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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED NOVEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File Number 0-23138
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AMERICAN CINEMASTORES, INC.
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(Exact name of registrant as specified in its charter)
California 95-4374952
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7330 Varna Avenue
North Hollywood, California 91605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 818-764-8044
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Indicate by check mark whether the registrant (1) has filed all reports 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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The number of shares of common stock outstanding as of November 30, 1996:
6,942,638
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1
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AMERICAN CINEMASTORES, INC.
FORM 10-QSB
PART I FINANCIAL STATEMENTS
ITEM 1 - FINANCIAL INFORMATION
AMERICAN CINEMASTORES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
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NOVEMBER 30, NOVEMBER 30,
1996 1995
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 175,120 $ 198,016
Marketable securities - 1,398,951
Accounts receivable, net (Note 7) 442,079 348,092
Notes receivable (Note 8) 100,543 -
Inventory 410,547 369,183
Prepaid and other 800 18,384
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TOTAL CURRENT ASSETS 1,129,099 2,332,626
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PROPERTY AND EQUIPMENT
Office furnishings and equipment 152,056 151,307
Automobiles 17,326 17,326
Leasehold improvements - 5,338
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242,951 173,971
Less accumulated depreciation
and amortization 88,602 48,137
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PROPERTY AND EQUIPMENT, NET 154,379 125,834
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DEPOSITS 3,000 25,207
PRODUCT LICENSES - 15,000
GOODWILL 266,282 -
DEFERRED ACQUISITION COSTS 351,688 -
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TOTAL ASSETS $ 2,002,647 $ 2,494,872
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SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
2
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AMERICAN CINEMASTORES, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
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NOVEMBER 30, NOVEMBER 30,
1996 1995
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LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 652,673 $ 225,744
Short term loan (Note 9) 100,000 -
Deferred Revenue 56,898 -
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TOTAL CURRENT LIABILITIES 820,818 225,744
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COMMITMENTS AND CONTINGENCY
(Note 4)
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STOCKHOLDERS' EQUITY
(Notes 1,2, and 3)
Preferred stock, $.01 par value
5,000,000 shares authorized,
500 shares issued 5 -
Common stock: $.001 par value
15,000,000 shares authorized,
6,942,638 issued and outstanding
at November 30,1996 and November 30,1995 6,942 6,892
Additional paid-in capital 7,800,832 7,103,552
Accumulated deficit (6,625,949) (4,841,316)
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Total stockholders' equity 1,181,830 2,269,128
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Total liabilities and
stockholders' equity $ 2,002,648 $ 2,494,872
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SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
3
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AMERICAN CINEMASTORES, INC
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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THREE MONTHS THREE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1996 1995
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SALES $ 645,393 $ 349,461
COST OF SALES 331,774 203,886
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GROSS PROFIT 313,619 145,575
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 392,016 470,979
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OPERATING LOSS FROM CONTINUING OPERATIONS (78,397) (325,404)
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OTHER INCOME (EXPENSE)
Interest income 11,015 23,310
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TOTAL OTHER INCOME 11,015 23,310
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Loss from continuing operations (67,382) (302,094)
Loss from discontinued operations - (535,172)
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NET LOSS $ (67,382) $ (837,266)
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NET LOSS PER COMMON STOCK SHARE
From continuing operations $ (0.01) $ (0.04)
From discontinued operations - (0.08)
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NET LOSS PER SHARE $ (0.01) $ (0.12)
WEIGHTED AVERAGE COMMON STOCK
SHARES OUTSTANDING 6,909,305 6,892,638
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
4
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AMERICAN CINEMASTORES, INC
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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SIX MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1996 1995
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SALES $ 1,049,688 $ 741,123
COST OF SALES 531,283 406,750
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GROSS PROFIT 518,405 334,373
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 901,411 915,261
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OPERATING LOSS FROM CONTINUING OPERATIONS (383,006) (580,896)
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OTHER INCOME (EXPENSE)
Interest income 19,552 49,330
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TOTAL OTHER INCOME 19,552 49,330
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Loss from continuing operations (363,454) (531,567)
Loss from discontinued operations - (665,948)
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NET LOSS $ (363,454) $(1,197,515)
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NET LOSS PER COMMON STOCK SHARE
From continuing operations $ (0.05) $ (0.08)
From discontinued operations - (0.09)
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NET LOSS PER SHARE $ (0.05) $ (0.17)
WEIGHTED AVERAGE COMMON STOCK
SHARES OUTSTANDING 6,900,971 6,892,638
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
5
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AMERICAN CINEMASTORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS SIX MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (353,923) $ (1,197,515)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 21,140 (28,097)
Increase (decrease) from changes in:
Accounts receivable (226,569) (324,876)
Inventory (337,349) (21,908)
Prepaids and other 20,950 29,397
Deferred revenue (65,702) (67,500)
Accounts payable and accrued expenses 323,853 58,123
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Net cash used in operating activities (617,600) (1,552,376)
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CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities 359,934 2,097,781
Acquisition of property and equipment (69,010) 432,923
Deferred acquisition costs (135,127) -
Increase in note receivable (7,448) -
Proceed from issuance of preferred stock 430,374 -
Loan from shareholder 100,000 -
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Net cash from investing activities 678,723 2,530,704
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NET INCREASE IN CASH 61,123 976,328
Cash and cash equivalents
at beginning of period 113,997 618,639
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Cash and cash equivalents
at end of period $ 175,120 $ 1,596,967
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SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO FINANCIAL
STATEMENTS
6
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AMERICAN CINEMASTORES, INC AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 and decided to expand into the soft goods portion of the advertising
specialty business. (Note 5)
On October 24, 1996 the Company acquired Just Jackets Corporation, one of the
Target Companies discussed in previous fiscal reports and began its operation as
a wholly owned subsidiary of the Company.
The accompanying consolidated financial statements include the accounts of
American Cinema Stores, Inc. and its subsidiaries Sierra Fixture and Design and
Just Jackets. 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.
7
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DEFERRED OFFERING AND ACQUISITION COSTS
Deferred offering and acquisition costs consist of legal and other professional
costs incurred in connection with the pending merger and anticipated offering of
the Company's common stock to finance the merger, as described in Note 6. Of
the $351,688 in deferred costs, $191,688 relates to the merger. Upon
consummation of the merger, the costs will be included in the determination of
the total cost of the merger, with any resulting goodwill to be amortized over
its estimated useful life under the straight-line method. The remaining
$160,000 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 merger and the offering are not completed, the costs will be
written off.
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.
8
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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.
9
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AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
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, 1,500,000 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. The amount of
warrants and shares of Common Stock have been adjusted for the Company's August
1994 stock dividend, Note 2.
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 1,000,000 redeemable warrants
to purchase its 2,000,000 shares of common stock 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. The amount of warrants and shares of
Common Stock have been adjusted for the Company's August 1994 stock dividend,
Note 2.
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.
10
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AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 October 21, 1996 the Company issued 500 shares of Series A Cumulative
Convertible Preferred Stock, par value $0.01 per share, of the Company ( the
"Preferred Stock") in reliance upon the exemption from registration afforded by
Regulation S ("Reg S") as promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act"). The preferred Stock
is convertible, whether all or in part, by the holder of the Preferred Stock
into shares of Common Stock, par value $0.001 per share of the Company ( the
"Common Stock") any time forty five (45) days after the date of the issuance of
the Preferred Stock at a conversion price equal to fifty per cent (50%) of the
average of the closing bid price of the Common Stock as quoted on NASDAQ for the
five (5) consecutive trading days preceding the notice to convert, as more
particularly set forth in the Certificate of Designation filed with the State of
Delaware October 21, 1996. The Preferred Stock also entitles the holder to
dividends at a rate of 10% per year, payable on a quarterly basis.
On October 25, 1996, the stockholders of the Company voted at the Company's
annual meeting to increase from 15,000,000 to 30,000,000 the number of
authorized shares of Common Stock, par value $0.001 per share, of 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
11
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AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 355,000 shares of Common Stock, including options
granted during the fiscal year ended May 31, 1995 to Messrs. Natale
and Ebert to purchase 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.
12
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AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company had leased approximately 3,500 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 moved its executive offices to one of the Target Company,
Superior Panoramic.
The Company did not incur any significant expenses regarding its relocation. If
a merger with Superior 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.
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.
By amendment, dated October 29, 1996, to that Settlement Agreement, dated June
25, 1996, between the Company and Gill Champion, the then Chief Executive
Officer as well as director and Chairman of the Company's Board of Directors,
Mr. Champion resigned as an officer and director of the Company, effective
December 5, 1996. Pursuant to such agreement and notwithstanding Mr. Champions
termination of employment, as of January 1, 1997, the Company continues to be
obligated through March 15, 1997, for payments to Mr. Champion in the aggregate
of approximately $35,000.
NOTE 5 - 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 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.
13
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AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - MERGER
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 merger with Just Jackets was consummated on October 24, 1996.
Its 1995 revenues were approximately $1.2 million. The merger with Superior will
be consummated in the event the Company raises sufficient capital via the
financing instruments available to it.
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 4,444,000 shares of common stock of the
Company. The Company will also provide working capital to the newly formed
subsidiaries.
Just Jackets was folded into a newly formed subsidiary of the Company and the
shareholders of Just Jackets received an aggregate of $80,000 in cash and 50,000
shares of common stock of the Company.
If the merger with Superior is not effected, the Company intends to expand the
operations of Sierra and Just Jackets. 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 moved the corporate
office to co-locate with Superior in North Hollywood, California. The Company
has terminated all corporate personnel except for Steve Natale, President, and
Christopher Ebert, Chief Financial Officer.
NOTE 7 - SIGNIFICANT CUSTOMERS
Sales to one customer represented approximately 41% of the Company's net sales
from continuing operations for the six month period ended November 30, 1996.
The related accounts receivable from three significant customers represented
approximately 50% of the accounts receivable at November 30, 1996.
NOTE 8 - NOTE RECEIVABLE
At May 31, 1996, the Company has a note receivable of $93,095 from Superior
Panoramic Hand Prints, 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.
NOTE 9 - SHAREHOLDER LOAN
On October 27, 1996, the President of the Company loaned to the Company $100,000
for use as working capital. Such loan is memorialized by a one year term
bearing interest of 10% per annum. The note may be repaid sooner without
penalty.
14
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MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 2 - 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 revenue levels were 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 proposed merger and expansion of its shopping mall and
retail fixtures business as well as the expansion of Just Jackets.
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 is obligated to raise funds
for payment of the consideration and to provide working capital to the
acquired Target Companies following the consummation of the Mergers. In
connection with the Mergers, the Company will be assuming approximately $1
million of institutional indebtedness of the Target Companies. On October
24, 1996 the Company completed the acquisition of Just Jackets Corporation
one of the above mentioned target companies. The information presented in
this document reflect the activities of Just Jackets for this five week
period as a wholly owned subsidiary of the Company.
The following discussion should be read in conjunction with the Company's
consolidated financial statements for its fiscal quarters ended November 30,
1996, and 1995, respectively, including the notes thereto.
RESULTS OF OPERATIONS- THE COMPANY
FISCAL PERIOD ENDED NOVEMBER 30, 1996 COMPARED TO THE FISCAL PERIOD ENDED
NOVEMBER 30, 1995
NET SALES
Net sales from operations for the six month period ended November 30, 1996 were
$1,049,688. Net sales from operations consisted of sales generated by Sierra
and Just Jackets. Sales from continuing
15
<PAGE>
operations for the six month period ended November 30, 1995 were $741,123, all
from Sierra. This increase in sales from continuing operations is primarily
attributable to orders received by Sierra from Center Court Concierge and the
California Mart which totaled approximately $200,000. Just Jackets' sales for
this period were approximately $132,000. Sales for the fiscal quarter ended
November 30, 1996 were $645,393 compared to quarterly sales from continuing
operations in fiscal 1996 of $349,641. This increase in sales is attributable
to improved Sierra activity as well as the aforementioned sales from Just
Jackets.
GROSS PROFIT
Gross profit from operations for the period ended November 30, 1996 was
$518,405, or 49.3% of net sales. Gross profit from continuing operations for
the period ended November 30, 1995 was $334,373 or 45.0%. The reason for the
improved gross profit for the period ended November 30, 1996 as compared to the
same period in the prior fiscal year is primarily the result of Sierra's
improved operating efficiencies since their first year of operation. Gross
profit from sales in the second fiscal quarter was $313,619 or 48.6% compared to
gross profit from continuing operations in the second fiscal quarter of 1996 of
$145,575 or 41.6%. Improved margins from Sierra are responsible for the
increased gross margin percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses relating to continuing operations for the period ended November
30, 1996 were $75,304 consisting of commissions paid to outside sales personnel
for Sierra. Selling expenses attributable to continuing operations for the
period ended November 30, 1995 were $42,298 which are primarily attributable to
commissions paid by Sierra. The reason for the increase in selling expenses of
continuing operations when comparing the fiscal periods ended November 30, 1995
and November 30, 1996 is due to additional sales being generated by commissioned
sales representatives used by Sierra.
General and administrative expenses relating to continuing operations for the
fiscal period ended November 30, 1996 were $826,107 as compared to $872,963 for
the fiscal period ended November 30, 1995. The reason for such decrease is
attributable to the parent reducing and eliminating corporate payroll and other
expenses in anticipation of the merger with Superior. General and
administrative expenses for the fiscal quarter of 1997 were $332,919 compared to
$428,.621 for continuing operations in the second fiscal quarter of 1996.
Reduced corporate expenses are attributable to this reduction.
INTEREST INCOME
Interest received from cash investments declined from $49,330 to $19,552 during
the fiscal period ended November 30, 1996, when compared to the quarter ended
November 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 operations for the fiscal period ended
November 30, 1996 of $363,454 or $0.05 per share. There was a net loss of
$531,567, or $0.08 per share, from continuing operations and a net loss of
$665,948, or $0.09 per share from discontinued operations for the period ended
November 30, 1995. As discussed in the selling, general and administrative
section, the decreased net loss from continuing operations is primarily the
result of continuing corporate overhead expenses being reduced in anticipation
of the finalization of the merger/acquisition. There was a net loss of $67,381
or $0.01 per share for the quarter ended November 30, 1996 compared to a loss
from continuing operations for the fiscal quarter ended November 30, 1995 of
$302,094, or $0.04 per share. Reduced corporate operating expenses and improved
gross margins from Sierra are the primary reasons for the improved performance.
16
<PAGE>
RESULTS OF OPERATIONS
FISCAL PERIOD ENDED NOVEMBER 30, 1995 COMPARED TO THE FISCAL PERIOD ENDED
NOVEMBER 30, 1994
During the reporting period ended November 30, 1995 the Company generated
$1,098,894 in net sales from continued and discontinued operations compared to
$382,075 for the same period in fiscal 1995. Sierra's sales from continuing
operations for the six month period ended November 30, 1995 were $651,750.
Sales from discontinued retail operations were $357,770 during this six month
period compared to $382,075 for the same period a year ago. Sales of
discontinued licensed products for the six months ended November 30, 1995 were
$89,373. There were no licensed product sales during the prior fiscal year.
Sierra's sales for the second fiscal quarter ended November 30, 1995 were
$260,088. Sales from discontinued retail operations for the second fiscal
quarter were $129,174 compared to $153,998 for the same period in fiscal 1994.
Sales from discontinued licensed products of $89,373 were recorded in the second
fiscal quarter which ended November 30, 1995.
As discussed in the "Plan of Operation", the Company terminated operations of
all of the remaining theatre lobby mini-stores during the fiscal quarter which
ended November 30, 1995 and has decided to terminate the remaining mall mini-
store operations no later than February 29, 1996. This amounted to seven
theatre lobby mini-stores being terminated during the fiscal quarter ending
November 30, 1995 and there will be ten mall mini-stores terminated during the
third fiscal quarter ending February 29, 1996. The majority of these stores
were terminated during January, 1996. Management considered the assets
associated with its retail operations to be impaired. Accordingly, the
fixed assets relating to the retail operations of the mini-stores were
written off in that fiscal period. The write-off of fixed assets
associated with these closures totaled $457,393 and was recorded in the
fiscal period covered by this report, November 30, 1995.
A consolidated net loss from continuing and discontinued operations of
$1,197,514 was reported during the six month period ended November 30, 1995. Of
this amount, $457,393 represents an extraordinary write-off taken in the
second fiscal quarter of all of the fixed assets related to retail operations.
Without this extraordinary item, the consolidated net loss for the period ended
November 30, 1995 would have been $740,148 compared to a loss of $678,940 for
the same fiscal 1994 six month period. The Sierra subsidiary recorded a net
profit of $12,164 for the second fiscal quarter. On a six month year to date
basis, Sierra reported a net profit of $117,503. Sierra was not operating at
this time in fiscal 1994, therefore no comparisons to prior period can be made.
Notwithstanding the write-off of fixed assets, selling, general and
administrative expenses, primarily for professional fees, labor, and rent, were
the principal reasons contributing to this loss.
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 November 30, 1996, the Company had working capital of $308,280, as compared
to working capital of $2,106,882 as of November 30, 1995. The decrease in
working capital was primarily attributable to the cash being utilized to fund
corporate operations after the discontinuance of retail operations. The
operations of the Sierra subsidiary are not yet of the magnitude to support all
of its own and corporate cash requirements. It is anticipated that the
operations of Sierra as well as the operations of the newly acquired Just
Jackets will be able provide sufficient cash for all operations.
17
<PAGE>
Net cash used in operating activities was $617,600 for the six month period
ended November 30, 1996, as compared to net cash used in operating activities of
$1,552,376 for the six month period ended November 30, 1995. The decrease in
cash used in operating activities was primarily attributable to the reduced net
loss from continuing operations as well as a substantial increase in accounts
payable and accrued expenses.
As a result of the discontinuance of retail operations, the Company has been
devoting its resources to support the operations of Sierra and Just Jackets and
to completing its due diligence investigation of the remaining Target Company,
negotiating the merger agreement (see Note 7 to the financial statements), and
implementing its plan to raise funds to finance the acquisition of the Target
Company and to provide working capital to them subsequent to the completion of
such Merger.
During the second fiscal quarter the Company received money from an investor to
complete the acquisition of Just Jackets. This was accomplished via a
Regulation-S offering whereby the investor was presented with 500 shares of
convertible preferred stock of the Company in exchange for a $500,000
investment. Additionally, during this period, a shareholder loaned the Company
$100,000 for working capital.
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 agreement, 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 merger with Superior is not effected, the Company intends
to expand operations of Sierra and Just Jackets. The Company has also taken
certain cost-cutting measures. Effective September 1, 1996, the Company
canceled its lease on the corporate office facility of 3,500 sq. ft, without
penalty, and relocated its corporate offices to Superior Panoramic. In the
event the merger with Superior does not take place, the Company will merge
the corporate office with Sierra's office in Newport Beach, California. The
Company has terminated 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.
18
<PAGE>
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.
19
<PAGE>
Pursuant to Section 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.
By By /s/ Christopher J. Ebert
---------------------------------- -----------------------------------
Steve Natale, Christopher J. Ebert
Chairman of The Board, and Chief Financial Officer, Director
Chief Operating Officer (Principal Financial Officer)
Secretary
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company and Sierra Fixture and Design have been named by a former vendor in
a lawsuit alleging infringement on proprietary technology and trade secrets.
The Company and its attorneys, retained with respect to such proceeding believe
this action to be without merit and are defending such proceeding.
ITEM 4 - SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders of the Company held October 25, 1996 in
Los Angeles, California, the stockholders of the Company voted by proxy to amend
the Certificate of Incorporation of the Company to provide for an increase from
15,000,000 to 30,000,000 the number of authorized shares of Common Stock, par
value $0.001 per share, of the Company and the number of authorized shares of
capital stock of the Company from 20,000,000 to 35,000,000. Out of the
6,892,638 issued and outstanding shares of stock entitled to vote at the
meeting, either by proxy or in person, 3,864,878 shares were present at the
meeting, either by proxy or in person. Of those shares present, 3,729,058
shares voted in favor of increasing the authorized capital of the Company.
ITEM 5 - OTHER INFORMATION
As discussed in the Company's 10-KSB for the fiscal year ended May 31, 1996 as
well as in the Company's 10-QSB for the fiscal quarter ended August 31, 1996 the
Company has decided to expand into the soft goods portion of the advertising
specialty business. To achieve that objective the Company completed the
acquisition of Just Jackets on October 24, 1996. In connection with the
merger of Just Jackets, the Company received $500,000 from an investor pursuant
to the sale of securities pursuant to Regulation S promulgated by the Securities
and Exchange Commission under the Securities act of 1933 as amended. Such funds
are to be utilized for working capital and to cover the acquisition costs.
Just Jackets designs and produces various styles of jackets and denim shirts,
for sale to distributors in the advertising specialty industry and to retailers
of souvenir and novelty products. They manufacture or add value to blank or
these plain jacket or denim shirts 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.
The remaining Target Company, Superior, designs and produces 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, golf shirts 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. Superior maintains an internal
graphic arts and design department of three people and state of the art
imprinting and embroidery equipment to meet the needs of customers.
On October 19, 1996, the Company entered into an Offshore Securities
Subscription Agreement (the "Agreement"), containing the standard investment
representations by the subscriber, including, without limitation, (i) that the
subscriber was not a "U.S. Person" as such term is defined in Regulation S ("Reg
S"), as promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act"), and (ii) that the transactions
contemplated are not part of a plan or scheme by such subscriber to evade the
registration provisions of the Act.
21
<PAGE>
Pursuant to such agreement, the Company issued 500 shares of Series A Cumulative
Convertible Preferred Stock, par value $0.01 per share, of the Company ( the
"Preferred Stock") for Five Hundred Thousand Dollars ($500,000), in reliance
upon the exemption from registration afforded by Regulation S ("Reg S") as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (the "Act"). The preferred Stock is convertible, whether
all or in part, by the holder of the Preferred Stock into shares of Common
Stock, par value $0.001 per share of the Company ( the "Common Stock") any time
forty five (45) days after the date of the issuance of the Preferred Stock at a
conversion price equal to fifty per cent (50%) of the average of the closing bid
price of the Common Stock as quoted on NASDAQ for the five (5) consecutive
trading days preceding the notice to convert, as more particularly set forth in
the Certificate of Designation filed with the State of Delaware October 21,
1996. The Preferred Stock also entitles the holder to dividends at a rate of
10% per year, payable on a quarterly basis.
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 finished 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.
During the six fiscal months which ended November 30, 1996, Sierra sold units to
3 significant customers, including General Growth Properties and The Walt Disney
Company, The California Mart, and Center Court Concierge who comprised
approximately 70% of Sierra's net sales which totaled $916,316. Of such number
of customers, The Walt Disney Company accounted for 41%, The California Mart 17%
and Center Court Concierge 12% of such revenues respectively. Accordingly, the
loss of any of these customers would have a material adverse effect on the
Company's mall and retail fixtures business.
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.
As of the date of this report, Sierra has a backlog of firm orders of
approximately $200,000. The backlog consists primarily of merchandising units
being produced for The Center Court Concierge Company, and Urban Properties.
These units will be shipped during the second fiscal quarter. As of May 31,
1996, Sierra had a backlog of approximately $400,000, consisting of
merchandising units which were shipped during the first fiscal quarter which
ended August 31, 1996.
OPERATIONS OF JUST JACKETS
Just Jackets designs and produces value-added jackets and denim shirts for sale
to distributors in the advertising specialty industry and to retailers of
souvenir and novelty products. Just Jackets manufactures and/or adds value to
blank or plain jackets and denim shirts by decorating them with the logos, names
or messages of the advertisers or other customers of the advertising specialty
distributors
22
<PAGE>
with whom the Just Jackets does business and the graphic designs required by
their retail customers. Just Jackets manufactures and/or decorates blank
jackets and denim shirts with graphic designs primarily by means of embroidery.
Just Jackets utilizes a showroom provided by the remaining Target Company,
Superior Panoramic, at their offices in North Hollywood, California, in which
they display their product lines of approximately 30 items. Just Jackets has
its own sales and customer service personnel to service the advertising
specialty customers. Marketing and sales efforts for Just Jackets are led by its
president, Bruce Sacks, and involves visits to customers by sales personnel or
Sacks, utilizing a catalog depicting a selection of the more than 30 products
available from Just Jackets, telephone solicitations, attendance at trade shows
and visits by customer representatives to the showroom.
Products are sold regionally and nationally to more than 100 advertising
specialty distributors. For the fiscal years ended December 31, 1994 and 1995,
sales to the advertising specialty market accounted for approximately 75% and
85%, respectively, of combined net sales of Just Jackets. Products are sold
nationally to more than 50 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 Just Jackets. Such products are used by the end users for product
promotions, employee incentive programs, customer gifts and advertising
campaigns. Customers of Just Jackets sell to end users in the manufacturing,
financial services, broadcasting, consumer products and communications
industries.
Just Jackets derived approximately 25% of its 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 Just
Jackets does not have sales contracts with any customers, they have been able to
maintain and increase sales volume by being responsive to their customers'
needs. The customer base of Just Jackets 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 Just Jackets has been to the same group of
customers.
At November 30, 1996, Just Jackets had a backlog of firm orders of approximately
$200,000 which orders are expected to be shipped during the third current fiscal
quarter .
The business of Just Jackets is seasonal. Sales are highest in the fall and
winter months. Sales usually begin to decline in the spring, by reason of warmer
weather and the reduction in certain tourism and industry sponsored promotional
events.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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