<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission File Number 0-24592
-------
CINEMA RIDE, INC.
-------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4417467
- ------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12001 VENTURA PLACE, STUDIO CITY, SUITE 340, CALIFORNIA 91604
(Address of principal executive offices)
(Zip Code)
(818) 761-1002
(Registrant's telephone number, including area code)
.......................................................
(Former name, former address and former fiscal year, if changed since last
report)
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 give such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes___ No X
---
As of November 11, 1998, there were 731,859 outstanding shares of common stock,
par value $0.01 per share.
Transitional Small Business Disclosure Format: Yes _____ No X
---
<PAGE>
CINEMA RIDE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998, and as
of December 31, 1997. 3
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1998, and September 30, 1997. 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998, and September 30, 1997. 6
Summary of Accounting Policies 8
Notes to Unaudited Consolidated Financial Statements. 10
Item 2. Management Discussion and Analysis or Plan of Operation 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission to Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CINEMA RIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998, AND DECEMBER 31, 1997
-----------------------------------------
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 432,303 $ 705,630
Inventories 8,408 21,614
Prepaid Expenses 73,634 69,601
Receivable from Times Square Landlord (Note 1) - 500,000
Assets to be disposed - short-term (Note 1) - 1,490,915
Other Receivables 1,093 852
----------- -----------
Total current assets 515,438 2,788,612
----------- -----------
Property and equipment:
Office Equipment and furniture 104,167 106,938
Equipment under capital lease (Note 4) 139,474 139,474
Leasehold improvements 942,912 943,873
Theater and film equipment 1,605,020 2,953,259
Theater and film equipment available for use 1,399,797 564,432
----------- -----------
4,191,370 4,707,976
Less accumulated depreciation and
amortization (1,267,901) (1,226,811)
----------- -----------
Total property and equipment (net) 2,923,469 3,481,165
----------- -----------
Film library:
Film projects under development - 316,387
Film library, net of accumulated amortization
of $618,115 and $460,714. 474,656 299,651
----------- -----------
Total film library, net 474,656 616,038
----------- -----------
Assets to be disposed - long-term (Note 1) - 161,629
Investment in joint venture (Note 7) 468,096 -
Receivable from officers (Note 5) 87,873 47,962
Consulting agreement (Note 5) 41,617 49,420
Deferred lease costs and other assets (net) 168,913 283,713
----------- -----------
Total assets $ 4,680,062 $ 7,428,539
=========== ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
3
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CINEMA RIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
SEPTEMBER 30, 1998, AND DECEMBER 31, 1997
-----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(unaudited) (audited)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 286,711 $ 539,006
Current portion of capital lease obligation (Note 4) 18,190 58,641
Current portion of notes payable to lender (Note 2) 362,308 322,286
Deferred Lease Termination (Note 1) - 1,490,915
Note payable to bank (Note 2) 10,170 10,568
------------ -----------
Total current liabilities 677,379 2,421,416
------------ -----------
Obligation under capital lease (Note 4) 68,059 300,819
Note payable to bank (Note 2) 2,371 11,576
Note payable to lender (Note 2) 617,273 894,098
Deferred rent 115,148 137,617
------------ -----------
Total long term liabilities 802,851 1,344,110
Total liabilities 1,480,230 3,765,526
Commitments and contingency (Note 2 & 6)
Stockholders' equity (Note 3)
Preferred stock, $.01 par value, 500,000
shares authorized, none issued - -
Common stock, $.01 par value, 2,500,000
shares authorized, 731,859 and 725,385 shares issued,
725,385 and 718,911 shares outstanding at September 30, 1998
and December 31, 1997 respectively 58,546 58,028
Additional paid-in-capital 9,175,780 9,173,191
Treasury Stock, at cost, 6,474 and 6,474 shares at
September 30, 1998 and December 31, 1997 respectively (29,000) (29,000)
Accumulated deficit (6,005,494) (5,539,206)
------------ -----------
Total stockholders' equity 3,199,832 3,663,013
------------ -----------
Total liabilities and stockholders' equity $ 4,680,062 $ 7,428,539
============ ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
4
<PAGE>
CINEMA RIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998, AND SEPTEMBER 30, 1997
- ------------------------------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
Revenues $ 708,901 $1,203,879 $1,869,919 $ 2,991,646
--------- ---------- ---------- ------------
Equity in net operations of joint venture 4,489 - 4,489 -
Selling, general and administrative 557,346 996,618 1,797,050 2,859,871
expenses
Depreciation and amortization 137,838 280,555 446,385 934,166
--------- ---------- ---------- ------------
Income (loss) from operations 18,206 (73,294) (369,027) (802,391)
Other Income - - 56,413 -
Interest expense 54,565 57,940 179,743 360,708
Interest income 6,727 5,342 21,769 8,377
--------- ---------- ---------- ------------
Net Income (Loss) $ (29,632) $ (125,892) $ (470,588) $ (1,154,722)
========= ========== ========== ============
Net Income (Loss) per common share $ (.04) $ (.18) $ (.64) $ (1.60)
========= ========== ========== ============
Weighted average common shares
outstanding 731,885 716,875 731,273 719,486
========= ========== ========== ============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
5
<PAGE>
CINEMA RIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
-----------------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (470,588) $ (1,154,722)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 446,385 934,166
Stock issued for services rendered 3,107 20,900
Non cash compensation - 14,652
Write-off of organization costs - 10,677
Amortization of deferred financing costs 32,190 146,107
Amortization of consulting agreement 7,803 -
Equity in net operations of joint venture (4,489) -
Settlement with vendors (56,413) -
Increase (decrease) from changes in:
Inventories 13,206 16,286
Prepaid expenses (4,033) 8,877
Other receivables (5,152) 4,580
Proceeds from Times Square landlord 500,000 -
Accounts payable and accrued expenses (195,237) (531,582)
Accrued interest on note payable - (48,824)
Deferred rent (22,469) (12,483)
------------- -------------
Net cash provided by (used in) operating activities 244,310 (591,366)
------------- -------------
Cash flows from investing activities:
Acquisition of:
Capital expenditures (2,643) (46,836)
Film production costs (16,018) (44,076)
Investment in joint venture (95,924) -
Loan made to officer (35,000) -
Loan payments from officers - 5,000
Deferred lease costs and other assets (9,000) 5,000
------------- -------------
Net cash used in investing activities (158,585) (80,912)
------------- -------------
Cash flows from financing activities:
Proceeds from notes payable - 150,000
Principal payments made on notes payable (246,405) (576,424)
Repurchase of stock - (19,000)
Principal payments under capital lease obligation (112,647) (25,472)
------------- -------------
Net cash used in financing activities (359,052) (470,896)
------------- -------------
Net decrease in cash and cash equivalents (273,327) (1,143,174)
Cash and cash equivalents at beginning of period 705,630 1,395,978
------------- -------------
Cash and cash equivalents at end of period $ 432,303 $ 252,804
============= =============
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
6
<PAGE>
CINEMA RIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
===========================================================
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1998 1997
-------------- -------------
<S> <C> <C>
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes $ 800 $ 800
============== =============
Cash paid during the period for interest $ 155,732 $ 196,180
============== =============
Non cash financing activities:
Conversion of accounts payable to notes payable - 12,354
</TABLE>
As a result of the termination agreement with the landlord of the Times Square
Facility, the Company recorded a loss of $275,548 during the year ended December
31, 1997 related to the impairment of signage and equipment and moving costs
(Note 1). The Company received $500,000 upon the execution of the agreement and
recorded a receivable of $500,000 for the remaining amount due. A deferred
liability of $1,490,915 was recorded in connection with the agreement and
$1,652,544 of net leasehold improvements and equipment are included as assets to
be disposed of. The Company informed the Landlord on February 26, 1998 that the
Company had vacated the premises. Accordingly, the assets to be disposed off,
deferred lease costs and related capital lease obligation were netted against
the deferred lease termination liability, and $1,203,048 in equipment was
transferred to Theater and film equipment available for use.
During the nine months ended September 30, 1998, the Company transferred
$330,272 in film projects under development to film library as these films were
completed and released during the period. The Company also transferred $367,683
from theater and equipment available for use to investment in joint venture.
During the nine months ended September 30, 1998, the Company settled certain
outstanding payables to vendors and recorded $56,413 as other income relating to
these settlements.
See Accompanying Notes to Unaudited Consolidated Financial Statements
7
<PAGE>
CINEMA RIDE, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
NINE MONTHS ENDED SEPTEMBER 30, 1998
====================================
Basis of presentation
- ---------------------
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position of Cinema Ride,
Inc. (the "Company") as of September 30, 1998, and December 31, 1997, and the
results of its operations and statements of cash flows for the three months and
nine months ended September 30, 1998, and September 30, 1997, in conformity with
generally accepted accounting principles applied on a consistent basis. Unless
the context otherwise requires, references to the "Company" in this report refer
to Cinema Ride, Inc. and its consolidated subsidiaries.
The results of operations for the three months and nine months ended September
30, 1998, are not necessarily indicative of the results of operations to be
expected for the full year ending December 31, 1998.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying financial statements should be
read in conjunction with the Company's audited financial statements and notes
thereto incorporated in reference in the 1997 Annual Report on Form 10-KSB.
Certain reclassifications were made to the financial statements previously
reported to conform with current year presentation.
Organization
- ------------
The Company was incorporated in Delaware in April 1993. The Company is in the
business of developing and operating rides consisting of motion simulator
attractions which combine projected three-dimensional action films of
approximately four minutes duration with computer-controlled, hydraulically-
mobilized seating platforms that are programmed to move in concert with the on-
screen action. Each attraction is designed to provide the viewer with a
realistic feeling of being a participant in the action on the screen. To date,
the Company has completed construction and installation of four facilities. The
first facility (the "Las Vegas Facility") commenced operations in October 1994
and is located in the Forum Shops at Caesars (the "Forum Shops"), a high traffic
tourist mall which is located between Caesars Palace Hotel & Casino and the
Mirage Hotel in Las Vegas, Nevada. The second facility (the " West Edmonton Mall
Facility") commenced operations in August 1995 and is located in the West
Edmonton Mall, Alberta, Canada. The third facility (the " Times Square
Facility") commenced operations in September 1996 and was located in Times
Square in New York City, New York. The Times Square Facility was closed during
January 1998. The fourth facility ( the "Atlanta Facility") commenced operations
in September 1998 as a joint venture with Dave & Buster's, Inc.. The Atlanta
Facility is located in Marietta, Georgia. The Company's executive offices are
located in Studio City, California.
Concentration of Credit Risk
- ----------------------------
The Company maintains cash balances at various financial institutions. Deposits
not to exceed $100,000 for each institution are insured by the Federal Deposit
Insurance Corporation. At September 30, 1998 and December 31, 1997, the Company
had uninsured cash and cash equivalents in the amount of $357,522 and $399,379.
Property and equipment
- ----------------------
Property and equipment are stated at cost. Depreciation is provided at the time
property and equipment is placed in service using the straight-line method over
the estimated useful lives of the assets which range from five to ten years.
Amortization of tenant improvements is provided using the straight-line method
over the lower of the estimated useful lives of the assets or the lease term
which range from five to ten years.
Film Production Costs
- ---------------------
Film production costs are stated at the lower of amortized cost or market. Upon
completion, film production costs are amortized on an individual production
basis in the proportion that current gross revenues bear to management's
estimate of total gross revenues with such estimates being reviewed at least
quarterly.
8
<PAGE>
CINEMA RIDE, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
NINE MONTHS ENDED SEPTEMBER 30, 1998
======================================
(CONTINUED)
Deferred Lease Costs
- --------------------
Deferred lease costs represent amounts paid in connection with the successful
negotiation of the Company's leases. Costs are amortized on a straight-line
basis over the term of the leases.
Foreign Currency Translation
- ----------------------------
Foreign currency denominated assets and liabilities of subsidiaries with local
functional currencies are translated to United States dollars at the prevailing
exchange rates. The effects of translation are recorded in the cumulative
translation component of shareholder's equity.
Income Taxes
- ------------
The Company provides for income taxes in accordance with Statement of Financial
Accounting Standards 109 (SFAS109"), Accounting for Income Taxes. Deferred
income taxes are provided on the difference in earnings determined for tax and
financial reporting purposes and result primarily from differences in methods
used to amortize production costs.
Loss Per Share
- --------------
Loss per share is based on the weighted average number of shares of common stock
outstanding during the period. For the nine months ended September 30, 1998,
common equivalents representing 1,577,500 outstanding stock options and
3,818,728 outstanding warrants are not included since their effect would be
anti-dilutive. For the nine months ended September 30, 1997, common stock
equivalents representing 1,333,500 outstanding stock options and 3,818,728
outstanding warrants are not included since their effect would be anti-dilutive.
The Company underwent a one for eight reverse stock split of its common stock
which became effective May 29, 1998. All per share amounts reflect such reverse
split. The Company adjusted the stock options and warrants outstanding whereby
eight stock options or warrants will be required to purchase one share of common
stock at eight times the original exercise price for such stock options or
warrants.
Statement of Cash Flows
- -----------------------
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments with an original maturity of three months or less to be
cash equivalents.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
New Accounting Standards
- ------------------------
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS No. 130) issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. Early application is
permitted. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company adopted this accounting standard on January 1,
1998 and its effects on the financial position, results of operations and
earnings per share were immaterial.
Statements of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (SFAS No. 131) issued by the FASB is
effective for financial statements beginning after December 15, 1997. The new
standard requires that public business enterprises report certain information
about operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate and their major customers. The Company adopted this accounting
standard on January 1, 1998 and its effects on the financial position, results
of operations and earnings per share were immaterial.
9
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. TIMES SQUARE LEASE TERMINATION
The Company entered into an agreement dated October 28, 1997 with the
landlord of the Times Square Facility to terminate the lease due to the intended
demolition of the existing building where the facility was located. The
agreement, among other things, required the Company to vacate the premises by
February 28, 1998 and waive the security deposit previously made to the
landlord. In consideration, the landlord 1) paid the Company $500,000 upon the
execution of the agreement, 2) agreed to a rent concession for the period from
April 1997 through October 1997, 3) waived its right for all future rents
following execution of the agreement to include the months of November 1997
through February 1998, and 4) paid the Company an additional $500,000 upon the
timely delivery of possession of the premises to the landlord on or before
February 28, 1998.
As a result of the termination agreement, the Company recorded a loss of
$275,548 during the year ended December 31, 1997 related to the impairment of
signage and equipment and moving costs. The Company received $500,000 upon the
execution of the agreement and recorded a receivable of $500,000 for the
remaining amount due. A deferred liability of $1,490,915 was recorded in
connection with the agreement and $1,652,544 of net leasehold improvements and
equipment are included as assets to be disposed of. The Company informed the
Landlord on February 26, 1998 that the Company had vacated the premises and the
remaining $500,000 payment was received on March 5, 1998.
NOTE 2 - NOTES PAYABLE
NOTE PAYABLE TO BANK
On March 6, 1996, Cinema Ride Edmonton, Inc. obtained a $40,328 loan
($55,000 Canadian dollars) from a Canadian bank at prime plus two percent (total
interest is 9.25% at September 30, 1998) . The loan has a term of four years
requiring monthly payments of approximately $1,027 ($1,400 Canadian dollars) and
is guaranteed by the Company. The lender has a first security interest in the
equipment and improvements located at the West Edmonton Facility. The loan also
restricts transfer of funds to the Company other than amounts in excess of cash
flow. The loan may be prepaid at any time without any penalties. As of September
30, 1998 $12,541 remains unpaid on this loan.
NOTE PAYABLE TO LENDER
On December 31, 1996, the Company closed a financing agreement with Finova
Technology Finance, Inc. ( the "Lender") structured as a sale leaseback
transaction of certain equipment owed by the Company. Based on the substance of
this transaction, this financing agreement was accounted for as a note payable
for financial reporting purposes. The gross loan amount was for $1,575,027 to be
paid over a four year term at $40,903 per month with a balloon payment of
$157,503. The loan bears interest at an annual rate of 15.7%. The financing
agreement requires the Company to repurchase the equipment at the end of the
lease for $1. In connection with obtaining the financing, the Lender required
the Company to raise a minimum of $500,000 through a combination of equity,
subordinated debt, or conversion to equity of existing notes/liabilities. The
Company has issued 55,536 shares of the Company's common stock to various
vendors and 31,250 shares to existing note holders in lieu of amounts owed by
the Company, enabling the Company to meet the Lender's requirement. The Company
also issued 100,000 warrants to the Lender at an exercise price of $16.00 per
share for every eight warrants, and an aggregate of 265,643 warrants to the
brokers who arranged the financing at an exercise price of $3.28 per share for
every eight warrants representing approximately 110% of the market value at the
closing date of the financing. During the quarter ended March 31, 1997, the
Company received the remaining $100,000 of this loan which was held by the
Lender pending the Company's meeting all of the Lender's requirements. As of
September 30, 1998 $979,581 remains unpaid on this loan.
NOTE 3. STOCK TRANSACTIONS
During the nine months ended September 30, 1998, the Company issued 6,474
shares to its Chief Financial Officer. The Company recorded the then fair market
value of the shares as additional compensation to the officer.
During the nine months ended September 30, 1998, the Company underwent a
one for eight reverse stock split of its common stock which became effective May
29, 1998. All per share amounts reflect such reverse split. The Company adjusted
the warrants and options outstanding whereby eight warrants or options will be
required to purchase one share of common stock at eight times the original
exercise price for such warrants and options.
10
<PAGE>
During June 1998, the Company's Board of Directors agreed on repricing the
exercise price of stock options already issued to employees and to the non
employee directors to the then current market value.
NOTE 4. CAPITAL LEASE OBLIGATION
Certain disputes arose with respect to the obligation to the lessor of the
sign at the Las Vegas Facility, and, commencing with the lease payment for the
month of April 1997, the Company withheld making payments. During March 1998,
the Company reached an agreement with the lessor of the sign to amend the lease
agreement to extend the term of the lease by eleven months with the first
payment becoming due on March 1, 1998.
During the quarter ended September 30, 1996, the Company entered into a
lease agreement for a sign to be installed at the Times Square Facility. The
lease term was for sixty months commencing the first month following
installation of the sign. Certain disputes arose with respect to the obligation
to the lessor of the sign, and, commencing with the lease payment for the month
of April 1997, the Company withheld payments. During March 1998, the Company
reached an agreement with the lessor of the sign whereby both parties agreed to
terminate the lease and for the Company to purchase the sign for $100,000 in
cash. In return, the lessor agreed to return to the Company 11,686 shares of the
Company's common stock, which were previously issued to the lessor during
December 1996. These shares were later sold to the Company's Chief Financial
Officer at the then current market price.
NOTE 5. RECEIVABLE FROM OFFICERS AND CONSULTING AGREEMENT
During the year ended December 31, 1995, the Company made loans to two of
its officers in the amount of $50,000. The loans bear interest at a rate of 8%
per year and were due on the earlier of June 30, 1998 or six months after the
officer ceases to be an employee of the Company. Principal payments of $5,000
per loan were due on June 30, 1996 and June 30, 1997, with the balance due on
June 30, 1998. Each note was secured by the higher of 5,000 shares or the number
of shares equivalent to the unpaid value of the note. The balance of the
remaining loan to officer at September 30, 1998 was $50,898, which included
$10,898 of accrued interest. The due date on this note was extended by the Board
of Directors during June 1998 to the earlier of (1) September 30, 2002 or (2)
six months after the officer ceases to be an employee.
On February 1, 1997, the Company's Chief Operating Officer resigned and
agreed to be available to the Company on a consulting basis for the period
between February 1, 1996 and September 30, 1997. Additionally, he agreed to be
available to the Company on a limited consulting basis for the five years
following September 30, 1997 in consideration for the release from one fifth
each year of his balance on his loan to the Company and the waiver of accrued
and future interest on the unpaid balance. The Company is amortizing the balance
of the consulting agreement over the period of the consulting contract. As such,
$51,021 was transferred from receivables from officers and is classified as
consulting agreement.
In January 1998, the Company made a loan of $35,000 to its Chief Executive
Officer. The loan bears interest at a rate of 8.5% per year and principal and
interest are due at the earlier of (1) June 30, 2001 or (2) six months after the
officer ceases to be an employee. The balance on this loan to officer at
September 30, 1998 was $36,975 which included $1,975 in accrued interest. This
loan is secured by the number of shares equivalent to the unpaid value of the
note. However, based on the current bid price of the Company's stock as of
October 30, 1998, the loans to the Chief Executive Officer are under
collateralized by approximately $73,000.
NOTE 6. COMMITMENTS AND CONTINGENCIES
During the quarter ended June 30, 1998, the Company entered into severance
agreements with its Chief Executive Officer and its Chief Financial officer that
would protect each officer in the case of a change in control of the Company.
These agreements are intended to provide certain benefits to the officers upon a
change of control of the Company which is defined to mean (a) the acquisition by
any person of 20% or more of the Company's voting power, (b) a change in control
of the Board of Directors, and (c) a merger or consolidation of the Company with
any other entity other than a merger or consolidation whereby the shareholders
of the Company prior to the merger or consolidation continue to represent 80% of
the combined voting power of the merged entity.
NOTE 7. INVESTMENT IN JOINT VENTURE
On May 29, 1998, the Company entered into a three-year joint venture
agreement with Dave & Buster's, Inc., to install its 3-D motion simulation
theater at Dave & Buster's, Inc. Atlanta facility. The Company was responsible
for the transportation and installation of the theater. As of November 11, 1998,
the Company incurred $95,924 in transportation and installation costs relating
to this facility in addition to $367,683 in equipment costs. Management
11
<PAGE>
does not expect any additional expenditures relating to the installation of this
facility. Dave and Buster's, Inc., was responsible for providing the space in
its Atlanta facility and preparing the premises for installation. The venture
agreement can be terminated earlier by either party if, among other things,
certain sales and cash flow goals are not met. The installation was completed
and operational on September 14, 1998. The Company accounts for its investment
in joint venture under the equity method of accounting whereby the Company
recognizes its share of the joint venture's net income or losses and
accordingly, the carrying value of investment in joint venture in the
accompanying consolidated balance sheets is adjusted.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
---------------------------------------------------------
FORWARD LOOKING STATEMENTS
- --------------------------
This Quarterly Report contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that may effect such forward-looking statements include,
without limitation: the Company's ability to successfully operate its existing
facilities, the impact of competition on the Company's revenues, and
seasonality. When used in this discussion, words such as "believes",
"anticipates", "expects", "intends" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
the report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and other reports filed with the
Securities and Exchange Commission that attempt to advise interested parties of
the risks and factors that may affect the Company's business.
Although the Company was formed in April 1993, operations of the Company
did not commence until October 1994 when the Las Vegas Facility was opened. The
Company opened its other locations, the West Edmonton Mall Facility, the Times
Square Facility, and the Atlanta Facility in August 1995, September 1996, and
September 98 respectively. The Company closed the Times Square Facility in
January 1998 and vacated the facility on February 26, 1998.
RESULTS OF OPERATIONS
- ---------------------
QUARTER ENDED SEPTEMBER 30, 1998 VS. QUARTER ENDED SEPTEMBER 30, 1997:
Revenues decreased by 41% or $494,978 from $1,203,879 in 1997 to $708,901
in 1998. The decrease is mainly due to a decrease of $465,126 in revenues from
the Times Square Facility which was closed in January 1998, and a decrease in
revenues of $46,379 from the Las Vegas Facility. This decrease was partially
offset by an increase in revenues at the West Edmonton Mall Facility.
Equity in net operations of joint venture increased by $4,489 which
represent the Company's share of net income from the joint venture as more fully
discussed in Note 7 to the unaudited consolidated financial statements.
Selling, general and administrative expenses decreased by 44% or $439,272
from $996,618 in 1997 to $557,346 in 1998. This decrease is mainly due to 1) a
decrease of approximately $305,000 in expenses from the Times Square Facility
which was closed in January 1998, 2) a decrease in corporate expenses of
approximately $111,000 mainly due to decreases in salaries and to decreases in
professional fees relating to costs incurred in the registration of additional
shares in 1997, and 3) a decrease in expenses at the Las Vegas Facility of
approximately $20,000.
Depreciation and amortization decreased by 51% or $142,717 from $280,555 in
1997 to $137,838 in 1998 mainly due to a decrease of approximately $144,000 in
depreciation and amortization from the Times Square Facility which was closed in
January 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED SEPTEMBER 30, 1997:
Revenues decreased by 38% or $1,121,727 from $2,991,646 in 1997 to
$1,869,919 in 1998. The decrease is mainly due to 1) a decrease of $1,132,311 in
revenues from the Times Square Facility which was closed in January 1998, and 2)
a decrease in revenues at the Las Vegas Facility of $57,068. This decrease was
partially offset by an increase in revenues at the West Edmonton Mall Facility.
12
<PAGE>
Equity in net operations of joint venture increased by $4,489 which
represent the Company's share of net income from the joint venture as more fully
discussed in Note 7 to the unaudited consolidated financial statements.
Selling, general and administrative expenses decreased by 37% or $1,062,821
from $2,859,871 in 1997 to $1,797,050 in 1998. This decrease is mainly due to 1)
a decrease of approximately $851,000 in expenses from the Times Square Facility
which was closed in January 1998, and 2) a decrease in corporate expenses of
approximately $245,000 mainly due to decreases in salaries and to decreases in
professional fees relating to costs incurred in the registration of additional
shares in 1997. This decrease was offset by increases in costs at the Las Vegas
Facility of approximately $17,000 and increases in costs at the West Edmonton
Mall Facility of approximately $16,000.
Depreciation and amortization decreased by 52% or $487,781 from $934,166 in
1997 to $446,385 in 1998 mainly due to a decrease of approximately $475,805 in
depreciation and amortization from the Times Square Facility which was closed in
January 1998.
Other income increased by $56,413 in 1998 due to settlement with vendors on
disputed payables.
Interest expense decreased by 50% or $180,965 from $360,708 in 1997 to
$179,743 in 1998 due to 1) the Company's write off of $146,103 in deferred
interest in 1997 relating to the issuance of common stock to note holders in
1996 and the subsequent repayment of these notes in January 1997, and 2) a
decrease of $20,348 in interest incurred relating to the Times Square Facility
which was closed in January 1998.
Interest income increased by $13,392 from $8,377 in 1997 to $21,769 in 1998
mainly due to utilization of cash available to the Company from the proceeds
received from the Times Square landlord.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $244,310 during the nine
months ended September 30, 1998, as compared to the cash used in operating
activities of $591,366 for the same period during the prior year. The increase
of $835,676 was primarily due to 1) a decrease in losses for the nine months
ended September 30, 1998 by $684,134 2) a decrease in accounts payable and
accrued expenses of $336,345, and 3) an increase in proceeds from the Times
Square landlord of $500,000. This increase was partially offset by 1) a decrease
in depreciation and amortization of $487,781, 2) a decrease in amortization of
deferred financing costs of $113,917, and 3) an increase in settlement with
vendors of $56,413.
Net cash used in investing activities increased by 96% or $77,673, from
$80,912 in 1997 to $158,585 in 1998. The increase is mainly due to 1) the
Company's investment in a joint venture and 2) to the loan made to an officer.
This increase was partially offset by a decrease in capital expenditures and
film production costs.
Net cash used in financing activities decreased by 24% or $111,844 from
$470,896 in 1997 to $359,052 in 1998. The decrease is primarily due to payments
made on notes payable in 1997 which was partially offset by the receipt of
$100,000 in 1997 that was held by the Lender, and by principal payments under
capital lease obligations which were made in 1998.
The Company has relied on the proceeds of sales of common stock, redeemable
warrants, loans and equipment leasing to provide it with the cash necessary to
develop its facilities and ride films and to operate its business.
On March 6, 1996, Cinema Ride Edmonton, Inc. obtained a $40,328 loan
($55,000 Canadian dollars) from a Canadian bank at prime plus two percent (total
interest is 9.25% at September 30, 1998). The loan has a term of four years
requiring monthly payments of approximately $1,027 ($1,400 Canadian dollars) and
is guaranteed by the Company. The lender has a first security interest in the
equipment and improvements located at the West Edmonton Facility. The loan also
restricts transfer of funds to the Company other than amounts in excess of cash
flow. The loan may be prepaid at any time without any penalties. As of September
30, 1998, $12,541 remains unpaid on this loan.
On December 31, 1996, the Company closed a financing agreement with Finova
Technology Finance, Inc. ( the "Lender") structured as a sale leaseback
transaction of certain equipment owed by the Company. Based on the substance of
this transaction, this financing agreement was accounted for as a note payable
for financial reporting purposes. The gross loan amount was for $1,575,027 to be
paid over a four year term at $40,903 per month with a balloon payment of
$157,503. The loan bears interest at an annual rate of 15.7%. The financing
agreement requires the Company to repurchase the equipment at the end of the
lease for $1. In connection with obtaining the financing, the Lender required
the Company to raise a minimum of $500,000 through a combination of equity,
subordinated debt, or conversion to equity of existing notes/liabilities. The
Company has issued 55,536 shares of the Company's common stock to various
vendors and 31,250 shares to existing note holders in lieu of amounts owed by
the
13
<PAGE>
Company, enabling the Company to meet the Lender's requirement. The Company also
issued 100,000 warrants to the Lender at an exercise price of $16.00 per share
for every eight warrants, and an aggregate of 265,643 warrants to the brokers
who arranged the financing at an exercise price of $3.28 per share for every
eight warrants representing approximately 110% of the market value at the
closing date of the financing. During the quarter ended March 31, 1997, the
Company received the remaining $100,000 held by the Lender pending the Company's
meeting all of the Lender's requirements. As of September 30, 1998, $979,581
remains unpaid on this loan.
As of September 30, 1998, the Company had a negative working capital of
$161,941. The Company's cash and cash equivalents as of September 30, 1998 were
$432,303 as compared to $705,630 at December 31, 1997. Accordingly, in order for
the Company to continue its operations as presently constituted and to fulfill
its business plan described below, the Company must obtain additional working
capital either in the form of debt, equity, or a combination thereof. No
assurance can be given, however, that the Company will be successful in raising
capital. Additionally, the Company has and is continuing to take steps to reduce
its expenses without materially impacting its operations.
COMPANY OUTLOOK:
IDENTIFY AND DEVELOP NEW SITES FOR ATTRACTIONS
The Company is currently seeking additional locations for attractions. In
general, the Company will attempt to locate sites for its attractions (i) which
are in large metropolitan areas or which are at tourist destinations which
attract more than three million persons per year, (ii) at which the Company can
lease high-profile, high-traffic space at a reasonable cost, (iii) which are in
areas with a large number of permanent residents and which do not have extreme
seasonal attendance patterns, and (iv) which are at or near other complementary
tourist attractions.
The Company believes that each new attraction will take approximately four
to six months from lease execution to commencement of operations. Total cost of
developing new attractions, including construction, fixtures, equipment and
start-up costs after completion are estimated to be at least $1,250,000 per two-
capsule site. These costs will vary depending on the leased space, the scope of
any tenant improvements required to be performed by the Company in connection
with leasing a given location and the number of capsules installed, as well as
the size and location of the planned attraction. The Company anticipates that
three more locations will be added in the next two years. Accordingly, the
Company expects to spend approximately at least an additional $3,750,000 on the
acquisition and installation of three more locations in the next two years. In
addition to the cost of the equipment necessary to establish a new attraction
location, the Company expects to add approximately twenty employees per each
additional two-capsule location that it owns and operates. However, the Company
currently has four capsules in its inventory which are available for
installation at future sites which should reduce the capital required to open at
least the next two facilities.
SIMULATOR SALES, JOINT VENTURES, AND RIDE FILM LEASING
The Company intends to pursue the sale or joint venturing of simulator
equipment to property owners and businesses that wish to operate attractions of
their own. The sale of simulators to third parties would provide the Company
with an additional source of revenues and profits with less risk than is
associated with owning and operating systems. Additional revenues would be
generated from the leasing of the Company's library of ride films to purchasers
of the Company's simulators or to operators of already existing simulators. The
Company does not intend to sell simulators or license ride films into markets in
which it expects to operate its own attractions.
It is expected that the Company's management will continue to be
responsible for the marketing of the Company's simulators and ride films for
sale and/or leasing. However, the Company may retain the services of outside or
in-house sales representatives to locate potential purchasers of simulators and
licensees of ride films.
In order to reduce the out-of-pocket costs in the development of
attractions, the Company is exploring joint venture arrangements with third
parties and with existing entertainment venues. The Company and its co-venturer
would then divide the profits, if any, from the attraction based on their
respective contributions to the venture.
On May 29, 1998, the Company entered into a three-year joint venture
agreement with Dave & Buster's, Inc., to install its 3-D motion simulation
theater at Dave & Buster's, Inc. Atlanta facility. The Company was responsible
for the transportation and installation of the theater. As of November 11, 1998,
the Company incurred $95,924 in transportation and installation costs relating
to this facility in addition to $367,683 in equipment costs. Management does not
expect any additional expenditures relating to the installation of this
facility. Dave and Buster's, Inc., was responsible for providing the space in
its Atlanta facility and preparing the premises for installation. The venture
agreement can be terminated earlier by either party if, among other things,
certain sales and cash flow goals are not met. The installation was completed
and operational on September 14, 1998.
14
<PAGE>
SEASONALITY OF BUSINESS
Because of the seasonal nature of tourist traffic, attendance patterns at
attractions may vary. The degree of this seasonality varies among attractions
depending on the nature of tourist and local traffic patterns at a given
location as well as the nature of entertainment alternatives available to
audiences. The Company expects that attendance at its facilities to be the
highest in June through September (the height of the tourist season) and lowest
during January and February. The West Edmonton Mall Facility is more effected by
seasonality as compared to the Las Vegas Facility due to the extreme weather
conditions during the Winter months in Alberta, Canada. Similarly, the Times
Square Facility was affected by seasonality during the slower Winter months. As
a result, the Company's results of operations at its facilities depends upon
sales generated from the peak tourist periods and any significant decrease in
sales for such periods could have a material adverse effect upon the Company's
operations.
During the quarter ended September 30, 1998, the landlord at the Las Vegas
Facility announced its intention to expand the existing mall (the Forum Shops)
where the Company's Las Vegas Facility is located. Construction is scheduled to
commence within the next six months within a close proximity of the Company's
facility which could interfere with or interrupt the Company's business.
Management cannot reasonably estimate the effect, if any, that the Las Vegas
Facility will experience during and after the construction period.
COMPETITION
The Company faces intense competition in the development and marketing of
attractions. Such competition extends to gaining access to desirable locations
for attractions as well as to selling or leasing simulators and ride films. Each
of IMAX Corporation, Iwerks Entertainment, Inc., Showscan Corporation and other
companies develop and market simulators which compete with the simulators and
related filmed entertainment being developed and marketed by the Company. Many
of these corporations have greater financial and marketing resources than the
Company and have established reputations for success in the development and
marketing of products that are competitive with those of the Company. In
addition, there are no significant barriers to entry which would prevent
additional competitors from competing with the Company in the development and
operation of attractions on a site- by-site basis.
The Company also competes with existing motion simulators on a site-by-site
basis. The Company is aware of several competing motion simulator attractions
either currently existing or planned to be opened in the vicinity of its
Facilities, including a motion simulator attraction developed by Caesars Palace
Hotel & Casino with IMAX Corporation which was opened during December 1997 in
the new expansion (Phase II) of the Forum Shops. In addition, the Excalibur
Hotel in Las Vegas has a simulator ride facility which has been operational for
many years. The MGM Grand Hotel and Casino Theme Park , the Hilton Hotel Casino,
and the Luxor Hotel and Casino in Las Vegas offer motion simulator attractions.
Other hotels or theme parks in Las Vegas may also have or potentially acquire
motion simulator attractions. The Company also competes for customers to some
extent with theme parks, traditional motion pictures and other forms of filmed
or computer entertainment. Similarly the West Edmonton Facility competes with
existing motion simulators within the immediate geographical area. The Company's
attractions compete with other attractions and entertainment alternatives in a
given region on the basis of location, price and content of its ride films.
The Company is also aware of several new major hotels and casinos scheduled
to open during the next twelve months in Las Vegas which may include motion
simulators or other similar attractions at their locations. On October 15, 1998,
the Bellagio Casino and Hotel opened (the "Bellagio") in Las Vegas near the
Company's Las Vegas Facility at the Forum Shops. Management cannot reasonably
estimate the impact on its business, if any, from the opening of the Bellagio or
any of the other resorts scheduled to open in the near future.
The Company believes that the real estate experience of its management will
assist it in effectively competing in locating and acquiring favorable locations
for its attractions. In addition, the Company believes that the compact size and
realistic motion capabilities of its simulators as well as the unique and
entertaining thematic elements and effects of its ride films will enable it to
effectively compete for customers for the sale and leasing of its simulators and
ride films.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculation causing disruption of operations, including, among other things,
a temporary inability to process transaction, send invoices or engage in similar
normal business activities. The Company does not anticipate that the cost of any
needed modifications will
15
<PAGE>
have a material effect on results of operations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company is not currently involved in any legal proceedings that it
believes could have, either individually or in the aggregate, a material adverse
effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
ITEM 6. EXHIBITS AND REPORTS IN FORM-8-K
--------------------------------
(a) Exhibits
The following exhibits are submitted herewith:
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended September 30,
1998.
16
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CINEMA RIDE, INC.
By: /s/ Mitch Francis
-------------------------
Mitch Francis, President
Signature Date
--------- ----
/s/ Mitch Francis November 11, 1998
- ------------------------------- -----------------
Mitch Francis
Chairman of the Board, President, Chief
Executive Officer and Director (principal
executive officer)
/s/ Toufic R. Bassil November 11, 1998
- --------------------------------- -----------------
Toufic R. Bassil
Chief Financial Officer (principal financial
officer, principal accounting officer), Secretary
and Treasurer
17
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