<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 THE QUARTER ENDED JUNE 30, 1996
Mountasia Entertainment International, Inc.
5895 Windward Parkway, Suite 220
Alpharetta, GA 30202-4128
(770) 442-6640
Commission File No. 0-22458
---------------------------
Georgia 58-1949379
------- -------------
(IRS Employer
I.D. No.)
The Registrant (1) had filed all reports required to be filed by Section 12, 13
or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for at least the past 90
days.
The number of shares outstanding of the Registrant's Common Stock as of August
9, 1996 was 13,951,144.
<PAGE> 2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current
Cash and cash equivalents............................................... $ 1,212,528 $ 1,549,338 $ 7,196,026
Restricted cash......................................................... 1,059,862 2,116,546 2,107,165
Restricted certificates of deposit...................................... 3,169,429 3,127,208
Accounts receivable..................................................... 467,955 79,708 161,137
Inventories............................................................. 1,395,998 1,551,180 1,855,545
Current portion of notes receivable..................................... 177,345 391,491 393,069
Other current assets.................................................... 6,921,285 2,763,912 1,111,060
------------ ----------- ------------
Total current assets.............................................. 11,234,973 11,621,604 15,951,210
------------ ----------- ------------
Property and equipment, less accumulated depreciation..................... 67,230,850 71,482,152 70,884,585
------------ ----------- ------------
Other noncurrent
Investments in and advances to limited partnerships..................... 8,738,136 5,111,847 5,129,758
Notes receivable........................................................ 4,640,785 1,042,528 1,062,387
Other assets............................................................ 3,475,977 1,116,455 630,431
Debt issuance costs, less accumulated amortization...................... 1,445,718 1,532,135 2,037,463
Intangible assets, less accumulated amortization........................ 2,935,723 4,414,112 4,498,776
------------ ----------- ------------
Total other noncurrent assets..................................... 21,236,339 13,217,077 13,358,815
------------ ----------- ------------
$ 99,702,162 $96,320,833 $100,194,610
============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of notes payable........................................ $ 5,813,016 $17,663,706 $ 10,406,788
Convertible subordinated debentures..................................... 5,650,000 5,650,000 5,650,000
Current portion of liability for guaranteed stock values................ 1,419,730 1,151,238
Accounts payable........................................................ 2,381,672 1,227,808 1,239,903
Accrued expenses........................................................ 8,683,762 6,234,270 5,746,412
Reserve for discontinued operations..................................... 795,000
Income taxes payable.................................................... 9,888 9,888 9,888
------------ ----------- ------------
Total current liabilities......................................... 22,538,338 33,000,402 24,204,229
Notes payable........................................................... 22,554,376 6,834,514 15,545,067
Convertible subordinated debentures..................................... 3,984,289 6,518,334 8,500,000
Other accrued expenses.................................................. 396,126 448,858 460,418
Deferred revenue........................................................ 1,856,248 2,444,140
Deferred income taxes................................................... 674,021 674,021 674,021
------------ ----------- ------------
Total liabilities................................................. 50,147,150 49,332,377 51,827,875
------------ ----------- ------------
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......................................................... 4,515,000 4,300,000
Class C, 1,000 shares authorized, 50, 50 and 0 shares issued and
outstanding......................................................... 500,000 500,000
Class D, 20,000 shares authorized, 3,810, 0 and 0 shares issued
and outstanding..................................................... 3,298,500
Common stock, 100,000,000 shares authorized with no par value;
13,235,416, 10,079,834 and 7,850,868 shares issued and outstanding.... 51,560,915 43,868,329 35,558,175
Outstanding warrants.................................................... 2,730,600 3,064,933 2,683,333
Unearned compensation................................................... (272,222) (497,222) (250,000)
Accumulated deficit..................................................... (14,591,629) (6,412,651) (2,578,015)
------------ ----------- ------------
Total shareholders' equity........................................ 47,741,164 45,294,075 46,989,109
Commitments and contingencies
------------ ----------- ------------
$ 99,702,162 $96,320,833 $100,194,610
============ =========== ============
</TABLE>
2
<PAGE> 3
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Entertainment revenue....................... $10,700,633 $10,631,365 $17,236,110 $16,965,007
Development and construction revenue from
related parties........................... 4,643,032 5,840,259
Formation and development revenue........... 1,057,500 1,057,500
Other....................................... 456,864 575,276 918,116 907,059
----------- ----------- ----------- -----------
Total operating revenues.......... 11,157,497 16,907,173 18,154,226 24,769,825
----------- ----------- ----------- -----------
OPERATING EXPENSES
FEC operating expenses...................... 8,667,221 7,471,625 15,508,783 13,593,323
General and administrative expenses......... 3,079,866 1,819,383 5,023,361 3,269,358
Development and construction expense........ 4,101,107 5,100,952
----------- ----------- ----------- -----------
Total operating expenses before
depreciation and amortization
and realized loss on sale of
securities...................... 11,747,087 13,392,115 20,532,144 21,963,633
----------- ----------- ----------- -----------
Depreciation and amortization............... 2,065,438 1,237,661 3,635,335 2,333,364
Loss due to impairment of assets............ 2,871,000 2,871,000
Realized loss on sale of securities......... 293,430
----------- ----------- ----------- -----------
Operating (loss) income..................... (5,526,028) 2,277,397 (8,884,253) 179,398
OTHER (EXPENSE) INCOME
Interest expense............................ (926,389) (1,070,772) (1,818,640) (1,849,651)
Interest income............................. 33,481 107,089 76,419 213,077
Loss on settlement of strategic alliance
agreements................................ (1,005,751) (1,005,751)
Gain associated with development and
construction division..................... 795,000 795,000
Gain associated with cancellation of
warrants.................................. 334,333 334,333
Other....................................... 345,823 1,193,372 1,293,342
----------- ----------- ----------- -----------
(Loss) income before benefit (provision) for
income taxes.............................. (5,949,531) 1,313,714 (9,309,520) (163,834)
Benefit (provision) for income taxes........ 1,929,500 (525,485) 3,186,174 99,370
Equity in net (losses) earnings of limited
partnerships, net of tax.................. 26,392 27,669 (45,976) 21,947
----------- ----------- ----------- -----------
Net (loss) income........................... $(3,993,639) $ 815,898 $(6,169,322) $ (42,517)
=========== =========== =========== ===========
NET (LOSS) INCOME APPLICABLE TO COMMON STOCK
Net (loss) income......................... $(3,993,639) $ 815,898 $(6,169,322) $ (42,517)
Less: Preferred stock dividends........... (212,808) (379,680)
----------- ----------- ----------- -----------
Net (loss) income applicable to common
stock..................................... $(4,206,447) $ 815,898 $(6,549,002) $ (42,517)
=========== =========== =========== ===========
Net (loss) income per share of common
stock..................................... $ (0.34) $ 0.10 $ (0.56) $ 0.00
=========== =========== =========== ===========
Weighted average number of shares of common
stock and common stock equivalents used in
calculating net (loss) income per share... 12,529,000 8,160,622 11,703,103 7,830,587
=========== =========== =========== ===========
</TABLE>
3
<PAGE> 4
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------- COMMON OUTSTANDING UNEARNED
CLASS A CLASS B CLASS C CLASS D STOCK WARRANTS COMPENSATION
----------- ---------- -------- ----------- ----------- ----------- ------------
<S> <C> <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............................. $ (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........
Accretion of preferred stock
dividends............................. 75,616
Net loss...............................
----------- ---------- -------- ----------- ----------- ---------- ---------
BALANCE, SEPTEMBER 30, 1995............ 11,575,616 35,558,175 2,683,333 (250,000)
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 financial advisory agreements.... (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.............. (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 (497,222)
Issuance of preferred stock............ $ 6,662,000
Issuance of common stock............... 3,912,500
Stock issuance costs................... (544,488)
Purchase and cancellation of stock..... (85,021)
Unearned compensation in connection
with the financial advisory
agreements............................ 225,000
Adjustment to common stock as a result
of guaranteed stock prices............ (495,247)
Accretion of preferred stock
dividends............................. 60,000 215,000
Accretion of preferred stock
discount.............................. 548,500
Preferred stock converted.............. (310,126) (1,991,000) 2,315,745
Preferred stock redeemed............... (1,921,000)
Subordinated debt converted............ 2,589,097
Payment of dividends................... (138,455)
Cancellation of warrants............... (334,333)
Adjust previous accretion of dividends
to actual............................. (82,105)
Net loss...............................
----------- ---------- -------- ----------- ----------- ---------- ---------
BALANCE, JUNE 30, 1996................. $ -- $4,515,000 $500,000 $ 3,298,500 $51,560,915 $ 2,730,600 $ (272,222)
=========== ========== ======== =========== =========== ========== =========
<CAPTION>
UNREALIZED
LOSS ON
SECURITIES RETAINED
AVAILABLE EARNINGS
FOR SALE (DEFICIT) TOTAL
---------- ------------ -----------
<S> <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...................... 300,00
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)
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............ (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 financial advisory agreements.... (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............. (6,412,651) 45,294,075
Issuance of preferred stock............ 6,662,000
Issuance of common stock............... 3,912,500
Stock issuance costs................... (531,657) (1,076,145)
Purchase and cancellation of stock..... (85,021)
Unearned compensation in connection
with the financial advisory
agreements............................ 225,000
Adjustment to common stock as a result
of guaranteed stock prices............ (495,247)
Accretion of preferred stock
dividends............................. (379,680) (104,680)
Accretion of preferred stock
discount.............................. (1,180,424) (631,924)
Preferred stock converted.............. 14,619
Preferred stock redeemed............... (1,921,000)
Subordinated debt converted............ 2,589,097
Payment of dividends................... (138,455)
Cancellation of warrants............... (334,333)
Adjust previous accretion of dividends
to actual............................. 82,105
Net loss............................... (6,169,322) (6,169,322)
--------- ------------ -----------
BALANCE, JUNE 30, 1996................. $ -- $(14,591,629) $47,741,164
========= ============ ===========
</TABLE>
4
<PAGE> 5
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1995
------------ -----------
<S> <C> <C>
Operating activities:
Net loss........................................................................... $ (6,169,322) $ (42,517)
Adjustments to reconcile net loss to net cash used by operating activities
Syndication revenue.............................................................. (1,057,500)
Equity in net losses (earnings) of limited partnerships, net of tax.............. 45,976 (21,947)
Allowance for doubtful accounts.................................................. 440,000
Depreciation and amortization.................................................... 3,635,335 2,333,364
Loss on impairment of assets..................................................... 2,871,000
Loss on settlement of strategic alliance agreements.............................. 521,000
Amortization of warrants......................................................... 225,000
Gain associated with cancellation of warrants.................................... (334,333)
Gain on sale of property and equipment........................................... (1,193,372)
Gain associated with development and construction division....................... (795,000)
Unrealized loss on securities available for sale................................. 293,430
Changes in assets and liabilities, net of acquisition
Increase in accounts receivable.................................................. (748,247) (844,607)
Decrease in inventory............................................................ 122,982 20,578
Increase in other assets......................................................... (6,516,895) (789,527)
Increase in debt issuance costs and intangible assets............................ (736,473) (218,281)
Increase (decrease) in accounts payable.......................................... 1,153,864 (195,987)
Decrease in accrued expenses..................................................... (193,009) (230,093)
(Decrease) increase in deferred revenue.......................................... (277,248) 2,460,140
------------ -----------
Cash (used) provided by operating activities................................ (7,948,742) 1,707,053
------------ -----------
Investing activities:
Purchases of property and equipment................................................ (2,232,908)
Proceeds from sale of property and equipment....................................... 3,390,683 1,250,000
Proceeds from sale of securities available for sale................................ 2,665,921
Increase in notes receivable....................................................... (3,473,579) (1,367,500)
Increase in notes receivable from shareholders..................................... (771,882)
Principal receipts under notes receivable.......................................... 9,468 48,798
Increase in investments in and advances to limited partnerships.................... (3,002,765) (168,762)
(Increase) decrease in restricted cash............................................. 1,056,684 (692,810)
(Increase) decrease in restricted certificates of deposit.......................... 3,169,429 (637,125)
Purchase of facilities............................................................. (250,971)
------------ -----------
Cash (used) provided by investing activities................................ (1,082,988) 75,669
------------ -----------
Financing activities:
Proceeds from borrowings........................................................... 18,063,565 1,383,475
Proceeds from issuance of subordinated debentures.................................. 750,000
Payments of borrowings............................................................. (14,194,393) (2,758,912)
Issuance of preferred stock........................................................ 6,662,000
Redemption of preferred stock...................................................... (1,935,740) (1,935,740)
Redemption of subordinated debentures.............................................. (200,000)
Accretion of preferred stock....................................................... (631,924)
Issuance of common stock........................................................... 3,912,500 1,141,250
Stock issuance costs............................................................... (962,102) (474,159)
Decrease in guaranteed stock values................................................ (1,795,510) (728,773)
Purchase of stock.................................................................. (85,021) (1,577,699)
Payment of dividends............................................................... (138,455)
------------ -----------
Cash (used) provided by financing activities................................ 8,694,920 (4,200,558)
------------ -----------
Decrease in cash and cash equivalents................................................ (336,810) (2,417,836)
Cash and cash equivalents, beginning of period....................................... 1,549,338 3,108,644
------------ -----------
Cash and cash equivalents, end of period............................................. $ 1,212,528 $ 690,808
============ ===========
</TABLE>
5
<PAGE> 6
MOUNTASIA ENTERTAINMENT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND JUNE 30, 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, the accompanying
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) considered necessary to fairly present, in all
material respects, the consolidated financial position and results of
operations of the Company and its subsidiaries. Operating results for the six
month period ended June 30, 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 (INCOME) PER SHARE OF COMMON STOCK
Net loss (income) per share of common stock is computed by dividing net loss
(income) applicable to common stock by the weighted average number of shares of
common stock outstanding during the periods.
The Company previously entered into purchase transactions for family
entertainment centers ("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 did not
achieve the guaranteed value, the Company has the option of issuing cash or
additional stock for the shortfall between the market value and the guaranteed
price. The contingent shares which may be issued 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.
6
<PAGE> 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction--Proposed Recapitalization
In the second quarter of 1996, the Company accepted a financing commitment from
a leading U.S. based financial institution (the "Senior Lender") to provide up
to $25 million in senior secured credit facilities and also entered into an
equity investment agreement with a U.S. based investment group (the "Equity
Investment Group") providing for an initial equity commitment of $40 million
with an additional $30 million available under certain conditions (together,
the "Recapitalization"). The equity investment agreement was subsequently
amended to provide for an initial equity commitment of up to $60 million. If
the Recapitalization is completed, the Company expects to implement a three
part growth strategy designed to build long term shareholder value, the
principal elements of which are: (i) upgrading the Company's existing FECs
through capital investment, (ii) acquisitions of new FECs, and (iii) the
development of FECs in select markets. While the Recapitalization is expected
to close in the third quarter of this year, there can be no assurance that it
will be completed. If all or part of the Recapitalization is not completed,
the Company will seek other equity and/or debt capital.
Results of Operations
In the period ended December 31, 1995, the Company decided to discontinue its
partnership formation and development activities for FECs ("Syndication") as
well as its FEC development and construction activities for third parties
("Development"). The result of discontinuing Syndication and Development was a
charge of $795,000 in the respective period. The Board of Directors
subsequently decided that it was in the Company's best interest to retain
Syndication and Development as discussed below. In the second quarter of 1996,
the Company determined, as a result of certain due diligence for the proposed
Recapitalization, that the carrying value of certain assets should be adjusted
in accordance with Financial Accounting Standards No. 121 ("FAS 121"). This
resulted in an increase in the Company's pretax loss for the six months and
three months ended June 30, 1996 by $2,871,000 (the "Asset Revaluations").
Operating revenues
On a historical basis, total operating revenues declined from $24,770,000
during the six month period ended June 30, 1995 to $18,154,000 during the six
month period ended June 30, 1996, a decrease of $6,616,000 or 27%.
Excluding the effects of newly acquired FECs which the Company began leasing in
January 1996, operating revenues from the Company's core entertainment center
business would have decreased $697,000 or 4%, on comparative period-to-period
basis. This decrease in entertainment revenue is primarily a result of
deferred enhancements of FEC (e.g. games and attractions) due to the Company's
capital constraints. Upon completion of the proposed Recapitalization, the
Company expects to reinvest substantial capital in its existing FECs for
deferred maintenance and facility expansions.
Operating expenses
On a historical basis, total operating expenses before depreciation and
amortization and the realized loss on the sale of securities decreased
$1,432,000 or 6.5% from $21,964,000 during the six month period ended June 30,
1995 to $20,532,000 during the six month period ended June 30, 1996. Excluding
the effects of Syndication and Development, operating expenses increased
$3,669,000 or 22%, on a comparative period-to-period basis, primarily as a
result of an increase of $1,916,000 in direct FEC operating expenses and an
increase of $1,754,000 in corporate general and administrative expenses. The
increase in direct FEC operating expenses was primarily attributable to the
increase in operating expenses for the two newly acquired FECs
7
<PAGE> 8
which the Company began operating in January of this year and non-capitalized
expenses incurred to rehabilitate certain existing FECs.
The increase in general and administrative expenses of $1,754,000 is a
result of the Company incurring the following expenses during the six month
period ended June 30, 1996 which were not present during the same period in the
prior year: (i) the recognition of approximately $225,000 in non-cash warrant
expense associated with amortizing the value of warrants issued in connection
with financial advisory agreements, (ii) approximately $150,000 of consulting
expense, (iii) legal and accounting expenses of approximately $100,000 related
to the Exchange Offer which has been terminated, (iv) environmental expense of
$150,000 and (v) approximately $400,000 of additional legal and accounting
expense above the prior year.
The increase in depreciation and amortization of $1,570,000 from the six
month period ended June 30, 1996 as compared to the same period in the prior
year is due to: (i) a full six months of depreciation recorded on assets placed
in service during fiscal 1995, (ii) the write off of unamortized loan expenses
on a prior credit facility, and (iii) the write off of approximately $145,000
of unamortized capitalized costs relating to drawings and skating costs which
were capitalized in prior years.
Interest income and expense were essentially unchanged on a comparative
period-to-period basis. However, the Company recorded certain non-operating
expenses, the aggregate effect of which was to increase the Company's pretax
loss by $2,401,000 and $1,554,000 for the three and six month periods ended
March 31, 1996 and June 30, 1996, respectively, as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
ITEM JUNE 30, 1996 JUNE 30, 1996
-------------- -------------
<S> <C> <C>
Loss due to impairment of assets $ (2,871,000) $ (2,871,000)
Termination of strategic alliances (1,005,751) (1,005,751)
Gain associated with development and
construction division 795,000 795,000
Gain associated with cancellation of warrants 334,333 334,333
Other 345,823 1,193,372
------------- -------------
$ (2,401,595) $ (1,554,046)
============= =============
</TABLE>
In the prior year, the Company entered into two strategic alliance
agreements in which the Company granted rights to third parties to build, own
and construct FECs domestically and internationally. In return for granting
these rights the Company received cash of $2,500,000 which was recorded as
deferred revenue. In addition to deferring the revenue, the Company also
deferred related costs of approximately $644,000. However, during the quarter
ended June 30, 1996 the Company terminated the international strategic alliance
agreement and recognized a loss of approximately $485,000. Additionally, the
Company entered into an agreement to terminate the domestic strategic alliance
agreement and has accrued the anticipated loss of approximately $521,000.
8
<PAGE> 9
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 FECs which had
previously been provided by its development and construction division. In April
1996, the Board of Directors determined that it was in the Company's best
interest to retain this division. Accordingly, the Company recorded a gain of
$795,000 during the three month period ended June 30, 1996 to reverse the loss
accrued during the three month period ended December 31, 1995 for the estimated
loss on the disposal of the division.
In fiscal year 1995, the Company entered into a financial advisory agreement
with an investment firm for a three year period. As consideration for their
retention, the Company issued to the investment firm 450,000 warrants. The
warrants were valued and the Company recognized $334,000 of expense associated
with these warrants of which $166,500 has been recognized in the six month
period ended June 30, 1996. In June 1996 the Company terminated the financial
advisory agreement and the investment firm returned all of the warrants. The
Company has recognized a gain of $334,000 related to the warrants value which
had previously been expensed.
The "other income" balance for the six month period ended June 30, 1995 is
a fee recognized for the termination of a construction contract related to a
limited partnership. There was no such fee for the six month period ended June
30, 1996, however, the Company recognized a gain of approximately $1,193,000
on the sale of excess land at an FEC. The sale of the land occurred in two
transactions, one transaction occurring in each the first and second quarter.
Liquidity and Capital Resources
In connection with the proposed Recapitalization, an affiliate of the Equity
Investment Group entered into an interim financing facility with the Company
under which the Company had borrowings of approximately $16 million as of June
30, 1996. These borrowings (which are classified as long term debt on the
accompanying balance sheet) were used to purchase certain term loans from the
Company's then existing senior lenders, to redeem certain convertible
securities and to fund working capital. Subsequent to June 30, 1996, the
Company borrowed an additional $6.4 million to repurchase and redeem additional
Company securities. As part thereof, the Company redeemed 30% of the
outstanding balance of its 10% Convertible Subordinated Debentures and its
Class B Preferred Stock. The remaining 70% of the 10% Convertible Subordinated
Debentures and the Class B Preferred Stock was exchanged for newly structured
10% Convertible Subordinated Debentures (the "New Subordinated Debentures") due
January 31, 1998. Each such debenture is convertible into Common Stock at the
lesser of $3.50 or the average closing bid price for the Common Stock as
determined under the terms of the debentures upon (i) election by the Holders'
beginning November 7, 1996, or (ii) automatically on January 31, 1998.
The redemption of the 10% Convertible Subordinated Debentures, along with the
issuance of the New Subordinated Debentures, will result in the Company
recognizing a "Loss on the Extinguishment of Debt" of approximately $838,000 in
July 1996. The "Loss on Extinguishment of Debt" is a result of the redemption
premium of 20%, along with the write off of unamortized debt issue costs.
One of the conditions to the Equity Investment Group's commitment is the
Company's closing on $20-25 million in newly structured senior credit facilities
with a third party lender. The Company presently has a commitment for a $12.5
million senior secured term loan and a $7.5 million senior secured revolving
credit facility, with a "best efforts" commitment for an additional $5 million
term loan. Each credit facility would mature five years from closing with no
interim principal amortization. The credit facilities would be secured by
substantially all of the Company's assets and bear interest at a floating
reference rate plus 1.5%. If the Company closes on these credit facilities and
the Recapitalization is completed, it is anticipated the outstanding borrowings
under the interim credit facility provided by an affiliate of the Equity
Investment Group will be converted into Common
9
<PAGE> 10
Stock to satisfy a portion of the Equity Investment Group's initial $40 million
equity investment. A condition of the Senior Lender's commitment is the
closing of the Equity Investment Group's initial $40 million equity investment.
If the Company completes the Recapitalization, the anticipated sources and uses
of funds from the initial closing thereof will be as follows:
<TABLE>
<S> <C>
Sources of Funds:
Senior secured credit facility $ 20,000,000
Equity investment 40,000,000
-------------
Total Sources of Funds $ 60,000,000
=============
Uses of Funds:
Repayment of interim financing $ 23,400,000
Repayment of term debt 4,000,000
Satisfaction of stock price guarantees 1,200,000
Repurchase of domestic development rights
and related real estate 2,500,000
Working capital reserve 4,000,000
Cash available for capital expenditures 24,900,000
-------------
Total Uses of Funds $ 60,000,000
=============
</TABLE>
At June 30, 1996, the Company was not in compliance with certain financial
covenants in respect to its $5,650,000 principal amount of 9% Convertible
Subordinated Debentures due November 1, 1999. Accordingly, the outstanding
balance has been classified as current on the accompanying balance sheet. The
Company is currently in discussions with the respective debenture holders to
cure the covenant violations with a waiver and amendment agreement, which is a
condition to close both the proposed senior credit facilities and the initial
$40 million equity investment.
Certain Additional Terms of the Proposed Recapitalization
The proposed Recapitalization contemplates that the Equity Investment Group will
receive 45.45% of the Company's total number of outstanding shares of Common
Stock for its initial investment of $40 million. In addition, the Company would
have the right to require the Equity Investment Group in certain circumstances,
and the Equity Investment Group would have the option, to invest up to an
additional $20 million in Common Stock (or, if shareholder approval of such
investment is not obtained, non-voting preferred stock at a per share price of
85% of the per share price for voting stock). The Equity Investment Group has
also agreed to provide up to $30 million to backstop certain future rights
offerings to the Company's shareholders.
If the total number of shares of the Company's Common Stock outstanding
immediately prior to the closing of the Recapitalization is 14,076,144, the
Equity Investment Group will receive at the completion of its initial investment
in the Recapitalization 11,727,970 shares (constituting 45.45% of the total then
outstanding Common Stock). If the Company or the Equity Investment Group were
thereafter to exercise the right to cause the additional $20 million investment
by the Equity Investment Group at approximately $3.41 per share, then
(assuming that a possible 15% price reduction was not applicable and that there
were no other changes in the number of shares of Common Stock outstanding), the
Equity Investment Group would receive an additional 5,853,985 shares (which,
together with the shares received at closing, would constitute 55.56% of the
total then outstanding Common Stock).
In order to maintain the Equity Investment Group's relative equity interest in
the Company, if the Recapitalization is completed, the Equity Investment Group
will receive a warrant (the "Investor Warrant") under which it will be entitled
to receive, without any further consideration, 0.8333 shares of Common Stock
(adjustable upward proportionately to the event the additional $20 million
investment is made) for each share of Common Stock issued pursuant to the
conversion of certain convertible securities which causes the total number of
shares of Common Stock to exceed 13,714,498 (the "Converts").
10
<PAGE> 11
There are three issues of Converts with aggregate principal amounts of
approximately $23,860,000 expected to be outstanding upon completion of the
Recapitalization, of which approximately $11,250,000 is anticipated to be issued
in connection with the acquisition of three FECs. Each of the Converts is
convertible at market prices determined with reference to the date of notice of
conversion and subject to maximum conversion prices ranging from $3.50 to $5.00
per share. The Company anticipates that if the Recapitalization is completed,
the entire principal amount of the Converts will be satisfied by the issuance
of Common Stock. The actual number of shares issuable under the Investor
warrant will vary depending upon the market price of the Common Stock at the
time of conversion.
The Investor Warrant also provides the Equity Investment Group traditional
anticollision protection against the issuance of securities at prices dilutive
to its adjusted purchase price under outstanding options and warrants other
than the Converts.
If certain events occur which vary adversely from specified assumptions of the
Purchaser, the Company has agreed to issue to the Purchaser (without the payment
of additional consideration) the number shares of Common Stock necessary to
protect the Purchaser form the economically dilutive effects thereof.
In addition, as part of the Recapitalization, the Company expects to adopt an
Employee Stock Purchase Program pursuant to which up to 4.15 million shares of
Common Stock would be available for option grants to, or purchase by, senior
management pursuant to recourse financing made available by the Company. The
purchase of such allocated shares would not cause anticollision adjustments
under the Investor Warrant or the Converts.
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 18, 1996, Mr. Jack Lowe sent notice of initiation of arbitration
proceedings against the Company and others pursuant to and based on an alleged
breach of (i) a Master Agreement executed in June and July of 1995 by the
Company, Mr. Lowe, Fantasy Fun Parks B.V. ("FFP"), Fantasy Fun Parks
Construction B.V., Fantasy Fun Parks Management B.V., Mr. Ron Potts and Ms.
Judith Demerau (collectively, the "Parties), pursuant to which Mr. Lowe and the
FFP companies undertook to assist in the development, construction, and
management of FECs in several European countries; (ii) a "Strategic Alliance
Agreement" between the Company and FFP; and (iii) certain related agreements
entered into by some or all of the Parties. On May 10, 1996, the Parties
executed a Settlement Agreement by which the above described agreements were
terminated, all claims and causes of action arising therefrom were released and
the arbitration demand was dismissed with prejudice. Pursuant to the
Settlement Agreement, the Company reacquired all rights previously provided to
Mr. Lowe and to FFP to develop and manage FECs for $690,000.
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 FECs, 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 attorney's fees and litigation expense. On
July 26, 1996, the Company and Kahn settled the litigation for an immediate
payment from the Company of $25,000 and an agreement by the Company to pay
$200,000 in September 1996.
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 alleged breach of contract and
recovery under the theory of quantum meruit. In July 1996, the Company settled
the lawsuit with prejudice in return for issuing the defendant a warrant to
purchase Common Stock at $8.00 per share.
On or about June 26, 1996, the Company was furnished a copy of a Complaint filed
in the United States District Court for the Southern District of New York by
Durham Capital Corporation ("Durham") against the Company and other defendants,
including the Equity Investment Group, for the Recapitalization and an executive
officer of the Company, seeking actual damages of $1,850,000, punitive damages
of $3,700,000 and other relief based upon, among other things, a financial
advisory agreement alleged to exist between the Company and Durham and alleged
interference therewith by the investor group. The Company is obligated to
indemnify the investment group with respect to this litigation.
Item 2. Changes in Securities
There have been no material modifications of any registered security either
directly or through the issuance or modification of any other class of
securities.
Item 3. Defaults Upon Senior Securities
On the date of this Report, the Company was not in default with respect to its
Senior Securities.
Item 4. Submission of Matters to a Vote of Security holders
During the period covered by this Report, the Company filed with the Commission
and delivered to its shareholders the Company's Proxy Statement for Annual
Meeting of Shareholders held on May 9, 1996 (the "Proxy Statement").
a) The Company's Annual Meeting of Shareholders was held on May 9, 1996.
12
<PAGE> 13
b) The Board of Directors of the Company was reelected in its entirety with
the addition of one new director, Robert E. Provost, Sr.
c) With respect to each matter (as more fully described in the Proxy
Statement) voted upon at the meeting, the Inspector of Election tabulated
the following votes:
(i) Election of Directors
<TABLE>
<CAPTION>
NUMBER OF VOTES NUMBER OF VOTES ABSTENTIONS AND
NOMINEE FOR OFFICE FOR WITHHELD BROKER NON VOTES
------------------ --- -------- ----------------
<S> <C> <C> <C>
L Scott Demerau 6,414,631 (None) (None)
Julia E. Demerau 6,313,781
Ervin E. Lewis, Sr. 6,469,033
Steven A. Cunningham 6,453,521
William E. Kearns, Jr. 6,472,346
Bert W. Wasserman 6,470,596
Robert E. Provost, Sr. 6,468,596
Gregory N. Waters 6,471,446
</TABLE>
(ii) Proposal to amend Mountasia's 1993 Incentive Stock Option Plan
<TABLE>
<CAPTION>
NUMBER OF VOTES NUMBER OF VOTES ABSTENTIONS AND
FOR WITHHELD BROKER NON VOTES
--- -------- ----------------
<S> <C> <C>
2,522,428 (None) (None)
</TABLE>
(iii) Proposal to ratify the selection of Arthur Anderson LLP as
independent accountants for 1996
<TABLE>
<CAPTION>
NUMBER OF VOTES NUMBER OF VOTES ABSTENTIONS AND
FOR WITHHELD BROKER NON VOTES
--- -------- ----------------
<S> <C> <C>
6,732,631 (None) (None)
</TABLE>
d) There was no solicitation subject to Rule 14a-11 of Regulation 14A under
the Securities Exchange Act of 1934.
13
<PAGE> 14
e) At the shareholders meeting on May 9, 1996 upon a motion from the floor,
the shareholders approved (with proxy holders exercising discretionary
power) 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.
Items 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (for SEC use only)
The following reports on Form 8-K were filed during the period being reported
upon:
Date Form 8-K was Filed Description
- ----------------------- -----------
May 6, 1996 Disclosure of Rights Agreement Plan.
May 15, 1996 Disclosure of special vote approved at the Annual
Meeting.
June 19, 1996 Investment Agreement with MEI Holdings, L.P.
August 2, 1996 Amendment No. 1 to the Form 8-K filed June 19, 1996
14
<PAGE> 15
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
August 14, 1996.
Signature Title
/s/ L. Scott Demerau President, Chief Executive
- -------------------- Officer and a Director
L. Scott Demerau (Principal Executive Officer)
/s/ Ann C. Travis Vice President of Finance
- --------------------- (Principal Accounting Officer)
Ann C. Travis
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,272,390
<SECURITIES> 0
<RECEIVABLES> 5,286,085<F1>
<ALLOWANCES> 0
<INVENTORY> 1,395,998
<CURRENT-ASSETS> 11,234,973
<PP&E> 67,230,850<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 99,702,162
<CURRENT-LIABILITIES> 22,538,338
<BONDS> 38,001,681
0
8,313,500
<COMMON> 51,560,915
<OTHER-SE> 12,133,251
<TOTAL-LIABILITY-AND-EQUITY> 99,702,162
<SALES> 17,236,110
<TOTAL-REVENUES> 18,154,226
<CGS> 0
<TOTAL-COSTS> 27,038,479
<OTHER-EXPENSES> (1,393,373)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,818,640
<INCOME-PRETAX> (9,309,520)
<INCOME-TAX> (3,186,174)
<INCOME-CONTINUING> (6,169,322)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,169,322)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
<FN>
<F1>THE AMOUNT INCLUDED IN RECEIVABLES REPRESENTS A NET AMOUNT.
<F2>THE AMOUNT INCLUDED IN PP&E REPRESENTS A NET AMOUNT.
</FN>
</TABLE>
