<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996 Commission File No. 0-22458
-------------- -----------
Mountasia Entertainment International, Inc.
-------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Georgia 58-1949379
- ------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
5895 Windward Parkway, Suite 220
Alpharetta, Georgia 30202-4128
-------------------------------
(Address of principal executive offices)
(770) 442-6640
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1996
----- ----------------------------
Common Stock, no par value 12,014,158
<PAGE> 2
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
March 31, December 31, September 30,
1996 1995 1995
(Unaudited) (Unaudited)
------------ ------------- -------------
<S> <C> <C> <C>
ASSETS
Current
Cash and cash equivalents $ 1,576,676 $ 1,549,338 $ 7,196,026
Restricted cash 1,276,446 2,116,546 2,107,165
Restricted certificates of deposit 1,951,533 3,169,429 3,127,208
Accounts receivable 64,700 79,708 161,137
Inventories 1,547,652 1,551,180 1,855,545
Current portion of notes receivable 511,220 391,491 393,069
Other current assets 4,770,821 2,763,912 1,111,060
------------ ------------ -------------
Total current assets 11,699,048 11,621,604 15,951,210
------------ ------------ -------------
Property and equipment, less accumulated depreciation 69,703,752 71,482,152 70,884,585
------------ ------------ -------------
Other noncurrent
Investments in and advances to limited partnerships 5,734,948 5,111,847 5,129,758
Notes receivable 1,204,784 1,042,528 1,062,387
Other assets 4,105,370 1,116,455 630,431
Debt issuance costs, less accumulated amortization 1,235,907 1,532,135 2,037,463
Intangible assets, less accumulated amortization 4,329,454 4,414,112 4,498,776
------------ ------------ -------------
Total other noncurrent assets 16,610,463 13,217,077 13,358,815
------------ ------------ -------------
$ 98,013,263 $ 96,320,833 $ 100,194,610
============ ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of notes payable $ 16,109,586 $ 17,663,706 $ 10,406,788
Convertible subordinated debenture 5,650,000 5,650,000 5,650,000
Current portion of contingent liability for guaranteed stock values 1,795,510 1,419,730 1,151,238
Accounts payable 1,445,296 1,227,808 1,239,903
Accrued expenses 6,373,667 6,234,270 5,746,412
Reserve for discontinued operations 795,000 795,000
Income taxes payable 9,888 9,888 9,888
------------ ------------ -------------
Total current liabilities 32,178,947 33,000,402 24,204,229
Notes payable 6,238,267 6,834,514 15,545,067
Convertible subordinated debenture 5,407,849 6,518,334 8,500,000
Other accrued expenses 448,784 448,858 460,418
Deferred revenue 1,856,248 1,856,248 2,444,140
Deferred income taxes 674,021 674,021 674,021
------------ ------------ -------------
Total liabilities 46,804,116 49,332,377 51,827,875
------------ ------------ -------------
Contingent liability for guaranteed stock values 1,813,848 1,694,381 1,377,626
------------ ------------ -------------
Shareholders' equity
Preferred stock, 6,000,000 shares authorized with no par value
Class A, 2,000 shares authorized, 0, 30 and 1,150 shares issued
and outstanding 470,686 11,575,616
Class B, 2,000 shares authorized, 430, 430 and 0 shares issued
and outstanding 4,407,500 4,300,000
Class C, 1,000 shares authorized, 50, 50 and 0 shares issued
and outstanding 500,000 500,000
Class D, 2,000 shares authorized, 4,118, 0 and 0 shares
issued and outstanding 3,551,500
Common stock, 100,000,000 shares authorized with no
par value; 11,328,182, 10,079,834 and 7,850,868
shares issued and outstanding 47,301,984 43,868,329 35,558,175
Outstanding warrants 3,064,933 3,064,933 2,683,333
Unearned compensation (384,722) (497,222) (250,000)
Accumulated deficit (9,045,896) (6,412,651) (2,578,015)
------------ ------------ -------------
Total shareholders' equity 49,395,299 45,294,075 46,989,109
------------ ------------ -------------
Commitments and contingencies
$ 98,013,263 $ 96,320,833 $ 100,194,610
============ ============ =============
</TABLE>
<PAGE> 3
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
1996 1995
<S> <C> <C>
OPERATING REVENUES
Entertainment revenue $ 6,535,477 $ 6,333,642
Construction and development revenue from related parties - 1,197,227
Other 461,252 331,783
------------ -----------
Total operating revenues 6,996,729 7,862,652
------------ -----------
OPERATING EXPENSES
Development and construction expense - 999,845
Salaries and wages 3,249,730 3,144,486
General and administrative 5,535,327 4,427,187
------------ -----------
Total operating expenses before depreciation and
amortization and realized loss on sale of securities 8,785,057 8,571,518
------------ -----------
Depreciation and amortization 1,569,897 1,095,703
Realized loss on sale of securities 293,430
------------ -----------
Operating loss (3,358,225) (2,097,999)
OTHER (EXPENSE) INCOME
Interest expense (892,251) (778,879)
Interest income 42,938 105,988
Other 847,549 1,293,342
------------ -----------
Loss before benefit for income taxes (3,359,989) (1,477,548)
Benefit for income taxes 1,256,674 624,855
Equity in net losses of limited partnerships, net of tax (72,368) (5,722)
------------ -----------
Net loss $ (2,175,683) $ (858,415)
============ ===========
NET LOSS APPLICABLE TO COMMON STOCK
Net loss $ (2,175,683) $ (858,415)
Less: Preferred stock dividends (166,872)
------------ -----------
Net loss applicable to common stock $ (2,342,555) $ (858,415)
============ ===========
Net loss per share of common stock $ (0.21) $ (0.11)
============ ===========
Weighted average number of shares of
common stock and common stock equivalents
used in calculating net loss per share 10,966,810 7,872,111
============ ===========
</TABLE>
<PAGE> 4
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock
------------------------------------------------ Common Outstanding
Class A Class B Class C Class D Stock Warrants
---------- ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993 $ 5,683,831
Issuance of common stock in connection
with initial public offering 24,800,000
Stock issuance costs (3,942,729)
Issuance of common stock for
investment in limited partnerships 516,768
Issuance of common stock to purchase
East Cobb FunCenter 558,463
Issuance of common stock to purchase
Greenville FunCenter 388,930
Issuance of common stock to purchase
Kingwood FunCenter 780,500
Issuance of common stock to purchase
Malibu facilities 1,582,031
Warrants issued in connection with the
formation of NEF $ 300,000
Adjustment to common stock as a result of
guaranteed stock prices 30,693
Unrealized loss on investment in
securities, net of tax
Net income
----------- ----------- ----------- ------------ ----------- --------------
Balance, September 30, 1994 30,398,487 300,000
Issuance of preferred stock $11,500,000
Issuance of common stock 13,051,923
Stock issuance costs (2,547,164)
Purchase and cancellation of stock (5,658,027)
Warrants issued in connection
with purchase of MGPC 900,000
Warrants issued in connection with
financial advisory agreement 333,333
Unearned compensation in connection
with the financial advisory agreement
Warrants issued in connection with the
Company's initial public offering 650,000
Warrants issued in connection with
November 1994 equity offering 100,000
Warrants issued in connection
with NEF 25,000
Warrants issued in connection
with September 1995 equity offering 375,000
Adjustment to common stock as a result of
guaranteed stock prices 312,956
Change in unrealized loss on securities
available for sale, net of tax
Accretion of preferred stock dividends 75,616
Net loss
----------- ----------- ----------- ------------ ----------- --------------
Balance, September 30, 1995 11,575,616 35,558,175 2,683,333
Issuance of preferred stock $ 500,000
Issuance of common stock 101,364
Stock issuance costs (221,529)
Purchase and cancellation of stock (51,257)
Warrants issued in connection with
financial advisory agreement 350,000
Unearned compensation in connection
with the financial advisory agreements
Warrants issued 31,600
Adjustment to common stock as a result
of guaranteed stock prices (585,247)
Accretion of preferred stock dividends 230,001
Preferred stock converted (7,034,931) 7,034,931
Subordinated debt converted 2,031,892
Transfer of Class A preferred stock
to Class B preferred stock (4,300,000)$ 4,300,000
Net loss
----------- ----------- ----------- ------------ ----------- --------------
Balance, December 31, 1995 470,686 4,300,000 500,000 43,868,329 3,064,933
Issuance of preferred stock 3,500,000
Issuance of common stock 2,825,000
Stock issuance costs (519,167)
Purchase and cancellation of stock (6,875)
Unearned compensation in connection
with the financial advisory agreements
Adjustment to common stock as a result
of guaranteed stock prices (495,247)
Accretion of preferred stock dividends 60,000 107,500 51,500
Preferred stock converted (310,126) 310,126
Subordinated debt converted 1,319,818
Payment of dividends (138,455)
Adjust previous accretion of dividends
to actual (82,105)
Net loss
----------- ----------- ----------- ------------ ----------- --------------
Balance, March 31, 1996 $ $ 4,407,500 $ 500,000 $ 3,551,500 $47,301,984 $ 3,064,933
=========== =========== =========== ============ =========== ==============
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Loss on
Securities Retained
Unearned Available Earnings
Compensation for Sale (Deficit) Total
------------ ---------- --------- -----
<S> <C> <C> <C> <C>
Balance, September 30, 1993 $ 123,916 $ 5,807,747
Issuance of common stock in connection
with initial public offering 24,800,000
Stock issuance costs (3,942,729)
Issuance of common stock for
investment in limited partnerships 516,768
Issuance of common stock to purchase
East Cobb FunCenter 558,463
Issuance of common stock to purchase
Greenville FunCenter 388,930
Issuance of common stock to purchase
Kingwood FunCenter 780,500
Issuance of common stock to purchase
Malibu facilities 1,582,031
Warrants issued in connection with the
formation of NEF 300,000
Adjustment to common stock as a result of
guaranteed stock prices 30,693
Unrealized loss on investment in
securities, net of tax $ (227,714) (227,714)
Net income 1,232,079 1,232,079
--------- ----------- ----------- -----------
Balance, September 30, 1994 (227,714) 1,355,995 31,826,768
Issuance of preferred stock 11,500,000
Issuance of common stock 13,051,923
Stock issuance costs (862,500) (3,409,664)
Purchase and cancellation of stock (5,658,027)
Warrants issued in connection
with purchase of MGPC 900,000
Warrants issued in connection with
financial advisory agreement 333,333
Unearned compensation in connection
with the financial advisory agreement $(250,000) (250,000)
Warrants issued in connection with the
Company's initial public offering 650,000
Warrants issued in connection with
November 1994 equity offering 100,000
Warrants issued in connection
with NEF 25,000
Warrants issued in connection
with September 1995 equity offering 375,000
Adjustment to common stock as a result of
guaranteed stock prices 312,956
Change in unrealized loss on securities
available for sale, net of tax 227,714 227,714
Accretion of preferred stock dividends (75,616)
Net loss (2,995,894) (2,995,894)
--------- ----------- ----------- -----------
Balance, September 30, 1995 (250,000) (2,578,015) 46,989,109
Issuance of preferred stock 500,000
Issuance of common stock 101,364
Stock issuance costs (36,617) (258,146)
Purchase and cancellation of stock (51,257)
Warrants issued in connection with
financial advisory agreement 350,000
Unearned compensation in connection
with the financial advisory agreements (247,222) (247,222)
Warrants issued 31,600
Adjustment to common stock as a result
of guaranteed stock prices (585,247)
Accretion of preferred stock dividends (230,001)
Preferred stock converted
Subordinated debt converted 2,031,892
Transfer of Class A preferred stock
to Class B preferred stock
Net loss (3,568,018) (3,568,018)
--------- ----------- ----------- -----------
Balance, December 31, 1995 (497,222) (6,412,651) 45,294,075
Issuance of preferred stock 3,500,000
Issuance of common stock 2,825,000
Stock issuance costs (290,690) (809,857)
Purchase and cancellation of stock (6,875)
Unearned compensation in connection
with the financial advisory agreements 112,500 112,500
Adjustment to common stock as a result
of guaranteed stock prices (495,247)
Accretion of preferred stock dividends (248,977) (29,977)
Preferred stock converted
Subordinated debt converted 1,319,818
Payment of dividends (138,455)
Adjust previous accretion of dividends
to actual 82,105
Net loss (2,175,683) (2,175,683)
--------- ----------- ----------- -----------
Balance, March 31, 1996 $(384,722) $ $(9,045,896) $49,395,299
========= =========== =========== ===========
</TABLE>
4
<PAGE> 5
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1996 1995
<S> <C> <C>
Operating activities:
Net loss $ (2,175,683) $ (858,415)
Adjustments to reconcile net loss to
net cash used by operating activities
Equity in net losses of limited partnerships,
net of tax 72,368 5,722
Increase in allowance for doubtful accounts
receivable 30,000
Depreciation and amortization 1,569,897 1,095,703
Amortization of warrants 112,500
Unrealized loss on securities available for sale 293,430
Gain on sale of property and equipment (847,549)
Changes in assets and liabilities, net of acquisition
Increase in accounts receivable (14,992)
Decrease in inventory 3,528
Increase in other assets (3,396,241) (1,635,457)
Increase (decrease) in debt issuance costs
and intangible assets (75,001) 4,521
Increase (decrease) in accounts payable 217,488 (248,938)
Increase in accrued expenses 348,656 195,081
------------- ------------
Cash used by operating activities (4,155,029) (1,148,353)
------------- ------------
Investing activities:
Purchases of property and equipment (471,137)
Proceeds from sale of property and equipment 2,663,359 1,250,000
Principal payments under notes receivable 5,636
Increase in notes receivable (191,500)
(Increase) decrease in investments in and advances to
limited partnerships (695,469) 298,097
(Increase) decrease in restricted cash 840,100 (729,140)
(Increase) decrease in restricted certificates of deposit (25,847) 562,875
Purchase of facilities (250,971)
------------- ------------
Cash provided by investing activities 2,316,642 939,361
------------- ------------
Financing activities:
Proceeds from borrowings 24,910
Payments of borrowings (3,568,278) (840,930)
Issuance of preferred stock 3,500,000
Issuance of common stock 2,825,000
Stock issuance costs (715,690)
Purchase of stock (6,875) (405,683)
Payment of dividends (168,432)
------------- ------------
Cash (used) provided by financing activities 1,865,725 (1,221,703)
------------- ------------
Increase in cash and cash equivalents 27,338 (1,430,695)
Cash and cash equivalents, beginning of period 1,549,338 3,108,644
------------- ------------
Cash and cash equivalents, end of period $ 1,576,676 $ 1,677,949
============= ============
</TABLE>
5
<PAGE> 6
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND MARCH 31, 1995
(UNAUDITED)
BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. On January 19, 1996 the Board of Directors
approved a change in the Company's fiscal year end from September 30th to
December 31st. Operating results for the three month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's report on Form 10-K/A for the year
ended September 30, 1995.
NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock is computed by dividing net loss applicable
to common stock by the weighted average number of shares of common stock
outstanding during the periods.
The Company previously entered into three purchase transactions for FECs in
which the Company issued common stock as partial consideration and guaranteed
to the respective seller(s) that the aggregate market value of the common stock
would have a certain value, as defined, on specified future dates. In the
event that the common stock does not achieve the guaranteed value, the Company
has the option of issuing cash for the shortfall between the market value and
the guaranteed price or, with respect to two transactions, issuing additional
shares of stock. In the circumstances in which the Company has agreed to pay
cash or issue common stock, the contingent shares are considered to be common
stock equivalents. Common stock equivalents are not included in the weighted
average number of shares of common stock outstanding in loss periods.
On March 29, 1996, the Company distributed an offering circular to its
shareholders offering to exchange one share of its Class E Preferred Stock,
with a liquidation preference of $12.00 per share, for two shares of its common
stock, no par value, up to a maximum of 7,000,000 shares of common stock (the
"Exchange Offer"). The Exchange Offer is anticipated to close on May 24, 1996.
DISCONTINUED SEGMENT
In January 1996, the Company signed a memorandum of understanding to
exclusively engage an outside development and construction firm to provide all
future design, development and construction services for its FEC's. However,
in April 1996, the Board of Directors determined that it was in the Company's
best interest to retain this division. Accordingly, the Company will record a
gain of $795,000 during the quarter ended June 30, 1996 to reverse the loss
accrued during the three months ended December 31, 1995 for the estimated loss
on the disposal of the division. All expenses related to development and
construction are included in determining loss from operations for the three
months ended March 31, 1996.
6
<PAGE> 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Information about the Company's operations as they related to entertainment,
development and construction, and corporate for the three months ended March
31, 1996 and 1995 is presented below (in millions):
<TABLE>
<CAPTION>
1996 DEVELOPMENT
---- AND
ENTERTAINMENT CONSTRUCTION CORPORATE
------------- ------------ ---------
<S> <C> <C> <C>
Operating revenues $ 6,535 $ - $ 461
Operating loss (306) (228) (1,255)
Depreciation and amortization - - (1,570)
1995 DEVELOPMENT
---- AND
ENTERTAINMENT CONSTRUCTION CORPORATE
------------- ------------ ---------
Operating revenues $ 6,334 $ 1,197 $ 332
Operating income (loss) 211 (38) (881)
Depreciation and amortization - - (1,096)
Realized loss on sale of securities - - (293)
</TABLE>
The Company has not allocated corporate general and administrative overhead
(i.e. rent, utilities, travel, etc.) to the entertainment or development and
construction operations.
Operating revenues
Total operating revenues decreased from $7,863,000 during the three-month
period ended March 31, 1995 to $6,997,000 during the three-month period ended
March 31, 1996, a decrease of $866,000 or 15%. The decrease is primarily a
result of a decrease in development and construction revenue from related
parties of $1,197,000. The decrease in development and construction revenue
from related parties is a result of the Company having no FECs under
construction during the current period. The increase in entertainment revenues
is a result of the addition of two FEC's which the Company is leasing from
limited partnerships.
Operating expenses
Total operating expenses before depreciation and amortization and the realized
loss on the sale of securities, excluding development and construction expense,
increased from $7,572,000 during the three-month period ended March 31, 1995 to
$8,785,000 during the three-month period ended March 31, 1996, an increase of
$1,213,000 or 16%3,903,000. The increase is primarily a result of an increase
in general and administrative expenses of $1,108,000.
The increase in general and administrative expenses and the related increase in
the operating loss from entertainment and corporate overhead disclosed above is
a result of the Company incurring the following expenses during the period
ended March 31, 1996 which were not present during the same period in the prior
year: (i) the recognition of approximately $554,000 of expenses related to two
limited partnerships which the Company has been leasing since January 1996;
(ii) the recognition of approximately $112,000 in non-cash warrant expense
associated with amortizing the value of warrants issued in connection with
financial advisory agreements which the Company entered into in previous
periods; (iii) the recognition of approximately $100,000 for marketing
promotions for the FEC's; (iv) approximately $120,000 of consulting expense;
and (v) legal expenses of approximately $160,000 related to the Exchange Offer
and other restructuring issues which the Company is researching. The remaining
increase in general and administrative is due to overall
7
<PAGE> 8
increases commensurate with the increase in revenues and also repair and
maintenance work which is being completed at the Malibu FEC's.
The decrease in development and construction expense is consistent with the
decrease in related revenue.
The increase in depreciation and amortization of $474,000 from the three month
period ended March 31, 1996 as compared to the same period in the prior year is
due to the acceleration of amortization of certain loan costs due to the change
of final maturity of a certain bank note to October 1996.
The "other income" balance for the three month period ended March 31, 1995 is a
fee recognized for the termination of a construction contract related to a
limited partnership. There was no such fee for the three month period ended
March 31, 1996, however, the Company recognized a gain of approximately
$848,000 on the sale of excess land at one of the FEC's.
Liquidity and Capital Resources
During the period ended March 31, 1996, the Company financed its operations
primarily through cash flow from operations and the issuance of equity. During
the period ended March 31, 1996 the Company expended cash as follows (i)
purchased property and equipment of approximately $471,000 and (ii) repaid
indebtedness of approximately $3,568,000. At March 31, 1996 the Company had
non-restricted cash and cash equivalents of $1,577,000.
The increase in other current assets is primarily a result of an income tax
benefit of approximately $3,464,000. The Company anticipates that the income
tax benefit will be offset by income taxes payable in the more profitable
months of April through September. The increase in long-term other assets is a
result of deposits towards the purchase of FEC's.
The Company is current with all scheduled principal and interest payments under
existing senior bank debt and subordinated debenture agreements. At March 31,
1996, the Company was not in compliance with certain financial covenants under
the $5,650,000 9% convertible subordinated debentures and a credit agreement
with NationsBank N.A. However, the Company is currently in discussions with
debenture holders to waive and amend the covenant violations. Additionally, as
discussed below, the Company is presently in the final stages of entering into
a new credit facility which will replace the current senior debt.
Stock Price Guarantee Agreements
All of the Company's agreements under which it has agreed to specified future
stock prices have matured and the Company is in the process of settling the
guarantees. Under two of the stock price guarantee agreements as of March 31,
1996, the Company is required to issue an additional 510,960 shares of common
stock. Under a third agreement, the Company has agreed to purchase the 87,050
shares issued in the initial purchase transaction for the guaranteed purchase
price of $1,795,510. Subsequent to March 31, 1996, a restricted certificate of
deposit for approximately $1,100,000 was liquidated to satisfy the stock
guarantee for $1,795,510.
Working Capital
At March 31, 1996, the Company has negative working capital of approximately
$20,500,000 which includes approximately $5,506,000 of senior debt which has
been classified as current due to a financial covenant violation in a senior
credit agreement which the bank had not waived at the date of this report. The
negative current debt also included $5,650,000 due to financial covenant
violations under the 9% subordinated debentures as discussed above.
In April 1996 the Company accepted a commitment letter from Foothill Capital
Corporation, a major U.S. financial institution, for a $25 million credit
facility. Proceeds from the credit facilities will be used to (i) refinance
the Company's existing balance of $9.5 million with its existing senior lender;
(ii) fund the cash
8
<PAGE> 9
portion of acquisition costs for six family entertainment centers presently
owned by limited partnerships and either managed or leased by the Company;
(iii) fund general working capital requirements.
On January 1, 1996, the Company entered into a Lease Agreement with M.F.G. of
Willowbrook, L.P. ("Willowbrook"), whereby Willowbrook agreed to lease the FEC
located in Willowbrook, Texas to the Company. The term of the lease expires
upon the earlier to occur of (i) December 31, 1996, (ii) the sale of the FEC to
the Company, and (iii) the termination of the Management Agreement. Under the
terms of the lease, the Company has agreed to pay rent of $1,800 per day and is
responsible for the maintenance and repair of the facility. The Company will
receive all revenues and be responsible for payment of all expenses at the FEC.
The Company has also entered into an agreement to acquire the FEC for a
purchase price of approximately $5.5 million (plus the assumption of
approximately $1.4 million of secured debt). The Company has paid a deposit of
approximately $650,000 on the purchase price and is obligated to pay an
additional $500,000 on September 30, 1996 if the closing of the acquisition has
not taken place by such date. The closing of the acquisition is anticipated to
take place prior to December 31, 1996.
On March 28, 1996, the Company formalized a Lease Agreement with F.F.C. of
Columbus, Limited Partnership ("Columbus"), whereby Columbus agreed to lease
the FEC located in Columbus, Ohio to the Company. The term of the lease
commenced on January 1, 1996 and expires upon the earlier to occur of (i) April
30, 1996, (ii) the sale of the FEC to the Company, or (iii) the termination of
the Management Agreement. Under the terms of the lease, the Company has agreed
to pay as rent Columbus' obligations with respect to three bank loans made to
Columbus in order to develop and construct the FEC. The Company will receive
all revenues and be responsible for the maintenance and repair of the facility,
as well as for all taxes, insurance and utilities with respect to the FEC
during the term of the lease.
Additionally, the Company is currently in negotiations with two other limited
partnerships to purchase an aggregate of four FEC's. The purchase of these
FECs is part of management's strategy to increase the core business of
entertainment revenue.
Issuance of Preferred Stock
In February 1996 the Company's Board of Directors designated 20,000 shares of
the Company's Preferred Stock as Class D Preferred Stock (the "Class D
Preferred Stock"). In March 1996 the Company issued 4,118 shares of Class D
Preferred Stock with a face value of $4,118,000 for $3,500,000. Holders of the
Class D Preferred Stock are entitled to receive annual dividends at 4% of the
face amount of the Class D Preferred Stock, payable quarterly. Subsequent to
March 31, 1996 the Company issued 3,410 shares of Class D Preferred Stock with
a face value of $3,410,000 for $2,830,000. The difference between the face
value of the Class D Preferred Stock and the issuance price will be accreted
over one year.
In the event of liquidation, the holders of the Class D Preferred Stock are
entitled to receive $1,000 for each share of Class D Preferred Stock. The
right of the holders of Class D Preferred Stock to distributions of the assets
of the Company in the event of a voluntary or involuntary liquidation are in
parity with the rights of the holders of the other classes of Preferred Stock.
Beginning sixty days following the date of the issuance, the Class D Preferred
Stock is convertible into the number of shares of common stock equal to the
Class D Original Issue Price, divided by the lesser of (i) $6.00 or (ii) the
average closing bid price, as defined, for the five trading days immediately
preceding the date the Class D Preferred Stock is converted (the "Class D
Conversion Price"). However, the Class D Conversion Price can not be less than
seventy percent of the average closing bid price for the five trading days
immediately preceding the date the Class D Preferred Stock is converted. The
Company is required to convert, at the Class D Conversion Price, all of the
shares of Class D Preferred Stock outstanding two years following the date of
the issuance
The Company may, at its option, redeem shares of Class D Preferred Stock
immediately prior to the conversion of such shares, if the Class D Conversion
Price is less than $3.00 per share on the date of a proposed conversion.
9
<PAGE> 10
In March 1996, the Company's Board of Directors designated 3,500,000 shares of
the Company's Preferred Stock as Class E Preferred Stock (the "Class E
Preferred Stock"). Holders of the Class E Preferred Stock are entitled to
cumulative dividends payable at the annual rate of 10%. The holders of the
Class E Preferred Stock are entitled to elect one director to the Company's
Board of Directors if the Company defaults with respect to any six consecutive
quarterly dividend payments.
In the event of liquidation the holders of the Class E Preferred Stock are
entitled to receive $12.00 for each share of Class E Preferred Stock, plus
accrued and unpaid dividends.
Holders of the Class E Stock may convert the Class E Preferred Stock into
common stock at any time from the date of issuance for an initial conversion
price of $8.00 per share. The Company is required to redeem the Class E
Preferred Stock on the fifth anniversary of its issuance at a redemption price
equal to $12.00 per share plus accrued and unpaid dividends. If the market
price of the common stock exceeds $10.00 per share for any fifteen consecutive
trading days, the Company may compel the holders of the Class E Preferred Stock
to convert such shares into shares of common stock at an initial price of $8.00
per share.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 24, 1994, the Company filed a complaint in the Superior Court of Fulton
County, Georgia against M.B. Kahn Construction Company, Inc. ("Kahn"), a
company engaged to perform various construction management and construction
related services in connection with six planned Mountasia FunCenters, alleging
breach of contract and requesting unspecified damages. Kahn answered the
complaint and filed a counterclaim seeking damages of $1,954,185 for breach of
contract, quantum merit and indemnity plus attorneys fees, and litigation
expenses. The Company intends to vigorously pursue its claims and defend
against Kahn's counterclaim, and management does not anticipate that the
ultimate resolution of this litigation will have a material adverse impact on
the Company's consolidated financial statements. While the Company intends to
vigorously defend this action, if necessary, due to the present posture of this
case, there can be no assurance that the Company will prevail in this matter or
that it will not incur damages in excess of the amount covered by insurance.
On December 21, 1994, the Company was served with a complaint for damages filed
by Thrill Technology, Inc. ("Thrill"). Thrill alleges that negotiations with
the Company for the construction and installation of "Sky Coaster amusement
rides" in more than one Mountasia/Malibu facility bound the Company to purchase
the rides, and that the company damaged Thrill by refusing to purchase the
rides. Thrill alleges claims and damages for 1) breach of contract in the
amount not less than $500,000; 2) promissory estoppel with damages not less
than $500,000; 3) equitable estoppel; 4) fraud; 5) breach of a duty of good
faith; 6) punitive damages; and 7) attorney's fees. The Company strongly
believes there is no liability or obligation to Thrill, and has filed a
counterclaim against Thrill for actionable defamation and tortuous interference
with business relations based upon alleged slanderous remarks regarding the
Company that Thrill's president has made to the manufacturer of the Sky Coaster
ride and others. Company management believes that Thrill's claims are without
merit both factually and legally. While the Company intends to vigorously
defend this action, if necessary, due to the present posture of this case,
there can be no assurance that the Company will prevail in this matter or that
it will not incur damages in excess of the amount covered by insurance.
On or about June 26, 1995, the Company was served with a Complaint for damages
filed by WXZ Development, Inc. in the Court of Common Pleas, Franklin County,
Ohio. This lawsuit arises out of the Company's purchase of some real property
from codefendant PDI Columbus II Limited Partnership. The Complaint set forth
claims for relief against the Company for tortuous interference and intentional
interference with prospective economic opportunity. The Complaint seeks
damages on the tortuous interference count in excess of $900,000 and on the
intentional interference with prospective economic opportunity in excess of
$450,000. On or about August 18, 1995, the Company filed a timely motion to
dismiss the suit for failure to state a claim upon which relief can be granted.
The Court denied the motion to dismiss on January 2, 1996. The Company filed a
timely answer denying liability on February 8, 1996. The Company is in the
process of preparing to conduct discovery in the case. While the Company
intends to vigorously defend this action, if necessary, due to the present
posture of this case, there can be no assurance that the Company will prevail
in this matter or that it will not incur damages in excess of the amount
covered by insurance.
On or about February 23, 1996, the Company, Scott Demerau and Juli Demerau were
served with a Complaint for damages filed by Douglas E. Hesse in the State
Court of Fulton County, Georgia. Mr. Hesse alleges breach of contract and
recovery under the theory of quantum meruit. He demands actual damages of
$400,000, pre- and post-judgment interest, attorneys fees and costs of
litigation. A timely answer on behalf of all defendants was filed March 25,
1996, denying the allegations and asserting numerous affirmative defenses.
Discovery is proceeding. The Company has instructed counsel to vigorously
defend this action. Due to the present posture of the case, we are unable to
assess the likelihood that the Company will prevail in this matter or estimate
its exposure for damages and other expenses.
11
<PAGE> 12
Malibu's business, primarily due to the operation of the Virage(R) race
tracks, has been, and will likely continue to be subject to a significant
number of personal injury lawsuits, certain of which may involve claims for
substantial damages, which could result in substantial damage awards and legal
and other expenses.
From time to time, the Company is a party to routine claims and litigation
incidental to its business. Currently, the Company is subject to certain
claims and lawsuits, the outcomes of which are not determinable at this time.
In the opinion of the Company, any liability that might be incurred upon the
resolution of these routine claims and lawsuits will not, in the aggregate,
exceed the limits of the Company's insurance policies or otherwise have a
material adverse effect on the financial condition or results of operations of
the Company.
Item 2. Change in Securities
The Company issued 4,118 shares of Class D Preferred Stock in March 1996. The
rights and privileges under the Class D Preferred Stock are discussed above.
Additionally, the Company's Board of Directors designated 3,500,000 shares of
Preferred Stock to be designated Class E Preferred Stock (the "Class E
Preferred Stock"). The rights and privileges under the Class E Preferred Stock
are disclosed above.
Item 3. Defaults Upon Senior Securities
The Company was not in compliance with certain financial covenants within a
credit agreement with its senior lender at March 31, 1996. Additionally, the
Company was not in compliance with certain financial convenants regarding its
$5,650,000 9% convertible subordinated debentures. At the date of this report,
the Company had not obtained waivers of non-compliance of these covenants,
therefore, all the amounts have been classified as current in the accompanying
balance sheet.
Although the following unaudited financial statements for the three month
transition period ended March 31, 1996 have not been audited by Arthur
Andersen LLP, they have informed the Company that if the covenant violation
described above continues to exist at the time of their audit of the financial
statements for the transition period and for the year ended December 31, 1996,
their report on those statements may include an explanatory fourth paragraph
with respect to that uncertainty.
Item 4. Submission of Matters to a Vote of Securityholders
During the period covered by this report, no matters were submitted to the vote
of the securityholders of the Company.
Item 5. Other Information
At the shareholders meeting on May 9, 1996 the shareholders approved, for a
period of one year, any Board approved sales by the Company of common stock (or
securities convertible into or exercisable for common stock): (a) in amounts
which may equal (or may result in the issuance of) 20% or more of the Company's
common shares outstanding before any such sale, and (b) at a price that is less
than the greater of book or market value of the Company's common stock at the
time of such sale. Shareholders also ratified all such previous sales.
This proposal was considered in response to an indication by the Nasdaq
National Market Inc. ("Nasdaq") that the Company was in violation of a NASD
By-Law which would affect the continued listing of the Company's common stock
on the Nasdaq National Market System. Nasdaq has taken the position that: (a)
certain of the Company's outstanding convertible securities have been converted
or could hypothetically be converted into common stock at a share price below
book or market value of the Company's common stock at the time of issuance of
the securities, and (b) the conversion of these securities have been or could
12
<PAGE> 13
hypothetically be in an amount equaling 20% or more of the common shares
outstanding at the time of issuance of the securities. Therefore, Nasdaq has
concluded the Company is in violation of NASD rules requiring shareholder
approval of such sales.
The Company believes that the shareholders' vote at the Annual Meeting
approving such previous transactions, along with other considerations,
satisfies all NASD compliance issues and should ensure continued listing on the
Nasdaq National Market System. A hearing before Nasdaq on this matter is
scheduled to be held on May 22, 1996.
Items 6. Exhibits and Reports on Form 8-K
Exhibit Description
- ------- -----------
27 Financial Data Schedule (for SEC use only)
Reports on Form 8-K:
Date Form 8-K was Filed Description
- ----------------------- -----------
January 31, 1996 Change in the Company's year end from September
30th to December 31st.
May 6, 1996 Disclosure of Rights Agreement Plan.
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
By: /s/ L. Scott Demerau
-----------------------------
L. Scott Demerau
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Form 10-Q was signed by the following persons in the capacities indicated
on May 13, 1996.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ L. Scott Demerau President, Chief Executive Officer and a Director
- -------------------- (principal executive officer)
L. Scott Demerau
/s/ Ann C. Travis Vice President Finance
- ---------------------
Ann C. Travis
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,804,655
<SECURITIES> 0
<RECEIVABLES> 1,780,704<F1>
<ALLOWANCES> 0
<INVENTORY> 1,547,652
<CURRENT-ASSETS> 11,699,048
<PP&E> 69,703,752<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 98,013,263
<CURRENT-LIABILITIES> 32,178,947
<BONDS> 33,405,702
0
8,459,000
<COMMON> 47,301,984
<OTHER-SE> (6,365,685)
<TOTAL-LIABILITY-AND-EQUITY> 98,013,263
<SALES> 6,535,477
<TOTAL-REVENUES> 6,996,729
<CGS> 0
<TOTAL-COSTS> 8,785,057
<OTHER-EXPENSES> (890,487)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 892,251
<INCOME-PRETAX> (3,359,989)
<INCOME-TAX> (1,256,674)
<INCOME-CONTINUING> (2,175,683)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,175,683)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
<FN>
<F1>The asset value for receivables and PP&E represent net amounts
</FN>
</TABLE>
