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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 FEBRUARY 28, 1997
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
AMERICAN CINEMASTORES, INC.
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(Exact name of registrant as specified in its charter)
California 95-4374952
- -------------------------- -----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7330 Varna Avenue
North Hollywood, California 91605
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 818-764-8044
------------
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 February 28, 1997:
6,942,638
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)
- --------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 92,563 $ 390,502
Marketable securities - 703,015
Accounts receivable, net 368,229 293,236
Notes receivable (Note 5) 102,103 -
Inventory 309,814 191,536
Prepaid and other 800 14,963
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 873,509 1,593,252
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PROPERTY AND EQUIPMENT
Office furnishings and equipment 225,655 151,307
Automobiles 17,326 17,326
Leasehold improvements - 5,338
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242,981 173,971
Less accumulated depreciation
and amortization 93,442 37,048
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PROPERTY AND EQUIPMENT, NET 149,539 136,923
- --------------------------------------------------------------------------------
DEPOSITS 3,000 14,554
PRODUCT LICENSES - 11,506
GOODWILL 374,421 -
DEFERRED ACQUISITION COSTS 453,188 -
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 1,853,657 $ 1,756,235
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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)
- --------------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1996
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES
Accounts payable and
accrued expenses $ 568,050 $ 96,116
Short term loan (Note 6) 100,000 -
Line of credit 46,073 -
Deferred revenue 71,324 -
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 785,447 96,116
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCY
(Note 2)
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
(Note 1)
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 (6,739,569) ( 5,450,325)
- --------------------------------------------------------------------------------
Total stockholders' equity 1,068,211 1,660,119
- --------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,853,657 $ 1,756,235
- --------------------------------------------------------------------------------
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
FEBRUARY 28, FEBRUARY 29,
1997 1996
- --------------------------------------------------------------------------------
SALES $ 520,930 $ 47,128
COST OF SALES 336,473 34,809
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GROSS PROFIT 184,457 12,319
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 412,007 428,029
- --------------------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING OPERATIONS ( 227,550) ( 415,710)
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OTHER INCOME (EXPENSE)
Interest income 5,383 13,878
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TOTAL OTHER INCOME 5,383 13,878
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Loss from continuing operations ( 222,167) ( 401,832)
Loss from discontinued operations - ( 207,196)
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NET LOSS $ ( 222,167) $ ( 609,028)
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NET LOSS PER COMMON STOCK SHARE
From continuing operations $ ( 0.03) $ ( 0.06)
From discontinued operations - ( 0.03)
- --------------------------------------------------------------------------------
NET LOSS PER SHARE $ ( 0.03) $ ( 0.09)
WEIGHTED AVERAGE COMMON STOCK
SHARES OUTSTANDING 6,942,638 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)
- --------------------------------------------------------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
- --------------------------------------------------------------------------------
SALES $ 1,570,618 $ 788,251
COST OF SALES 867,756 441,559
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GROSS PROFIT 702,862 346,692
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,313,417 1,343,290
- --------------------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING OPERATIONS ( 610,555) ( 996,598)
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OTHER INCOME (EXPENSE)
Interest income 24,935 63,208
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TOTAL OTHER INCOME 24,935 63,208
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Loss from continuing operations ( 585,620) ( 933,390)
Loss from discontinued operations - ( 873,134)
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NET LOSS $ ( 585,620) $ ( 1,806,524)
- --------------------------------------------------------------------------------
NET LOSS PER COMMON STOCK SHARE
From continuing operations $ ( 0.08) $ ( 0.13)
From discontinued operations - ( 0.13)
- --------------------------------------------------------------------------------
NET LOSS PER SHARE $ ( 0.08) $ ( 0.26)
WEIGHTED AVERAGE COMMON STOCK
SHARES OUTSTANDING 6,920,416 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)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
NINE MONTHS NINE MONTHS
ENDED ENDED
FEBRUARY 28, FEBRUARY 29,
1997 1996
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ ( 585,620) $ ( 1,806,524)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 22,221 ( 39,186)
Increase (decrease) from changes in:
Accounts receivable ( 152,719) ( 270,189)
Inventory ( 236,604) 155,909
Prepaids and other 31,323 6,757
Deferred revenue ( 51,276) ( 67,500)
Accounts payable and accrued expenses 254,033 ( 71,505)
- --------------------------------------------------------------------------------
Net cash used in operating activities ( 718,642) ( 2,092,238)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities 359,934 1,431,178
Acquisition of property and equipment ( 45,665) 432,923
Deferred acquisition costs ( 138,427) -
Increase in note receivable ( 9,008) -
Proceed from issuance of preferred stock 430,374 -
Loan from shareholder 100,000 -
- --------------------------------------------------------------------------------
Net cash from investing activities 697,208 1,864,101
- --------------------------------------------------------------------------------
NET DECREASE IN CASH ( 21,434) ( 228,137)
Cash and cash equivalents
at beginning of period 113,997 618,639
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Cash and cash equivalents
at end of period $ 92,563 $ 390,502
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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. (Notes 3 & 4)
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. (Note 4)
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.
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.
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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 4. Of
the $453,188 in deferred costs, $293,188 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 - 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 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
10
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AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 2 - COMMITMENTS AND CONTINGENCIES
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. If a merger with Superior is not consummated, the Company
intends to relocate the Corporate offices to Sierra.
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 $25,000.
NOTE 3 - 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 included both
theatre lobby mini-stores as well as the mini-stores in regional malls. This
decision was the result of the retail operation's continued lack of
profitability. The regional mall stores remained open through that Christmas
season. The Company considered 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.
11
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AMERICAN CINEMASTORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - 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.
Just Jackets' 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 explore
other merger/acquisition opportunities as well as expand the operations of
Sierra and Just Jackets. The Company has also taken certain cost-cutting
measures. The Company has terminated all corporate personnel except for Steve
Natale, President, and Christopher Ebert, Chief Financial Officer.
NOTE 5 - NOTE RECEIVABLE
At February 28, 1997, the Company has a note and interest receivable of $102,103
from Superior Panoramic Hand Prints, Inc., the company 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 6 - 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.
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NOTE 7 - SIGNIFICANT SUBSEQUENT EVENT
On March 28, 1997 the Company accepted a loan from an investor in the amount of
$200,000 cash. This is a one year loan and it bears interest of 12% per annum.
The loan may be repaid early or the principal balance may be converted to
common stock under mutually acceptable terms which will be determined by the
Company and the investor. In addition, the Company also received a $300,000
Promissory Note redeemable in 12 months at 12% interest. This money was put
toward the Company's working capital. Accordingly, as of March 28, 1997,
the Company's assets exceed $2,000,000 which is the current minimum
requirement for listing on the NASDAQ SmallCap Exchange.
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,
13
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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 the period October 24, 1996 through February 28, 1997 as a wholly owned
subsidiary of the Company.
The following discussion should be read in conjunction with the Company's
consolidated financial statements including the notes thereto.
RESULTS OF OPERATIONS- THE COMPANY
FISCAL PERIOD ENDED FEBRUARY 28, 1997 COMPARED TO THE FISCAL PERIOD ENDED
FEBRUARY 29, 1996
NET SALES
Net sales from operations for the nine month period ended February 28, 1997 were
$1,570,618. Net sales from operations consisted of sales generated by Sierra
and Just Jackets. Sales from continuing operations for the nine month period
ended February 29, 1996 were $788,251, all from Sierra. This increase in sales
from continuing operations is primarily attributable to orders received by
Sierra from Center Court Concierge, Urban Properties, and the California Mart
which totaled approximately $350,000. Just Jackets' sales since its merger
have been approximately $515,000. Sales for the fiscal quarter ended February
28, 1997 were $520,930 compared to quarterly sales of the same three month
period from continuing operations in fiscal 1996 of $47,128. This increase in
sales is primarily attributable to the aforementioned sales from Just Jackets as
well as improved Sierra activity.
GROSS PROFIT
Gross profit from operations for the nine month period ended February 28, 1997
was $702,862, or 44.8% of net sales. Gross profit from continuing operations
for the nine month period ended February 29, 1996 was $346,692 or 44.0%. The
reason for the improved gross profit for the nine month period ended February
28, 1997 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 third fiscal quarter was $184,457 or
35.4% compared to gross profit from continuing operations in the third fiscal
quarter of 1996 of $12,319 or 26.2%. Sales from Just Jackets and improved
margins from Sierra are responsible for the increased gross margin percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses for the nine month period ended February 28, 1997 were
$67,724 consisting primarily of commissions paid to outside sales personnel
for Sierra. Selling expenses attributable to operations for the nine month
period ended February 29, 1996 were $62,298 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
February 28, 1997 and February 29, 1996 is due to additional sales being
generated by commissioned sales representatives used by Sierra.
14
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General and administrative expenses relating to operations for the nine month
fiscal period ended February 28, 1997 were $1,245,694 as compared to $1,280,992
for the nine month fiscal period ended February 29, 1996. There is an actual
decrease in general and administrative expenses. The general and administrative
expenses for the parent and Sierra for the nine month period ended February 28,
1997 were $1,089,031. This demonstrates a reduction of expenses of $191,961
when comparing like entities over the same period. 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. Selling, general
and administrative expenses for the fiscal quarter of 1997 were $412,007
compared to $428,029 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 and lease payments from customers
declined from $63,208 to $24,935 during the nine month fiscal period ended
February 28, 1997, when compared to the quarter ended February 29, 1996. 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 nine month fiscal period
ended February 28, 1997 of $585,620 or $0.08 per share. There was a net loss of
$933,390, or $0.13 per share, from continuing operations and a net loss of
$873,134, or $0.13 per share from discontinued operations for the period ended
February 29, 1996. As discussed in the selling, general and administrative
section, the decreased net loss from continuing operations is primarily the
result of corporate overhead expenses being reduced. There was a net loss of
$222,167 or $0.03 per share for the fiscal quarter ended February 28, 1997
compared to a loss from continuing operations for the fiscal quarter ended
February 29, 1996 of $401,832, or $0.06 per share. Reduced corporate operating
expenses and improved gross margins from Sierra are the primary reasons for the
improved performance.
RESULTS OF OPERATIONS
FISCAL PERIOD ENDED FEBRUARY 29, 1996 COMPARED TO THE FISCAL PERIOD ENDED
FEBRUARY 28, 1995
During the nine month reporting period ended February 29, 1996 the Company
generated $1,360,337 in net sales from continued and discontinued operations
compared to $606,949 for the same period in fiscal 1995. Sierra's sales from
continuing operations for the nine month period ended February 29, 1996 were
$614,218. Sales from discontinued retail operations were $674,519 during this
nine month period compared to $606,949 for the same period a year ago. There
were no sales from Sierra in the prior fiscal year. Sales of discontinued
licensed products for the nine months ended February 29, 1996 were $89,373.
There were no licensed product sales during the prior fiscal year.
Sierra's sales for the third fiscal quarter ended February 29, 1996 were
$34,067. Sales from discontinued retail operations for the third fiscal quarter
were $227,375 compared to $224,874 for the same period in fiscal 1995.
15
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A consolidated net loss from continuing and discontinued operations of
$1,806,524 was reported during the nine month period ended February 29, 1996.
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
February 29, 1996 would have been $1,349,131 compared to a loss of $1,336,760
for the same fiscal 1995 nine month period. The Sierra subsidiary recorded a
net loss of $24,825 for the third fiscal quarter. On a nine month year to date
basis, Sierra reported a net profit of $92,678. Sierra was not operating at
this time in fiscal 1995, 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 February 28, 1996, the Company had working capital of $88,062, as compared to
working capital of $1,496,137 as of February 29, 1996. 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.
Net cash used in operating activities was $718,642 for the nine month period
ended February 28, 1997, as compared to net cash used in operating activities of
$2,092,238 for the nine month period ended February 29, 1996. The decrease in
cash used in operating activities was primarily attributable to the reduced net
loss from continuing operations as well as an 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 4 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, the Company's President loaned
to the Company $100,000 for working capital.
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.
16
<PAGE>
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 investigate other
merger candidates as well as expand operations of Sierra and Just Jackets.
17
<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, Chief Financial Officer, Director
President, and (Principal Financial Officer)
Chief Operating Officer Secretary
18
<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 frivolous and 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 its previous fiscal 1997 quarterly reports, 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.
19
<PAGE>
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.
Sierra's business is seasonal. Sales are highest in the fall 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 spring of the year and do not resurge
until about June.
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 Riley Golf. These
units will be shipped during the fourth 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 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.
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
20
<PAGE>
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 February 28, 1997, Just Jackets had a backlog of firm orders of approximately
$100,000 which orders are expected to be shipped during the fourth 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
21
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