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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1996
Commission File Number 0-23138
AMERICAN CINEMASTORES, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-4374952
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1543 7TH STREET
SANTA MONICA, CALIFORNIA 90401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 394-6444
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Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of exchange on which registered
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None None
Securities registered pursuant to Section 12 (g) of the Act:
COMMON STOCK AND REDEEMABLE WARRANTS
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Registration S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
Issuer's loss for its fiscal year 1996: $2,510,147 .
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant on July 31, 1996, based on the average bid and asked price on such
date was $1.31
The number of shares of common stock outstanding as of July 31, 1996: 6,892,638.
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AMERICAN CINEMASTORES, INC.
FORM 10-KSB
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
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 pending mergers with Superior Panoramic Hand Prints,
Inc. and Just Jackets Corporation (the "Target Companies") (See Note 7 of the
financial statements), and expanding Sierra's business.
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. They 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 they do business and the graphic designs required by
their retail customers. Just Jackets 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, and Just Jackets was
established in 1993.
The Target Companies decorate blank garments and other textile products with
graphic designs primarily by means of screenprinting and embroidery. They
believe that producing high quality graphic images on the garments they supply,
coupled with their ability to produce and deliver value added products within
short time frames, fortifies their reputation in the advertising specialty
industry. 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.
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 and 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.
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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 consists
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 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.
Sierra's president and 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 Sales
Dynamics, Inc., and had net sales of approximately $698,000 and a net loss from
operations. Of such number of customers, Sales Dynamics, Inc. with 54%, and
General Growth Properties with 24%, accounted for 78% 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.
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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 report, 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.
BACKLOG
As of the date of this report, Sierra has a backlog of firm orders of
approximately $400,000. The backlog consists primarily of merchandising units
being produced for The Walt Disney Company, Center Court Concierge Company, and
Cal-Mart. These units 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 Sierra 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 its own manufacturing facility and some of the competitors may
have greater 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.
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EMPLOYEES
As of the date of this report, the Company had nine employees, three 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.
ITEM 2 - DESCRIPTION OF PROPERTIES
The Company does not own any properties.
The Company currently leases approximately 3,000 square feet of office space in
Santa Monica, California. The lease had a term of 36 months at $8,260 per
month, expiring in February 1998. In anticipation of a merger being
consummated, the Company has terminated its existing lease without penalty and
will move its executive offices to Sierra or to the space currently leased by
the Target Companies in September, 1996.
The Company does not anticipate incurring any significant expenses regarding its
relocation. If a merger is not consummated, the Company intends to relocate the
Corporate offices to Sierra. Sierra currently leases approximately 1,500 square
feet of office and showroom space in Newport Beach, California at a monthly
rental of $1,500. Such lease expires in June 1999.
ITEM 3 - LEGAL PROCEEDINGS
There are no proceedings of any sort to which the Company, or to the knowledge
of the Company or subsidiary, or any director, officer or affiliate of the
Company, any beneficial owner of more than five percent of the registrants
common stock, or any associate of such person, is a party that is adverse to the
Company or its properties.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year.
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PART II
ITEM 5 -MARKET FOR REGISTRANT'S COMMON STOCK
The Company's common stock and redeemable warrants are traded on the NASDAQ
Small Cap Market. The closing bid information for the quarter ended May 31,
1996, as quoted by the NASDAQ was 2 1/2. The range of bid information as quoted
by NASDAQ for fiscal 1996 is as follows:
Quarter Ended High Low
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May 31, 1996 2 7/8 7/8
February 29, 1996 4 7/8 2 1/4
November 30, 1995 5 3 1/8
August 31, 1995 5 1/2 3 3/8
The Company's common stock is held by approximately 450 shareholders of record
and the warrants are held by approximately 43 holders of record as of July 31,
1996. Most shares are held in street name by nominees who hold stock
certificates for an unknown number of shareholders and/or warrant holders.
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 August 1, 1994. The stockholders' equity
accounts and all per share data have been retroactively adjusted to reflect the
stock dividend. Any future determination as to stock or cash dividends will
depend upon the financial position of the Company at that time and such other
factors as the Board of Directors may deem appropriate.
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ITEM 6 - 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 proposed 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 "Mergers"). Toward that end, the Company has formed
two wholly-owned subsidiaries who, in turn, have entered into merger agreements
with the Target Companies pursuant to which the Company it is obligated to raise
at least $3.5 million through 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 acquired Target Companies
following the consummation of the Mergers. 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 and a
cartoon series 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,
1996, and 1995, respectively, including the notes thereto.
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RESULTS OF OPERATIONS- THE COMPANY
FISCAL YEAR ENDED MAY 31, 1996 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 1995
NET SALES
Net sales from continuing operations for the year ended May 31, 1996 were
$683,888. Sales from continuing operations for the year ended May 31, 1995 were
$14,418. Net sales from continuing operations consisted of sales generated by
Sierra. If sales of $742,895 from the discontinued retail operations were
included in the net sales for the year ended May 31, 1996, net sales for such
period would have been $1,416,728, as compared to net sales from all operations
of $841,146 for the year ended May 31, 1995. This increase is primarily
attributable to sales generated by Sierra.
GROSS PROFIT
Gross profit from continuing operations for the year ended May 31, 1996 was
$273,799, or 40% of net sales. Gross profit from continuing operations is
primarily attributable to net sales generated by Sierra. Cost of goods sold
from the discontinued retail operations were $659,084, approximately 88% of net
sales. If the gross profit of $83,811 from discontinued retail operations were
included in the net sales for the year ended May 31, 1996, gross profit for such
period would have been $347,555 (or 25%), as compared to gross profit from all
operations of $103,205, or 12%, for the year ended May 31, 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 year ended May 31,
1996 were $97,600, consisting of commissions paid to outside sales personnel for
Sierra. There were no selling expenses attributable to continuing operations
for the year ended May 31, 1995. Selling expenses from discontinued operations
for the year ended May 31, 1996 were $638,928, as compared to $969,305 for the
year ended May 31, 1995. The reason for the decrease was a decrease in the
retail sales of the discontinued operations.
General and administrative expenses relating to continuing operations for the
year ended May 31, 1996 were $1,931,785, as compared to $1,277,270 for the year
ended May 31, 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 from $160,765 to $80,065
during the year ended May 31, 1996, as compared to the year ended May 31,
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 year ended May 31,
1996 of $2,510,148, or $0.36 per share. There was a net loss of $1,668,957, or
$0.24 per share, from continuing operations and a net loss of $841,190, or $0.12
per share from discontinued operations. Loss from discontinued operations
includes a loss on disposal of fixed assets of $450,139. The Company incurred a
net loss of $2,255,847, or $0.36 per share, for the year ended May 31, 1995.
Loss from continuing operations was $1,122,904, primarily attributed to start-up
expenses for Sierra and licensed product operations. Loss from discontinued
operations was $1,132,943, of which $136,813 related to a write-off of fixed
assets.
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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 of 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 $1,277,270. There were
no 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 $1,091,725, 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 $1,122,904 or $0.18 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
$1,132,943 or $0.18 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 $136,813
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.
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 May 31, 1996, the Company had working
capital of $525,612, as compared to working capital of $3,311,185 at May 31,
1995. The decrease in working capital was primarily attributable to
inventory write-downs and loss related to discontinued retail operations and
continuing operations.
Net cash used in operating activities was $1,852,923 for the year ended May 31,
1996, as compared to net cash used in operating activities of $2,477,917 for the
year ended May 31, 1995. The increase in cash used in operating activities was
primarily attributable to the net loss from continuing operations.
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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 Target Companies, negotiating the merger
agreements (see Note 7 to the financial statements), and implementing its plan
to raise funds to finance the acquisition of the Target Companies and to provide
working capital to them subsequent to the completion of such Mergers.
The Company provides for income taxes in accordance with STATEMENT OF FINANCIAL
STANDARDS ("SFAS") NO. 109, ACCOUNTING FOR INCOME TAXES. As of May 31, 1996,
the Company has significant amounts of net operating loss carry-forwards which
result in deferred tax assets of $2.1 million (See Note 5 to the Financial
Statements). 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. As of May 31, 1996, a valuation allowance has been
recognized for the full amount of the deferred tax asset of $2.1 million.
For federal income tax purposes, the Company has federal net operating loss
carry-forwards of $5,912,000 and state net operating loss carry-forwards of
$2,723,000 at May 31, 1996. These carry-forwards expire in the years 2008 to
2011. Federal tax rules impose limitations on the use of net operating losses
following certain changes in ownership. The Company experienced such a change
in March 1994, which will limit the use of the federal net operating loss
carryforward to $370,000 per year on a total of $985,000 incurred prior to the
change in ownership.
The Company believes it will generate sufficient cash flows from operations in
fiscal 1997 to meet cash requirements for existing subsidiary operations. In
the event the Company consummates the merger agreements, additional financing
may be required to meet operational and cash necessities of the new entity.
However, no assurance can be given that such financing will be obtained.
If the mergers are not effected, the Company intends to expand Sierra's
operations. The Company has also taken certain cost-cutting measures.
Effective September 1, 1996, the Company canceled its lease on the corporate
office facility, without penalty, and will merge the corporate office with
Sierra's office in Newport Beach, California. The Company plans to terminate
corporate personnel in areas where duplication of functions occurs.
STATEMENTS 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 non-employees 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.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is included in the Company's financial
statements beginning on page 12 of this report.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
The information required by Part III, Items 9 through 12, is hereby incorporated
by reference from the Company's Proxy Statement to be filed with the Securities
and Exchange Commission within 120 days after the end of fiscal 1996.
ITEM 13 - EXHIBITS AND LISTS AND REPORTS ON FORM 8-K
(a) INDEX TO EXHIBITS AND LISTS
EXHIBIT DESCRIPTION
3.1 Articles of Incorporation as amended. (1)(2)
3.2 By-Laws. (1)(2)
4.2 Form of Warrant Agreement between the Company and Continental
Stock Transfer & Trust Company, including form of redeemable
warrant. (1)(2)
10.1 Employment Agreement dated November 19, 1993, between the Company
and Steve Natale. (1)(2)
10.2 Employment Agreement dated November 19, 1993, between the Company
and Gill Champion. (1)(2)
10.3 1993 Stock Option Plan. (1)(2)
10.11 Standard Industrial lease dated July 15, 1993, between the
Company and Bruce Meyer. (1)(2)
10.17 Letter Agreement, dated June 25, 1996.
10.18 Registration Rights Agreement, dated April 8, 1993, between the
Company and the stockholders of the Company listed on the
signature page thereto. (1)(2)
21.1 Subsidiaries of the Company
1. Sierra Fixture and Design, Inc.
2. JJI/ASCI Acquisition Corporation
3. SPI/ASCI Acquisition Corporation
24.1 Power of Attorney (see signature page of Registration Statement
on Form SB-2, filed December 3, 1993). (1)(2)
27.1 Financial Data Summary
(b) REPORTS ON FORM 8-K
The Company filed one report on Form 8-K relating to the Registration
Statement for the proposed merger with Superior and Just Jackets,
dated June 28, 1996.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, filed December 3, 1993, as amended by Post-Effective Amendment No. 1
to Form SB-2, filed July 23, 1996 (Registration No. 33-72930-LA)
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
filed June 28, 1996.
10
<PAGE>
Pursuant to the requirements of Sections 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
AMERICAN CINEMASTORES, INC.
- --------------------------------
Gill Champion Chairman August 27, 1996
Chief Executive Officer
Secretary
- --------------------------------
Steve Natale President August 27, 1996
Chief Operating Officer
Treasurer and Director
- --------------------------------
Christopher J. Ebert Chief Financial Officer August 27, 1996
(Principal Accounting Officer)
11
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
- -------------------------------------------------- --------------------------------------------
<S> <C>
Report of Independent Certified Public Accountants 13
Consolidated Balance Sheets as of May 31, 1995 and 1996 14
Consolidated Statements of Operations for the years ended May 31, 1995 and 1996 16
Consolidated Statements of Changes in Stockholders' Equity for the years ended May 31, 1995 and 1996 17
Consolidated Statements of Cash Flows for the years ended May 31, 1995 and 1996 18
Summary of Significant Accounting Policies 20
Notes to Consolidated Financial Statements 22
</TABLE>
12
<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, 1995 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of 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, 1995 and 1996, and the
results of their operations and cash flows for each of the years then ended in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
August 19, 1996
13
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
--------------------------------------------
--------------------------------------------
ASSETS MAY 31,
-------------------------
1995 1996
------------ ----------
CURRENT ASSETS:
Cash and cash equivalents $ 618,369 $ 113,997
Marketable securities 2,134,193 359,934
Accounts receivable, net (Note 8) 695 215,510
Notes receivable (Note 9) -- 93,095
Inventory 28,552 73,210
Prepaid and other current assets 27,776 21,750
Net assets of discontinued operations (Note 6) 571,629 --
------------ ----------
Total 3,381,214 877,496
------------ ----------
FIXED ASSETS:
Office furnishings and equipment 132,942 151,307
Automobiles 17,326 17,326
Leasehold improvements 5,338 5,338
------------ ----------
155,606 173,971
Less accumulated depreciation 20,153 71,221
------------ ----------
Property and equipment, net 135,453 102,750
------------ ----------
DEFERRED OFFERING AND ACQUISITION COSTS -- 314,761
DEPOSITS 20,005 13,373
------------ ----------
Total assets $3,536,672 $1,308,380
------------ ----------
------------ ----------
See accompanying summary of significant accounting policies
and notes to Consolidated Financial Statements.
14
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
--------------------------------------------
--------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 31,
-------------------------
1995 1996
------------ -----------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,529 $ 229,284
Deferred revenue (Note 4) 67,500 122,600
------------ -----------
Total current liabilities 70,029 351,884
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY (Notes 1, 2 and 3)
Preferred stock: $0.01 par value
5,000,000 shares authorized; none issued
Common stock: $0.001 par value
15,000,000 shares authorized
6,892,638 shares issued and outstanding
at May 31, 1995 and 1996 6,892 6,892
Additional paid in capital 7,103,552 7,103,552
Accumulated deficit (3,643,801) (6,153,948)
------------ -----------
Total stockholders' equity 3,466,643 956,496
------------ -----------
Total liabilities and stockholders' equity $3,536,672 $1,308,380
------------ -----------
------------ -----------
See accompanying summary of significant accounting policies
and notes to Consolidated Financial Statements.
15
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------
--------------------------------------------
YEAR ENDED MAY 31,
--------------------------
1995 1996
------------ ------------
SALES (Note 8) $ 14,418 $ 683,888
COST OF SALES 6,808 410,089
------------ ------------
GROSS PROFIT 7,610 273,799
------------ ------------
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES 1,277,270 2,029,385
------------ ------------
OPERATING LOSS FROM CONTINUING OPERATIONS (1,269,660) (1,755,586)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 160,765 80,065
Other income (expense) (14,009) 6,564
------------ ------------
Total other income 146,756 86,629
------------ ------------
Loss from continuing operations (1,122,904) (1,668,957)
Discontinued operations (Note 6)
Loss from operations (1,132,943) (391,051)
Loss on disposal -- (450,139)
------------ ------------
Loss from discontinued operations (1,132,943) (841,190)
------------ ------------
NET LOSS $(2,255,847) $(2,510,147)
------------ ------------
------------ ------------
NET LOSS PER COMMON STOCK SHARES
From continuing operations $(0.18) $(0.24)
From discontinued operations (0.18) (0.12)
------------ ------------
NET LOSS PER SHARE $(0.36) $(0.36)
------------ ------------
------------ ------------
WEIGHTED AVERAGE COMMON STOCK SHARES 6,185,790 6,892,638
------------ ------------
------------ ------------
See accompanying summary of significant accounting policies and notes
to Consolidated Financial Statements.
16
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------
----------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JUNE 1, 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) 0
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 (2,510,147) (2,510,147)
----------- --------- ----------- ------------ -----------
BALANCE, MAY 31, 1996 6,892,638 $6,892 $7,103,552 $(6,153,948) $956,496
----------- --------- ----------- ------------ -----------
----------- --------- ----------- ------------ -----------
</TABLE>
See accompanying summary of significant accounting policies and notes
to Consolidated Financial Statements.
17
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------
--------------------------------------------
Increase (Decrease) in Cash and Cash Equivalent
YEAR ENDED MAY 31,
--------------------------
1995 1996
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(1,122,904) $(1,668,957)
Adjustments to reconcile net loss from
continuing operations to net cash used in
operating activities:
Depreciation and amortization 22,844 50,555
Provision for bad debt -- 20,000
Increase (decrease) from changes in:
Accounts receivable (695) (234,815)
Inventory (28,552) (44,658)
Prepaids and other (8,002) 12,658
Accounts payable and accrued expenses 2,529 226,755
Deferred revenue 67,500 55,100
----------- ------------
Net cash used in continuing operations (1,067,280) (1,583,363)
Net cash used in discontinued operations (1,410,637) (269,561)
----------- ------------
Net cash used in operating activities (2,477,917) (1,852,923)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities (1,134,193) 1,774,259
Acquisition of property and equipment (132,687) (17,852)
Increase in note receivable -- (93,095)
Increase in deferred offering and
acquisition costs -- (314,761)
----------- ------------
Net cash provided by (used in) investing
activities (1,266,880) 1,348,551
----------- ------------
See accompanying summary of significant accounting policies and notes
to Consolidated Financial Statements.
18
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------
--------------------------------------------
Increase (Decrease) in Cash and Cash Equivalent
(CONTINUED)
YEAR ENDED MAY 31,
-------------------------
1995 1996
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 225,000 --
------------ ----------
Net cash provided by financing activities 225,000 --
------------ ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,519,797) (504,372)
CASH AND CASH EQUIVALENTS, at beginning of period 4,138,166 618,369
------------ ----------
CASH AND CASH EQUIVALENTS, at end of period $ 618,369 $113,997
------------ ----------
------------ ----------
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.
See accompanying summary of significant accounting policies and notes
to Consolidated Financial Statements.
19
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------
---------------------------------------------
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 had been
engaged in the installation and operation of mini-stores in movie theatre
lobbies and regional malls from which the Company sold movie related products
including clothing, posters, and toys as well as compact discs of movie
soundtracks and other popular music recordings. The Company also sold 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. (Note 6)
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.
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. The Company's policy is to hold such securities to maturity, unless
cash is needed for operations.
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.
DEFERRED OFFERING AND ACQUISITION COSTS
Deferred offering and acquisition costs consist of legal and other professional
costs incurred in connection with the pending mergers and anticipated offering
of the Company's common stock to finance the mergers, as described in Note 7.
Of the $314,761 in deferred costs, $156,892 relates to the mergers. Upon
consummation of the mergers, the costs will be included in the determination of
the total cost of the mergers, with any resulting goodwill to be amortized over
its estimated useful life under the straight-line method.
The remaining $157,869 relates to the anticipated offering and will be recorded
as a reduction of gross proceeds raised upon completion of the offering.
In the event the mergers and the offering are not completed, the costs will be
written off.
20
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------
---------------------------------------------
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.
LOSS PER SHARE
Loss per share is based on the weighted average number of shares of common stock
outstanding during the period using a treasury stock method, after giving effect
to the stock dividend described in Note 2.
ACCOUNTING 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, 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.
NEW ACCOUNTING PRONOUNCEMENTS
STATEMENTS 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 non-employees 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to 1996 presentation.
21
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------
---------------------------------------------
NOTE 1 - INITIAL PUBLIC OFFERING
In May 1993, the Company issued convertible warrants to subscribers for $30,000
which entitled the holders to purchase an aggregate of 3,000,000 shares of the
Company's common stock at $.25 per share. These warrants were automatically
converted into redeemable warrants at the closing date of the initial public
offering and, in May 1994, 3,000,000 redeemable warrants and 3,000,000 shares 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.
On March 21, 1994, the Company completed an initial public offering of 2,800,000
shares of its common stock at $2.50 per share and 2,000,000 redeemable warrants
to purchase its common stock at $.125 per redeemable warrant 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 $3.00 per share.
In May 1994, the Company's underwriter exercised its over-allotment option and
the Company issued an additional 420,000 shares of its common stock at $2.50 per
share and 300,000 redeemable warrants at $.125 per redeemable warrant.
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).
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 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.
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
22
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------
---------------------------------------------
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.
NOTE 3 - 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 filing, 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. Ebert
during the fiscal year ended May 31, 1996 to purchase 200,000 shares of Common
Stock at an exercise price of $2.50.
23
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------
---------------------------------------------
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company currently leases approximately 3,000 square feet of office space in
Santa Monica, California. The lease had a term of 36 months at $8,260 per
month, expiring February 1998. In anticipation of a merger being consummated
(see Note 7), the Company has terminated the lease without penalty, effective
September 1996, and will move its executive offices to Sierra or to the space
currently leased by The Target Companies.
The Company does not anticipate incurring any significant expenses regarding its
relocation. If a merger is not consummated, the Company intends to relocate the
Corporate offices to Sierra. 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.
Minimum future payments for the corporate office for the years ending May 31,
1997, 1998, and 1999, are $46,147, $18,000 and $18,000.
Rent expense for the years ended May 31, 1995 and 1996 amounted to $175,739 and
$145,644.
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 $67,500
advance from the customer, with the remaining balance to be received in
installments through September 1997. The $335,000 was recognized as revenue
upon completion and delivery of the carts during the year ended May 31, 1996.
In May 1996, the Company received, among others, a $100,000 advance from another
customer on an agreement to construct and sell retail fixtures for a total of
$328,500. The $328,500 will be recognized as revenue upon completion and
delivery of the fixtures subsequent to May 31, 1996.
24
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------
---------------------------------------------
NOTE 5 - INCOME TAXES
The components of deferred tax assets are as follows:
1995 1996
----------- -----------
Deferred tax assets:
Accounts receivable reserve $ -- $ 24,447
Accrued vacation 7,000 13,325
Inventory reserve 62,700 10,208
Net operating loss carry-forwards 1,276,404 2,085,937
----------- -----------
Net deferred tax assets 1,346,104 2,133,917
Valuation allowance (1,346,104) (2,133,917)
----------- -----------
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 income tax purposes, the Company has federal net operating loss
carry-forwards of $5,912,000 and state net operating loss carry-forwards of
$2,723,000 at May 31, 1996. These carry-forwards expire in the years 2008 to
2011. Federal tax rules impose limitations on the use of net operating losses
following certain changes in ownership. The Company experienced such a change
in March 1994, which will limit the use of the federal net operating loss
carryforward to $370,000 per year on a total of $985,000 incurred prior to the
change in ownership.
NOTE 6 - 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. The Company considers the fixed assets associated with the retail
operation impaired and therefore these fixed assets were written off during the
fiscal year ended 1996. The loss on disposal of the fixed assets written off in
connection with the discontinuation of retail operations amounts to $450,139,
and is included in the loss from discontinued operations of $841,190 for the
twelve months ended May 31, 1996. The Company maintains physical ownership of
these assets and is seeking to dispose of them in a manner beneficial to the
Company.
For the fiscal year ended May 31, 1995, the Company segregated for purposes of
comparative disclosure on the balance sheet the net assets of discontinued
operations of $571,629 as follows: accounts receivable of $22,621, inventory of
$318,893, fixed assets of $395,206, and accounts payable of $165,091.
Discontinued operations resulted in revenues of $742,894 and $826,728 for the
fiscal year ended May 31, 1996 and 1995, respectively.
25
<PAGE>
AMERICAN CINEMASTORES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------------------
---------------------------------------------
NOTE 7 - SUBSEQUENT EVENT
On June 19, 1996 the Company signed definitive merger purchase agreements
with Superior Panoramic Hand Prints, Inc. and Just Jackets, Inc of North
Hollywood, California. The mergers have yet to be consummated pending the
Company raising sufficient capital. The Company intends to raise
approximately $4,000,000 in capital via public financing instruments
available to it, and has signed an engagement agreement, dated August 26,
1996, with an underwriter to effect a Regulation S offering of the Company's
common stock. The Company has also filed Registration Statement Form SB-2
and a post-effective amendment to register 5,225,000 shares of common stock
underlying outstanding redeemable warrants that may be exercised by the
warrant holders to provide additional capital.
Superior was formed in 1981 as a specialty merchandise company. Today its focus
is in the advertising specialty arena where it provides silk screen and
embroidery to textile blanks. Superior now employs in excess of 100 people with
production runs of 20 hours per day, six days per week. Its 1995 revenues were
nearly $8.5 million. Just Jackets was formed in 1993 and performs silk screen
and embroidery work similar to Superior for custom jackets and denim shirts.
Its 1995 revenues were approximately $1.2 million.
The terms of the anticipated merger state that Superior will fold into a newly
formed subsidiary of the Company and that the shareholders of Superior will
receive an aggregate of $1,960,000 and 975,000 shares of common stock of the
Company. Just Jackets will fold into a newly formed subsidiary of the Company
and the shareholders of Just Jackets will receive an aggregate of $80,000 in
cash and 50,000 shares of common stock of the Company. The Company will also
provide $1 million of working capital to the newly formed subsidiaries.
If the mergers are not effected, the Company intends to expand Sierra's
operations. The Company has also taken certain cost-cutting measures.
Effective September 1, 1996, the Company canceled its lease on the corporate
office facility, without penalty, and will merge the corporate office with
Sierra's office in Newport Beach, California. The Company plans to terminate
corporate personnel in areas where duplication of functions occurs.
NOTE 8 - SIGNIFICANT CUSTOMERS
Sales to two customers represented approximately 54% and 24% of the Company's
net sales from continuing operations for the year ended May 31, 1996. The
related accounts receivable from these customers represented 63% and 11% of the
accounts receivable at May 31, 1996.
NOTE 9 - NOTE RECEIVABLE
At May 31, 1996, the Company has a note receivable of $93,095 from Superior
Panoramic Handprints, Inc., one of the companies with which a merger is pending.
The note bears interest at 12% per annum and is due upon demand. The note is
secured by equipment that Superior had purchased with the note proceeds.
26
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<CASH> 113,997
<SECURITIES> 359,934
<RECEIVABLES> 118,605
<ALLOWANCES> 0
<INVENTORY> 73,210
<CURRENT-ASSETS> 877,496
<PP&E> 173,971
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<COMMON> 6,892
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<TOTAL-LIABILITY-AND-EQUITY> 1,308,380
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<OTHER-EXPENSES> (6,564)
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<INCOME-CONTINUING> (1,668,957)
<DISCONTINUED> (841,190)
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