applying for and securing the Insurance Policies, including, without limitation,
submitting to a physical examination and executing and delivering any and all
necessary documents required by the insurance company.
(g) Employer may, at its sole option, pledge the Life Policy with the
insurance company or with others as collateral for any loan made by the Company.
(h) Employee shall have the option, exercisable within 30 days after any of
the following events (the "Option Period"), to acquire the interest of the
Employer in the Insurance Policies by paying to Employer the then cash surrender
value of any such policy: (i) termination of Employee's employment with the
Company; (ii) enactment of a resolution for the liquidation of the Company or
Subsidiary or for the sale of substantially all of its assets; or (iii) filing
of a petition in any bankruptcy, receivership, or reorganization proceeding of
the Company or Subsidiary. If Employee exercises this option, the Employer shall
take such action as necessary to assign all the rights in the Insurance Policies
and to deliver physical possession of the Insurance Policies. Failure to
exercise the option within the Option Period terminates the obligations of
Employer hereunder and Employer may cancel the Insurance Policies and receive
its cash surrender value, in which case neither Employee nor any person claiming
through Employee shall have any rights to any part of the Insurance Policies or
its values.
(i) Employer's obligations with respect to the Insurance Policies shall be
limited to those set forth in Sections 4 and 9 and in no event shall Employer be
deemed a guarantor of the insurance company's obligations. The insurance company
shall not be deemed a party to this Agreement, and it may rely upon any action
that Employer takes so long as Employer is the record owner of the Insurance
Policies.
10. Limited Compensation Upon Termination.
(a) If the Employee's employment shall be terminated by reason of his
death, the Employer shall pay to such person as he shall designate in a notice
filed with the Employer, or if no such person shall be designated, to his estate
as a lump sum
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<PAGE>
benefit, his Salary earned to the date of his death and, except as otherwise
provided in this Agreement, any payments the Employee's spouse, beneficiaries or
estate may be entitled to receive pursuant to any pension or employee benefit
plan or life insurance policy or similar plan or policy then maintained by the
Employer, and such payments shall, assuming the Employer is in compliance with
the provisions of this Agreement, fully discharge the Employer's obligations
with respect to Section 3 of this Agreement.
(b) During any period that the Employee fails to perform his duties
hereunder as a result of incapacity due to Disability, the Employee shall
continue to receive his Salary until the earlier to occur of (i) the Employee's
employment is terminated pursuant to Section 6.2 of this Agreement or (ii) the
payments of disability benefits under the Disability Policy shall become
generally available to the Employee.
(c) If the Employee's employment shall be terminated for Cause, the
Employer shall pay the Employee his full Salary through the Date of Termination,
at the rate in effect at the time Notice of Termination is given, and the
Employer shall have no further obligations with respect to Section 3 of this
Agreement.
(d) Except as provided for above, upon Termination, all other obligations
of the Employer under this Agreement, including the obligations to indemnify,
defend and hold harmless the Employee, shall remain in full force and effect.
11. Confidentiality; Noncompetition.
(a) The Employer and the Employee acknowledge that the services to be
performed by the Employee under this Agreement are unique and, as a result of
such employment, the Employee will be in possession of confidential information
relating to the business practices of Subsidiary and the Company. The term
"confidential information" shall mean any and all information (verbal and
written) relating to Subsidiary, the Company or any of its affiliates, or any of
their respective activities, other than such information in the public domain
(such information not being deemed to be in the public domain merely because it
is embraced by more general information which is in the public domain) other
than as the result of breach of the provisions of this Section 11(a), including,
but not limited to, information relating to: trade secrets, personnel lists,
financial information, research projects, services used, pricing, customers,
customer lists and prospects, product sourcing, marketing and selling and
servicing. The Employee agrees that he will not, during the period of his
employment and for the "Restricted Period" (as defined in the following
paragraph), directly or indirectly, use, communicate, disclose or disseminate to
any person, firm or corporation any confidential information
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<PAGE>
regarding the clients, customers or business practices of Subsidiary or the
Company acquired by the Employee, without the prior written consent of Employer
except to the extent required to be disclosed by law, a court or administrative
order; provided, however, that the Employee understands that Employee will be
prohibited from misappropriating any trade secret at any time during or after
the termination of employment.
The term "Restricted Period" shall mean a two (2) year period following
either (i) the voluntary termination of employment by the Employee or (ii)
termination of his employment by Employer pursuant to Section 6.3 of this
Agreement.
(b) The Employee hereby agrees that he shall not, during the period of his
employment and for the "Restricted Period", directly or indirectly, within any
county (or adjacent county) in any State within the United States or territory
outside the United States in which the Company is engaged in business during the
period of the Employee's employment or on the date of termination of the
Employee's employment, engage, have an interest in or render any services to any
business (whether as owner, manager, operator, licensor, licensee, lender,
partner, stockholder, joint venturer, employee, consultant or otherwise)
directly competitive with the business activities of Subsidiary or the Company
on the date of termination of his employment.
(c) At no time during the term of this Agreement, or thereafter shall the
Employee directly disparage the commercial, business or financial reputation of
Subsidiary or the Company.
(d) For purposes of clarification, but not of limitation, the Employee
hereby acknowledges and agrees that the provisions of subparagraphs 11(b) and
(c) above shall serve as a prohibition against him, during the period referred
to therein, directly or indirectly soliciting any officer, employee, agent, who
has been previously contacted by either a representative of Subsidiary or the
Company, including the Employee, to discontinue or alter his, her or its
relationship with the Company.
(e) Upon the termination of the Employee's employment for any reason
whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and other
materials which refer or relate to any aspect of the business of Subsidiary or
the Company which are in the possession of the Employee including all copies
thereof, shall be promptly returned to Subsidiary or the Company, as the case
may be.
(f) (i) The Employee agrees that all processes, technologies and inventions
("Inventions"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
by him during his employment by Employer shall belong to Subsidiary or
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<PAGE>
the Company, provided that such Inventions grew out of the Employee's work with
Subsidiary or the Company are related in any manner to the business (commercial
or experimental) of Subsidiary or the Company or are conceived or made on the
Company's time or with the use of the facilities or materials of Subsidiary or
the Company. The Employee shall further: (1) promptly disclose such Inventions
to the Company; (2) assign to the Company, without additional compensation, all
patent and other rights to such Inventions for the United States and foreign
countries; provided, however, that such assignment does not apply to any right
which qualifies fully under California Labor Code Section 2870; (3) sign all
papers necessary to carry out the foregoing; and (4) give testimony in support
of his inventorship; and
(ii) The Employee agrees that he will not assert any rights to any
Invention as having been made or acquired by him prior to the date of this
Agreement, except for Inventions, if any, disclosed to the Company in writing
prior to the date hereof.
(g) The Company shall be the sole owner of all products and proceeds of the
Employee's services hereunder, including, but not limited to, all materials,
ideas, concepts, formats, suggestions, developments, arrangements, packages,
programs and other intellectual properties that the Employee may acquire,
obtain, develop or create in connection with and during the term of the
Employee's employment hereunder, free and clear of any claims by the Employee
(or anyone claiming under the Employee) of any kind or character whatsoever
(other than the Employee's right to receive payments hereunder). The Employee
shall, at the request of the Company, execute such assignments, certificates or
other instruments as the Company may from time to time deem necessary or
desirable to evidence, establish, maintain, perfect, protect, enforce or defend
its right, or title and interest in or to any such properties; provided,
however, that such assignment does not apply to any right which qualifies fully
under California Labor Code Section 2870.
(h) The parties hereto hereby acknowledge and agree that: (i) the
employment hereunder is made in conjunction with the purchase by the Employer of
the entire business of the Prior Company, of which the Employee was a director
and controlling beneficial shareholder, and the Company would be irreparably
injured in the event of a breach by the Employee of any of his obligations under
this Section 11, (ii) monetary damages would not be an adequate remedy for any
such breach, and (iii) the Company shall be entitled to injunctive relief, in
addition to any other remedy which it may have, in the event of any such breach.
(i) The parties hereto hereby acknowledge that, in addition to any other
remedies the Company may have under Section 11(h) hereof, the Company shall have
the right and remedy to
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require the Employee to account for and pay over to the Company all
compensation, profits, monies, accruals, increments or other benefits
(collectively, "Benefits") derived or received by the Employee as the result of
any transactions constituting a breach by Employee of any of the provisions of
Section 11, and the Employee hereby agrees to account for any pay over such
Benefits to the Company.
(j) Each of the rights and remedies enumerated in Section 11(h) and 11(i)
shall be independent of the other, and shall be severally enforceable, and all
of such rights and remedies shall be in addition to, and not in lieu of, any
other rights and remedies available to the Company under law or in equity.
(k) If any provision contained in this Section is hereafter construed to be
invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid portions.
(l) If any provision contained in this Section 11 is found to be
unenforceable by reason of the extent, duration or scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, scope or other provision and in its reduced form any such
restriction shall thereafter be enforceable as contemplated hereby.
12. Indemnification. The Employer shall indemnify and hold harmless the
Employee against any and all expenses reasonably incurred by him in connection
with or arising out of (a) the defense of any action, suit or proceeding in
which he is a party, or (b) any claim asserted or threatened against him, in
either case by reason of or relating to his being or having been an employee,
officer or director of the Company or its subsidiaries, whether or not he
continues to be such an employee, officer or director at the time of incurring
such expenses, except insofar as such indemnification is prohibited by law. Such
expenses shall include, without limitation, the fees and disbursements of
attorneys, amounts of judgments and amounts of any settlements, provided that
such expenses are agreed to in advance by the Employer. Such expenses shall be
reimbursed on a current basis. In the event Employer disputes its obligation to
so indemnify Employee, Employer shall reimburse such expenses on a current basis
pending a final determination with respect to such indemnification obligation.
The foregoing indemnification obligation is independent of any similar
obligation provided in the Employer's Certificate of Incorporation or Bylaws,
and shall apply with respect to any matters attributable to periods prior to the
Effective Date, and to matters attributable to his employment hereunder, without
regard to when asserted.
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13. General. This Agreement is further governed by the following
provisions:
(a) Notices. All notices relating to this Agreement shall be in writing and
shall be either personally delivered, sent by telecopy (receipt confirmed) or
mailed by certified mail, return receipt requested, to be delivered at such
address as is indicated below, or at such other address or to the attention of
such other person as the recipient has specified by prior written notice to the
sending party. Notice shall be effective when so personally delivered, one
business day after being sent by telecopy or five days after being mailed.
To the Employer:
ASCI/SPI Acquisition Corp.
c/o American CinemaStores, Inc.
1543 Seventh Street, Ste. 400
Santa Monica, CA 90401
Attention: Steve Natale
With a copy in the same manner to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attn: Gary A. Schonwald, Esq.
To the Employee:
Robert J. Strem
5715 Ridgebrook Drive
Agoura Hills, CA 91301
With a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street
48th Floor
Los Angeles, CA 90071
Attn: Lawrence M. Braun, Esq.
(b) Parties in Interest/Successors. Employee may not delegate his duties or
assign his rights hereunder. Employer shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Employer or its subsidiaries,
by agreement in form and substance satisfactory to Employee, to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that Employer would be required to perform it if no such succession has taken
place. Failure of Employer to obtain such agreement prior to the effectiveness
of any such succession shall be a breach of this Agreement and shall entitle
Employee to compensation from Employer in the same amount and on the same terms
as he would be
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entitled to hereunder if he had terminated his employment for Good Reason,
except that for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the date of Termination. As
used in this Agreement, "Employer" shall mean Employer as herein before defined
and any successor to its business and/or assets as aforesaid which executes and
delivers the agreement provided for in this paragraph or which otherwise becomes
bound by all the terms and provisions of this Agreement by operation of law.
This Agreement and all rights of Employee hereunder shall inure to the benefit
of and be enforceable by Employee's personal or legal representatives,
executors, administrators, successors, heirs, distributees, designees and
legatees.
(c) Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Employee by the Employer and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever. Any modification or termination of this Agreement will be
effective only if it is in writing signed by the party to be charged.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California. Employee and
Employer agree to and hereby do submit to jurisdiction before any state or
federal court of record in Los Angeles County, California.
(e) Warranty. Employee hereby warrants and represents as follows:
(i) That the execution of this Agreement and the discharge of
Employee's obligations hereunder will not breach or conflict with any other
contract, agreement, or understanding between Employee and any other party
or parties.
(ii) Employee has ideas, information and know-how relating to the type
of business conducted by Employer, and Employee's disclosure of such ideas,
information and know-how to Employer will not conflict with or violate the
rights of any third party or parties.
(f) Severability. In the event that any term or condition in this Agreement
shall for any reason be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other term or condition of this Agreement
but this Agreement shall be construed as if such invalid or illegal or
unenforceable term or condition had never been contained herein or, to the
extent permissible, construed so as to limit such term or condition as to be
enforceable without
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invalidating the remaining terms and conditions of this Agreement.
(g) Execution in Counterparts. This Agreement may be executed by the
parties in one or more counterparts, each of which shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has been
signed by each of the parties hereto and delivered to each of the other parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
COMPANY: American CinemaStores, Inc.
By:
--------------------------------
Name: Steve Natale
Title: President
EMPLOYEE:
--------------------------------
Robert J. Strem
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of ________________________________, 1996,
between JJI/ASCI Acquisition Corp., a California corporation and the surviving
corporation of the merger referenced hereinbelow (the "Employer" or the
"Company"), and Bruce Sacks (the "Employee").
W I T N E S S E T H :
WHEREAS, the Employee served as Secretary and director of Just Jackets
Corporation (the "Prior Company") which Prior Company has been acquired by, and
merged as a going concern with and into the Company, a wholly-owned subsidiary
of American CinemaStores, Inc. (the "Parent") pursuant to that certain Agreement
and Plan of Merger entered into as of even date herewith (the "Merger
Agreement"); and
WHEREAS, the parties acknowledge that the Employee is intimately familiar
with the business operations of the Prior Company; and
WHEREAS, the parties further acknowledge that retention of the services of
the Employee by the Company is a condition of the Merger Agreement and the
Employer desires to employ the Employee to insure a smooth transition of the
business of the Prior Company, as a going concern, to the Company; and
WHEREAS, the Employee desires to serve the Company in an executive capacity
on the terms and conditions hereinafter set forth and the Employee is willing to
accept such employment on such terms and conditions.
NOW, THEREFORE, in consideration of the mutual cove- nants and agreements
hereinafter set forth, and intending to be legally bound hereby, the Employer
and the Employee hereby agree as follows:
1. Term. Employer hereby agrees to employ Employee, and Employee hereby
agrees to serve Employer for a one (1) year period (the "Employment Term")
commencing effective as of the date of this Agreement (the "Effective Date") and
terminating on the first anniversary of the Effective Date unless sooner
terminated as hereinafter provided. The term of employment may be renewed for an
additional one (1) year period (the "Renewal Term") upon written notice no more
than sixty (60) days prior to the Expiration Date by the Employer or the
Employee of their intention to renew, subject to the mutual agreement of the
<PAGE>
parties; provided, however, that both parties are in compliance with the terms
of this Agreement as of the date of such notice and at the commencement of any
Renewal Term. The Renewal Term shall commence effective as of the first (1st)
day after the expiration of the Employment Term and terminate on the second
(2nd) anniversary date of the Effective Date unless sooner termination as
hereinafter provided.
2. Employee Duties.
(a) During the term of this Agreement, the Employee shall have the duties
and responsibilities of the President of the Company, reporting to the President
and the Board of Directors of Parent (the "Board"). It is understood that such
duties and responsibilities shall be reasonably related to Employee's position
as President.
(b) The Employee shall devote substantially all of his business time,
attention, knowledge and skills faithfully, diligently and to the best of his
ability, in furtherance of the business and activities of the Company. The
principal place of performance by the Employee of his duties hereunder shall be
in the counties of Ventura or Los Angeles, although the Employee may be required
to travel outside of the area where the Company's principal executive offices
are located in connection with the business of the Company.
3. Compensation.
(a) During the term of this Agreement, the Employer shall pay the Employee
a salary (the "Salary") at a rate of $110,000 per annum, payable in equal
installments bi-weekly, or at such other times as may mutually be agreed upon
between the Employer and the Employee. Such Salary may be increased from time to
time at the discretion of the Board.
(b) In addition to the Salary, the Employer shall provide Employee with an
automobile, together with automobile insurance in accordance with the then
current Company's policy with respect to Subsidiary; provided, however, that the
Company shall not be obligated for lease payments on such automobile in excess
of $650 per month. Employer shall reimburse Employee for all expenses of
maintaining and operating such automobile upon the presentation of appropriate
vouchers and/or receipts.
(c) In addition to the Salary, the Employee shall be entitled to such other
cash bonuses as may from time to time be awarded to him by the Board during or
in respect of his employment hereunder.
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4. Benefits.
(a) During the Employment Term, the Employee shall receive or participate
in benefits and benefit plans substantially similar and comparable to those
benefits and benefit plans currently offered to Employee by the Prior Company,
including, but not limited to, the existing disability policy ("Disability
Policy") with respect to Employee and the medical benefits provided by the Prior
Company, as well as comparable benefits and benefit plans that may be offered to
other executives of the Company and its subsidiaries and for which the Employee
is eligible, including, without limitation, the incentive program scheduled to
be finalized by the Company within sixty (60) days from the Effective Date.
Nothing paid to the Employee under any plan or arrangement presently in effect
or made available in the future shall be deemed to be in lieu of the salary or
any other obligation payable to the Employee pursuant to this Agreement.
(b) During the term of this Agreement, the Employee will be entitled to the
number of paid holidays, personal days off, and sick leave days in each calendar
year in accordance with the then current policy of the Company. The Employee
shall be entitled to three (3) weeks vacation during the term of this Agreement,
which vacation may be taken in the Employee's discretion with the prior approval
of the Employer, and at such time or times as are not inconsistent with the
reasonable business needs of the Company.
5. Travel Expenses. All travel and other expenses incident to the rendering
of services reasonably incurred on behalf of the Company by the Employee during
the term of this Agreement shall be paid by the Employer provided that any such
expenses, in excess of $1,000.00 at any single time, must be preapproved by the
Chairman of the Board. All submissions for reimbursement made by Employee shall
include appropriate receipts for any such expenses.
6. Termination. Employee's employment under this Agreement may be
terminated without any breach of this Agreement only on the following
circumstances:
6.1. Death. The Employee's employment under this Agreement shall terminate
upon his death.
6.2. Disability. If, as a result of the Employee's incapacity due to
disability (as defined herein), the Employee shall have been absent from his
duties under this Agreement for 90 calendar days during any calendar year, the
Employer may terminate the Employee's employment under this Agreement.
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"Disability" shall be defined either (i) as such term is defined by any
Disability Policy (as defined in Section 9), in which case said term shall be
construed in accordance and pursuant to the provisions thereof or (ii) if no
Disability Policy is in effect on the date that Employee becomes disabled, as
the inability of the Employee,by reason of physical illness or injury or mental
illness, substantially to perform his usual duties as an employee of the
Company, in which case the Board and the Employee shall determine whether the
Employee is disabled and when such Disability commenced and ended. In making any
such determination, the parties may rely upon the opinion of a physician who is
jointly selected by the Board and the Employee. If the Board and the Employee
are unable to agree as to the existence of a disability, such determination
shall be made by arbitration in the State of California under the rules and
auspices of the American Arbitration Association before a panel of three (3)
physicians.
6.3. Cause. The Employer may terminate the Employee's employment under this
Agreement for Cause. For purposes of this Agreement, the Employer shall have
"Cause" to terminate the Employee's employment under this Agreement upon (a) the
willful and continued failure by the Employee to substantially perform his
duties under this Agreement (other than any such failure resulting from the
Employee's Disability) after demand for substantial performance is delivered by
the Employer, in writing, specifically identifying the manner in which the
Employer believes the Employee has not substantially performed his duties and
the Employee fails to perform as required within 15 days after such demand is
made, (b) the willful engaging by the Employee in criminal misconduct (including
embezzlement and criminal fraud) which is materially injurious to the Employer,
monetarily or otherwise or (c) the conviction of the Employee of a felony. For
purposes of this paragraph, no act, or failure to act, on the Employee's part
shall be considered "willful" unless done, or omitted to be done, by him not in
good faith and without reasonable belief that his action or omission was in the
best interest of the Employer. Notwithstanding the foregoing, Employee shall not
be deemed to have been terminated for cause unless and until there has been
delivered to Employee a copy of a resolution, duly adopted by the affirmative
vote of not less than a majority of the entire membership of the board of
directors of the Company at a meeting of such board called and held for such
purpose (after reasonable notice to Employee and an opportunity for him,
together with his counsel, to be heard before such board), finding that, in the
good faith opinion of such board, Executive conducted, or failed to conduct,
himself in a manner set forth above, and specifying the particulars thereof in
detail.
7. Notice of Termination.
Any termination of the Employee's employment by the Employer or by the
Employee (other than termination by reason of
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the Employee's death) shall be communicated by written Notice of Termination to
the other party of this Agreement. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Employee's employment under the provision so indicated.
8. Date of Termination.
The "Date of Termination" shall mean (a) if the Employee's employment is
terminated by his death, the date of his death, (b) if the Employee's employment
is terminated pursuant to Section 6.2 above, the date on which the Notice of
Termination is given, and (c) if the Employee's employment is terminated
pursuant to Section 6.3 above, the date specified on the Notice of Termination
after the expiration of any cure periods.
9. Disability Insurance and Life Insurance.
(a) The Company will, at its cost, procure a Disability Policy for the
Employee as provided for in Section 4(a) hereof. Subject to Section 4(a) hereof,
the Employer shall pay all premiums and take all action reasonably necessary to
maintain such policy in full force and effect in accordance with the then policy
of the Company and so long as the Employee is employed by the Company and not in
default of any of his obligations or responsibilities hereunder. In the event of
a Disability, payment of benefits under the Disability Policy shall be: (i)
used, to the extent generally available under the Disability Policy prior to the
termination of employment of the Employee in accordance with Section 6.2 of this
Agreement, to reimburse the Employer for any Salary paid to the Employee
pursuant to Section 10(c) of this Agreement and (ii) upon termination of
employment of the Employee in accordance with Section 6.2 of this Agreement,
paid to the Employee provided that any such insurance payments, on a post-tax
basis, are not less than sixty-six and two/thirds percent (66.66%) of the then
current total annual compensation of the Employee.
(b) In addition to the foregoing, the Employer may, at its sole option and
cost, procure and maintain a term life insurance policy, in the face amount of
$1,000,000, on the life of the Employee for the benefit of the Employer (the
"Life Insurance Policy" and, together with the Disability Policy, the "Insurance
Policies"). Any obligation herein is based and conditioned upon the
representation by the Employee that he is in good health and insurable. To this
end, the Employee agrees to cooperate fully with the Employer with respect to
applying for and securing the Insurance Policies, including, without limitation,
submitting to a physical examination and executing
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and delivering any and all necessary documents required by the insurance
company.
(c) With respect to any Life Insurance Policy procured for Employee
hereunder, Employer shall be the owner and exercise all the rights of ownership.
Employer shall also be the beneficiary of any such Life Insurance Policy.
(d) The Employer may, at its sole option, pledge the Life Insurance Policy
with the insurance company or with others as collateral for any loan made by the
Company.
(e) If the Employer has secured and maintained any Life Insurance Policy,
the Employee shall have the option to acquire the interest of the Employer in
the Life Insurance Policy by paying to the Employer the then cash surrender
value of any such policy, which option shall be exercisable within 30 days after
any of the following events (the "Option Period"): (i) termination of the
employment of the Employee with the Company; (ii) enactment of a resolution for
the liquidation of the Company or Parent or for the sale of substantially all of
their assets; or (iii) filing of a petition in any bankruptcy, receivership, or
reorganization proceeding of the Company or Parent. If the Employee exercises
this option, the Employer shall take such action as necessary to assign all the
rights in the Life Insurance Policy and to deliver physical possession of the
Life Insurance Policy. Failure to exercise the option within the Option Period
terminates the obligations of the Employer hereunder and the Employer may cancel
the Life Insurance Policy and receive its cash surrender value, in which case
neither the Employee nor any person claiming through the Employee shall have any
rights to any part of the Life Insurance Policy or its values.
(f) The Employer's obligations with respect to the Insurance Policies shall
be limited to those set forth in this Section 9 and in no event shall the
Employer be deemed a guarantor of the obligations of the insurance company. The
insurance company shall not be deemed a party to this Agreement, and it may rely
upon any action that we take so long as the Employer is the record owner of the
Insurance Policies
10. Limited Compensation Upon Termination.
(a) If the Employee's employment shall be terminated by reason of his
death, the Employer shall pay to such person as he shall designate in a notice
filed with the Employer, or if no such person shall be designated, to his estate
as a lump sum benefit, his Salary to the date of his death in addition to any
payments the Employee's spouse, beneficiaries or estate may be entitled to
receive pursuant to any pension or employee benefit plan or life insurance
policy or similar plan or policy then
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maintained by the Employer, and such payments shall, assuming the Employer is in
compliance with the provisions of this Agreement, fully discharge the Employer's
obligations with respect to Section 3 of this Agreement.
(b) During any period that the Employee fails to perform his duties
hereunder as a result of incapacity due to Disability, the Employee shall
continue to receive his Salary (as adjusted to reflect any disability benefits
under the Disability Policy, if any, that becomes generally available to
Employer) until the Employee's employment is terminated pursuant to Section 6.2
of this Agreement, after which time Employee shall receive payments or
disability benefits subject to the provisions of Section 9(a) of this Agreement.
(c) If the Employee's employment shall be terminated for Cause, the
Employer shall pay the Employee his full Salary through the Date of Termination,
at the rate in effect at the time Notice of Termination is given, and the
Employer shall, assuming the Employer is in compliance with the provisions of
this Agreement, have no further obligations with respect to Section 3 of this
Agreement.
(d) Except as provided above, upon Termination, all other obligations of
the Employer under this Agreement, including the obligations to indemnify,
defend and hold harmless the Employee, shall remain in full force and effect.
11. Confidentiality; Noncompetition.
(a) The Employer and the Employee acknowledge that the services to be
performed by the Employee under this Agreement are unique and, as a result of
such employment, the Employee will be in possession of confidential information
relating to the business practices of the Company. The term "confidential
information" shall mean any and all information (verbal and written) relating to
the Company or any of its affiliates, or any of their respective activities,
other than such information in the public domain (such information not being
deemed to be in the public domain merely because it is embraced by more general
information which is in the public domain) other than as the result of breach of
the provisions of this Section 11(a), including, but not limited to, information
relating to: trade secrets, personnel lists, financial information, research
projects, services used, pricing, customers, customer lists and prospects,
product sourcing, products sold as "specialty distributor", marketing and
selling and servicing. The Employee agrees that he will not, during the period
of his employment or for a period of six (6) months after the termination of
employment, directly or indirectly, use, communicate, disclose or disseminate to
any person, firm or corporation any confidential information regarding the
clients, customers or business practices of the Company acquired by the
Employee, without the prior
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written consent of Employer except to the extent required to be disclosed by
law, a court or an administrative order; provided, however, that the Employee
understands that Employee will be prohibited from misappropriating any trade
secret at any time during or after the termination of employment.
(b) The Employee hereby agrees that he shall not, during the period of his
employment and for a period of six (6) months following such employment,
directly or indirectly, within any county (or adjacent county) in any State
within the United States or territory outside the United States in which the
Company is engaged in business during the period of the Employee's employment or
on the date of termination of the Employee's employment, engage, have an
ownership interest in or render any services to any business (whether as owner,
manager, operator, licensor, licensee, lender, partner, stockholder, joint
venturer, employee, consultant or otherwise) competitive with the business
activities of the Company on the date of termination of his employment;
provided, however, that anything contained in this Agreement to the contrary
notwithstanding, the Employee shall not be precluded from engaging in business
with or having an ownership interest Time Warner and its affiliates, Chorus Line
and any of Dick Clark's affiliated companies.
(c) At no time during the term of this Agreement, or thereafter shall the
Employee directly disparage the commercial, business or financial reputation of
the Company.
(d) For purposes of clarification, but not of limitation, the Employee
hereby acknowledges and agrees that the provisions of subparagraphs 11(b) and
(c) above shall serve as a prohibition against him, during the period referred
to therein, directly or indirectly, soliciting any officer, employee, agent, or
customer who has been previously contacted by either a representative of the
Company, including the Employee, to discontinue or alter his, her or its
relationship with the Company.
(e) Upon the termination of the Employee's employment for any reason
whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and other
materials which refer or relate to any aspect of the business and are owned by
the Company which are in the possession of the Employee including all copies
thereof, shall be promptly returned to the Company.
(f) (i) The Employee agrees that all processes, technologies and inventions
("Inventions"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
by him during his employment by Employer shall belong to the Company, provided
that such Inventions grew out of the Employee's work with the Company are
related in any manner to the business
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(commercial or experimental) of the Company or are conceived or made on the
Company's time or with the use of the Company's facilities or materials. The
Employee shall further: (1) promptly disclose such Inventions to the Company;
(2) assign to the Company, without additional compensation, all patent and other
rights to such Inventions for the United States and foreign countries, provided,
however, that such assignment does not apply to any right which qualifies fully
under California Labor Code Section 2870; (3) sign all papers necessary to carry
out the foregoing; and (4) give testimony in support of his inventorship; and
(ii) The Employee agrees that he will not assert any rights to any
Invention as having been made or acquired by him prior to the date of this
Agreement, except for Inventions, if any, disclosed to the Company in writing
prior to the date hereof.
(g) The Company shall be the sole owner of all products and proceeds of the
Employee's services hereunder, including, but not limited to, all materials,
ideas, concepts, formats, suggestions, developments, arrangements, packages,
programs and other intellectual properties that the Employee may acquire,
obtain, develop or create in connection with and during the term of the
Employee's employment hereunder, free and clear of any claims by the Employee
(or anyone claiming under the Employee) of any kind or character whatsoever
(other than the Employee's right to receive payments hereunder). The Employee
shall, at the request of the Company, execute such assignments, certificates or
other instruments as the Company may from time to time deem necessary or
desirable to evidence, establish, maintain, perfect, protect, enforce or defend
its right, or title and interest in or to any such properties; provided,
however, that such assignment does not apply to any right which qualifies fully
under California Labor Code Section 2870.
(h) The parties hereto hereby acknowledge and agree that (i) the employment
hereunder is made in conjunction with the purchase by the Employer of the entire
business of the Prior Company, of which the Employee was a director and
controlling shareholder, and the Company would be irreparably injured in the
event of a breach by the Employee of any of his obligations under this Section
11, (ii) monetary damages would not be an adequate remedy for any such breach,
and (iii) the Company shall be entitled to injunctive relief, in addition to any
other remedy which it may have, in the event of any such breach.
(i) Each of the rights and remedies enumerated in this Section 11 shall be
severally enforceable, and all of such rights and remedies shall be in addition
to, and not in lieu of, any other rights and remedies available to the Company
under law or in equity.
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(j) If any provision contained in this Section 10 is hereafter construed to
be invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid portions.
(k) If any provision contained in this Section 11 is found to be
unenforceable by reason of the extent, duration or scope thereof, or otherwise,
then the court making such determi- nation shall have the right to reduce such
extent, duration, scope or other provision and in its reduced form any such
restriction shall thereafter be enforceable as contemplated hereby.
12. Indemnification. The Employer shall indemnify and hold harmless the
Employee against any and all expenses reasonably incurred by him in connection
with or arising out of (a) the defense of any action, suit or proceeding in
which he is a party, or (b) any claim asserted or threatened against him, in
either case by reason of or relating to his being or having been an employee,
officer or director of the Company, whether or not he continues to be such an
employee, officer or director at the time of incurring such expenses, except
insofar as such indemnifica- tion is prohibited by law. Such expenses shall
include, without limitation, the fees and disbursements of attorneys, amounts of
judgments and amounts of any settlements, provided that such expenses are agreed
to in advance by the Employer. In the event Employer disputes its obligation to
so indemnify Employee, Employer shall reimburse such expenses on a current basis
pending a final determination with respect to such indemnification obligation.
The foregoing indemnification obligation is independent of any similar
obligation provided in the Employer's Certificate of Incorporation or Bylaws,
and shall apply with respect to any matters attributable to periods prior to the
Effective Date, and to matters attributable to his employment hereunder, without
regard to when asserted.
13. General. This Agreement is further governed by the following
provisions:
(a) Notices. All notices relating to this Agreement shall be in writing and
shall be either personally delivered, sent by telecopy (receipt confirmed) or
mailed by certified mail, return receipt requested, to be delivered at such
address as is indicated below, or at such other address or to the attention of
such other person as the recipient has specified by prior written notice to the
sending party. Notice shall be effective when so personally delivered, one
business day after being sent by telecopy or five days after being mailed.
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To the Employer:
JJI/ASCI Acquisition Corp.
c/o American CinemaStores, Inc.
1543 7th Street, Suite 400
Santa Monica, CA 90401
Attention: Steve Natale, President
With a copy to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Gary A. Schonwald, Esq.
To the Employee:
Bruce Sacks
1389 North Tottenham
Agoura Hills, CA 91301
With a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street
48th Floor
Los Angeles, California 90071
Attention: Lawrence Braum, Esq.
(b) Parties in Interest. Employee may not delegate his duties or assign his
rights hereunder.
(c) Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Employee by the Employer and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever. Any modification or termination of this Agreement will be
effective only if it is in writing signed by the party to be charged.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California. Employee and Employer agree
to and hereby does submit to jurisdiction before any state or federal court of
record in Los Angeles County, California.
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(e) Warranty. Employee hereby warrants and represents as follows:
(i) That the execution of this Agreement and the discharge of
Employee's obligations hereunder will not breach or conflict with any other
contract, agreement, or understanding between Employee and any other party
or parties.
(ii) Employee has ideas, information and know-how relating to the type
of business conducted by Employer, and Employee's disclosure of such ideas,
information and know-how to Employer will not conflict with or violate the
rights of any third party or parties.
(f) Severability. In the event that any term or condition in this Agreement
shall for any reason be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other term or condition of this Agreement,
but this Agreement shall be construed as if such invalid or illegal or
unenforceable term or condition had never been contained herein or, to the
extent permissible, construed so as to limit such term or condition as to be
enforceable without invalidating the remaining terms and conditions of this
Agreement.
(g) Execution in Counterparts. This Agreement may be executed by the
parties in one or more counterparts, each of which shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has been
signed by each of the parties hereto and delivered to each of the other parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
JJI/ASCI ACQUISITION CORP.
By:
--------------------------------
Name: Steve Natale
Title: President
--------------------------------
Bruce Sacks
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GUARANTEE TO EMPLOYMENT AGREEMENT
[TEXT TO BE SUPPLEMENTED]
AMERICAN CINEMASTORES, INC.
By:
----------------------------
Steve Natale, President
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of __________, 1996, between American
CinemaStores, Inc., a Delaware corporation (the "Employer" or the "Company"),
and Christopher Ebert (the "Executive").
W I T N E S S E T H :
WHEREAS, the Employer desires to employ Executive as Chief Financial
Officer of the Company on the terms and conditions hereinafter set forth; and
WHEREAS, the Executive is willing to accept such employment on such terms
and conditions.
NOW, THEREFORE, in consideration of the mutual cove- nants and agreements
hereinafter set forth, and intending to be legally bound hereby, the Employer
and the Executive hereby agree as follows:
1. Term. Employer hereby agrees to employ Executive, and Executive hereby
agrees to serve Employer on the terms and conditions herein provided for a two
(2) year period, commencing effective as of the date of this Agreement (the
"Effective Date") and terminating on the second anniversary of the Effective
Date unless sooner terminated as hereinafter provided.
2. Executive Duties.
(a) During the term of this Agreement, the Executive shall have the duties
and responsibilities of the Chief Financial Officer of the Company, reporting to
the Chairman of the Board of Directors of the Employer (the "Board"). It is
understood that such duties and responsibilities shall be reasonably related to
the Executive's position as the Chief Financial Officer.
(b) The Executive shall devote substantially all of his business time,
attention, knowledge and skills faithfully, diligently and to the best of his
ability, in furtherance of the business and activities of the Company and its
subsidiaries. The principal place of performance by the Executive of his duties
hereunder shall be in the counties of Ventura or Los Angeles, although the
Executive may be required to travel outside of the area where the Subsidiary's
principal executive offices are located in connection with the business of the
Company and its subsidiaries.
<PAGE>
3. Compensation.
(a) During the term of this Agreement, the Employer shall pay the Executive
a salary (the "Salary") at a rate of $110,000 per annum, payable in equal
installments bi-weekly, or at such other times as may mutually be agreed upon
between the Employer and the Executive. Such Salary may be increased from time
to time at the discretion of the Board.
(b) In addition to the Salary, the Employer shall provide Executive with an
automobile, together with automobile insurance in accordance with the then
current Company's policy, provided, however, that the Company shall not be
obligated for lease payments on such automobile in excess of $650 per month.
Employer shall reimburse Executive for all expenses of maintaining and operating
such automobile upon the presentation of appropriate vouchers and/or receipts.
(c) In addition to the Salary, the Executive may receive such cash bonuses
as may from time to time be awarded to him by the Board at its discretion during
or in respect of his employment hereunder. Such bonuses shall be at least
comparable to those received by other executives of the Company and its
subsidiaries.
4. Benefits.
(a) During the term of this Agreement, the Executive shall receive or
participate in benefits and benefit plans substantially similar and comparable
to those benefits and benefit plans offered from time to time to other
executives of the Company and its subsidiaries and for which the Executive is
eligible, including, without limitation, health and disability insurance and
four (4) weeks vacation. Such vacation may be taken in the Executive's
discretion with the prior approval of the Employer, and at such time or times as
are not inconsistent with the reasonable business needs of the Subsidiary and
Company.
(b) During the term of this Agreement, the Employer shall provide the
Executive the number of paid holidays, personal days off and sick leave days
with respect to each calendar year in accordance with the then current Company's
policy.
5. Executive Expenses Incident to Performance of Service. The Company shall
promptly reimburse all travel and other expenses reasonably incurred by the
Executive and incident to his rendering of services hereunder during the term of
this Agreement. Any such expenses, in excess of [$ ] at any single time, must be
preapproved by the Chairman of the Board. All submissions for reimbursement made
by Executive shall include appropriate receipts for any such expenses.
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6. Termination. Employer shall have the right to Terminate Executive's
employment under this Agreement only in the following circumstances:
6.1. Death. The Executive's employment under this Agreement shall terminate
immediately upon the date of his death.
6.2. Disability. If, as a result of the Executive's incapacity due to
"Disability" (as herein defined), the Executive shall have been absent from his
duties under this Agreement for [120] calendar days during any calendar year,
the Employer may terminate the Executive's employment under this Agreement.
"Disability" shall be defined either (i) as such term is defined by any
Disability Policy (as defined in Section 9 hereof), in which case said term
shall be construed in accordance and pursuant to the provisions thereof or (ii)
if no Disability Policy is in effect on the date that Executive becomes
disabled, as the inability of Executive,by reason of physical illness or injury
or mental illness, substantially to perform his usual duties as an employee of
the Company, in which case the Board and the Executive shall determine whether
the Executive is disabled and when such Disability commenced and ended. In
making any such determination, the parties may rely upon the opinion of a
physician who is jointly selected by the Board and the Executive. If the Board
and the Executive are unable to agree as to the existence of a disability, such
determination shall be made by arbitration in the State of California under the
rules and auspices of the American Arbitration Association before a panel of
three (3) physicians.
6.3. Cause. The Employer may terminate the Executive's employment under
this Agreement for Cause. For purposes of this Agreement, the Employer shall
have "Cause" to terminate the Executive's employment under this Agreement upon
(a) the willful and continued failure by the Executive to substantially perform
his duties under this Agreement (other than any such failure resulting from the
Executive's Disability) after demand for substantial performance is delivered by
the Employer, in writing, specifically identifying the manner in which the
Employer believes the Executive has not substantially performed his duties and
the Executive fails to perform as required within 15 business days after such
demand is made, (b) the willful criminal misconduct by Executive (including
embezzlement, fraud, harassment of employees) which is materially injurious to
the Employer, monetarily or otherwise or (c) the conviction of the Executive of
a serious felony which is injurious to the Employer, monetarily or otherwise. No
act, or failure to act, on Executive's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best interest of Employer.
Notwithstanding the foregoing,
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Executive shall not be deemed to have been terminated for cause unless and until
there has been delivered to Executive a copy of a resolution, duly adopted by
the affirmative vote of not less than a majority of the entire membership of the
Board at a meeting of the Board called and held for such purpose (after
reasonable notice to Executive and an opportunity for him, together with his
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, Executive conducted, or failed to conduct, himself in a manner set
forth above, and specifying the particulars thereof in detail.
6.4. Termination by Executive. Executive may terminate his employment
hereunder for "Good Reason". For purposes of this Agreement, "Good Reason" shall
mean (i) a Change in Control (as hereinafter defined) of Employer, or (ii) any
limitation of his powers, or (iii) any removal of Executive, as, or any failure
to re-elect Executive as, President of the Subsidiary, except in connection with
termination of Executive's employment for Cause or Disability. For purposes of
this Agreement, a "Change in Control" of Employer shall be deemed to have
occurred if (i) any "Person" (as such term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")), other than Employer or
any group of which it is a member, is or become the "beneficial owner" (as
defined in Rule 13(d)-3 under the Exchange Act), directly or indirectly, of
securities of Employer representing twenty-five percent (25%) or more of the
combined voting power of Employer's then outstanding securities. Upon such
termination by Executive, Employer shall pay Executive his salary through the
end of the two year term of this Agreement in a lump sum upon the date of
Termination, all other amounts to which Executive is entitled, including,
without limitation, expense reimbursement amounts accrued to the date of
Termination and Employer shall maintain in effect all benefits during the
balance of such three year period. In such case, Executive shall not be required
to mitigate the amount of any payment provided for in this section.
7. Notice of Termination.
Any termination of the Executive's employment by the Employer or by the
Executive (other than termination by reason of the Executive's death) shall be
communicated by written Notice of Termination to the other party of this
Agreement.
8. Date of Termination.
The "Date of Termination" shall mean (a) if the Executive's employment is
terminated by his death, the date of his death, (b) if the Executive's
employment is terminated pursuant to Section 6.2 above, the date on which the
Notice of Termination is given, (c) if the Executive's employment is terminated
pursuant to Section 6.3 above, the date specified on the Notice of Termination
after the expiration of any cure
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periods and (d) if Executive terminates his employment pursuant to Section 6.4
above, the date specified in Executive's Notice of Termination.
9. Life Insurance and Disability Insurance.
(a) The Company may, at its sole option, secure a key- man term life
insurance policy, in the face amount of $1,000,000, on the Executive's life,
(the "Life Policy"). The Company shall obtain a disability insurance policy for
Executive (the "Disability Policy") and, together with the Life Policy,
hereinafter on occasion referred to as the "Insurance Policies").
(b) With respect to any Insurance Policies, subject to Section 4 above,
Employer shall pay all premiums and take all action necessary to maintain such
policies in full force and effect in accordance with the then Company's policy
and so long as Executive is employed by the Company and not in default of any of
his obligations or responsibilities hereunder.
(c) Employer shall be the owner and exercise all the rights of ownership
with respect to any Life Policy procured hereunder. Employer shall also be the
beneficiary of any such Life Policy.
(d) Employer shall be the owner, exercising all the rights of ownership,
with respect to any Disability Policy procured hereunder; provided, however,
that the beneficiary under any such Disability Policy shall be as identified by
Executive from time to time. Employer shall take such steps as necessary to make
the Disability Policy payable to the person(s) and in the manner so designated
by Executive.
(e) With respect to any Life Policy procured for Executive hereunder,
Employer shall be the owner and exercise all the rights of ownership. Employer
shall also be the beneficiary of any such Life Policy.
(f) Executive hereby agrees to cooperate fully with Executive with respect
to applying for and securing the Insurance Policies, including, without
limitation, submitting to a physical examination and executing and delivering
any and all necessary documents required by the insurance company.
(g) Employer may, at its sole option, pledge the Life Policy with the
insurance company or with others as collateral for any loan made by the Company.
(h) Executive shall have the option, exercisable within 30 days after any
of the following events (the "Option Period"), to acquire the interest of the
Employer in the
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Insurance Policies by paying to Employer the then cash surrender value of any
such policy: (i) termination of Executive's employment with the Company; (ii)
enactment of a resolution for the liquidation of the Company or for the sale of
substantially all of its assets; or (iii) filing of a petition in any
bankruptcy, receivership, or reorganization proceeding of the Company. If
Executive exercises this option, the Employer shall take such action as
necessary to assign all the rights in the Insurance Policies and to deliver
physical possession of the Insurance Policies. Failure to exercise the option
within the Option Period terminates the obligations of Employer hereunder and
Employer may cancel the Insurance Policies and receive its cash surrender value,
in which case neither Executive nor any person claiming through Executive shall
have any rights to any part of the Insurance Policies or its values.
(i) Employer's obligations with respect to the Insurance Policies shall be
limited to those set forth in Sections 4 and 9 and in no event shall Employer be
deemed a guarantor of the insurance company's obligations. The insurance company
shall not be deemed a party to this Agreement, and it may rely upon any action
that Employer takes so long as Employer is the record owner of the Insurance
Policies.
10. Limited Compensation Upon Termination.
(a) If the Executive's employment shall be terminated by reason of his
death, the Employer shall pay to such person as he shall designate in a notice
filed with the Employer, or if no such person shall be designated, to his estate
as a lump sum benefit, his Salary earned to the date of his death and, except as
otherwise provided in this Agreement, any payments the Executive's spouse,
beneficiaries or estate may be entitled to receive pursuant to any pension or
employee benefit plan or life insurance policy or similar plan or policy then
maintained by the Employer, and such payments shall, assuming the Employer is in
compliance with the provisions of this Agreement, fully discharge the Employer's
obligations with respect to Section 3 of this Agreement.
(b) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to Disability, the Executive shall
continue to receive his Salary until the earlier to occur of (i) the Executive's
employment is terminated pursuant to Section 6.2 of this Agreement or (ii) the
payments of disability benefits under the Disability Policy shall become
generally available to the Executive.
(c) If the Executive's employment shall be terminated for Cause, the
Employer shall pay the Executive his full Salary through the Date of
Termination, at the rate in effect at the time Notice of Termination is given,
and the Employer shall have
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no further obligations with respect to Section 3 of this Agreement.
(d) Except as provided for above, upon Termination, all other obligations
of the Employer under this Agreement, including the obligations to indemnify,
defend and hold harmless the Executive, shall remain in full force and effect.
11. Confidentiality; Noncompetition.
(a) The Employer and the Executive acknowledge that the services to be
performed by the Executive under this Agreement are unique and, as a result of
such employment, the Executive will be in possession of confidential information
relating to the business practices of the Company and its subsidiaries. The term
"confidential information" shall mean any and all information (verbal and
written) relating to the Company or any of its subsidiaries, affiliates, or any
of their respective activities, other than such information in the public domain
(such information not being deemed to be in the public domain merely because it
is embraced by more general information which is in the public domain) other
than as the result of breach of the provisions of this Section 11(a), including,
but not limited to, information relating to: trade secrets, personnel lists,
financial information, research projects, services used, pricing, customers,
customer lists and prospects, product sourcing, marketing and selling and
servicing. The Executive agrees that he will not, during the period of his
employment and for the "Restricted Period" (as defined in the following
paragraph), directly or indirectly, use, communicate, disclose or disseminate to
any person, firm or corporation any confidential information regarding the
clients, customers or business practices of the Company acquired by the
Executive, without the prior written consent of Employer except to the extent
required to be disclosed by law, a court or administrative order; provided,
however, that the Executive understands that Executive will be prohibited from
misappropriating any trade secret at any time during or after the termination of
employment.
The term "Restricted Period" shall mean a two (2) year period following
either (i) the voluntary termination of employment by the Executive or (ii)
termination of his employment by Employer pursuant to Section 6.3 of this
Agreement.
(b) The Executive hereby agrees that he shall not, during the period of his
employment and for the "Restricted Period", directly or indirectly, within any
county (or adjacent county) in any State within the United States or territory
outside the United States in which the Company is engaged in business during the
period of the Executive's employment or on the date of termination of the
Executive's employment, engage, have an interest in or render any services to
any business (whether as owner, manager, operator, licensor, licensee, lender,
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partner, stockholder, joint venturer, employee, consultant or otherwise)
directly competitive with the business activities of the Company or its
subsidiaries on the date of termination of his employment.
(c) At no time during the term of this Agreement, or thereafter shall the
Executive directly disparage the commercial, business or financial reputation of
Subsidiary or the Company or its subsidiaries.
(d) For purposes of clarification, but not of limitation, the Executive
hereby acknowledges and agrees that the provisions of subparagraphs 11(b) and
(c) above shall serve as a prohibition against him, during the period referred
to therein, directly or indirectly soliciting any officer, employee, agent, who
has been previously contacted by either a representative of Subsidiary or the
Company, including the Executive, to discontinue or alter his, her or its
relationship with the Company.
(e) Upon the termination of the Executive's employment for any reason
whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and other
materials which refer or relate to any aspect of the business of Subsidiary or
the Company which are in the possession of the Executive including all copies
thereof, shall be promptly returned to Subsidiary or the Company, as the case
may be.
(f) (i) The Executive agrees that all processes, technologies and
inventions ("Inventions"), including new contributions, improvements, ideas and
discoveries, whether patentable or not, conceived, developed, invented or made
by him during his employment by Employer shall belong to Subsidiary or the
Company, provided that such Inventions grew out of the Executive's work with
Subsidiary or the Company are related in any manner to the business (commercial
or experimental) of the Company or its subsidiaries or are conceived or made on
the Company's time or with the use of the facilities or materials of the Company
or its subsidiaries. The Executive shall further: (1) promptly disclose such
Inventions to the Company; (2) assign to the Company, without additional
compensation, all patent and other rights to such Inventions for the United
States and foreign countries; provided, however, that such assignment does not
apply to any right which qualifies fully under California Labor Code Section
2870; (3) sign all papers necessary to carry out the foregoing; and (4) give
testimony in support of his inventorship; and
(ii) The Executive agrees that he will not assert any rights to any
Invention as having been made or acquired by him prior to the date of this
Agreement, except for Inventions, if any, disclosed to the Company in writing
prior to the date hereof.
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(g) The Company shall be the sole owner of all products and proceeds of the
Executive's services hereunder, including, but not limited to, all materials,
ideas, concepts, formats, suggestions, developments, arrangements, packages,
programs and other intellectual properties that the Executive may acquire,
obtain, develop or create in connection with and during the term of the
Executive's employment hereunder, free and clear of any claims by the Executive
(or anyone claiming under the Executive) of any kind or character whatsoever
(other than the Executive's right to receive payments hereunder). The Executive
shall, at the request of the Company, execute such assignments, certificates or
other instruments as the Company may from time to time deem necessary or
desirable to evidence, establish, maintain, perfect, protect, enforce or defend
its right, or title and interest in or to any such properties; provided,
however, that such assignment does not apply to any right which qualifies fully
under California Labor Code Section 2870.
(h) The parties hereto hereby acknowledge and agree that: (i) the
employment hereunder is made in conjunction with the purchase by the Employer of
the entire business of the Prior Company, of which the Executive was a director
and controlling beneficial shareholder, and the Company would be irreparably
injured in the event of a breach by the Executive of any of his obligations
under this Section 11, (ii) monetary damages would not be an adequate remedy for
any such breach, and (iii) the Company shall be entitled to injunctive relief,
in addition to any other remedy which it may have, in the event of any such
breach.
(i) The parties hereto hereby acknowledge that, in addition to any other
remedies the Company may have under Section 11(h) hereof, the Company shall have
the right and remedy to require the Executive to account for and pay over to the
Company all compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by the Executive as the
result of any transactions constituting a breach by Executive of any of the
provisions of Section 11, and the Executive hereby agrees to account for any pay
over such Benefits to the Company.
(j) Each of the rights and remedies enumerated in Section 11(h) and 11(i)
shall be independent of the other, and shall be severally enforceable, and all
of such rights and remedies shall be in addition to, and not in lieu of, any
other rights and remedies available to the Company under law or in equity.
(k) If any provision contained in this Section is hereafter construed to be
invalid or unenforceable, the same shall not affect the remainder of the
covenant or covenants, which shall be given full effect, without regard to the
invalid portions.
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(l) If any provision contained in this Section 11 is found to be
unenforceable by reason of the extent, duration or scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, scope or other provision and in its reduced form any such
restriction shall thereafter be enforceable as contemplated hereby.
12. Indemnification. The Employer shall indemnify and hold harmless the
Executive against any and all expenses reasonably incurred by him in connection
with or arising out of (a) the defense of any action, suit or proceeding in
which he is a party, or (b) any claim asserted or threatened against him, in
either case by reason of or relating to his being or having been an employee,
officer or director of the Company or its subsidiaries, whether or not he
continues to be such an employee, officer or director at the time of incurring
such expenses, except insofar as such indemnification is prohibited by law. Such
expenses shall include, without limitation, the fees and disbursements of
attorneys, amounts of judgments and amounts of any settlements, provided that
such expenses are agreed to in advance by the Employer. Such expenses shall be
reimbursed on a current basis. In the event Employer disputes its obligation to
so indemnify Executive, Employer shall reimburse such expenses on a current
basis pending a final determination with respect to such indemnification
obligation. The foregoing indemnification obligation is independent of any
similar obligation provided in the Employer's Certificate of Incorporation or
Bylaws, and shall apply with respect to any matters attributable to periods
prior to the Effective Date, and to matters attributable to his employment
hereunder, without regard to when asserted.
13. General. This Agreement is further governed by the following
provisions:
(a) Notices. All notices relating to this Agreement shall be in writing and
shall be either personally delivered, sent by telecopy (receipt confirmed) or
mailed by certified mail, return receipt requested, to be delivered at such
address as is indicated below, or at such other address or to the attention of
such other person as the recipient has specified by prior written notice to the
sending party. Notice shall be effective when so personally delivered, one
business day after being sent by telecopy or five days after being mailed.
To the Employer:
American CinemaStores, Inc.
1543 Seventh Street, Ste. 400
Santa Monica, CA 90401
Attention: Steve Natale
-10-
<PAGE>
To the Executive:
Christopher Ebert
1527 West Shamrock Street
Rialto, CA 92376
With a copy in the same manner to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attn: Gary A. Schonwald, Esq.
(b) Parties in Interest/Successors. Executive may not delegate his duties
or assign his rights hereunder. Employer shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Employer or its subsidiaries,
by agreement in form and substance satisfactory to Executive, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that Employer would be required to perform it if no such succession has
taken place. Failure of Employer to obtain such agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Executive to compensation from Employer in the same amount and on
the same terms as he would be entitled to hereunder if he had terminated his
employment for Good Reason, except that for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the date of Termination. As used in this Agreement, "Employer" shall mean
Employer as herein before defined and any successor to its business and/or
assets as aforesaid which executes and delivers the agreement provided for in
this paragraph or which otherwise becomes bound by all the terms and provisions
of this Agreement by operation of law. This Agreement and all rights of
Executive hereunder shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, designees and legatees.
(c) Entire Agreement. This Agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the employment of the Executive by the Employer and contains all of the
covenants and agreements between the parties with respect to such employment in
any manner whatsoever. Any modification or termination of this Agreement will be
effective only if it is in writing signed by the party to be charged.
(d) Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of
-11-
<PAGE>
the State of California. Executive and Employer agree to and hereby do submit to
jurisdiction before any state or federal court of record in Los Angeles County,
California.
(e) Warranty. Executive hereby warrants and represents as follows:
(i) That the execution of this Agreement and the discharge of
Executive's obligations hereunder will not breach or conflict with any
other contract, agreement, or understanding between Executive and any other
party or parties.
(ii) Executive has ideas, information and know-how relating to the
type of business conducted by Employer, and Executive's disclosure of such
ideas, information and know-how to Employer will not conflict with or
violate the rights of any third party or parties.
(f) Severability. In the event that any term or condition in this Agreement
shall for any reason be held by a court of competent jurisdiction to be invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other term or condition of this Agreement
but this Agreement shall be construed as if such invalid or illegal or
unenforceable term or condition had never been contained herein or, to the
extent permissible, construed so as to limit such term or condition as to be
enforceable without invalidating the remaining terms and conditions of this
Agreement.
(g) Execution in Counterparts. This Agreement may be executed by the
parties in one or more counterparts, each of which shall be deemed to be an
original but all of which taken together shall constitute one and the same
agreement, and shall become effective when one or more counterparts has been
signed by each of the parties hereto and delivered to each of the other parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
COMPANY: American CinemaStores, Inc.
By:
-------------------------------
Name: Steve Natale
Title: President
EXECUTIVE:
-------------------------------
Christopher Ebert
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
American CinemaStores, Inc.
Santa Monica, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form SB-2 of our report dated July 27, 1995, except
for Note 7 which is as of June 7, 1996, relating to the consolidated financial
statements of American CinemaStores, Inc. which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Los Angeles, California
July 22, 1996
Consent of Independent Certified Public Accountants
We have issued our report dated April 18, 1996 accompanying the financial
statements of Superior/Panoramic Hand Prints, Inc. contained in this
Post-Effective Amendment on Form SB-2 Registration Statement and Prospectus. We
consent to the use of the aforementioned report in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts".
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 22, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q AT FEBRUARY 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> APR-30-1996
<CASH> 596,459
<SECURITIES> 0
<RECEIVABLES> 381,646
<ALLOWANCES> 0
<INVENTORY> 124,685
<CURRENT-ASSETS> 1,105,869
<PP&E> 106,158
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,402,790
<CURRENT-LIABILITIES> 86,610
<BONDS> 0
0
0
<COMMON> 6,892
<OTHER-SE> 1,309,288
<TOTAL-LIABILITY-AND-EQUITY> 1,402,790
<SALES> 4,252
<TOTAL-REVENUES> 4,252
<CGS> 6,310
<TOTAL-COSTS> 243,747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (17,800)
<INCOME-PRETAX> (315,385)
<INCOME-TAX> 0
<INCOME-CONTINUING> (215,385)
<DISCONTINUED> (128,555)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (343,940)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0.00
</TABLE>
