<PAGE> 1
As Filed with the Securities and Exchange Commission on July 24, 1996
Registration No. 333-4422
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT*
Under the
Securities Act of 1933
----------------------
CINEMASTAR LUXURY THEATERS, INC.**
(Name of small business issuer in its charter)
431 COLLEGE BOULEVARD
OCEANSIDE, CALIFORNIA 92057
(619) 630-2011
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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CALIFORNIA 7832 33-0451054
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.)
of Incorporation or Organization) Classification Code Number)
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JOHN ELLISON, JR., PRESIDENT
CINEMASTAR LUXURY THEATERS, INC.
431 COLLEGE BOULEVARD
OCEANSIDE, CALIFORNIA 92057
(619) 630-2011
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
RONALD P. GIVNER, ESQ. BARRY D. FALK, ESQ.
JEFFER, MANGELS, BUTLER & MARMARO LLP JEFFERS, WILSON & SHAFF
2121 AVENUE OF THE STARS, 10TH FLOOR 18881 VAN KARMAN AVENUE
LOS ANGELES, CALIFORNIA 90067 IRVINE, CALIFORNIA 92715
(310) 203-8080 (714) 660-7700
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practical after the Registration Statement is declared effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
In any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
<PAGE> 2
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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==================================================================================================================================
TITLE OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED OFFERING PRICE AGGREGATE REGISTRATION FEE
PER SHARE OFFERING PRICE
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Class B Warrants (1) 4,725,000 Wts. $4.50 $21,262,500 $7,331.90
Common Stock, no 4,725,000 Shs. $7.50 $35,437,500 $12,219.83
par value (2)
Total Fee $19,551.73
Previously Paid
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(1) Each Class B Warrant is issuable upon exercise of Redeemable Warrant along
with one share of Common Stock for $7.00. Estimated offering price of a
Class B Warrant is $0.25. See Rule 424(a). The Underlying Common Stock is
covered by Registration Statement 33-86716.
(2) Issuable upon exercise of Class B Warrants. See Rule 424(g).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION SUCH DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER
AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -----------------------
* Pursuant to Rule 429, the enclosed Prospectus constitutes a combined
Prospectus relating to the Securities covered by Registration Statement No.
33-86716 (Common Stock, Redeemable Warrants and Underwriter's Warrants) and
a post-effective amendment to said Registration Statement
** Formerly Nickelodeon Theater Co., Inc.
<PAGE> 3
CINEMASTAR LUXURY THEATERS, INC.
CROSS REFERENCE SHEET
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ITEM NUMBER AND HEADING IN LOCATION
FORM SB-2 REGISTRATION STATEMENT IN PROSPECTUS
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1. Front of the Registration Statement and Outside
Front Cover Page of Prospectus........................... Facing Page and Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front Cover and Outside Back Cover Pages of
Prospectus............................................... Prospectus
3. Summary Information and Risk Factors..................... Prospectus Summary; Risk Factors
4. Use of Proceeds.......................................... Use of Proceeds
5. Determination of Offering Price.......................... Outside Front Cover Page of Prospectus; Risk Factors; The
Offer; Selling Security Holder
6. Dilution................................................. Not Applicable
7. Selling Security Holders................................. Selling Security Holder; Outside Front Cover
Page of Prospectus; Certain Transactions
8. Plan of Distribution..................................... The Offer; Selling Security Holder; Outside Front Cover
Page of Prospectus; Risk Factors
9. Legal Proceedings........................................ Business
10. Directors, Executive Officers, Promoters and
Control Persons.......................................... Management; Certain Transactions; Risk Factors
11. Security Ownership of Certain Beneficial Owners
and Management........................................... Principal Shareholders; Selling Security Holder
12. Description of Securities................................ Description of Securities
13. Interest of Named Experts and Counsel.................... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities........... Management
15. Organization Within Last Five Years...................... Certain Transactions; Management
16. Description of Business.................................. Business; Prospectus Summary; Risk Factors;
Management's Discussion and Analysis
17. Management's Discussion and Analysis or Plan of
Operations............................................... Management's Discussion and Analysis
18. Description of Property ................................. Business
19. Certain Relationships and Related Transactions........... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters...................................... Market Prices; Description of Securities; Dividend Policy;
Management; Certain Transactions
21. Executive Compensation...................................
22. Financial Statements..................................... Financial Statements
23. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure................... Not Applicable
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PROSPECTUS ____________, 1996
CINEMASTAR LUXURY THEATERS, INC.
OFFER TO HOLDERS OF
REDEEMABLE WARRANTS FOR COMMON STOCK
This offer expires on _________________ 1996
at 5:00 p.m., Eastern Standard Time
unless extended
--------------------
SUBJECT TO THE TERMS AND CONDITIONS SET FORTH HEREIN, THE OFFER
IS BEING MADE TO ALL EXISTING REDEEMABLE WARRANTHOLDERS OF
CINEMASTAR LUXURY THEATERS, INC.
AND CERTIFICATES REPRESENTING THE WARRANTS
MAY BE TENDERED AND EXERCISED
IN ACCORDANCE WITH THE TERMS HEREOF.
--------------------
TO THE HOLDERS OF THE REDEEMABLE WARRANTS EXPIRING ON FEBRUARY 6, 2006 OF
CINEMASTAR LUXURY THEATERS, INC.
CinemaStar Luxury Theaters, Inc. (the "Company") hereby offers to
holders of its Redeemable Warrants to lower the exercise price of the Redeemable
Warrants each holder owns of record from $6.00 to $_____ per Redeemable Warrant
share and to issue upon exercise of each Redeemable Warrant not only one share
of Common Stock but also one Class B Redeemable Warrant (the "Class B
Warrants"). To accept this Offer the Redeemable Warrants must be tendered and
exercised on or prior to 5:00 p.m. Eastern Standard Time on August __, 1996,
unless such date is extended by the Company in its sole discretion. EACH RECORD
HOLDER OF REDEEMABLE WARRANTS MUST EITHER ACCEPT THE OFFER OR RETAIN HIS CURRENT
REDEEMABLE WARRANTS ON THEIR CURRENT TERMS.
The Redeemable Warrants were issued in the Company's initial public
offering and private placements prior thereto.
THE OFFER EXPIRES AT 5:00 P.M., EASTERN STANDARD TIME, ON ____________,
1996 UNLESS EXTENDED. The Company will accept for tender and exercise any and
all Redeemable Warrants duly tendered and exercised pursuant to the Offer. There
are 4,725,000 Redeemable Warrants outstanding and the Offer applies to all of
the outstanding Redeemable Warrants. Officers and directors of the Company own
1,020 Redeemable Warrants. The Company has not obtained a fairness opinion
concerning the Offer.
--------------------
THESE ARE SPECULATIVE SECURITIES
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS"
ON PAGES 11 TO 19.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------
Soliciting Agent:
<PAGE> 5
THE BOSTON GROUP, L.P.
The terms of the Offer were determined by negotiation between the
Company and The Boston Group, LP, which will act as Soliciting Agent and which
will receive a 4% fee for each Redeemable Warrant exercised.
EXISTING REDEEMABLE WARRANTHOLDERS MUST MAKE THEIR OWN DECISION AS TO
WHETHER TO TENDER AND EXERCISE THE REDEEMABLE WARRANTS PURSUANT TO THE OFFER
AND, IF SO, HOW MANY REDEEMABLE WARRANTS TO TENDER AND EXERCISE PURSUANT TO THIS
OFFER.
The Redeemable Warrant exercise price will be payable at the Redeemable
Warrantholder's option in cash or by certified or official bank check made
payable to Continental Stock Transfer & Trust Company, Agent for CinemaStar
Luxury Theaters, Inc. or by wire transfer to the Depository for the benefit of
the Company. Continental Stock Transfer & Trust Company (the "Depository") and
The Boston Group, L.P. (the "Soliciting Agent") have agreed to provide certain
services in connection with the Offer. If you require assistance, please contact
the Depository at (212) 509-4000 ext. 253, the Soliciting Agent at (310)
843-9007.
The exercise of Redeemable Warrants is irrevocable, except that
Redeemable Warrants exercised pursuant to the Offer may be withdrawn prior to
12:00 midnight, New York City time, on ____________, 1996 (or the latest time
and date at which the Offer, if extended by the Company, shall expire) or after
____________, 1996, if the Redeemable Warrants tendered and exercised have not
been accepted by the Company. The Offer is subject to a number of conditions,
but is not conditioned upon the exercise of a minimum number of Redeemable
Warrants. The Company also reserves the right to extend the Offer provided that
in no event will the Offer expire later than 5:00 p.m., New York City time, on
____________, 1996.
-------------------------
Each Class B Warrant entitles the registered holder thereof to purchase
one share of Common Stock at an exercise price of $_____ per share, subject to
adjustment until __________, 200_. The Class B Warrants are redeemable by the
Company at any time at a price of $0.25 per Class B Warrant, upon at least 30
days' prior written notice, provided that the closing bid price of the Common
Stock as reported by the National Association of Securities Dealers, Inc.'s
Automated Quotation System shall equal or exceed $_____ per share for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of redemption. The Class B Warrants
have neither voting or dividend rights nor any rights or preferences upon the
liquidation or dissolution of the Company. This Prospectus relates up to
4,725,000 shares of Common stock which will underlie each Class B Warrant
issued. See "Description of Securities -- Class B Warrants."
This Prospectus also relates to 4,725,000 shares (the "Shares") of
Common Stock (the "Common Stock") underlying 4,750,000 Redeemable Warrants. The
Shares and the Redeemable Warrants are hereinafter sometimes collectively
referred to as the "Securities." Each Redeemable Warrant entitles the registered
holder thereof to purchase one share of Common Stock at an exercise price of
$6.00 per share, subject to adjustment, until February 6, 2000. The Redeemable
Warrants are redeemable by the Company at any time at a price of $0.25 per
Redeemable Warrant, upon at least 30 days' prior written notice, provided that
the closing bid price of the Common Stock as reported by the National
Association of Securities Dealers, Inc.'s Automated Quotation System shall equal
or exceed $7.00 per share for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to the date of
the notice of redemption. The Redeemable Warrants have neither voting or
dividend rights nor any rights or preferences upon the liquidation or
dissolution of the Company. See "Description of Securities." The Redeemable
Warrants were issued in the Company's initial public offering in February 1995.
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This Prospectus also relates to warrants (the "Underwriter's Warrants")
granted to Goldmen, the underwriter for the Company's initial public offering on
February 7, 1995. The Underwriter's Warrants provide for the purchase from the
Company of up to 150,000 shares of Common Stock and up to 150,000 Redeemable
Warrants. The Underwriter's Warrants are exercisable at a price of $7.50 per
share of Common Stock and $0.375 per Redeemable Warrant for a period of four
years commencing on February 7, 1996. Thus, this Prospectus also relates to the
150,000 shares of Common Stock and 150,000 Redeemable Warrants underlying the
Underwriter's Warrants and the 150,000 shares of Common Stock underlying such
Redeemable Warrants. Goldmen is hereinafter referred to as the Selling Security
Holder.
The sale of the Selling Security Holder's Securities may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Security Holder) in the over-the-counter market
or in negotiated transactions, through the writing of options on the Selling
Security Holder's Securities, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If the Selling
Security Holder sells its Securities, or options thereon, pursuant to this
Prospectus at a fixed price or at a negotiated price which is, in either case,
other than the prevailing market price or in a block transaction to a purchaser
who resells, or if the Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holder's
Securities, a post-effective amendment to the Registration Statement of which
this Prospectus is a part would need to be filed and declared effective by the
Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
The Common Stock and Redeemable Warrants of CinemaStar Luxury Theaters,
Inc. are traded on the Nasdaq Small Cap Market (Symbols: LUXY and LUXYW). On
July 18, 1996, the last sale prices of the Company's Common Stock and Redeemable
Warrants were $7 1/2 and $2 1/8, respectively. There is currently no market for
the Class B Warrants and no assurances can be given that a market will develop.
In order to be quoted on the Nasdaq Small Cap Market, at least 100,000 Class B
Warrants must be issued in the Offer.
The Company estimates that the total costs of this offering, including
the Offer (exclusive of soliciting fees to be paid to the Soliciting Agent),
all of which will be paid by the Company, will be $140,000.
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<PAGE> 7
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
These reports, proxy statements and other information can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: The Chicago Regional Office,
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago Illinois
60661-2511 and the New York Regional Office, 7 World Trade Center, 12th Floor,
New York, New York 10048. Such reports, proxy statements and other information
filed by the Company can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. Copies of such materials can also be obtained by mail at prescribed rates
upon written request addressed to the Public Reference Section of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company has filed with the Commission in Washington, D.C., a
Registration Statement on Form SB-2 under the Securities Act of 1933, as
amended, with respect to the securities offered hereby (the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement, including the exhibits and financial statements and
schedules, if any, filed therewith or incorporated therein by reference.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or incorporated herein by reference, each statement being
qualified in its entirety by such reference. The Registration Statement,
including the exhibits thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C., and copies of any and all
parts thereof may be obtained from such office after payment of the fees
prescribed by the Commission.
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<PAGE> 8
PROSPECTUS SUMMARY
THE COMPANY
CinemaStar Luxury Theaters, Inc. (the "Company") develops, owns and
operates multi-screen, primarily first-run movie theater locations in Southern
California. The Company currently operates theaters having a total of 44 screens
in San Diego and Riverside Counties in Southern California. Construction of the
Company's first theater an eight screen theater complex at the Mission
Marketplace Shopping Mall in Oceanside, California, was completed in November
1991. In May 1992, the Company opened the Galaxy Six Cinemas in Bonsall,
California. In May 1993, the Company opened the Chula Vista 10, a 10 screen
theater complex in Chula Vista, California. The Company acquired a six screen
complex in Chula Vista, California in August 1995. In March 1996, the Company
opened a 14 screen leased theater in Riverside, California. The Company has
entered into agreements pursuant to which it has agreed to develop a 10 screen
theater complex in Perris, California, develop a 10 screen theater complex in
Riverside, California, develop a 9 screen theater complex in Chula Vista,
California and develop a 10 screen theater complex in Thousand Oaks, California.
In addition, CinemaStar Luxury Theaters, S.A. de C.V., a 75% owned subsidiary of
the Company, is developing a leased 12 screen theater in Guadalajara, Mexico and
a leased 10 screen theater in Tijuana, Mexico.
The Company has pursued a strategy of selectively developing and leasing
multi-screen theaters, except for the six screen complex in Chula Vista which it
owns. In evaluating theaters, the Company attempts to locate sites in which it
can achieve a dominant position as the sole or leading exhibitor in the targeted
film licensing zones. A film licensing zone (a "film zone") is a geographic area
established by film distributors, generally encompassing a radius of from three
to six miles in metropolitan and suburban markets (depending primarily upon
population density), in which a given film is allocated to only one theater. The
Company believes that 34 of its 44 screens are located in film zones in which it
presently is the only exhibitor and that the Ultraplex 14 at Mission Grove is
the leading theater in its film zone. By developing theaters in film zones in
which there are a limited number of theaters, the Company believes it is able to
select the most desirable films from, and negotiate more effectively with,
motion picture distributors that supply the Company's theaters with films. Film
zones are designated in the sole discretion of film distributors and may be
changed at any time for a variety of reasons, most of which are outside the
control of the Company.
The Company believes that the locations of its theaters, as well as its
high-quality sound systems, state- of-the-art projection equipment, luxurious
appointments, such as roomy, comfortable seats and spacious seating
configurations, and a carefully selected and trained staff which emphasizes
service, provide patrons with an enjoyable movie-going experience. The Company's
theater complexes typically contain auditoriums having 120 to 390 seats, which
provides the Company the flexibility to adjust its screening schedules by
shifting films from larger to smaller auditoriums within the same complex in
response to audience demand. The Company expects that its future growth will be
dependent upon its ability to develop theaters in desirable locations, although
it may consider strategic acquisitions of existing theaters or theater chains.
The motion picture exhibition industry is highly competitive,
particularly with respect to licensing films, attracting patrons and locating
new theater sites. Many of the Company's competitors, including United Artists
Theaters, Pacific Theaters and Mann Theaters, each of which operates one or more
theaters in the same geographic vicinity as the Company's current theaters, have
been in existence longer, are better established in the markets in which the
Company's theaters are or may be located and are better capitalized than the
Company. Competition can also come from other sources such as cable television ,
direct satellite television, video tapes and pay-for-view. The ability of the
Company to operate successfully depends on a number of factors, the most
important of which is the availability of marketable motion pictures. In June
1996, Disney announced plans to distribute significantly fewer films in the
future than they are presently distributing. Other distributors may also produce
fewer films. Although the Company believes it can favorably compete with respect
to the licensing of films, poor relationships with film distributors, a
disruption in the production of motion pictures or poor commercial success of
motion pictures booked by the Company would have a material adverse effect upon
the Company's business and results of operation.
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<PAGE> 9
The Company was incorporated in California in April 1989 under the name
Nickelodeon Theater Co., Inc. and adopted its current name in August 1995. The
Company's executive offices are located at 431 College Boulevard, Oceanside,
California 92057 and its telephone number is (619) 630-2011.
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<PAGE> 10
THE OFFER
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The Offer......................................................... The Company is offering to lower the exercise
price of its Redeemable Warrants to $_____
and to issue one share of Common Stock and
one Class B Warrant upon such exercise. The
purpose of the Offer is to raise additional
working capital to finance the planned
additional theaters. The Company believes
the Offer is a viable way of raising
additional funds, although the Company is
continuing to explore other alternatives.
Expiration........................................................ The Offer expires at 5:00 p.m., New York City
time, on ____________, 1996, unless extended
(the "Expiration Date"). The Expiration Date
of the Offer may be extended, provided that
in no event will the Offer expire later than
5:00 p.m., New York City time, on
____________, 1996. See "The Offer --
Expiration Date."
Withdrawal Rights................................................. The tender and exercise of Redeemable
Warrants pursuant to the Offer may be
withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
Withdrawn Redeemable Warrants may be
re-tendered and re-exercised at any time
prior to the Expiration Date. If the tendered
and exercised Redeemable Warrants are not
accepted by the Company by 5:00 p.m. New York
City time ____________, 1996, withdrawal
rights also apply.
Impact on Non-tendering and Non-exercising
Redeemable Warrantholders......................................... The reduced number of outstanding Redeemable
Warrants as a result of the Offer may limit
the trading market for the Redeemable
Warrants and may adversely affect their
liquidity and market price. TO THE EXTENT THE
NUMBER OF REDEEMABLE WARRANTS AND REDEEMABLE
WARRANTHOLDERS IS REDUCED PURSUANT TO THE
OFFER, THE REDEEMABLE WARRANTS MAY NOT
CONTINUE TO BE QUOTED BY NASDAQ AND MAY CEASE
TO BE REGISTERED UNDER THE EXCHANGE ACT. See
"Purposes and Effects of the Warrant
Reduction Offer--Impact on Non-exercising
Warrantholders."
Acceptance of all Redeemable Warrants............................. The Company will accept any and all
Redeemable Warrants duly tendered and
exercised and not
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properly withdrawn on the Expiration Date,
subject to certain conditions. See "The
Offer--Certain Conditions of the Offer."
Conditions of the Offer........................................... The Offer is subject to a number of
conditions. See "The Offer--Certain
Conditions of the Offer."
How to Exercise the Redeemable Warrants........................... Any holder of Redeemable Warrants wishing to
accept the Offer should either (a) fill out
the exercise subscription form on the back of
the Redeemable Warrant Certificate and
forward it along with (i) cash; (ii) a
certified or official bank check made payable
to Continental Stock Transfer & Trust
Company, Agent for CinemaStar Luxury
Theaters, Inc.; or (iii) a wire transfer to
the Depository for the benefit of the Company
in the amount of the aggregate warrant
exercise price and any other required
documents to the Depository, or (b) request a
broker or bank to effect the transaction for
him or her. HOLDERS OF REDEEMABLE WARRANTS
REGISTERED IN THE NAME OF A BROKER, DEALER,
BANK, TRUST COMPANY OR NOMINEE SHOULD
INSTRUCT SUCH INSTITUTIONS TO EXERCISE THEIR
REDEEMABLE WARRANTS. See "The Offer--How to
Exercise the Redeemable Warrants."
Delivery of Securities............................................ The Company will deliver the certificates for
the shares of Common Stock and Class B
Warrants issuable upon tender and exercise of
the Redeemable Warrants as soon as
practicable after the Expiration Date. See
"The Offer--Issuance of Common Stock and
Class B Warrants."
Certain Income Tax Consequences................................... There is no current authority directly
addressing the tax consequences of the Offer.
The Company has not sought a ruling from the
Internal Revenue Service or an opinion of
counsel with respect to such tax
consequences. Redeemable Warrantholders are
urged to consult their own tax advisors
regarding this matter. The Offer itself may
constitute a significant modification of the
Redeemable Warrants, resulting in a taxable
exchange regardless of whether a Redeemable
Warrantholder
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accepts the Offer by tendering and exercising
Redeemable Warrants. A Redeemable
Warrantholder accepting the Offer may
recognize income, gain or loss and would have
a tax basis in the Common Stock and Class B
Warrants acquired upon such tender and
exercise determined in a manner consistent
with the tax treatment of the transaction. See
"The Offer--Certain Federal Income Tax
Consequences."
Depositary........................................................ Continental Stock Transfer & Trust Company,
Two Broadway, New York, New York 10004.
Soliciting Agent.................................................. The Boston Group, L.P., 2049 Century Park East
30th Floor/Suite 3000
Los Angeles, California 90067
(310) 843-9007.
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OTHER OFFERINGS
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Securities Being Offered for the Account of the
Company........................................................... 4,725,000 shares underlying 4,725,000
Redeemable Warrants and 4,725,000 Class B
Warrants which could be issued pursuant to
the Offer and 4,725,000 shares of Common
Stock underlying the Class B Warrants.
Securities Being Offered for the Account of the
Selling Security Holders.......................................... 150,000 shares of Common Stock, 150,000
Redeemable Warrants and 150,000 shares of
Common Stock issuable upon exercise of such
Redeemable Warrants are being registered
and may be sold by the Selling Security
Holder. The Company will not receive any of
the proceeds from sales by the Selling
Security Holder of the Common Stock or
Redeemable Warrants, although it will receive
the exercise price if the Redeemable Warrants
are exercised. See "Selling Security
Holder."
Terms of the Redeemable Warrants.................................. Except as provided in the Offer, each
Redeemable Warrant entitles the holder to
purchase one share of
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Common Stock at a price of $6.00 per share,
subject to adjustment, and is exercisable until
February 6, 2000.
The Redeemable Warrants will be redeemable at
$0.25 per Redeemable Warrant, upon at least
30 days prior written notice provided that
the closing bid price of the Common Stock as
reported by Nasdaq shall equal or exceed
$7.00 per share for any 20 trading days
within a period of thirty consecutive trading
days ending on the fifth trading day prior to
the date of the notice of redemption.
Terms of the Class B Warrants..................................... Each Class B Warrant will entitle the holder
to purchase one share of Common Stock at a
price of $_____ per share, subject to
adjustment, and is exercisable until
__________, 200_.
The Class B Warrants will be redeemable at
$0.25 per Redeemable Warrant, upon at least
30 days prior written notice provided that
the closing bid price of the Common Stock as
reported by Nasdaq shall equal or exceed
$____ per share for any 20 trading days
within a period of thirty consecutive trading
days ending on the fifth trading day prior to
the date of the notice of redemption.
There are no Class B Warrants outstanding and
no assurances can be given that a market for
the Class B Warrants will exist after the
Offer.
Common Stock Outstanding.......................................... 6,327,152 shares
Redeemable Warrants Outstanding................................... 4,725,000 Redeemable Warrants
Risk Factors...................................................... The securities offered hereby involve a high
degree of risk. See "Risk Factors."
Nasdaq Symbols:
Common Stock.............................................. LUXY
Redeemable Warrants....................................... LUXYW
Class B Warrants.......................................... LUXYZ*
</TABLE>
- ------------
* Proposed. The Class B Warrants will be quoted on the Nasdaq Small Cap Market
only if at least 100,000 Class B Warrants are issued pursuant to the Offer.
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<PAGE> 14
SUMMARY FINANCIAL DATA
The following table sets forth, for the periods and at the dates
indicated, summary consolidated financial data of the Company. The summary
consolidated historical financial data has been derived from the audited
consolidated financial statements of the Company for the two years ended March
31, 1996. The data should be read in conjunction with the financial statements,
related notes and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
1995
ACTUAL(1) PRO FORMA(2) 1996
--------- ------------ ----
(In Thousands, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................. $ 10,045 $ 11,624 $ 11,525
Cost and expenses ........................ 11,168 12,569 11,863
Operating income (loss) .................. (1,122) (946) (339)
Other income (expense) ................... (961) (930) (298)
Net loss ................................. $ (2,086) $ (1,875) $ (639)
Net loss per common share ................ $ (0.29) $ (0.26) $ (0.10)
Weighted average number of common
shares outstanding ..................... 7,303 7,303 6,200
BALANCE SHEET DATA (END OF PERIOD):
Working capital (deficiency) ............ $ 3,235 $ 43 $ (776)
Total assets ............................ 6,783 6,783 8,950
Long-term debt and deferred rent liability 3,494 3,494 5,227
Shareholders' equity ..................... 2,080 2,080 1,541
</TABLE>
- --------------------
(1) Includes Chula Vista 6 since August 17, 1995.
(2) Includes the operations data of the Chula Vista 6 complex which was
acquired on August 17, 1995 as if it was acquired on April 1, 1994.
------------------------------
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<PAGE> 15
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK , THE REDEEMABLE WARRANTS OR THE CLASS
B WARRANTS INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS,
PRIOR TO MAKING AN INVESTMENT IN THE SECURITIES, SHOULD CAREFULLY CONSIDER,
ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS AND
SHOULD CONSULT WITH THEIR OWN LEGAL, TAX AND FINANCIAL ADVISORS WITH RESPECT
THERETO. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS".
History of Losses. The Company was founded in April 1989. Operations
began with the completion of construction of the Company's first theater in
November 1991. Therefore, the Company has a limited operating history. The
Company has had significant and increasing net losses in each fiscal year of its
operations, including net losses of $2,086,418 and $638,585 in the fiscal years
ended March 31, 1995 and 1996, respectively. There can be no assurance as to
whether the Company will be able to generate profits .
Need for Additional Financing; Use of Cash. The Company has aggressive
expansion plans but at March 31, 1996 had a working capital deficit of $775,814,
an accumulated deficit of $5,426,903 and stockholder's equity of $1,541,713. In
this regard, the Company has entered into lease and other binding commitments
with respect to the development of 61 additional screens at six locations during
fiscal 1997. The capital requirements necessary for the Company to complete its
development plans is estimated to be at least $6,200,000 during fiscal 1997.
Such developments will require the Company to raise substantial amounts of new
financing, in the form of additional equity investments or loan financing. There
can be no assurance that the Company will be able to obtain such additional
financing on terms that are acceptable to the Company and at the time required
by the Company, or at all. Further, any such financing may cause dilution of the
interests of the current shareholders in the Company. If the Company is unable
to obtain such additional equity or loan financing, the Company's financial
condition and results of operations will be materially adversely affected.
Moreover, the Company's estimates of its cash requirements to develop and
operate such theaters and service any debts incurred in connection with the
development of such theaters are based upon certain assumptions, including
certain assumptions as to the Company's revenues, net income (loss) and other
factors, and there can be no assurance that such assumptions will prove to be
accurate or that unbudgeted costs will not be incurred. Future events, including
the problems, delays, expenses and difficulties frequently encountered by
similarly situated companies, as well as changes in economic, regulatory or
competitive conditions, may lead to cost increases that could have a material
adverse effect on the Company and its expansion and development plans. The
Company used a substantial portion of its available cash to purchase the Chula
Vista 6 in August 1995 but obtained mortgage financing in January 1996 for part
of the purchase price for such complex. If the Company is not successful in
obtaining loans or equity financing for future developments, it is unlikely that
the Company will have sufficient cash to open additional theaters any may be in
breach of the leases for such theaters. The Company cannot predict how many, if
any, Redeemable Warrants will be tender and exercised in the Offer and thus, how
much, if any, funds it will receive pursuant to the Offer.
Potential Dilution. The Company recently has financed certain expansion
activities through the private placement of debt instruments convertible into
shares of its Common Stock. In order to induce parties to purchase such
securities, the instruments are convertible into Common Stock of the Company at
a conversion price that is significantly lower than the price at which the
Company's Common Stock is trading. The Company believes that because of its
history of operating losses, limited equity, and rapid growth plans, it has
limited options in acquiring the additional debt and/or equity the Company needs
and, thus, may issue debt and/or
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<PAGE> 16
equity securities, or securities convertible into its equity securities, on
terms that could result in substantial dilution to its existing shareholders.
The Company believes that in order to raise needed capital, it may be required
to issue debt or equity securities convertible into Common Stock at conversion
prices that are significantly lower than the current market price of the
Company's Common Stock. In addition, certain potential investors have indicated
that they will require that the conversion price adjust based on the current
market price of the Company's Common Stock. In the event of a significant
decline in the market price for the Company's Common Stock, such a conversion
feature could result in significant dilution to the Company's existing
shareholders. In addition, the Company has issued securities in offshore
transactions pursuant to Regulation S, promulgated by the Securities and
Exchange Commission, and may do so in the future. Because the purchasers of such
securities are free to sell the securities after holding them for a minimum of
40 days pursuant to Regulation S, sales of securities by such holders may
adversely impact the market price of the Company's Common Stock.
Dependence on Films. The ability of the Company to operate successfully
depends upon a number of factors, the most important of which is the
availability of marketable motion pictures. Poor relationships with film
distributors, a disruption in the production of motion pictures or poor
commercial success of motion pictures would have a material adverse effect upon
the Company's business and results of operations. In June 1996, Disney announced
plans to distribute significantly fewer films in the future than they are
presently distributing. Other distributors may also produce fewer films. See
"Business -- Film Licensing."
Long-Term Lease Obligations; Periodic Rent Increases. The Company
operates most of its current theaters pursuant to long-term leases which provide
for large monthly minimum rental payments which increase periodically over the
terms of the leases. The Chula Vista 6 is owned by the Company and not subject
to such lease payments. The Company will be dependent upon increases in box
office and other revenues to meet these long-term lease obligations. In the
event that box office and other revenues decrease or do not significantly
increase, the Company will likely not have sufficient revenues to meet its lease
obligations, which would have a material adverse effect on the Company and its
results of operations. See "Business -- Theater Operations" .
Possible Delay in Theater Development and Other Construction Risks. In
connection with the development of its theaters, the Company typically receives
a construction budget from the property owner and oversees the design,
construction and completion of the theater site. The Company is generally
responsible for construction costs in excess of the negotiated construction
budget. As a result, the Company is subject to many of the risks inherent in the
development of real estate, many of which are beyond its control. Such risks
include governmental restrictions or changes in Federal, state or local laws or
regulations, strikes, adverse weather, material shortages and increases in the
costs of labor and materials. There can be no assurance that the Company will be
able to successfully complete any theater development in a timely manner or
within its proposed budget. The Company has experienced cost overruns and delays
in connection with the development of one of its existing theaters and no
assurance can be given that such overruns and delays will not occur with respect
to any future theater developments. Failure of the Company to develop its
theaters within the construction budget allocated to it will likely have a
material adverse effect on the Company. See "Business -- Theater
Operations--Development of Theaters."
In addition, the Company will be dependent upon unaffiliated contractors
and project managers to complete the construction of its theaters. Although the
Company believes that it will be able to secure commitments from contractors,
project managers and other personnel needed to design and construct its
theaters, the inability to consummate a contract for the development of a
theater or any subsequent failure of any contractor or supplier to comply with
the terms of its agreement with the Company might have a material adverse effect
on the Company. See "Business -- Theater Operations -- Development of Theaters."
Dependence on Ability to Secure Favorable Locations and Lease Terms. The
success of the Company's operations is dependent on its ability to secure
favorable locations and lease terms for each of its theaters. There can be no
assurance that the Company will be able to locate suitable locations for its
theaters or lease
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<PAGE> 17
such locations on term favorable to it. The failure of the Company to secure
favorable locations for its theaters or to lease such locations on favorable
terms would have a material adverse effect on the Company.
Competition. The motion picture exhibition industry is highly
competitive, particularly with respect to licensing films, attracting patrons
and finding new theater sites. There are a number of well-established
competitors with substantially greater financial and other resources than the
Company that operate in Southern California. Many of the Company's competitors,
including United Artists Theaters, Pacific Theaters, and Mann Theaters, each of
which operates one or more theaters in the same geographic vicinity as the
Company's current theaters, have been in existence significantly longer than the
Company and are both better established in the markets where the Company's
theaters are or may be located and better capitalized than the Company.
Competition can also come from other sources such as television, cable
television, pay television, direct satellite television and video tapes.
Many of the Company's competitors have established, long-term
relationships with the major motion picture distributors (Paramount,
Disney/Touchstone, Warner Brothers, Columbia/Tri-Star, Universal and 20th
Century Fox), who distribute a large percentage of successful films. Although
the Company attempts to identify film licensing zones in which there is no
substantial current competition, there can be no assurance that the Company's
competitors will not develop theaters in the same film zone as the Company's
theaters. To the extent that the Company directly competes with other theater
operators for patrons or for the licensing of first- run films, the Company may
be at a competitive disadvantage. See "Business -- Overview of Movie Exhibition
Industry" and "Business -- Film Licensing."
Although the Company attempts to develop theaters in geographic areas
that it believes have the potential to generate sufficient current and future
box office attendance and revenues, adverse economic or demographic
developments, over which the Company has no control, could have a material
adverse effect on box office revenues and attendance at the Company's theaters.
In addition, there can be no assurance that new theaters will not be developed
near the Company's theaters, which development might alter existing film zones
and might have a material adverse effect on the Company's revenues and earnings.
In addition, future advancements in motion picture exhibition technology and
equipment may result in the development of costly state-of-the-art theaters by
the Company's competitors which may make the Company's current theaters
obsolete. There can be no assurance that the Company will be financially able to
pay for or able to incorporate such new technology or equipment, if any, into
its existing or future theaters.
In recent years, alternative motion picture exhibition delivery systems
have been developed for the exhibition of filmed entertainment, including cable
television, direct satellite delivery, video cassettes and pay- per-view. An
expansion of such delivery systems could have a material adverse effect on
motion picture attendance in general and upon the Company's business and results
of operations. See "Business -- Competition."
Geographic Concentration. Each of the Company's current theaters are
located in San Diego and Riverside Counties, in Southern California and the
proposed theaters are all in Southern California. As a result, negative economic
or demographic changes in Southern California will have a disproportionately
large and adverse effect on the success of the Company's operations as compared
to those of its competitors having a wider geographic distribution of theaters.
Dependence on Concession Sales. Concession sales accounted for
approximately 29.4% and 27.9% of the Company's revenues in the fiscal years
ended March 31, 1995 and 1996, respectively. Therefore, the financial success of
the Company depends, to a significant extent, on its ability to successfully
generate concession sales in the future. The Company currently depends upon
Pacific Concessions, Inc. ("Pacific Concessions"), a creditor of the Company, to
operate and supply the concession stands located in
-14-
<PAGE> 18
certain of the Company's theaters. The Company's concession agreements with
Pacific Concessions may be terminated by the Company prior to the expiration of
their respective terms upon payment of a substantial early termination fee. See
"Business --Theater Operations - Additional Revenue Sources."
Relationship with Pacific Concessions. The Company utilizes loans from
Pacific Concessions to fund a portion of its operations. In the Company's loan
agreements with Pacific Concessions, an event of default is defined to include,
among other things, any failure by the Company to make timely payments on its
loans from Pacific Concessions. In the event that an event of default occurs
under such loan agreements, Pacific Concessions has certain remedies against the
Company in addition to those afforded to it under applicable law, including, but
not limited to, requiring the Company to immediately pay all loan amounts due to
Pacific Concessions and requiring the Company to sell, liquidate or transfer any
of its theaters and related property to third parties in order to make timely
payments on its loans. If the Company were to default under any of its
agreements with Pacific Concessions, and if Pacific Concessions enforced its
rights thereunder, the Company would be materially adversely affected. See
"Business -- Theater Operations -- Additional Revenue Sources" and "Certain
Transactions."
Possible Increases in Minimum Wage. Most of the Company's employees are
paid the Minimum Wage. The enactment of current proposals to increase the
Federal or California Minimum Wage would increase the Company's labor costs and
may adversely affect results of operations.
Control of the Company. As of June 26, 1996, the current officers and
directors of the Company own approximately 50.4% of the Common Stock (27.5%
assuming exercise in full of the Redeemable Warrants, including the Redeemable
Warrants being registered for the account of the Selling Security Holders). As a
result, these individuals are in a position to materially influence, if not
control, the outcome of all matters requiring shareholder approval, including
the election of directors. See "Management," "Principal Shareholders" and
"Description of Securities -- Common Stock."
Dependence on Management. The Company is significantly dependent upon
the continued availability of John Ellison, Jr., Alan Grossberg and Jerry
Willits, its President and Chief Executive Officer, Executive Vice President and
Chief Financial Officer, and Vice President, respectively. The loss or
unavailability of any one of these officers to the Company for an extended
period of time could have a material adverse effect on the Company's business
operations and prospects. To the extent that the services of these officers are
unavailable to the Company for any reason, the Company will be required to
procure other personnel to manage and operate the Company and develop its
theaters. There can be no assurance that the Company will be able to locate or
employ such qualified personnel on acceptable terms. The Company has entered
into five-year employment agreements with each of Messrs. Ellison, Grossberg and
Willits. The Company maintains "key man" life insurance in the amount of
$1,250,000 on the lives of each of John Ellison, Jr., Russell Seheult and Alan
Grossberg, with respect to which the Company is the sole beneficiary. See
"Management."
Expansion; Management of Growth. The Company's plan of operation calls
for the rapid addition of new theaters and screens. The Company's ability to
expand will depend on a number of factors, including the selection and
availability of suitable locations, obtaining any required financing, the hiring
and training of sufficiently skilled management and personnel and other factors,
such as general economic and demographic conditions, which are beyond the
control of the Company. Such growth, if it occurs, could place a significant
strain on the Company's management and operations. To manage such growth
effectively, the Company will be required to increase the depth of its
financial, administrative and theater management staffs. The Company has not
conducted any efforts to determine the feasibility of expanding its staff, but
in the past has been able to identify and hire qualified personnel available to
satisfy its growth requirements. There can be no assurance, however, that the
Company will be able to identify and hire additional qualified personnel or take
such other
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<PAGE> 19
steps as are necessary to manage its growth, if any, effectively. In addition,
there is no assurance that the Company will be able to open any new theaters or
that, if opened, those theaters can be operated profitably.
Risks of International Expansion. The Company has signed agreements to
lease a 12 screen theater in Guadalajara, Mexico and a 10 screen theater in
Tijuana, Mexico through CinemaStar Luxury Theaters, S.A. de C.V., a Mexican
corporation in which the Company has a 75% ownership interest. To the extent
that the Company elects to develop theaters in Mexico or any other country, the
Company will be subject to the attendant risks of doing business abroad,
including adverse fluctuations in currency exchange rates, increases in foreign
taxes, changes in foreign regulations, political turmoil, deterioration in
international economic conditions and deterioration in diplomatic relations
between the United States and such foreign country. Recently the value of the
Mexican Peso has fallen in relation to the U.S. Dollar and Mexico is
experiencing substantial inflation. See "Business -- Theater Operations --
Proposed Theater Development."
Fluctuations in Quarterly Results of Operations. The Company's revenues
have been seasonal, coinciding with the timing of major releases of motion
pictures by the major distributors. Generally, the most marketable motion
pictures have been released during the summer and the Thanksgiving through
year-end holiday season. The unexpected emergence of a hit film during other
periods can alter the traditional trend. The timing of such releases can have a
significant effect on the Company's results of operations, and the results of
one quarter are not necessarily indicative of results for subsequent quarters.
See "Business -- Overview of Movie Exhibition Industry."
Potential Business Interruption Due to Earthquake. All of the Company's
current and proposed theaters are or will be located in seismically active areas
of Southern California. In the event of an earthquake of significant magnitude,
damage to any of the Company's theaters or to surrounding areas could cause a
significant interruption or even a cessation of the Company's business, which
interruption or cessation would have a material adverse effect on the Company,
its operations and any proposed theater development. Although the Company
maintains business interruption insurance, such insurance does not protect
against business interruptions due to earthquakes.
Officer's Other Business Activities. Alan Grossberg, the Company's
Executive Vice President and Chief Financial Officer, devotes a portion of his
time and activities to the operation of a motion picture booking business.
Pursuant to the terms of his employment agreement, Mr. Grossberg will not be
required to devote a specific amount of time to his duties to the Company, but
will be required to devote only such time and attention as may be reasonably
necessary to perform and carry out such duties. Mr. Grossberg devotes
approximately eight to 12 hours per week to his motion picture booking business
and 28 to 32 or more hours per week to the Company's affairs. A substantial
portion of the booking services rendered by Mr. Grossberg are provided to the
Company. To the extent that Mr. Grossberg's film booking activities prevent him
from devoting his complete time and attention to the business of the Company,
its operations and future potential expansion could be materially adversely
affected. See "Management -- Employment and Consulting Agreements".
Conflicts of Interest. Several possible conflicts of interest may exist
between the Company and its officers and directors. In particular, certain
officers and directors have directly or indirectly advanced funds or guaranteed
loans or other obligations of the Company. As a result, a conflict of interest
may exist between these officers and directors and the Company with respect to
the determination of which obligations will be paid out of the Company's
operating cash flow and when such payments will be made. See "Certain
Transactions." Another potential conflict of interests may exist between Alan
Grossberg and the Company with respect to the amount of time devoted by Mr.
Grossberg to the Company's affairs. Pursuant to the terms of his employment
agreement with the Company, Mr. Grossberg is permitted to conduct film booking
services for entities other than the Company (so long as such services are not
rendered to theaters owned or operated in a film licensing zone in which the
Company owns, operates or has a commitment to lease or develop a theater). See
"Management -- Employment and Consulting Agreements" and "Certain Transactions."
As a result, a conflict may result between the demands placed on Mr. Grossberg
by the Company and by his film booking business.
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<PAGE> 20
In addition, a conflict of interest between the Company and Mr. Grossberg
existed in connection with the negotiation of the terms of Mr. Grossberg's film
booking agreement with the Company. In order to reduce the potential conflicts
of interest between the Company and its officers and directors, prior to
entering into any transaction in which a potential material conflict exists, the
Company's policy has been and will continue to be to obtain the approval of a
majority of the disinterested members of the Company's Board of Directors or the
approval of holders of a majority of the shares of the Company's Common Stock
(excluding the shares owned by the interested party). However, there can be no
assurance that conflicts will be resolved in a manner favorable to the Company.
Compensation of Executive Officers. Effective August 1994, the Company
entered into five-year employment agreements with each of John Ellison, Jr.,
Alan Grossberg and Jerry Willits, pursuant to which their annual salaries are
$197,106, $145,860 and $94,380, respectively, subject to annual increases of
between 10% and 12%. Mr. Grossberg (or an entity controlled by him) receives an
additional $52,000 per year in exchange for film booking services. In addition,
Messrs. Ellison, Grossberg and Willits will be entitled to receive substantial
bonuses based on a percentage of net income in the event that the Company's net
income for a given year exceeds $2 million and additional bonuses in the event
that the Company has net income in excess of $7 million in a given year. Each of
Messrs. Ellison, Grossberg and Willits will also receive an automobile allowance
of up to $650 per month and certain insurance and other benefits. Moreover, in
the event that Mr. Ellison or Mr. Grossberg is terminated or is not reelected or
appointed as a director or executive officer of the Company for any reason other
than for an uncured breech of his obligations under his employment agreement or
his conviction of a felony involving moral turpitude, he shall have the right to
receive his annual salary and bonuses for the remainder of the original
five-year term of the contract. See "Management -- Employment and Consulting
Agreements." The employment agreements described above require that the Company
pay substantial salaries during each year of the five year terms thereof to each
of Messrs. Ellison, Grossberg and Willits, regardless of the Company's financial
condition or performance. As a result, the agreements could have a material
adverse effect on the Company's financial performance and condition.
No Assurance of Continued Nasdaq Inclusion; Risk of Low-Priced
Securities. In order to qualify for continued listing on Nasdaq, a company,
among other things, must have $2,000,000 in total assets, $1,000,000 in capital
and surplus and a minimum bid price of $1.00 per share. If the Company is unable
to satisfy the maintenance requirements for quotation on Nasdaq, of which there
can be no assurance, it is anticipated that the Securities would be quoted in
the over-the-counter market National Quotation Bureau ("NQB") "pink sheets" or
on the NASD OTC Electronic Bulletin Board. As a result, an investor may find it
more difficult to dispose of, or obtain accurate quotations as to the market
price of, the Securities, which may materially adversely affect the liquidity of
the market for the Securities. In addition, if the Securities are delisted from
Nasdaq, they might be subject to the low-priced security or so-called "penny
stock" rules that impose additional sales practice requirements on
broker-dealers who sell such securities. For any transaction involving a penny
stock the rules require, among other things, the delivery, prior to the
transaction, of a disclosure schedule required by the Securities and Exchange
Commission (the "Commission") relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in the customer's account.
Although the Company believes that the Securities are not a penny stock
due, among other reasons, to their continued listing on Nasdaq, in the event the
Securities subsequently become characterized as a penny stock, the market
liquidity for the Securities could be severely affected. In such an event, the
regulations relating to penny stocks could limit the ability of broker-dealers
to sell the Securities and, thus, the ability of purchasers in this offering to
sell their Securities in the secondary market.
Possible Volatility of Common Stock and Redeemable Warrant Prices;
Possible Adverse Effects of The Offer On The Redeemable Warrants. The trading
prices of the Securities may respond to quarterly variations in operating
results and other events or factors, including, but not limited to, the sale or
attempted sale of a large amount of the Securities into the market. In addition,
the stock market has experienced extreme price and
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<PAGE> 21
volume fluctuations in recent years, particularly in the securities of smaller
companies. These fluctuations have had a substantial effect on the market prices
of many companies, often unrelated to the operating performance of the specific
companies, and similar events in the future may adversely affect the market
prices of the Securities.
THERE IS A MINIMUM OF 100,000 REDEEMABLE WARRANTS THAT MUST REMAIN
OUTSTANDING AFTER THE OFFER FOR CONTINUED INCLUSION OF THE REDEEMABLE WARRANTS
UNDER THE NASDAQ SMALL CAP MARKET. IF ENOUGH REDEEMABLE WARRANTS ARE TENDERED
AND EXERCISED PURSUANT TO THE OFFER THE REDEEMABLE WARRANTS MAY NO LONGER BE
QUOTED ON THE NASDAQ SMALL CAP MARKET, THE CURRENTLY LIMITED MARKET FOR THE
REDEEMABLE WARRANTS COULD BE SEVERELY ADVERSELY AFFECTED RESULTING IN THE LACK
OF ANY REAL MARKET FOR THE REDEEMABLE WARRANTS AND MATERIALLY ADVERSELY
AFFECTING THE LIQUIDITY OF THE REDEEMABLE WARRANTS. THE COMPANY WILL NOT SEEK TO
DELIST THE REDEEMABLE WARRANTS FROM THE NASDAQ SMALL CAP MARKET.
Possible Adverse Effect of Offer on Market for the Securities. Although
the Company has several market makers for its Securities and the Soliciting
Agent is a an active market maker. During the Offer, the Soliciting Agent may
have to cease making a market in the Securities. If during the term of the
Offer, the Soliciting Agent has to cease making a market in the Securities, the
market for the Company's Securities could be adversely effected.
Lack of Market for the Class B Warrants. There is currently no market
for the Class B Warrants and no assurances can be given as to how many Class B
Warrants, if any, will be issued in the Offer or whether a market will develop
for the Class B Warrants. If a market for the Class B Warrants does develop, the
Class B Warrants will be subject to all the risks of the markets for the
Securities described herein. Without a market for the Class B Warrants, the
holders of the Class B Warrants may not be able to sell them and would be forced
to exercise the Class B Warrants and sell the underlying Common Stock to realize
any value in the Class B Warrants. The NASD requires at least 100,000 Class B
Warrants to be outstanding for inclusion in the Nasdaq Small Cap Market. See
"The Offer-Blue Sky Laws."
Risk of Limitation of Use of Net Operating Loss Carryforwards. As of
March 31, 1996, the Company had net operating loss carryforwards of
approximately $3,500,000 for federal income tax purposes, which may be utilized
through 2006 to 2011, and approximately $1,700,000 for state income tax
purposes, which may be utilized through 1998 to 2011 (subject to certain
limitations). The initial public offering resulted in an "ownership change" as
defined in Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), and the issuance of warrants to investors in the Company's September
1994 private placement may have resulted in an ownership change under the Code.
As a result, the Company's use of its net operating loss carryforwards to offset
taxable income in any post-change period may be subject to certain specified
annual limitations. If the issuance of warrants resulted in an ownership change
for purposes of the Code, the amount of net operating loss carryforwards, if
any, available in any post-change year may be limited in each taxable year. It
is uncertain whether
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<PAGE> 22
the Offer would create an additional ownership change under Code Section 382 and
an additional limitation in the Company's net operating loss carryforwards.
Issuance of Preferred Stock. The Board of Directors of the Company has
the authority to issue up to 100,000 shares of preferred stock, without par
value, in one or more series and to fix the number of shares constituting any
such series, the voting powers, designation, preferences and relative,
participating, optional or other special rights and the qualifications,
limitations or restrictions thereof, including the dividend rights and dividend
rate, terms of redemption (including sinking fund provisions), redemption price
or prices, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the shareholders.
The issuance of preferred stock by the Board of Directors could adversely affect
the rights of the holders of Common Stock. For example, such issuance could
result in a class of securities outstanding that would have preferences with
respect to voting rights and dividends and in liquidation over the Common Stock,
and could (upon conversion or otherwise) enjoy all of the rights appurtenant to
the Common Stock.
The authority possessed by the Board of Directors to issue preferred
stock could potentially be used to discourage attempts by others to obtain
control of the Company through a merger, tender offer, proxy contest or
otherwise by making such attempts more difficult to achieve or more costly. The
Board has designated 25,000 shares of preferred stock as Series A Preferred
Stock. There are no issued and outstanding shares of preferred stock and, there
are no agreements or understandings regarding the issuance of preferred stock .
See "Description of Securities -- Preferred Stock."
Current Prospectus and State Registration Required To Exercise
Redeemable Warrants and Class B Warrants. The Redeemable Warrants and the Class
B Warrants (collectively, the "Warrants") are not exercisable unless, at the
time of the exercise, the Company has a current prospectus covering the shares
of Common Stock issuable upon exercise of the Warrants and such shares have been
registered, qualified or deemed to be exempt under the securities or "blue sky"
laws of the state of residence of the exercising holder of the Warrants. See
"The Offer-Blue Sky Laws." In addition, in the event that any holder of the
Warrants attempts to exercise any Warrants at any time after nine months from
the date of this Prospectus, the Company may be required to file a
post-effective amendment to the Registration Statement of which this Prospectus
is a part and deliver a current prospectus before the Warrants may be exercised.
Although the Company has undertaken to use its best efforts to have all of the
shares of Common Stock issuable upon exercise of the Warrants registered or
qualified on or before the exercise date and to maintain a current prospectus
relating thereto until the expiration of the Warrants, there is no assurance
that it will be able to do so. The value of the Warrants may be greatly reduced
if a current prospectus covering the Common Stock issuable upon the exercise of
the Warrants is not kept effective or if such Common Stock is not qualified or
exempt from qualification in the states in which the holders of the Warrants
then reside.
Investors may purchase the Warrants in the secondary market (if one
exists) or may move to jurisdictions in which the shares underlying the Warrants
are not registered or qualified during the period that the Warrants are
exercisable. In such event, the Company will be unable to issue shares to those
persons desiring to exercise their Warrants unless and until the shares are
qualified for sale in jurisdictions in which such purchasers reside, or an
exemption from such qualification exists in such jurisdictions, and holders of
the Warrants would have no choice but to attempt to sell the Warrants in a
jurisdiction where such sale is permissible or allow them to expire unexercised.
See "Description of Securities -- Redeemable Warrants" and "Description of
Securities - Class B Warrants."
Speculative Nature of Warrants; Adverse Effect of Possible Redemption of
Warrants. The Warrants do not confer any rights of Common Stock ownership on the
holders thereof, such as voting rights or the right to receive dividends, but
rather merely represent the right to acquire shares of Common Stock at a fixed
price for a limited period of time. Subject to the Offer, specifically, holders
of the Redeemable Warrants and Class B Warrants may exercise their right to
acquire Common Stock and pay an exercise price of $6.00 per share and $_____ per
share, respectively, subject to adjustment in the event of certain dilutive
events, on or prior to February 6, 2000 or __________, 200_, respectively, after
which date any unexercised Redeemable Warrants
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<PAGE> 23
and Class B Warrants, respectively, will expire and have no further value. There
can be no assurance that the market price of the Common Stock will ever equal or
exceed the exercise price of the respective Warrants, and consequently, whether
it will ever be profitable for holders of the Warrants to exercise the Warrants.
The Warrants are subject to redemption by the Company, at any time on 30
days prior written notice, at a price of $0.25 per Warrant if the average
closing bid price for the Common Stock equals or exceeds $7.00 per share for the
Redeemable Warrants or $_____ per share for the Class B Warrants for any 20
trading days within a period of 30 consecutive trading days ending on the fifth
trading day prior to the date of the notice of redemption. Redemption of the
Warrants could force the holders thereof to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for such holders to do
so, to sell the Warrants at the current market price (if market exists) when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which may be substantially less than the market value of the Warrants at
the time of redemption. The holders of the Warrants will automatically forfeit
their rights to purchase shares of Common Stock issuable upon exercise of the
Warrants unless the Warrants are exercised before they are redeemed. See
"Description of Securities -- Redeemable Warrants" and "Description of
Securities -- Class B Warrants."
No Dividends. The Company has not paid any dividends on its Common Stock
and does not intend to pay any dividends in the foreseeable future. Earnings, if
any, are expected to be retained for use in expanding the Company's business.
See "Dividend Policy."
Shares Eligible for Future Sale. Sales of substantial amounts of
Securities in the public market or the perception that such sales could occur
may adversely affect prevailing market prices of the Securities. The Company may
issue up to 4,725,000 shares of Common Stock upon exercise of the Common Stock
under Redeemable Warrants at any time through February 6, 2000. A maximum of
4,725,000 shares of Common Stock could be issued upon exercise of Class B
Warrants if the Offer is fully subscribed for. In connection with the initial
public offering, the Company issued to A.S. Goldmen & Co., Inc. Underwriter's
Warrants to purchase up to 150,000 shares of Common Stock and/or Redeemable
Warrants to purchase up to an additional 150,000 shares of Common Stock. Sales
of either the Warrants or the underlying shares of Common Stock, or even the
existence of the Warrants, may depress the price of the Common Stock or the
Warrants in the market for such Securities or Class B Warrants (if a market
develops). In addition, in the event that any holder of Warrants exercises his
Warrants, the percentage ownership of the Common Stock by current shareholders
would be diluted. Finally, the Company has reserved 587,500 shares of Common
Stock for issuance to key employees and officers pursuant to the Company's Stock
Option Plan. As of the date of this Prospectus, fully-vested options to purchase
376,000 shares of Common Stock have been granted pursuant to such Stock Option
Plan. In the event that these or any other stock options granted pursuant to
such Stock Option Plan are exercised, dilution of the percentage ownership of
Common Stock owned by the public investors will occur. Moreover, the mere
existence of such options may depress the price of the Common Stock. See
"Management," "Selling Security Holders," "Certain Transactions -- Private
Placements," "Shares Eligible for Future Sale" and "Underwriting."
Limitation of Monetary Liability of Officers. Pursuant to the provisions
of the California General Corporation Law, the Articles of Incorporation of the
Company include a provision which eliminates the personal liability of its
directors to the Company and its shareholders for monetary damages to the
fullest extent permissible under California law. This limitation has no effect
on a director's liability (i) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (ii) for acts or
omissions that a director believes to be contrary to the best interests of the
Company or its shareholders or that involve the absence of good faith on the
part of the director, (iii) for any transaction from which a director derived an
improper personal benefit, (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing his duties, of a risk of a serious injury to the
Company or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders, (vi) under Section 310 of the
California Corporations Code (concerning contracts or transactions between the
Company and a director) or (vii) under Section 316 of the
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<PAGE> 24
California Corporations Code (concerning directors' liability for improper
dividends, loans and guarantees). The provision does not eliminate or limit the
liability of an officer for any act or omission as an officer, notwithstanding
that the officer is also a director or that his actions, if negligent or
improper, have been ratified by the Board of Directors. Further, the provision
has no effect on claims arising under federal or state securities laws and does
not affect the availability of injunctions and other equitable remedies
available to the Company's shareholders for any violation of a director's
fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation also authorize the Company to
indemnify its officers, directors and agents for breaches of duty to the Company
and its shareholders, through bylaw provision, agreements, vote of shareholders
or disinterested directors or otherwise, in excess of the indemnification
specifically permitted by statute; provided, however, that, in the context of a
derivative action or class action on behalf of shareholders, the Company may not
expand the right to indemnification so far as the standard of conduct of
officers and directors is concerned. The Company has entered into
indemnification agreements with all of its directors and executive officers
whereby the Company has agreed to indemnify each such person (an "indemnitee")
against claims arising out of certain past, present or future acts, omissions or
breaches of duty committed by an indemnitee while serving as a director or
officer of the Company or its subsidiaries. Under certain circumstances, such
indemnification (including reimbursement of expenses incurred) will be allowed
for liability arising under the Act. Insofar as indemnification for liabilities
arising under the Act may be permitted to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
Tax Consequences of the Offer are Uncertain. There is no current
authority directly addressing the federal income tax consequences of the Offer.
The Company has not sought a ruling from the Internal Revenue Service or an
opinion of counsel with respect to such federal income tax consequences.
Redeemable Warrantholders are urged to consult their own tax advisors regarding
this matter. The Offer may constitute a significant modification of the
Redeemable Warrants resulting in (i) a taxable exchange resulting from the
Offer, regardless of whether a Redeemable Warrantholder accepts such offer by
tendering and exercising Redeemable Warrants or (ii) a recognition of income or
gain resulting from acceptance of the Offer by a Redeemable Warrantholder. The
Warrantholder's tax basis in the Common Stock and Class B Warrants acquired upon
such tender and exercise would be determined in a manner consistent with the tax
treatment of the transaction. See "Offer-- Certain Federal Income Tax
Consequences."
Possible Rescission Rights. Purchasers of units in a private placement
were provided with unaudited financial statements which, upon subsequent audit,
proved to be inaccurate. In particular, the unaudited financial statements
contained in the Company's offering documents, which management believed to be
prepared in accordance with generally accepted accounting principles, were
determined not to have been prepared in accordance with generally accepted
accounting principles in several respects, the most significant of which was the
failure of the financial statements to amortize payments due under long-term
leases (which typically call for increasing rental payments over time) on a
straight-line basis. As a result, the financial statements significantly
understated the extent of the Company's operating losses and stockholders'
deficit for the periods in question. As a result of the differences between the
financial statements contained in the prospectus for the initial public offering
and the financial statements contained in the offering documents for the private
placement, the purchasers of units might seek to rescind their investment or
seek other damages. If the purchasers of such units rescind their investment or
seek other damages, the Company might be liable to these investors for the full
amount of their investment (an aggregate of $3,000,000), plus interest and any
fines or penalties which state regulators or courts may impose. In addition, the
Company would bear the costs of any rescission offer. However, the Company used
approximately $3,073,176 of the proceeds of the initial public offering to repay
in full the principal of and interest on the promissory notes issued in
connection with the private placement. As a result, the Company believes that
its potential liability in any suit by purchasers of units has been
significantly reduced, particularly since they now hold only Redeemable
Warrants.
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<PAGE> 25
THE OFFER
Summary. The Company hereby offers to the holders of its Redeemable
Warrants duly tendered and exercised on the following basis:
To lower the exercise price per share from $6.00 per Redeemable Warrant
to $______ and to receive for each Redeemable Warrant tendered and
exercised not only one share of Common Stock but also one Class B
Warrant. For a description of the Class B Warrants, see "Description of
Securities -- Class B Warrants." Each record holder of Redeemable
Warrants must either accept the Offer during its term and tender and
exercise any or all of his Redeemable Warrants at $______ per Redeemable
Warrant or retain his current Redeemable Warrants on their current
terms. See "Description of Securities -- Redeemable Warrants."
Subject to the terms and conditions described below, the Company is
obligated to accept tenders and exercises of all the outstanding Redeemable
Warrants which are tendered and exercised pursuant to the Offer, if any are
accepted.
Holders of Redeemable Warrants will not be required to pay any brokerage
commissions or fees with respect to the tender and exercise of their Redeemable
Warrants that would ordinarily be associated with the regular exercise of their
Redeemable Warrants. The Company will pay all charges and expenses of the
Depository and the Soliciting Agent in connection with the Offer.
Purpose of the Offer. The Company has proposed the Offer at this time,
since the tender and the exercise of a significant number of the Redeemable
Warrants would provide the Company with additional working capital. As set forth
elsewhere herein, the Company needs at least $6,200,000 to complete its
development plans for opening new theaters. Further, given the existence of the
Redeemable Warrants and the fact that the market prices for the Common Stock are
at a level which may allow the Company to call the Redeemable Warrants for
redemption, the Company is making this offer at this time instead of possibly
calling the Redeemable Warrants for redemption. The terms of this Offer were
determined by The Boston Group, L.P., after consulting with the Soliciting
Agent.
There was no independent committee of the Board of Directors of the
Company which considered the Offer since except as provided below, no member of
the Board of Directors or officers of the Company owns any Redeemable Warrants.
The Board of Directors unanimously approved the Offer. No appraisal rights are
available under California law for the holders of the Redeemable Warrant and the
Company will not extend such rights to holders of the Redeemable Warrants. The
Offer is not dependent on approval of a vote of the holders of a majority of the
Redeemable Warrants nor was an independent committee appointed to represent the
Redeemable Warrantholders.
The officers and directors of the Company do not own any Redeemable
Warrants, except for Andrew Friedenberg who owns 1,020 Redeemable Warrants.
ACCEPTANCE OF THE OFFER BY HOLDERS OF THE REDEEMABLE WARRANTS IS
COMPLETELY VOLUNTARY. THE COMPANY DOES NOT MAKE ANY RECOMMENDATION TO THE
EXISTING REDEEMABLE WARRANTHOLDERS TO TENDER AND EXERCISE OR REFRAIN FROM
TENDERING AND EXERCISING ANY OR ALL OF THEIR REDEEMABLE WARRANTS ELIGIBLE TO BE
TENDERED AND EXERCISED. THE DECISION WHETHER OR NOT TO TENDER AND EXERCISE MUST
BE MADE BY EACH REDEEMABLE WARRANTHOLDER BASED UPON HIS INDIVIDUAL INVESTMENT
OBJECTIVES, TAX POSITION AND OTHER FACTORS AFFECTING HIM PERSONALLY.
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<PAGE> 26
Impact on Non-Tendering and Non-Exercising Warrantholder.
THERE IS A MINIMUM OF 100,000 REDEEMABLE WARRANTS THAT MUST REMAIN
OUTSTANDING AFTER THE OFFER FOR CONTINUED INCLUSION OF THE REDEEMABLE WARRANTS
UNDER THE NASDAQ SMALL CAP MARKET. IF ENOUGH REDEEMABLE WARRANTS ARE TENDERED
AND EXERCISED PURSUANT TO THE OFFER, THE CURRENTLY LIMITED MARKET FOR THE
REDEEMABLE WARRANTS COULD BE SEVERELY ADVERSELY EFFECTED , SUCH EVENTS COULD
RESULT IN THE REDEEMABLE WARRANTS NO LONGER BEING QUOTED ON NASDAQ, COULD RESULT
IN THE LACK OF ANY REAL MARKET FOR THE REDEEMABLE WARRANTS AND COULD MATERIALLY
ADVERSELY AFFECTING THE LIQUIDITY OF THE REDEEMABLE WARRANTS.
The Company will not seek to delist the Redeemable Warrants from the
NASDAQ Small Cap Market.
Further, the Offer could result in less than 300 Redeemable
Warrantholders of record which could make the Redeemable Warrants eligible for
deregistration under Section 12(g)(4) of the Securities Exchange Act of 1934.
However, the Company will not seek such deregistration even if available. The
Common Stock will continue to be registered under Section 12(g) of such Act and
the Class B Warrants will be so registered. Therefore, the Company will remain
subject to all the applicable requirements of such Act, including filing
periodic reports.
Redeemable Warrantholders who do not accept the Offer will continue to
hold their Redeemable Warrants under their original terms. Upon the tender and
exercise of a Redeemable Warrant pursuant to the Offer, a Redeemable Warrant
will be retired.
Certain Federal Income Tax Consequences. The following summary is a
general discussion of certain of the anticipated federal income tax consequences
of the Offer. No discussion is included regarding any applicable state, local or
foreign tax laws.
The summary is limited to Redeemable Warrantholders who hold the
Redeemable Warrants as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Internal Revenue Code of
1986, as amended (the "Code"). The tax consequences to any particular Redeemable
Warrantholder may be affected by matters not discussed below. For example,
certain types of Redeemable Warrantholders (including life insurance companies,
tax-exempt organizations and foreign taxpayers) may be subject to special rules
not addressed in this summary.
There is no current authority directly addressing the tax consequences
of the Offer, and the Company has not sought a ruling from the Internal Revenue
Service ("IRS") or an opinion of counsel with respect to such tax consequences.
ACCORDINGLY, EACH REDEEMABLE WARRANTHOLDER IS URGED TO CONSULT WITH HIS OR HER
OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF HOLDING OR EXERCISING THE
REDEEMABLE WARRANTS.
The Offer is probably a tax-free event to the Redeemable Warrantholders.
However, the Offer contains a significant modification to the terms of the
Redeemable Warrants. Accordingly, the Offer itself may be characterized as
either a deemed distribution to, or a deemed exchange by, the Redeemable
Warrantholders regardless of whether a Redeemable Warrantholder accepts the
Offer. Whether the transaction is treated by the IRS as a deemed distribution
under Sections 305 and 301 of the Code, or a material change in the terms of the
Redeemable Warrants resulting for federal income tax purposes in a deemed
exchange of the existing Redeemable Warrants, the tax treatment will be
essentially the same assuming the Company has no current earnings and profits
during the taxable year of the Offer. Each Redeemable Warrantholder would
recognize
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capital gain (or loss only in the case of a deemed exchange) as a result of the
Offer in an amount equal to the difference between (i) the tax basis of the
Redeemable Warrant and (ii) the fair market value of the Class B Warrants
received in the deemed distribution or deemed exchange. In the case of a deemed
exchange, the Redeemable Warrantholders would receive a basis adjustment
consistent with the tax treatment of the transaction. The holding period for the
Class B Warrants received in the distribution or deemed exchange would begin on
the day after the date of the Offer. To the extent the Company has earnings and
profits during the taxable year of the Offer each Redeemable Warrantholder may
have ordinary dividend income from a deemed distribution by the Company limited
in the aggregate to the amount of such earnings and profits. The remaining
amount deemed distributed would be treated as described above. The Company does
not intend to report the Offer as either a taxable dividend distribution or
exchange.
Redeemable Warrantholders ordinarily would not recognize any gain or
loss at the time of exercise of their respective Redeemable Warrants. Upon such
exercise the adjusted tax basis of the Common Stock and Class B Warrants
received on the exercise of a Redeemable Warrant would equal the sum of the
exercising Redeemable Warrantholder's tax basis in the Redeemable Warrant and
the Redeemable Warrant exercise price paid allocated between the Common Stock
and Class B Warrants based on their respective fair market values. The
Redeemable Warrantholder's holding period for the Common Stock and Class B
Warrants received upon such exercise would begin on the date such Redeemable
Warrants are exercised.
Another alternative treatment that could be asserted by the IRS is that,
although the Offer itself does not cause a deemed exchange to occur, the
acceptance of the Offer by any Redeemable Warrantholder would result in the
recognition of income by the Redeemable Warrantholder (either as a deemed
exchange of the Redeemable Warrant for the Class B Warrant, or a receipt of
taxable rights by the Redeemable Warrantholder). If a deemed exchange were to
occur, the Redeemable Warrantholder would recognize capital gain (or loss) in a
manner and amount as described above with respect to the tax treatment of the
Offer itself. If the acceptance of the Offer were treated as the receipt of a
taxable right, the Redeemable Warrantholder would likely recognize income in an
amount equal to the difference between (i) the sum of the reduction in the price
to be paid for Common Stock pursuant to the Offer and the fair market value of
the Class B Warrant and (ii) the tax basis of the Redeemable Warrant. In either
case, the Redeemable Warrantholder would receive a basis adjustment consistent
with the tax treatment of the transaction.
No gain or loss will be recognized by the Company as a result of the
Offer or the exercise of Redeemable Warrants. Pursuant to Section 382 of the
Code, utilization of net operating loss ("NOL") carryforwards is limited if
there is a change in control of the Company during a specified time period.
Prior stock transactions have previously resulted in limitations under Section
382 with respect to the Company's NOL carryforwards. It is uncertain whether the
exercise of Redeemable Warrants under the Offer,
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<PAGE> 28
would create an additional change in control under Section 382 and an additional
limitation on the Company's NOL carryforwards. Management believes that the
value of the Company is such that NOLs that have been incurred since the last
change in control will be available for use within the statutory carryforward
periods, irrespective of the Section 382 limitation. See "Management's
Discussion and Analysis--Liquidity and Capital Resources."
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<PAGE> 29
How to Tender and Exercise. The acceptance by a Redeemable Warrantholder
of the Offer pursuant to one of the procedures set forth below will constitute
an agreement between the Redeemable Warrantholder and the Company in accordance
with the terms and subject to the conditions set forth herein.
For effective exercise, the exercise form on the reverse side of each
Redeemable Warrant certificate must be completed and executed as indicated
thereon and the Redeemable Warrants must be accompanied by payment of the
aggregate exercise price in cash or certified or official bank check made
payable to "Continental Stock Transfer & Trust Company, Agent for "CinemaStar
Luxury Theaters, Inc." or by wire transfer to the Depository for the benefit of
the Company, together with any other required documents. The foregoing materials
must be delivered to and received by the Depository at its address set forth
herein on or before the Expiration Date. However, in lieu of the foregoing, a
holder may either (i) exercise the Redeemable Warrants pursuant to the procedure
for book-entry tender and exercise set forth below (and a confirmation of such
book-entry exercise must be received by the Depository on or before the
Expiration Date) or (ii) comply with the guaranteed delivery procedure set forth
below.
THE BENEFICIAL HOLDERS OF REDEEMABLE WARRANTS THAT ARE HELD BY OR
REGISTERED IN THE NAME OF A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR
OTHER NOMINEE OR CUSTODIAN ARE URGED TO CONTACT SUCH ENTITY PROMPTLY IF THEY
WISH TO ACCEPT THE OFFER.
Redeemable Warrants together with the cash, a certified or official bank
check made payable to Continental Stock Transfer & Trust, Agent for CinemaStar
Luxury Theaters, Inc. or a wire transfer to the Depository for the benefit of
CinemaStar Luxury Theaters, Inc. and any other required documents to be
delivered under the Offer should be delivered only by hand or by courier, or
transmitted by mail, and only to the Depository and not to the Company or the
Soliciting Agent. The method of delivery of Redeemable Warrants and all other
required documents to the Depository is at the election and risk of the holder,
but if such
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<PAGE> 30
delivery is by mail it is suggested that the holder use properly insured,
registered mail with return receipt requested, and that the mailing be made
sufficiently in advance of the Expiration Date to permit delivery to the
Depository on or prior to the Expiration Date.
Within two business days after the date hereof, the Warrant Agent will
establish with respect to the Redeemable Warrants at each of the Depository
Trust Company, the Midwest Securities Trust Company and Philadelphia Depository
Trust Company (each a "Book-Entry Transfer Facility" and collectively referred
to as "Book-Entry Transfer Facilities") for purposes of the Offer. Any financial
institution that is a participant in a Book-Entry Transfer Facility's system may
make book-entry delivery of Redeemable Warrants by causing the Book-Entry
Transfer Facility to transfer the same into the Depository's account at such
Book-Entry Transfer Facility in accordance with such Book-Entry Transfer
Facility's procedure for such transfer and to confirm such transfer to the
Depository in writing. Any exercise of Redeemable Warrants to be effected
through book-entry delivery at a Book-Entry Transfer Facility must have either
(i) the Redeemable Warrants executed by the holder of record, together with the
proper signature guarantees, and delivered to a Book-Entry Transfer Facility and
the cash or certified or official bank check made payable to Continental Stock
Transfer & Trust, Agent for CinemaStar Luxury Theaters, Inc. or a wire transfer
for the benefit of the Company, together with all other documents required,
transmitted to and received by the Depository at its address set forth herein on
or before the Expiration Date or (ii) complied with the guaranteed delivery
procedure set forth below. Delivery of documents to a Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedure does
not constitute delivery to the Depository.
If the certificates for Redeemable Warrants are registered in the name
of a person other than the person executing such Redeemable Warrants, or if
Redeemable Warrants that are not accepted for exercise pursuant to the Offer are
to be returned to a person other than the registered owner, then the
certificates for such Redeemable Warrants must be endorsed or accompanied by an
appropriate instrument of transfer, signed exactly as the name of the registered
owner appears on the certificates, with the signatures on the certificates or
instruments of transfer guaranteed by a participant in the Medallion Signature
Guarantee Program.
If a holder of Redeemable Warrants desires to tender and exercise such
Redeemable Warrants pursuant to the Offer but is unable either to deliver his
certificates, the cash, the certified or official bank check or the wire
transfer and all other required documents to the Depository on or before the
Expiration Date or to comply with the procedure for book-entry exercise on a
timely basis, such Redeemable Warrants may nevertheless be exercised pursuant to
the Offer, provided that all of the following conditions are satisfied:
(i) such tenders and exercises are made by or through a member firm of a
registered national securities exchange or a member of the National Association
of Securities Dealers, Inc. or a commercial bank or trust company having an
office or correspondence in the United States (an "Eligible Institution").
(ii) prior to the Expiration Date, a properly completed and duly
executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery) setting forth the name and address of the
Redeemable Warrantholder and the number of Redeemable Warrants tendered and
exercised, stating that the tender and exercise is being made thereby and
guaranteeing that within three New York Stock Exchange trading days after the
Expiration Date, the Redeemable Warrants and the cash, the certified or official
bank check or the wire transfer, together with all other documents required,
will be deposited by the Eligible Institution with the Depository; and
(iii) the certificates for all tendered and exercised Redeemable
Warrants in proper form for transfer (or a written confirmation of book-entry
transfer into the Depository's account at a Book-Entry Transfer Facility as
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described above) and the cash, the certified or official bank check or the wire
transfer, together with all other documents required, are received by the
Depository within three New York Stock Exchange trading days after the
Expiration Date.
The issuance of Common Stock and Class B Warrants in exchange for
Redeemable Warrants tendered and exercised pursuant to the Offer will be made
only after timely receipt by the Depository of the certificates for such
Redeemable Warrants (or a confirmation of a book-entry transfer of such
Redeemable Warrants into the Depository's account at one of the Book-Entry
Transfer Facilities as described above) and the cash, the certified or official
bank check or the wire transfer, together with all other documents required. If
less than the entire number of Redeemable Warrants evidenced by a submitted
certificate are to be tendered and exercised, the tendering and exercising
Redeemable Warrantholder should indicate the number of Redeemable Warrants being
tendered and exercised. The entire number of Redeemable Warrants represented by
the certificates for Redeemable Warrants delivered to the Depository will be
deemed to have been tendered and exercised unless otherwise indicated.
All questions with respect to the validity, form, eligibility (including
time of receipt) and acceptance for tender and exercise of Redeemable Warrants
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all exercises of Redeemable Warrants which it determines not to be in proper
form, or the acceptance or exercise of which would, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any defect or irregularity in the tender and exercise of Redeemable
Warrants. None of the Company, the Depository, the Soliciting Agent or any other
person will be under any duty to give notification of any defects or
irregularities in exercise, nor will they incur any liability for failure to
give such notification. The tender and exercise of Redeemable Warrants will not
be deemed to have been properly made until any irregularities have been waived
by, or cured to the satisfaction of, the Company. The Company's reasonable
interpretation of the terms and conditions of the Offer will be final and
binding.
It is a violation of Section 10(b) of the Securities Exchange Act of
1934, as amended, and Rule 10b-4 promulgated thereunder for a person to tender
Redeemable Warrants for his own account unless the person so tendering owns such
Redeemable Warrants. Section 10(b) and Rule 10b-4 provide a similar restriction
applicable to the tender or guarantee of a tender on behalf of another person.
The tender and exercise of Redeemable Warrants to the Company pursuant to any of
the procedures described in the Offer will constitute an agreement between the
tendering and exercising Redeemable Warrantholder and the Company upon the terms
and subject to the conditions of the Offer, including the tendering and
exercising Redeemable Warrantholder's representations that (i) such Redeemable
Warrantholder owns the Redeemable Warrants being tendered and exercised within
the meaning of Rule 10b-4 and (ii) the tender and exercise of such Redeemable
Warrants complies with Rule 10b-4.
Source of Funds. To consummate the Offer, the Company believes it will
need approximately $140,000 in expenses which it will pay out of existing
working capital. See "The Offer-- Payment of Expenses" and "Use of Proceeds."
Expiration Date. As used in this Offer, the term "Expiration Date" means
5:00 p.m., New York time, on ____________, 1996; provided, however, that if the
Company, in its sole discretion, has extended the period of time for which the
Offer is open, the term "Expiration Date" means the latest time and date to
which the Offer is extended. The Offer may be extended by notice from the
Company to each Redeemable Warrantholder, but in no event shall the Offer be
extended beyond ____________, 1996.
During any such extension, all Redeemable Warrants previously exercised
and not withdrawn will remain subject to the Offer, subject to the right of a
tendering and exercising Redeemable Warrantholder to withdraw
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<PAGE> 32
such Redeemable Warrantholder's Redeemable Warrants. The Company shall notify
the Depository of any extension by oral or written notice prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date.
Any extension or expiration of the Offer will be followed as soon as
practicable, but in no event later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date, by public
announcement thereof, and any amendment of the Offer will be followed as soon as
practicable by public announcement. Without limiting the manner by which the
Company may choose to make such public announcement, the Company shall not,
unless otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such public announcement other than by making a
release to the Dow Jones News Service.
If the Company decides to waive, modify or amend a material provision of
the Offer, it may do so at any time, or from time to time, provided that it
gives notice thereof in the manner specified above and extends such Offer to the
extent required by the Securities Exchange Act of 1934 (the "Exchange Act").
With respect to an increase or decrease in the percentage of the class of
securities being sought or a change in the consideration offered, Rule
13e-4(f)(1) under the Exchange Act generally requires that a tender offer remain
open for at least 10 business days from the date that notice of such change is
first published or sent or given to security holders. The minimum period during
which the Offer must remain open following other material changes in the terms
of the Offer or information concerning the Offer will depend upon the facts and
circumstances, including the relative materiality of the change in the terms of
information. Any amendment to the Offer will apply to all Redeemable Warrants
tendered and exercised pursuant thereto, regardless of when or in what order the
Redeemable Warrants are tendered and exercised. The term "business day" shall
mean a day other than Saturday, Sunday or a federal holiday and shall consist of
the time period from 12:01 a.m. through 12:00 midnight, New York City time.
Withdrawal Rights and Return of Redeemable Warrants Not Tendered and
Exercised. The Redeemable Warrants tendered and exercised pursuant to the Offer
may be withdrawn subject to the procedures described below, at any time before
the Expiration Date. Thereafter, such exercises are irrevocable, except that
they may be withdrawn after the expiration of 40 business days from the
commencement of the Offer, unless theretofore accepted for tender and exercise
as provided herein. If the Company extends the period of time during which the
Offer is open, is delayed in its acceptance of Redeemable Warrants for tender
and exercise or is unable to accept Redeemable Warrants for tender and exercise
pursuant to the Offer for any reason, then, without prejudice to the Company's
rights under the Offer, the Depository may, on behalf of the Company, retain all
Redeemable Warrants tendered and exercised, and such Redeemable Warrants may not
be withdrawn except as otherwise provided herein, subject to Rule 13e-4(f)(5)
under the Exchange Act.
To be effective, a written, telegraphic or facsimile transmission of a
notice of withdrawal must (i) be timely received by the Depository at its
address set forth herein before the Depository receives notice of acceptance by
the Company of the Redeemable Warrants, (ii) specify the name of the person who
exercised the Redeemable Warrants, (iii) if the Redeemable Warrants have been
deposited with or otherwise identified to the Depository, contain the
description of the Redeemable Warrants to be withdrawn and indicate the
certificate numbers shown on the certificates evidencing such Redeemable
Warrants (except in the case of book-entry exercises) and (iv) be executed by
the holder of the Redeemable Warrants in the same manner as the original
Redeemable Warrant or be accompanied by evidence satisfactory to the Company
that the person withdrawing the exercise pursuant to the Offer has succeeded to
the beneficial ownership of the Redeemable Warrants. If the Redeemable Warrants
have been tendered and exercised pursuant to the procedure for book-entry
exercise, a notice of withdrawal must specify, in lieu of certificate numbers,
the name and account number at a Book-Entry Transfer Facility (as hereinafter
defined) to be credited with the withdrawn Redeemable Warrants.
No interest shall be paid on any amount returned to a Redeemable
Warrantholder pursuant to a proper withdrawal or otherwise, regardless of any
delay in the Offer.
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<PAGE> 33
All questions with respect to the validity, form and eligibility
(including time of receipt) of notices of withdrawal will be determined by the
Company, in its sole discretion, which determination will be final and binding.
None of the Company, the Depository, the Solicitation Agent or any other person
will be under any duty to give notification of any defects or irregularities in
any notice of withdrawal or incur any liability for failure to give such
notification.
Any Redeemable Warrants properly withdrawn will thereafter be deemed not
to have been validly exercised for purposes of the Offer. Moreover, withdrawn
Redeemable Warrants may be re-tendered and re- exercised at any time prior to
the Expiration Date.
Certain Condition of the Offer. Notwithstanding any other provision of
the Offer, the Company may cancel, modify or terminate the Offer and is not
required to accept for tender and exercise any Redeemable Warrants pursuant to
the Offer if prior to the Expiration Date:
(i) there shall be pending, instituted or threatened any legal
action or administrative proceeding before any court or governmental
agency, by any governmental agency or any other person, prohibiting,
restricting or delaying the Offer;
(ii) any statute, rule or regulation shall have been enacted, or
any action shall have been taken by any governmental authority, which
would prohibit or materially restrict or delay consummation of the
Offer; or
(iii) there shall have occurred (and the adverse effect of such
occurrence will be continuing): (a) any general suspension of, or
limitation on prices for trading on, the Nasdaq Small Cap or National
Market or in the other over-the-counter markets or the New York Stock
Exchange; (b) a declaration of a banking moratorium by United States,
New York or California authorities; or (c) a commencement of a war,
armed hostilities or other international or national calamity directly
or indirectly involving the United States of America which would
reasonably be expected to affect materially and adversely (or to delay
materially) the consummation of the Offer.
In the event that the Company terminates the Offer pursuant to any of
the conditions set forth above, the Depository will promptly return the
applicable Redeemable Warrants and funds for the aggregate exercise price to the
holders thereof.
The Company reserves the absolute right to waive satisfaction of any
conditions and compliance with any terms of the Offer. The Company further
reserves the absolute right to reject any and all exercises not in proper form.
The Company will accept any and all Redeemable Warrants which are properly
exercised subject to the conditions stated herein, if any are accepted.
Blue Sky Laws. This Offer is not being made to, nor will the Company
accept tenders from, holders of the Redeemable Warrants in any jurisdiction of
the United States in which this Offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such jurisdiction. In those
jurisdictions in which the securities or blue sky laws require this Offer to be
made by a licensed broker or dealer, this Offer will be made on behalf of the
Company only by registered brokers or dealers who are licensed under the laws of
such jurisdiction.
Only Redeemable Warrantholders residing in the states set forth below
and in which the Company has mailed this Prospectus may tender and exercise the
Redeemable Warrants pursuant to the Offer. The Company initially selected the
jurisdictions in which Redeemable Warrantholders may participate in the Offer
after determining from the Redeemable Warrantholder records and from record
owners the states where substantially all the known owners reside. The Company
either then determined that there was an exemption available in such state for
the Offer or the Company filed necessary applications for clearance of the
Offer. For various reasons, but principally due to a lack of a state licensed
broker/dealer in making the Offer, clearance of the Offer was denied by various
state regulatory agencies.
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<PAGE> 34
The Offer has been cleared in the following states and residents of such
states can participate in the Offer: California, Colorado, Connecticut, Florida,
Georgia, Illinois, Maryland, New Jersey, New Mexico, Nevada, New York,
Pennsylvania, Rhode Island, Utah and Wisconsin.
The Company may add additional states if it determines additional
beneficial owners are in other states. This Prospectus will be delivered to
those Redeemable Warrantholders eligible to participate in this Offer. In the
event the Company receives a tender and exercise from a person who is not
entitled to tender and exercise, the Company will promptly notify that person of
his or its inability to participate in the Offer, and return any Redeemable
Warrants and funds received.
The Company either has not filed applications in the following states
because it has no knowledge that a Redeemable Warrantholder resides in such
state or it filed applications to qualify the Offer in the following states but
after a good faith effort, the Offer was not approved in states set forth below
and the Offer can not be made in such states: Alabama, Alaska, Arizona,
Arkansas, Delaware, Washington D.C., Hawaii, Idaho, Indiana, Iowa, Kansas,
Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi,
Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma,
Oregon, PR, South Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia,
Washington, West Virginia, and Wyoming.
Issuance of Common Stock and Class B Warrants. Upon the terms and
subject to the conditions of the Offer, Redeemable Warrants properly tendered
for exercise and not properly withdrawn will be accepted for tender and exercise
on the Expiration Date. For purposes of the Offer, the Company will be deemed to
have accepted for exercise properly tendered and exercised Redeemable Warrants
when, as and if the Company has given oral or written notice thereof to the
Depository. All tendering and exercising holders of Redeemable Warrants will be
deemed to have waived any right to receive notice of the acceptance of their
Redeemable Warrants. Certificates for Common Stock and Class B Warrants and for
Redeemable Warrants not tendered and exercised will be issued as promptly as
practicable after the Redeemable Warrants are accepted for exercise.
The Depository will act as agent for the tendering and exercising
holders of Redeemable Warrants, for the purposes of issuing on behalf of Company
the Common Stock and Class B Warrants and for returning Redeemable Warrants not
tendered and exercised and transmitting such securities to the holders. Tendered
and exercised Redeemable Warrants not accepted for exercise by the Company will
be returned (or, in the case of Redeemable Warrants exercised by book-entry
transfer through a Book-Entry Transfer Facility, will be credited to an account
maintained with such Book-Entry Transfer Facility) without expense to the
exercising holders as promptly as practicable following the Expiration Date.
If the Company extends the period during which the Offer is open, is
delayed in its acceptance for tender and exercise or is unable to accept for
tender and exercise any Redeemable Warrants pursuant to the Offer for any
reason, then, without prejudice to the Company's rights hereunder, the
Depository, at the request of the Company, may nevertheless retain Redeemable
Warrants exercised and tendered together with any cash, certified or official
bank check or wire transfer and any other required document subject to the
withdrawal rights of holders thereof as set forth herein and applicable
securities laws.
Mutilated, Lost, Stolen or Destroyed Certificates. Any holder whose
certificates evidencing Redeemable Warrants have been mutilated, lost, stolen or
destroyed should contact the Depository at its address set forth herein for
further information.
Solicitation of Tenders. The Company has entered into a Solicitation
Agreement with The Boston Group, L.P., in which The Boston Group, L.P. will act
as the exclusive Solicitation Agent for the Company in the Offer and will
receive a four percent (4%) fee of the exercise price paid upon each tender and
exercise of Redeemable Warrants pursuant to this Offer, except for Redeemable
Warrants tendered for its own account. The Company has also agreed to indemnify
The Boston Group, L.P. including for liabilities under the Securities Act of
1933. The Company has also agreed to reimburse The Boston Group, L.P. for its
reasonable out-of- pocket expenses, including fees and disbursements of counsel,
in connection with the Offer. The Boston Group,
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<PAGE> 35
Inc. may also receive a four percent (4%) commission upon certain exercises of
the Class B Warrants. See "Description of Securities - Class B Warrants."
Except as set forth above, the Company will not pay any fees or
commissions to any broker or dealer or any other person for soliciting tenders
and exercise of the Redeemable Warrants pursuant to this Offer. Brokers,
dealers, commercial banks and trust companies will be reimbursed by the Company
for customary mailing and handling expenses incurred by them in forwarding
offering materials to their customers.
The Boston Group, L.P. is an active market maker for the Company's
Securities and the failure to be able to be a market maker during the Offer
could adversely affect the market for the Securities.
Depositary. All correspondence in connection with the Offer should be
addressed to the Depositary as follows:
<TABLE>
<CAPTION>
By Mail By Hand Delivery Wire Transfer Instructions
- ------- ---------------- --------------------------
<S> <C> <C>
Depositary: Depositary: ______________________
Continental Stock Transfer Continental Stock Transfer ______________________
& Trust Company & Trust Company ABA __________
2 Broadway 2 Broadway, 19th Floor Re Account No.: ______
New York, NY 10004 New York, NY 10004
Attention: Reorganization Telephone: (212) 509-4000
Department Facsimile: (212) 509-5150
</TABLE>
Payment of Expenses. The expenses to be incurred in connection with the
Offer (exclusive of the fee to be paid to the Soliciting Agent) are estimated as
follows: Registration Fees ($19,552), NASD and NASDAQ fees ($12,340), Depositary
($3,500), reproduction ($3,000), legal and accounting fees ($55,000), blue sky
fees and expenses (including legal fees) ($20,000), Soliciting Agent expenses
($25,000) and miscellaneous other items ($1,108). Total fees are estimated at
$140,000, all payable by the Company.
Transfer Taxes. The Company will pay all transfer taxes, if any,
applicable to the transfer to it and the exercise of Redeemable Warrants under
the Offer but only from the registered holders thereof and issuance of the
underlying Common Stock and Class B Warrants.
Recent Transactions. There have been no transactions in the Redeemable
Warrants or the underlying Common Stock that was effected during the past 40
business days by the Company or by any officer, director or controlling person
of the Company.
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<PAGE> 36
Subsequent Purchase of Redeemable Warrants and Common Stock. While the
Company has no obligation to do so, it reserves the right, after the expiration
of the Offer, to make subsequent offers to acquire Redeemable Warrants or
purchase Redeemable Warrants directly from Redeemable Warrantholders or the
Company's Common Stock, or to lower the exercise price on such terms and
conditions as may then be specified, although no such purchases of Redeemable
Warrants or Redeemable Common Stock or Class B Warrants or changes will be made
by the Company, or its affiliates, within ten business days after the Expiration
Date.
MARKET PRICES
On February 7, 1995, the Company's Common Stock and Redeemable Warrants
became listed in the Nasdaq Small Cap Market (Symbols: LUXY and LUXYW) in
connection with its initial public offering and continues to be traded in such
market following the initial public offering on such date of the Common Stock at
$5.00 per share and Redeemable Warrants at $0.25 per Redeemable Warrant. The
table below shows the high and low bid prices had prices as reported by the
Nasdaq. The bid prices represent inter-dealer quotations, without adjustments
for retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Calendar Year ended December 31, Common Stock Redeemable Warrants
------------ -------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1995
First Quarter (From
February 7, 1995) $7.50 $3.25 $2.13 $0.81
Second Quarter 4.25 2.75 1.41 0.56
Third Quarter 6.25 3.62 1.59 0.62
Fourth Quarter 7.47 4.50 1.84 0.87
1996
First Quarter 8.25 4.50 2.63 1.34
Second Quarter 8.88 7.38 2.63 2.17
Third Quarter
(through July 11) 7.50 7.38 2.63 2.50
</TABLE>
See "The Offer--Purpose of the Offer" as to the possible effect of the
Offer on the limited market for the Redeemable Warrants. There currently is no
market for the Class B Warrants and no assurance can be given that a market will
develop.
The Company as of June 7, 1996 has 52 shareholders of record and 39
holders of Redeemable Warrants of record.
As of March 31, 1995 and 1996, the net tangible book value per share of
the Company's Common Stock was $0.33 and $0.24, respectively. Net tangible per
share represents the amount of total tangible assets reduced by the amount of
all liabilities and divided by the number of shares of Common Stock outstanding.
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<PAGE> 37
USE OF PROCEEDS
Any net proceeds received from the Offer will be used for expansion of
the Company's theaters and working capital. Gross proceeds from the Offer could
range from no proceeds to $__________. See "The Offer -- Purpose of the Offer."
The Company will not receive any amounts upon the sale of the Securities
by the Selling Security Holder. The Company may receive funds upon exercise of
Redeemable Warrants or Class B Warrants. Any such funds will be used for working
capital. The Company estimates that the total costs of this offering, including
the Offer (exclusive of soliciting fees paid to Soliciting Agent), all of which
will be paid for by the Company, will be $140,000.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not
anticipate paying any dividends in the foreseeable future. Earnings, if any, of
the Company are expected to be retained for use in expanding the Company's
business. The payment of dividends is within the discretion of the Board of
Directors of the Company and will depend upon the Company's earnings, if any,
capital requirements, financial condition and such other factors as the Board of
Directors may consider relevant. Dividend payments are currently prohibited by a
bank loan agreement.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
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<PAGE> 38
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<PAGE> 39
Total revenues for the year ended March 31, 1996 increased 14.7% to
$11,524,740 from $10,045,581 for the year ended March 31, 1995. The increase
consisted of a $1,095,257, or 15.7% increase in admission revenues and a
$383,902, or 12.6%, increase in concession sales and other operating revenues.
The Chula Vista 6 theater opened in August 1995 and accordingly the results of
operations for the year ended March 31, 1996 include only eight months of
operations at the Chula Vista 6. The Chula Vista 6 had admission revenues of
$552,470 and concession sales and other operating revenues of $253,167 for total
revenues of $805,637, accounting for 54.5% of the increase in total revenues of
the Company taken as a whole. The Ultraplex 14 at Mission Grove opened March 29,
1996 and accordingly the results of operations for the year ended March 31, 1996
include only three days of operations at the Ultraplex 14 at Mission Grove. The
Ultraplex 14 at Mission Grove had admission revenues of $26,623 and concession
sales and other operating revenues of $14,092 for total revenues of $40,715,
accounting for 2.8% of the increase in total revenues of the Company taken as a
whole.
Film rental and booking costs for the year ended March 31, 1996
increased 14.5% to $4,405,483 from $3,847,431 for the year ended March 31, 1995.
The increase was due to additional film rental and booking costs paid on the
additional admission revenues discussed above. As a percentage of admission
revenues, film rental and booking costs for the year ended March 31, 1996
decreased to 54.5% from 55.0% for the year ended March 31, 1995.
Cost of concession supplies for the year ended March 31, 1996 increased
5.9% to $1,252,603 from $1,182,436 for the year ended March 31, 1995. The dollar
increase is primarily due to additional concession costs associated with
increased admissions . As a percentage of concession revenues, concession costs
for the year ended March 31, 1996 decreased to 39.0% from 40% for the year ended
March 31, 1995. The decrease is due to concession sales at the Chula Vista 6 and
the Ultraplex 14 at Mission Grove. The Company operates concessions at these
theaters and experiences a lower cost than the fixed concession cost experienced
at all of the other theaters where there is a contract with Pacific Concessions,
Inc. to provide concessions for a 40% return of concession sales.
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<PAGE> 40
Theater operating expenses for the year ended March 31, 1996 increased
0.6% to $3,473,009 from $3,453,768 for the year ended March 31, 1995. As a
percentage of total revenues, other theater operating expenses decreased to
30.1% from 34.4% during the applicable periods, due primarily to the relatively
fixed nature of certain of the theater operating expenses, such as rent, which
did not vary significantly during the periods in question. In addition, Chula
Vista 6 is owned by the Company and therefore no rent is paid on that theater.
Theater operating expenses for the year ended March 31, 1996 decreased $200,768,
or 5.8% on theaters operated by the Company partially as a result of a cost
containment program in which senior management approves material purchase orders
and volume discounts are obtained. In addition, whenever possible, the Company
seeks competitive bids. Enactment of proposals to increase the Federal or
California Minimum Wage would increase the Company's labor costs and may
adversely affect results of operations.
General and administrative expenses for the year ended March 31, 1996
increased 9.4% to $2,157,803 from $1,972,643 for the year ended March 31, 1995,
primarily as a result of additional salary costs and increased legal and
accounting expenses. As a percentage of total revenues, general and
administrative costs decreased to 18.7% from 19.6% during the applicable
periods.
Depreciation and amortization for the year ended March 31, 1996
increased 27.1% to $574,377 from $451,924 for the year ended March 31, 1995,
primarily due to additional depreciation related to the operation of the Chula
Vista 6, which was acquired in August 1995 and additional equipment purchased at
other theaters. Depreciation and amortization for the Chula Vista 6 was $65,070
or 53.1% of the increase.
Interest expense for the year ended March 31, 1996 decreased to $400,966
from $609,862 for the year ended March 31, 1995 primarily as a result of the
repayment of debt with the proceeds of the Company's initial public offering is
February 1995.
Results of operations for the year ended March 31, 1996 included a loss
of $260,371 resulting from the refinancing of a capital equipment lease. The
lease was refinanced in order to obtain more favorable terms.
Results of operations for the year ended March 31, 1995 included
$396,320 of debt issuance costs associated with the Company's private placement
debt offering completed in September 1994.
As a result of the above, the net loss for the year ended March 31, 1996
decreased 69.4% to $638,585 from $2,086,418 for the year ended March 31, 1995.
Liquidity and Capital Resources
The Company's revenues are collected in cash, principally through box
office admissions and concession sales. Because its revenues are received in
cash prior to the payment of related expenses, the Company has an operating
"float" which partially finances its operations.
The Company's capital requirements arise principally in connection with
new theater openings and acquisitions of existing theaters. New theater openings
typically are financed with internally generated cash flow and long-term leasing
arrangements for facilities and equipment.
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<PAGE> 41
The Company has entered into lease agreements requiring it to develop 61 screens
for approximately $6,200,000. The Company plans to construct additional theater
complexes; however, no assurances can be given that any additional theaters will
be financed or constructed, or, if constructed, that they will be operated
profitably.
The Company leases its four of its current theater properties and
various equipment under noncancelable operating lease agreements which expire
through 2021 and require various minimum annual rentals. At March 31, 1996, the
aggregate future minimum lease payments due under noncancelable operating leases
was $41,838,000. The Company has also signed lease agreement for two additional
theater locations and an expansion of one existing theater. The new leases and
expansion will require expected minimum rental payments aggregating
approximately $97,583,000 over the life of the leases. Accordingly, existing
minimum lease commitments as of March 31, 1996, plus those expected minimum
commitments for the proposed theater locations and expansion would aggregate
minimum lease commitments of approximately $139,421,000.
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<PAGE> 42
During the year ended March 31, 1996, the Company generated cash of
$320,052 from operating activities, as compared to using $1,056,182 in cash for
the year ended March 31, 1995. The increased generation of cash for the year
ended March 31, 1996 primarily resulted from the reduction of the net loss
coupled with an increase in accounts payable.
During the year ended March 31, 1996, the Company used cash for
investing activities of $5,908,736, as compared to $187,874 for the year ended
March 31, 1995. Increased use of cash for investing activities for the year
ended March 31, 1996 primarily resulted from the purchase of the Chula Vista 6
theater and an increase in purchases of property and equipment .
During the year ended March 31, 1996, the Company generated net cash of
$1,955,349 from financing activities as compared to $5,242,418 for the year
ended March 31, 1995. In 1995 the Company completed the private stock issuances
which raised net proceeds of approximately $6,500,000. This was partially offset
by the repayment of promissory notes and other debts.
In February 1995 the Company completed an initial public offering of
1,500,000 shares of common stock and 1,500,000 redeemable warrants for an
aggregate of $7,875,000. Underwriting discounts and other offering costs
aggregated approximately $1,484,000 which yielded net proceeds of approximately
$6,391,000 to the Company.
In March 1995, the Company received notice that A.S. Goldmen & Co., Inc.
had exercised its option to purchase 225,000 of the Company's Redeemable
Warrants to cover over-allotments in connection with the Company's initial
public offering. The sale of such Redeemable Warrants was consummated on or
about March 24, 1995 and the net proceeds to the Company were approximately
$46,000.
At March 31, 1996, the Company had a working capital deficit of
$775,814. On each of April 11, 1996 and May 21, 1996, the Company issued a
Convertible Debenture in the principal amount of $500,000 (the "Debentures") to
one entity, in transactions pursuant to Regulation S as promulgated by the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Debentures are convertible into shares of Common Stock of the Company at a
conversion price at $3.95 per share and $4.25 per share, respectively. The
Debentures bear interest at the rate of four percent (4%) per annum, payable
quarterly. The Convertible Debentures and accrued interest were converted into
245,372 shares of Common Stock. In connection with the placement of the
Debentures, the Company paid brokerage commissions in the amount of
approximately $134,000 to The Boston Group, L.P.
In the opinion of management, the Company believes it can obtain
adequate capital and/or financing resources to sustain operations, satisfy all
financial obligations and commitments, and finance the investment of all
proposed new theater locations through fiscal 1997. However, future events,
including the problems, delays, expenses and difficulties frequently encountered
by similarly situated companies, as well as changes in
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economic, regulatory or competitive conditions, may lead to cost increases that
could make the funds anticipated to be generated from the Company's operations
insufficient to fund the Company's expansion for the next 12 months. Management
may also determine that it is in the best interest of the Company to expand more
rapidly than currently intended, in which case additional financing will be
required. If any additional financing is required, there can be no assurances
that the Company will be able to obtain such additional financing on terms
acceptable to the Company and at the times required by the Company, or at all.
The Company has plans for significant expansion. In this regard, the
company has entered into lease and other binding commitments with respect to the
development of 61 additional screens at six locations. The capital requirements
necessary for the Company to complete its development plans is estimated to be
at least $6,200,000 in fiscal 1997. Such developments will require the Company
to raise substantial amounts of new financing, in the form of additional equity
or loan financing, during fiscal 1997. The Company believes it has, or can
obtain, adequate capital and/or financing resources to sustain operations
through the year ending March 31, 1997. However, there can be no assurance that
the Company will be able to obtain such additional financing on terms that are
acceptable to the Company and at the time required by the Company, or at all. If
the Company is unable to obtain such additional equity or loan financing, the
Company's financial condition and results of operations will be materially
adversely affected. Moreover, the Company's estimates of its cash requirements
to develop and operate such theaters and service any debts incurred in
connection with the development of such theaters are based upon certain
assumptions, including certain assumptions as to the Company's revenues,
earnings and other factors, and there can be no assurance that such assumptions
will prove to be accurate or that unbudgeted costs will not be incurred. Future
events, including the problems, delays, expenses and difficulties frequently
encountered by similarly situated companies, as well as changes in economic,
regulatory or competitive conditions, may lead to cost increases that could have
a material adverse effect on the Company and its expansion and development
plans. The Company used a substantial portion of its available cash to purchase
the Chula Vista 6 in August 1995 but obtained mortgage financing in January 1996
for part of the purchase price of such complex. If the Company is not successful
in obtaining loans or equity financing for future developments, it is unlikely
that the Company will have sufficient cash to open additional theaters.
The Company recently has financed certain expansion activities through
the private placement of debt instruments convertible into shares of its common
stock. In order to induce parties to purchase such securities, the instruments
or convertible into common stock of the company at a conversion price that is
significantly lower than the price at which the Company's common stock is
trading. The Company believes that because of its history of operating losses,
limited equity, and rapid growth plans, it has limited options in acquiring the
additional debt and/or equity the Company may issue debt and/or equity
securities, or securities convertible into its equity securities, on terms that
could result in substantial dilution to its existing shareholders. The Company
believes that in order to raise needed capital, it may be required to issue debt
or equity securities convertible into common stock at conversion prices that are
significantly lower than the current market price of the company's common stock.
In addition, certain potential investors have indicated that they will require
that the conversion price adjust based on the current market price of the
Company's Common Stock. In the event of a significant decline in the market
price for the Company's Common Stock, such a conversion feature could result in
significant dilution to the Company's existing shareholders. In addition, the
Company has issued securities in offshore transactions pursuant to Regulation S,
promulgated by the Securities and Exchange Commission, and may do so in the
future. Because the purchasers of such securities are free to sell the
securities after holding them for a minimum of 40 days pursuant to Regulation S,
sales of securities by such holders may adversely impact the market price of the
Company's Common Stock.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $509,336, $1,551,002, $2,086,418, and
$638,585 in the fiscal years ended March 31, 1993, 1994, 1995 and 1996,
respectively. There can be no assurance as to when the Company will be
profitable, if at all. Continuing losses would have a material detrimental
effect on the liquidity and operations of the Company.
As of March 31, 1996, the Company has net operating loss ("NOL")
carryforwards of approximately $3,500,000 and $1,700,000 for Federal and
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California income tax purposes. The Federal NOLs are available to offset future
years taxable income and expire during the year ended March 31, 2006 through the
year ending March 31, 2010, while the California NOLs are available to offset
future years taxable income and expire during the year ending March 31, 1998
through the year ending March 31, 2001. The utilization of these NOLs could be
limited due to restrictions imposed under federal and state laws upon a
change in ownership.
At March 31, 1996, the Company has total deferred income tax assets of
approximately $1,476,000. Such potential income tax benefits, a significant
portion of which relates to NOLs discussed above, have been subjected to a 100%
valuation allowance since realization of such assets is not more likely than not
in light of the Company's recurring losses from operations.
On March 1, 1996, the Company borrowed $500,000 from a bank. The loan
bears interest at two points over prime (currently 10.25%) and is due on April
1, 2003. The Company must maintain certain ratios and cannot pay any dividends.
The loan is secured by all the Company's personal property and life insurance
policies on the lives of Messrs. Ellison, Jr. and Grossberg. Further, Messrs.
Ellison, Jr., Grossberg and Seheult guarantee the loan.
The Company's largest creditor is Pacific Concessions, Inc, ("Pacific
Concessions") which has a number of outstanding loans to the Company having an
aggregate principal amount of $1,024,700 as of March 31, 1996. Each of such
loans bears interest at the prime rate plus 2% and is secured by substantially
all of the assets of the Company. Principal and interest on the loans are paid
in monthly installments which totals approximately $25,700 for all of the loans.
Pacific Concessions has contracted with the Company to provide certain
concession equipment and supplies. The loans by Pacific Concessions to the
Company are generally secured by the Company's concession and projection
equipment. Pursuant to the terms of the Company's loan agreements with Pacific
Concessions, an event of default is defined to include, among other things, any
failure by the Company to make timely payments on its loans from Pacific
Concessions. In the event that an event of default occurs under such loan
agreements, Pacific Concessions has certain remedies against the Company in
addition to those afforded to it under applicable law, including, but not
limited to, requiring the Company to immediately pay all loan amounts due to
Pacific Concessions, requiring the Company to sell, liquidate or transfer any of
its theaters and related property to third parties in order to make timely
payments on its loans, and setting off any rents or other payments owed to the
Company against payments under Pacific Concessions' loans. If the Company were
to default under any of its agreements with Pacific Concessions, and if Pacific
Concessions enforced its rights thereunder, the Company would be materially
adversely, affected.
Seasonality and Inflation
The Company's revenues have been seasonal, coinciding with the timing of
major releases of motion pictures by the major distributors. Generally, the most
marketable motion pictures have been released during the summer and the
Thanksgiving through year-end holiday season. The unexpected emergence of a hit
film during other periods can alter the traditional trend. The timing of such
releases can have a significant effect on the Company's results of operations,
and the results of one quarter are not necessarily indicative of results for
subsequent quarters.
During the past few years, inflation in the United States has been
relatively stable. Should the American economy again experience double-digit
inflation rates, as was the case in the past, the Company's results of
operations may be adversely affected due to lower admission revenues and higher
expenses.
New Accounting Standards
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Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company is in the process of analyzing the impact of this
statement and does not believe that it will have a material impact on the
Company's financial position or results of operations. The Company anticipates
adopting the provisions of the statement for fiscal year 1997.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," established financial accounting and reporting
standards for stock-based employee compensation plans and certain other
transactions involving the issuance of stock. The Company is in the process of
analyzing the impact of this statement and anticipates adopting the provisions
of the statement for fiscal year 1997.
BUSINESS
General
The Company develops, owns and operates multi-screen, primarily first-run
movie theater locations in Southern California. The Company currently operates
five theaters having a total of 44 screens in San Diego and Riverside Counties
in Southern California. Construction of the Company's first theater, an eight
screen leased theater complex at the Mission Market Place Shopping Mail in
Oceanside, California, was completed in November 1991. In May 1992, the Company
leased the Galaxy Six Cinemas in Bonsall, California. In May 1993, the Company
began leasing the Chula Vista 10, a ten screen theater complex in Chula Vista,
California. The Company acquired a United Artists theater in Chula Vista,
California, a 6 screen complex, in August, 1995. The Company opened a leased 14
screen theater complex in Riverside, California in March 1996. The Company has
entered into agreements pursuant to which it has agreed to develop a 10 screen
theater complex in Perris, California, develop a 10 screen theater complex in
Riverside, California, develop a 9 screen theater complex in Chula Vista,
California and develop a 10 screen theater complex in Thousand Oaks, California.
In addition, CinemaStar Luxury Theaters, S.A. de C.V., a 75% owned subsidiary of
the Company, is developing a leased 12 screen theater in Guadalajara, Mexico and
a leased 10 screen theater in Tijuana, Mexico.
The Company has pursued a strategy of selectively developing and leasing
multi-screen theaters. In evaluating theaters, the Company attempts to locate
sites in which it believes it can achieve a dominant position as the sole or
leading exhibitor in the targeted film licensing zones. A film licensing zone (a
"film zone") is a geographic area established by film distributors, generally
encompassing a radius of from three to six miles in metropolitan and suburban
markets (depending primarily upon population density), in which a given film is
allocated to only one theater. Thirty of the Company's 44 screens are located in
film zones in which it presently is the only exhibitor. By developing theaters
in films zones in which there are a limited number of theaters, the Company
believes it is able to select the most desirable films from, and negotiate more
effectively with, motion picture distributors that supply the Company's theaters
with films. Film zones are designated in the sole discretion of film
distributors and may be changed at any time for a variety of reasons, most of
which are outside the Company's control.
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The Company believes that the locations of its theaters, as well as its
high-quality sound systems, state-of- the-art projection equipment, luxurious
appointments, such as roomy, comfortable seats and spacious seating
configurations, and a carefully selected and trained staff which emphasizes
service, provide patrons with an enjoyable movie-going experience. The Company's
theater complexes typically contain auditoriums having 120 to 390 seats, which
provide the Company the flexibility to adjust its screening schedules by
shifting films from larger to smaller auditoriums within the same complex in
response to audience demand. The Company expects that its future growth will be
dependent upon its ability to develop theaters in desirable locations, although
it may consider strategic acquisitions of existing theaters or theater chains.
The motion picture exhibition industry is highly competitive, particularly
with respect to licensing films, attracting patrons and locating new theater
sites. Many of the Company's competitors, including United Artists Theaters,
Pacific Theaters and Mann Theaters, each of which operates one or more theaters
in the same geographic vicinity as the Company's current theaters, have been in
existence longer, are better established in the markets in which the Company's
theaters are or may be located and are better capitalized than the Company.
Competition can also come from other sources such as cable television and video
tapes. The ability of the Company to operate successfully depends on a number of
factors, the most important of which is the availability of marketable motion
pictures. Although the Company believes it can favorably compete with respect to
the licensing of films, poor relationships with film distributors, a disruption
in the production of motion pictures or a poor commercial success of motion
pictures booked by the Company would have a material adverse effect upon the
Company's business and results of operations. See "Business -- Film Licensing"
and "Business--- Competition."
The Company conducts a portion of its business through CinemaStar Luxury
Cinemas, Inc., a California corporation and a wholly-owned subsidiary of the
Company which manages the Chula Vista 10. In addition, in July 1994, certain
officers and directors of the Company contributed to the Company their 60%
ownership interest in CinemaStar Luxury Theaters, S.A. de C.V., a Mexican
corporation which is in the process of opening two theater complexes.
Overview of Movie Exhibition Industry
Participants in the domestic motion picture exhibition industry vary
substantially in size, from small independent operators of single screen
theaters to large national chains of multi-screen theaters, many of which are
affiliated with entertainment conglomerates. In an effort to achieve greater
operating efficiencies, many theater operators have emphasized the development
of multi-screen theater complexes over the past decade, as evidenced by a
gradual increase in the total number of screens in the United States as well as
an increase in the average number of screens per location.
Theatrical motion picture exhibition is typically the initial release
vehicle for filmed entertainment. However, the motion picture exhibition
industry faces competition from a number of motion picture exhibition delivery
systems. In recent years, alternative motion picture exhibition delivery systems
have been developed for the exhibition of filmed entertainment, including cable
television, direct satellite television, video cassettes and pay-per-view.
Management believes that the emergence of these and other new forms of home
entertainment has not adversely affected theater admissions; as evidenced by the
relatively stable motion picture attendance patterns over the past ten years.
Annual U.S. theater attendance during this period has ranged from
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approximately 1.0 billion to 1.2 billion. However, there can be no assurance
that new or alternative forms of entertainment or motion picture delivery
systems will not adversely impact motion picture attendance in general or at the
Company's theaters in particular. Movie theaters also face competition from
other forms of entertainment competing for the public's leisure time and
disposable income.
Traditionally, the motion picture industry's largest producers and
distributors have been the seven major studios (Paramount, Disney/Touchstone,
Warner Brothers, Columbia/Tri-Star, Universal, 20th Century Fox and MGM/UA).
Since 1989, films distributed by these companies typically have accounted for
between approximately 84% and 96% of annual U.S. admissions revenues. No single
one of the seven major studios dominates the film distribution market.
Disruption in the production of motion pictures by the major studios and/or
independent producers or poor commercial success of motion pictures would have a
material adverse effect upon the Company's business and results of operations,
in June 1996, Disney announced plans to distribute significantly fewer films in
the future than they are presently distributing. Other distributors may also
produce fewer films.
In licensing films, film distributors typically establish geographic film
licensing zones and allocate each available film to one theater within that
zone. As a result, the ability of motion picture exhibitors to maintain good
working relationships with each of the major distributors is an important factor
in the success of such exhibitor. The Company believes that it has good working
relationships with each of the major motion picture distributors. See "Business
- -- Film Licensing."
The motion picture exhibition industry tends to be seasonal, as major film
distributors have generally released the films expected to the greatest
commercial appeal during the summer and the Thanksgiving through the year-end
holiday season. However, the Company believes that this seasonality has been
reduced in recent years as studios have begun to release major motion pictures
somewhat more evenly throughout the year.
Business Strategy
The Company believes that the following characteristics are the key
elements of its operating strategy:
Identify Favorable Target Markets. The Company attempts to target markets
in which it believes it can achieve a dominant position as a leading motion
picture exhibitor. All of the Company's forty-four screens are currently located
in film licensing zones in which it is the only exhibitor and the Company
believes it is currently one of the dominant exhibitors in the remaining film
zone in which it currently operates. The Company believes that a dominant market
position will enable it to achieve a significant competitive advantage with
respect to film bookings. In addition, the Company attempts to identify
development sites in areas having economic and demographic trends that are
favorable to increased motion picture attendance.
Develop Multi-Screen Theaters. All of the Company's current and proposed
screens are located in multi- screen theaters. By pursuing a multi-screen
strategy, the Company believes it is able to reduce its dependence on any single
film, more effectively respond to demand by adjusting its screening schedules to
respond to attendance increases or decreases during the release life of a given
film, and achieve operating efficiencies through staggered film starts that
enable the Company to reduce the amount of staffing required to show its films.
Focus on Patron Satisfaction. The Company attempts to develop and operate
conveniently located, high quality facilities that offer a wide variety of
films. To enhance the movie going experience, the Company typically invests in
high-quality sound and projection equipment, luxurious appointments and a
carefully selected and trained staff which emphasizes service.
Theater Operations
Development of Theaters. The Company generally oversees the design,
development and construction of the theaters that it leases. In this regard, the
Company's primary concerns are to identify potential theater sites
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in which it believes it will be the sole or leading exhibitor in the target film
zone and to develop and/or acquire such sites at a reasonable cost. Other
factors considered by the Company in the selection of a potential theater site
include the size and demographics of the surrounding population, the
accessibility and visibility of the theater site and economic trends in the
surrounding community.
Once a potential theater site has been selected and the Company determines
that it wishes to develop such site, the Company negotiates and enters into a
lease contract with the owner of the undeveloped property Pursuant to the terms
of the lease contract, the property owner advances to the Company a negotiated
estimate of the construction costs for the development. Developments typically
include the Company's theater as the "anchor" tenant. but include other retail
or commercial space as well.
Once a lease, basic design and construction budget have been negotiated,
the Company, through an independent construction project manager, oversees the
design, construction and development of the Company's theater. The Company is
responsible for completing construction of the theater project within the
negotiated construction budget. In the event that the construction budget is not
sufficient, the Company is required to fund any shortfall. Similarly, in the
event that the Company is able to develop a site for less than the construction
budget, any excess funds are retained by the Company.
By directly overseeing the construction and development of its theaters,
the Company believes it is able to negotiate favorable lease terms while
retaining control over the quality and timing of construction. However, as a
developer of theater properties, the Company is subject to many of the risks
inherent in the development of real estate, including the risk that the
construction funds advanced by the property owner will be insufficient to pay
for the costs of construction. Other risks associated with the development and
construction of theaters include the effects of governmental restrictions or
changes in federal, state or local laws or regulations, strikes, adverse
weather, material shortages and increases in the costs of labor and materials.
There ran be no assurance that the Company will be able to successfully complete
any theater development in a timely manner or within its proposed budget.
Additional Revenue Sources. In addition to revenues from box office admissions,
the Company receives revenues from concession sales. Concession sales typically
constitute approximately 27% to 32% of the Company's revenues for a given fiscal
year. During fiscal 1995 and 1996, concession sales constituted 29.4% and 27.9%
of the Company's revenues, respectively. The Company's theaters offer a wide
range of concession choices. The Company has entered into a long-term concession
agreement with Pacific Concessions, Inc. for The Mission Market 8, Chula Vista
10, and Bonsall Galaxy 6 theaters. Pursuant to the terms of these agreements,
Pacific Concessions, Inc. installs and supplies counters, equipment, paper and
food items in a given theater, while the Company provides the concession space
and employees to operate the concession stands. The agreements with Pacific
Concessions, Inc. provide that the Company will receive approximately 60% of the
gross concession revenues generated at a given theater and Pacific Concessions,
Inc. receives the remainder. The concession agreements have terms ranging from
eight to ten years and may be terminated by the Company prior to the expiration
of the term upon payment of an early termination fee equal to 7.5% of the
average monthly net concession sales multiplied by the number of months
remaining in the term, less six months. The Company operates the concessions at
the other theaters.
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Video games in certain locations were leased from third parties on a
short-term basis and located in the lobby area of the Company's theaters. For
the leased games half of all revenues collected are given to the lessor of the
machines. In May of 1995 the Company terminated the third party involvement for
its Mission Market 8 location and purchased video games, skill games, and a
photo booth to replace the leased video games. At the Mission Market 8 location
the Company now receives all of the proceeds which must now cover video game
purchases and maintenance of the equipment. The Company intends in the future to
purchase its own machines for all present and future locations. Video games do
not constitute a significant portion of the Company's revenues. During fiscal
1995 and 1996, revenues from video games were $55,455 (0.6% of total revenues)
and $181,652 (1.6%), respectively.
Advertising and Marketing
The Company relies upon advertisements and movie schedules published in
newspapers to inform its patrons of film selections and show times. Primary
television, radio and print advertising campaigns for major film releases are
carried out and paid for by film distributors. The Company also participates in
national "co-op" advertising with all major film distributors. In "co-op"
advertising, the Company and a film distributor share the cost of advertising
for a feature film that also advertises that the film is showing at one or more
of the Company's theaters. The Company's theaters also show previews of coming
attractions and films already playing at the Company's theaters in the same
market area.
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In connection with the opening of a new theater, the Company utilizes a
variety of promotional programs to create public awareness of the theater. Such
promotional programs generally include discounted tickets and concession
programs as well as more traditional printed advertising.
Film Licensing
The Company licenses films from distributors on a film-by-film and
theater-by-theater basis. Prior to negotiating for a film license,
representatives of the Company generally preview and evaluate upcoming films on
the basis of cast, director, plot, performance of similar films, estimated film
rental costs and expected Motion Picture of America rating. The Company's
success in licensing a given film depends to a large extent upon its knowledge
of trends and historical film preferences of the residents in markets served by
the Company's theaters, as well as on the availability of commercially
successful motion pictures. The Company negotiates and obtains film licenses
through a film booking arrangement with Alan Grossberg, a director and officer
of the Company. See "Certain Transactions."
Films are licensed from the major film distributors and from independent
film distributors that generally distribute films for smaller production
companies. Film distributors typically establish geographic film licensing
zones, generally encompassing a radius from three to six miles in metropolitan
and suburban markets (depending primarily on population density) ("film zones"),
and allocate each available film to one theater within that zone. The Company
generally attempts to locate its theaters in film zones in which it is the sole
or one of a few exhibitors, thereby permitting the Company to exhibit many of
the most commercially successful films in these zones. The Company believes that
30 of its 44 screens are located in film zones in which it is the sole
exhibitor, and that the Ultraplex 14 at Mission Grove is the leading theater in
its film zone.
In film zones where the Company is the sole exhibitor, film licenses for
the Company are generally obtained by the Company selecting a film from among
those offered and negotiating directly with the distributor. In film zones where
there may be competition, a distributor will generally either require the
exhibitors in the zone to bid for a film or will allocate films among the
exhibitors in the film zone. When films are licensed under the allocation
process a distributor will choose which exhibitor is offered a movie and then
that exhibitor will negotiate film rental terms directly with the distributor.
Over the past several years, distributors have generally used the allocation
rather than bidding process and exhibitors compete for licenses based upon the
exhibition fees to be paid. The Company currently does not bid for films in any
of its markets, although it may be required to do so in the future.
The Company predominantly licenses "first run" films. If a film has
substantial remaining potential following its first run, the Company may license
it for a "second run." Second runs enable the Company to exhibit a variety of
films during periods in which there are few new releases. Film distributors
establish second run availability on a national or market-by-market basis after
the release in first run theaters and generally permit each theater within the
market to exhibit such films.
Film licenses entered into in either a negotiated or bidding process
typically specify rental fees based on the higher of a gross receipts formula or
theater admissions revenue formula. Under a gross receipts formula, the
distributor receives a specified percentage of box office receipts from the
licensed film with the percentage declining over the term of the film run. First
run film rental fees usually begin at approximately 70% of box office receipts
for the licensed film and gradually decline, over a period of four to seven
weeks, to as low as 30% of box office receipts. Second run film rental fees
typically begin at 35% of box office receipts for the licensed film and often
decline to 30% of box office receipts after the first week. Under a theater
admissions revenue formula (commonly known as a "90/10" clause), the distributor
receives a specified percentage (i.e.,
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90%) of the excess of box office receipts for a given film over a negotiated
allowance for theater expenses. In addition, if the distributor deems a film to
be extremely promising, the Company may be required to make refundable advance
payments of film rental fees in order to obtain a license for a film. Although
generally not specifically contemplated by the provisions of film licenses, the
terms of film licenses often are adjusted or renegotiated subsequent to the
initial release of the film.
The Company's business is dependent upon the availability of marketable
motion pictures and its relationships with distributors. Many distributors
provide first run movies to the motion picture exhibition industry; however,
distribution has been historically dominated by seven distributors (Warner
Brother, Paramount, 20th Century Fox, Universal, Disney/Touchstone, MGM/UA and
Columbia/Tri-Star) which, since 1989, have typically accounted for well over 75%
of domestic admission revenues and virtually every one of the top grossing films
in a given year. No single one of the seven major distributors dominates the
market. Disruption in the production of motion pictures by the major studios
and/or independent producers, poor commercial success of motion pictures or poor
relationships with distributors would have a material adverse effect upon the
Company's business and results of operations. In June 1996, Disney announced
plans to distribute significantly fewer films in the future than they are
presently distributing. Other distributors may also produce fewer films.
Competition
The motion picture exhibition industry is highly competitive, particularly
with respect to film licensing including terms, the seating capacity, location
and prestige of an exhibitor's theaters, the quality of projection and sound
equipment at the theaters and the exhibitor's ability and willingness to promote
the films. Competition for patrons is dependent upon factors such as the
availability of popular films, the location of theaters, the comfort and quality
of theaters and ticket prices. The Company believes that it competes favorably
with respect to each of these factors.
Participants in the domestic motion picture exhibition industry vary
substantially in size, from small independent operators of a single screen
theater to large national chains of multi-screen theaters affiliated with
entertainment conglomerates. Many of the Company's competitors, including United
Artists Theaters, Pacific Theaters and Mann Theaters, have been in existence
significantly longer than the Company and are both better established in the
markets where the Company's theaters are or may be located and are better
capitalized than the Company.
Many of the Company's competitors have established, long-term
relationships with the major motion picture distributors (Paramount,
Disney/Touchstone, Warner Brothers, Columbia/Tri-Star, Universal, 20th Century
Fox and MGM/UA), who distribute a large percentage of successful films. Although
the Company attempts to identify film licensing zones in which there is no
substantial current competition, there are no significant barriers to entry in
the motion picture exhibition industry and there can be no assurance that
competition will not develop theaters in the same film zone or geographic
vicinity as the Company's theaters.
The Company believes that there is a growing trend in the motion picture
exhibition industry toward larger, multiscreen theater complexes having as many
as 20 screens which are part of larger family entertainment centers offering
both traditional motion picture entertainment and other forms of family
entertainment for its patrons. Certain of the Company's competitors have sought
to increase the number of theaters and screens in operation. Such increase may
cause certain markets to become over-screened, resulting in a negative impact on
the earnings of the theaters involved, including the Company's theaters in those
markets.
Future advancements in motion picture exhibition technology and equipment
may result in the development of state-of-the-art theaters by the Company's
competitors which may make the Company's current theaters obsolete. There can be
no assurance that the Company will be able to incorporate such new technology or
equipment, if any, into its existing or future theaters,
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In recent years, alternative motion picture exhibition delivery systems
have been developed for the exhibition of filmed entertainment, including cable
television, direct satellite television, video cassettes and pay- per-view.
While the impact of such delivery systems on movie theaters is difficult to
determine precisely, there can be no assurance that they will not adversely
impact attendance at the Company's theaters. Movie theaters also face
competition from other forms of entertainment competing for the public's leisure
time and disposable income.
Government Regulation
The distribution of motion pictures is in large part regulated by federal
and state antitrust laws and has been the subject of numerous antitrust cases.
The Company has never been a party to any of such cases but its licensing
operations are subject to decrees issued in connection with such cases. Consent
decrees resulting from these cases, which predate the formation of the Company,
bind certain major film distributors and require the films of such distributors
to be offered and licensed to exhibitors, including the Company, on a
film-by-film and theater-by-theater basis. Consequently, exhibitors cannot
assure themselves of a supply of films by entering into long-term arrangements
with the major distributors, but must negotiate for licenses on a film-by-film
and theater-by-theater basis.
The federal Americans with Disabilities Act (the "ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. The ADA became effective as to public accommodations in January 11,
1992 and as to employment in July 1992. The Company designs its theaters in
development so that they are in conformity with the ADA and it believes that its
existing theaters are in substantial compliance with all currently applicable
regulations relating to accommodations for the disabled. The Company intends to
comply with future regulations relating to accommodating the needs of the
disabled and the Company does not currently anticipate that such compliance will
have a material adverse effect on the Company.
The Company's theater operations are also subject to federal, state and
local laws governing such matters as wages, working conditions, citizenship and
health and sanitation requirements and licensing. A significant portion of the
Company's employees are paid at the federal Minimum Wage and, accordingly,
already adopted and further increases in the Minimum Wage would increase the
Company's labor costs.
In connection with the construction of its theaters, the Company, its
contractors or landlords will be subject to the building permit and other
requirements of local zoning and other laws and regulations. The Company does
not anticipate that compliance with such laws and regulations will have a
material adverse effect on its business.
Employees
As of June 6, 1996, the Company employed 258 persons, of which 35 were
full-time and 223 were part-time employees. Of the Company's employees, 17 are
corporate personnel, 18 are theater management personnel and the remainder are
hourly personnel. The Company is not subject to any union or collective
bargaining agreements and considers its employee relations to be good.
Properties
The Company currently operates five theaters with an aggregate of 44
screens in San Diego and Riverside Counties, in Southern California. Each of the
Company's theaters is a multi-screen facility. Multi-screen theaters enable the
Company to offer a diverse selection of films attractive to several segments of
patrons residing within the drawing area of a particular theater. Varied
auditorium seating capacities within the same theater enable the Company to
reduce film rental costs, which generally decrease over the length of a film's
release, by exhibiting films for a longer period by shifting films to smaller
auditoriums to meet changing attendance levels. In addition, operating
efficiencies are realized through the economics of having common box
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office, concession, projection, lobby and restroom facilities, which enable the
Company to spread certain costs, such as payroll and rent, over a higher revenue
base.
The following briefly describes each of the Company's existing theaters:
Chula Vista 10 (Chula Vista, California)--The Company considers the Chula
Vista 10 as its "flagship" theater complex. This site is a ten screen, 34,037
square foot complex located in the Chula Vista Center which has a total seating
capacity of 2,169 persons. The Chula Vista 10 contains multiple concession
stands and a computerized ticketing system. Individual theater sizes range from
162 to 390 seats. Each theater features Lucasfilm Ltd's "THX SOUND" environment,
along with six channel, digital surround-sound equipment, plush, reclining seats
with cup holders, and row spacing that is designed to allow seated patrons more
leg room as other patrons pass in front of them to reach their seats or the
aisle. The largest theater in the Chula Vista 10 complex is capable of showing
70mm film presentations as well as more traditional film formats.
The primary competition for the Chula Vista 10 is a six screen complex the
Company acquired in August 17, 1995, which is located approximately one mile
from the Chula Vista 10 and is in the same film licensing zone as the Chula
Vista 10. In addition, a six screen Mann Theaters complex and a nine screen
Pacific Theaters complex are located four miles from the Chula Vista 10, but
each is considered to be in a separate film licensing zone. It is anticipated
that by dominating the zone, and spreading available film product over sixteen
screens, the Company will be able to increase its revenues on a per screen
basis.
The Chula Vista 10 theater is leased by CinemaStar Cinemas, Inc., a
wholly-owned subsidiary of the Company, from Homart Development Co. The
performance of the lease is guaranteed by several of the Company's shareholders
and officers. The initial term of the lease is 20 years commencing May 1993, and
provides for minimum rent payments of $288,000 per year for the first year of
the lease, $576,000 per year for the next four years of the lease, $655,200 for
the next five years of the lease, $748,800 per year for the next five years of
the lease and $853,200 per year of the lease for every year thereafter until
termination. All annual rental amounts are payable in equal monthly
installments. In addition to the minimum rent payments, the lease requires
CinemaStar Cinemas, Inc. to pay 10% of its net sales at the theater (excluding
concession and certain other revenues) over a base level which increases
annually from $2,880,000 in net sales in the first year of the lease to
$8,532,000 in net sales per year in the 15th and subsequent years of the lease.
Chula Vista 6 (Chula Vista, California)--The Company acquired a six-screen
theater complex in Chula Vista, California in August 17, 1995 from United
Artists Theater Circuit, Inc. The theater is located at 320 Third Ave., Chula
Vista, CA 91910. The cost of approximately $3,192,000 was initially paid with
the cash funds of the Company. The theater consists of a six screen complex
having a total seating capacity of 1,914 persons. In addition to the theater
complex, also purchased were shops for two tenants who are currently paying an
aggregate of approximately $3,000 per month for rent. The Company has secured
mortgage financing for this theater.
Mission Marketplace (Oceanside, California)--The Mission Marketplace site
is the Company's first theater complex. The theater consists of an eight screen,
28,000 square foot complex having a total seating capacity of 1,496 persons and
it contains multiple concession stands and a computerized ticketing system.
Individual theater sizes range from 120 to 292 seats. Each theater
features Lucasfilm Ltd's "THX SOUND" environment (a state-of-the-art motion
picture sound system), along with six channel, digital surround- sound
equipment, plush seats with cup holders, and row spacing that is designed to
allow seated patrons more leg room as other patrons pass in front of them to
reach their seats or an aisle. This site also has additional office space which
serves as the Company's corporate headquarters.
The nearest first-run theater complexes to Mission Marketplace are an
eight screen Mann Theater complex and two SoCal Cinemas complexes, one with
three screens and another with four screens, as well as the Company's own Galaxy
Six Cinemas, each of which is located approximately seven miles from Mission
Marketplace. However, none of these theaters is currently considered to be
within the same film
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licensing zone as the Mission Marketplace and, as a result, the presence of
these competing theaters does not currently affect the Company's ability to
license films at this location.
The Company leases the Mission Marketplace theater complex from Pacific
Oceanside Holdings, L.P. The initial term of such lease is 20 years, expiring in
2011, with three consecutive five-year options to extend. The minimum annual
rent for the first five years of the Mission Marketplace lease is $422,000
payable in equal monthly installments. The lease provides for 15% increases in
the minimum, annual rent every five years of the lease term commencing in the
sixth year of the lease term. In addition, the Company is required to pay
additional rent of 10% of theater revenues (excluding concessions and box office
sales from certain films licensed to the Company) to the extent that such
percentage rent exceeds the minimum rent. The performance by the Company of its
obligations under the Mission Marketplace lease is guaranteed by certain
shareholders and officers of the Company.
Galaxy Six Cinemas (Bonsall, California)--This site is a six screen,
22,780 square foot complex located in the River Village Shopping Center and
having a total seating capacity of 1,344 persons. Individual theater sizes range
from 168 to 292 seats. The complex was built and the related equipment was
installed in 1991 and the lease and theater equipment were acquired by the
Company in 1992. The Galaxy Six Cinemas features Dolby sound and six channel
digital, surround-sound but does not contain plush seating, THX SOUND
environment and many of the other amenities found in the Company's other
theaters.
As is the case with the Mission Marketplace, the Galaxy Six Cinemas is
currently considered to be in its own film licensing zone. See "Business--Film
Licensing." The nearest first-run theater complex is the Company's own Mission
Marketplace complex, which is approximately seven miles away.
The Company leases the Galaxy Six Cinemas from River Village, William C.
Buster and Harold F. Alles. The initial term of such lease is 15 years
commencing March 1, 1994, with three consecutive five-year options to extend.
The minimum rent for the Galaxy Six Cinemas is $16,000 per month for the first
three years of the lease, $17,000 per month in year four of the lease term,
$18,000 per month in year five of the lease, $21,000 per month in years six
through ten of the lease and $24,000 per month in years 11 through 15 of the
lease. In addition, the Company is required to pay additional rent of 15% of box
office receipts (excluding sales from certain films licensed to the Company) and
8% of concession sales for the first five years of the lease and 10% of
concession sales thereafter. Such percentage rents are payable only to the
extent that they exceed the minimum rent payable under the lease. For the first
five years of the lease, the Company is also required to provide the landlord
with 100 free passes per month, and provide free children's movies on the first
Saturday and Sunday morning of each month.
Ultraplex 14 at Mission Grove (Riverside, California)--Pursuant to a lease
dated August 1, 1995, as amended on August 29, 1995, the Company leased from
Mission Grove Plaza, L.P. ("Mission Grove") premises consisting of 46,400 square
feet of floor area, located at the Mission Grove Plaza, in the City of
Riverside, County of Riverside, California. The initial term of the lease is 25
years, with two consecutive options to renew, each for five years. The initial
minimum monthly rent is as follows: $44,000.00 in Year 1; $48,000.00 in Year 2;
$52,000.00 in Year 3; $56,000.00 in Year 4; $60,000.00 in Years 5-10. On the
first day of the One Hundred Twenty First (121st) month, and every sixty months
thereafter, the minimum rent shall be increased by the
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<PAGE> 55
lessor of (i) Fifteen Percent (15%), or (ii) the cost of living increase for the
preceding five (5) year period. The Company shall also pay Ten Percent (10%) of
gross box office receipts (but no percentage rent paid on "90/10" films).
All of the Company's leases are triple net leases which require the
Company to pay, in addition to rent, a pro- rata share of certain taxes,
charges, expenses, and other impositions incurred by the landlord in connection
with the ownership and operation of the premises.
Proposed Theater Development. The following summarizes certain theaters
which are in development by or for the Company. There can be no assurance that
any of these theaters will be successfully completed or operated by the Company.
Thousand Oaks, California--In July 1994, the Company entered into a lease
with Newbury Park Group for a location on which a 10 screen, 33,000 square foot,
1,700 seat theater complex is to be built in Thousand Oaks, California. On May
24, 1995, the lease was amended to increase the square footage to 39,000 square
feet with seating increased to 2,000. The lease with Newbury Park Group has an
initial term of 25 years with rent payments commencing on the earlier of 90 days
after the Company commences business at the location or 210 days from the
completion of the construction, with two consecutive five-year options to
extend. The minimum monthly rent for the first year of the lease term is
$52,000. For years two through five it is $71,500; for years six through ten it
is $78,650; for years eleven through fifteen it is $86,515; for years sixteen
through twenty it is $99,492; and for years twenty one through twenty five it is
$114,416. In addition, the Company will be required to pay 10% of certain box
office revenues to the extent that such amount exceeds the minimum rent. In the
event the Company does not meet certain financial criteria as to net worth and
cash flow by July 30, 1996, the Company, at Newbury Park Group's option, will be
required to reimburse Newbury Park Group up to $60,000 for certain expenses
incurred in the development of the theater site and Newbury Park Group will have
the right to terminate the lease. The net worth and cashflow required for the
Company to meet the terms of the lease range from $14,000,000 net worth and
$400,000 annual cashflow in the case of a ground lease (in which the Company is
responsible for paying for the construction of the building comprising the
complex) to $22,000,000 net worth and $400,000 annual cashflow in the case of a
"building-to-suit" lease (in which the landlord is responsible for constructing
the building). The Company does not meet such criteria. The parties have until
July 30, 1996 to obtain construction financing. If construction financing is not
obtained by that date, either party may terminate the lease.
Chula Vista, California -- Pursuant to a ground lease dated September 5,
1995, the Company agreed to lease land in Chula Vista to build a nine screen
theater complex. The term is for fifty years with four options to extend of ten
years each. Minimum monthly rent shall be calculated as follows: $14,520 in
Years 1 and 2;
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$16,000 in Years 3 and 4; and $21,250 in Year 5 through 10; thereafter each five
years the rent will be increased by a factor of 1.1. Construction of the project
has been delayed while the Company has sought construction financing. In March
1996, the lessor delivered a notice to the company asserting that the Company
was in default in its obligations under the lease as a result of the delay in
commencing construction of the project. On June 25, 1996, the lessor advised the
Company that it had terminated the lease. The Company is reviewing the matter
with its legal counsel.
Riverside, California--Pursuant to a lease dated July 14, 1995, the
Company agreed to lease from University Village, LLC 14 (the "Village") premises
consisting of approximately 40,000 square feet located in the City of Riverside,
County of Riverside, California, adjacent to the campus of the University of
California, Riverside at the intersection of University Avenue and Interstate
215. The initial term of this lease if for a period of 25 years, with two
consecutive options to extend for five years each. Either party shall have the
right to terminate this lease upon 30 days' written notice to the other party in
the event that Village fails to enter into a Disposition and Development
Agreement for the Center in which the premises are located. The rent
commencement date shall be 180 days following delivery of a "pad" (foundation)
to the Company, and issuance of building permits for the tenant work, but in no
event later than 420 days after the date of this lease. Landlord shall
contribute for the tenant work an amount equal to $80.00 per square foot of the
ground floor area of the building. Minimum rent, payable monthly shall be
calculated as follows: $30,000.00 in Year 1; $34,000.00 in Year 2; $34,000 in
Year 3; $38,000 in Year 4; and $42,000 in Year 5. Beginning in the sixty-first
(61st) month, and continuing for sixty (60) months thereafter, the minimum rent
shall be increased by the following formula: rent as of the preceding month
times One Hundred Fifteen Percent 115%, Every sixty months thereafter, until the
end of the initial term, the minimum rent shall be increased according to the
same formula. At the option of the Village, the Company shall pay, in lieu of
minimum rent, percentage rent (annually) in the amount equal to eight percent
(8%) of box office receipts (excluding receipts for "90/10" films), plus Five
Percent (5%) of concession sales (less excluded sales and business transacted
(as defined in the lease)).
Ultraplex 10 at Perris (Perris, California)--Pursuant to a lease dated
February 15, 1996, the Company agreed to lease from The Coudures Family Limited
Partnership (the "Coudures Partnership"), premises consisting of 35,000 square
feet located at 1688 North Perris Boulevard, Perris, California 92571 (the
"Center"). The initial term is 25 years, with two consecutive options to extend,
each for five years. Construction began on the project in April, 1996 with an
expected opening date of mid-August 1996. The rent commencement date shall be
180 days after the issuance by the City of Perris of the building permits for
the construction of the theater. Initial minimum rent, which is payable monthly,
is as follows: $315,000.00 for Year 1; $378,000.00 for Year 2; $420,000.00 for
Year 3; $462,000.00 for Year 4; $525,000.00 for Year 5; for years 6 through 25
the minimum rent will be increased every fifth year during such period by the
lesser of 10% or cost of living. In addition to minimum rent, the Company shall
pay percentage rent as follows: 10% of gross Box Office receipts (excluding
90/10 films) and 6% of concession and miscellaneous income.
In addition to the foregoing projects, the Company periodically enters
into non-binding letters of intent or options for the lease of theater sites to
be developed. The Company currently has entered into such arrangements for a
twenty-four screen complex in South Gate, California. There can be no assurance
that the sites for which the Company currently has letters of intent or options
will ultimately be leased by the Company.
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Mexico--In July 1994, certain officers and directors of the Company
contributed to the Company their 60% ownership interest in CinemaStar Luxury
Theaters, S.A. de C.V., a Mexican corporation ("CinemaStar Mexico"). An
additional 15% ownership interest in CinemaStar Mexico has been returned to the
Company by a previous shareholder for consideration of payment to him on legal
fees amounting to approximately $30,000, subsequently reduced to $15,000.
CinemaStar Mexico is developing the following theater sites in Mexico .
Tijuana, Mexico -- Pursuant to a lease entered into June 14, 1996, the
Company agreed to lease premises consisting of 34,000 square feet located in
Tijuana, Mexico. The initial term is 20 years, with two consecutive options to
extend, each for five years. The Company is obligated by the lease to provide
equipment in the theater expected to cost $1,200,000. Financing is currently
being pursued. Initial minimum monthly rent is as follows: $32,300 for Year 1;
$34,000 for Year 2; $35,700 for Year 3; $37,400 for Year 4; $39,100 for Year 5;
after the sixth year the minimum rent will be increased annually in compliance
with the percentage increase that is established in the Price Index for Urban
Consumers in the City of San Diego, California from the previous year of the
mentioned price increase. Construction is expected to begin soon with an
expected opening date of December 1996.
Guadalajara, Mexico -- Pursuant to a lease entered into May 11, 1996, the
Company agreed to lease premises consisting of 40,000 square feet located in
Guadalajara, Mexico. The initial term is 20 years, with two consecutive options
to extend, each for five years. The Company is obligated by the lease to provide
equipment in the theater expected to cost $1,200,000. Financing is currently
being pursued. Initial minimum monthly rent is as follows: $42,000 for Year 1;
$44,000 for Year 2; $46,000 for Year 3; $48,000 for Year 4 and 5; on the first
day of the sixty first month, and continuing for remainder of the initial term
and any extension thereof, minimum rent shall be increased by the greater of:
two percent (2%) over the minimum rent paid the previous year, or the annual
inflation rate increase of the United States of America as determined at the end
of each calendar year. Notwithstanding any provision to the contrary, minimum
rent shall in no event be increased annually by more than three percent (3%).
Percentage rent shall be calculated at the end of each calendar year and shall
be based upon fifteen percent (15%) of box office and concession sales. If this
calculation exceeds the minimum rent already paid by the Company for the
preceding calendar year, the Company shall pay the excess. For those films, the
rental of which exceeds fifty-five percent (55%) of box office sales. Such film
rental shall not be included in any calculation of percentage rent. Construction
began in June 1996 with an expected opening date of January 1997.
Legal Proceedings
From time to time the Company is involved in routine litigation and
proceedings in the ordinary course of its business. The Company is not currently
involved in any pending litigation matters which the Company believes would have
a material adverse effect on the Company.
An Action was filed against the Company and its subsidiary by MTV
Networks, Inc., a subsidiary of Viacom International, Inc., on March 2, 1995.
The Action involved an alleged infringement of plaintiff's federally registered
trademarks NICKELODEON, NICKELODEON STUDIOS, NICK, NICK AT NITE, AND NICK JR.,
under Section 32(1) of the Lanham Act, 15 U.S.C. Section 1114(1); unfair
competition under Section 43(a) of the Lanham Act, 15 U.S.C. Section 1125(a),
unfair competition under New York State law, dilution and injury to business
reputation under N.Y. Gen. Bus. Law Section 368-d, and deceptive trade practices
under N.Y. Gen. Bus. Law Section 349. On April 27, 1995, the parties entered
into a Settlement Agreement and Release of Claims under the terms of which the
Company agreed to change its operating and legal name by deleting therefrom any
reference to the word Nickelodeon or Nick. The parties further agreed that no
damages would be paid and each would pay its own legal expense. The Company
subsequently changed its name to CinemaStar Luxury Theaters, Inc. The March 31,
1995 fiscal year financial statements include a $78,000 allowance of estimated
costs to make the change. The Company does not believe that the name change has
or will have a material adverse impact on the Company or its operations.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning the
Company's executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John Ellison, Jr. 54 President, Chief Executive Officer and Director
Alan Grossberg 45 Executive Vice President, Chief Financial Officer,
Chief Accounting Officer and Director
Jerry Willits 56 Vice President of New Development and Director
Jon Meloan 61 Secretary, General Counsel and Director
Russell Seheult, M.D., D.D.S. 44 Chairman of the Board
Walter Schlotter 45 Director
Andrew Friedenberg 41 Director
Katherine McKeever 36 Vice President of Operations
Randal D. Siville 44 Vice President of Finance and Accounting
</TABLE>
JOHN ELLISON, JR. co-founded and became a director of the Company in
April 1989 and has been its President since February 1992 and an officer since
1989. Prior to February 1992, Mr. Ellison was a Vice President of the Company.
Mr. Ellison has over 30 years of experience in the motion picture theater and
exhibition business. He has managed theater operations and expansion programs
for several theater chains and, prior to forming the Company, he owned and
operated the largest locally-owned theater chain in San Diego County, which he
sold to Edwards Cinemas in 1985.
ALAN GROSSBERG co-founded and became a director of the Company in April
1989 and has been its Executive Vice President and Chief Financial Officer since
that time, Mr. Grossberg has over 19 years of experience in theater and
entertainment management. Mr. Grossberg previously has acquired and sold several
theater and cinema complexes in San Diego County. Mr. Grossberg also owns a film
booking and licensing company which provides films bookings and related services
to the Company. See "Management--Employment and Consulting Agreements" and
"Certain Transactions."
JERRY WILLITS has been the Company's Vice President since 1992 and a
director since July 1994. For at least five years prior to joining the Company,
Mr. Willits owned and operated two theaters in San Diego County. Mr. Willits
currently serves as an officer of the Theater & Entertainment Association of
Greater San Diego.
JON MELOAN joined the Company in March 1991 as its Secretary and
General Counsel and became a director in July 1994. From 1989 to 1991, Mr.
Meloan was an independent business consultant. Prior to 1989, Mr. Meloan served
as senior counsel with Honeywell Inc. Mr. Meloan has over 22 years experience as
a corporate lawyer.
RUSSELL SEHEULT is an anesthesiologist and dental surgeon who has been
a director of the Company since June 1991 and has served as Chairman of the
Board of Directors since February 1992. Since 1993 he has operated an outpatient
dental surgery clinic in Redlands, California. For at least three years prior to
joining the dental clinic, Dr. Seheult was an anesthesiologist in Loma Linda,
California and served as head of anesthesiology at Loma Linda Hospital in Loma
Linda, California.
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<PAGE> 59
WALTER SCHLOTTER was appointed as a director of the Company in June
1995. Mr. Schlofter is currently Senior Vice President of the Greater San Diego
Chamber of Commerce, and has been the Commissioner of the San Diego Film
Commission for more than ten years. He previously worked at Columbia Pictures
Television and KPBS-TV, and has received several San Diego Emmy nominations for
work as producer on documentaries and commercials.
ANDREW FRIEDENBERG was appointed as a director of the Company in June
1995. Mr. Friedenberg is the founder and has been for over five years the
director of both the Cinema Society and the Visual Arts Foundation in San Diego,
and previously served as Chairman of La Jolla Cultural Arts Committee. Through
the Cinema Society and the Visual Arts Foundations, he has helped bring
exclusive previews of first-run movies and quality film series programs to San
Diego over the last twelve years. Mr. Friedenberg previously worked at Columbia
Pictures and United Artists. He is a member of the Academy of Motion Picture
Arts and Sciences.
KATHERINE MCKEEVER was appointed as the Company's Vice President of
Operations in June 1995. Prior to such appointment she served as Director of
Advertising and Marketing of the Company from January 1993. Prior to 1993 she
directed marketing activities for SoCal Cinemas, Inc. for over 5 years. Ms.
McKeever has also worked in advertising production and promotions for national
consumer product brands.
RANDAL D. SIVILLE has served as the Company's Vice President of Finance
and Accounting since June 1995. From January 1994 to June 1995, he served as the
Company's Controller. For six years prior to joining the Company in January
1994, Mr. Siville worked as a Certified Public Accountant with various firms in
the Los Angeles area. Mr. Siville is a Certified Public Accountant licensed in
California, as well as a Certified Management Accountant and a Certified
Internal Auditor.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of
the chief executive officer and all other executive officers of the Company
whose salary and bonus exceeded an annual rate of $100,000 during the fiscal
year ended March 31, 1996:
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<PAGE> 60
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Compensation Securities
Name and --------------------- Other Annual Underlying
Principal Position Year Salary Bonus Compensation Options/SARs
- ------------------ ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
John Ellison, Jr....................... 1996 $217,620 $ -0- $--(1) -0-
President and Chief Executive 1995 $160,792 $50,000 --(1) 88,125
Officer 1994 $115,500 -0- --(1) -0-
Alan Grossberg......................... 1996 $211,263(3) $ -0- $--(1) -0-
Chief Financial Officer and 1995 $168,939(2) $15,000 --(1) 88,125
Executive Vice President 1994 $115,500 -0- --(1) -0-
</TABLE>
- ---------------
(1) Perquisites and other personal benefits did not in the aggregate reach
the lesser of $50,000 or 10 percent of the total of annual salary
reported in this table for any named executive officer.
(2) Includes $34,500 paid to Mr. Grossberg in the year ended March 1995,
pursuant to the terms of a Film Booking Agreement pursuant to which Mr.
Grossberg has agreed to provide film booking services to the Company.
See "Management--Employment and Consulting Agreements."
(3) Includes $52,000 paid to Mr. Grossberg pursuant to the terms of a Film
Booking Agreement pursuant to which Mr. Grossberg has agreed to provide
film booking service to the Company.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective August 25, 1994, the Company entered into five-year
employment agreements with each of Messrs. Ellison, and Grossberg, pursuant to
which their salaries are $197,106 and $145,860, subject to annual increases of
10% and 12%, respectively. In addition, Messrs. Ellison and Grossberg will be
entitled to receive an annual bonus for each year of their respective
employment. Mr. Ellison and Mr. Grossberg's bonuses shall each equal five
percent of the Company's net income (before payment of income taxes or bonuses
to executive officers) over $2 million, which shall be paid quarterly based on
annualized results. In addition, if the Company has net income (before payment
of incomes taxes, but after payment of other bonuses to executive officers) in
any year over $7 million, there will be an additional payment of $500,000 to
each of Mr. Ellison and Mr. Grossberg. Each of Messrs. Ellison and Grossberg
also receive an automobile allowance of up to $650 per month. The Company has
also agreed to pay maintenance, gasoline (to the extent the usage is
business-related), and cellular telephone service for such automobile.
Additionally, the employment agreements also give Messrs. Ellison and Grossberg
the right to participate in any and all group, life, disability, income health
or accident insurance programs applicable to any personnel of the Company,
subject only to the eligibility restrictions of such programs. Messrs. Ellison
and Grossberg are also entitled, at the Company's expense, to a disability
income insurance policy covering each which provides for a monthly payment of at
least $10,000. In the event that Mr. Ellison or Mr. Grossberg is terminated or
is not reelected or appointed as a director or
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executive officer of the Company for any reason other than for an uncured breach
of his obligations under the employment agreement or his conviction of a felony
involving moral turpitude, he shall have the right to receive his annual salary
and bonus for the remainder of the original five-year term of the contract.
In August 1994, Alan Grossberg entered into a Film Booking Agreement
pursuant to which he has agreed to provide film booking and licensing services
to the Company for five years at an annual fee $52,000 per year. The contract is
assignable by Mr. Grossberg to any entity owned or controlled by Mr. Grossberg,
The Company believes that the terms of the Film Booking Agreement are at least
as favorable to the Company as would be available to the Company in a
third-party transaction.
The Company has entered into a five-year Consulting Agreement with
Russell Seheult, the Company's Chairman of the Board, pursuant to which he has
agreed to render management consulting services to the Company in exchange for a
fee of $25,000 per year.
OPTION GRANTS DURING FISCAL 1996
No stock options were granted to the officers identified in the Summary
Compensation Table during the year ended March 31, 1996 .
OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options
which were exercised during, or held at the end of, fiscal 1996 by the officers
named in the Summary Compensation Table:
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<PAGE> 62
<TABLE>
<CAPTION>
OPTION EXERCISES AND YEAR-END VALUE TABLE (1)
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END AT FISCAL YEAR END(2)
ACQUIRED VALUE -------------------------------- --------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John Ellison, Jr. 0 $0 $88,125 $0 $502,312 $0
Alan Grossberg 0 $0 $88,125 $0 $502,312 $
</TABLE>
- ---------------
(1) There were no option exercises during fiscal 1996.
(2) Valued at $8.25 per share of Common Stock.
STOCK OPTION PLAN
In July 1994, the Company adopted the Stock Option Plan (the "Option
Plan") under which a maximum of 587,500 shares of Common Stock of the Company
may be issued pursuant to incentive and non-qualified stock options granted to
officers, key employees or consultants of the Company.
The Option Plan is administered by the Board of Directors or, in the
discretion of the Board of Directors, by a committee of not less than two
individuals, each of whom must be a disinterested member of the Board of
Directors, with authority to determine employees to whom options will be
granted, the timing and manner of grants of options, the exercise price, the
number of shares covered and the terms of options, and all other determinations
necessary or advisable for administration of the Option Plan.
The purchase price for the shares subject to any option granted under
the Option Plan shall not be less than 100% of the fair market value of the
shares of Common Stock of the Company on the date the option is granted. No
option shall be exercisable after the earliest of the following: the expiration
of 10 years after the date the option is granted; three months after the date of
the optionee's employment (if the optionee is an employee of the Company)
terminates if termination is for any reason other than permanent disability or
death; or one year after the date the optionee's employment (if the optionee is
an employee of the Company) terminates, if termination is a result of death or
permanent disability. Unless sooner terminated by the Board of Directors, the
Option Plan expires on December 31, 2003.
COMPENSATION OF DIRECTORS
Directors prior to June 3, 1995 received no cash compensation for
serving on the Board of Directors. The Board of Directors at the June 3, 1995
Board Meeting approved payment of $1,000 per Board Member for attending each
Board Meeting, effective with the June 3, 1995 meeting. It is anticipated there
will be not less than four Board Meetings per year to coincide with review and
approval of quarterly and annual financial statement filings.
In the fiscal years ended March 31, 1996 and 1995, Russell Seheult
received $26,000 and $20,500 in consulting fees. In August 1994, the Company
entered into a five year consulting agreement with Mr. Seheult pursuant to which
Mr. Seheult is entitled to receive $26,000 per year. In addition, in July 1994,
Mr. Seheult was granted an option to purchase 176,250 shares of Common Stock
under the Company's Stock Option Plan at a price of $2.55 per share.
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See "Management--Employment and Consulting Agreements" for a
description of the Film Booking Agreement between the Company and Alan
Grossberg.
The Company has entered into a Finders Fee Agreement, dated September
11, 1993, with Jon Meloan, the Company's General Counsel and Secretary, pursuant
to which Mr. Meloan is entitled to receive a fee of 4.5% of all funds raised
through Mr. Meloan's sources. The Finders Fee Agreement was terminated on May
24, 1995. No fees were paid to Mr. Meloan pursuant to such agreement. In March
1995, the Company entered into a finder's fee agreement with Robert Bailey
pursuant to which the Company agreed to pay a fee of 5% to Mr. Bailey for all
funds raised through from Mr. Bailey's sources. Mr. Bailey has agreed to pay Jon
Meloan 32% of any fees Mr. Bailey receives from the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS
Pursuant to provisions of the California General Corporation Law, the
Articles of Incorporation of the Company, as amended, include a provision which
eliminates the personal liability of its directors to the Company and its
shareholders for monetary damage to the fullest extent permissible under
California law. This limitation has no effect on a director's liability (i) for
acts or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or missions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing his or her duties,
of a risk of a serious injury to the Company or its shareholders, (v) for acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its shareholders, (vi)
under Section 310 of the California General Corporation Law (concerning
contracts or transaction between the Company and a director) or (vii) under
Section 316 of the California General Corporation Law (concerning directors'
liability for improper dividends, loans and guarantees). The provision does not
eliminate or limit the liability of an officer for any act or omission as an
officer, notwithstanding that the officer is also a director or that his
actions, if negligent or improper, have been ratified by the Board of Directors.
Further, the provision has no effect on claims arising under federal or state
securities laws and does not affect the availability of injunctions and other
equitable remedies available to the Company's shareholders for any violation of
a director's fiduciary duty to the Company or its shareholders.
The Company's Articles of Incorporation authorize the Company to
indemnify its officers, directors and other agents to the fullest extent
permitted by California law, exclusive of rights provided through bylaw
provisions, agreements, vote of shareholders or disinterested directors or
otherwise. The Company's Articles of Incorporation also authorize the Company to
indemnify its officers, directors and agents for breach of duty to the
corporation and its shareholders through bylaw provisions, agreements or both,
in excess of the indemnification otherwise permitted under California law,
subject to certain limitations. The Company has entered into indemnification
agreements with all of its directors and executive officers whereby the Company
will indemnify each such person (an "indemnitee") against certain claims arising
out of certain past, present or future acts, omissions or breaches of duty
committed by an indemnitee while serving in his employment capacity. Such
indemnification does not apply to acts or omissions which are knowingly
fraudulent, deliberately dishonest or arise from willful misconduct.
Indemnification will only be provided to the extent that the indemnitee has not
already received payments in respect of a claim from the Company or from an
insurance company. Under certain circumstances, such as a successful defense of
a claim or when allowed pursuant to controlling case law, such indemnification
(including reimbursement of expenses incurred) will be allowed for liability
arising under the Act.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
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The Company intends to purchase a directors' and officers' liability
policy insuring directors and officers of the Company.
"KEY-MAN" LIFE INSURANCE
The Company maintains "key-man" life insurance in the amount of
$1,250,000 on the lives of each of Mr. Ellison, Mr. Seheult and Mr. Grossberg,
with respect to which the Company is the sole beneficiary.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of July 1, 1996 as to (a) each
director, (b) each executive officer identified in the Summary Compensation
Table above, (c) all officers and directors of the Company as a group, and (d)
each person known to the Company to beneficially own five percent or more of the
outstanding shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
NAME AND ADDRESS (1) SHARES (2) OWNERSHIP (3)
- -------------------- ---------- -------------
<S> <C> <C>
Directors:
John Ellison, Jr. 1,302,725 20.72%
Alan Grossberg 1,202,725 19.13%
Russell Seheult 1,390,850 21.81%
Jerry Willits 266,815 4.30%
Jon Meloan 16,929 *
Andrew Friedenberg 1,720 *
Walter Schlotter 0 0
Non-Director Employees:
Katherine McKeever 2,520 *
Randal D. Siville 2,525 *
All directors and executive officers as
a group (9 persons) 4,187,289 65.96%
</TABLE>
- ------------------
* Less than 1%
(1) The address of Messrs. Ellison, Grossberg, and Seheult is c/o the Company,
431 College Boulevard, Oceanside, California 92057.
(2) The number of shares each person owns is determined by assuming the
exercise of options, warrants and Redeemable Warrants, that are held by
such person and which are exercisable within 60 days.
(3) Shares of Common Stock which a person has the right to acquire within 60
days are deemed outstanding in calculating the percentage ownership of the
persons, but not deemed outstanding as to any other person. Percentages
are calculated based on 6,200,000 shares of Common Stock outstanding.
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CERTAIN TRANSACTIONS
John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry
Willits with respect to the lease of the Chula Vista 10, and Eileen Seheult the
former wife of Russell Seheult, with respect to certain lease and bank
obligations incurred or guaranteed by Mr. and Ms. Seheult on behalf of the
Company) have personally guaranteed, on a joint and several basis, all
significant obligations of the Company pursuant to its theater leases and
certain loans. Certain of these obligations of the Company are secured by real
or personal property pledged by such individuals.
Messrs. Seheult, Ellison and Grossberg have from time to time utilized
their personal credit resources on behalf of the Company by personally borrowing
funds and then lending those funds to the Company as demand loans. The Company
believes that the terms of such loans, as described below, are substantially
more favorable to the Company than those that otherwise would have been
available to the Company. The following summarizes loan transactions which were
entered into or which the Company was obligated to pay within the last two
completed fiscal years.
In 1991, Mr. Seheult personally borrowed $196,000 from Great
Western Bank and in turn loaned all of the loan proceeds to
the Company. The loan to Mr. Seheult is secured by a first
trust deed on a single family residence owned by Mr. Seheult.
The loan is amortized over 30 years at an interest rate of 7%
per annum, with monthly payments of principal and interest of
$1,304. The Company made monthly payments of principal and
interest directly to Great Western Bank on Mr. Seheult's
behalf. As payments were made to the bank, the Company's
obligation to Mr. Seheult was reduced. The entire balance of
principal and interest on the funds loaned to the Company by
Mr. Seheult was repaid in October 1994.
In 1992, Mr. Seheult advanced $80,000 of funds to the Company
out of the proceeds of a personal line of credit. The advances
were unsecured, bore interest at the rate of 5.25% per annum
and are payable on demand. The Company has made several
payments of principal and interest on the borrowing directly
to the lender on Mr. Seheult's behalf. As payments are made to
the lender, the Company's obligation to Mr. Seheult is
reduced. As of March 31, 1995 the outstanding balance of
principal and interest on the line of credit had been repaid
in full.
On June 30, 1993, Mr. Ellison obtained a personal unsecured
line of credit of $100,000 from a local bank. Mr. Ellison drew
$70,000 of the line and, in turn, loaned the funds to the
Company. The line of credit bore interest at a rate of prime
plus 4%. The Company has made monthly payments of principal
and interest directly to the lender since the loan date. As of
March 31, 1995 the outstanding balance of principal and
interest on this line of credit had been repaid in full.
The Company operates a portion of its business through CinemaStar, Inc.
("Cinemas"). Prior to July 1994, the Company owned 80% of the outstanding common
stock of Cinemas. The remaining 20% of the common stock was owned by Jerry
Willits, an officer of the Company. In July 1994, Mr. Willits and the Company
entered into an agreement pursuant to which Mr. Willits exchanged his shares of
Cinemas for 255,065 shares of Common Stock.
In January 1994, Messrs. Seheult, Ellison, Grossberg and Willits and
certain third parties unaffiliated with the Company formed Nickelodeon Cinemas
Internacionales, S.A. de C.V., a Mexican corporation. In May 1995 the name was
changed to CinemaStar Luxury Theaters, S.A. de C.V. ("CinemaStar Mexico"), to
develop theaters in Mexico under the name "CinemaStar." CinemaStar Mexico has
not yet commenced operations. In July 1994, Messrs. Seheult, Ellison, Grossberg,
and Willits contributed, for no additional consideration. 18.6%, 18.6%, 18.6%
and 4,2%, respectively, totaling 60.0% of the outstanding equity in CinemaStar
Mexico to the Company, which constituted all of such individuals' equity in
CinemaStar Mexico. The remaining 40% of
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CinemaStar Mexico was owned by unrelated third parties. The Company subsequently
acquired an additional 15% of the equity in CinemaStar Mexico from one of the
unrelated shareholders. The Company has loaned as of March 31, 1996 a total of
$311,519 to CinemaStar Mexico since its formation pursuant to a promissory note
bearing interest at an annual rate of 8%. All interest and principal on such
note is due in July 1999. The Company believes that the terms of such note are
more favorable than CinemaStar Mexico could receive from a third party lender.
For certain other transactions with Alan Grossberg, Russell Seheult,
Jon Meloan and Robert Bailey, see "Management's Discussion and Analysis -
Liquidity and Capital Resources" and "Management -- Employment and Consulting
Agreements."
In May 1992, the Company repurchased 1,214,600 shares from Harrah's
Theater Service and Supply Inc., one of the Company's founding shareholders, for
aggregate consideration of $67,200.
In May 1994, the Company repurchased 1,214,600 shares of Common Stock
in connection with the settlement of litigation with a former shareholder.
On February 12, 1996, the Company and The Boston Group, L.P. entered
into a two year Consulting Agreement beginning on April 1, 1996. The Boston
Group, L.P. is to provide certain consulting services involving business
development, management and investor relations. The Boston Group, L.P. has been
paid $250,000 for such services and also received a warrant for 400,000 shares
of Common Stock exercisable at $6.50 per share. The warrant becomes exercisable
on August 12, 1996 and terminates on August 12, 2000. The Boston Group, L.P. was
granted certain demand and piggyback registration rights for the Common Stock
underlying the warrants.
Many of the transactions described above involve actual or potential
conflicts of interest between the Company and its officers or directors. In
order to reduce the potential for conflicts of interest between the Company and
its officers and directors, prior to entering into any transaction in which a
potential material conflict exists, the Company's policy has been and will
continue to be to obtain the approval of a majority of the disinterested members
of the Company's Board of Directors or the approval of holders of a majority of
the disinterested shares of the Company's Common Stock. However, there can be no
assurance that conflicts will be resolved in a manner favorable to the Company.
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SELLING SECURITY HOLDER
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<PAGE> 69
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<PAGE> 71
The Selling Security Holder is A.S. Goldmen which holds Underwriter's
Warrants to purchase up to 150,000 shares of Common Stock and 150,000 Redeemable
Warrants. The Underwriter's Warrants and the underlying Common Stock and
Redeemable Warrants and the Common
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Stock underlying the Redeemable Warrants are registered for resale by this
Prospectus. If the Underwriter's Warrants included in this Prospectus and the
underlying were fully exercised, Goldmen would acquire 450,000 shares of Common
Stock. Set forth below are the holders of the Underwriter's Warrants covered by
this Prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter's Unit
Name Purchase Warrants
---- ------------------
<S> <C>
A.S. Goldmen & Co., Inc.......................... All
</TABLE>
For transactions between Goldmen and the Company, see "Selling
Securities Holder -- Private Placements," "Description of Securities --
Redeemable Warrants" and "Description of Securities -- Underwriter's
Warranties."
PLAN OF DISTRIBUTION
The sale of the Selling Security Holder's Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holder) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holder's Securities, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If the Selling
Security Holder sells his, her or its Securities, or options thereon, pursuant
to this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if the Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holder's
Securities, a post-effective amendment to the Registration Statement of which
this Prospectus is a part would need to be filed and declared effective by the
Securities and Exchange Commission before such Selling Security Holder could
make such sale, pay such compensation or make such a distribution. The Company
is under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
The Selling Security Holder may effect transactions in their
securities by selling their securities directly to purchasers, through
broker-dealers acting as agents for the Selling Security Holder or to
broker-dealers who may purchase the Selling Security Holder's Securities as
principals and thereafter sell such securities from time to time in the
over-the-counter market, in negotiated transactions, or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Security Holder and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both.
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The Selling Security Holder and broker-dealers, if any, acting in
connection with such sales might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Act and any commission received by them and any
profit on the resale of such securities might be deemed to be underwriting
discounts and commissions under the Act.
The Securities covered by this Prospectus may be sold under Rule 144
instead of under this Prospectus. None of the shares of Common Stock or
Redeemable Warrants currently qualifies for sale under Rule 144.
The Selling Security Holder have been advised that during the time
it is engaged in distribution of the securities covered by this Prospectus,
each must comply with Rules 10b-5 and 10b-6 under the Securities Exchange Act of
1934, as amended, and pursuant thereto: (i) shall not engage in any
stabilization activity in connection with the Company's securities; (ii) shall
furnish each broker through which securities covered by this Prospectus may be
offered the number of copies of this Prospectus which are required by each
broker; and (iii) shall not bid for or purchase any securities of the Company or
attempt to induce any person to purchase any of the Company's securities other
than as permitted under the Securities Exchange Act of 1934, as amended. Any
Selling Security Holder who may become an "affiliated purchasers" of the Company
as defined in Rule 10b- 6, pursuant to Securities Exchange Act Release 34-23611
(September 11, 1986), must coordinate their sales under this Prospectus with
each other and the Company for purposes of Rule 10b-6.
PRIVATE PLACEMENTS
In September 1994, the Company completed a private placement of 30
units (the "Bridge Units"). Each Bridge Unit was offered at a price of $100,000
per Unit and consisted of an unsecured promissory note in the principal amount
of $98,000, bearing interest at the rate of 10% per annum, and 100,000 warrants
(the "Bridge Warrants"), each exercisable to purchase one share of Common Stock
at an exercise price of $1.00 per share. The sale of Bridge Units was exempt
from registration under the Securities Act of 1933 by virtue of Regulation D
promulgated thereunder. The unsecured promissory notes were paid out of the
proceeds of the initial public offering.
The terms of the Bridge Warrants provide that, if the Company
consummates a public offering of its securities which includes warrants to
purchase shares of Common Stock, the Bridge Warrants shall automatically be
converted into warrants included in the public offering. Such warrants into
which the Bridge Warrants are automatically converted shall be exercisable to
purchase the same number of shares as the Bridge Warrants, but shall otherwise
contain the terms (including the exercise price) of the warrants offered to the
public. The terms of the Bridge Warrants also provided that the Company shall
cause the new warrants and the underlying shares of Common Stock to be included
in the registration statement relating to the public offering. Accordingly, the
Bridge Warrants, upon consummation of the initial public offering, automatically
converted into Redeemable Warrants exercisable to purchase an aggregate of
3,000,000 shares of Common Stock.
Purchasers of Bridge Units were provided with unaudited financial
statements which, upon subsequent audit, proved to be inaccurate. In particular,
the unaudited financial statements contained in the Company's offering
documents, which management believed to be prepared in accordance with generally
accepted accounting principles, were determined not to have been prepared in
accordance with generally accepted accounting principles in several respects,
the most significant of which was the failure of the financial statements to
amortize payments due under long-term leases (which typically call for
increasing rental payments over time) on a straight-line basis. As a result, the
financial statements significantly understated the extent of the Company's
operating losses and stockholders' deficit for the periods in question. As a
result of the differences between the financial statements contained in the
Prospectus for the initial public offering and the financial statements
contained in the offering documents for the private placement, the purchasers of
Bridge Units might seek to rescind their investment or seek other damages. If
the purchasers of Bridge Units rescind their investment or seek other damages,
the Company might be liable to these investors for the full amount of their
investment (an aggregate of
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$3,000,000), plus interest and any fines or penalties which state regulators or
courts may impose. In addition, the Company would bear the costs of any
rescission offer. However, the Company used approximately $3,073,176 of the
proceeds of the initial public offering to repay in full the principal of and
interest on the promissory notes issued in connection with the private
placement. As a result, the Company believes that its potential liability in any
suit by purchasers of Bridge Units has been significantly reduced.
The Company paid A.S. Goldmen $392,250 for acting as placement agent in
the private placement of the Bridge Units. Such amount represented a 10%
commission and a three percent non-accountable expense allowance on the gross
proceeds received by the Company from the sale of the Bridge Units, as well as
reimbursement of mailing expenses.
In July 1994, the Company sold an aggregate of 801,135 shares of Common
Stock to certain of the Selling Security Holden who are clients of A.S. Goldmen
& Co., Inc. at a price of $0.0132 per share. A.S. Goldmen & Co., Inc. did not
receive any compensation or reimbursement of expenses from the Company in
connection with such sale.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock and 100,000 shares of preferred stock, without par value, 25,000 of
which have been designated Series A Preferred Stock.
COMMON STOCK
The holders of outstanding Common Stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the Board of Directors may from time to time determine. (The Company
has no present intention of paying dividends on its Common Stock). Upon
liquidation, dissolution or winding up of the Company, and subject to the
priority of any outstanding Preferred Stock, the assets legally available for
distribution to shareholders are distributable ratably among the holders of the
Common Stock at the time outstanding.
No holder of shares of Common Stock has a preemptive right to subscribe
to future issuances of securities by the Company. Accordingly, all existing
shareholders will suffer dilution of their percentage interest in the Company
upon future sales of Common Stock or securities convertible into Common Stock.
Holders of Common Stock are entitled to cast one vote for each share
held of record on all matters presented to shareholders, other than with respect
to the election of directors, for which cumulative voting is currently required
under certain circumstances by applicable provisions of California law. Under
cumulative voting, each shareholder may give any one candidate whose name is
placed in nomination prior to the commencement of voting a number of votes equal
to the number of directors to be elected, multiplied by the number of votes to
which the shareholder's shares are normally entitled, or distribute such number
of votes among as many candidates as the shareholder sees fit. The effect of
cumulative voting is that the holders of a majority of the outstanding shares of
Common Stock may not be able to elect all of the Company's directors. The Common
Stock will be, when issued pursuant to the terms of this Prospectus, fully paid
and nonassessable.
REDEEMABLE WARRANTS
Each Redeemable Warrant entitles the holder thereof, upon exercise, to
purchase one share of Common Stock at a price of $6.00 per share, subject to
adjustment, through February 6, 2000.
The exercise price of the Redeemable Warrants and the number and kind
of shares of Common Stock issuable upon the exercise of Redeemable Warrants are
subject to adjustment in certain circumstances, including a stock split of, or
stock dividend on, the Common Stock, all as set forth in the Warrant Agreement
relating to the
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issuance of the Redeemable Warrants. There will be no adjustment for the payment
of cash dividends, if any, by the Company on its Common Stock. Holders of the
Redeemable Warrants have no voting power and are not entitled to any dividends.
In the event of any dissolution or winding up of the Company, the holders of the
Redeemable Warrants will not be entitled to participate in a distribution of the
Company's assets.
In the event that the Company adopts a resolution to merge,
consolidate, or sell all or substantially all of its assets prior to the
expiration of the Redeemable Warrants, each Redeemable Warrant holder, upon the
exercise of his Redeemable Warrant, would be entitled to receive the same
treatment as other holders of any other shares of Common Stock. In the event the
Company adopts a resolution for the liquidation, dissolution or winding-up of
the Company's business, the Company will give written notice of the adoption of
such resolution to the registered holders of the Redeemable Warrants. Thereupon,
all liquidation and dissolution rights under the Redeemable Warrants will
terminate at the end of 30 days from the date of the notice to the extent not
exercised within those 30 days.
The Redeemable Warrants are subject to redemption by the Company, at
any time on 30 days prior written notice, at a price of $0.25 per Redeemable
Warrant if the average closing bid price for the Common Stock equals or exceeds
$7.00 per share for any 20 trading days within a period of 30 consecutive
trading days ending on the fifth trading day prior to the date of the notice of
redemption.
Upon notice to the Redeemable Warrant holders, the Company has the
right to reduce the exercise price or extend the expiration date of the
Redeemable Warrants. The Redeemable Warrants may be exercised upon surrender of
the Redeemable Warrant certificate on or prior to the expiration date (or
earlier redemption date, if applicable) of such Redeemable Warrants at the
offices of the warrant agent, with the form of "Election to Purchase" on the
reverse side of the Redeemable Warrant certificate completed and executed as
indicated, accompanied by payment of the full exercise price (in cash or by
certified check payable to the order of the warrant agent, as agent for the
Company) for the number of Redeemable Warrants being exercised.
No Redeemable Warrant will be exercisable unless, at the time of
exercise, the Company has filed a current Prospectus with the Securities and
Exchange Commission covering the shares of Common Stock to be issued upon
exercise of such Redeemable Warrant and such shares have been registered or
qualified or deemed to be exempt under the securities laws of the state of
residence of the holder of such Redeemable Warrant. The Company will use its
best efforts to have all such shares so registered or qualified and to maintain
a current Prospectus relating thereto until the expiration of the Redeemable
Warrants, subject to the terms of the Warrant Agreement. While it is the
Company's intention to do so, there is no assurance that it will be able to do
so. This Prospectus currently covers the issuance of the Common Stock (and
during the terms of the Offer, the Class B Warrants) underlying the Redeemable
Warrants.
CLASS B WARRANTS
Each Class B Warrant entitles the holder thereof,upon exercise, to
purchase one share of Common Stock at a price of $_____ per share, subject to
adjustment, through __________, 200_.
The exercise price of the Class B Warrants and the number and kind of
shares of Common Stock issuable upon the exercise of Class B Warrants are
subject to adjustment in certain circumstances, including a stock split of, or
stock dividend on, the Common Stock, all as set forth in the Warrant Agreement
relating to the issuance of the Class B Warrants. There will be no adjustment
for the payment of cash dividends, if any, by the Company on its Common Stock.
Holders of the Class B Warrants have no voting power and are not entitled to any
dividends. In the event of any dissolution or winding up of the Company, the
holders of the Class B Warrants will not be entitled to participate in a
distribution of the Company's assets.
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In the event that the Company adopts a resolution to merge,
consolidate, or sell all or substantially all of its assets prior to the
expiration of the Class B Warrants, each Class B Warrant holder, upon the
exercise of his Class B Warrant, would be entitled to receive the same treatment
as other holders of any other shares of Common Stock. In the event the Company
adopts a resolution for the liquidation, dissolution or winding-up of the
Company's business, the Company will give written notice of the adoption of such
resolution to the registered holders of the Class B Warrants. Thereupon, all
liquidation and dissolution rights under the Class B Warrants will terminate at
the end of 30 days from the date of the notice to the extent not exercised
within those 30 days.
The Class B Warrants are subject to redemption by the Company, at any
time on 30 days prior written notice, at a price of $0.25 per Class B Warrant if
the average closing bid price for the Common Stock equals or exceeds $____ per
share for any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
Upon notice to the Class B Warrant holders, the Company has the right
to reduce the exercise price or extend the expiration date of the Class B
Warrants. The Class B Warrants may be exercised upon surrender of the Class B
Warrant certificate on or prior to the expiration date (or earlier redemption
date, if applicable) of such Class B Warrants at the offices of the warrant
agent, with the form of "Election to Purchase" on the reverse side of the Class
B Warrant certificate completed and executed as indicated, accompanied by
payment of the full exercise price (in cash or by certified check payable to the
order of the warrant agent, as agent for the Company) for the number of Class B
Warrants being exercised.
No Class B Warrant will be exercisable unless, at the time of exercise,
the Company has filed a current Prospectus with the Securities and Exchange
Commission covering the shares of Common Stock to be issued upon exercise of
such Class B Warrant and such shares have been registered or qualified or deemed
to be exempt under the securities laws of the state of residence of the holder
of such Class B Warrant. The Company will use its best efforts to have all such
shares so registered or qualified on or before the exercise date of the Class B
Warrants and to maintain a current Prospectus relating thereto until the
expiration of the Class B Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there is no assurance
that it will be able to do so. This Prospectus currently covers the Common Stock
underlying the Class B Warrants.
The Company has agreed, in connection with the exercise of Class B
Warrants pursuant to solicitation by the Soliciting Agent (commencing one year
from the date of this Prospectus), to pay to the Soliciting Agent a fee of four
percent (4%) of Class B Warrant exercise price of which ____% may be reallowed
to any dealer who solicited the exercise (which may also be the Soliciting
Agent) for each Class B Warrant exercised, provided, however, that the
Soliciting Agent will not be entitled to receive such compensation in any Class
B Warrant exercise transactions in which (i) the market price of the Common
Stock of the Company at the time of exercise is lower than the exercise price of
the Class B Warrants; (ii) the Class B Warrants are held in any discretionary
account; (iii) disclosure of compensation arrangements is not made, in addition
to the disclosure provided in this Prospectus, in documents provided to holders
of the Class B Warrant at the time of exercise; (iv) the exercise of the Class B
Warrants is unsolicited; (v) after the Company has called the Class B Warrants
for redemption; and (vi) the solicitation of exercise of the Class B Warrants
was in violation of Rule 10b-6 promulgated under the Securities Exchange Act of
1934, as amended. In addition, unless granted an exemption by the Securities and
Exchange Commission from Rule 10b-6, the Soliciting Agent will be prohibited
from engaging in any market-making activities or solicited brokerage activities
with regard to the Company's securities during the period prescribed by Rule
10b-6 before the solicitation of the exercise of any Class B Warrant until the
later of (i) the termination of such solicitation activity, or (ii) the
termination by waiver or otherwise of any right the Soliciting Agent may have to
receive a fee for the exercise of the Class B Warrants following such
solicitations. The Company has agreed not to solicit Warrant exercises other
than through the Soliciting Agent.
-71-
<PAGE> 77
PREFERRED STOCK
The Company is authorized to issue 100,000 shares of preferred stock.
The Company's Board of Directors is authorized to issue the preferred stock in
one or more series and, with respect to each series, to determine the
preferences and rights and the qualifications, limitations or restrictions
thereof, including the dividends rights, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, sinking fund provisions,
the number of shares constituting the series and the designation of such series.
The Board of Directors could, without shareholder approval, issue preferred
stock with voting and other rights that could adversely affect the voting rights
of the holders of Common Stock and could have certain anti-takeover effects. The
Board has designated 25,000 shares of preferred stock as Series A Preferred
Stock. There are currently no shares of Series A Preferred Stock outstanding,
but may in the future issue Preferred Stock but has no definitive plans to do
so. See "Managements Discussion and Analysis - Liquidity and Capital Resources".
Holders of shares of the Company's Series A Preferred Stock (the
"Preferred Stock") shall be entitled to receive, when, as, and if declared by
the Board of Directors, out of funds of the Company legally available therefor,
cumulative cash dividends, payable annually, at the rate of 10% per annum
(equivalent to $10.00 per share per annum). Dividends on the Preferred Stock
shall accrue from the original issue date or the most recent dividend payment
date.
Outstanding shares of Preferred Stock may be redeemed by the Company at
any time. The redemption price shall equal $100 per share equal to any accrued
but unpaid dividends. If fewer than all of the outstanding shares of Preferred
Stock are to be redeemed, the Company will select those to be redeemed pro rata,
or by lot, or in such other manner as the Board of Directors may determine.
Except as required by applicable law, the holders of Preferred Stock
will not be entitled to any voting rights.
In the event of any liquidation, dissolution or winding up of the
Company, the holders of outstanding shares of Preferred Stock shall be entitled
to receive, out of the assets of the Company legally available for such
distribution to shareholders under applicable law, the amount of $100 per share
plus an amount per share equal to any accrued but unpaid dividends. A
consolidation, merger or sale of all or substantially ail of the assets of the
Company will not be considered a liquidation, dissolution or winding up of the
Company for this purpose.
-72-
<PAGE> 78
No holder of any shares of Preferred Stock will have any preemptive
rights to subscribe to stock, obligations, warrants, rights to subscribe to
stock, or other securities of the Company of any class, whether now or hereafter
authorized.
UNDERWRITER'S WARRANTS
In connection with the initial public offering, the Company sold to the
underwriter A.S. Goldmen & Co., Inc. ("Goldmen"), for nominal consideration,
warrants (the "Underwriter's Warrants") to purchase from the Company up to
150,000 shares of Common Stock and/or up to 150,000 Redeemable Warrants. The
Underwriter's Warrants are exercisable at a price of $7.50 per share of Common
Stock and $0.375 per Redeemable Warrant for a period of four years commencing on
February 7, 1996.
The Underwriter's Warrants grant to the holder(s) thereof piggy-back
registration rights for a period of seven years after February 7, 1995 with
respect to the Underwriter's Warrants and the securities issuable upon exercise
of the Underwriter's Warrants. Holders of the Underwriter's Warrants have the
right to demand, for a period of five years after February 7, 1995, that the
Company prepare and file two registration statements covering the sale of the
Underwriter's Warrants and the securities issuable upon exercise of the
Underwriter's Warrants, one of which is to be prepared at the expense of the
Company. The Underwriter's Warrants and underlying securities are covered by
this Prospectus.
During the term of the Underwriter's Warrants, the holders are given
the opportunity to profit from a rise in the market price of the Common Stock
with a resulting dilution in the interest of other shareholders. Further, the
holders may exercise the Underwriter's Warrants at a time when the Company would
in all likelihood be able to obtain equity capital on terms more favorable than
those provided in the Underwriter's Warrants.
Further in connection with initial public offering, Goldmen also
received $200,000 in commissions and $60,000 in non-accountable expense
allowances.
TRANSFER AGENT AND WARRANT AGENT
Continental Stock Transfer & Trust Company is the transfer agent and
registrar for the shares of Common Stock and the warrant agent for the
Redeemable Warrants and Class B Warrants.
LEGAL MATTERS
The validity of the issuance of the Securities will be passed upon for
the Company by Jeffer, Mangels, Butler & Marmaro LLP, Los Angeles, California.
Jeffers, Wilson & Shaff, LLP, Irvine, California has acted as attorneys for the
Soliciting Agent.
EXPERTS
The financial statements of CinemaStar Luxury Theaters, Inc. included
in this Prospectus and in the Registration Statement have been audited by BDO
Seidman LLP, independent certified public accountants, to the extent and for the
periods set forth in their report, appearing elsewhere herein and in the
Registration Statement and is included in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The financial statements of United Artist - Chula Vista 6 included in
this Prospectus and in the Registration Statement have been audited by BDO
Seidman LLP, independent certified public accountants, to the extent and for the
periods set forth in their report, appearing elsewhere herein and in the
Registration Statement
-73-
<PAGE> 79
and is included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
-74-
<PAGE> 80
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
No.
<S> <C>
(a) Pro forma financial information:
Pro Forma Condensed Consolidated Balance Sheet as of
March 31, 1995 (unaudited)............................................................................ F-1
Pro Forma Condensed Consolidated Statement of Operations
for the year ended March 31, 1995 (unaudited)......................................................... F-2
Pro Forma Condensed Consolidated Statement of Operations
for the three months ended June 30, 1995 (unaudited).................................................. F-3
Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)............................ F-4
(b) Fiscal year end financial statements
Report of Independent Certified Public Accountants.................................................... F-5
Consolidated Balance Sheets as of March 31, 1995 and 1996............................................. F-6
Consolidated Statements of Operation for the years ended
March 31, 1995 and 1996............................................................................... F-8
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended March 31, 1995 and 1996................................................................... F-9
Consolidated Statements of Cash Flows for the years ended
March 31, 1995 and 1996............................................................................... F-10
Summary of Accounting Policies........................................................................ F-12
Notes to Consolidated Financial Statements........................................................... F-15
(c) United Artists - Chula Vista 6:
Report of Independent Certified Public Accountants.................................................... F-29
Balance Sheets as of December 31, 1994 and 1993....................................................... F-30
Statements of Operations and Theater Equity for the years ended
December 31, 1994 and 1993............................................................................ F-31
Statements of Cash Flows for the years ended
December 31, 1994 and 1993............................................................................ F-32
Summary of Accounting Policies........................................................................ F-33
Notes to Financial Statements......................................................................... F-34
</TABLE>
-77-
<PAGE> 81
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 1995
(SEE NOTE 1)
<TABLE>
<CAPTION>
CinemaStar United Artists 6 See
3/31/95 12/31/94 Adjustments Note # Pro Forma
---------- ----------------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
Assets
Current
Cash and cash equivalents $4,091,885 $ 25,295 $(3,217,295) (2) $ 899,885
Commissions receivable 24,196 -- 24,185
Merchandise inventory -- 7,058 (7,058) (2) --
Prepaid expenses 64,000 -- 54,000
Other current assets 273,000 7,317 (7,317) (2) 273,000
---------- ---------- ----------- --- ----------
Total current assets 4,443,081 39,669 (3,231,669) 1,251,061
Property and equipment,
net of accumulated depreciation
and amortization 2,153,345 2,534,137 657,863 (3) 5,345,345
Deposits and other assets 187,043 -- -- 187,043
---------- ---------- ----------- --- ----------
Total Assets $6,783,489 $2,573,808 $(2,573,806) $6,783,469
========== ========== =========== === ==========
Liabilities and Stockholders' Equity
Current
Accounts payable &
accrued expenses $ 786,403 $ 320,634 $ (320,834) (2) $ 786,403
Current portion of long-term
debt & capital lease
obligations 421,872 -- 421,872
---------- ---------- ----------- --- ----------
Total current liabilities 1,208,275 320,634 (320,634) 1,206,275
Long-term debt & capital lease
obligations, net of current
portion 2,248,680 -- 2,248,880
Deferred rent liability 1,246,016 -- 1,246,016
---------- ---------- ----------- --- ----------
Total liabilities 4,703,171 320,634 (320,634) 4,703,171
---------- ---------- ----------- --- ----------
Stockholders' equity 2,080,288 2,253,172 (2,253,172) 2,080,288
---------- ---------- ----------- --- ----------
Total Liabilities and
Stockholders' Equity $6,783,489 $2,573,806 $(2,573,806) $6,783,489
========== ========== =========== === ==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
F-1
<PAGE> 82
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
YEAR ENDED MARCH 31, 1995
(SEE NOTE 1)
<TABLE>
<CAPTION>
CINEMASTAR UNITED ARTISTS 6 SEE
3/31/95 12/31/94 ADJUSTMENTS NOTE # PRO FORMA
----------- ---------------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C>
Revenues:
Admissions $ 6,992,935 $1,177,219 $ 8,170,154
Concessions 2,956,083 394,000 3,350,083
Other 96,563 6,750 103,313
----------------------------- -----------
Total revenue 10,045,581 1,577,969 11,623,550
----------------------------- -----------
Costs and expenses:
Film rental and booking costs 3,847,431 649,708 4,497,139
Cost of concession supplies 1,182,438 71,349 1,253,785
Theater operating expenses 3,354,580 572,644 4,127,204
General and administrative expenses 1,871,851 242,723 $(235,800) (3) 1,877,774
Depreciation and amortization 451,924 100,935 (3) 552,850
Loss on lease refinanced 260,371 -- 260,371
----------------------------- ----------
Total costs and expenses 11,168,573 1,537,350 12,569,133
----------------------------- -----------
Operating loss (1,122,992) (59,391) (945,583)
Other income (expense):
Rental income 33,855 33,855
Interest expense (583,931) -- (563,931)
Debt issuance costs (396,320) -- (396,320)
Other (3,175) -- (3,175)
----------------------------- -----------
Total other income (expense) (963,426) 33,855 (929,571)
Net loss $(2,086,418) (25,538) $(1,875,154)
============================= ===========
Net loss per common share $ (0.29) $ (0.28)
Weighted average number of
shares outstanding 7,303,429 7,303,429
</TABLE>
F-2
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
<PAGE> 83
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended June 30, 1995
(see note 1)
<TABLE>
<CAPTION>
CINEMASTAR UNITED ARTISTS 6 SEE
6/30/95 6/30/95 ADJUSTMENTS NOTE # PRO FORMA
---------- ---------------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Admissions $1,882,523 $275,007 $2,157,530
Concessions 765,883 99,050 854,933
Other 31,095 971 32,066
------------------------ ----------
Total revenues 2,679,501 375,028 3,054,529
------------------------ ----------
COSTS AND EXPENSES:
Film rental and booking costs 1,057,558 140,726 1,196,394
Cost of concession supplies 308,353 36,264 342,517
Theater operating expenses 845,581 139,702 985,283
General and administrative expenses 523,061 60,104 $(59,200) (3) 523,965
Depreciation and amortization 117,231 25,359 142,590
------------------------ ----------
Total costs and expenses 2,549,594 402,155 3,192,549
------------------------ ----------
OPERATING LOSS (170,393) (27,127) (138,320)
------------------------ ----------
OTHER INCOME (EXPENSE):
Rental income - 8,963 8,963
Interest expense (103,521) - (103,521)
Interest income 55,429 - 55,429
------------------------ ----------
Total other income (expense) (48,092) 8,963 (39,129)
------------------------ ----------
NET LOSS $ (213,485) $(18,164) $ (177,449)
======================== ==========
NET LOSS PER COMMON SHARE $ (0.04) $ (0.03)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 6,200,000 6,200,000
</TABLE>
F-3
See Notes to Pro Forma Consolidated Financial Statements (Unaudited)
<PAGE> 84
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - On August 17, 1995 CinemaStar Luxury Theaters, Inc. ("the Company")
purchased an operating movie theater from United Artists Theatre Circuit, Inc.
The six screen theater ("United Artists 6") is located at 320 Third Ave., Chula
Vista, CA 91910.
The Pro Forma Condensed Consolidated Balance Sheet and Statement of Operations
as of and for the year ended March 31, 1995 reflect the financial position and
results of operations for the Company's fiscal year ended March 31, 1995
combined with the financial position and results of operations of United
Artists 6 for its fiscal year ended December 31, 1994.
The Pro Forma Condensed Consolidated Statement of Operations for the three
months ended June 30, 1995 include the Company's unaudited results of
operations combined with the estimated results of operations for United
Artists 6.
Note 2 - The pro forma adjustments to the condensed consolidated balance sheet
include the transfer of cash of $3,192,000 for the acquisition of the United
Artists 6 land, building, and equipment and the elimination of United Artists 6
assets and liabilities that were not acquired.
Note 3 - The Pro Forma Condensed Consolidated Statement of Operations for the
year ended March 31, 1995 and the three months ended June 30, 1995 reflect an
adjustment to eliminate management fees charged to the individual theater by
United Artists Theatre Circuit, Inc. The Company's management believes that any
additional general and administrative expenses related to the operation of this
location would have been immaterial.
As a significant portion of the net $657,863 increase in property and equipment
is attributable to land value, additional depreciation for the year ended March
31, 1995 and the three months ended June 30, 1995 is considered to be
?????.
F-4
<PAGE> 85
[BDO LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CinemaStar Luxury Theaters, Inc.
We have audited the accompanying consolidated balance sheets of CinemaStar
Luxury Theaters, Inc. (formerly Nickelodeon Theater Co., Inc.) and
Subsidiaries as of March 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended March 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CinemaStar Luxury
Theaters, Inc. (formerly Nickelodeon Theater Co., Inc.) and Subsidiaries as of
March 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the two years in the period ended March 31, 1996, in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
Costa Mesa, California
May 23, 1996
F-5
<PAGE> 86
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1995 1996
===================================================================================================
<S> <C> <C>
ASSETS (Note 3)
CURRENT ASSETS:
Cash and cash equivalents $4,091,885 $ 458,550
Commission and other receivables 24,196 87,605
Refundable construction deposit (Note 6) - 600,000
Prepaid expenses (Note 6) 54,000 181,000
Other current assets 273,000 78,508
- ---------------------------------------------------------------------------------------------------
Total current assets 4,443,081 1,405,663
- ---------------------------------------------------------------------------------------------------
Property and equipment, net
(Notes 2, 3 and 11) 2,153,345 6,887,704
Preopening costs - 211,756
Deposits and other assets (Note 6) 187,043 445,408
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,783,469 $8,950,531
===================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
<PAGE> 87
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1995 1996
=====================================================================================================
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations (Note 3) $ 421,872 $ 580,533
Accounts payable 469,649 838,140
Accrued expenses 185,216 147,779
Accrued consulting fees (Note 6) - 150,000
Deferred revenue 131,538 145,025
Advances from stockholder (Note 7) - 320,000
- -----------------------------------------------------------------------------------------------------
Total current liabilities 1,208,275 2,181,477
Long-term debt and capital lease obligations,
net of current portion (Note 3) 2,248,880 3,725,568
Deferred rent liability (Note 6) 1,246,016 1,501,773
- -----------------------------------------------------------------------------------------------------
Total liabilities 4,703,171 7,408,818
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 3, 6 and 7)
Subsequent events (Note 12)
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (NOTES 4, 8, 9 AND 12):
Preferred stock, no par value; 100,000 shares authorized:
Series A redeemable preferred stock; 25,000 shares
designated; no shares issued or outstanding - -
Common stock, no par value; 15,000,000 shares
authorized; 6,200,000 shares issued and outstanding 6,458,586 6,458,586
Additional paid-in capital 410,030 510,030
Accumulated deficit (4,788,318) (5,426,903)
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 2,080,298 1,541,713
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,783,469 $ 8,950,531
=====================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-7
<PAGE> 88
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996
======================================================================================================
<S> <C> <C>
REVENUES:
Admissions $ 6,992,935 $ 8,088,192
Concessions 2,956,083 3,210,477
Other operating revenues 96,563 226,071
- ------------------------------------------------------------------------------------------------------
Total revenues 10,045,581 11,524,740
- ------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Film rental and booking costs 3,847,431 4,405,483
Cost of concession supplies 1,182,436 1,252,603
Theater operating expenses (Note 6) 3,453,768 3,473,009
General and administrative expenses 1,972,643 2,157,803
Depreciation and amortization 451,924 574,377
Loss on lease refinanced 260,371 -
- ------------------------------------------------------------------------------------------------------
Total costs and expenses 11,168,573 11,863,275
- ------------------------------------------------------------------------------------------------------
Operating loss (1,122,992) (338,535)
- ------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 44,356 102,516
Interest expense (609,862) (400,966)
Debt issuance costs (Note 4) (396,320) -
- ------------------------------------------------------------------------------------------------------
Total other income (expense) (961,826) (298,450)
- ------------------------------------------------------------------------------------------------------
Loss before provision for income taxes (2,084,818) (636,985)
Provision for income taxes (Note 5) (1,600) (1,600)
- ------------------------------------------------------------------------------------------------------
NET LOSS $ (2,086,418) $ (638,585)
======================================================================================================
NET LOSS PER COMMON SHARE $ (.29) $ (.10)
======================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND SHARE EQUIVALENTS OUTSTANDING 7,303,429 6,200,000
======================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-8
<PAGE> 89
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, 1995 AND 1996
---------------------------------------------------------------------------------------
Series A
Preferred Stock Common Stock Additional
----------------- --------------------- Paid-in
Shares Amount Shares Amount Capital Deficit Total
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 - - 4,858,400 $ 452,200 $ - $(2,701,900) $(2,249,700)
Repurchase of common stock (Note 8) - - (1,214,600) (95,000) - - (95,000)
Issuance of common stock for minority
interest of subsidiary (Note 8) - - 255,065 3,357 - - 3,357
Issuance of common stock for cash (Note 8) - - 801,135 10,544 - - 10,544
Issuance of common stock warrants (Note 4) - - - - 60,000 - 60,000
Issuance of common stock and common stock
warrants in initial public offering, net
of offering costs (Note 8) - - 1,500,000 6,087,485 350,030 - 6,437,515
Net loss for the year - - - - - (2,086,418) (2,086,418)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 - - 6,200,000 6,458,586 410,030 (4,788,318) 2,080,298
Issuance of common stock warrants
(Notes 6 and 8) - - - - 100,000 - 100,000
Net loss for the year - - - - - (638,585) (638,585)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 - $ - 6,200,000 $6,458,586 $510,030 $(5,426,903) $ 1,541,713
==================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-9
<PAGE> 90
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (NOTE 10)
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996
====================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,086,418) $ (638,585)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 450,384 574,377
Amortization of debt issuance costs 396,320 -
Deferred rent liability 327,753 255,757
Loss on lease refinanced 260,371 -
Increases (decrease) from changes in:
Commission and other receivables 78,054 (63,409)
Prepaid expenses and other current assets (45,500) (44,264)
Deposits and other assets (258,619) (258,365)
Accounts payable (190,767) 368,491
Accrued expenses and other liabilities 12,240 126,050
- ----------------------------------------------------------------------------------------------------
Cash provided by (used in) operating activities (1,056,182) 320,052
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (212,874) (5,308,736)
Refundable construction deposit - (600,000)
Collection of amounts due from officer 25,000 -
- ----------------------------------------------------------------------------------------------------
Cash used in investing activities (187,874) (5,908,736)
- ----------------------------------------------------------------------------------------------------
</TABLE>
F-10
<PAGE> 91
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (NOTE 10)
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996
====================================================================================================
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 350,000 2,100,000
Principal payments on long-term debt
and capital lease obligations (825,181) (464,651)
Proceeds from issuance of promissory
notes payable, net of issuance costs 2,543,680 -
Repayment of promissory notes (2,940,000) -
Repayment of stockholder notes payable (190,897) -
Advances from stockholder - 450,000
Repayment of advances from stockholder (111,600) (130,000)
Net proceeds from issuances of common stock
and common stock warrants 6,511,416 -
Repurchase shares of common stock (95,000) -
- ----------------------------------------------------------------------------------------------------
Cash provided by financing activities 5,242,418 1,955,349
- ----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,998,362 (3,633,335)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 93,523 4,091,885
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,091,885 $ 458,550
====================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-11
<PAGE> 92
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF The accompanying consolidated financial statements
CONSOLIDATION include the accounts of CinemaStar Luxury Theaters,
Inc. ("Theaters, Inc.") and its wholly-owned subsidiary
CinemaStar Luxury Cinemas, Inc. ("Cinemas, Inc."), and
its 75%-owned subsidiary CinemaStar Luxury Theaters,
S. A. de C.V. ("CinemaStar International"), hereafter
collectively referred to as the "Company". Cinemas,
Inc. was an 80%-owned subsidiary of Theaters, Inc.
through June 1994. CinemaStar International was a
60%-owned subsidiary of Theaters Inc. through June
1995. In July 1994, Theaters, Inc. acquired the
remaining 20% minority interest in Cinemas, Inc. in
exchange for 255,065 shares of Theaters, Inc. common
stock valued at $3,357 (Note 8). All material
intercompany transactions and balances have been
eliminated in consolidation.
In July 1994, certain officers and directors of the
Company contributed to the Company their 60% ownership
interest in CinemaStar International. In June 1995,
the Company acquired an additional 15% interest in
CinemaStar International. For accounting purposes, the
acquisition of CinemaStar International was accounted
for as a reorganization of affiliates under common
control and recorded in a manner similar to a
pooling-of-interest. A minority interest is not
reflected in the consolidated financial statements
since CinemaStar International has no material net
assets and has incurred losses since inception.
REVENUE The Company recognizes revenues from concession
RECOGNITION and non-group ticket sales at the time of sale. The
Company has a group ticket sales program under which
corporations and large groups can purchase tickets, in
advance, for discount prices. Group tickets must be used
within twelve months of issuance. Revenues from group
ticket sales are recorded as deferred revenue and are
recognized when group tickets are used or expire.
F-12
<PAGE> 93
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
CASH AND CASH For purposes of the statements of cash flows, the
EQUIVALENTS Company considers all highly liquid investments
purchased with an original maturity of three months or
less to be cash equivalents.
The Company maintained cash deposits and cash
equivalents in certain accounts for which the balance
was in excess of the Federal Deposit Insurance
Corporation limits. At March 31, 1995 and 1996, the
uninsured cash and cash equivalents totaled
approximately $2,552,000 and $170,000.
COMMISSIONS Commissions receivable represent amounts due from a
RECEIVABLE concession supply company. The Company sells
concession products which are kept on-hand on a
consignment basis. A specified percentage of gross
receipts from such sales are remitted to the concession
supply company and a portion is retained by the Company
as a commission. The balance recorded as a receivable
represents amounts due to the Company from the
concession supply company upon monthly reconciliation of
concession sales activity.
PROPERTY AND Property and equipment is recorded at cost.
EQUIPMENT Depreciation and amortization are provided using the
straight-line method over the estimated useful lives
(3 - 27 years) of the related assets. Leasehold
improvements are amortized over the lesser of the
related lease terms or the estimated useful lives of the
improvements. Repairs and maintenance are charged to
expense as incurred.
DEFERRED RENT Deferred rent liability represents the difference
LIABILITY between base rentals paid under theater operating lease
agreements and the expense recorded in the statements of
operations on a straight-line basis over the life of the
leases. In the early years of such leases, rent expense
recorded in the statement of operations exceeds cash
payments.
PREOPENING COSTS Preopening costs related to new theaters are
capitalized and amortized over twelve months.
F-13
<PAGE> 94
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
INCOME TAXES The Company uses the liability method of accounting for
income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting For Income
Taxes." Deferred income taxes are recognized based on
the differences between financial statement and income
tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences
are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The
provision for income taxes represents the tax payable
for the period and the change during the period in
deferred tax assets and liabilities.
NET LOSS Net loss per share is computed by dividing net loss by
PER SHARE the weighted average number of common shares and common
share equivalents outstanding during the period. Common
share equivalents consist of dilutive outstanding stock
options and warrants calculated using the treasury stock
method. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin No. 83, common stock and
warrants issued and stock options granted during the
twelve-month period preceding the date of the initial
filing of the Registration Statement have been included
in the calculation of common share equivalents, using
the treasury stock method, as if they were outstanding
through the closing date of the Company's initial public
offering (see Notes 4 and 8).
FAIR VALUE OF The carrying amount of the Company's financial
FINANCIAL instruments, consisting of receivables, accounts
INSTRUMENTS payable, and debt, approximates their fair value.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities,
revenues and expenses, and disclosure of contingent
assets and liabilities at the date of the financial
statements. Actual amounts could differ from those
estimates.
RECLASSIFICATIONS Certain reclassifications have been made to the 1995
financial statements to conform to the 1996
presentation.
F-14
<PAGE> 95
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF Theaters, Inc. and Cinemas, Inc. were incorporated in
BUSINESS California in 1989 and 1992, respectively, for the
purpose of establishing multi-screen, first-run theater
locations in the Western United States, with an initial
focus on Southern California. The Company currently
operates five theaters having a total of 44 screens in
San Diego County and Riverside County, California. In
August 1995, the Company filed an amendment to its
articles of incorporation and changed its legal name
from Nickelodeon Theater Co., Inc. to CinemaStar Luxury
Theaters, Inc.
CinemaStar International was incorporated in Mexico in
July 1994 for the purpose of establishing multi-screen,
first-run theater locations in Mexico. As of March 31,
1996, the Company had no theaters operating in Mexico.
The ability of the Company to operate depends on the
availability of marketable motion pictures. The
Company currently obtains the motion pictures for its
theaters from approximately 10 to 12 distributors.
However, poor relationships with distributors or a
disruption in the production of motion pictures could
limit the Company's ability to obtain films for its
theaters. These factors, along with the poor
commercial success of motion pictures could have a
material adverse effect on the Company's business and
results of its operations. However, at this time, the
Company, in management's opinion, has good working
relationships with its distributors.
2. PROPERTY AND Property and equipment consist of the following:
EQUIPMENT
<TABLE>
<CAPTION>
March 31, 1995 1996
========================================================================
<S> <C> <C>
Furniture, fixtures and
equipment $ 3,137,989 $ 5,302,367
Building - 2,169,798
Land - 960,000
Leasehold improvements 134,719 149,279
------------------------------------------------------------------------
3,272,708 8,581,444
Accumulated depreciation
and amortization (1,119,363) (1,693,740)
------------------------------------------------------------------------
$ 2,153,345 $ 6,887,704
========================================================================
</TABLE>
F-15
<PAGE> 96
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. PROPERTY AND Property and equipment at March 31, 1995 and 1996
EQUIPMENT includes assets under capital lease agreements with an
(CONTINUED) original cost of $1,737,096 and $1,744,763. At March
31, 1995 and 1996, the accumulated amortization of
assets under capital lease agreements totalled $728,427
and $1,016,587. Amortization expense related to the
capital leases is included in depreciation and
amortization in the accompanying consolidated
financial statements.
3. LONG-TERM Obligations under long-term debt and capital lease
DEBT AND arrangements are as follows:
CAPITAL LEASE
OBLIGATIONS
<TABLE>
<CAPTION>
March 31, 1995 1996
========================================================================
<S> <C> <C>
Note payable to bank; interest is at
LIBOR plus 5.4% (8.45% at March 31,
1996). Monthly payments of principal
and interest are $12,246 at March 31,
1996. The note matures in February
2026 and is collateralized by a deed
of trust (Note 11) and is guaranteed
by certain officers/directors/
stockholders of the Company. $ - $1,588,865
Notes payable to supplier; interest
is at prime plus 2% (10% at
March 31, 1996). Monthly payments
are the greater of 10% of concession
sales or $25,700. Notes are secured
by substantially all assets of the
Company and mature October 1999
through April 2003. 1,216,480 1,024,007
Note payable to bank; interest is at
prime plus 2% (10.25% at March 31,
1996). Principal payments of $5,952
plus accrued interest are payable
monthly. Note is secured by
substantially all assets of the
Company and matures in April 2003. - 500,000
</TABLE>
F-16
<PAGE> 97
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31, 1995 1996
========================================================================
<S> <C> <C> <C>
3. LONG-TERM Unsecured note payable to former stockholder
DEBT AND for stock repurchase and employment
CAPITAL LEASE settlement (Note 8). Note bears interest
OBLIGATIONS at 6% and is payable in monthly principal
(CONTINUED) And interest payments of $5,000 through
March 1998. 163,272 111,664
Capitalized lease obligation discounted at
18.9%, payable in monthly installments
of $25,101, including interest. Lease
matures March 2000. 609,085 478,936
Capitalized lease obligation resulting from
refinancing of other obligations; discounted
at 22.3%, payable in monthly installments
of $11,293, including interest. Lease
matures March 2000. 399,072 347,354
Capitalized lease obligation discounted at
5.25%, payable in monthly installments of
$2,060, including interest. Lease matures
March 1999. 243,772 231,555
Other 39,071 23,720
------------------------------------------------------------------------
2,670,752 4,306,101
Current portion (421,872) (580,533)
------------------------------------------------------------------------
$2,248,880 $3,725,568
========================================================================
</TABLE>
F-17
<PAGE> 98
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM Aggregate principal maturities of long-term debt and
DEBT AND capital lease obligations are as follows:
CAPITAL LEASE
OBLIGATIONS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ending Long-term Capital
March 31, Debt Leases Total
==========================================================================
<S> <C> <C> <C>
1997 $ 369,232 $ 392,824 $ 762,056
1998 379,983 464,068 844,051
1999 349,237 388,760 737,997
2000 270,036 162,401 432,437
2001 212,648 26,452 239,100
Thereafter 1,658,400 195,700 1,854,100
--------------------------------------------------------------------------
Total minimum payments 3,239,536 1,630,205 4,869,741
Amount representing
interest on leases - (563,640) (563,640)
--------------------------------------------------------------------------
Total long-term debt and
present value of
minimum lease payments $3,239,536 $1,066,565 $4,306,101
==========================================================================
</TABLE>
4. PROMISSORY In July 1994, the Company commenced a private placement
NOTES of equity and debt securities. The private placement
PAYABLE was offered for a maximum of 30 units, each unit
consisting of one unsecured promissory note in the
principal amount of $98,000 (an aggregate principal
amount of $2,940,000), bearing interest at 10% per
annum, and 100,000 warrants each to purchase one share
of the Company's common stock (or an aggregate 3,000,000
shares of common stock) at $1.00 per share. Upon the
completion of the initial public offering (Note 8), the
warrants were converted into redeemable warrants
exercisable for the same number of shares as are
purchasable upon the exercise of a warrant but having
terms identical to the redeemable warrants included in
the Company's public offering, including an exercise
price of $6.00 per share of common stock.
F-18
<PAGE> 99
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROMISSORY Through September 8, 1994, the closing date of the
NOTES private placement offering, the Company sold all 30
PAYABLE units offered and raised a gross $3,000,000 of which
$60,000 was allocated to the common stock warrants and
(Continued) included in additional paid-in capital.
Costs incurred by the Company to effect this private
placement aggregated approximately $396,000 which were
amortized over six months beginning August 1994.
The promissory notes were repaid by the Company in
February 1995 out of the net proceeds of its initial
public offering (Note 8).
5. INCOME TAXES For the years ended March 31, 1995 and 1996, the
Company incurred only the minimum state income taxes
due to the losses resulting from operations. A summary
of the significant items comprising the Company's
deferred income tax assets and liabilities is as
follows:
<TABLE>
<CAPTION>
March 31, 1995 1996
========================================================================
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 145,200 $ 211,000
Net operating loss carryforwards 829,900 1,018,000
Deferred rent liability 206,900 253,000
Business start-up expenses 107,800 37,000
Accrued expenses and other 43,700 24,000
------------------------------------------------------------------------
Total deferred income tax assets 1,333,500 1,543,000
Valuation allowance (1,333,500) (1,476,000)
------------------------------------------------------------------------
Net deferred income tax assets - 67,000
Deferred tax liabilities:
Preopening costs - 67,000
------------------------------------------------------------------------
Net deferred income taxes $ - $ -
========================================================================
</TABLE>
F-19
<PAGE> 100
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INCOME TAXES Reconciliation of the Federal statutory rate to the
(CONTINUED) Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
March 31, 1995 1996
=========================================================================
<S> <C> <C>
Federal statutory rate (34.0)% (34.0)%
State income taxes, net of
federal benefit 0.1 0.3
Effect of foreign operations 2.0 5.9
Non deductible expenses 1.3 5.0
Net operating loss carryforward with
no tax benefit realized 30.7 23.1
--------------------------------------------------------------------------
Effective income tax rate 0.1% 0.3%
==========================================================================
</TABLE>
At March 31, 1995 and 1996, a 100% valuation allowance
has been provided on the total deferred income tax
assets since they are not more likely than not to be
realized.
At March 31, 1996, the Company has net operating loss
(NOL) carry-forwards of approximately $3,500,000 and
$1,700,000 for federal and state purposes. The NOLs
are available to offset future taxable income. The
federal NOLs expire in 2006 through 2011, while the
state NOLs expire in 1998 through 2001.
The utilization of these NOLs could be limited due to
restrictions imposed under the federal and state laws
upon a change in ownership.
6. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES The Company leases four theater properties and various
equipment under noncancelable operating lease agreements
which expire between March 2009 and March 2021 and
require various minimum annual rentals. The Company also
leases various equipment under noncancelable operating
lease agreements which expire through October 1998.
Several of the theater leases provide for renewal
options to extend the leases for additional five to 10
year periods. Certain theater leases also require the
payment of property taxes, normal maintenance and
insurance on the properties and additional
F-20
<PAGE> 101
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS rents based on percentages of gross theater and
AND concession revenues in excess of various specified
CONTINGENCIES revenue levels. Certain of the theater operating
(CONTINUED) leases are also personally guaranteed by certain of
the Company's officers/stockholders.
In connection with the lease of one theater property,
the Company made a refundable construction deposit of
$600,000 during the year ended March 31, 1996. In April
1996, the deposit was refunded to the Company.
During the years ended March 31, 1995 and 1996, the
Company incurred rent expense under operating leases of
approximately $1,472,000 and $1,405,000. The Company
did not incur any contingent rental expense above the
base rental charges during either of the years ended
March 31, 1995 and 1996.
At March 31, 1996, the aggregate future minimum lease
payments due under these noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
Year Ending Theater Equipment
March 31, Leases Leases Total
==========================================================================
<S> <C> <C> <C>
1997 $ 1,544,902 $ 42,385 $ 1,587,287
1998 1,801,848 17,662 1,819,510
1999 1,943,048 2,589 1,945,637
2000 2,024,048 - 2,024,048
2001 2,072,048 - 2,072,048
Thereafter 32,389,628 - 32,389,628
--------------------------------------------------------------------------
Total minimum lease
payments $ 41,775,522 $ 62,636 $ 41,838,158
==========================================================================
</TABLE>
The commitments in the table above represent the
minimum cash payments required under the leases. For
financial statement purposes, rent expense is recorded
on a straight-line basis over the life of the lease.
As such, because of lower lease payments in the early
years of the lease terms, financial statement expense
is greater than cash payments. For the years ended
March 31, 1995 and 1996, rent expense charged to
operations exceeded cash payment requirements by
$327,753 and $255,757 and resulted in an increase to
the deferred rent liability for the same amount.
The Company has signed lease agreements for six new
theater locations. The theater leases each have an
initial term of 20 to 50 years and begin upon the
occupancy of the theater locations, none of which
have yet been
F-21
<PAGE> 102
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS constructed. The new leases, certain of which will be
AND guaranteed by certain of the Company's officers/
CONTINGENCIES stockholders, will require expected minimum rental
(CONTINUED) payments aggregating approximately $97,583,000 over
the life of the leases. Accordingly, existing minimum
lease commitments as of March 31, 1996 plus those
expected minimum commitments for the proposed theater
locations would aggregate minimum lease commitments of
approximately $139,421,000.
In addition to the foregoing projects, the Company
periodically enters into non-binding letters of intent
or options for the purchase or lease of theater sites to
be developed. There can be no assurance that the sites
for which the Company currently is negotiating or has
letters of intent or options will ultimately be leased
or purchased by the Company.
CONCESSIONS
The Company operates concession stands at two of its
theaters. At the other three theaters the Company
relies on one supplier for its concession supplies who
is also a significant creditor to which the Company was
indebted $1,216,480 and $1,024,007 as of March 31, 1995
and 1996 under note payable arrangements (Note 3). Any
events of default on the Company's agreements with this
supplier or other events which result in the
deterioration of this relationship, could have an
adverse effect on the Company's operations since the
Company's concession agreements require a substantial
early termination fee.
F-22
<PAGE> 103
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS EMPLOYMENT AGREEMENTS
AND
CONTINGENCIES Effective August 1994, the Company entered into
(CONTINUED) five-year employment contracts with three of the
Company's officers/stockholders. The agreements provide
for aggregate annual salaries of $350,000 subject to
annual increases of 10% to 12%. These officers will be
entitled to annual bonuses equal to 2% to 5% of the
Company's income before income taxes and officer bonuses
in years when the income before income taxes and officer
bonuses exceeds $2,000,000. The three officers will be
entitled to additional individual bonuses of $200,000 to
$500,000 in years when the income before income taxes
but after payment of officer bonuses exceeds $7,000,000.
CONSULTING AGREEMENT
In February 1996, the Company entered into a consulting
agreement for services to be rendered during the years
ending March 31, 1997 and 1998. The agreement requires
cash payments aggregating $250,000 and the issuance of
a warrant to purchase 400,000 shares of the Company's
common stock at an exercise price of $6.50 per share
(Note 8). The Company estimated the value of the
warrant to be $100,000 and recorded such amount as
additional paid-in capital. As of March 31, 1996, the
Company had issued the warrant and had paid $100,000 of
the required cash payment.
The consideration for the consulting services,
aggregating $350,000, has been recorded in prepaid
expenses and other assets. Such amount will be
amortized on a straight-line basis over the two-year
period of the consulting agreement.
SEASONALITY
The Company's business is highly seasonal with a large
portion of its revenues and profits being derived
during the months of June through August and the
holiday season in November and December.
F-23
<PAGE> 104
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RELATED PARTY The Company has been advanced funds by certain
TRANSACTIONS officer/stockholders as follows:
- In 1991, the Chairman of the Board of Directors
(the "Chairman") personally borrowed $196,000
from a bank and in turn loaned the funds to the
Company. The Company made monthly principal and
interest payments directly to the bank on behalf
of the Chairman until January 1995 when the
Company repaid the outstanding principal to the
Chairman.
- In 1992, the Chairman advanced $80,000 of funds
to the Company. The advances were unsecured and
bore interest at 5.25%. The outstanding balance
of $41,600 at March 31, 1994 was repaid during
the year ended March 31, 1995.
- In 1993, an officer of the Company personally
obtained an unsecured line of credit from a local
bank. The officer drew $70,000 on the line and
in turn loaned the funds to the Company. The
outstanding balance of $70,000 at March 31, 1994
was repaid in March 1995.
The Company also has the following related party
transactions.
The Company pays a fee of $1,000 per week to a company
wholly-owned by one of the Company's
officer/director/stockholders which provides film
buying and booking services to the Company. Such
expense aggregated $52,000 for each of the years ended
March 31, 1995 and 1996.
Commencing August 1994, the Company pays a consulting
fee of $26,000 per year for five years to the Company's
Chairman of the Board. In addition, the Company has
agreed to indemnify the Chairman's former wife for all
liabilities that she may incur in connection with her
guarantee of certain obligations of the Company, such
as notes payable and theater operating leases (see
Notes 3 and 6).
In January 1996, the Company borrowed $450,000 from an
officer/director/stockholder pursuant to a short-term
note payable. At March 31, 1996, the outstanding
balance was $320,000, which amount was repaid in full
in April 1996.
Refer to Note 8 for equity transactions with related
parties.
F-24
<PAGE> 105
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' In May 1994, the Company repurchased 1,214,600 shares
EQUITY of its common stock in connection with a settlement
TRANSACTIONS agreement with a former shareholder. Under the
settlement agreement, the Company paid $95,000 for the
shares of common stock. In addition, the Company made a
cash payment of $55,000 and executed a note payable to
the former shareholder in the amount of $200,000. The
note, which bears interest at 6%, requires monthly
principal and interest payments of $5,000 until repaid
(Note 3).
In July 1994, the Company issued 255,065 shares of
common stock to acquire the 20% minority interest of
Cinemas, Inc. which was owned by an officer/director
of the Company.
In July 1994, the Company issued 801,135 shares of
common stock for aggregate cash consideration of
$10,544.
In July 1994, the Company's Board of Directors
authorized a new class of preferred stock. A total of
100,000 shares of no par preferred stock has been
authorized, of which 25,000 shares have been designated
as Series A redeemable preferred stock. No shares of
Series A preferred stock have been issued through March
31, 1996. The authorized class of preferred stock
shall have the following rights and privileges upon
issuance of any such shares.
- Dividends - The holders of shares of preferred
stock shall be entitled to cumulative annual
dividends of $10 per share and will be payable in
cash annually on February 1.
- Redemption - At any time, the Company may redeem
all or a portion of the outstanding shares of
preferred stock at $100 per share plus all
accrued but unpaid dividends.
- Preference on Liquidation - The holders of shares
of preferred stock are entitled to a preference
on liquidation, dissolution or winding up of the
Company. Holders of the shares of preferred
stock are to be paid an amount equal to the
redemption price prior to any distribution to
holders of shares of common stock. Should the
Company's assets be insufficient to pay the
holders of the preferred stock, the holders of
the preferred stock shall share ratably in any
distribution of assets.
F-25
<PAGE> 106
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' In February 1995, the Company successfully completed an
EQUITY initial public offering of common stock and redeemable
TRANSACTIONS warrants to purchase shares of common stock. The
(CONTINUED) Company sold 1,500,000 shares at $5.00 per share, and
1,500,000 warrants to purchase one share of common stock
at $6.00 per share at $.25 per warrant. The net
proceeds to the Company were approximately $6,391,000
after deducting underwriter commissions, discounts, and
other offering expenses of approximately $1,484,000.
The redeemable warrants are exercisable at any time
during a 54-month period commencing August 1995 and
include an option whereby, under certain conditions,
the Company can redeem the warrants.
In March 1995, the underwriter exercised its option to
purchase 225,000 of the Company's redeemable warrants
to cover over-allotments in connection with the
Company's initial public offering. The net proceeds to
the Company were approximately $46,000 after deducting
underwriter commissions, discounts, and other offering
costs of approximately $10,000.
In February 1996, the Company issued a warrant to
purchase 400,000 shares of the Company's common stock
at an exercise price of $6.50 per share in conjunction
with a consulting agreement (Note 6).
As of March 31, 1996, the Company has reserved
5,125,000 shares of common stock for the exercise of
outstanding warrants.
A summary of all common stock warrant activity follows:
<TABLE>
<CAPTION>
Number
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at March 31, 1994 - $ -
Issued 4,725,000 6.00
------------------------------------------------------------------------
Outstanding at March 31, 1995 4,725,000 6.00
Issued 400,000 6.50
------------------------------------------------------------------------
Outstanding at March 31, 1996 5,125,000 $ 6.00-6.50
========================================================================
</TABLE>
In connection with the initial public offering in
February 1995, the Company issued warrants to the
Underwriter ("Underwriter's Warrants") to purchase up
to 150,000 shares of common stock and up to 150,000
redeemable warrants. The Underwriter's Warrants are
exercisable at a
F-26
<PAGE> 107
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCKHOLDERS' price of $7.50 per share of common stock and $0.375 per
EQUITY redeemable warrant and expire in February 2000.
TRANSACTIONS Accordingly, the Company has reserved 300,000 shares of
(CONTINUED) common stock for the exercise of the outstanding
Underwriter's Warrants.
9. STOCK OPTIONS In July 1994, the Company's Board of Directors approved
the formation of the CinemaStar Luxury Theaters, Inc.
Stock Option Plan. The Board of Directors has reserved
587,500 shares of common stock for the granting of
incentive stock options and non-qualified stock
options. Options generally vest over three years and
must be exercised within ten years from the date of
grant.
A summary of all stock option activity follows:
<TABLE>
<CAPTION>
Number
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at March 31, 1994 - $ -
Granted 376,000 2.55
-------------------------------------------------------------------------
Outstanding at March 31, 1995 376,000 2.55
Granted 19,305 5.25 - 7.63
-------------------------------------------------------------------------
Outstanding at March 31, 1996 395,305 $ 2.55 - 7.63
=========================================================================
</TABLE>
As of March 31, 1996, 385,302 stock options were
exercisable at prices ranging from $2.55 to $7.63 per
share.
10. SUPPLEMENTAL Cash paid for interest and income taxes was as follows:
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996
=========================================================================
<S> <C> <C>
Interest $610,646 $400,966
=========================================================================
Income taxes $ 1,600 $ 1,600
=========================================================================
</TABLE>
F-27
<PAGE> 108
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ACQUISITION In August 1995, the Company acquired an operating movie
theater complex from United Artists Theatre Circuit,
Inc. in Chula Vista California ("Chula Vista-6") for
approximately $3,200,000. The acquisition was accounted
for under the purchase method of accounting. The
operations of Chula Vista-6 have been included in the
Company's financial statements since the date of the
acquisition. The purchase price approximated the fair
value of the assets acquired, which included land,
building and the related furniture, fixtures and
equipment.
The unaudited results of operations on a pro forma basis
as though Chula Vista-6 had been acquired as of April 1,
1994 are as follows:
<TABLE>
<CAPTION>
Years ended March 31, 1995 1996
-------------------------------------------------------------------------
<S> <C> <C>
Total revenues $11,624,000 $12,095,000
Net loss $(1,875,000) $ (576,000)
Net loss per common share $ (.26) $ (.09)
</TABLE>
In January 1996, the Company obtained a $1,600,000 loan
collateralized by a deed of trust on Chula Vista-6
(Note 3).
12. SUBSEQUENT On each of April 11, 1996 and May 21, 1996, the Company
EVENTS issued a convertible debenture in the principal amount
of $500,000. The debentures bear interest at 4% per
annum and are due three years after issuance. The
debentures are convertible after 40 days into shares of
common stock at a conversion price of $3.95 or $4.25 per
share. On May 22, 1996, the April 1996 debenture and
accrued interest was converted into 127,152 shares of
common stock.
F-28
<PAGE> 109
[BDO LETTERHEAD]
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
To The Board of Directors
CinemaStar Luxury Theaters, Inc.
Oceanside, California
We have audited the accompanying balance sheets of the United Artists-Chula
Vista 6, a stand alone operating movie theater formerly owned by United Artists
Theatre Circuit, Inc., as of December 31, 1994 and 1993, and the related
statements of operations and theater equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the United Artists-Chula Vista
6 at December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
October 5, 1995
F-29
<PAGE> 110
United Artists-Chula Vista 6
BALANCE SHEETS
===============================================================================
<TABLE>
<CAPTION>
December 31, 1994 1993
===============================================================================
<S> <C> <C>
ASSETS (Note 3)
CURRENT
Cash $ 25,296 $ 9,147
Merchandise inventory 7,056 4,294
Prepaid expenses and other current 7,317 23,692
- ------------------------------------------------------------------------------
Total current assets 39,669 37,133
- ------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Land 613,283 613,283
Building 1,554,549 1,551,525
Theater equipment and fixtures 607,466 590,305
- ------------------------------------------------------------------------------
2,775,298 2,755,113
Accumulated depreciation (241,161) (140,225)
- ------------------------------------------------------------------------------
Net property and equipment 2,534,137 2,614,888
- ------------------------------------------------------------------------------
Total assets $2,573,806 $2,652,021
==============================================================================
LIABILITIES AND THEATER EQUITY
Accounts payable and other accrued expenses, current $ 320,634 $ 209,207
Commitments (Note 2)
Theater equity (Note 1) 2,253,172 2,442,814
- ------------------------------------------------------------------------------
Total liabilities and theater equity $2,573,806 $2,652,021
==============================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-30
<PAGE> 111
UNITED ARTISTS-CHULA VISTA 6
STATEMENTS OF OPERATIONS AND THEATER EQUITY
===============================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1994 1993
===============================================================================
<S> <C> <C>
REVENUES:
Admissions $1,177,219 $1,268,153
Concessions 394,000 441,670
Other operating revenues 6,750 9,183
- ------------------------------------------------------------------------------
TOTAL REVENUES 1,577,969 1,719,006
- ------------------------------------------------------------------------------
COSTS AND EXPENSES:
Film rental and booking costs 649,708 677,571
Cost of concession supplies 71,349 80,201
Theater operating expenses 672,644 692,792
General and administrative (Note 1) 242,723 262,209
Depreciation 100,936 91,111
- ------------------------------------------------------------------------------
TOTAL COST AND EXPENSES 1,637,360 1,803,884
- ------------------------------------------------------------------------------
OPERATING LOSS (59,391) (84,878)
OTHER INCOME
Rental income 33,855 32,769
- ------------------------------------------------------------------------------
Net loss (25,536) (52,109)
THEATER EQUITY, beginning of year 2,442,814 2,359,529
Net change in parent company investment (Note 1) (164,106) 135,394
- ------------------------------------------------------------------------------
THEATER EQUITY, end of year $2,253,172 $2,442,814
==============================================================================
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-31
<PAGE> 112
UNITED ARTISTS-CHULA VISTA 6
STATEMENTS OF CASH FLOWS
================================================================================
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,536) $ (52,109)
Adjustments to reconcile net loss to cash
provided by operating activities:
Depreciation 100,936 91,111
Increase (decrease) from changes in:
Merchandise inventory (2,762) 1,961
Prepaid expenses and other current assets 16,375 (2,818)
Accounts payable and accrued expenses 111,427 132,864
- --------------------------------------------------------------------------------
Cash provided by operating activities 200,440 171,009
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20,185) (306,683)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in parent company investment (164,106) 135,394
- --------------------------------------------------------------------------------
Net increase (decrease) in cash 16,149 (280)
CASH, beginning of year 9,147 9,427
- --------------------------------------------------------------------------------
CASH, end of year $ 25,296 $ 9,147
================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-32
<PAGE> 113
UNITED ARTISTS-CHULA VISTA 6
SUMMARY OF ACCOUNTING POLICIES
===============================================================================
BUSINESS The United Artists-Chula Vista 6 (the "Theater") operates as a
multi-screen, first run theater located in Chula Vista, San
Diego County, California.
Until August 17, 1995, the Theater, was owned and operated by
United Artists Theatre Circuit, Inc. at which time it was sold
to CinemaStar Luxury Theaters, Inc. (Note 3).
The Theater's business is highly seasonal with a large portion
of its revenues and profits being derived during the months of
June through August and the holiday season in November and
December.
REVENUE The Theater recognizes revenue from ticket and concessions
RECOGNITION sales at the time of sale. The Theater has a group ticket
sales program under which corporations and large groups can
purchase tickets, in advance, for discount prices. Revenues
from group ticket sales are recognized when group tickets are
used or expire.
PROPERTY AND Property and equipment is recorded at cost substantially all of
EQUIPMENT which is based on allocation of the purchase cost based on an
appraisal at the time the Theater was acquired by United
Artists Theatre Circuit, Inc. ("UATCI") in May 1992, upon a
spin-off of UATCI from its former parent company, TCI
Communications, Inc. Depreciation is provided using the
straight-line method over the estimated useful lives (10 to 40
years) of the related assets. Repairs and maintenance are
charged to expense as incurred.
INCOME TAXES As discussed in Note 1, the accompanying financial statements
represent those of one operating theater owned by UATCI. The
results of operations for the years ended December 31, 1994 and
1993, are included in the consolidated tax return of UATCI. As
the Theater, after allocation of corporate overhead (Note 1),
operated at a loss for each 1994 and 1993, no allocation of
corporate income taxes or income tax benefit was provided.
CASH AND CASH For purposes of the statements of cash flows, the Theater
EQUIVALENTS considers all highly liquid investments purchased with an
original maturity of three months or less to be cash
equivalents.
F-33
<PAGE> 114
UNITED ARTISTS-CHULA VISTA 6
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. RELATED PARTY TRANSACTIONS
The Theater operations, through the date of sale by UATCI (Note 3), are
significantly controlled by the parent company, UATCI. In that regard, cash
deposited to the Theater's operating accounts is transferred to the parent
company which uses the funds to pay operating expenses, along with the funds
from other UATCI theaters, on a company-wide basis using an integrated system.
The net effect of such intercompany cash transfers results in an
intercompany receivable or payable. At December 31, 1994, the Theater was due
approximately $101,750 from its parent while it owed approximately $62,400 to
the parent company. These amounts have been included as a component of the net
Theater equity as of December 31, 1994 and 1993.
In addition to the normal operating expenses, the Theater is allocated
a management fee from UATCI consisting of two components. The first is an
allocation of UATCI corporate overhead based on the pro-rata revenues of all
UATCI 100%-owned theaters. Such allocation amounted to approximately $83,700
and $112,600 for the years ended December 31, 1994 and 1993. The second
component is an allocation of corporate finance and interest charges. Such an
allocation is intended to reflect the financing costs that would be incurred as
a normal cost of operations if the Theater was truly a stand-alone business.
The allocations, which totalled approximately $153,100 and $145,100 for the
years ended December 31, 1994 and 1993 are based on the pro-rata net tangible
assets of all UATCI 100%-owned theaters. All of such management fees have been
included in general and administrative expenses in the accompanying statements
of operations.
2. COMMITMENTS
Rental Income Agreements
The Theater has leased certain portions of its facilities to two
tenants. These leases have terms ranging from three to five years and require
minimum monthly rentals as follows:
F-34
<PAGE> 115
UNITED ARTISTS-CHULA VISTA 6
NOTES TO FINANCIAL STATEMENTS
================================================================================
2. COMMITMENTS
(CONTINUED)
<TABLE>
<CAPTION>
DATE OF INITIAL MINIMUM
LEASE TERM MONTHLY RENTAL
---------------------------------------------------------------
<S> <C> <C>
January 1, 1993 January 1993 to December 1997 $1,386
December 28, 1994 March 1995 to February 1998 1,365
</TABLE>
As of December 31, 1994, the aggregate future minimum lease
payments due to the Theater under these leases is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
----------------------------------------------------------------
<S> <C>
1995 $ 31,458
1996 34,458
1997 34,908
1998 2,730
----------------------------------------------------------------
Total minimum lease payments $103,644
================================================================
</TABLE>
Parking Structure Rental
The Theater is party to an agreement with the Redevelopment
Agency of the City of Chula Vista which provides for rental of
space in a city-owned parking structure adjacent to the
Theater. Such agreement provides for annual rent consisting
of a "flat rate payment" of $26,438 plus a "percentage
payment", currently equal to .30% of annual gross sales. The
flat rent payment is to be paid by UATCI or its successors
through 2016 while the percentage payment, which increases to
.42% of gross sales in 2000, continues through 2010.
As such, the minimum rental payments required under such lease,
for the next five years and thereafter is as follows:
F-35
<PAGE> 116
UNITED ARTISTS-CHULA VISTA 6
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $ 26,438
1996 26,438
1997 26,438
1998 26,438
1999 26,438
Thereafter 449,446
--------
$581,636
========
</TABLE>
3. SUBSEQUENT EVENTS
On August 17, 1995, substantially all of the Theater's assets,
including the land, building, equipment and various operating contracts and
leases, were sold to CinemaStar Luxury Theaters, Inc. at a sales price of
$3,180,000 which was received in cash upon the closing of the transaction.
The Theater began operating, effective August 18, 1995, as a CinemaStar
location. The terms of the sale prohibit the use of the "United Artists" name
in its future operations.
F-36
<PAGE> 117
================================================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER INDIVIDUAL HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information .................................................... 4
Prospectus Summary ....................................................... 5
Risk Factors ............................................................. 12
The Offer ................................................................ 22
Market Prices ............................................................ 33
Use of Proceeds .......................................................... 34
Dividend Policy .......................................................... 34
Management's Discussion and Analysis ..................................... 34
Business ................................................................. 42
Management ............................................................... 55
Principal Stockholders ................................................... 62
Certain Transactions ..................................................... 63
Selling Security Holder .................................................. 65
Description of Securities ................................................ 69
Legal Matters ............................................................ 73
Experts .................................................................. 73
Index to Consolidated
Financial Statements ................................................... 75
</TABLE>
---------------
================================================================================
================================================================================
Shares of
Common Stock
Redeemable Warrants
Class B Warrants
Underwriter's Warrant
CINEMASTAR LUXURY
THEATERS, INC.
----------------
PROSPECTUS
----------------
THE BOSTON GROUP, L.P.,
Soliciting Agent
________ __, 1996
================================================================================
<PAGE> 118
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under California law, in non-derivative actions, an officer or director
may be reimbursed for expenses, judgments and settlement if such individual has
acted in good faith and in a manner he believes to be in the best interests of a
company and the shareholders and in the case of criminal proceeding, he had no
reasonable cause to believe the conduct was unlawful. With regard to derivative
actions, such person may be reimbursed for expense if the officer or director
acted in good faith, in a manner the officer or director believes to be in the
best interests of a company and the shareholders; provided, however, that no
indemnification shall be made (1) if the officer or director is found liable to
a company, except as may be determined by the court in which the action is or
was pending; or (2) for amounts paid in defending such action which is
terminated without court approval.
If indemnification is authorized, but not required, by California law,
then the right to indemnification shall be determined by (i) a majority vote of
the disinterested members of the board of directors, (ii) a majority vote of the
disinterested shareholders (iii) the court in which the action is or was
pending, or (iv) if there is not a majority of disinterested directors, by a
written option of independent counsel. If the officer or director is successful
in the defense of any action, California law provides that such individual shall
be entitled to indemnification. A company can maintain officers' and directors'
liability insurance.
See "Management -- Limitations of Liability and Indemnification of
Directors"
The Company intends to purchase a directors' and officers' liability
insurance policy insuring directors and officers of the Company for up to the
maximum amounts set forth in such policy.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with
the sale and distribution of the securities covered hereby other than the fee
payable to Soliciting Agent.
<TABLE>
<S> <C>
Filing Fees ....................................... $ 19,552
NASD .............................................. $ 11,840
NASDAQ ............................................ $ 1,000
Legal fees and expenses ........................... $ 40,000
Accounting fees and expenses ...................... $ 15,000
Reproduction ...................................... $ 3,000
Depositary (fees and expenses) .................... $ 3,500
Blue Sky fees and expenses (including counsel fees) $ 20,000
Soliciting Agent Expenses ......................... $ 25,000
Miscellaneous expenses ............................ $ 1,108
--------
Total ............................................. $140,000
========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Company has sold or issued the following securities during the last
three years (except as otherwise indicated, all share information gives effect
to the 6.460637-for-1 stock split effected by the Company in July 1994 and the
1.175-for-1 stock split effected by the Company in January 1995):
1. In August 1992, the Company issued a total of 6,073,000 shares of its
Common Stock to five founders, John Ellison, Jr., Alan Grossberg, Russell
Seheult, Myles Regan and Harrah's Theater Equipment & Supply. Such sale
was not subject to registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof.
2. In July 1994, the Company issued 255,065 shares of its Common Stock to an
officer of the Company (Jerry Willits) in exchange for a minority
interest in a subsidiary of the Company. Such sale was not subject to
registration under the Securities Act of 1933, as amended, by virtue of
Section 4(2) thereof.
II-1
<PAGE> 119
3. In July 1994, the Company sold 801,135 shares of its Common Stock to four
investors. Such sale was not subject to registration under the Securities
Act of 1933, as amended, by virtue of Section 4(2) thereof.
4. In September 1994, the Company completed a private placement of Units
consisting of an unsecured promissory note and warrants to purchase
shares of the Company's Common Stock at $1.00 per share. A total of
$3,000,000 was raised and warrants to purchase up to 3,000,000 shares
were issued to 40 investors. Such sale was not subject to registration
under the Securities Act of 1933, as amended, by virtue of Regulation D
promulgated thereunder. By agreement with each of these investors, the
1.175-for-1 stock split effected in January 1995 did not apply to the
outstanding warrants. Upon the effectiveness of the Registration
Statement for the initial public offering, the warrants issued in the
September 1994 private placement were automatically converted into
Redeemable Warrants to purchase the same number of shares and such
conversion was exempt from registration under the Securities Act of 1993,
as amended, by Section 3(a)(9).
5. Since July 1994, the Company issued options to acquire a total of 395,302
shares of Common Stock to certain officers, directors and/or consultants
of the Company pursuant to the Company's Employee Stock Option Plan. Such
sale was not subject to registration under the Securities Act of 1933, as
amended, by virtue of Section 4(2) thereof. The Company has filed a Form
S-8 Registration Statement to cover the shares issuable under such Plan.
6. On each of April 11, 1996 and May 21, 1996, the Company issued a
Convertible Debenture in the principal amount of $500,000 (the
"Debentures") to one entity, in transactions pursuant to Regulation S.
The Debentures are convertible into shares of Common Stock of the Company
at a conversion price at $3.95 per share and $4.25 per share,
respectively. The Debentures bear interest at the rate of four percent
(4%) per annum, payable quarterly. If not sooner converted, the principal
amount of the Debentures are due and payable on April 11, 1999 and May
21, 1999, respectively.
The Company repurchased 2,429,200 of the shares described above in May
1992 and May 1994.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
1.2 Warrant Solicitation Agreement (1)
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended (3)
3.2 Bylaws of the Company (4)
4.1 Specimen Stock Certificate of the Company (10)
4.2 Form of Redeemable Warrant Agreement (with form of
certificate attached) (4)
4.3 Form of Underwriter's Warrant Agreement (with form of
certificate attached) (4)
4.4 Form of Bridge Warrant (4)
4.5 Form of Acknowledgment and Agreement of Warrant Holder (4)
4.6 Form of Class B Warrant Agreement (with form of certificate
attached) (1)
4.7 $500,000 Debenture (5)
4.8 $520,000 Debentures (6)
4.9 First National Bank Business Loan Agreement and related
Guarantees (1)
</TABLE>
II-2
<PAGE> 120
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
5 Opinion of Jeffer, Mangels, Butler & Marmaro LLP (1)
10.1 Employment Agreement of John Ellison, Jr.(4)
10.2 Employment Agreement of Alan Grossberg (4)
10.3 Employment Agreement of Jerry Willits (4)
10.4 Consulting Agreement of Russell Seheult (4)
10.5 Film Booking Agreement between the Company and Alan Grossberg
(4)
10.6 Form of Indemnification Agreement with officers and directors
(4)
10.7 Stock Option Plan (4)
10.8 Placement Agent Agreement between the Company and A.S.
Goldmen & Co., Inc. as amended (9)
10.9 Equipment Purchase and Ride Film Rental Agreement, dated
August 8, 1994, between the Company and Cinema Ride, Inc., as
amended (10)
10.10 Form of Promissory Note of the Company issued in connection
with a private placement of Promissory Notes and Bridge
Warrants in August 1994 and September 1994 (4)
10.11 Form of Financial Advisory and Consulting Agreement between
the Company and the A.S. Goldmen Co., Inc. (4)
10.12 Lease Agreement, dated April 30, 1991, between Nickelodeon
Cinemas, Inc. and Homart Development Co. (4)
10.13 Lease, dated November 21, 1990, between the Company and Blue
Ravine Associates, Inc. (now Pacific Oceanside Holdings, L.P.
(4)
10.13.1 First Amendment to Lease, dated July 14, 1995 between the
Company and Pacific Oceanside Holdings, L.P. (2)
10.14 Real Property Lease Agreement between the Company and Gary E.
Elam, Receiver (4)
10.15 Equipment Purchase Agreement between the Company and Gary E.
Elam, Receiver (4)
10.16 Modification and Supplement of Lease and Equipment Purchase
Agreement, dated March 1, 1994, between the Company and River
Village, William Buster and Harold Alles, as successor in
interest to Gary E. Elam, Receiver (4)
10.17 Lease Agreement, dated October 12, 1993, between the Company
and Oceanside Cornerstone, Inc.(4)
10.18 Lease, dated October 19, 1994, between the Company and
Glenwood Buena Park Limited Partnership (4)
10.19 Purchase Agreement with United Artist (7)
10.20 Newbury Park Center Lease, dated July 12, 1994, between the
Company and Newbury Park Group (4)
10.20.1 Amendment No. 1 to Newbury Park Lease (2)
10.21 Agreement, dated July 12, 1994, between the Company and
Newbury Park Group, as amended (10)
10.22 Agreements with Pacific Concessions (4)
10.23 Letter of Intent, dated August 5, 1994, between Southland
Consulting and the Company (9)
10.24 Memorandum of Intent Re Development, Construction, and
Operation of Motion Picture Theater, dated December 1, 1994,
between CinemaStar Cinemas Internacionales, S.A. de C.V. and
Jose Manuel Gonzolez (9)
10.25 Lease Agreement, dated July 11, 1995 between the Company and
Buena Park Cinema Center Limited Partnership and related
Guaranty (2)
10.26 Lease Agreement, dated August 1, 1995 between the Company and
Mission Grove Plaza, L.P. (as amended) (2)
10.27 Lease Agreement, dated July 14, 1995 between the Company and
University Village, LLC (2)
10.28 Ground Lease, dated August 5, 1995 between the Company and
Craig W. Clark (2)
10.29 Lease Agreement, dated February 15, 1996 with the Coudures
Family Limited Partnership
10.30 Adjustable Rate Note, dated January 23, 1996 (2)
10.31 Settlement Agreement and Release of Claims, dated April 27,
1995, between the Company and Viacom International, Inc. (2)
10.32 First National Bank promissory Note, dated March 1, 1996, for
$500,000 (11)
10.33 First National Bank Promissory Note, dated May 28, 1996, for
$500,000 (11)
10.34 First National Bank Business Loan Agreement, dated May 28,
1996 (11)
</TABLE>
II-3
<PAGE> 121
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.35 Consulting Agreement with The Boston Group, L.P., dated
February 12, 1996 (11)
10.36 400,000 Warrant issue to The Boston Group, L.P., dated
February 12, 1996 (11)
10.37 Lease Agreement, dated May 11, 1996, between the Company and
Espacios de Zapopan, S.A. de C.V. (11)
10.38 Lease Agreement, dated June 14, 1996, between the Company and
Inmobiliaria Lunar, S.C. (11)
10.39 Finder's Fee Agreement with Robert Bailey (1)
10.40 Consulting Agreement with Boston Group, L.P. (1)
10.41 Warrant Agreement with The Boston Group, L.P. (1)
21 Subsidiaries:
CinemaStar, Inc., a California corporation, 100% owned
CinemaStar Cinemas Internacionales, S.A. de C.V., a
Mexican corporation, 75% owned
24.1 Consent of BDO Seidman LLP (see page II-9)
24.2 Consent of Jeffer, Mangels, Butler & Marmaro (included in
Exhibit 5)
24.3 Consent of BDO Seidman LLP. (see page II-0)
27 Financial Data Schedule (10)
25 Power of Attorney (see page II-6)
99.1 Letter to Holders of Redeemable Warrants (1)
99.2 Letter to Brokers et al. (1)
99.3 Letter to Clients (1)
99.4 Notice of Guaranteed Delivery (1)
99.5 Depositary Agreement (1)
</TABLE>
- --------------------
(1) Filed herewith
(2) Incorporated by reference to identically numbered Exhibits filed with
Post-Effective Amendment No. 1 to Form SB-2 Registration Statement No.
33-86716, filed on March 20, 1996
(3) Incorporated by reference to Exhibit 3.1 to form 10-KSB for the fiscal
year ended March 31, 1995
(4) Incorporated by reference in identically numbered Exhibits filed with
Registration Statement No. 33-8671, filed on November 23, 1994
(5) Incorporated by reference to Exhibit 4.1 to Form 8-K for April 11, 1996
(6) Incorporated by reference to Exhibit 4.1 to Form 8-K for May 21, 1996
(7) Incorporated by reference to Exhibit 10.1 to Form 10-K SB for the fiscal
year ended March 31, 1995
(8) Incorporated by reference into Exhibit 10.2 to the Form 10-K SB for the
fiscal year ended March 31, 1995
(9) Incorporated by reference to identically numbered Exhibits filed with
Amendment No. 1 to Form SB-2 Registration Statement No. 33-867, filed on
January 4, 1995
(10) Incorporated by reference to identically numbered Exhibits to Amendment
No. 1 to Form SB-2 Registration Statement, filed on January 31, 1995
(11) Incorporated by reference to identically numbered Exhibits to Form 10-KSB
for the fiscal year ended March 31, 1996
II-4
<PAGE> 122
ITEM 28. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes :
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually ,
or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement;
notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b),
in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement
; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising from the
Securities Act may be permitted to directors, officers, and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against policy polish as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The Registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under
the Securities Act as part of this Registration Statement as of the time the
Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of securities at that time as the initial bona fide offering
of those securities.
II-5
<PAGE> 123
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Oceanside, State of California on the
19th of July, 1996.
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ John Ellison, Jr.
----------------------------
John Ellison, Jr., President
POWER OF ATTORNEY
Each person whose individual signature appears below hereby constitutes
and appoints John Ellison, Jr. and Alan Grossberg, or either of them, as his
true and lawful attorney(s)-in-fact with full power of substitution to execute
in the name and on behalf of such person, individually and in each capacity
stated below, and to file, any and all amendments to this Registration
Statement, including any and all post-effective amendments.
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ John Ellison, Jr. President, Chief Executive
- -------------------------- Officer and Director (principal
John Ellison, Jr. executive officer) July 19, 1996
/s/ Alan Grossberg Chief Financial Officer,
- -------------------------- Executive Vice President, and
Alan Grossberg Director (principal financial and
accounting officer) July 19, 1996
/s/ Terry Willits * Vice President and Director
- -------------------------- July 19, 1996
Jerry Willits
/s/ Jon Meloan General Counsel, Secretary and
- -------------------------- Director July 19, 1996
Jon Meloan
/s/ Russell Seheult * Director
- -------------------------- July 19, 1996
Russell Seheult
II-6
<PAGE> 124
/s/ Walter Schlotter * Director
- -------------------------- July 19, 1996
Walter Schlotter
/s/ Andrew Friedenberg * Director
- -------------------------- July 19, 1996
Andrew Friedenberg
* By /s/ Alan Grossberg
- --------------------------
Alan Grossberg
Attorney-in-Fact
II-7
<PAGE> 125
CONSENT OF COUNSEL
The consent of Jeffer, Mangels, Butler & Marmaro LLP has been contained in
their opinion, Exhibit 5.1.
II-8
<PAGE> 126
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CinemaStar Luxury Theaters, Inc.
Oceanside, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated May 23, 1996 relating to the
consolidated financial statements of CinemaStar Luxury Theaters, Inc. and
Subsidiaries, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Costa Mesa, California
July 19, 1996
II-9
<PAGE> 127
CERTIFIED PUBLIC ACCOUNTANTS
CinemaStar Luxury Theaters, Inc.
Oceanside, California
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated October 5, 1995 relating to the
financial statements of United Artist Chula - Vista 6, which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO SEIDMAN, LLP
Costa Mesa, California
July 19, 1996
II-10
<PAGE> 128
II-11
<PAGE> 129
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1.2 Warrant Soliciting Agent Agreement
4.6 Form of Class B Warrant Agreement (with form of certificate attached)
5 Opinion of Jeffer Mangels, Butler & Marmaro, L.L.P.
10.32 Finder's Fee Agreement with Robert Bailey
10.33 Consulting Agreement with The Boston Group, L.P.
10.34 Warrant Agreement with The Boston Group, L.P.
99.1 Letter to Holders of Redeemable Warrants
99.2 Letter to Brokers, et al.
99.3 Letter to Clients
99.4 Notice of Guaranteed Delivery
99.5 Depository Agreement
</TABLE>
II-12
<PAGE> 1
EXHIBIT 1.2
CINEMASTAR LUXURY THEATERS, INC.
431 College Boulevard
Oceanside, CA 92057
WARRANT SOLICITATION AGREEMENT
AGREEMENT dated this _____ day of _______________, 1996, by and among
the Boston Group, L.P. (the "Soliciting Agent") and CinemaStar Luxury Theaters,
Inc. ("CinemaStar").
WITNESSETH:
WHEREAS, CinemaStar has offered to the holders of its warrants to
purchase one share of Common Stock that expire on February 6, 2000 (the
"Redeemable Warrants") to lower the exercise price from $6.00 to $4.00 for each
Redeemable Warrant and to issue upon the exercise of each Redeemable Warrant
one share of Common Stock (no par value) and one Class B Redeemable Warrant
which enables the holder thereof to purchase one share of Common Stock at an
exercise price of $7.50 per Class B Warrant ("the Offer").
WHEREAS, CinemaStar has filed, with the Securities and Exchange
Commission, a Prospectus dated ____________, as part of a Registration
Statement on Form SB-2 (the "Prospectus") relating to the Offer and;
WHEREAS, CinemaStar desires to engage the Soliciting Agent to assist in
the solicitation of the exercise of the Redeemable Warrants and the Soliciting
Agent is willing to be so engaged pursuant to the terms stated herein.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties hereto agree as follows:
1. Engagement. CinemaStar hereby engages and appoints the Soliciting
Agent to serve as its exclusive Solicitation Agent for CinemaStar in connection
with the Offer.
2. Solicitation. The Soliciting Agent is hereby authorized to solicit
holders of the Redeemable Warrants pursuant to the terms hereof and of the
enclosed Prospectus or any revisions thereof, the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended, and the applicable
rules and regulations of the Securities and Exchange Commission thereunder, the
Rules of Fair Practice of the National Association of Securities Dealer(s),
Inc., and the applicable state securities laws and regulations.
<PAGE> 2
3. Solicitation Material. Copies of the Prospectus relating to
the Offer have been furnished to the Soliciting Agent with this Agreement and
the Soliciting Agent agrees to deliver a copy of the then effective Prospectus
to each Redeemable Warrant holder. The Soliciting Agent is authorized to use
only such documents and other Offer literature prepared by CinemaStar and the
Soliciting Agent is not authorized to make use of any Prospectus or to make use
of soliciting literature not so prepared or furnished, or to make any
representations or furnish any information other than that contained in the
Prospectus or in such sales literature. The Soliciting Agent will be supplied
without charge a reasonable number of Prospectuses and other soliciting
literature as may, from time to time, be prepared. The Soliciting Agent agrees
not to deliver any soliciting literature to any person unless accompanied or
proceeded by the then effective Prospectus.
4. Offer Acceptance Procedures. Executed and exercised Redeemable
Warrants together with cash or a certified or official bank check made payable
to CinemaStar Luxury Theaters, Inc. in the amount of the aggregate exercise
price should be mailed to Continental Stock Transfer & Trust Company,
("Depository"). If Redeemable Warrants and checks are received by the
Soliciting Agent, the Soliciting Agent agrees to deliver such Redeemable
Warrants, and checks to the Depositary immediately upon its receipt. Upon
receipt of the proper consideration, the Redeemable Warrant properly completed
and executed by the record holders, and after acceptance by CinemaStar as set
forth in the Offer, the Depository will deliver one share of Common Stock and
one Class B Warrant.
5. Fee. Subject to the valid exercise by the holder of the
Redeemable Warrants, the Soliciting Agent is entitled to receive from
CinemaStar a fee equal to four percent (4%) of the exercise price paid upon
each tender and exercise of the Redeemable Warranty pursuant to the Offer. In
addition, CinemaStar agrees to pay the Soliciting Agent a fee equal to four
percent (4%) of the proceeds upon exercise of each Class B Warrant.
6. Expenses. Whether or not the transactions contemplated
hereunder are consummated or this Agreement is terminated, CinemaStar agrees to
pay all costs, fees and expenses, incurred in connection with the performance
of its obligations hereunder and in connection with the transactions
contemplated hereby, including (i) all filing fees, attorneys' fees and
expenses incurred by CinemaStar or the Soliciting Agent in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) under the Blue Sky laws, (ii) the filing fee of the National
Association of Securities Dealers, Inc., (iii) all other fees, costs and
expenses referred to in Item 25 of the Registration Statement, and (iv) shall
reimburse the Soliciting Agent for any and all of its reasonable out-of-pocket
expenses, including fees and disbursements of its counsel not to exceed
$25,000, incurred by the Soliciting Agent in connection with the Soliciting
Agent's performance of this Agreement.
7. Inspection of Records. During the period of the Offer and for
thirty (30) days thereafter, but in no event after the termination of this
Agreement, the Soliciting Agent may, at any time during business hours, examine
the records of CinemaStar and the Depository which relates to the Offer.
2
<PAGE> 3
8. Termination. The term of this Agreement shall be the longer of
(i) five (5) years from and after the date first above written or (ii) one (1)
year after expiration of the last to expire of the Class B Warrants. The
obligations of CinemaStar provided for in Section 5 and 6 above and Section 9
below shall survive the termination of expiration of the term of this
Agreement.
9. Indemnification. CinemaStar agrees to indemnify and hold
harmless the Soliciting Agent, the directors, officers, employees and agents of
the Soliciting Agent and each person who controls the Soliciting Agent within
the meaning of Section 15 of the Securities Act of 1933, as amended (the "Act")
or Section 20 of the Exchange Act of 1934, as amended (the "Exchange Act")
against any and all losses, claims, damages or liabilities, joint or several,
to which they or any of them may become subject under the Act, the Exchange
Act, or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or action in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement as
originally filed, or in any amendment thereof, or in any Preliminary Prospectus
or the Prospectus, or any amendment thereof, or supplement thereto, or any of
the soliciting literature provided by CinemaStar, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and agrees to reimburse each such indemnified party for any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage, liability or action.
10. Notices. Any notice or other communication required or
permitted to be given pursuant to this Agreement shall be deemed sufficiently
given if sent by first-class mail, postage prepaid, addressed as follows: if to
CinemaStar, at 431 College Boulevard, Oceanside, CA 92057, Attention: John
Ellison, President, with copies to Ron Givner, Jeffer, Mangels, Butler &
Marmaro LLP; if to the Soliciting Agent, at 1999 Avenue of the Stars, Suite
2500, Los Angeles, CA 90067, Attention: Robert DiMinico, Chairman, with copies
to Barry D. Falk, Jeffers, Wilson & Shaff, LLP.
11. Supplements and Amendments. CinemaStar and the Soliciting
Agent may from time to time supplement or amend this Agreement in writing
without the approval of any holders of Redeemable Warrants in order to cure any
ambiguity or to correct or supplement any provisions contained herein or to
make any other provisions in regard to matters or questions arising hereunder
which CenemaStar and the Soliciting Agent may deem necessary or desirable and
which do not adversely affect the interests of the holders of Redeemable
Warrants.
12. Assignments. This Agreement may not be assigned by any party
without the express written approval of all other parties, except that the
Soliciting Agent may assign this Agreement to its successors.
13. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of the State of New York.
3
<PAGE> 4
14. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give any person or corporation other than CinemaStar and the
Soliciting Agent any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of
CinemaStar and the Soliciting Agent.
15. Descriptive Headings. The descriptive headings of the sections
of this Agreement are inserted for convenience only and shall not control or
affect the meanings or construction of any of the provisions hereof.
16. Enforceability. If any of the provisions of this Agreement are
held to be void or unenforceable, all of the other provisions shall nonetheless
continue in full force and effect.
17. Waiver. The waiver by any of the parties hereto of a breach or
alleged breach of the terms of this Agreement by the other party shall not
constitute a waiver of any other breach or alleged breach.
18. Entire Agreement. This Agreement supersedes all previous
arrangements and agreements whether written or oral, and comprises the entire
agreement, between CinemaStar and the Soliciting Agent in respect of the
subject matter hereof.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
CINEMASTAR LUXURY THEATRES, INC.
---------------------------------------
John Ellison, Jr., President
AGREED and ACCEPTED:
We agree and accept all the terms and conditions stated in the above
Agreement. We hereby acknowledge receipt of copies of the Prospectus referred
to above.
Dated: June , 1996
THE BOSTON GROUP, L.P.
"Soliciting Agent"
By:
------------------------------------
Robert DiMinico, Chairman
Address: 1999 Avenue of the Stars,
Suite 2500, Los Angeles, California
90067
5
<PAGE> 1
EXHIBIT 4.6
WARRANT AGREEMENT
This WARRANT AGREEMENT, dated this day of , 1996, by and
between CINEMASTAR LUXURY THEATERS, a California corporation (the "Company"),
and CONTINENTAL TRANSFER & TRUST COMPANY, a New York corporation.
WITNESSETH:
WHEREAS, in connection with the Offer to its existing holders of
Redeemable Warrants, the Company may issue up to Four Million Seven Hundred
Twenty-five Thousand (4,725,000) redeemable Class B warrants (the "Warrants")
each Warrant entitling the holder thereof to purchase one share of the Company's
common stock (the "Warrant Stock").
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants; and
WHEREAS, the Company desires Continental Stock Transfer & Trust Company
to act on behalf of the Company, and Continental Stock Transfer & Trust Company
is willing to so act, in connection with the issuance, registration, transfer
and exchange of certificates representing the Warrants and the exercise of the
Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the certificates representing the Warrants and
the respective rights and obligations thereunder of the Company, the
Representative, the holders of certificates representing the Warrants and
Continental Stock Transfer & Trust Company, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have
the following meanings, unless the context shall otherwise requires:
(a) "Act" shall have the meaning assigned to such term in
Section 5(b) of this Agreement.
(b) "Change of Shares" shall have the meaning assigned to
such term in Section 8(a)(i) of this Agreement.
(c) "Common Stock" shall mean stock of the Company of any
class, whether now or hereafter authorized, which has the right to participate
in the voting and in the distribution of earnings and assets of the Company
without limit as to amount or percentage.
<PAGE> 2
(d) "Company" shall have the meaning assigned to such
term in the first (1st) paragraph of this Agreement.
(e) "Corporate Office" shall mean the office of the
Warrant Agent (as such term is defined in Section 1(y) hereof) at which at any
particular time its principal business in New York, New York, shall be
administered, which office is located on the date hereof at 2 Broadway, New
York, New York 10004.
(f) "Exchange Act" shall have the meaning assigned to
such term in Section 4(b) of this Agreement.
(g) "Exercise Date" shall mean, subject to the provisions
of Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent
shall have received both (i) the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder (as such
term is defined in Section 1(o) hereof) thereof or his attorney duly authorized
in writing, and (ii) payment in cash or by check made payable to the Warrant
Agent for the account of the Company of the amount in lawful money of the United
States of America equal to the applicable Purchase Price (as such term is
defined in Section 1(l) hereof).
(h) "Initial Warrant Exercise Date" shall mean ,
199 [ONE YEAR AFTER THE DATE OF THE PROSPECTUS].
(i) "Initial Warrant Redemption Date" shall mean ,
199 [ONE YEAR AFTER THE DATE OF THE PROSPECTUS].
(j) "NASD" shall have the meaning assigned to such term
in Section 4(b) hereof.
(k) "Purchase Price" shall mean, subject to modification
and adjustment as provided in Section 8 hereof, dollars ($ ) per share of
Common Stock.
(l) "Redemption Date" shall have the meaning assigned to
such term in Section 9(c) hereof.
(m) "Registered Holder" shall mean the person in whose
name any certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6 hereof.
(n) "Shares" shall have the meaning assigned to such term
in Section 2(b) hereof.
(o) "Subsidiary" or "Subsidiaries" shall mean any
corporation or corporations, as the case may be, of which stock having ordinary
power to elect a majority of the Board of Directors of such corporation or
corporations (regardless of whether or not at the time the stock of any other
class or
-2-
<PAGE> 3
classes of such corporation shall have or may have voting power by reason of the
happening of any contingency) is at the time directly or indirectly owned by the
Company or by one or more Subsidiaries, or by the Company and one or more
Subsidiaries.
(p) "Transfer Agent" shall mean Continental Stock
Transfer & Trust Company, New York, New York, or its authorized successor.
(q) "Warrant Agent" shall mean Continental Stock Transfer
& Trust Company, New York, New York, or its authorized successor.
(r) "Warrant Certificate" shall mean a certificate
representing each of the Warrants substantially in the form annexed hereto as
Exhibit A.
(s) "Warrant Expiration Date" shall mean, unless the
Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:00
p.m. (New York time) on , 200 , or, if such date shall in the State of
New York be a holiday or a day on which banks are authorized to close, then 5:00
p.m. (New York time) on the next following day which in the State of New York is
not a holiday or a day on which banks are authorized to close, subject to the
Company's right, prior to the Warrant Expiration Date, in its sole discretion,
to extend such Warrant Expiration Date on five (5) business days prior written
notice to the Registered Holders.
(t) "Warrants" shall have the meaning assigned to such
term in the first (1st) WHEREAS clause of this Agreement.
(u) "Warrant Stock" shall have the meaning assigned to
such term in the first (1st) WHEREAS clause of this Agreement.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the Registered
Holder of the Warrant Certificate representing such Warrant to purchase at the
Purchase Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one (1) share of Common Stock upon the exercise thereof, subject
to modification and adjustment as provided in Section 8 hereof.
(b) Upon execution of this Agreement, Warrant
Certificates representing up to Four Million Seven Hundred Thousand Twenty-five
Hundred (4,725,000) Warrants to purchase up to an aggregate of Four Million
Seven Hundred Twenty-five Thousand (4,725,000) shares (the "Shares") of Common
Stock (subject to modification and adjustment as provided in Section 8 hereof).
-3-
<PAGE> 4
(c) From time to time, up to the Warrant Expiration Date,
as the case may be, the Warrant Agent shall countersign and deliver Warrant
Certificates in required denominations of one or whole number multiples thereof
to the person entitled thereto in connection with any transfer or exchange
permitted under this Agreement. No Warrant Certificates shall be issued except
(i) Warrant Certificates initially issued hereunder, (ii) Warrant Certificates
issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates
issued in replacement of lost, stolen, destroyed or mutilated Warrant
Certificates pursuant to Section 7 hereof, and (iv) at the option of the
Company, Warrant Certificates in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Purchase Price, the number
of shares of Common Stock purchasable upon the exercise of a Warrant or the
redemption price therefor.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in
the form annexed hereto as Exhibit A (the provisions of which are hereby
incorporated herein) and may have such letters, numbers or other marks of
identification or designation and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates).
(b) Warrant Certificates shall be executed on behalf of
the Company by its Chairman of the Board, President or any Vice President and by
its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon, and
shall have imprinted thereon a facsimile of the Company's seal. Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Warrant Certificates shall cease to be
such officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant Agent and issued and delivered with the same force and effect as
though the officer of the Company who signed such Warrant Certificates had not
ceased to hold such office.
-4-
<PAGE> 5
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number
multiples thereof may be exercised commencing at any time on or after the
Initial Warrant Exercise Date, but not after the Warrant Expiration Date or the
Redemption Date, upon the terms and subject to the conditions set forth herein
(including the provisions set forth in Sections 5 and 9 hereof) and in the
applicable Warrant Certificate. A Warrant shall be deemed to have been exercised
immediately prior to the close of business on the Exercise Date, provided that
the Warrant Certificate representing such Warrant, with the exercise form
thereon duly executed by the Registered Holder thereof or his attorney duly
authorized in writing, together with payment in cash or by check made payable to
the Warrant Agent for the account of the Company of an amount in lawful money of
the United States of America equal to the applicable Purchase Price, has been
received by the Warrant Agent. The person entitled to receive the securities
deliverable upon such exercise shall be treated for all purposes as the holder
of such securities as of the close of business on the Exercise Date. As soon as
practicable on or after the Exercise Date, the Warrant Agent on behalf of the
Company shall cause to be issued to the person or persons entitled to receive
the same a Common Stock certificate or certificates for the shares of Common
Stock deliverable upon such exercise, and the Warrant Agent shall deliver the
same to the person or persons entitled thereto. Upon the exercise of any
Warrants, the Warrant Agent shall promptly notify the Company in writing of such
fact and of the number of securities delivered upon such exercise and, subject
to Section 4(b) hereof, shall cause all payments in cash or by check made
payable to the order of the Company in respect of the Purchase Price to be
deposited promptly in the Company's bank account.
(b) At any time upon the exercise of any Warrants after
the Initial Warrant Exercise Date, the Warrant Agent shall, on a daily basis,
within two (2) business days after any such exercise, notify The Boston Group,
L.P. or its successors or assigns of the exercise of any such Warrants and
shall, on a weekly basis (subject to collection of funds constituting the
tendered Purchase Price, but in no event later than five (5) business days after
the last day of the calendar week in which such funds were tendered), remit to
The Boston Group, L.P. or its successors or assigns an amount equal to four
percent (4%) of the Purchase Price of such Warrants being then exercised unless
The Boston Group, L.P. or its successors or assigns shall have notified the
Warrant Agent that the payment of such amount with respect to any such Warrant
is violative of the rules and regulations promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations
of the National Association of Securities Dealers, Inc. (the "NASD") or
applicable state securities or "blue sky" laws, in any of which events the
Warrant Agent shall have to pay such amount
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<PAGE> 6
to the Company; provided, however, that the Warrant Agent shall not be obligated
to pay any amounts pursuant to this Section 4(b) during any week that such
amounts payable are less than one thousand dollars ($1,000) and the Warrant
Agent's obligation to make such payments shall be suspended until the amount
payable aggregates one thousand dollars ($1,000), and provided further, that, in
any event, any such payment (regardless of amount) shall be made not less
frequently than monthly. Under current rules of the NASD, amounts can be paid to
The Boston Group, L.P. upon any exercise of a Warrant under this Section 4(b)
only if (i) the market price of the Company's Common Stock is greater than the
then Purchase Price of the Warrants, (ii) the exercise of the Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.
("NASD"), (iii) the Warrant was not held in a discretionary account, (iv)
disclosure of compensation arrangements has been made in documents provided to
customers both as part of the original offering and at the time of exercise and
(v) the solicitation of the exercise of the Warrant was not in violation of Rule
10b-6 (as such rule or any successor rule may be in effect as of such time of
exercise) promulgated under the Securities Exchange Act of 1934. The provisions
of this Section 4(b) may not be modified, amended or deleted without the prior
written consent of The Boston Group, L.P.
(c) The Company shall not be obligated to issue any
fractional share interests or fractional warrant interests upon the exercise of
any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash in
lieu of fractional interests. Any fraction equal to or greater than one-half
shall be rounded up to the next full share or Warrant, as the case may be. Any
fraction less than one-half shall be eliminated.
SECTION 5. Reservation of Shares; Listing, Payment of Taxes; etc.
(a) The Company covenants that it will at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon the exercise of Warrants, such number of shares of
Common Stock as shall then be issuable upon the exercise of all outstanding
Warrants. The Company covenants that, upon exercise of the Warrants and payment
of the Purchase Price for the shares of Common Stock underlying the Warrants,
all shares of Common Stock which shall be issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable, free from all preemptive or
similar rights, and free from all taxes, liens and charges with respect to the
issuance thereof, and that upon issuance such shares shall be listed or quoted
on each securities exchange or NASDAQ, if any, on which the other shares of
outstanding Common Stock of the Company are then listed.
(b) The Company covenants that if any securities
reserved for the purpose of exercise of Warrants hereunder require registration
with, or approval of, any governmental
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<PAGE> 7
authority under any federal securities law before such securities may be validly
issued or delivered upon such exercise, then the Company will file a
registration statement under the federal securities laws or a post-effective
amendment to a registration statement, use its best efforts to cause the same to
become effective, keep such registration statement current while any of the
Warrants are outstanding and deliver a prospectus which complies with Section
10(a)(3) of the Securities Act of 1933, as amended (the "Act"), to the
Registered Holder exercising the Warrant (except, if in the opinion of counsel
to the Company, such registration is not required under the federal securities
law or if the Company receives a letter from the staff of the Securities and
Exchange Commission (the "Commission") stating that it would not take any
enforcement action if such registration is not effected). The Company will use
its best efforts to obtain appropriate approvals or registrations under the
state "blue sky" securities laws of all states in which Registered Holders
reside. Warrants may not be exercised by, nor may shares of Common Stock be
issued to, any Registered Holder in any state in which such exercise would be
unlawful.
(c) The Company shall pay all documentary, stamp or
similar taxes and other governmental charges that may be imposed with respect to
the issuance of Warrants, or the issuance or delivery of any shares of Common
Stock upon exercise of the Warrants; provided, however, that if shares of Common
Stock are to be delivered in a name other than the name of the Registered Holder
of the Warrant Certificate representing any Warrant being exercised, then no
such delivery shall be made unless the person requesting the same has paid to
the Warrant Agent the amount of transfer taxes or charges incident thereto, if
any.
(d) The Warrant Agent is hereby irrevocably authorized
as the Transfer Agent to requisition from time to time certificates representing
shares of Common Stock or other securities required upon exercise of the
Warrants, and the Company will comply with all such requisitions.
(e) Nothing contained in this Agreement shall be
constructed as conferring upon any Registered Holder the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, the Company shall
adopt a resolution for the liquidation, dissolution or winding up of the
Company's business, then the Company shall give written notice of the adoption
of such resolution to all Registered Holders. No such liquidation, dissolution
or winding-up of the Company's affairs shall commence until at least thirty (30)
days after such written notice is given, at which time the right of the
Registered Holders to participate in the liquidation, dissolution or winding-up
of the Company's affairs
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<PAGE> 8
shall terminate unless the Redeemable Warrants are exercised within such thirty
(30) day period.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other
Warrant Certificates representing an equal aggregate number of Warrants or may
be transferred in whole or in part. Warrant Certificates to be so exchanged
shall be surrendered to the Warrant Agent at its Corporate Office, and the
Company shall execute and the Warrant Agent shall countersign, issue and deliver
in exchange therefor the Warrant Certificate or Certificates which the
Registered Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office, books
in which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented
for registration of transfer, or for exchange or exercise, the subscription or
assignment form, as the case may be, on the reverse thereof shall be duly
endorsed or be accompanied by a written instrument or instruments of
subscription or assignment, in form satisfactory to the Company and the Warrant
Agent, duty executed by the Registered Holder thereof or his attorney duly
authorized in writing.
(d) No service charge shall be made for any exchange or
registration of transfer of Warrant Certificates. However, the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or
for exchange shall be promptly canceled by the Warrant Agent.
(f) Prior to due presentment for registration or
transfer thereof, the Company and the Warrant Agent may deem and treat the
Registered Holder of any Warrant Certificate as the absolute owner thereof of
each Warrant represented thereby (notwithstanding any notations of ownership or
writing thereon made by anyone other than the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary.
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<PAGE> 9
SECTION 7. Loss or Mutilation.
Upon receipt by the Company and the Warrant Agent of evidence
satisfactory to them of the ownership of and the loss, theft, destruction or
mutilation of any Warrant Certificate and (in the case of loss, theft or
destruction) of indemnity satisfactory to them, and (in case of mutilation) upon
surrender and cancellation thereof, the Company shall execute and the Warrant
Agent shall countersign and deliver in lieu thereof a new Warrant Certificate,
representing an equal number of Warrants. Applicants for a substitute Warrant
Certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of
Common Stock Deliverable.
(a) (i) Except as hereinafter provided, in the event
the Company shall, at any time or from time to time after the date hereof, sell
any shares of Common Stock for a consideration per share less than the Purchase
Price or issue any shares of Common Stock as a stock dividend to the holders of
Common Stock, or subdivide or combine the outstanding shares of Common Stock
into a greater or lesser number of shares (any such sale, issuance, subdivision
or combination being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price for the Warrants (whether
or not the same shall be issued and outstanding) in effect immediately prior to
such Change of Shares shall be changed to a price (including any applicable
fraction of a cent to the nearest cent) determined by dividing (A) the sum of
(x) the total number of shares of Common Stock outstanding immediately prior to
such Change of Shares, multiplied by the Purchase Price in effect immediately
prior to such Change of Shares, and (y) the consideration, if any, received by
the Company upon such sale, issuance, subdivision or combination by (B) the
total number of sham of Common Stock outstanding immediately after such Change
of Shares; provided, however, that in no event shall the Purchase Price be
adjusted pursuant to this computation to an amount in excess of the Purchase
Price in effect immediately prior to such computation, except in the case of a
combination of outstanding shares of Common Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a)(i) the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common
Stock (or of other securities deemed hereunder to involve the issuance or sale
of shares of Common Stock) for a consideration part or all of which shall be
cash, the amount of the cash portion of the consideration therefor deemed to
have been received by the Company shall be (i) the subscription price, if shares
of Common Stock are offered by the Company for subscrip-
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<PAGE> 10
tion, or (ii) the public offering price (before deducting therefrom any
compensation paid or discount allowed in the sale, underwriting or purchase
thereof by underwriters or dealers or others performing similar services, or any
expenses incurred in connection therewith), if such securities are sold to
underwriters or dealers for public offering without a subscription offering, or
(iii) the gross amount of cash actually received by the Company for such
securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash or as
part of a unit, the amount of the consideration therefor other than cash deemed
to have been received by the Company or the amount received per share as part of
a unit shall be the value of such consideration as determined in good faith by
the Board of Directors of the Company on the basis of a record of values of
similar property, services or securities.
(C) Shares of Common Stock issuable by way of dividend
or other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the day following the record
date for the determination of shareholders entitled to receive such dividend or
other distribution and shall be deemed to have been issued without
consideration.
(D) The reclassification of securities of the Company
other than shares of Common Stock into securities including shares of Common
Stock shall be deemed to involve the issuance of such shares of Common Stock for
a consideration other than cash immediately prior to the close of business on
the date fixed for the determination of security holders entitled to receive
such shares, and the value of the consideration allocable to such shares of
Common Stock shall be determined as provided in Section 8(a)(i)(B) hereof.
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(ii) Upon each adjustment of the Purchase Price
pursuant to this Section 8, the number of shares of Common Stock purchasable
upon the exercise of each Warrant shall be the number derived by multiplying the
number of shares of Common Stock purchasable immediately prior to such
adjustment by the
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<PAGE> 11
Purchase Price in effect prior to such adjustment and dividing the product so
obtained by the applicable adjusted Purchase Price.
(b) In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share (determined as provided in Section
8(a)(i) hereof and as provided below) less than the Purchase Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, or without consideration (including the
issuance of any such securities by way of dividend or other distribution), the
Purchase Price for the Warrants (whether or not the same shall be issued and
outstanding) in effect immediately prior to the issuance of such options, rights
or warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making the computation in accordance
with the provisions of Section 8(a)(i) hereof, provided that:
(i) The aggregate maximum number of shares of
Common Stock, as the case may be, issuable or that may become issuable under
such options, rights or warrants (assuming exercise in full even if not then
currently exercisable or currently exercisable in full) shall be deemed to be
issued and outstanding at the time such options, rights or warrants were issued,
for a consideration equal to the minimum purchase price per share provided for
in such options, rights or warrants at the time of issuance, plus the
consideration, if any, received by the Company for such options, rights or
warrants; provided, however, that upon the expiration or other termination of
such options, rights or warrants, if any thereof shall not have been exercised,
the number of shares of Common Stock deemed to be issued and outstanding
pursuant to this subsection (i) (and for the purposes of Section 8(a)(i)(E)
hereof) shall be reduced by the number of shares as to which options, warrants
and/or rights shall have expired, and such number of shares shall no longer be
deemed to be issued and outstanding, and the Purchase Price then in effect shall
forthwith be readjusted and thereafter be the price that it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued plus the shares remaining issuable upon the exercise of those options,
rights or warrants as to which the exercise rights shall not have expired or
terminated unexercised.
(ii) The aggregate maximum number of shares of
Common Stock issuable or that may become issuable upon conversion or exchange of
any convertible or exchangeable securities (assuming conversion or exchange in
full even if not then currently convertible or exchangeable in full) shall be
deemed to be issued and outstanding at the time of issuance of such securities,
for a consideration equal to the consideration received by the Company for such
securities, plus the minimum
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<PAGE> 12
consideration, if any, receivable by the Company upon the conversion or exchange
thereof; provided, however, that upon the termination of the right to convert or
exchange such convertible or exchangeable securities (whether by reason of
redemption or otherwise), the number of shares of Common Stock deemed to be
issued and outstanding pursuant to this subsection (ii) (and for the purposes of
Section 8(a)(i)(E) hereof) shall be reduced by the number of shares as to which
the conversion or exchange rights shall have expired or terminated unexercised,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Purchase Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon conversion or exchange of those convertible or
exchangeable securities as to which the conversion or exchange rights shall not
have expired or terminated unexercised.
(iii) If any change shall occur in the price per
share provided for in any of the options, rights or warrants referred to in
Section 8(b)(i) hereof, or in the price per share or ratio at which the
securities referred to in Section 8(b)(ii) hereof are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(c) In case of any reclassification or change of
outstanding shares of Common Stock issuable upon exercise of the Warrants (other
than a change in par value, or from par value to no par value, or from no par
value to par value or as a result of a subdivision or combination), or in case
of any consolidation or merger of the Company with or into another corporation
(other than a merger with a Subsidiary in which merger the Company is the
continuing corporation and which does not result in any reclassification or
change of the then outstanding shares of Common Stock or other capital stock
issuable upon exercise of the Warrants), or in case of any sale or conveyance to
another corporation of the property of the Company as an entirety or
substantially as an entirety, then, as a condition of such reclassification,
change, consolidation, merger, sale or conveyance, the Company, or such
successor or purchasing corporation, as the case may be, shall make lawful and
adequate provision whereby the Registered Holder of each Warrant then
outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change,
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<PAGE> 13
consolidation, merger, sale or conveyance and shall forthwith file at the
Corporate Office of the Warrant Agent a statement signed by its Chairman of the
Board, President or a Vice President and by its Treasurer or an Assistant
Treasurer or its Secretary or an Assistant Secretary evidencing such provision.
Such provisions shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in Sections
8(a) and 8(b) hereof. The above provisions of this Section 8(c) shall similarly
apply to successive reclassifications and changes of shares of Common Stock and
to successive consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the
Purchase Price or the number of shares of Common Stock pur- chasable upon
exercise of the Warrants, the Warrant Certificates theretofore and thereafter
issued shall, unless the Company shall exercise its option to issue new Warrant
Certificates pursuant to Section 2(e) hereof, continue to express the Purchase
Price per share and the number of shares purchasable thereunder as the Purchase
Price per share and the number of shares purchasable thereunder were expressed
in the Warrant Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant
to this Section 8, the Company will promptly prepare a certificate signed by the
Chairman of the Board, President, or a Vice President and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary of the Company
setting forth: (i) the Purchase Price, as so adjusted, (ii) the number of shares
of Common Stock purchasable upon exercise of each Warrant, after such
adjustment, and (iii) a brief statement of the facts accounting for such
adjustment. The Company will promptly file such certificate with the Warrant
Agent and cause a brief summary thereof to be sent by ordinary first class mail
to each Registered Holder at his last address as it shall appear on the registry
books of the Warrant Agent. No failure to mail such notice nor any defect
therein or in the mailing thereof shall affect the validity thereof except as to
the holder to whom the Company failed to mail such notice, or except as to the
holder whose notice was defective. The affidavit of an officer of the Warrant
Agent or the Secretary or an Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(f) No adjustment of the Purchase Price shall be made as
a result of or in connection with (i) the issuance or sale of shares of Common
Stock pursuant to options, warrants, stock purchase agreements and convertible
or exchangeable securities outstanding or in effect on the date hereof, (ii) the
issuance or sale of shares of Common Stock upon the exercise of any "incentive
stock options" (as such term is defined in the Internal Revenue Code of 1986, as
amended), or any non-qualified stock options to non-employee directors of the
Company pursuant
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<PAGE> 14
to the Company's 1995 Stock Option Plan, whether or not such options were
outstanding on the date hereof, or (C) the issuance or sale of shares of Common
Stock if the amount of said adjustment shall be less than ten cents ($.10);
provided, however, that in such case, any adjustment that would otherwise be
required then to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment that shall amount, together
with any adjustment so carried forward, to at least ten cents ($. 10). In
addition, Registered Holders shall not be entitled to cash dividends paid by the
Company prior to the exercise of any Warrant or Warrants held by them.
(g) In case of any consolidation of the Company with or
merger of the Company into another corporation or other entity or in case of any
sale, lease, conveyance or other transfer to another corporation, person or
other entity of the property, assets or business of the Company as an entirety
or substantially as an entirety, the Company or such successor or purchasing
corporation, person or other entity, as the case may be, shall execute with the
Warrantholder, and the agreements governing such consolidation, merger, sale,
lease, conveyance or other transfer shall require such execution of, an
agreement that the Warrantholder shall have the right thereafter upon payment of
the Warrant Price in effect immediately prior to such event, upon exercise of
the Warrants, to receive the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, lease, conveyance or other
transfer had the Warrants (and each underlying security) been exercised
immediately prior to such action. The Company shall promptly mail to each
Warrantholder by first class mail, postage prepaid, notice of the execution of
any such agreement. In the event of a merger described in Section 368(a)(2)(E)
of the Internal Revenue Code of 1986, in which the Company is the surviving
corporation, the right to purchase shares of Warrant Stock under the Warrants
shall terminate on the date of such merger and thereupon the Warrants shall
become null and void, but only if the controlling corporation shall agree to
substitute for the Warrants its warrant which entitles the holder thereof to
purchase upon its exercise the kind and amount of shares and other securities
and property which it would have owned or been entitled to receive had the
Warrants been exercised immediately prior to such merger. Any such agreements
referred to in this Section 8(g) shall provide for adjustments, which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
Section 8 hereof, and shall provide for terms and provisions at least as
favorable to the Warrantholder as those contained in this Agreement. The
provisions of this Section 8(g) shall similarly apply to successive
consolidations, mergers, sales, leases, conveyances or other transfers.
(h) Before taking any action which would cause an
adjustment effectively reducing the portion of the Purchase Price
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<PAGE> 15
allocable to each share of Warrant Stock below the then par value per share, if
any, of the Warrant Stock issuable upon exercise of the Warrants, the Company
shall take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Warrant Stock upon exercise of the Warrants.
(i) The Company may retain BDO Seidman LLP (or such
other accounting firm qualified to practice in front of the Securities and
Exchange Commission (the "Commission") as is reasonably acceptable to the
Representative) to make any computation required under this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section 8.
SECTION 9. Redemption.
(a) Commencing on the Initial Warrant Redemption
Date, the Company may, on thirty (30) days prior written notice redeem all of
the Warrants at a redemption price of twenty five cents ($.25) per Warrant;
provided, however, that before any such call for redemption of Warrants can take
place, (i) the average closing bid price for the Common Stock in the
over-the-counter market as reported by the Nasdaq Stock Market or (ii) the
average closing sale price on the primary exchange on which the Common Stock is
traded, if the Common Stock is traded on a national securities exchange, shall
have for any twenty (20) trading days within a period of thirty (30) consecutive
trading days ending on the fifth (5th) trading day prior to the date on which
the notice contemplated by Sections 9(b) and 9(c) hereof is given, equalled or
exceeded _____ dollars ($_.00) per share (subject to adjustment in the event of
any stock splits or other similar events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to
redeem all of the Warrants, it shall give or cause to be given notice to the
Registered Holders of the Warrants, by mailing to such Registered Holders a
notice of redemption, first class, postage prepaid, at their last address as
shall appear on the records of the Warrant Agent. Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice. Not less than five
(5) business days prior to the mailing to the Registered Holders of the Warrants
of the notice of redemption, the Company shall deliver or cause to be delivered
to the Underwriter or its successors or assigns a similar notice telephonically
and confirmed in writing, together with a list of the Registered Holders
(including their respective addresses and number of Warrants beneficially owned
by them) to whom such notice of redemption has been or will be given.
(c) The notice of redemption shall specify (i) the
redemption price, (ii) the date fixed for redemption, which shall in no event be
less than thirty (30) days after the
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<PAGE> 16
date of mailing of such notice, (iii) the place where the Warrant Certificates
shall be delivered and the redemption price that shall be paid, (iv) that The
Boston Group, LLP or its successors or assigns is the Company's exclusive
warrant solicitation agent and shall receive the commission contemplated by
Section 4(b) hereof, and (v) that the right to exercise the Warrant shall
terminate at 5:00 p.m. (New York time) on the business day immediately preceding
the date fixed for redemption. The date fixed for the redemption of the Warrants
shall be the "Redemption Date" for purposes of this Agreement. No failure to
mail such notice nor any defect therein or in the mailing thereof shall affect
the validity of the proceedings for such redemption except as to a holder (A) to
whom notice was not mailed or (B) whose notice was defective. An affidavit of
the Warrant Agent or the Secretary or Assistant Secretary of the Company that
notice of redemption has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at
5:00 p.m. (New York time) on the business day immediately preceding the
Redemption Date. The redemption price payable to the Registered Holders shall be
mailed to such persons at their addresses of record.
(e) The Company shall as soon as practicable after the
Redemption Date, and in any event within fifteen (15) months thereafter, make
"generally available to its security holders" (within the meaning of Rule 158
under the Act) an earnings statement (which need not be audited) complying with
Section II(a) of the Act and covering a period of at least twelve (12)
consecutive months beginning after the Redemption Date.
SECTION 10. Registration Requirement.
(a) The Company shall be obligated to the registered
holders of the Warrants to continually maintain, at the Company's own expense,
the currency and effectiveness of a registration statement of the Company under
the Securities Act of 1933, as amended, including the filing of any and all
applications and other notifications, filings and post-effective amendments and
supplements (collectively, the "Current registration statement") and any
necessary filings under applicable state blue sky (securities) laws, as may be
necessary, so as to permit the issuance of the Common Stock underlying the
Warrants to the holder of the Warrants until the earlier of the time that all
shares of Securities have been exercised pursuant to the Current Registration
Statement or the Expiration Date.
SECTION 11. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a
ministerial capacity for the Company and The Boston Group, L.P. and its duties
shall be determined solely by the provisions hereof. The Warrant Agent shall
not, by issuing and delivering
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<PAGE> 17
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and non-assessable.
(b) The Warrant Agent shall not at any time be under any
duty or responsibility to any holder of Warrant Certificates to make or cause to
be made any adjustment of the Purchase Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustment, or with
respect to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. It shall not (i) be liable
for any recital or statement of fact contained herein or for any action taken,
suffered or omitted by it in reliance on any Warrant Certificate or other
document or instrument believed by it in good faith to be genuine and to have
been signed or presented by the proper party or parties, (ii) be responsible for
any failure on the part of the Company to comply with any of its covenants and
obligations contained in this Agreement or in any Warrant Certificate, or (iii)
be liable for any act or omission in connection with this Agreement except for
its own gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with
counsel satisfactory to it (who may be counsel for the Company or The Boston
Group, L.P.) and shall incur no liability or responsibility for any action
taken, suffered or omitted by it in good faith in accordance with the opinion or
advice of such counsel.
(d) Any notice, statement, instruction, request,
direction, order or demand of the Company shall be sufficiently evidenced by an
instrument signed by the Chairman of the Board of Directors, President or any
Vice President (unless other evidence in respect thereof is herein specifically
prescribed). The Warrant Agent shall not be liable for any action taken,
suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand.
(e) The Company agrees to pay the Warrant Agent
reasonable compensation for its services hereunder and to reimburse it for its
reasonable expenses hereunder; the Company further agrees to indemnify the
Warrant Agent and hold it harmless against any and all losses, expenses and
liabilities, including judgments, costs and counsel fees, for anything done or
omitted by the Warrant Agent in the execution of its duties and powers hereunder
except losses, expenses and liabilities arising as a result of the Warrant
Agent's gross negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be
discharged from all further duties and liabilities hereunder
-17-
<PAGE> 18
(except liabilities arising as a result of the Warrant Agent's own gross
negligence or willful misconduct), after giving thirty (30) days' prior written
notice to the Company. At least fifteen (15) days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation the Company shall
appoint in writing a new warrant agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after it has been notified in
writing of such resignation by the resigning Warrant Agent, then the Registered
Holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a stock transfer
company licensed by the Securities and Exchange Commission and reasonably
acceptable to The Boston Group, L.P. After acceptance in writing of such
appointment by the new warrant agent is received by the Company, such new
warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the warrant agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment, the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any
new warrant agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates,
and any of its or their officers or directors, may buy and hold or sell Warrants
or other securities of the Company and otherwise deal with the Company in the
same manner and to the same extent and with like effect as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
-18-
<PAGE> 19
(i) The Warrant Agent shall retain for a period of two
(2) years from the date of exercise any Warrant Certificate received by
it upon such exercise.
SECTION 12. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement (a) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained, or (b) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates; provided, however, that, except as
provided in the next two sentences, this Agreement shall not otherwise be
modified, supplemented or altered in any respect except with the consent in
writing of the Registered Holders holding over fifty percent (50%) of the
Warrants then outstanding; provided, further, that no change in the number or
nature of the securities purchasable upon the exercise of any Warrant, and no
change that increases the Purchase Price of any Warrant, other than such changes
as are specifically set forth in this Agreement as originally executed, shall be
made without the consent in writing of each Registered Holders affected by such
change. In addition, this Agreement may not be modified, amended or supplemented
without the prior written consent of The Boston Group, L.P. or its successors or
assigns, other than to cure any ambiguity or to correct any defective or
inconsistent provision or manifest mistake or error herein contained or to make
any such change that the Warrant Agent and the Company deem necessary or
desirable and which shall not adversely affect the interests of The Boston
Group, L.P. or its successors or assigns. Notwithstanding any other provision
hereof, the Company upon notice to the Warrantholders, the Warrant Agent and The
Boston Group, L.P., may permanently or temporarily lower the exercise price of
the Warrants or extend the expiration date of the Warrants.
SECTION 13. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid or delivered to a telegraph office for
transmission, if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company at 431 Collage Boulevard, Oceanside, California 92051,
Attention: John Ellison, Jr., President.
SECTION 14. Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of California without giving effect to conflicts of laws.
-19-
<PAGE> 20
SECTION 15. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Except as
hereinafter stated, nothing in this Agreement is intended or shall be construed
to confer upon any other person any right, remedy or claim or to impose upon any
other person any duty, liability or obligation. The Representative is, and shall
at all times irrevocably be deemed to be, a third-party beneficiary of this
Agreement, with full power, authority and standing to enforce the rights granted
to it hereunder.
SECTION 16. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
[Rest of page intentionally left blank]
-20-
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the date first above written.
CINEMASTAR LUXURY THEATERS, INC. CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
As Warrant Agent
BY: By:
-------------------------------- ---------------------------------
Name: John Ellison, Jr. Name:
Title: President Title:
THE BOSTON GROUP, L.P.
By:
--------------------------------
Name:
Title:
-21-
<PAGE> 22
EXHIBIT A
No. BW_____ VOID AFTER __________, 200_
____ WARRANTS
REDEEMABLE CLASS B WARRANT CERTIFICATE TO
PURCHASE SHARES OF COMMON STOCK
CINEMASTAR LUXURY THEATERS, INC.
CUSIP 17244C 12 9
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and non-assessable share of Common Stock, no par value,
of CinemaStar Luxury Theaters, Inc., a California corporation (the "Company"),
at any time from ________, 1996 and prior to the Expiration Date (as hereinafter
defined) upon the presentation and surrender of this Warrant Certificate with
the Subscription Form on the reverse hereof duly executed, at the corporate
office of Continental Stock Transfer & Trust Company, 2 Broadway, New York, New
York 10004, as Warrant Agent, or its successor (the "Warrant Agent"),
accompanied by payment of $____, subject to adjustment (the "Purchase Price"),
in lawful money of the United States of America in cash or by check made payable
to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby
are issued pursuant to and are subject in all respects to the terms and
conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated
___________, 199_, by and between the Company, the Warrant Agent and The Boston
Group, L.P.
In the event of certain contingencies provided for in the
Warrant Agreement, the Purchase Price and the number of shares of Common Stock
subject to purchase upon the exercise of each Warrant represented hereby are
subject to modification or adjustment.
Each Warrant represented hereby is exercisable at the option
of the Registered Holder, but no fractional interests will be issued. In the
case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute
A-1
<PAGE> 23
and deliver a new Warrant Certificate or Warrant Certificates of like tenor,
which the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York
time) on __________, 200_. If such date shall in the State of New York be a
holiday or a day on which banks are authorized to close, then the Expiration
Date shall mean 5:00 p.m. (New York time) the next following day which in the
State of New York is not a holiday or a day on which banks are authorized to
close.
The Company shall not be obligated to deliver any securities
pursuant to the exercise of this Warrant unless a registration statement under
the Securities Act of 1933, as amended (the "Act"), with respect to such
securities is effective or an exemption thereunder is available. The Company has
covenanted and agreed that it will file a registration statement under the
Federal securities laws, use its best efforts to cause the same to become
effective, to keep such registration statement current, if required under the
Act, while any of the Warrants are outstanding, and deliver a prospectus which
complies with Section 10(a)(3) of the Act to the Registered Holder exercising
this Warrant. This Warrant shall not be exercisable by a Registered Holder in
any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender
hereof by the Registered Holder at the corporate office of the Warrant Agent,
for a new Warrant Certificate or Warrant Certificates of like tenor representing
an equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of any
tax or other charge imposed in connection therewith or incident thereto, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Under certain circumstances, The Boston Group, L.P. shall be
entitled to receive aggregate of four percent of the Purchase Price of the
Warrants represented hereby.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this
Warrant may be redeemed at the option of the Company, at a
A-2
<PAGE> 24
redemption price of $.25 per Warrant, at any time commencing ________________,
199_, provided that (i) the average closing bid price for the Company's Common
Stock in the over-the-counter market as reported by the Nasdaq Stock Market or
(ii) the average closing sale price on the primary exchange on which the Common
Stock is traded, if the Common Stock is traded on a national securities
exchange, shall have for any twenty (20) trading days within a period of thirty
(30) consecutive trading days ending on the fifth trading day prior to the
Notice of Redemption, as defined below, equalled or exceeded $____ per share
(subject to adjustment in the event of any stock splits or other similar
events). Notice of redemption (the "Notice of Redemption") shall be given not
later than the thirtieth day before the date fixed for redemption, all as
provided in the Warrant Agreement. On and after the date fixed for redemption,
the Registered Holder shall have no rights with respect to this Warrant except
to receive the $.25 per Warrant upon surrender of this Certificate.
Under certain circumstances, The Boston Group, L.P. shall be
entitled to receive aggregate of four percent of the Purchase Price of the
Warrants represented hereby.
Prior to due presentment for registration of transfer hereof,
the Company and the Warrant Agent may deem and treat the Registered Holder as
the absolute owner hereof and of each Warrant represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Warrant Agent) for
all purposes and shall not be affected by any notice to the contrary, except as
provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
conflicts of laws.
This Warrant Certificate is not valid unless countersigned by
the Warrant Agent.
A-3
<PAGE> 25
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed, manually or in facsimile by two of its officers
thereunto duly authorized and a facsimile of its corporate seal to be imprinted
hereon.
Dated: 199_
CINEMASTAR LUXURY THEATERS, INC.
[SEAL]
By:__________________________
Name: John Ellison, Jr.
Title: President
By:__________________________
Name: Jon Meloun
Title: Secretary
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By:_____________________________
Authorized Officer
A-4
<PAGE> 26
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to
exercise Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities be issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
-----------------------
-----------------------
-----------------------
-----------------------
(please print or type name and address)
and be delivered to
-----------------------
-----------------------
-----------------------
-----------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
A-5
<PAGE> 27
The undersigned represents that the exercise of the within
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in
the space below. Unless otherwise indicated by listing the name of another NASD
member firm, it will be assumed that the exercise was solicited by The Boston
Group, L.P.
-----------------------
(Name of NASD member if
other than The Boston
Group, L.P.)
Dated: X
------------- ----------------------
-----------------------
-----------------------
Address
-----------------------
Social Security or Taxpayer
Identification Number
-----------------------
Signature Guaranteed
-----------------------
A-6
<PAGE> 28
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, ______________________, hereby sells,
assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER
_______________________
_______________________
_______________________
_______________________
(please print or type name and address)
_______________________ of the Warrants represented by this Warrant Certificate,
and hereby irrevocably constitutes and appoints ________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated:_____________ X______________________
_______________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A PARTICIPANT IN THE MEDALLION SIGNATURE GUARANTEE PROGRAM.
A-7
<PAGE> 1
Exhibit 5
[JEFFER, MANGELS, BUTLER & MARMARO LLP LETTERHEAD]
June 3, 1996 56138-0001
CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, CA 92057
Re: CinemaStar Luxury Theaters, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
At your request, we have examined the Registration Statement
on Form SB-2 (the "Registration Statement") which CinemaStar Luxury Theaters,
Inc., a California corporation (the "Company"), has filed with the Securities
and Exchange Commission. The Registration Statement covers the issuance of up to
4,725,000 Class B Redeemable Warrants (the "Warrants") pursuant to an offer
being made to the holders of Redeemable Warrants of the Company. The
Registration Statement also covers up to 4,725,000 shares of Common Stock, no
par value (the "Shares"), underlying the Warrants.
In rendering the following opinion, we have examined and
relied only upon the documents and certificates of public officials as are
specifically described below. In our examination, we have assumed the
genuineness of all signatures, the authenticity, accuracy and completeness of
the documents submitted to us as originals, and the conformity with the original
documents of all documents submitted to us as copies. Our examination was
limited to the following documents and no others:
1. Articles of Incorporation of the Company, as amended to
date;
2. By-Laws of the Company, as amended to date;
3. Resolutions adopted by the Board of Directors of the
Company approving and adopting the Warrant Agreement (as
<PAGE> 2
JEFFER, MANGELS, BUTLER & MARMARO LLP
CinemaStar Luxury Theaters, Inc.
June 3, 1996
Page 2
referred to below) for the Warrants, and the issuance of Shares upon execution
of the Warrants;
4. The Warrant Agreement between the Company, the Warrant
Agent and The Boston Group, L.P. providing for the issuance of the Warrants,
including the form of Warrant Certificate;
5. The form of the Company's Common Stock certificate; and
6. The Registration Statement, together with all amendments
thereto, exhibits filed in connection therewith and the form of Prospectus
contained therein.
Based upon and subject to the foregoing, it is our opinion
that:
(i) The Warrants to be issued pursuant to the
Registration Statement have been duly authorized, and, when duly executed in
accordance with the terms of the Warrant Agreement, and subject to due execution
of the Warrant Agreement by the Company, the Warrant Agent and the Boston Group,
L.P., the effectiveness of the Registration Statement, and compliance with
applicable blue sky laws, when issued and delivered against payment therefor in
accordance with the terms of the Warrant Agreement and as set forth in the
Registration Statement, will have been legally issued and will constitute valid
and binding obligations of the Company in accordance with their terms, subject
to:
(a) applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws of general application
(including, without limitation, general principles of equity, whether considered
in a proceeding in equity or at law), now or hereafter in effect relating to
creditors' rights and claims generally and/or general laws generally affecting
or relating to the enforcement of creditors' rights, including, but not limited
to Section 547 of the Federal Bankruptcy Reform Act of 1978; and
(b) the remedy of specific performance and
injunctive and other forms of equitable relief which are subject to equitable
defenses and to the discretion of the court before which any proceeding
therefore may be brought.
(ii) The Shares to be sold upon exercise of the
Warrants, subject to effectiveness of the Registration Statement and compliance
with applicable blue sky laws, when issued and
<PAGE> 3
JEFFER, MANGELS, BUTLER & MARMARO LLP
CinemaStar Luxury Theaters, Inc.
June 3, 1996
Page 3
delivered against payment therefor in accordance with the terms of the Warrant
Agreement and Warrants (assuming execution of the Warrant Agreement and
Warrants), and as set forth in the Registration Statement, will constitute
legally issued, fully paid and nonassessable shares of Common Stock of the
Company.
We have not undertaken, nor do we intend to undertake, any
independent investigation beyond such documents and records, or to verify the
adequacy or accuracy of same.
We express no opinion as to compliance with the securities or
"blue sky" laws of any state in which the Shares are proposed to be offered and
sold or as to the effect, if any, which non-compliance with such laws might have
on the validity of issuance of the Shares.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement; to the filing of this opinion in connection with
such filings of applications by the Company as may be necessary to register,
qualify or establish eligibility for an exemption from registration or
qualification of the Securities under the blue sky laws of any state or other
jurisdiction; and to the reference, if any, to this firm in the Prospectus under
the heading "Legal Opinion". In giving this consent, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Commission promulgated thereunder.
Other than as provided in the preceding sentence, this opinion
(i) is addressed solely to you, (ii) may not be relied upon by any other party,
(iii) may not be quoted or reproduced or delivered by you to any other person,
and (iv) may not be relied upon for any other purpose whatsoever. Nothing herein
shall be deemed to relate to or constitute an opinion concerning any matters not
specifically set forth above.
The opinions set forth herein are based upon the federal laws
of the United States of America and the laws of the State of California, all as
now in effect. We express no opinion as to whether the laws of any particular
jurisdiction apply, and no opinion to the extent that the laws of any
jurisdiction other than those identified above are applicable to the subject
matter hereof.
<PAGE> 4
JEFFER, MANGELS, BUTLER & MARMARO LLP
CinemaStar Luxury Theaters, Inc.
June 3, 1996
Page 4
The information set forth herein is as of the date of this
letter. We disclaim any undertaking to advise you of changes which may be
brought to our attention after the effective date of the Registration Statement.
Very truly yours,
/s/ JEFFER, MANGELS, BUTLER & MARMARO LLP
-------------------------------------
JEFFER, MANGELS, BUTLER & MARMARO LLP
RPG:mjl
cc: Mr. Randal Siville
<PAGE> 1
Exhibit 10.32
[CINEMASTAR LETTERHEAD]
May 2, 1995
Robert A. Bailey, #117
P.O. Box 5005
Rancho Santa Fe, CA 92067
Dear Robert:
We would like you to assist us in establishing one or more corporate
"Lines of Credit", or establishing Loans to support our company expansion. In
addition, we would like you to assist us in locating and establishing leases
for existing or "build to suit" theater sites. This letter agreement will serve
to establish the terms of your compensation for obtaining for us, one or more
"Lines of Credit" and/or for obtaining one or more Loans and/or for
establishing leases for existing or "build to suit" theater sites. We reserve
the right to accept or decline the terms of a proposed "Line of Credit" or a
proposed Loan, or proposed theater lease that you bring to us. Of course, if we
decline any of these transactions, no fee is payable on that transaction.
1. Term. This Agreement will become effective upon execution by
the parties and will extend until November 2, 1995. It is understood and
agreed however, that for a period of two years after the expiration of the
Term, if a commitment for a "Line of Credit" is accepted, and/or any funds are
borrowed and funded from a source of yours, or a lease is entered into from one
of your sources, a fee will nevertheless be paid as if this Agreement were
still in full force and effect.
2. Line of Credit. In recognition of the fact that most of your
effort will be spent in obtaining a commitment for a "Line of Credit", we agree
to pay you a cash fee of three percent (3%) upon our receipt of a written
commitment for a "Line of Credit" from one of your lending sources. We agree to
draw sufficient funds from this "Line of Credit" at the time of the written
commitment in order to make this payment to you, or to instruct the Lender to
make payment directly to you from the "Line" as soon as it is issued. In
addition, we agree to pay you a cash fee of two percent (2% ) on amounts that
are funded against the "Line of Credit". This fee will be payable from proceeds
funded against the "Line". It is understood that if a commitment is made to
increase an already established "Line of Credit", the above referenced 3%
commitment fee will be payable upon such commitment increase, and the 2% fee
will be paid on amounts funded as the increased credit line is accessed.
<PAGE> 2
Mr. Robert A. Bailey Page 2
May 2, 1995
3. ADDITIONAL LINES. If more than one lender commits to our
receiving a "Line of Credit", it is understood that the terms of payment
specified in paragraph 1., above will apply to any additional "Lines of
Credit" as well as the initial "Line".
4. LOANS. If you obtain a loan for the corporation, the terms of
which are acceptable to us, a fee of five percent (5%) of the amount loaned
will be paid at the time of funding such loan.
5. LEASES. In the event that you are able to obtain a Lease for
either an existing theater or a "build to suit" theater, on terms that are
acceptable to us, we will pay you a fee of $3.00 per square foot upon our
opening that theater for business. You will attempt to have this fee paid by
the Landlord, but if you are unsuccessful, then we shall be obligated to pay
the fee.
6. ASSUMPTION OF OBLIGATION. It is our understanding that you
will assume the fee obligation that would be owed under any of these
transactions by CinemaStar Luxury Theaters, (formerly Nickelodeon Theater Co.,
Inc.), to Chris Nicholas and to Jon Meloan pursuant to their respective "Fee
Agreements" dated 9/3/93.
7. AGREEMENT TO COOPERATE. We understand that in order to develop
a substantial "Line of Credit", lenders will require cash-flow projections,
company statements, background data, company growth plans, a review of the
facilities and interviews with operating management. We fully expect that this
will take executive and staff time. We also know that to effectively establish
such a banking relationship, several months may be required, along with
compensating balances, incremental borrowings and some negotiations with the
Lender. We agree to support such an effort.
8. CONFIDENTIALITY. We understand that the Lending Sources and
Contacts you bring to us are to be treated as private and confidential and
are not to be disclosed to outside parties for a period of one year after the
expiration of the term of this Agreement.
9. ENTIRE AGREEMENT. This letter constitutes the entire agreement
between the parties regarding lines of credit and loans. Any modification
hereto must be made by a written amendment that is signed by both parties.
Very Truly Yours, Acknowledged and Agreed:
/s/ John Ellison, Jr., /s/ Robert A. Bailey
_____________________________ ______________________________
John Ellison, Jr., Robert A. Bailey
President 5/2/95
<PAGE> 1
Exhibit 10.33
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement") is made as of
February 9, 1996, by and between CinemaStar Luxury Theaters, Inc., a California
corporation, having its business address at 431 College Boulevard, Oceanside,
California 92057 (referred to herein as the "Company"), and The Boston Group,
L.P., having its principal place of business at 1999 Avenue of the Stars, Los
Angeles, California 90067 (hereinafter "Consultant").
In consideration of the mutual promises contained herein and
on the terms and conditions hereinafter set forth, the Company and Consultant
agree as follows:
1. PROVISION OF SERVICES.
(a) Consultant agrees, to the extent reasonably
required in the conduct of the business of the Company, to place at the disposal
of the Company its judgment and experience and to provide business development
services to the Company including the following:
(i) evaluate the Company's managerial and
financial requirements;
(ii) assist when requested by the Company in
recruiting, screening, evaluating and
recommending key personnel, directors,
accountants, commercial and investment
bankers, underwriters, attorneys, other
professional consultants;
(iii) assist in preparation of budgets and
business plans;
(iv) advise with regard to theater development
activities
(v) evaluate financial requirements and assist
in financial arrangements; and
(vi) advise with regard to shareholder relations
and public relations matters.
All such services shall at all times be at the request of the
Company.
(b) Consultant agrees to use its best efforts in the
furnishing of advice and recommendations, and for this purpose Consultant shall
at all times maintain or keep available an adequate organization of personnel or
a network of outside professionals for the performance of its obligations under
this Agreement.
2. COMPENSATION. In consideration of Consultant's services,
the Company agrees to pay Consultant the compensation described below:
<PAGE> 2
(a) Cash Fee. Simultaneously with the execution of
this Agreement, the Company shall pay Consultant an advance of fees in the sum
of $100,000 for services to be rendered during fiscal 1997 and 1998. In
addition, within sixty (60) days following the date of execution of this
Agreement the Company shall pay the Consultant an additional $150,000 in cash.
(b) Warrants. In addition to the cash fee described
in Section 2(a) above, promptly following the date of execution of this
Agreement, the Company shall issue to Consultant Warrants (the "Warrant") to
purchase up to 400,000 shares of Common Stock at $6.50 per share (the closing
price of the Company's Common Stock as of February 9, 1996). The form of Warrant
shall be substantially identical to the form of Warrant attached hereto as
Exhibit A.
3. LIABILITY OF CONSULTANT. In furnishing the Company with
management advice and other services as herein provided, neither Consultant nor
any officer, director or agent thereof shall be liable to the Company or its
creditors for errors of judgment or for anything except willful malfeasance, bad
faith or gross negligence in the performance of its duties or reckless disregard
of its obligations and duties under the terms of this Agreement.
It is further understood and agreed that Consultant
may rely upon information furnished to it reasonably believed to be accurate and
reliable and that, except as herein provided, Consultant shall not be
accountable for any loss suffered by the Company by reason of the Company's
action or non-action on the basis of any advice, recommendation or approval of
Consultant, its partners, employees or agents.
4. STATUS OF CONSULTANT. Consultant shall be deemed to be an
independent contractor and, except as expressly provided or authorized in this
Agreement, shall have no authority to act or represent the Company.
5. OTHER ACTIVITIES OF CONSULTANT. The Company recognizes that
Consultant now renders and may continue to render consulting, financial and
other services to other companies which may or may not have policies and conduct
activities similar to those of the Company. Consultant shall be free to render
such advice and other services and the Company hereby consents thereto.
Consultant shall not be required to devote its full time and attention to the
performance of its duties under this Agreement, but shall devote only so much of
its time and attention as it deems reasonable or necessary for such purposes.
6. CONTROL. Nothing contained herein shall be deemed to
require the Company to take any action contrary to its Articles of Incorporation
or By-Laws, or any applicable statute or regulation, or to deprive its Board of
Directors of their
<PAGE> 3
responsibility for any control of the conduct or the affairs of
the Company.
7. TERM. Consultant's retention hereunder shall be for a term
of two years commencing on April 1, 1996; provided, however, that the provisions
of Sections 3 and 8 shall survive the termination of this Agreement.
8. REGISTRATION RIGHTS. Consultant will have the following
registration rights with respect to the Warrant and shares of Common Stock
underlying the Warrant (the "Warrant Shares"):
(a) Demand Registration. At any time commencing on
six months from the date of issuance of the Warrant, and expiring four (4) years
thereafter, Consultant shall have the right (which right is in addition to the
registration rights under Section 8(b) hereof), exercisable by written notice to
the Company, to have the Company prepare, file and use its best efforts to have
declared effective by the Securities and Exchange Commission (the "Commission"),
on one occasion, a registration statement and such other documents, including a
prospectus, as may be necessary in the opinion of both counsel for the Company
and counsel for the Consultant, if any, in order to comply with the provisions
of the Securities Act of 1933, as amended (the "Securities Act"), so as to
permit a public offering and sale by Consultant of the Warrants and Warrant
Shares owned and held of record by the Consultant at the time of exercise of
such registration rights, for a period of twenty-four (24) consecutive months.
(b) Piggy-Back Registration. If at any time the
Company proposes to register any of its securities under the Securities Act
(other than in connection with a merger, acquisition, exchange offer, redemption
or pursuant to Form S-8 or successor form) it will give written notice by
registered mail, at least twenty (20) days prior to the filing of each such
registration statement to the Consultant of its intention to do so. Upon the
written request of Consultant given within ten (10) days after receipt of any
such notice of Consultant's desire to include any Warrants or Warrant Shares
owned by Consultant in such proposed registration statement, the Company shall
afford Consultant the opportunity to have such Warrants or Warrant Shares
registered under such registration; provided, however, the Consultant shall not
have the right to include any Warrants or Warrant Shares in the event that the
registration relates to solely to the registration of (or updating of an
existing registration relating to) Redeemable Warrants and underlying shares of
Common Stock registered in connection with the Company's initial public
offering. The "piggy-back" registration rights described in this Section 8(b)
shall terminate on the earlier to occur of (i) five (5) years from the date
hereof or (ii) at such time as the Warrants or Warrant Shares, as the case
<PAGE> 4
may be, are saleable in one or more transactions pursuant to Rule 144(k) of the
Securities Act.
Notwithstanding anything to the contrary contained
in the provisions of this Section 8(b) the Company shall have the right at any
time after it shall have given written notice pursuant to this Section 8(b)
(irrespective of whether a written request for inclusion of any such securities
shall have been made) to elect not to file any such proposed registration
statement, or to withdraw the same after the filing but prior to the effective
date thereof.
(c) Limitation on Registration Rights.
Notwithstanding anything to the contrary contained in this Agreement, (i) the
Company shall not be obligated to effect a registration pursuant to Section 8 of
this Agreement during the period starting with the date ninety (90) days prior
to the Company's estimated date of filing of, and ending on a date ninety (90)
days following the effective date of, a registration statement pertaining to an
underwritten public offering of the Company's securities, provided that the
Company is actively employing in good faith all reasonable efforts to cause such
registration statement to become effective and that the Company's estimate of
the date of filing such registration statement is made in good faith; and (ii)
if the Company shall furnish Consultant a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors it
would be seriously detrimental to the Company or its shareholders for a
registration statement to be filed in the near future, then the Company's
obligations to use its best efforts to file a registration statement on demand
by the Consultant shall be deferred for a period not to exceed ninety (90) days;
provided, however, that the Company shall not obtain such a deferral more than
once in any twelve (12) month period.
(d) Indemnification.
(i) The Company shall indemnify and hold
harmless the Consultant from and against any and all losses, claims, damages and
liabilities caused by any untrue statement of a material fact contained in any
registration statement filed by the Company under the Securities Act by reason
of this Agreement, any post-effective amendment to such registration statements,
or any prospectus included therein, or caused by any omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission based upon
information furnished or required to be furnished in writing to the Company by
the Consultant (or the authorized representatives or agents of the Consultant)
expressly for use therein, which indemnification shall include each person, if
any, who controls the Consultant within the meaning of the Securities Act and
each officer, director, employee and agent of the Consultant; provided,
<PAGE> 5
however, that the indemnification in this Section 8(d) with respect to any
prospectus shall not inure to the benefit of the Consultant (or to the benefit
of any person controlling the Consultant) on account of any such loss, claim,
damage or liability arising from the sale of Shares, Warrants or Warrant Shares
by the Consultant, if a copy of a subsequent prospectus correcting the untrue
statement or omission in such earlier prospectus was provided to the Consultant
by the Company prior to the subject sale and the subsequent prospectus was not
delivered or sent by the Consultant to the purchaser of such securities prior to
such sale; and provided further, that the Company shall not be obligated to so
indemnify the Consultant or any other person referred to above unless the
Consultant or other person, as the case may be, shall at the same time indemnify
the Company, its directors, each officer signing the Registration Statement and
each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any and all losses, claims, damages and
liabilities caused by any untrue statement of a material fact contained in any
registration statement or any prospectus required to be filed or furnished by
reason of this Agreement or caused by any omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or omission based upon information furnished in
writing to the Company by the Consultant expressly for use therein.
(ii) If for any reason the indemnification
provided for in the preceding subparagraph is held by a court of competent
jurisdiction to be unavailable to an indemnified party with respect to any loss,
claim, damage, liability or expense referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party thereunder, shall
contribute to the amount paid or payable by the indemnified party as a result of
such loss, claim, damage or liability in such proportion as is appropriate to
reflect not only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party and the
indemnifying party, as well as any other relevant equitable considerations.
9. MISCELLANEOUS. This Agreement sets forth the entire
agreement and understanding between the parties and supersedes all prior
discussions, agreements and understandings of every nature between them with
respect to the subject matter hereof. This Agreement is executed in and shall be
construed and interpreted according to the laws of the State of California.
<PAGE> 6
IN WITNESS WHEREOF, the parties have caused this Agreement and
by their respective officers or representatives to be signed duly authorized the
day and year first above written.
CINEMASTAR LUXURY THEATERS, INC.
By:____________________________
John Ellison, Jr.
THE BOSTON GROUP, L.P.
By:____________________________
Robert DiMinico
Chairman
<PAGE> 1
Exhibit 10.34
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH WARRANTS AND SHARES MAY NOT BE
SOLD, OFFERED FOR SALE, TRANSFERRED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
CINEMASTAR LUXURY THEATERS, INC.
WARRANT
DATED: February 12, 1996
---------------
Holder: The Boston Group, L.P.
Number of Warrants: 400,000
---------------
THIS CERTIFIES THAT Holder is the owner of the number of
Warrants set forth above of CinemaStar Luxury Theaters, Inc., a California
corporation (hereinafter called the "Company"). Each Warrant entitles the
registered holder to purchase for $6.50 (as adjusted, the "Exercise Price") one
share of Common Stock of the Company ("Common Stock").
1. Right to Exercise Warrants. The rights represented by this
Warrant may be exercised at the Holder's option at any time commencing six (6)
months from the date of this Warrant (the "Exercise Date"), and terminating at
2:00 p.m., Los Angeles time, forty-eight (48) months after the Exercise Date.
2. Exercise of Warrants. Subject to the other provisions of
this Warrant, the rights represented by this Warrant may be exercised by (i)
surrender of this Warrant (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to Holder at
the address of Holder appearing on the books of the Company); and (ii) payment
to the Company of the exercise price for the number of shares specified in the
above-mentioned purchase form together with applicable stock transfer taxes, if
any. This Warrant shall be deemed to have been exercised
<PAGE> 2
immediately prior to the close of business on the date the Warrant is
surrendered and payment is made in accordance with the foregoing provisions of
this Section 3, and the person or persons in whose name or names the
certificates for shares of Common Stock shall be issuable upon such exercise
shall become the holder or holders of record of such Common Stock at that time
and date. The certificates for the Common Stock so purchased shall be delivered
to Holder within a reasonable time, not exceeding ten (10) business days, after
the rights represented by this Warrant shall have been so exercised, and shall
bear a legend substantially similar to the following restrictive legend:
"This security has not been registered under the Securities
Act of 1933 and may not be sold or offered for sale unless
registered under said Act and any applicable state securities
laws or unless the Company has received an opinion of counsel
satisfactory to the Company that such registration is not
required."
3. Assignment. This Warrant may be transferred, sold, assigned
or hypothecated, only pursuant to a valid and effective registration statement
or if the Company has received from counsel to the Company a written opinion, in
a form reasonably acceptable to the Company, to the effect that registration of
the Warrant or the Common Stock underlying the Warrant is not necessary in
connection with such transfer, sale, assignment or hypothecation. Any such
assignment shall be effected by Holder by (i) executing the form of assignment
at the end hereof; (ii) surrendering the Warrant for cancellation to the
Company, accompanied by the opinion of counsel to the Company referred to above;
and (iii) delivery to the Company of a statement by the transferee Holder (in a
form acceptable to the Company and its counsel) that such Warrant is being
acquired by such Holder for investment and not with a view to its distribution
or resale; whereupon the Company shall issue, in the name or names specified by
Holder (including Holder) new Warrants representing in the aggregate rights to
purchase the same number of Shares as are purchasable under the Warrant
surrendered. The term "Holder" shall be deemed to include any person to whom
this Warrant is transferred in accordance with the terms herein.
4. Registration Rights. The Holder shall be entitled to
certain demand and piggy-back registration rights with respect to this Warrant
and the Warrant Shares pursuant to the provisions of Section 8 of that certain
Consulting Agreement, dated as of February 9, 1996, between Holder and the
Company (the "Agreement"). The registration rights granted with respect to this
Warrant and the Warrant Shares shall be subject to the limitations and
restrictions set forth in the Agreement.
5. Common Stock. The Company covenants and agrees that all
shares of Common Stock which may be issued upon exercise hereof will, upon
issuance, be duly and validly issued, fully paid and non-assessable and no
personal liability will attach to
-2-
<PAGE> 3
the holder thereof. The Company further covenants and agrees that, during the
periods within which this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common Stock
for issuance upon exercise of this Warrant and all other Warrants.
6. No Stockholder Rights. This Warrant shall not entitle
Holder to any voting rights or other rights as a stockholder of the Company.
7. Adjustment of Rights. In the event that the outstanding
shares of Common Stock of the Company are at any time increased or decreased or
changed into or exchanged for a different number or kind of share or other
security of the Company or of another corporation through reorganization,
merger, consolidation, liquidation, recapitalization, stock split, combination
of shares or stock dividends payable with respect to such Common Stock,
appropriate adjustments in the Exercise Price and the number and kind of such
securities then subject to this Warrant shall be made effective as of the date
of such occurrence so that the position of Holder upon exercise will be the same
as it would have been had he owned immediately prior to the occurrence of such
events the Common Stock subject to this Warrant. Such adjustment shall be made
successively whenever any event listed above shall occur and the Company will
notify Holder of the Warrant of each such adjustment. Any fraction of a share
resulting from any adjustment shall be eliminated and the price per share of the
remaining shares subject to this Warrant adjusted accordingly.
8. Cashless Exercise. Notwithstanding any provisions herein to
the contrary, if the fair market value of one share of Common Stock is greater
than the Exercise Price (at the date of calculation as set forth below), in lieu
of exercising this Warrant for cash, the Holder may elect to receive shares
equal to the value (as determined below) of this Warrant (or the portion thereof
being canceled) by surrender of this Warrant at the principal office of the
Company together with the properly endorsed purchase form and notice of such
election in which event the Company shall issue to the Holder a number of shares
of Common Stock computed using the following formula:
X = Y (A-B)
-------
A
Where X = the number of shares of Common Stock to be
issued to the Holder
Y = the number of shares of Common Stock
purchasable under the Warrant or, if only a
portion of the Warrant is being exercised,
the portion of the Warrant being canceled (at
the date of such calculation)
-3-
<PAGE> 4
A = the fair market value of one share of the
Common Stock (at the date of such
calculation)
B = Exercise Price (as adjusted to the date of
such calculation)
For purposes of the above calculation, fair market value of one share of Common
Stock shall be determined by the Company's Board of Directors in good faith;
provided, however, that in the event that at the time of any such exercise the
Common Stock (i) is listed on any established stock exchange or a national
market system, including without limitation the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ")
System, the fair market value of a share of common stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such system or exchange (or the exchange with the greatest volume of
trading in common stock) on the last market trading day prior to the day of
determination, as reporting in the Wall Street Journal or such other source as
the Board of Directors of the Company deems reliable or (ii) is not listed on
any established stock exchange or a national market system but is quoted on the
NASDAQ System (but not on the National Market System thereof) or is regularly
quoted by a recognized securities dealer but selling prices are not reported,
the fair market value of a share of common stock shall be the mean between the
bid and asked prices for the common stock on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board of Directors of the Company deems reliable.
9. Notices. Unless applicable law requires a different method
of giving notice, any and all notices, demands or other communications required
or desired to be given hereunder by any party shall be in writing. Assuming that
the contents of a notice meet the requirements of the specific Section of this
Warrant which mandates the giving of that notice, a notice shall be validly
given or made to another party if served either personally or if postage
prepaid, or if transmitted by telegraph, telecopy or other electronic written
transmission device or if sent by overnight courier service, and if addressed to
the applicable party as set forth below. If such notice, demand or other
communication is served personally, service shall be conclusively deemed made at
the time of such personal service. If such notice, demand or other communication
is given by mail, service shall be conclusively deemed given upon the earlier of
receipt or seventy-two (72) hours after the deposit thereof in the United States
mail, postage pre-paid. If such notice, demand or other communication is given
by overnight courier, or electronic transmission, service shall be conclusively
made at the time of confirmation of delivery. The addresses for Holder and the
Company are as follows:
-4-
<PAGE> 5
If to Holder:
The Boston Group, L.P.
1999 Avenue of the Stars
Los Angeles, California 90067
Telecopier No.: 310-226-2796
If to the Company:
CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
Telecopier No.: (619) 630-8593
Attention: John Ellison, Jr.
Any party hereto may change its or his or its address for the purpose of
receiving notices, demands and other communications as herein provided, by a
written notice given in the aforesaid manner to the other parties hereto.
10. Governing Law. This Warrant shall be governed by and
construed in accordance with the internal laws of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its duly authorized officers, and to be dated as of the date set forth
above.
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ John Ellison, Jr.
-----------------------------
Name: John Ellison, Jr.
President
ACKNOWLEDGED, AGREED AND ACCEPTED BY HOLDER:
THE BOSTON GROUP, L.P.
By: /s/ Robert DiMinico
-----------------------------
Name: Robert DiMinico
Chairman
-5-
<PAGE> 6
PURCHASE FORM
(To be signed only upon exercise of Warrant)
The undersigned, the holder of the foregoing Warrant, hereby
irrevocably elects to exercise the purchase rights represented by such Warrant
to exercise ___________ Warrants for, and to the purchase thereunder, __________
shares of Common Stock and herewith makes payment of $____________ thereof, and
requests that the certificates for shares of Common Stock be issued in the
name(s) of, and delivered to _______________ whose address(es) is (are)
_________________________.
Dated:____________, ____
______________________________
______________________________
Address
-6-
<PAGE> 7
TRANSFER FORM
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto _______________ the right to purchase shares of Common Stock
represented by _________________________ Warrants, and appoints
_________________________ attorney to transfer such rights on the books of
_________________________, with full power of substitution in the premises.
Dated:____________, ____
______________________________
Holder
______________________________
Address
In the presence of:
_________________________
-7-
<PAGE> 1
Exhibit 99.1
[CINEMASTAR LUXURY THEATERS, INC. Stationary]
_____ __, 1996
Dear Redeemable Warrantholder:
As part of a plan to raise additional capital, CinemaStar
Luxury Theaters, Inc. (the "Company") has temporarily reduced the price at which
each of its outstanding Redeemable Warrants (the "Warrants") may be exercised
and to also offer Class B Redeemable Warrants upon exercise along with the
Common Stock already provided for. From the date hereof until ________, 1996,
unless the offer (the "Offer") is extended, the exercise price of each of the
outstanding Redeemable Warrants has been reduced to $____ per Warrant, and upon
the tender and exercise of each Redeemable Warrant, the holder will receive one
share of Common Stock and one Class B Warrant. The Offer is not conditioned upon
the tender and exercise of a minimum number of Redeemable Warrants. Upon the
conclusion of the Offer, the exercise price of each Redeemable Warrant will
revert to $6.00 until February 6, 2000, the expiration date of the Redeemable
Warrants, with each Warrant exercisable for only one share of Common Stock and
no Class B Redeemable Warrants.
I urge you to consider carefully this opportunity to exercise
your Redeemable Warrants pursuant to the Offer. The Offer affords Redeemable
Warrantholders the opportunity to make an equity investment in the Company on
terms more attractive than those otherwise available.
The accompanying Prospectus provides important information
about the Company and the detailed terms of the Offer. Please read and consider
it carefully. Any Redeemable Warrantholders electing to exercise Redeemable
Warrants pursuant to the Offer should either (i) fill out the subscription form
on the back of the Redeemable Warrant certificate and forward it along with
cash, a certified or official bank check made payable to "Continental Stock
Transfer & Trust Company, Agent for CinemaStar Luxury Theaters, Inc." or a wire
transfer for the benefit of the Company in the amount of the aggregate exercise
price and any other required documents to Continental Stock Transfer & Trust
Company, or (ii) request a broker or bank to
<PAGE> 2
effect the transaction, all as more fully described in the accompanying
Prospectus.
Redeemable Warrantholders not exercising their Redeemable
Warrants may realize a portion of the economic benefit to them of the Offer by
selling their Redeemable Warrants in the market. You are urged to obtain current
market quotations for the Redeemable Warrants and Common Stock or contact your
broker.
Questions and requests for assistance or for additional copies
of the Prospectus should be directed to The Boston Group, L.P., the Company's
soliciting agent, at ______________.
Again, I urge you to give your careful consideration to the
Offer described in the accompanying Prospectus.
Sincerely yours,
John Ellison, Jr.
President
2
<PAGE> 1
Exhibit 99.2
CINEMASTAR LUXURY THEATERS, INC.
NOTICE OF OFFER TO HOLDERS
OF REDEEMABLE WARRANT
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
__________, ___________, 1996, UNLESS EXTENDED.
To Brokers, Dealers, Commercial Banks, Trust Companies and Other
Nominees:
We are asking you, as the record holder of Redeemable Warrants
of CinemaStar Luxury Theaters, Inc. (the "Company"), to bring to the attention
of clients for whom you hold Redeemable Warrants the Company's offer (the
"Offer") to reduce temporarily the exercise price for the Company's outstanding
Redeemable Warrants and to further modify the Redeemable Warrants to provide
that on the exercise of a Redeemable Warrant, the Company will issue one share
of Common Stock, plus one Class B Redeemable Warrant. The Offer, commenced on
_______, 1996, and will end on __________, 1996, unless extended (the
"Expiration Date"). After the Offer, each Redeemable Warrant will revert back to
its original terms which entitles the holder until February 6, 2006, to purchase
one share of Common Stock at a price of $6.00.
Each Class B Redeemable Warrant is exercisable from __________
____________, 1997 until _________ ___________, 200_ to purchase one share of
Common Stock at $_____.
For your information, we are enclosing herewith the following
materials:
1. Prospectus dated ____________, 1996.
2. Letter to Redeemable Warrantholders of the Company from
John Ellison, Jr., President of the Company, dated _________, 1966.
3. Notice of Guaranteed Delivery to be used to accept the
Offer if the Redeemable Warrants and all other required documents are not
immediately available or cannot be delivered to the Depository Trust Company,
the Midwest Securities Trust Company or the Philadelphia Depository Trust
Company by the Expiration Date or if the procedure for book-entry transfer
cannot be completed prior to the Expiration Date.
4. A printed form of letter which may be sent to customers for
whose account you hold Redeemable Warrants registered in your name or in the
name of your nominee, with
1
<PAGE> 2
space provided for obtaining such customers' instructions with regard to the
Offer.
5. Envelopes addressed to Continental Stock Transfer & Trust
Company, the Depository, to be used by you to return the tendered and executed
Redeemable Warrants.
WE URGE YOU TO CONTACT YOUR CUSTOMERS AS PROMPTLY AS POSSIBLE.
PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M. NEW YORK
CITY TIME, ON _________, ___________, 1996, UNLESS EXTENDED.
In all cases, the delivery of Common Stock and Class B
Redeemable Warrants for Redeemable Warrants accepted for tender and exercise
pursuant to the Offer will be made only after timely receipt by the Depository
of certificates evidencing such Redeemable Warrants (or a confirmation of a
book-entry transfer of such Redeemable Warrants into the book entry account at
one of the Book-Entry Transfer Facilities (as defined in the Prospectus)) with
the subscription form on the back of such Redeemable Warrant certificates
properly completed and duly executed and any other required documents.
Payment of the Redeemable Warrant exercise price may be made,
at the Redeemable Warrantholder's option, in the form of cash, a certified or
official bank check made payable to "Continental Stock Transfer & Trust Company,
Agent for CinemaStar Luxury Theaters, Inc." or by wire transfer to Continental
Stock Transfer & Trust Company for the benefit of CinemaStar Luxury Theaters,
Inc. Redeemable Warrantholders who wish to exercise their Redeemable Warrants
should complete the subscription form on the back of the Redeemable Warrant
certificates to be Depository and deliver the same by hand or by mail to:
Continental Stock Transfer & Trust Company, Two Broadway, New York, New York
10004, Attn: Corporate Trust Department. While the method of delivery of
Redeemable Warrants (which may be by hand or by mail) is at the option and risk
of the Redeemable Warrantholders, it is suggested that delivery, if made by
mail, be registered or certified and properly insured.
If Redeemable Warrantholders wish to exercise their Redeemable
Warrants, but it is impracticable for them to forward their Redeemable Warrants
and all other required documents prior to the Expiration Date, an exercise may
be effected by following the guaranteed delivery procedure described in the
Prospectus under the caption "The Offer--How to Tender and Exercise".
The Company will promptly reimburse brokers and other nominees
for the reasonable expenses incurred by them in forwarding materials relating to
the Offer to the beneficial holders of the Redeemable Warrants. The Company will
pay such brokerage commissions or fees and all applicable transfer taxes with
respect to the exercise of Redeemable Warrants pursuant to the Offer which would
ordinarily be associated with the regular
2
<PAGE> 3
exercise of such Redeemable Warrants, except in the case of deliveries of Common
Stock or Class B Warrants or certificates for unexercised Redeemable Warrants
that are to be made to any person other than a registered holder of Redeemable
Warrants.
Questions or requests for additional copies of the enclosed
materials should be directed to The Boston Group, L.P., Telephone No.
1-__________.
CINEMASTAR LUXURY SUITES, INC.
NOTHING CONTAINED HEREIN OR IN THE DOCUMENTS ENCLOSED HEREWITH
SHALL CONSTITUTE YOUR OR ANY OTHER PERSON THE AGENT FOR THE COMPANY, THE
DEPOSITORY OR THE SOLICITING AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON
BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFER OTHER THAN THE ENCLOSED
DOCUMENTS AND THE STATEMENTS SPECIFICALLY SET FORTH THEREIN.
3
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Exhibit 99.3
CINEMASTAR LUXURY THEATERS, INC.
NOTICE OF OFFER TO HOLDERS OF REDEEMABLE WARRANTS
THE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON _________, __________, 1996, UNLESS EXTENDED
__________, 1996
To Our Clients:
Enclosed for your consideration is the Prospectus, dated
__________, 1996, of CinemaStar Luxury Theaters, Inc. (the "Company"), relating
to the Offer described therein, together with a Letter to Redeemable
Warrantholders from the Company. This material is being forwarded to you as the
beneficial owner of Redeemable Warrants of the Company carried by us in your
account but not registered in your name. A tender and exercise of such
Redeemable Warrants may be made only by us as the holder of record and pursuant
to your instructions. The Letter to Redeemable Warrantholders is furnished to
you for your information only and cannot be used by you to tender and exercise
Redeemable Warrants held by us for your account.
Accordingly, we request instructions as to whether you wish us
to tender and exercise any or all of the Redeemable Warrants held by us for your
account, pursuant to the terms and conditions set forth in the Prospectus.
Your instructions to us should be forwarded as promptly as
possible in order to permit us to tender and exercise on your behalf in
accordance with the provisions of the Offer, which terminates at 5:00 p.m. New
York City time, on ___________, __________, 1996, unless extended (the
"Expiration Date"). The Offer is not conditioned upon the exercise of a minimum
number of Redeemable Warrants.
All Redeemable Warrants properly tendered and exercised and
not withdrawn prior to the Expiration Date will be deemed to have been accepted
by the Company when, as and if the Company has given oral or written notice
thereof to the Depository.
If you wish to have us tender and exercise any or all of the
Redeemable Warrants held by us for your account, will you kindly so instruct us
by completing, executing, detaching and returning to us the instruction form set
forth below. An envelope in which to return your instructions to us is enclosed.
If you authorize the exercise of your Redeemable Warrants, all such Redeemable
Warrants will be exercised unless otherwise specified in your instructions. Your
instructions should be
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forwarded to us in ample time to permit us to submit a tender and exercise of
Redeemable Warrants on your behalf prior to the Expiration Date. The Company
will pay such brokerage commissions or fees with respect to the exercise of
Redeemable Warrants pursuant to the Offer which would ordinarily be associated
with the regular exercise of such Redeemable Warrants.
The Offer is made solely by the Prospectus and is being made
to all Redeemable Warrantholders. The Offer can only be accepted by residents of
states set forth in the Prospectus under "The Offer - Blue Sky Law". If the
Company becomes aware of beneficial owners in other states, the Company will
seek to clear the Offer in such states. If, after such good faith effort, the
Company cannot comply with such state statute, the Offer will not be made to
(nor will exercises of Redeemable Warrants be accepted from or on behalf of) the
holders of Redeemable Warrants in such state. In any state where the securities,
blue sky or other laws require the Offer to be made by a licensed broker or
dealer, the Offer shall be deemed to be made on behalf of the Company by one or
more registered brokers or dealers licensed under the laws of such state.
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<PAGE> 3
INSTRUCTIONS WITH RESPECT TO THE
CINEMASTAR LUXURY THEATERS, INC.
The undersigned acknowledge(s) receipt of your letter
enclosing the Prospectus, dated , 1996, of CinemaStar Luxury Theaters,
Inc., such Prospectus and the other documents referred to in your letter.
This will instruct you to tender and exercise the number of
Redeemable Warrants of CinemaStar Luxury Theaters, Inc. indicated below held by
you for the account of the undersigned, pursuant to the terms and conditions set
forth in the Prospectus.
The undersigned represents that the exercise of the within
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. and shall be entitled to receive compensation as set forth in the
Prospectus.
Number of Redeemable Warrants SIGN HERE
to be tendered and exercised:
- ----------------------------- ------------------------------
Dated:
---------------------- ------------------------------
(Signature(s))
------------------------------
(Please type or print name(s)
here)
------------------------------
(Please type or print address)
------------------------------
(Please type or print Area
Code and Telephone Number)
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Exhibit 99.4
NOTICE OF GUARANTEED DELIVERY
for
Tendered and Exercised Redeemable Warrants
of
CINEMASTAR LUXURY THEATERS, INC.
As set forth in the Prospectus dated ___________, 1996 (the
"Prospectus") under "The Offer--How to Tender and Exercise" this form or one
substantially equivalent hereto must be used to tender and exercise Redeemable
Warrants of CinemaStar Luxury Theaters, Inc., a California corporation, pursuant
to the Offer (as defined in the Prospectus) if the certificate(s) for the
Redeemable Warrants to be exercised are not immediately available, or the
procedure for book-entry transfer cannot be completed on a timely basis or a
Redeemable Warrantholder cannot deliver the certificate(s) and all other
required documents to the Depository at the address listed below prior to the
Expiration Date (as defined in the Prospectus). This form may be delivered by
hand or sent by facsimile transmission or mail to the Depository and must be
received by the Depository on or prior to the Expiration Date.
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(Depository)
By Mail: By Hand:
Two Broadway Two Broadway
New York, New York 10004 19th Floor
Attn: Corporate Trust Department New York, New York 10004
Telephone:
(212) 509-4000 ext. 253
Facsimile:
(212) 509-5150
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
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Gentlemen:
The undersigned hereby tenders and exercises the number of
Redeemable Warrants of CinemaStar Luxury Theaters, Inc., a California
corporation, set forth below upon the terms and subject to the conditions set
forth in the Prospectus dated , 1996, receipt of which is hereby
acknowledged, together with cash or a certified or official bank check made
payable to "Continental Stock Transfer & Trust Company, Agent for CinemaStar
Luxury Theaters, Inc." or a wire transfer to the Depository for the benefit of
CinemaStar Luxury Theaters, Inc. in the amount of the aggregate exercise price
of the Redeemable Warrants tendered and exercised, pursuant to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The
Offer--How to Tender and Exercise."
Number of Redeemable Warrants Name(s) of Record Holder(s):
to be Tendered and Exercised:
- ----------------------------- ------------------------------
------------------------------
Certificate Nos. (if available) Please Print Address(es) Here:
- ----------------------------- ------------------------------
- ----------------------------- ------------------------------
------------------------------
Check ONE box if Redeemable
Warrants will be exercised
by book-entry transfer: Area Code and Telephone Number:
/ / The Depository Trust
Company
------------------------------
/ / Midwest Securities Trust
Company
/ / Philadelphia Depository
Trust Company Signature(s)
------------------
Account Number Dated: , 1996
-------------- ------------------
GUARANTEE
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The undersigned, a member firm of a registered national
securities exchange or a member of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an office or
correspondent in the United States, guarantees that (a) the above named
person(s) owns the Redeemable Warrants exercised hereby and (b) the undersigned
will deliver to the Depository the certificates representing the Redeemable
Warrants exercised hereby in proper form for tender and exercise with required
signature guarantees (or written confirmation of book-entry transfer of such
Redeemable Warrants into the Depository's account at The Depository Trust
Company, the Midwest Securities Trust Company or the Philadelphia Depository
Trust Company), together, in each case, with cash or a certified or official
bank check made payable to CinemaStar Luxury Theaters, Inc. or a wire transfer
to the Depository for the benefit of CinemaStar Luxury Theaters, Inc. in the
amount of the aggregate exercise price of the Redeemable Warrants exercised, and
any other required documents, all within three New York Stock Exchange trading
days after the Expiration Date.
- -------------------------------- ------------------------------
(Address) (Name of Firm)
- -------------------------------- ------------------------------
(Area Code and Telephone Number) (Authorized Signature)
Dated: , 1996
---------------
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Exhibit 99.5
DEPOSITORY AGREEMENT
June __, 1996
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Ladies and Gentlemen:
CinemaStar Luxury Theaters, Inc., a California corporation
(the "Company"), proposes to offer (the "Offer") to holders of its outstanding
Redeemable Warrants the right to exercise such Redeemable Warrants for
$__________ per Redeemable Warrant and receive one share of Common Stock, ($.01)
(the "Common Stock") and one Class B Redeemable Warrant ("Class B Warrants")
upon the exercise of each Redeemable Warrant. Each Class B Warrant entitles the
holder thereof to purchase one share of Common Stock at a specified exercise
price. The Offer is being made all in accordance with and subject to the terms
and conditions set forth in a Prospectus (the "Prospectus") of the Company dated
June __, 1996.
The Offer will commence upon the mailing to holders of the
Redeemable Warrants the Prospectus (the "Initial Date"), and will terminate at
the date and time as set forth in the Prospectus, subject to extension by the
Company by written notice, or by oral notice promptly confirmed in writing, to
you (such time and date, as they may be extended, are herein referred to as the
"Expiration Date"). The terms of the Offer are set forth in the Prospectus.
Subject to the provisions hereof, the Company hereby appoints
you, and you hereby agree to act, as the Depository for purposes of receiving,
accepting for delivery and otherwise acting upon tenders and exercises of the
Redeemable Warrants in accordance with the Prospectus and with the terms and
conditions of the Offer.
In connection with your appointment as Depository, the
following documents have been delivered to you:
(a) A copy of the Prospectus;
(b) The Class B Warrant Agreement; and
(c) Specimen of the Class B Warrants.
You are hereby authorized and you hereby agree:
(a) To receive all tenders and exercises of Redeemable
Warrants made pursuant to the Offer;
(b) To examine each Redeemable Warrant delivered or
mailed to you to determine whether or not all
requirements necessary to constitute a valid tender
and exercise of the Redeemable Warrant, as set forth
in the Prospectus,
<PAGE> 2
have been met. All Redeemable Warrants must be
tendered and exercised on the terms and conditions
set forth in the Prospectus, unless waived by the
Company. You are not authorized to accept any
alternative, conditional or contingent tender and
exercises, or any other tender and exercises that you
deem to have been improperly made, except with the
consent of the Company. In the event a Redeemable
Warrant Certificate has been improperly completed or
executed or in the case where a Redeemable Warrant
Certificate do not bear the requisite endorsement or
are not accompanied by appropriate stock powers (if
required by the Offer), or if some other irregularity
in connection with the purported tender and exercise
exists, you will endeavor to take such action as you
believe necessary and appropriate to cause such
irregularity to be corrected. You may notify the
person tendering and exercising the Redeemable
Warrants in writing and/or by telephone of each such
irregularity or defect. The determination to waive
any irregularities or conditions to tenders and
exercises or granting of consents shall be made
solely by the Company, and the determination made by
the Company shall be final and binding;
(c) To record (including day, month and approximate time
of receipt) and hold, subject to farther instructions
from the Company, all tenders and exercises of
Redeemable Warrants received by you (along with all
funds so received) and determined to have been
validly made;
(d) To report periodically to the Company and The Boston
Group, L.P., the Company's Solicitation Agent for the
Offer, on the number of tenders and exercises made
and the number of Redeemable Warrants surrendered;
(e) To accept delivery of tenders and exercises made
without the initial receipt and deposit of Redeemable
Warrants by actual delivery or by book-entry transfer
as described in the Offer, if:
(1) the Notice of Guaranteed Delivery has been
executed by an Eligible Institution (as
defined in the Offer) and the holder prior
to the Expiration Date; and
(2) the Redeemable Warrants, the exercise price
and any other documents required by the
Offer are received by you within three New
York Stock Exchange trading days after the
Expiration Date, and to record the day,
month and approximate time that the
documentation and funds referred to in
clauses (i) and (ii) is received by you;
(f) In the event a holder of shares of Redeemable
Warrants delivers to you a number of Redeemable
Warrants in excess of the number of Redeemable
Warrants actually tendered and exercised under the
Offer, to return such Redeemable Warrants to the
tendering Redeemable Warrants in accordance with the
Offer;
(g) To follow and to act in accordance with the terms of
the Offer and amendments, modifications or
supplements to these instructions, and upon any
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further instructions in connection with the Offer,
any of which may be given to you by the President,
the Chief Financial Officer or any Vice President of
the Company or such other person or persons as the
Company shall designate in writing, including
instructions with respect to any extension of the
Offer;
(h) To return to the tendering and exercising holders of
Redeemable Warrants, in accordance with the
provisions of the Offer, any Redeemable Warrants that
were not properly tendered and exercised and as to
which the irregularities or defects were not cured or
waived, or Redeemable Warrants that were withdrawn in
accordance with the terms of the Offer as described
in the Prospectus, or if the Offer is terminated in
accordance with its terms;
(i) If the Offer has been consummated, to deliver as soon
as practicable, but not earlier than seven days after
the Expiration Date, by First Class Mail, postage
prepaid, to holders of shares of Redeemable Warrants
who have properly tendered and exercised and whose
tenders and exercises have been accepted by the
Company, the Common Stock and Class B Warrants as set
forth in the Offer, at the addresses specified in
such Redeemable Warrants with proper procedures to
ensure the protection of the Common Stock and Class B
Warrants during mailing;
(j) To follow and act upon ail instructions properly
completed and given pursuant to any Offer received by
you;
(k) To return all certificates for Redeemable Warrants
properly tendered and exercised to the Company as
directed by the Company; and
(l) To maintain such records with respect to the Offer as
the Company may reasonably request at the Company's
cost and expense.
You acknowledge that you have a list as of a recent date of
all holders of Redeemable Warrants eligible to tender and exercise such
Redeemable Warrants pursuant to the Offer, and a fist of the number of
Redeemable Warrants owned of record by each such holder.
As Depository you:
(a) shall have no duties or obligations other than those
specifically set forth herein or as may subsequently
be agreed to by you and the Company;
(b) will not be required to and will make no
representations and have no responsibilities as to
the validity, accuracy, value or genuineness of (i)
the Offer, (ii) any Redeemable Warrants or documents
deposited with you, (iii) any Common Stock and Class
B Warrants delivered by you pursuant to the Offer,
(iv) any documents prepared by the Company in
connection with the Offer, or (v) any signatures or
endorsements, other than your own;
(c) shall not be obligated to take any legal action
hereunder that might in your reasonable judgment
involve any expense or liability unless you have been
furnished with reasonable indemnity by the Company;
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<PAGE> 4
(d) may rely on and shall be protected in acting on the
written or oral instructions with respect to any
matter relating to your actions as Depository
specifically covered by this Agreement or
supplementing or qualifying any such instructions of
any officer of the Company authorized to give
instructions under paragraph (g) above;
(e) may rely on and shall be protected in acting upon any
certificate, instrument, opinion, notice, letter,
telegram or any other document or security delivered
to you and reasonably and in good faith believed by
you to be genuine and to have been duly signed by the
proper party or parties;
(f) may consult counsel satisfactory to you (including
counsel for the Company) and the advice or opinion of
such counsel shall be full and complete authorization
and protection in respect of any action taken,
suffered or omitted by you hereunder in good faith
and in accordance with such advice or opinion of such
counsel;
(g) shall not be called on at any time to advise, and
shall not advise, any person tendering pursuant to
the Offer as to the value of the Redeemable Warrants
tendered and exercised pursuant to the Offer; and
(h) shall not be liable for anything which you may do or
refrain from doing in connection with this Agreement
except for your own gross negligence, willful
misconduct or bad faith.
For your services as Depository you shall be entitled to fees
in the amounts agreed upon and stated in a separate letter attached hereto as
Exhibit A. The Company shall indemnify and hold you harmless against any loss or
liability incurred, without gross negligence, willful misconduct or bad faith on
your part, arising out of or in connection with the administration of your
duties hereunder, including the cost of defending you against any such claim or
liability; provided, however, that this indemnity shall not extend to any losses
of Redeemable Warrants certificates or other documents occurring in the process
of delivery of Redeemable Warrants Stock to you or Common Stock and Class B
Warrants by you. In no case shall the Company be liable pursuant to this
paragraph with respect to any claim against you unless you shall have notified
the Company by letter, or by cable or telex confirmed by letter, of the written
assertion of a claim against you or of any action commenced against you,
promptly after you shall have received any such written assertion of any such
claim or shall have been served with the summons or other first legal process
giving information as to the nature and basis of the claim, but failure so to
notify the Company shall not relieve the Company from any liability which it may
have otherwise than pursuant to this paragraph. The Company shall be entitled to
participate at its own expense in the defense of any such claim which may be
asserted against you, and if the Company so elects at any time after receipt of
such notice, the Company may assume the defense of any suit brought to enforce
any such claim; provided, however, that if there exists a conflict of interest
which would make it inappropriate for the same counsel to represent both you and
the Company, you shall be entitled to retain your own counsel at the expense of
the Company, Notwithstanding the foregoing, the Depository may retain its own
counsel in connection with the defense of any such claim at its own expense.
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This Depository Agreement shall be construed and enforced in
accordance with the laws of the State of New York and shall inure to the benefit
of and the obligations created hereby shall be binding upon the successors and
assigns of the parties hereto.
Unless otherwise expressly provided herein, all notices,
requests, demands and other communications hereunder shall be in writing, shall
be delivered by hand, by telephonic facsimile transmission with a confirmed
telephonic transmission answer back or by First Class Mail, postage pre-paid,
shall be deemed given when received and shall be addressed to you and the
Company at the respective addresses listed below or to such other addresses as
you or the Company shall designate from time to time in writing forwarded in
like manner.
If to the Company, to: CinemaStar Luxury Theaters
2121 Avenue of the Stars, 10th Floor
Los Angeles, California 90067
Attn: John Ellison, Jr.
With copies to: Jeffer, Mangels, Butler & Marmaro LLP
2121 Avenue of the Stars, 10th Floor
Los Angeles, California 90067
Attn: Joel I. Bennett, Esq.
If to you, to: Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Attn: Compliance Department
If you are in accord with the above, please indicate your
agreement herewith by having an authorized officer sign the enclosed copy of
this letter as indicated and return it to the undersigned.
Very truly yours,
CINEMASTAR LUXURY THEATERS, INC.
By:___________________________________
John Ellison, Jr.
President
Agreed to and Accepted:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By:______________________________
William F. Seegraber,
Vice President
Date:____________________________
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