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United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 0-25252
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CinemaStar Luxury Theaters, Inc.
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(Name of Small Business Issuer in its charter)
California 33-0451054
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(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
431 College Blvd., Oceanside, CA 92057-5435
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(Address of principal executive offices) (Zip Code)
(619) 630-2011
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(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Redeemable Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file
such reports),and (2) has been subject to such filing requirements for the past
90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB._____
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on June 26,
1996 as reported on the NASDAQ Small Capital Market, was approximately
$24,335,500. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The Issuer's revenues for the year ended March 31, 1996 totaled $11,524,740.
As of June 26, 1996 Registrant had outstanding 6,327,152 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by
reference in the Parts of this report indicated below: Part III, Items 9, 10,
11, and 12 - Definitive proxy statement for the 1996 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
within 120 days after the close of the 1996 fiscal year.
Transitional Small Business Disclosure Format Yes No X
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
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 leased 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 leased 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 leased 14 screen theater in
Riverside, California. The Company has entered into agreements pursuant to
which it has agreed to develop a leased 10 screen theater complex in Perris,
California, develop a leased 10 screen theater complex in Riverside,
California, develop a leased nine screen theater complex in Chula Vista,
California and develop a leased 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 believes it can achieve a leading market 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 30 of its 44 screens
are located in film zones in which it presently is the only exhibitor. In the
Riverside market where So Cal Theaters has theaters in proximity to the
Ultraplex 14 at Mission Grove, the Company believes that it is the leading
theater in the market. 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 multiple auditoriums each 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 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 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.
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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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, 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 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 market position as a leading motion picture
exhibitor. Thirty of the Company's forty-four screens are located in film
licensing zones in which it currently is the only exhibitor. The Company
believes that a leading 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
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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 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 retain 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 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.
Additional Revenue Sources
Concessions - 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 total 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
concessions for Chula Vista 6 and Mission Grove 14 are managed directly by the
Company and purchased from Metropolitan Concessions Industries. The Company
plans in future theaters to purchase concessions from the best source with
consideration as to cost, product quality, and responsiveness of the vendor.
Video Games - Video games in all three 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 1995 the Company terminated the third party involvement for
its locations and purchased video games, skill games, and a photo booth to
replace the leased video games. At all locations 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,
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revenues from video games were $55,455 (0.6% of total revenues) and $181,652
(1.6% of total revenues), 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.
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 a director and officer of the Company.
See "Certain Relationships and Related 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 currently 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 is 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
economic terms. 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., 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
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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 between
approximately 84% and 96% 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, multi-screen theater complexes having as
many as 30 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.
In recent years, alternative motion picture exhibition delivery systems have
been developed for the exhibition of filmed entertainment, including cable
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
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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
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,
further increases in the minimum wage would increase the Company's labor costs.
Several bills are pending before Congress that would significantly increase the
minimum wage and that would materially 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,
seventeen are corporate personnel, eighteen 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.
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. The Company has had significant 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. Through March 31,
1996, the Company has accumulated losses aggregating $5,426,903.
Need for Additional Financing; Use of Cash. The Company has
aggressive expansion plans. 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. Such developments will require the Company to raise substantial
amounts of new financing, in the form of additional equity investments or loan
financing, during fiscal 1997. 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. See "Management's Discussion and Analysis or Plan of Operation -
Liquidity and Capital Resources".
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
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
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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. 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."
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 such locations on terms 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,
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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 or Riverside Counties, California and the proposed
theaters are all in Southern California or Mexico. 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 29.4%
and 27.9% of the Company's total 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 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"
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 and conversion of
debentures). 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.
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., Alan Grossberg and
Russell Seheult (the Chairman of the Company's Board of Directors), with
respect to which the Company is the sole beneficiary.
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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, 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 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."
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 and Mexico. 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. It is anticipated that Mr.
Grossberg will devote 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. It is expected that a substantial portion of the booking services to
be rendered by Mr. Grossberg will be 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
"Executive Compensation -- Employment and Consulting Agreements" and "Certain
Relationships and Related Transactions."
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 Relationships and Related Transactions." Another potential conflict of
interest 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
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licensing zone in which the Company owns, operates or has a commitment to lease
or develop a theater). See "Executive Compensation -- Employment and
Consulting Agreements" and "Certain Relationships and Related Transactions."
As a result, a conflict may result between the demands placed on Mr. Grossberg
by the Company and by his film booking business. 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
breach 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 "Executive Compensation -- 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 defined as a
penny stock due 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.
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 2001 (subject to certain
limitations). As of March 31, 1996, the Company's deferred tax assets,
consisting primarily of the net operating loss carryforwards, have been fully
reserved since the assets are not more likely than not realizable. The initial
public offering and certain other equity transactions resulted or may have
resulted in an "ownership change" as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (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 there has
been an ownership change for purposes of the Code, there can be no assurance as
to the
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specific amount of net operating loss carryforwards, if any, available in any
post-change year since the calculation is based upon fact-dependent formula.
Possible Volatility of Common Stock and Redeemable Warrant Prices.
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 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.
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.
Current Prospectus and State Registration Required To Exercise
Redeemable Warrants. The Redeemable 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 Redeemable 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 Redeemable Warrants. Although the Company has undertaken to use
its best efforts to have all of the shares of Common Stock issuable upon
exercise of the Redeemable Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Redeemable Warrants, there is no assurance that it will be
able to do so. The value of the Redeemable Warrants may be greatly reduced if
a current prospectus covering the Common Stock issuable upon the exercise of
the Redeemable 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 Redeemable Warrants then reside.
Investors may purchase the Redeemable Warrants in the secondary market
or may move to jurisdictions in which the shares underlying the Redeemable
Warrants are not registered or qualified during the period that the Redeemable
Warrants are exercisable. In such event, the Company will be unable to issue
shares to those persons desiring to exercise their Redeemable 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 Redeemable Warrants would have no choice but
to attempt to sell the Redeemable Warrants in a jurisdiction where such sale is
permissible or allow them to expire unexercised.
Speculative Nature of Redeemable Warrants; Adverse Effect of Possible
Redemption of Redeemable Warrants. The Redeemable 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.
Specifically, holders of the Redeemable Warrants may exercise their right to
acquire Common Stock and pay an exercise price of $6.00 per share, subject to
adjustment in the event of certain dilutive events, on or prior to February 6,
2000, after which date any unexercised Redeemable Warrants 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 Redeemable
Warrants, and consequently, whether it will ever be profitable for holders of
the Redeemable Warrants to exercise the Redeemable Warrants.
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
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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. Redemption of the Redeemable Warrants could force
the holders thereof to exercise the Redeemable Warrants and pay the exercise
price at a time when it may be disadvantageous for such holders to do so, to
sell the Redeemable Warrants at the current market price when they might
otherwise wish to hold the Redeemable Warrants, or to accept the redemption
price, which may be substantially less than the market value of the Redeemable
Warrants at the time of redemption. The holders of the Redeemable Warrants
will automatically forfeit their rights to purchase shares of Common Stock
issuable upon exercise of the Redeemable Warrants unless the Redeemable
Warrants are exercised before they are redeemed.
On May 3, 1996, the Company filed a registration statement and other
related documents with the Securities and Exchange Commission in connection
with a potential temporary reduction in the exercise price of its Redeemable
Warrants and the issuance of certain new warrants to holders of Redeemable
Warrants who choose to exercise the Redeemable Warrants. The registration
statement is pending and no final decision has been made by the Company to
proceed with the proposed transaction. In the event the Company elects to
proceed with the transaction, the market value of the Company's Common Stock
and Redeemable Warrants could be materially and adversely affected.
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.
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
Redeemable Warrants being offered by the Company and the Redeemable Warrants
being registered for the account of the Selling Security Holders entitle the
holders of such Redeemable Warrants to purchase up to an aggregate of 4,500,000
shares of Common Stock at any time through February 7, 2000. 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 Redeemable Warrants or the underlying shares
of Common Stock, or even the existence of the Redeemable Warrants, may depress
the price of the Common Stock or the Redeemable Warrants in the market for such
Securities. In addition, in the event that any holder of Redeemable 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. Fully-vested options to purchase 385,302
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.
This Annual Report on Form 10-KSB 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" above.
ITEM 2 - DESCRIPTION OF PROPERTY
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 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:
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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 having a major presence in the zone, and spreading
available film product over 16 screens, the Company will be able to increase
its revenues on a per screen basis. See "Chula Vista 6" below.
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 Luxury 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 cost was approximately $3,192,000
paid through escrow from 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.
In January 1996, the Company secured a $1,600,000 loan using this theater as
security.
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 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. See "Business -- Film
Licensing."
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.
14
<PAGE> 15
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 the plush seating, THX SOUND
environment and many of the other amenities found in the Company's other two
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), as well as 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 agreed
to lease 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
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 in Year 1; $48,000 in Year 2; $52,000 in Year 3;
$56,000 in Year 4; $60,000 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 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
is 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. The lease requires the Company to meet
certain financial criterion as of July 30, 1996. The net worth and cash flow
required for the Company to meet the terms of the lease range from $14,000,000
net worth and $400,000 annual cash flow 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 cash flow
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 criterion. 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.
15
<PAGE> 16
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; $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
Riverside, California, adjacent to the campus of the University of California,
Riverside. The initial term of this lease if for a period of 25 years, with
two consecutive options to extend for five years each. The rent commencement
date shall be 180 days following delivery of a "pad" 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 per square foot of the ground floor area of
the building. Minimum monthly rent shall be calculated as follows: $30,000
in Year 1; $34,000 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 in Perris, California (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 monthly rent is as follows: $26,250 for Year 1;
$31,350 for Year 2; $35,000 for Year 3; $38,500 for Year 4; $43,750 for Year 5;
for years 6 through 25 the minimum rent will be increased every fifth year 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.
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 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, CA 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
16
<PAGE> 17
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.
ITEM 3 - 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 Company does not believe that the name change will have a material adverse
impact on the Company or its operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1996 to a
vote of security holders.
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<PAGE> 18
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Redeemable Warrants are traded over the
counter on the NASDAQ Small Cap Market (Symbols: LUXY and LUXYW). The table
below shows the high and low bid 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 (through May 31) 8.44 7.75 3.25 2.12
</TABLE>
The Company as of June 17, 1996 has 52 shareholders of record and 39
holders of Redeemable Warrants of record; the Company believes that such
numbers substantially understate the number of beneficial holders of its
securities.
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.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Year ended March 31, 1996 compared to year ended March 31, 1995.
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. New theaters opened in
fiscal 1996 accounted for $846,352 of the increase in total revenues. 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.
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<PAGE> 19
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 40.0% 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.
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 expense,
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
$200,728, or 5.8%, on theaters operated by the Company in both years.
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 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 the 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 from the Company's initial public offering
in February 1995.
Results of operations for the year ended March 31, 1995 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 end 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 debt
financing arrangements for facilities and equipment. The Company has entered
into lease agreements requiring it to develop 61 screens. The Company plans to
construct additional theater complexes; however, no assurances can be given
that any additional theaters will be constructed, or, if constructed, that they
will be operated profitably.
The Company leases four 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
approximately $41,838,000. The Company has also signed lease agreements for
six additional theater locations. The new leases 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
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<PAGE> 20
commitments for the proposed theater locations would aggregate minimum lease
commitments of approximately $139,421,000.
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 improvement in operations decreasing
the net loss.
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 furniture 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 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. A portion of the public offering proceeds were paid to retire
certain debt (aggregating $2,940,000) incurred in connection with the Company's
private placement which was completed in September 1994.
In March 1995, the Company's 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 sale of such
Redeemable Warrants was consummated in March 1995 and the net proceeds to the
Company were approximately $46,000.
At March 31, 1996, the Company had $458,550 in cash on hand. The Company at
March 31, 1996 had a working capital deficit of $775,814. On April 11, 1996,
the Company issued a $500,000 convertible debenture. On May 21, 1996, the
Company issued a second $500,000 convertible debenture. On May 22, 1996, the
April 1996 debenture and accrued interest was converted to 127,152 shares of
common stock.
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 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.
20
<PAGE> 21
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 California income
tax purposes, respectively. The Federal NOLs are available to offset future
years taxable income and expire in 2006 through 2011, while the California NOLs
are available to offset future years taxable income and 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.
At March 31, 1996, the Company has total net 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.
New Accounting Standards
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 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 the 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.
ITEM 7 - FINANCIAL STATEMENTS
The Company's audited Financial Statements for the years ended March 31, 1995
and 1996 are presented immediately following on pages F-1 to F-25.
21
<PAGE> 22
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets
as of March 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years
ended March 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended March 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years
ended March 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Summary of Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-12
</TABLE>
F-1
<PAGE> 23
[BDO SEIDMAN, LLP FAX]
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.
Costa Mesa, California
May 23, 1996
F-2
<PAGE> 24
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-3
<PAGE> 25
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-4
<PAGE> 26
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-5
<PAGE> 27
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-6
<PAGE> 28
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-7
<PAGE> 29
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-8
<PAGE> 30
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-9
<PAGE> 31
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-10
<PAGE> 32
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-11
<PAGE> 33
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-12
<PAGE> 34
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-13
<PAGE> 35
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-14
<PAGE> 36
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-15
<PAGE> 37
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-16
<PAGE> 38
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-17
<PAGE> 39
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-18
<PAGE> 40
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-19
<PAGE> 41
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-20
<PAGE> 42
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-21
<PAGE> 43
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-22
<PAGE> 44
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-23
<PAGE> 45
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-24
<PAGE> 46
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-25
<PAGE> 47
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Reference is made to the Company's definitive Proxy Statement for its 1996
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to Directors, Executive Officers, Promoters and Control Persons and
Compliance with Section 16(a) of the Exchange Act. Such information is
incorporated herein by reference.
ITEM 10 - EXECUTIVE COMPENSATION
Reference is made to the Company's definitive Proxy Statement for its 1996
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to Executive Compensation. Such information is incorporated herein by
reference.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the Company's definitive Proxy Statement for its 1996
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to Security Ownership of Certain Beneficial Owners and Management.
Such information is incorporated herein by reference.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the Company's definitive Proxy Statement for its 1996
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1996, for information
relating to Certain Relationships and Related Transactions. Such information
is incorporated herein by reference.
47
<PAGE> 48
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company, as amended**
3.2 Bylaws of the Company*
4.1 Specimen Stock Certificate of the Company*
4.2 Form of Redeemable Warrant Agreement (with form of certificate attached)*
4.3 Form of Underwriter's Warrant Agreement (with form of certificate attached)*
4.4 Form of Bridge Warrant*
4.5 Form of Acknowledgment and Agreement of Warrant Holder*
4.6 Form of Class B Warrant Agreement (with form of certificate attached)
4.7 $500,000 Debenture***
4.8 $500,000 Debenture****
10.1 Employment Agreement of John Ellison, Jr.*
10.2 Employment Agreement of Alan Grossberg*
10.3 Employment Agreement of Jerry Willits*
10.4 Consulting Agreement of Russell Seheult*
10.5 Film Booking Agreement between the Company and Alan Grossberg*
10.6 Form of Indemnification Agreement with officers and directors*
10.7 Nickelodeon Theater Co., Inc. Stock Option Plan*
10.8 Placement Agent Agreement between the Company and A.S. Goldmen & Co., Inc. as amended*
10.9 Equipment Purchase and Ride Film Rental Agreement, dated August 8, 1994, between the Company and
Cinema Ride, Inc., as amended*
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*
10.11 Form of Financial Advisory and Consulting Agreement between the Company and the A.S. Goldmen Co.,
Inc.*
10.12 Lease Agreement, dated April 30, 1991, between Nickelodeon Cinemas, Inc. and Homart Development
Co.*
10.13 Lease, dated November 21, 1990, between the Company and Blue Ravine Associates, Inc. (now Pacific
Oceanside Holdings, L.P.)*
10.13.1 First Amendment to Lease, dated July 14, 1995 between the Company and Pacific Oceanside Holdings,
L.P.*
10.14 Real Property Lease Agreement between the Company and Gary E. Elam, Receiver*
10.15 Equipment Purchase Agreement between the Company and Gary E. Elam, Receiver*
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*
10.17 Lease Agreement, dated October 12, 1993, between the Company and Oceanside Cornerstone, Inc.*
10.18 Lease, dated October 19, 1994, between the Company and Glenwood Buena Park Limited Partnership*
10.19 Purchase Agreement with United Artist**
10.20 Newbury Park Center Lease, dated July 12, 1994, between the Company and Newbury Park Group*
10.21 Agreement, dated July 12, 1994, between the Company and Newbury Park Group, as amended
10.22 Agreements with Pacific Concessions*
10.23 Letter of Intent, dated August 5, 1994, between Southland Consulting and the Company*
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*
10.25 Lease Agreement, dated July 11, 1995 between the Company and Buena Park Cinema Center Limited
Partnership*
10.26 Lease Agreement, dated August 1, 1995 between the Company and Mission Grove Plaza, L.P.*
10.27 Lease Agreement, dated July 14, 1995 between the Company and University Village, LLC*
10.28 Ground Lease, dated August 5, 1995 between the Company and Craig W. Clark*
10.29 Lease Agreement, dated February 15, 1996 with the Coudures Family Limited Partnership
</TABLE>
48
<PAGE> 49
<TABLE>
<S> <C>
10.30 Adjustable Rate Note, dated January 23, 1996*
10.31 Settlement Agreement and Release of Claims, dated April 27, 1995, between the Company and Viacom
International, Inc.*
10.32 First National Bank Promissory Note, dated March 1, 1996, for $500,000
10.33 First National Bank Promissory Note, dated May 28, 1996, for $500,000
10.34 First National Bank Business Loan Agreement, dated May 28, 1996
10.35 Consulting Agreement with The Boston Group, L.P., dated February 12, 1996
10.36 400,000 Warrant Issue to The Boston Group, L.P., dated February 12, 1996
10.37 Lease Agreement, dated May 11, 1996, between the Company and Espacios de Zapopan, S.A. de C.V.
10.38 Lease Agreement, dated June 14, 1996, between the Company and Inmobiliaria Lunar, S.C.
21 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
24 Power of Attorney
</TABLE>
____________________
* Incorporated by reference to the exhibits filed with Registration
Statement No. 33-86716
** Incorporated by reference to Form 10-KSB for the year ended March 31, 1995
*** Incorporated by reference to Form 8-K for April 11, 1996
**** Incorporated by reference to Form 8-K for June 6, 1996
(b) Reports on Form 8-K
There were no reports on 8-K filed during the last quarter of the period
covered by this report.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CINEMASTAR LUXURY THEATERS, INC.
/s/ John Ellison, Jr.
----------------------------
John Ellison, Jr., President Dated June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ John Ellison, Jr. President, Chief Executive
------------------------- Officer and Director (principal June 28, 1996
John Ellison, Jr. executive officer)
/s/ Alan Grossberg Chief Financial Officer,
------------------------- Executive Vice President,
Alan Grossberg and Director
June 28, 1996
Vice President and Director
/s/ Jerry Willits June 28, 1996
-------------------------
Jerry Willits
General Counsel, Secretary
and Director June 28, 1996
/s/ Jon Meloan
-------------------------
Jon Meloan
Director and
/s/ Russell Seheult Chairman of the Board June 28, 1996
-------------------------
Russell Seheult
Director June 28, 1996
/s/ Walter Schlotter
-------------------------
Walter Schlotter
Director
/s/ Andrew Friedenberg June 28, 1996
-------------------------
Andrew Friedenberg
</TABLE>
50
<PAGE> 51
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION SEQUENTIALLY NUMBERED PAGE
- --------- ----------- --------------------------
<S> <C> <C>
10.32 First National Bank Promissory Note, dated March 1, 1996,
for $500,000 52-53
10.33 First National Bank Promissory Note, dated May 28, 1996,
for $500,000 54-55
10.34 First National Bank Business Loan Agreement, dated May 28, 1996 56-60
10.35 Consulting Agreement with the Boston Group, L.P., dated
February 12, 1996 61-65
10.36 400,000 Warrant Issue to the Boston Group, L.P., dated
February 12, 1996 66-73
10.37 Lease Agreement, dated May 11, 1996, between the Company and
Espacios de Zapopan, S.A. de C.V. 74-101
10.38 Lease Agreement, dated June 14, 1996, between the Company and
Inmobiliaria Lunar, S.C. 102-122
21 Subsidiaries of CinemaStar Luxury Theaters, Inc. 123
23.1 Consent of BDO Seidman, LLP 124
</TABLE>
<PAGE> 1
Exhibit 10.32
[LOGO] FIRST NATIONAL BANK
BUSINESS LOAN AGREEMENT
<TABLE>
- -----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$500,000.00 03-01-1996 04-01-2003 790304333 013/15 038
- -----------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
BORROWER: CINEMASTAR LUXURY THEATERS, INC. LENDER: FIRST NATIONAL BANK
431 COLLEGE BLVD. 401 WEST "A" STREET
OCEANSIDE, CA 92057-5435 P.O. BOX 85625
SAN DIEGO, CA 92186-5625
==================================================================================
</TABLE>
PRINCIPAL AMOUNT: $500,000.00 INITIAL RATE: 10.250% DATE OF NOTE: MARCH 1, 1996
PROMISE TO PAY. CINEMASTAR LUXURY THEATERS, INC. ("BORROWER") PROMISES TO PAY
TO FIRST NATIONAL BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED
STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE HUNDRED THOUSAND & 00/100
DOLLARS ($500,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE
FROM MARCH 1, 1996, UNTIL PAID IN FULL.
PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX,
BORROWER WILL PAY THIS LOAN IN 83 PRINCIPAL PAYMENTS OF $5,952.38 EACH AND ONE
FINAL PRINCIPAL AND INTEREST PAYMENT OF $6,005.00. BORROWER'S FIRST PRINCIPAL
PAYMENT IS DUE MAY 1, 1996, AND ALL SUBSEQUENT PRINCIPAL PAYMENTS ARE DUE ON
THE SAME DAY OF EACH MONTH AFTER THAT. IN ADDITION, BORROWER WILL PAY REGULAR
MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE.
BORROWER'S FIRST INTEREST PAYMENT IS DUE MAY 1, 1996, AND ALL SUBSEQUENT
INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S
FINAL PAYMENT DUE APRIL 1, 2003, WILL BE FOR ALL PRINCIPAL AND ACCRUED INTEREST
NOT YET PAID. Interest on this Note is computed on a 365/360 simple Interest
basis; that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied by
file actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid interest, then
to principal, and any remaining amount to any unpaid collection costs and late
charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from lime to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may or
may not be the lowest rate available from Lender at any given time. Lender
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. THE INDEX
CURRENTLY IS 8.250% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID
PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 2.000 PERCENTAGE POINTS
OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 10.250% PER ANNUM. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT PENALTY; MINIMUM INTEREST CHARGE. Borrower agrees that all loan
fees and other prepaid finance charges are earned fully as of the date of the
loan and will not be subject to refund upon early payment (whether voluntary or
as a result of default), except as otherwise required by law. In any event,
even upon full prepayment of this Note, Borrower understands that Lender is
entitled to a minimum interest charge of $100.00. UPON PREPAYMENT OF THIS NOTE,
LENDER IS ENTITLED TO THE FOLLOWING PREPAYMENT PENALTY: IN THE EVENT OF EARLY
PAYOFF DURING MONTHS 1-12: 5% OF THE PAYOFF BALANCE; MONTHS 13-24: 4%; MONTHS
25-36: 3%; MONTHS 37-48: 2%; MONTHS 49-60: 1%. FOLLOWING MONTH 60, NO
PREPAYMENT PENALTY IS APPLICABLE. Other than Borrower's obligation to pay any
minimum interest charge and prepayment penalty, Borrower may pay all or a
portion of the amount owed earlier than it is due. Early payments will not,
unless agreed to by Lender in writing, relieve Borrower of Borrower's
obligation to continue to make payments under the payment schedule. Rather,
they will reduce the principal balance due and may result in Borrower making
fewer payments.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $5.00, WHICHEVER IS GREATER.
DEFAULT. Borrower will be in default it any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any of the events described in this default section occurs
with respect to any guarantor of this Note. (h) A material adverse change
occurs in Borrower's financial condition, or Lender believes the prospect of
payment or performance of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15) days;
or (b) if the cure requires more than fifteen (15) days, immediately initiates
steps which Lender deems in Lender's sole discretion to be sufficient to cure
the default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
pay all amounts declared due pursuant to this section, including failure to pay
upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 6,000
percentage points over the Index. Lender may hire or pay someone also to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower also
will pay any court costs, in addition to all other sums provided by law. THIS
NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF
CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO
SUBMIT TO THE JURISDICTION OF THE COURTS OF SAN DIEGO COUNTY, THE STATE OF
CALIFORNIA THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF CALIFORNIA.
DEPOSIT ACCOUNTS. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA, Keogh, and trust
accounts.
THIRD PARTY COSTS. Borrower agrees to reimburse Lender for any third party
costs, if required by regulation or dictated by changing market conditions,
whenever incurred.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the Related Documents or any other agreement that Borrower or
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantors' guaranty of the Loan or
any other loan with Lender; or (e) for any other reason where Lender may deem
itself insecure,
LOAN FEE. A loan fee in the amount of $10,000.00 is payable prior to or at
time of execution of loan documents.
ADDITIONAL LENDER'S RIGHTS. In the event of a lawsuit, the prevailing party of
such lawsuit shall be entitled to reimbursement of attorney's fees and legal
expenses, in addition to all other sums provided by law.
<PAGE> 2
03-28-1996 PROMISSORY NOTE PAGE 2
Loan No 790304333 (CONTINUED)
===============================================================================
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive any applicable statute of limitations, presentment, demand for payment,
protest and notice of dishonor. Upon any change in the terms of this Note, and
unless otherwise expressly stated in writing, no party who signs this Note,
whether as maker, guarantor, accommodation maker or endorser, shall be released
from liability. All such parties agree that Lender may renew or extend
(repeatedly and for any length of time) this loan, or release any party or
guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ JOHN ELLISON, JR., PRESIDENT
--------------------------------------
JOHN ELLISON, JR., PRESIDENT
===============================================================================
<PAGE> 1
Exhibit 10.33
[LOGO] FIRST NATIONAL BANK
PROMISSORY NOTE
<TABLE>
- -----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$500,000.00 05-28-1996 05-30-2003 790304643 013/V16 038
- -----------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
BORROWER: CINEMASTAR LUXURY THEATERS, INC. LENDER: FIRST NATIONAL BANK
431 COLLEGE BLVD. 401 WEST "A" STREET
OCEANSIDE, CA 92057-5435 P.O. BOX 85625
SAN DIEGO, CA 92186-5625
==================================================================================
</TABLE>
PRINCIPAL AMOUNT: $500,000.00 INITIAL RATE: 10.250% DATE OF NOTE: MAY 28, 1996
PROMISE TO PAY. CINEMASTAR LUXURY THEATERS, INC. ("BORROWER") PROMISES TO PAY
TO FIRST NATIONAL BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED
STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE HUNDRED THOUSAND & 00/100
DOLLARS ($500,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE
FROM MARCH 1, 1996, UNTIL PAID IN FULL.
PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX,
BORROWER WILL PAY THIS LOAN IN 83 PRINCIPAL PAYMENTS OF $5,952.38 EACH AND ONE
FINAL PRINCIPAL AND INTEREST PAYMENT OF $6,005.00. BORROWER'S FIRST PRINCIPAL
PAYMENT IS DUE MAY 1, 1996, AND ALL SUBSEQUENT PRINCIPAL PAYMENTS ARE DUE ON
THE SAME DAY OF EACH MONTH AFTER THAT. IN ADDITION, BORROWER WILL PAY REGULAR
MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE.
BORROWER'S FIRST INTEREST PAYMENT IS DUE MAY 1, 1996, AND ALL SUBSEQUENT
INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S
FINAL PAYMENT DUE APRIL 1, 2003, WILL BE FOR ALL PRINCIPAL AND ACCRUED INTEREST
NOT YET PAID. Interest on this Note is computed on a 365/360 simple interest
basis; that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied by
file actual number of days the principal balance is outstanding. Borrower
will pay Lender at Lender's address shown above or at such other place as
Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to accrued unpaid interest, then
to principal, and any remaining amount to any unpaid collection costs and late
charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an index which is Lender's Prime Rate
(the "Index"). This is the rate Lender charges, or would charge, on 90-day
unsecured loans to the most creditworthy corporate customers. This rate may or
may not be the lowest rate available from Lender at any given time. Lender
will tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each DAY. THE INDEX
CURRENTLY IS 8.250% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID
PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 2.000 PERCENTAGE POINTS
OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 10.250% PER ANNUM. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even
upon full prepayment of this Note, Borrower understands that Lender is entitled
to a minimum interest charge of $100.00. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments under the payment schedule. Rather, they will reduce the
principal balance due and may result in Borrower making fewer payments.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
6.000% OF THE REGULARLY SCHEDULED PAYMENT OR $5.00, WHICHEVER IS GREATER.
DEFAULT. Borrower will be in default it any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any of the events described in this default section occurs
with respect to any guarantor of this Note. (h) A material adverse change
occurs in Borrower's financial condition, or Lender believes the prospect of
payment or performance of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15) days;
or (b) if the cure requires more than fifteen (15) days, immediately initiates
steps which Lender deems in Lender's sole discretion to be sufficient to cure
the default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to
pay all amounts declared due pursuant to this section, including failure to pay
upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 6,000
percentage points over the Index. Lender may hire or pay someone also to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower also
will pay any court costs, in addition to all other sums provided by law. THIS
NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF
CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO
SUBMIT TO THE JURISDICTION OF THE COURTS OF SAN DIEGO COUNTY, THE STATE OF
CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN
ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OF BORROWER
AGAINST THE OTHER. (INITIAL HERE_____) THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, convoys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
THIRD PARTY COSTS. Borrower agrees to reimburse Lender for any third party
costs, if required by regulation or dictated by changing market conditions,
whenever incurred.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the Related Documents or any other agreement that Borrower or
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantors' guaranty of the Loan or
any other loan with Lender; or (e) for any other reason where Lender may deem
itself insecure,
LOAN FEE. A loan fee in the amount of $5,000.00 is payable prior to or at
time of execution of loan documents.
ADDITIONAL LENDER'S RIGHTS. In the event of a lawsuit, the prevailing party of
such lawsuit shall be entitled to reimbursement of attorney's fees and legal
expenses, in addition to all other sums provided by law.
<PAGE> 2
05-28-1996 PROMISSORY NOTE PAGE 2
LOAN NO 790304643 (CONTINUED)
===============================================================================
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive any applicable statute of limitations, presentment, demand for payment,
protest and notice of dishonor. Upon any change in the terms of this Note, and
unless otherwise expressly stated in writing, no party who signs this Note,
whether as maker, guarantor, accommodation maker or endorser, shall be released
from liability. All such parties agree that Lender may renew or extend
(repeatedly and for any length of time) this loan, or release any party or
guarantor or collateral; or impair, fail to realize upon or perfect Lender's
security interest in the collateral; and take any other action deemed necessary
by Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ JOHN ELLISON, JR., PRESIDENT
--------------------------------------
JOHN ELLISON, JR., PRESIDENT
===============================================================================
<PAGE> 1
Exhibit 10.34
[LOGO] FIRST NATIONAL BANK
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$500,000.00 05-28-1996 05-30-2003 790304643 13/V16 038
- -----------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
BORROWER: CINEMASTAR LUXURY THEATERS, INC. LENDER: FIRST NATIONAL BANK
431 COLLEGE BLVD. 401 WEST "A" STREET
OCEANSIDE, CA 92O57-5435 P.O. BOX 85625
SAN DIEGO, CA 92186-5625
==================================================================================
</TABLE>
THIS BUSINESS LOAN AGREEMENT BETWEEN CINEMASTAR LUXURY THEATERS, INC.
("BORROWER") AND FIRST NATIONAL BANK ("LENDER") IS MADE AND EXECUTED ON THE
FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS
FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER
FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT
OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS
FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE
"LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT:
(A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON
BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS
AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT
ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C)
ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND
CONDITIONS OF THIS AGREEMENT
TERM. This Agreement shall be effective as of MAY 28, 1996, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings
when used in this Agreement. Terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial
Code. All references to dollar amounts shall mean amounts in lawful money of
the United States of America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement,
as this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
BORROWER. The word "Borrower" means CINEMASTAR LUXURY
THEATERS, INC. The word "Borrower" also includes, as applicable, all
subsidiaries and affiliates of Borrower as provided below in the
paragraph titled "Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
COLLATERAL. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security for
a Loan, whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien or
title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation
each and all of the persons or entities granting a Security Interest
in any Collateral for the Indebtedness, including without limitation
all Borrowers granting such a Security Interest
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or
not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become
barred by any statute of limitations; and whether such Indebtedness
may be or hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means FIRST NATIONAL BANK, its successors
and assigns.
LOAN. The word "Loan" or "Loans" means and includes without
limitation any and all commercial loans and financial accommodations
from Lender to Borrower, whether now or hereafter existing, and
however evidenced, including without limitation those loans and
financial accommodations described herein or described on any exhibit
or schedule attached to this Agreement from time to time.
NOTE. The word "Note" means and includes without limitation
Borrower's promissory note or notes, if any, evidencing Borrower's
Loan obligations in favor of Lender, as well as any substitute,
replacement or refinancing note or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet
due or being contested in good faith; (c) liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens arising in
the ordinary course of business and securing obligations which are not
yet delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net
value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
SECURITY INTEREST. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the
form of a lien, charge, mortgage, deed of trust, assignment, pledge,
chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien or title retention contract,
lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions
set forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel, including without limitation any assignments of life
insurance described below and any guaranties described below.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duty
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion, may require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties
set forth in this Agreement, in the Rotated Documents, and in any
document or certificate delivered to Lender under this Agreement are
true and correct.
<PAGE> 2
05-28-1996 BUSINESS LOAN AGREEMENT Page 2
Loan No 790304643 (Continued)
===============================================================================
NO EVENT OF DEFAULT. There shall not exist at the time of any advance
a condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
California and is validly existing and in good standing in all states
in which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in
which it is presently engaged or presently proposes to engage.
Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly
authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation of,
or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled
in Borrower's legal name, and Borrower has not used, or filed a
financing statement under, any other name for at least the last five
(5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used
in this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation and Recovery
Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of
Division 20 of the California Health and Safety Code, Section 25100,
et seq., or other applicable state or Federal laws, rules, or
regulations adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of,
or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened
release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower
nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose
of, or release any hazardous waste or substance on, under, about or
from any of the properties; and any such activity shall be conducted
in compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes
Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and
for Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to
any other person. The representations and warranties contained herein
are based on Borrower's due diligence in investigating the properties
for hazardous waste and hazardous substances. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section
of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release
occurring prior to Borrower's ownership or interest in the properties,
whether or not the same was or should have been known to Borrower.
The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the Indebtedness
and the termination or expiration of this Agreement and shall not be
affected by Lender's acquisition of any interest in any of the
properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for
unpaid taxes) against Borrower is pending or threatened, and no other
event has occurred which may materially adversely affect Borrower's
financial condition or properties, other than ligation, claims, or
other events, if any, that have been disclosed to and acknowledged by
Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and
reports of Borrower that are or were required to be filed, have been
filed, and all taxes, assessments and other governmental charges have
been paid in full, except those presently being or to be contested by
Borrower in good faith in the ordinary course of business and for
which adequate reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which
Borrower may have any liability complies in all material respects with
all applicable requirements of law and regulations, and (i) no
Reportable Event nor Prohibited Transaction (as defined in ERISA) has
occurred with respect to any such plan, (ii) Borrower has not
withdrawn from any such plan or initiated steps to do so, (ii) no
steps have been taken to terminate any such plan, and (iv) there are
no unfunded liabilities other than those previously disclosed to
Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business is located at 431 COLLEGE BLVD., OCEANSIDE,
CA 92057-5435. Unless Borrower has designated otherwise in writing
this location is also the office or offices where Borrower keeps his
records concerning the Collateral.
INFORMATION. All Information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, Is relying upon
the above representations and warranties in making the above
referenced Loan to Borrower. Borrower further agrees that the
foregoing representations and warranties shall be continuing in nature
and shall remain in full force and effect until such time as Borrower's
Indebtedness shall be paid in full, or until this Agreement shall be
terminated in the manner provided above, whichever is the last to
occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or
the financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables
and payables, inventory schedules, budgets, forecasts, tax returns,
and other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
Borrower, upon request of Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lander. Each insurance policy
<PAGE> 3
05-28-1996 BUSINESS LOAN AGREEMENT Page 3
Loan No 790304643 (Continued)
===============================================================================
Borrower or any other person. In connection with all policies
covering assets in which Lender holds or is offered a security
interest for the Loans. Borrower will provide Lender with such loss
payable or other endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal
shall be paid by Borrower.
LIFE INSURANCE. As soon as practical, obtain and maintain life
insurance in form and with insurance companies reasonably acceptable
to Lender on the following individuals in the amounts indicated below
and, at Lender's option, cause such insurance coverage to be pledged,
made payable to, or assigned to Lender on Lender's forms. Lender, at
its discretion, may apply the proceeds of any insurance policy to the
unpaid balances of any Indebtedness:
<TABLE>
<CAPTION>
Names of Insured Amounts
<S> <C>
JOHN ELLISON, JR. $500,000.00
ALAN GROSSBERG $500,000.00
</TABLE>
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish
executed guaranties of the Loans in favor of Lender, on Lender's
forms, and in the amounts and by the guarantors named below:
<TABLE>
<CAPTION>
Guarantors Amounts
<S> <C>
JOHN ELLISON, JR. $1,000,000.00
ALAN M. GROSSBERG $1,000,000.00
RUSSELL 0. SEHEULT $1,000,000.00
</TABLE>
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether new or hereafter existing, between Borrower and
any other party and notify Lender immediately in writing of any
default in connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such assessment,
tax, charge, levy, lien or claim so long as (a) the legality of the
same shall be contested in good faith by appropriate proceedings, and
(b) Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien, or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand of Lender, will furnish to Lender evidence of payment of
the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or
profits.
PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender
of any change in executive and management personnel; conduct its
business affairs in a reasonable and prudent manner and in compliance
with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses
and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards
and other requirements of ERISA and other laws applicable to
Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans and
Borrower's other properties and to examine or audit Borrower's books,
accounts, and records and to make copies and memoranda of Borrower's
books, accounts, and records. If Borrower now or at any time
hereafter maintains any records (including without limitation computer
generated records and computer software programs for the generation of
such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free
access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of
Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements
or other obligations which would (a) increase the cost to Lender for extending
or maintaining the credit facilities to which this Agreement relates, (b)
reduce the amounts payable to Lender under this Agreement or the Related
Documents, or (c) reduce the rate of return on Lender's capital as a
consequence of Lender's obligations with respect to the credit facilities to
which this Agreement relates, then Borrower agrees to pay Lender such
additional amounts as will compensate Lender therefor, within five (5) days
after Lender's written demand for such payment, which demand shall be
accompanied by an explanation of such imposition or charge and a calculation in
reasonable detail of the additional amounts payable by Borrower, which
explanation and calculations shall be conclusive in the absence of manifest
error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or (c)
sell with recourse any of Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that
notwithstanding the foregoing, but only so long as no Event of Default
has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in
the Internal Revenue Code of 1986, as amended), Borrower may pay cash
dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and
make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership
of shares of stock of Borrower, or (d) purchase or retire any of
Borrower's outstanding shares or alter or amend Borrower's capital
structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surely or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other
<PAGE> 4
05-28-1996 BUSINESS LOAN AGREEMENT Page 4
Loan No 790304643 (Continued)
===============================================================================
any Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; or (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender.
CONDITIONS.
1) CinemaStar will maintain a profitable deposit relationship at
First National Bank. A profitable relationship is defined as, average
non-interest bearing demand deposits net of float and reserve requirements
sufficient to compensate the Bank for services rendered. The account will be
reviewed on a monthly basis and charged for any deficit at that time.
2) Borrower to provide certified copies of its quarterly 10-Q
Financial Statements within 50 days of quarter-end. Borrower to provide copies
of fiscal year end Securities and Exchange Commission form 10K within 100 days
of fiscal year end. Borrower to provide certified copies of its Federal Tax
Return concurrent with filing.
3) Borrower's recurring cash flow shall be sufficient to service
all debt 1.5 times measured quarterly. Recurring is defined as that cash flow
sustained after the removal of non-recurring expense items from the Income
Statement. Non-recurring is defined as those expenses related to stock
offerings and other expenses that may be classified non-recurring at the
Bank's sole discretion.
4) Borrower to maintain a leverage ratio at or below 3.25:1
calculated quarterly.
5) Guarantors to provide personal Financial Statements annually
or when requested by the Bank. Guarantors to provide certified copies of
Federal Tax Returns concurrent with filing.
6) In the event of early payoff, the following prepayment penalty
will be assessed: Payoff during months 1-12: 5% of the payoff balance; months
13-24: 4%: months 25-36: 3%; months 37-48: 2%; months 49-60: 1%. Following
month 60, no prepayment penalty is applicable.
7) Borrower to provide Bank with a status report of capital
efforts for expansion on a quarterly basis commencing 6/30/96 and quarterly
thereafter.
8) Borrower to provide verification of sufficient cash to
complete the purchase of the equipment prior to loan closing.
9) Any default on either loan #790304333 or loan #790304643 shall
result in a default on both loans.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement.
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or
to perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of
the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as
a going business, the insolvency of Borrower, the appointment of a
receiver for any part of Borrower's property, any assignment for the
benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply
if there is a good faith dispute by Borrower or Grantor, as the case
may be, as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding, and if Borrower or
Grantor gives Lender written notice of the creditor or forfeiture
proceeding and furnishes reserves or a surety bond for the creditor or
forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of,
or liability under, any Guaranty of the Indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's
estate to assume unconditionally the obligations arising under the
guaranty in a manner satisfactory to Lender, and, in doing so, cure
the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
RIGHT TO CURE. If any default, other than a Default on Indebtedness,
is curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default
within fifteen (15) days; or (b) if the cure requires more than fifteen
(15) days, immediately initiates steps which Lender deems in Lender's
sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate and, at Lender's
option, all Indebtedness immediately will become due and payable, all without
notice of any kind to Borrower, except that in the case of an Event of Default
of the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Borrower or of any Grantor shall not
affect Lender's right to declare a default and to exercise its rights and
remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND
ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IT THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF
THE COURTS OF SAN DIEGO COUNTY, THE STATE OF CALIFORNIA. LENDER AND
BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER
AGAINST THE OTHER. (INITIAL HERE [INITIALS]) THIS AGREEMENT SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF CALIFORNIA.
CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
decline the provisions of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to
Lender's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more
<PAGE> 5
05-28-1996 BUSINESS LOAN AGREEMENT Page 5
Loan No 790304643 (Continued)
===============================================================================
relating to the Loan, and Borrower hereby waives any rights to privacy
it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well
as all notices of any repurchase of such participation interests.
Borrower also agrees that the purchasers of any such participation
interests will be considered as the absolute owners of such interests
in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset
or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may
enforce Borrower's obligation under the Loans irrespective of the
failure or insolvency of any holder of any interest in the Loans.
Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal
claims or defenses that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of
Lender's expenses, including without limitation attorneys' fees,
incurred in connection with the preparation, execution, enforcement,
modification and collection of this Agreement or in connection with
the Loans made pursuant to this Agreement. Lender may pay someone
else to help collect the Loans and to enforce this Agreement, and
Borrower will pay that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees
for bankruptcy proceedings (including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Borrower also will pay any court
costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimilie, and shall be
effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above, Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice
is to change the party's address. To the extent permitted by
applicable law, if there is more than one Borrower, notice to any
Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
SEVERABILITY. If a court of competent jurisdiction finds any
provision of this Agreement to be invalid or unenforceable as to any
person or circumstance, such finding shall not render that provision
invalid or unenforceable as to any other persons or circumstances. If
feasible, any such offending provision shall be deemed to be modified
to be within the limits of enforceability or validity: however, if the
offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall
remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and
affiliates of Borrower. Notwithstanding the foregoing however, under
no circumstances shall this Agreement be construed to require Lender
to make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or
on behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent
of Lender.
SURVIVAL. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the Loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever
the consent of Lender is required under this Agreement the granting of
such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MAY
28,1996.
BORROWER:
CINEMASTAR LUXURY THEATERS, INC.
BY: /s/ JOHN ELLISON, JR.
----------------------------------
JOHN ELLIS0N, JR., PRESIDENT
LENDER:
FIRST NATIONAL BANK
BY:
----------------------------------
AUTHORIZED OFFICER
===============================================================================
<PAGE> 1
Exhibit 10.35
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement") is made as of February
12, 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 12, 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 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 nonaction 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 of (ii) at such time as the Warrants or Warrant Shares, as the case
<PAGE> 4
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 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
interpreted according to the laws of the State of California.
<PAGE> 5
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: /s/ JOHN ELLISON, JR.
--------------------------------
John Ellison, Jr.
THE BOSTON GROUP, L.P.
By:
--------------------------------
Robert DiMinico
Chairman
<PAGE> 1
Exhibit 10.36
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
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> 3
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 12, 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> 4
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> 5
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> 6
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:
--------------------------------------
Name: Robert DiMinico
Chairman
-5-
<PAGE> 7
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> 8
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 10.37
MOTION PICTURE THEATER LEASE
ESPACIOS DE ZAPOPAN
GUADALAJARA, MEXICO
THIS LEASE ("Lease") is entered into this 11th day of May, 1996, by
and between Espacios de Zapopan, S.A. de C.V., (hereinafter referred to as
"Landlord") and CinemaStar Luxury Theaters, S.A. de C.V., (hereinafter referred
to as "Tenant").
RECITALS
A. Landlord is an organization duly organized and existing by
virtue of the Laws of the United Mexican States. Landlord maintains its
principal place of business at
B. Landlord owns and controls that certain real property
development known as Espacios de Zapopan, which is more particularly described
in the map and real property description attached hereto as Exhibit A.
C. Tenant is a corporation duly organized and existing by virtue
of the Laws of the United Mexican States, maintaining its principal place of
business in Tijuana, Baja California, Mexico. Tenant is principally engaged in
the motion picture exhibition industry through the development, ownership,
lease, operation, management and maintenance of motion picture theaters in
Mexico.
D. Landlord and Tenant have independently investigated the
existing and future opportunity for developing, owning, leasing, operating,
managing and maintaining motion picture theaters in Mexico generally and
specifically the site in Guadalajara more particularly described in Exhibit "A"
hereto. Landlord has had an opportunity to visit various theater sites
operated by CinemaStar Luxury Theaters, Inc., a California corporation which
holds 75% of the outstanding stock of Tenant. Tenant has had the opportunity
to visit the specific site in Guadalajara owned by Landlord. In order to
facilitate and accomplish the independent business goals of Landlord and
Tenant, the parties freely and voluntarily enter into the following Lease
Agreement for the development of a motion picture theater complex on the
aforedescribed real property.
NOW THEREFORE, in consideration of the recitals, mutual covenants and
conditions contained herein, it is agreed:
1.
<PAGE> 2
ARTICLE I
BASIC LEASE PROVISIONS
1.1 Date of Lease. May 11, 1996.
1.2 Landlord. Espacios de Zapopan, S.A. de C.V.
1.3 Tenant. CinemaStar Luxury Theaters, S.A. de C.V., Tijuana, Baja
California, Mexico.
1.4 Demised Premises. That certain real property described generally as
Espacios de Zapopan, Guadalajara, and which is more particularly described in
Exhibit "A" hereto, together with the "Building" as defined at Paragraph 3.1
hereafter and "Landlord's Work" as defined at Paragraph 6.2 hereafter.
1.5 Ground Floor Area. To be determined
1.6 Initial Term. Twenty (20) years, (240) months.
1.7 Options to Extend. At the end of the initial term, Tenant shall have
the right to extend this Lease for two (2) consecutive terms of five (5) years
each. Payment of Rent and conditions of occupancy shall remain the same.
1.8 Landlord's Commencement Date. Ten (10) days after issuance of all
necessary building permits, or as soon thereafter as reasonably practicable.
1.9 Initial Minimum Rent.
<TABLE>
<S> <C>
Year 1 - $1.05 (U.S.) per sq. foot per month
Year 2 - $1.10 (U.S.) per sq. foot per month
Year 3 - $1.15 (U.S.) per sq. foot per month
Year 4 - $1.20 (U.S.) per sq. foot per month
Year 5 - $1.20 (U.S.) per sq. foot per month
</TABLE>
Initial Minimum Rent is payable in advance each month. On the first
day of the Sixty First (61st) 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%).
1.10 Percentage Rent. Percentage Rent shall be calculated at the end of
each calendar year and shall be based upon Fifteen Percent (15%) of Box Office
Sales and Fifteen Percent (15%) of Concession Sales. If this calculation
exceeds the Minimum Rent already paid
2.
<PAGE> 3
by Tenant for the preceding calendar year, Tenant 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.
1.11 Use of Demised Premises. Operation of a first-rate multiplex, indoor
motion picture theater and related concessions and any other use related
thereto; the sale of video cassettes of movies; and the incidental on-Demised
Premises use of vending and video game machines. Tenant shall also be allowed
to operate a family-oriented arcade center with a ticket redemption program for
prizes. Tenant shall also be allowed to operate family-oriented, collateral
merchandising for clothing, ceramics, posters, and other articles of cinema
orientation.
1.12 Addresses. Addresses for Notices, Payments and Reports:
Landlord: Espacios de Zapopan, S.A. de C.V.
Attention:
Tenant: CinemaStar Luxury Theaters, S.A. de C.V.
Attention:
This Article I is intended to supplement and summarize the provision
of this Lease. If there is any conflict between any provisions contained in
this Article I and the balance of this Lease, the balance of the lease shall
control.
ARTICLE 2
EXHIBITS
EXHIBIT A - Site Plan ("Site Plan") showing Landlord's proposed
development of the property. The Demised Premises are
"cross-hatched" in the color red on the Site Plan.
EXHIBIT B - Legal description of real properties and owners.
EXHIBIT C - Signage
EXHIBIT D - Tenant's Statement of Box Office and Concession Sales
3.
<PAGE> 4
ARTICLE 3
DEFINITIONS
3.1 Building. "Building" shall mean the Building Shell within
which the Demised Premises are located, (or shall be located once constructed).
The location of Building is cross-hatched in the color red on the Site Plan
which is Exhibit "A" to this Lease.
3.2 Center Area. As used in this Lease, the term "Center Area"
shall exclude the demised premises, but shall include, without limitation, all
portions of the Center which have been improved and maintained by Landlord and
shall include, but not be limited to, parking areas, parking structures,
driveways, walkways, access and perimeters roads, sidewalks, signs, landscaped
areas, curbs, and other structures, facilities, and areas. Tenant, for its
benefit and the benefit of other subtenants and assigns, and each of their
respective agents, employees, customers, patrons, licensees and invitees, shall
have the non-exclusive right to use the Center Area, provided, however, that
Landlord may, from time to time, change the location, size, configuration and
design of the Center Areas from that shown on the attached Exhibit "A" or from
time to time constructed, including, without limitation, the location of
driveways, signs, aisles, parking areas, drive-through facilities and parking
spaces; provided that no alterations shall be made to the Common Areas as
depicted on the attached Exhibit "A" without the prior written consent of
Tenant, which consent shall not unreasonably be withheld.
3.3 Demised Premises. The "Demised Premises" shall mean the
Building leased by Tenant pursuant to this Lease.
3.4 Extended Term. "Extended Term" shall mean each of the two (2)
additional periods of five (5) years (sixty (60) months) each, such periods
being hereinafter referred to as an "Extended Term" upon exercise of the Option
to Extend in accordance with Sections 5.3 and 5.4 of this Lease.
3.5 Ground Floor Area. The term "Ground Floor Area", as used in
this Lease, shall mean all areas designated for the exclusive use of Tenant,
measured from the exterior surface of exterior walls to the exterior surface of
exterior walls exclusive of the mezzanine. The Demised Premises shall contain
approximately Thousand ( ,000) square feet of Ground Floor Area.
Landlord's Architect and Tenant's Architect shall measure the exact ground
floor area of the Demised Premises and shall certify the actual Ground Floor
Area to Landlord and Tenant ("GFA Certification"). If the actual Ground Floor
Area set forth in the GFA Certification deviates from the Ground Floor Area
specified in Section 1.5 above, this Lease shall be amended to reflect the
actual ground Floor Area and corresponding Minimum Annual Rent based on actual
Ground Floor Area.
4.
<PAGE> 5
Said "GFA Certification" shall be completed no later than sixty (60) days first
succeeding occupancy of the Demised Premises by Tenant.
3.6 Improvements. "Improvements" shall mean collectively all
on-site and off-site improvements, the Landlord's Work, at the Property where
the Demised Premises are located, as set forth at Article 6 of this Lease.
3.7 Interest. "Interest Rate", wherever herein used, shall mean
the London Interbank Overnight Rate 6-month (LIBOR) at the time the amount
which is subject to interest under this Lease by agreement of the parties or
judgment of court of competent jurisdiction was due and payable.
3.8 Lease Term. "Lease Term" shall mean the period which
commences on the Rent Commencement Date and which extends thereafter for a
period of twenty (20) years (two hundred forty (240) months) from (i) the Rent
Commencement Date if the Rent Commencement Date occurs on the first (1st) day
of a calendar month, or (ii) the first (1st) day of the first calendar month
following the Rent Commencement Date if the Rent Commencement Date occurs on
other than the first (1st) day of a calendar month, unless sooner terminated in
accordance with the terms of this Lease. The parties shall execute an
amendment to the Lease specifying the Term Commencement Date at such time as it
is determined.
3.9 Lease Year. "Lease Year" shall mean a period of three hundred
sixty-five (365) days, or if in a leap year, three hundred sixty-six (366)
days and shall commence on the first day of the first full calendar month
following the Rent Commencement Date, as provided in Section 3.14 below.
3.10 Minimum Rent. "Minimum Rent" is defined at Section 7.2.
3.11 Permitted Users. "Permitted Users" shall mean the Tenant's
employees, vendors, agents, invitees, guests, visitors, and customers.
3.12 Property. "Property" shall mean the parcel of real property
upon which the Center is constructed or is to be constructed, and which is more
fully described in Exhibit "B".
3.13 Parking Rights. "Parking Rights" shall mean the rights
granted Tenant, its vendors, agents, invitees, guests, visitors, customers,
employees, successors, and assigns.
3.14 Rent Commencement Date. The Rent Commencement Date shall be
deemed to be the first Calendar day of the third calendar month after delivery
of the Demised Premises from Landlord and Tenant opens the theater for
business.
3.15 Rentable Area of the Building. "Rentable Area of the
5.
<PAGE> 6
Building" shall mean the Ground Floor Area as herein defined and set forth in
the Basic Lease provisions as the Rentable Area of the Building which excludes
any mezzanine area and any Center Area or related facilities. This figure is
agreed upon by the parties to be the appropriate figure to represent the Ground
Floor Area square footage of the Demised Premises.
ARTICLE 4
DEMISED PREMISES
4.1 Lease of Demised Premises. In consideration of the Rent to be
paid hereunder and the mutual covenants and agreements herein contained,
Landlord hereby grants and leases to Tenant and Tenant hereby takes and leases
from Landlord the Demised Premises described in Sections 1.4 and 1.5, upon and
subject to the terms and conditions herein contained ("Demised Premises").
ARTICLE 5
TERM
5.1 Initial Term. This Lease shall be effective from and after
the Date of Lease specified in Section 1.1 ("Date of Lease"). The term of this
Lease ("Term") shall commence on the Rent Commencement Date; and the Term shall
continue, unless sooner terminated in accordance with the provisions of this
Lease, for the number of months specified in section 1.6 of this Lease (the
"Initial Term").
5.2 Failure of Commencement of Lease. In the event Landlord
diligently pursues obtaining all necessary approvals, licensing and building
permits and does not obtain all necessary approvals, licensing and building
permits within one hundred eighty (180) days following the Date of Lease,
either Landlord or Tenant may, without liability to or further obligation to
the other party, terminate this Lease upon written notice to the other party,
and this Lease shall have no further force and effect.
5.3 Options to Extend. Tenant shall have the two (2) consecutive
options to extend the Initial Term of this Lease as set forth at Section 1.7
provided Tenant is not in default (hereinafter defined) at the time of Exercise
of Option under any provisions of this Lease when exercised during the Initial
Term, or any extension ("Extended Term") .
5.4 Exercise of Option. Tenant may exercise the right to extend
the Initial Term by delivering written notice to Landlord of Tenant's desire to
extend the Initial Term or any previously
6.
<PAGE> 7
elected and commenced Extended Term ("Extension Notice") no later than one
hundred eighty (180) nor sooner than three hundred sixty five (365) days prior
to the expiration of the Initial Term, or of any commenced Extended Term.
ARTICLE 6
POSSESSION, CONSTRUCTION, AND OPENING DATE
6.1 Landlord's Site Work. "Landlord's Site Work" shall be based
on the engineering plans, specifications, and drawings to be prepared to
Tenant's specifications and pursuant to paragraph 6.2, below. Landlord's Work
shall include providing Tenant with a certified compacted pad, sloped to
Tenant's specifications, all required parking, all landscaping, all on-site
paving, parking, curbs, gutters, and sidewalks, all irrigation, all utilities
stubbed to within 5 feet of building line and all impact fees, all utility
hook-up fees, and all building permits for Tenant's building.
6.2 Landlord's Building Work. The term "Landlord's Building Work"
shall mean and consist of the construction of a first-class theater building
constructed to Tenant's specifications and including, without limitation, all
architecture and engineering; all building structural costs and project
management, including, without limitation, all contingencies necessary for a
first class theater building including, a second floor mezzanine structure;
concrete sloped and flat floors; auditorium dividing walls; long span roof
structure; complete fire sprinkler system; stairways; drop ceiling; completed
electrical; finished plumbing (to include full, finished, and fixturized
restroom facilities); emergency exit-ways; all HVAC systems; storefront exit
doors; all hardware; all signage, (including a readerboard and marquee, ) all
utilities, all wall coverings, and all carpeting and decorative flooring.
6.3 Tenant's Interior Finishing Work. Tenant's Interior Finishing
Work shall include the installation of, without limitation: state-of-the-art
screens, speakers, carpeting, auditorium wall coverings, projection equipment,
concession equipment, fixturization, seating, other furniture, and subject to
approval of applicable governmental entities.
Within sixty (60) days from execution of this Lease, Landlord shall
cause the Preliminary Plans to be prepared ("Preliminary Plans") to Tenant's
specifications and thereafter shall submit the Preliminary Plans to Tenant for
its approval or disapproval, which approval shall not be unreasonably withheld
or delayed and which approval or disapproval shall be given within ten (10)
days following receipt of the Preliminary Plans from Landlord. After Tenant
has approved a set of Preliminary Plans, Landlord shall cause its architect to
prepare final plans and specifications ("Final
7.
<PAGE> 8
Plans") which shall be based upon and fall within the scope of the Preliminary
Plans approved by Tenant, which Final Plans shall be submitted to Tenant for
approval, (which approval shall not be unreasonably withheld,) in the same
manner and with the same procedure set forth for approval of Preliminary Plans
(the "Approved Plans"). Once approved by Tenant, Landlord shall, within thirty
(30) days submit at its expense, the Approved Plans to the appropriate
governmental authorities for their approval. In connection with the
governmental approval process and subsequent construction, Landlord may, if
required by any applicable governmental agency, make changes to the Approved
Plans it may deem reasonably necessary to obtain approvals, and may, without
Tenant's approval, make changes which are within the general scope of the Final
Plans approved by Tenant. Otherwise, the Approved Plans shall not be modified
or amended without the prior written consent of Tenant provided, however, that
Tenant's consent shall not be required for minor field changes to conform to
governmental requirements or the recommendations of the contractor or
architect. In the event Tenant disapproves of the Preliminary or Final Plans
("Disapproved Plans"), Tenant shall notify Landlord in writing ("Notice of
Disapproval of Plans") within the above ten day (10-day) period and, at the
same time, return to Landlord one (1) set of the Disapproved Plans marked to
show wherein the Disapproved Plans have been disapproved. Landlord shall cause
the Disapproved Plans to be appropriately revised, in a manner satisfactory to
Tenant within thirty (30) days of Landlord's receipt of Tenant's Notice of
Disapproval of Plans and submit to Tenant two (2) complete sets of the revised
Landlord's Plans for the approval of Tenant. Landlord and Tenant agree to
cooperate reasonably with each other in resolving any objections to the
Landlord's Plans or requested revisions, provided that Landlord has diligently
attempted, in a timely manner, to obtain approval of the Final Plans from all
governmental agencies.
Tenant may terminate this Lease if, for any reason whatsoever,
Landlord and Tenant should fail to agree upon mutually satisfactory Preliminary
Plans within ninety (90) days of the date Landlord first submits the
Preliminary Plans to Tenant; or should Landlord and Tenant fail to agree upon
mutually satisfactory Final Plans within ninety (90) days of the date Landlord
first submits the Final Plans to Tenant, or in the event that all governmental
agencies have not approved and issued all necessary building permits for the
construction of the Building Shell within one hundred eighty (180) days from
the date of this Lease.
6.4 Commencement of Landlord's Work. Landlord shall, within
thirty (30) days from receipt of the necessary approvals from the applicable
governmental agencies, commence actual construction of the Building Shell.
6.5 Diligence. Both parties shall perform their obligations
8.
<PAGE> 9
under this Lease with reasonable skill and diligence and may not intentionally
interfere with or prevent the other party's performance of its obligations
under this Article 6.
ARTICLE 7
RENT
7.1 Payment of Rent. Tenant shall pay the sums specified in
Section 1.9 or 1.10 to Landlord, as "Minimum Rent" or "Percentage Rent" as such
terms are hereinafter defined in sections 7.2 and 7.3, respectively, without
notice or demand and without any deduction, elimination, abatement, or rebate
of any kind except for the offset specified in Paragraph 7.2.3, below. Rent
shall be payable, at Tenant's election, in U.S. Dollars or Mexican Peso
equivalents, in which case the amount of Pesos paid shall be determined by the
official U.S. Dollar/Mexican Peso exchange rate as determined by Banco de
Mexico and published in "Diario Oficial" on the twenty-fifth (25th) day of the
month, preceding the month in which said rental payment is due.
7.2 Minimum-Rent.
7.2.1 Subject to adjustment, the Minimum Rent of this Lease shall
be at the rate specified in paragraph 1.9 above, and shall be payable
in monthly installments in advance on the first (1st) day of each
month.
7.2.2 Should the rent under the terms of this Lease commence on a
date other than the first (1st) day of the month, the first (1st)
monthly installment of Minimum Rent shall be prorated on the basis of
the days in said month and shall be paid within twenty (20) calendar
days from the date that the term commences.
7.2.3 During the Initial Term or any Extension thereof, after each
of the following three-month periods, January 1 through March 31,
April 1 through June 30, July 1 through September 30 or October 1
through December 31, Tenant's total sales will be measured for the
preceding three-month period. If Tenant's total sales during the
measured period fall below $1,000,000 U.S., for any reason, then
monthly Rent payable by Tenant during the three-month period
following the measured three-month period, will be reduced. The
reduction in Rent, if any, will be proportional to the amount by which
total sales have fallen below $1,000,000 during the measured,
three-month period.
Example - Lessee determines that its total sales for the preceding
three-month period (which is one of the three-month
9.
<PAGE> 10
periods specified in 7.2.3, above) are $875,000. The percentage
difference between $1,000,000 and $875,000 is Twelve and One Half
Percent (12 1/2%.) Therefore, the monthly rent payable for each of the
months in the three-month period following the one measured, will be
reduced by 12 1/2%.
7.3 Percentage Rent. At Landlord's option, and in lieu of paying
Minimum Rent, Tenant shall pay to Landlord annually in the manner, upon the
conditions, and at the times hereinafter set forth, during the initial Lease
Term, percentage rent (the "Percentage Rent") in the amount, if any, of the sum
equal to Fifteen Percent (15%) of box office receipts, excluding box office
receipts on films for which Tenant must pay Fifty Five Percent (55%) or more.
Minimum Rent and Percentage Rent shall be collectively referred to herein as
the "Rent". The total Percentage Rent due from Tenant shall be the amount by
which the percentage outlined above exceeds the minimum rent actually paid
during the same Lease Year by the Tenant.
ARTICLE 8
TENANT FINANCIAL DATA
8.1 Records of Sales. At the time of a sale or other
transaction, Tenant shall record the sale or other transaction in the presence
of the customer, either in a cash register or computer with sealed continuous
tape, or by using any other method of recording sequentially numbered purchases
and keeping a cumulative total.
8.2 Reports of Box Office and Concession Sales. Upon Landlord's
written request, Tenant shall furnish to Landlord a Statement of Box Office and
Concession Sales within ten (10) days after the close of the second (2nd)
calendar month following the end of the calendar month which is the subject of
the report ("Tenant's Monthly Statement"), and an Annual Statement, including a
monthly breakdown of Box Office Sales on or before the twentieth (20) day of
February of each calendar year pertaining to the immediately preceding calendar
year. In addition, Tenant shall furnish a Statement of Box Office Sales on or
before sixty (60) days following the date the Initial Term or Extended Term
(as appropriate) expires or ends.
The Annual Statement shall, if applicable, be accompanied by a payment
to Landlord of the Percentage Rent, as provided in subparagraph (1) of Section
7.3, above, less the Fixed Minimum Rent for the applicable year. The Monthly
Statement shall be executed by an officer of Tenant in good faith, and based
upon the best information and belief of the officer.
8.3 Books and Records. For a period of three (3) years
10.
<PAGE> 11
following the close of each calendar year, Tenant shall keep at its Home office
in Tijuana, Baja, Mexico, full, complete, and proper books, records and
accounts of its daily gross sales, both for cash and on credit, of each
separate department, subtenant, and concessionaire at any time operated in the
Demised Premises. Provided Landlord has given Tenant thirty (30) days prior
written notice, Landlord and its agents shall have the right, during Tenant's
regular business hours, to conduct a confidential examination and inspection of
all the books and records of Tenant's business in the Demised Premises,
including any sales tax reports pertaining to the business of Tenant conducted
in, upon or from the Demised Premises, for the purpose of investigating and
verifying the accuracy of any statement of gross sales.
ARTICLE 9
TAXES AND UTILITIES
9.1 Payment of Utilities. Tenant shall pay prior to delinquency
all charges for gas, water, electricity, telephone service, and other public
utilities for the Demised Premises during the Initial Term of this Lease or any
Extended Term.
9.2 Personal Property Taxes. Tenant shall pay before they become
delinquent all taxes, assessments, or other charges levied, or imposed by any
governmental entity on the furniture, trade fixtures, appliances and other
personal property placed by Tenant in, on or about the Demised Premises.
9.3 Real Property Taxes. Tenant agrees to pay, monthly in
advance, Tenant's Pro Rata Share of all real property taxes and assessments
levied or assessed upon the Demised Premises.
ARTICLE 10
USE AND OCCUPANCY
10.1 Permitted Use and Occupancy. Tenant may use the Demised
Premises for the uses specified in Section 1.11, and the name and style of
"CINEMASTAR" or "CINEMASTAR LUXURY THEATERS" or other trade name established by
Tenant.
Landlord shall not lease space within the Center to any other Tenant
that shall be engaged in any of the following uses:
(a) Exhibition of motion pictures;
(b) Meetings and conventions for which auditoriums are necessary
or appropriate, without first obtaining Tenant's prior written
approval;
11.
<PAGE> 12
10.3 Exclusive Use. Landlord has not heretofore entered into and
shall not enter into, any other lease of space in the Center which permits the
tenant thereunder (i) to conduct any of the activities described in
subparagraphs (a) and (b) of Section 10.1.
10.4 Compliance. Tenant shall comply with all laws relating to the
Demised Premises, all requirements of any board of casualty insurance
underwriters or similar entity, and all reasonable requirements of Landlord's
or Tenant's insurers (except to the extent that compliance requires structural
alterations or improvements to the Demised Premises or is otherwise Landlord's
responsibility hereunder).
10.5 Covenant. From and after the opening Date, Tenant shall
operate continuously and uninterruptedly under the provisions of this Lease,
unless prevented by conditions beyond Tenant's control and, at all times, shall
keep and maintain within the Demised Premises adequate advertising, displays
and stocks of merchandise and trade fixtures to service and to supply in
accordance with the usual and ordinary practices of first-class motion picture
theaters in the United States and Mexico which includes, without limitation,
Tenant's exercise of its best efforts to secure the best quality, first-run
motion picture feature films for exhibition at the Demised Premises. However,
no shortage of funds on Tenant's part, nor any other financial difficulties as
may be encountered by Tenant, shall be considered conditions which are beyond
Tenant's control. Tenant shall incorporate and exhibit such current or
retrospective films produced in Mexico or other Spanish-speaking countries as
Tenant, in its sole discretion, shall deem commercially appropriate. Landlord
and Tenant acknowledge that the distribution of U.S. film product in Mexico is
governed, in part, by Mexican federal law which may require sub-titling in the
Spanish language. Current Mexican distribution policy may inhibit access to
product otherwise available in Southern California or preclude "Day and Date"
exhibition.
10.6 Hours of Business. From and after the Opening Date, Tenant
shall continuously operate in the Demised Premise for business during those
days and hours determined by Tenant in its sole discretion including, but not
limited to, all holidays such as Christmas Day, New Year's Day, and Easter
Sunday, public school holidays, legal holidays, and hours and days of operation
customarily observed by first-class motion picture theaters in the United
States and Mexico. Tenant shall comply with all Mexican federal and state
laws, rules, and regulations regarding the operation of theaters and businesses
in general. Tenant acknowledges that optimizing patronage and attendance in
Mexico may require hours of operation that are different from those understood
and experienced in Southern California.
10.7 Rules and Regulations. Lines of Theatergoers.
12.
<PAGE> 13
Tenant shall keep the Demised Premises in neat and clean condition, free from
any objectionable noises, odors or nuisances, and shall comply with all
applicable health, safety and police laws, ordinances, and regulations of
Landlord and any governmental authority having jurisdiction over the Demised
Premises.
10.8 Landlord's Responsibility. As between Landlord and Tenant
only; Landlord, its agents, employees, and contractors shall not bring upon,
keep or use in or about the Demised Premises any Hazardous material except in a
manner that complies with all laws, ordinances, and regulations applicable to
any such Hazardous Material so brought upon, kept or used in or about the
Demised Premises. If contamination of the Demised Premises or Center Area
occurs and is caused by Landlord, its agents, employees, or contractors, then
Landlord shall take all actions at its sole cost and expense as may be
necessary to return the Demised Premises to substantially the same condition as
existing prior to the introduction of any such Hazardous Material.
10.9 Tenant's Responsibility. As between Tenant and Landlord only;
Tenant, its agents, employees, and contractors shall not bring upon, keep or
use in or about the Demised Premises any Hazardous Material except in a manner
that complies with all laws, ordinances, and regulations applicable to any such
Hazardous Material so brought upon, kept or used in or about the Demised
Premises. If contamination of the Demised Premises or Center occurs and is
caused by Tenant, its agents, employees, or contractors, then Tenant shall take
all actions at its sole cost and expense as may be necessary to return the
Demised Premises to substantially the same condition as existing prior to the
introduction of any such Hazardous Material.
ARTICLE 11
LANDLORD'S MAINTENANCE OBLIGATIONS
11.1 Landlord's Maintenance Obligations. Landlord shall maintain
in good condition and repair, structural and all exterior portions of the
Building, including, without limitation, foundations, all exteriors, all
components of the roof, and all HVAC equipment.
11.2 Landlord's Right of Entry. Landlord, its agents, contractors,
servants, and employees may enter the Demised Premises at all reasonable times
upon prior written notice to Tenant:
(a) To examine the Demised Premises;
(b) To perform any obligations under this Lease;
(c) To make repairs, improvements or additions to the Demised
13.
<PAGE> 14
Premises or to other portions of the Center as reasonably necessary
and which do not unreasonably interfere with the conduct of Tenant's
business and operations at the Demised Premises;
(d) To perform work necessary to comply with laws, ordinances,
rules or regulations of any public authority or of any insurance
underwriter;
(e) To perform work reasonably necessary to prevent waste or
deterioration in connection with the Demised Premises should Tenant
fail to commence such repairs or, after commencing same, fail to
diligently pursue such repairs to completion within forty five (45)
days after written demand by Landlord; and
(f) To show the Demised Premises to any lender or prospective
lender or purchaser of the Center (or a portion thereof).
If Landlord makes any repairs which Tenant is obligated to make
pursuant to the terms of this Lease, Tenant shall pay the cost of such repairs
to Landlord promptly upon receipt of a bill which shall be accompanied by the
receipts, vouchers, and other statements sufficient to evidence the actual
costs relative to the subject request for payment from the landlord requesting
payment. In the event of an emergency condition arising within the Demised
Premises which endangers property or the safety of individuals, Tenant waives
the requirements for prior written notice.
In the event Tenant has failed to exercise the Option to Extend under
Sections 5.3 above, Landlord may enter the Demised Premises during Tenant's
normal business hours to show the Demised Premises to prospective tenants or
purchasers; provided, however, that no such entry shall interfere with or
create a hazard to the conduct of Tenant's normal business in the Demised
Premises.
During the final sixty (60) days of the Initial Term or any Extended
Term, provided, however, that Tenant has failed to exercise the Option to
Extend, Landlord and its authorized agents may erect on or about the Demised
Premises a reasonable and customary sign advertising the Demised Premises for
sale or lease, provided that such sign does not interfere with or create a
hazard to Tenant's normal business in the Demised Premises.
ARTICLE 12
TENANT'S MAINTENANCE, ALTERATIONS AND ADDITIONS
12.1 Maintenance and Repair. Tenant shall maintain the interior of
the Demised Premises in good order and condition (except for ordinary wear and
tear and damage caused by casualty or a taking) and shall make all repairs to
the interior of the Demised
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Premises including, (without limitation except for structural maintenance,)
interior plumbing, window glass, plate glass and doors, utility laterals
servicing only the Demised Premises, heating and air conditioning systems, and
interior surfaces of the Demised Premises and shall take such other action as
may be necessary or appropriate to keep and maintain the Demised Premises in
good order and condition.
12.2 Alterations. Provided Tenant receives the prior written
consent of Landlord, which consent shall not be unreasonably withheld, Tenant
may make additions, improvements or alterations to the Demised Premises. Each
addition, improvement or alteration approved by Landlord:
(a) Must not, individually or in the aggregate, lessen the fair
market value of the Demised Premises or materially affect the property's
usefulness in Tenant's business; and
(b) shall be completed expeditiously in a good and workmanlike
manner, and in compliance with all legal requirements and all insurance
requirements; and
(c) Shall become part of the property and subject to this Lease.
12.3 Replacements. Subject to applicable laws, regulations,
ordinances, and provided that the exterior appearance of the Demised Premises
is not affected, Tenant may install or place or reinstall or replace upon and
remove from the Demised Premises any trade fixtures, machinery, and equipment.
Such trade fixtures, machinery, and equipment shall not become the property of
Landlord.
ARTICLE 13
INSURANCE
13.1 Insurance Coverage. Tenant will maintain with insurers
authorized to do business in the Republic of Mexico, the types of insurance and
limitations of coverage as more fully described hereafter. The coverage limits
set forth hereinafter are, for the convenience of the parties, expressed in
U.S. Dollars. These limitations shall remain constant during the Initial Term,
or an Extended Term, of this Lease notwithstanding any change in the new
Peso/U.S. Dollar exchange or conversion rate.
13.1.1 Tenant's Insurance. From the time when the Tenant commences
construction of the Tenant's Work, or from and after any earlier date
when the Tenant makes actual use of the whole or any part of the
Demised Premises, Tenant shall obtain a policy of comprehensive public
liability and property damage
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insurance, insuring the Landlord against any and all claims and demands
made by any person or persons whomsoever for injuries received in
connection with construction, operation and maintenance of the Demised
Premises, improvements, and buildings located on the Demised Premises
or for any other risk insured against by such policies with limits not
less than One million and No/100 Dollars ($1,000,000.00) for damages
incurred or claimed by any one person for bodily injury, or otherwise,
and One Million and No/100 Dollars ($1,000,000.00) for damage to
property, and Two Million and No/100 Dollars ($2,000,000.00) for
damages incurred or claimed by more than one person for bodily injury,
or otherwise, in any single occurrence. All such policies shall name
the Landlord as an additional insured and shall not be terminated
without thirty (30) days prior written notice to landlord of such
termination. A certificate of insurance or a duplicate original of
each of such policy or policies shall be delivered to Landlord by
Tenant or its insurance agent promptly upon the receipt of such
policies, together with adequate evidence of the fact that premiums
thereon are paid.
13.1.2 Fire insurance with "special coverage" or "all risk
endorsement" and insurance with respect to risks from time to time
included under the standard extended coverage endorsement, including
vandalism, malicious mischief, and windstorm in amounts not less than
Ninety Percent (90%) of the replacement cost of the Demised Premises
as determined from time to time (but not less often than once every
three (3) years) by the insurer(s).
13.1.3 Comprehensive general public liability insurance against
claims for bodily injury, death or property damage arising out of the
use or occupancy of the Demised Premises by Tenant. In addition,
Tenant shall carry rental loss insurance for a period of not less than
twelve (12) months for an amount sufficient to compensate Landlord for
the Minimum Rent, the Percentage Rent (based upon the prior year's
Percentage Rent paid as adjusted from time to time), and any other
additional payments required to be paid by Tenant hereunder. For
purposes of determining the amount of rental loss insurance carried by
Tenant, Percentage Rent for the first year of the Initial Term shall
be assumed to be zero ($0.00). Tenant shall not conduct any operation
in the Demised Premises which would cause suspension of the insurance
carried by Tenant pursuant to the terms of this Lease. In no event
shall any insurance policies required to be carried by Tenant under
the terms of this Lease or the Declaration be written on a "claims
made basis."
13.2 Policy Terms and Conditions. The policies of insurance required
to be maintained by Tenant pursuant to this Article 15
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shall name the Landlord and Tenant as insured parties as their respective
interests may appear, and may be carried under blanket policies maintained by
Tenant if such policies comply with the provisions of this Article 13. The
fire policies may provide for deductible amounts which do not exceed Ten
Thousand and No/100 Dollars ($10,000.00). All such insurance policies shall be
primary coverage, and shall contain a provision that it cannot be terminated
without thirty (30) days prior written notice to Landlord of such termination.
All insurance required to be carried hereunder must satisfy the requirements of
the Declaration, this Lease, and any of Landlord's lenders who may have a
security interest in the Demised Premises or Center at the commencement of the
Term of this Lease.
13.3 Insurance Certification. Promptly after the commencement of
the Term of this Lease, Tenant shall deliver to Landlord certificates of the
insurers evidencing all the insurance which is required to be maintained
hereunder by Tenant, and within thirty (30) days prior to the expiration of any
such insurance, other certificates or binders evidencing the renewals of such
insurance.
13.4 Waiver of Subrogation. Provided the insurance required to be
maintained by Tenant pursuant to this lease is in full force and effect and
remains, and the proceeds thereof are paid, Tenant shall not indemnify
Landlord against any claims arising out of any injury to or death of a person
or property damage resulting from the type of risk covered by a public
liability or property insurance policy in which the Landlord is an insured
party, except to the extent any claim exceeds the policy limits provided for in
this Lease.
13.5 Landlord's Insurance. At all times during the course of
construction and after substantial completion of the Demised Premises, Landlord
shall maintain in effect a policy or policies of insurance covering the Demised
Premises and the Center Areas, including the parking lots, in an amount not
less than Ninety Percent (90%) of the full replacement cost of the Center Areas
during this Lease, or the amount of insurance Landlord's mortgagee(s) or
beneficiaries may require Landlord to maintain, whichever is greater. In
addition, Landlord shall carry comprehensive public liability insurance issued
by one or more insurers authorized to do business in the Republic of Mexico and
in accordance with the standard described at Paragraph 13.1, supra, against
liability for injury to or death of persons and loss of damage to property
occurring in the demised Premises during course of construction in an amount
not less than One Million and No/100 Dollars ($1,000,000) per occurrence and in
the aggregate. Landlord shall name Tenant as an additional insured under such
policy, and no such policy shall be issued on a "claims made" basis.
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ARTICLE 14
CONDEMNATION AND CASUALTY
14.1 Notice. Tenant shall notify Landlord, in writing, immediately
upon the occurrence of any damage to the Demised Premises, or if there is any
damage to or destruction of the Demised Premises discovered by Landlord,
Landlord shall notify Tenant, in writing, immediately upon the occurrence. If
any proceedings or negotiations are instituted which do or may result in taking
under power of eminent domain ("Taking"), each party with knowledge of the
applicable event shall promptly give written notice thereof to the other party.
14.2 Casualty Covered By Insurance. If the Demised Premises are
damaged by a cause or casualty covered by the insurance to be carried under
Article 13 of this Lease, Landlord shall repair or replace the building damaged
or destroyed by the insurable cause on the same plan and design as existed
immediately prior to such damage or destruction, subject to availability of
insurance proceeds and such delays as may be reasonably attributable to
settlement with applicable insurance carrier(s), governmental restrictions, or
failure to obtain materials or labor or other causes, so long as such causes
are beyond the control of Landlord. Tenant shall repair, at its expense, any
damage to Tenant's fixtures, equipment or improvements concurrently with or
immediately following Landlord's repair of the building.
If the damage to the Demised Premises occurs during the last eighteen
(18) months of the Lease term, Landlord may elect to terminate this Lease as of
the date the damage occurred, regardless of the sufficiency of any insurance
proceeds; provided, however, if Tenant gives an Extension Notice, Landlord
shall be obligated to repair or restore the Demised Premises and Tenant shall
have the right to continue this Lease.
In the event Tenant fails to give an Extension Notice, Landlord shall
not be obligated to repair the Demised Premises and Tenant shall have no right
to continue this Lease. Landlord shall notify Tenant of its election within
thirty (30) days after receipt of the notice of the occurrence of the damage,
and Tenant shall notify Landlord of its election within thirty (30) days after
receipt of Landlord's notice under this section.
14.3 Casualty Not Covered by Insurance. If the Demised Premises
are damaged or destroyed by a cause or casualty not covered by the insurance
Tenant is required to maintain pursuant to Article 13 of this Lease, to the
extent of Thirty Percent (30%) of the monetary value thereof, then by written
notice to the other party within thirty (30) days after the date of such damage
or destruction, either party may elect to terminate this Lease or to
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cause the repair and restoration of the Demised Premises at the sole cost and
expense of the party electing to cause such repair or restoration. However, if
either party gives notice of termination to the other party, this Lease shall
not be so terminated if the other party shall within thirty (30) days after
receipt of such notice, give written notice to the terminating party of said
other party's election to cause the repair and restoration of the Demised
Premises. The party electing to cause the repair and restoration shall, at its
sole expense, provide the funds necessary thereof and shall thereafter promptly
and diligently repair and restore the Demised Premises to the same extent set
forth in Section 15.2 above. In the event any such damage or destruction, from
a cause not covered by insurance required to be maintained by Tenant, is to an
extent of less than Thirty Percent (30%) of the monetary value thereof,
Landlord shall, at Landlord's sole cost and expense, promptly repair and
restore the Demised Premises to the same extent required in Section 14.2 above.
14.4 Rent Reduction. If the Demised Premises are destroyed or
damaged through no fault of Tenant, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Demised Premises is impaired as a first-class
motion picture exhibition theater.
ARTICLE 15
CENTER AREA
15.1 Control of Center Area. Tenant for its benefit and the
benefit of other subtenants and assigns, and each of their respective agents,
employees, customers, patrons, licensees and invitees, shall have the
non-exclusive right to use the Center Area; provided, however that Landlord
may, from time to time, change the location, size, configuration, and design of
the Center Areas and building areas within the Center from that shown on the
attached Exhibit "A" or from time to time constructed, including, without
limitation, the location of driveways, signs, aisles, parking areas, drive
through facilities and parking spaces, provided, however, that no alterations
shall be made to the Primary Center Areas without the prior written consent of
Tenant, which consent shall not unreasonably be withheld. Subject to
governmental action and temporary closures for repairs and maintenance that
shall not unreasonably interfere with Tenant's operations and theater patron
parking at the Demised Premises, Landlord agrees to maintain Ninety Percent
(90%) of the parking shown in Exhibit A in compliance with all applicable and
hereinafter enacted government parking requirements for Tenant's patrons and
employees. Notwithstanding the foregoing, in the event that Landlord cannot
provided Ninety Percent (90%) of the parking shown on Exhibit A, Tenant shall
have the right to terminate this Lease at any time prior to obtaining its
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building permit and shall thereby be relieved from any liability under this
Lease.
15.2 Landlord's Maintenance Obligations; Rules and Regulations.
Landlord, at its expense, shall maintain and operate, or cause to be
maintained, operated, lighted, landscaped and repaired, Center Areas at all
times during the Term and any Extensions following completion in a manner
consistent with first-class centers of a similar size and nature for the
benefit and use of Tenant and its patrons and invitees. Tenant agrees to
comply with all reasonable rules and regulations as Landlord may adopt from
time to time for the orderly and proper operation of said Center Areas.
Said rules may include, but shall not be limited to, the following:
(a) The restriction of employee parking to limited designated
areas or the prohibition of employee parking within the Center,
subject to the provisions of Section 15.1;
(b) The regulation of the removal, storage, and disposal of refuse
and other rubbish; location of Tenant's trash enclosures are indicated
on the site plan attached as Exhibit A.
(c) The access routes and hours for delivery to the Demised
Premises by trucks and trailers; and
(d) The restriction of designated areas for drive through banking,
savings, restaurant or other drive through facilities, promotional
and/or seasonal sales activities and/or loading, trash, and other
storage areas, whether or not roofed and/or enclosed; provided that no
such drive through facilities, promotional and/or seasonal sales
activities or loading, trash, and other storage areas that materially
and adversely affect Tenant's business in the Premises shall be
permitted within the Center Area without Tenant's prior approval.
15.3 Landlord's Duty. Landlord agrees: (a) To obtain and maintain
on the Center Areas one or more comprehensive public liability and property
damage insurance policies issued by a good and solvent insurance company or
companies naming Tenant as an additional insured, such insurance to afford
protection to a limit of not less than One Million Dollars ($1,000,000) for
injury or death of one person, and One Million Dollars ($1,000,000) with
respect to any one accident; and to the limit of not less than One Million
Dollars ($1,000,000) for property damages;
20.
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ARTICLE 16
RIGHT TO CURE DEFAULTS
16.1 Landlord's Defaults. Landlord shall not be in default under
any provisions of this Lease, unless written notice specifying such default is
mailed to Landlord of which Landlord acknowledges said default and/or has been
adjudicated of such and all mortgagees and/or deed of trust holders and/or
assignees of which Tenant has, prior to such notice, been notified in writing.
Tenant agrees that any such mortgagee or deed of trust holder or assignee shall
have the right to cure such default on behalf of Landlord. Tenant further
agrees not to enforce or to attempt to enforce any remedy, or to exercise any
right based upon or due to such default, until thirty (30) days after such
notice has been mailed to Landlord and to such mortgagees, deed of trust
holders and assigns, or during any period that Landlord or any such mortgagee,
deed of trust holder or assignee is proceeding to cure such default with due
diligence, or during any period that any such mortgagee, deed of trust holder
or assignee is taking steps with due diligence to obtain the legal right to
enter the Demised Premises and/or Center to cure the default. No amendment or
modification of this Lease shall be binding upon or effective against the
holder of any encumbrance of record prior to the date of such modification or
amendment without the consent of the holder of such encumbrance.
In the event of a default of this Lease by either Landlord or Tenant,
either Landlord or Tenant shall be entitled to seek all of its legal remedies
under the terms of this Lease and the prevailing party may further make all
payments in connection therewith, including but not limited to, the payment of
any reasonable attorney's fees, costs and charges of or in connection with any
legal action or arbitration proceeding which may have been brought. The
prevailing party is entitled to collect forthwith any amount so paid by
prevailing party from the other party, together with interest thereon at the
maximum legal rate per annum. All sums charged to the losing party hereunder
shall be indebtedness upon demand.
If any such indebtedness of Landlord is not fully paid within thirty
(30) days after demand, Tenant may elect to deduct such amount from any rent
subsequently becoming due hereunder.
16.2 Tenant's Rights on Default. Upon the occurrence of an event
of default by Landlord, or at any time thereafter during the continuance of
such default, Tenant's remedies under the Lease shall include, without
limitation an action, for damages or specific performance. Tenant's remedies
under the Lease shall be cumulative, and no remedy expressly provided for
herein shall be deemed to exclude any other remedy allowed by law or equity or
by other provisions of the Lease.
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16.3 Tenant Defaults. Tenant shall not be in default under any
provisions of this Lease, unless written notice specifying such default is
mailed to Tenant in accordance with the following provisions; provided,
however, that Tenant shall be in default under this Lease if any one or more of
the following events shall occur:
16.3.1. If Tenant shall fail to pay Fixed Minimum Rent, Additional
Rent, Percentage Rent, or any other monetary sum properly payable
under the Lease when due, and the failure shall continue for a thirty
(30) day period after Landlord shall have given written notice of
Tenant's initial failure to pay; or
16.3.2 If Tenant shall fail to perform any of its other obligations
under the lease and the failure shall continue for a thirty (30) day
period after Landlord shall have given Tenant written notice of its
initial failure to perform; or
16.3.3 If at any time, during the Initial Lease Term or any Extended
Term, proceeding in bankruptcy shall be instituted by or against
Tenant, and if filed against and not dismissed within sixty (60) days,
or if a receiver of the business or assets of Tenant be appointed and
his appointment not be vacated within sixty (60) day after notice to
Tenant, or Tenant makes an assignment for the benefit of creditors, or
any sheriff, marshal, constable or keeper takes possession of any
assets of Tenant by virtue of any attachment or execution of
proceedings and offers the same for sale publicly, then Tenant shall
be in default under the Lease and Landlord may exercise any of its
remedies provided herein. If Landlord terminates the Lease by reason
of such default, all installments of rents earned to the date of
termination and unpaid shall at once become due and payable, and in
addition thereto, Landlord shall have all rights provided by the
bankruptcy law of the United Mexican States.
Notwithstanding the foregoing, if Tenant shall fail to perform an
obligation other than an obligation to pay Minimum Rent, Percentage Rent or any
other monetary sum payable under the Lease, and the failure cannot be cured by
Tenant within thirty (30) days after Landlord shall have given notice of the
failure in the exercise of reasonable diligence for any reason other than
financial inability, Tenant shall not be in default if Tenant commences to cure
the failure within the thirty (30) day period and diligently prosecutes the
cure to completion.
In the event of any such default or breach by Tenant, Landlord may, at
any time thereafter, with or without notice or demand, and without limiting
Landlord in the exercise of any right or remedy which Landlord may have by
reason of such default or breach:
(a) Immediately terminate Tenant's right to possession of
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the Demised Premises, and repossess the same by summary proceedings
or other appropriate action, and Landlord shall thereupon be entitled
to pursue any and all other remedies provided by the laws of the
United Mexican States;
(b) Continue this Lease in effect without terminating
Tenant's right to possession, even though Tenant has breached this
Lease and abandoned the Demised Premises, and enforce all of
Landlord's right and remedies under this Lease, including the right to
recover the rent as it becomes due under this Lease; provided,
however, that Landlord may at any time thereafter elect to terminate
this Lease for such previous breach by notifying Tenant in writing
that Tenant's right to possession of the Demised Premises has been
terminated, in which event the remedies in subsection (a) immediately
above shall be available to Landlord.
(c) Pursue any other remedy now or hereafter available to
Landlord under the laws or judicial decisions of the United States of
Mexico.
Landlord's failure to take advantage of any default or breach of
covenant on the part of Tenant shall not be, or be construed to be, a waiver
thereof, nor shall any custom or practice which may grow between the parties
in the course of administering this Lease be construed to waive or to lessen
the right of Landlord to insist upon the performance by Tenant of any term,
covenant or conditions hereof, or to exercise any rights given Landlord on
account of any such default. A waiver of a particular breach or default shall
not be deemed to be a waiver of the same or any subsequent breach or default.
The acceptance of rent hereunder shall not be, or be construed to be, a waiver
of any term, covenant or condition of this Lease or breach thereof, whether or
not such breach is then known to Landlord.
Except due to the default, legal responsibility or fault of Landlord,
should Tenant fail to pay and discharge, when due and payable, any lien or
claim for labor or materials employed or used in, or any claim for damages
arising out of the repair, alteration, maintenance and use of the Demised
Premises, or should Tenant fail to provide or evidence the provision (of any
insurance policy required by this Lease, or should Tenant fail to fully pay or
perform any sum to be paid or any covenant or agreement to be performed by
Tenant, as provided in this Lease, after ten (10) days written notice from
Landlord, then Landlord may, at its option and without waiving or releasing
Tenant from any of Tenant's obligations hereunder, pay any such lien, claim or
charge, or settle or discharge any action therefor or satisfy any judgment
thereon, or obtain any such insurance, or pay any such sum or perform any such
covenant or agreement. All costs, expenses and other sums reasonably incurred
or paid by Landlord in connection therewith, together with
23.
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interest at the then applicable maximum legal rate permitted by law and such
costs, expenses and sums from the date incurred or paid by Landlord, shall be
deemed to be additional rent hereunder and shall be paid by Tenant with and at
the same time as the next installment of Minimum Rent hereunder, and any
default therein shall constitute a breach of the covenants and conditions of
this Lease.
ARTICLE 17
ASSIGNMENT AND SUBLETTING
17.1 Covenant Against Assignment. Tenant shall not voluntarily or
by operation of law, hypothecate, mortgage or otherwise encumber all or any
part of Tenant's interest in the Lease or in the Demised Premises, in whole or
in part, without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed. Landlord's consent to one or more
assignments or subleases shall not be construed as a waiver of the requirement
that Landlord's consent be obtained to any subsequent assignment or sublease.
A consent to assignment or subletting shall be deemed to be unreasonably
withheld if the proposed assignee is of financial standing and responsibility
at the time of assignment and is able to give reasonable assurance of the
payment of all Rent and other amounts reserved to Landlord in the lease.
Anything herein to the contrary notwithstanding, Tenant may assign or sublease
the Lease, in whole or in part, without the express written consent of Landlord
to:
17.1.1 Any corporation for which or with which Tenant merges or
consolidates;
17.1.2 Any parent, subsidiary or affiliate corporation of Tenant
(controlling, controlled by, or common control with Tenant (control of
a corporation shall be defined to mean fifty-one percent (51%) or more
ownership of each class of the outstanding capital stock of such
corporation));
17.1.3 Any corporation which acquires all or substantially all of the
assets or issued and outstanding shares of capital stock of Tenant; or
17.1.4 Any partnership, the majority interest of which shall be owned
by the parent of Tenant, if such parent is the general partner.
Any permitted assignment or sublease shall operate to release Tenant
of its liabilities and obligations arising hereunder after the date of such
assignment or sublease. If Tenant desires at any time to assign or sublet the
Demised Premises and Landlord's consent is required to such assignment or
sublease, Tenant shall first notify Landlord in writing and submit to Landlord:
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(a) The name of the proposed subtenant or assignee;
(b) The nature of the proposed subtenant's or assignee's
business to be carried on in the Demised Premises (which
business must be identical to the permitted uses of the
Demised Premises under Section 1.11 and 10.1 of this Lease);
(c) The proposed sublease or assignment and all
agreements relating to the proposed sublease or assignment;
and
(d) Current financial statements, audited if available,
and such other reasonable financial and other information as
Landlord may request concerning the proposed subtenant or
assignee including, without limitation, recent per square foot
sales figures and advertising budgets for the proposed
assignee's or sublessee's comparable business operations from
other locations.
Landlord may condition its consent to any such assignment upon the
assignee's agreement in writing to assume and perform all of the terms and
conditions of this Lease on Tenant's part to be performed from and after the
effective date of such assignment and the execution and delivery of a personal
guaranty from a guarantor reasonably acceptable to Landlord guaranteeing the
assignee's obligations under the Lease.
17.2 Effect of Assignment on Landlord's Liability. In the event
Landlord shall transfer or convey its fee estate in and to the Demised
Premises and, as part of said transaction, shall transfer, convey or
assign its interest as Landlord in and to the Lease, then from and
after the effective date of such assignment, transfer or conveyance,
Landlord shall have no further liability under this Lease on the
condition that:
(a) Landlord is not in default of any term or condition
contained herein or that Landlord's proposed transferee or
successor in interest has agreed in writing and in a form
acceptable to Tenant to cure any such default;
(b) Landlord's transferee or successor in interest
agrees, in a form acceptable to Tenant, to be bound by,
perform and discharge all of Landlord's obligations and
responsibilities hereunder; and
(c) Any such transfer or conveyance is in accordance with
the laws, rules, and regulations of the United Mexican States.
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ARTICLE 18
SIGNS
Landlord shall erect, at its own expense, signs identifying the
theater to the public on the sides of the Building shell, marquees advertising
Tenant's product(s), and pylon signs. A description of the proposed signage
and location thereof is attached hereto and incorporated herein as Exhibit "C".
ARTICLE 19
MISCELLANEOUS
19.1 Construction. Each term and provision of this Lease shall be
construed to be both a covenant and a condition.
19.2 Applicable Law. This Lease shall be construed and interpreted
in accordance with the laws of the United Mexican States. However, any action
brought to interpret or enforce any term, condition, covenant, or provision of
this Lease shall first be commenced in the United States District Court for the
Southern District of California, San Diego. By way of procedure, said Court
shall order the parties to mediate and conciliate any such dispute pursuant to
Chapter 7 of California's Code of Arbitration and Conciliation of International
Commercial Disputes, Cal. C.C.P. Section 1297.314 et. seq. In such event, and
to the fullest extent permitted by both U.S. and Mexican law, said Court and
any mediator or conciliator shall apply the laws, rules and regulations then in
force and effect in the United Mexican States.
19.3 Partial Invalidity. If any provision of the Lease shall be
invalid or unenforceable, it shall not affect the validity or enforceability of
any other provision of the Lease.
19.4 Authority to Execute. The officers of Landlord and Tenant
represent that each is duly authorized to execute this Lease on behalf of their
respective principal(s).
19.5 Headings. Headings as to contents of particular sections
herein are inserted only for convenience, and are in no way to be construed as
part of the Lease or as a limitation on the scope of the particular section to
which they refer.
19.6 Binding-Effect. The covenants, conditions and agreements
contained in this Lease shall bind, apply to and inure to the benefit of the
parties hereto and their respective successors.
19.7 No Partnership. Notwithstanding that this Lease provides for
the payment of rent based upon percentage of Sales and
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Business Transacted, it is expressly understood that Landlord shall not be
construed or held to be a partner or associate of Tenant in the conduct of
Tenant's business and that the relationship between the parties hereto is and
shall at all times remain that of Landlord and Tenant.
19.8 Estoppel Certificate. Landlord and Tenant shall from time to
time, upon not less than ten (10) days prior written notice from Landlord,
execute, acknowledge and deliver to Landlord a statement in writing:
(a) Certifying that the Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such
modification and certifying that the Lease as so modified is
in full force and effect), and the date to which the rental
and other charges are paid in advance, if any; and
(b) Acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults if any are claimed; and
(c) Setting forth the date of commencement of rents and
expiration of the term hereof and the amount of the Minimum
Rent then payable.
Any such statement may be relied upon by any prospective purchaser or
encumbrancer of all or any portion of the real property of which the Demised
Premises are a part.
19.9 TIME. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor.
19.10 Attorneys Fees. If legal action is brought in a court of
competent jurisdiction by either party hereto arising out of or concerning this
Lease or the right of any party hereto, the prevailing party in the action
shall be awarded reasonable attorney's fees and court costs from the
non-prevailing party.
19.11 Liability of Landlord. Tenant shall look solely to the estate
and property of Landlord in the land and buildings comprising the Shopping
Center for the collection of any judgment, or in connection with any other
judicial process requiring the payment of money by Landlord in the event of any
default or breach by Landlord with respect to any of the terms, covenants, and
conditions of this Lease to be observed and performed by Landlord, and no
other property or estates of Landlord shall be subject to levy, execution or
other enforcement procedures for the satisfaction of Tenant's remedies and
rights under this Lease. In the event that, pursuant to Paragraph 19.2, supra,
any final judgment shall be entered and
27.
<PAGE> 28
recorded against Landlord, then a certified translation of said judgment shall
be prepared, in the customary form, and recorded in the official record of the
Federal Courts, United Mexican States. Enforcement of any judgment so recorded
shall be pursuant to Mexican Law.
19.12 Translation, Interpretation, Recordation and Binational
Effect. This Lease shall be translated into the Spanish language and certified
as an official translation. This Lease is intended to be recorded in the
official records of the State of Mexico by licensed Notario Publico. In any
dispute arising herein, the original English version and the certified Spanish
translation shall be given equal dignity and weight in determining the intent
of the parties hereto.
19.13 Entire Agreement. Modifications. It is understood that there
are no oral or written agreements or representations between the parties to
this Lease affecting this Lease, and this Lease supersedes and cancels any
previous negotiations, arrangements, representations, agreements, and
understandings, if any, between the parties. As between Landlord and Tenant,
this Lease contains all agreements, terms, and conditions made between the
parties hereto with respect to the matters contained herein, and may not be
modified orally or in any manner other than by agreement in writing or by an
amendment duly executed by both parties hereto.
IN WITNESS WHEREOF, ESPACIOS DE ZAPOPAN, S.A. de C.V., ("Landlord")
and CINEMASTAR LUXURY THEATERS, S.A. de C.V., ("Tenant") have duly executed
this Theater Lease consisting of 28 pages, plus Exhibits A through D, as of
the date and year first hereinabove written.
LANDLORD TENANT
ESPACIOS DE ZAPOPAN S.A. de C.V. CINEMASTAR LUXURY THEATERS,
S.A. de C.V.
BY:____________________ BY:____________________
Lic. M. A. Aleman B.
Presidente
DATE:____________________ DATE:____________________
BY:____________________
John Ellison, Jr.,
Chairman of the Board
DATE:____________________
28.
<PAGE> 1
EXHIBIT 10.38
LEASE CONTRACT
LEASE CONTRACT, HEREIN CALLED "LEASE" CELEBRATED ON JUNE 14, 1996, BY A FIRST
PARTY INMOBILIARIA LUMAR, S.C. REPRESENTED BY MR. LUIS JAVIER FIMBRES AZTIAZARAN
APPOINTED AS LEGAL-REPRESENTATIVE OF THE COMPANY, HEREIN CALLED "LESSOR"; AND
CINEMASTAR LUXURY THEATER, S.A. DE C.V. REPRESENTED BY MR. MARCO ANTONIO ALEMAN
BONILLA, AS SOLE ADMINISTRATOR OF THE PARTNERSHIP, WHO IS HEREIN CALLED
"LESSEE", A THIRD PARTY CONCURS TO THE CELEBRATION OF THIS ACT, THE COMPANY
CINEMASTAR LUXURY THEATER, INC. REPRESENTED BY MR. JOHN ELLISON JR. AS SPECIAL
EMPOWERED FOR THE MEANS ESTABLISHED IN THIS CONTRACT, MR. ELLISON IS ASSISTED
BY THE EXPERT TRANSLATOR MR. GABRIEL JIMENEZ CODINACH, THIS CONTRACT IS
CELEBRATED UPON THE FOLLOWING DECLARATIONS AND CLAUSES:
I - "The Lessor in behalf of its legal representative declares:
a) That it is a Mexican Civil Partnership rightly constituted, as
appears in the Public Deed no. 232686, granted by Public Notary no. 87 from
Mexico City, and inscribed before Public Property Register and Civil Section in
Tijuana, B.C.Mexico.
b) "Lessor" continues declaring that his power has not been repealed nor
modified and that he has full legal capacity to undertake it in the terms of
this Lease.
II - "Lessee in behalf of its legal representative declares:
a) That it is a rightly constituted Mexican Business Partnership appears
as Public Deed no. 6,800 vol. No. 270, passed before Public Notary No. 11 from
Tijuana, B. C. Mexico and inscribed in the Office of Public Property Register
and Commerce of Tijuana, B. C. Mexico, under annotation no. 5867316, Commerce
section dated April 23, 1996.
b) Mr. Marco Antonio Aleman Bonilla, has sufficient power to subscribe
this Lease, he was designated as Sole Administrator of the Partnership, and as
consequence has faculties to compel his principal in the terms of this
document, as noted in a copy of the Public Scripture quoted in the above part
a) and that is aggregated as Annex IV, and such faculties have not been
revocated nor limited in any way.
c) Mr. Aleman acknowledges that he knows the premises in which the
Shopping Center will be built, in the land, owned by the "Lessor:, he also
acknowledges that he knows the first Draft of the construction at preliminary
drafts and specifications level of Plaza Americana Otay, for which in this
consideration and in the Terms and Conditions of this contract, he agrees to
the celebration of this Lease Contract.
III - The company Cinemastar Luxury Theaters, Inc. in behalf or its legal
representative, declares:
a) That it is a Partnership rightfully constituted by the laws of the
State of California in the United States of America, which it assures with the
document enclosed in this contract as Annex V
b) Among the social objectives of the declarant he agrees to provide all
kinds of services related with the Movie Exhibition Industry, to operate
showrooms, movie theaters, auditoriums, video and games rooms,
<PAGE> 2
candy and snacks store, as well as designing, planning, installing all kinds of
premises for movie exhibitions, expressing also that it is also empowered to
grant warranties as the one referred to in this Contract and the Annex XIII of
such.
c) Mr. John Ellison Jr. declares, under oath, to have sufficient power to
subscribe this Lease and to compele his representative as liability guarantor
that "Lessor" assumes in the terms of this contract, as expressed in the
certified copy of the Administration Board agreement dated _____ 1996, which is
enclosed as Annex VI, Mr. Ellison's power has not been revocated nor limited in
any way.
ALL THE PARTS THAT PARTICIPATE IN THIS CONTRACT EXPRESS THEIR INTEREST IN
CARRYING IT ON, IN THE CONDITIONS, MODALITIES AND TERMS THAT SHALL BE
MENTIONED, GRANTING FOR SUCH THE FOLLOWING:
CLAUSES
CLAUSE I
TERM AND RENT
1.01 Lessor, in consideration to the rental payments stipulated in this
contract and in the terms and conditions contained in its clauses, demises the
premises to the Lessee, and the Lessee receives possession of the premises,
commencing from the date of Lease starting date, the buildings that are inside
the Development shall be destined to movie theaters and other means indicated
hereof. (Lease's material goods ) for which the future space of the Lease in
its exclusive area inside the preliminary plans marked as Annex VIII, which is
an integral part of this contract, plans which for its rightful identification
should be signed by the Lessor and the Lessee, for without signature this
contract shall be invalid.
1.02 Lessee, complying with the terms and conditions agreed upon this
contract shall have the right to have and possess the leased premises with all
its rights, privileges, accessories and annexations, that belong and correspond
to the Lessee, for a term of twenty (20) years, this term can be called "In
Force Term."
This Lease contract shall initiate from the day of its commencing date, which
shall take place ninety (90)) days after the date in which Lessor delivers
exclusive possession of the leased premises to Lessee, once Lessor's
Construction is finished (further defined) in accordance with dispositions of
this contract, and with compliance to the Construction and Specifications
drafts, mentioned herein, without obstructions, all scaffolds, construction
materials and any other type of obstructions, removed, so the movie theaters
may be open to the public and movies may be shown without any difficulties or
bothers.
If the commencing date does not coincide with the first day of a calendar
month, the Lease shall commence its twenty year (20) term, the first day of a
calendar month, following the commencement date.
Lessee shall have the right, TO SOLICIT TWO PERIODS OF ADDITIONAL AND
CONSECUTIVE EXTENSION PERIODS OF FIVE (5) YEARS EACH, when the prorogation in
each of the above mentioned periods is solicited by Lessee, he shall be in
compliance with the payments of all his liabilities in the terms provided
herein.
<PAGE> 3
To exercise the right consigned in this clause, Lessee shall solicit in
writing, expressing his desire to exercise the extension within a term no less
then 180 natural days and no longer then 360 natural days before the expiring
date of the initial term of the first extension.
1.03 Within the thirty (30) following days of the initiation of the term of
this Lease, the parties are obliged to sign a notice that shall establish the
commencing date and the termination of the term of this contract, Lessor shall
comply with all the obligations derived from this contract even in the event of
refusal for any reason, to sign the document mentioned herein.
CLAUSE II
SEQUENCE OF THE LESSOR'S CONSTRUCTION WORK AND DELIVERY OF THE LEASED
PREMISES
2.01 Lessor pacts and agrees that at his own expense except what is
specifically expressed herein, shall build the area of the premises that shall
be destined by Lessee for the movie theaters in the leased premises, foreseen in
the Construction drafts and specifications, which in the terms of part b) of
this section 2.01, shall be authorized by the parties. Construction and
delivery of the premises will take place in compliance with the following:
a) PRELIMINARY PLANS AND IDENTIFICATION OF THE EXCLUSIVE LEASED AREA.
At the date of the signature of this contract, Lessor has prepared a
preliminary draft which when signed by the parties will be integrated to the
contract Annex VII. The exclusive leasing area designated by Lessee for the
building of the movie theaters and service areas shall be identified in the
draft. The surface of the land identified in the preliminary draft shall not
be reduced by Lessee nor be less to the surface resulting from the draft
mentioned above.
b) ELABORATION OF THE CONSTRUCTION DRAFTS AND SPECIFICATIONS. Within a
reasonable term Lessor shall elaborate the building drafts for the premises as
well as the specifications . These drafts shall be submitted to Lessee, who
will have a period of thirty (30) natural days to revise and authorize such
drafts. During such term Lessee shall be able to ask for reasonable
modifications to the drafts and specifications, which shall be modified by
Lessor's technical staff and shall be submitted once again to the approval of
Lessee. Once approved, the Construction drafts and specifications will become
integrated to this Lease contract, as if they were part of the body of this
contract. When referring to the drafts and specifications approved by the
parties herein called "Work drafts and Specifications", which shall be annexed
to this contract marked as Annex VIII. In case Lessor or Lessee do not agree
on the drafts and specifications within a term of up to (60) sixty days from
the day of the signature of this contract they shall not be considered as
authorized by the parties and in such case, Lessor may terminate this lease.
In any case once drafts and specifications are approved, these shall not be
modified by the parties except in the terms and conditions established in this
contract.
C) BUILDING LICENSES AND CONSTRUCTION WORK INITIATION. Within thirty
days (30) following the date in which the parties had authorized the
Construction drafts and specifications in the terms of the previews paragraph
Lessor shall obtain at his own expense each and all the permits and licenses
required from all municipal, state and federal authorities in order to proceed
with the construction of the Real Estate Development and within its premises
the movie theaters, including in an declarative, but not limiting
<PAGE> 4
form, permits for ground use, building licenses, sanitary and environmental
authorities, feasibility determination and infrastructure availability and
public services. Within the same thirty (30) day term mentioned in this
paragraph, Lessee shall initiate the construction in accordance with the work
drafts and specifications for the building of the real estate development and
within it the movie theaters described in Annex VIII of this contract.
The parties agree that within the Construction drafts and specifications for
the realization of the real estate development of the Lessor, the
specifications which are foreseen in the Free Trade Agreement between Mexico,
the United States and Canada will be incorporated. Such specifications shall
be considered complied once all permits and construction licenses from
pertaining authorities in charge of authorizing the realization of the works.
d) BUILDING OF LESSOR'S CONSTRUCTION. Lessor is liable to build all the
elements of the Shopping Center within his property and inside it, the movie
theaters more amply described in Annex IX, of the present (Lessor's Construction
Work) within 120 days, following the date in which Lessor initiates the work,
with the understanding that the termination term may be extended due to
inevitable delays, such as established Clause XXIX. Lessor's Construction will
be built, installed and completed in a rightful manner, according to the
Construction draft and specifications. The part related to the movie theaters
and service areas of the leased premises, will be built with the support from
the technical staff, that under their strict responsibility and exclusive cost
is designated by the Lessee, who will verify the complete termination of the
Lessor's work, without any right to stop or oppose the execution of the
construction, in any case Lessor should be notified, he together with Lessee
will solve the difference. In relation with the work of the Lessor, the work
contracts with subcontractors and suppliers, all their subcontracts and the
selection of the contractors and sub-contractors shall be the responsibility
and sole and exclusive right of the Lessor.
Lessor at his own expense and risk shall hire the service of technical
supervision, from a firm, specialized in movie theater construction, which will
be approved by Lessee.
2.02 When the work of Lessor is terminated, this will be free of claims
from material suppliers, subcontractors, workers and others parties and Lessor
shall maintain Lessee in peace and free of any claim made to Lessee in relation
with the realization of Lessor's work.
2.03 Lessee also agrees that no modification or substantial change will be
made or permitted in relation to the work drafts and specifications, approved
and identified for the movie theaters and their service areas, without pervious
notice, consent and approval in writing by Lessee, who shall grant or deny it
fundamentally in a term of maximum five (5) working days from the date
requested in writing by Lessor. If there is no written response from Lessee
during the mentioned term, he will be considered to be in accordance with the
modification solicited by Lessor..
2.04 Lessor will build the premises adhering to the drafts and
specifications approved by the parties and shall comply with the law and
applicable ordinances (municipal, state federal, and others), however he does
not assume or acquire any liability in relation to the exertions or proceedings
that Lessee shall realize to obtain the permits or functioning licenses to
operate a complex of movie theaters in the leased premises with a minimum of 10
screens and with 2,000 seats approximately in total and such permits and
licenses be legally or illegally denied; in every case Lessor without any
liability shall provide all his support to Lessee so that the corresponding
proceeding will be satisfactorily concluded with the
<PAGE> 5
obtainance of the cited permits. The movie theaters will be built in a such
way that each of them have an interior height of 10 (ten) meters with air
conditioning in all. Consistent with what will be established in the
specifications approved by the parties, the walls, floors and roof of each one
of the theaters, will be insulated against noise and vibrations in the parking
area, streets and other establishments in the terms provided and agreed by the
parties in the drafts and specification of the Work.
2.05 Lessee will be able to credit with a previous written authorization
from Lessor, the person or people that may enter upon the premises during the
construction and installment of the Lessor's work, to inspect the advancement
of the same, to determine if the work is taking place in accordance with this
clause, and to proceed with the work of Lessee, with the understanding that
Lessee shall be permitted to enter upon the premises an a way that does not
interfere with Lessor's work.
2.06 Lessee is liable to sign to Lessor, the acceptance of the premises
once lessors' work has concluded, in such a way that commencement of the term
periods of this contract be established in accordance to such.
CLAUSE III
LESSEE'S WORK
3.01 Lessee at his expense, will realize the work that he is in charge of,
including those special installations, furniture and equipment described in
Annex X hereof, within sixty (60) days following the termination of Lessor's
work.
3.02 It is understood and agreed by the parties that during the proceeding
of the Lessors' work, Lessee shall have the right to initiate and proceed
directly or through his own agents, contractors or employees and without any
liability for the Lessor, his work within the premises., with the understanding
that this possibility shall be applicable only and when it does not interfere
with Lessor's work. However, it is agreed that neither the realization of the
Lessee's work, nor his entry to the premises will be considered as a delivery
of possession so as to make the term of this lease initiate before the
specified time for this possession.
3.03 If Lessee should have possession of the premises before the date in
which Lessors' work has concluded according to the work drafts and
specifications above mentioned, such delivery of possession of the premises
shall not be taken into account for the term commencement of this contract, and
conditions for the rental payments be given unless Lessor's work has been
terminated and Lessee does not realize the part of his work in sixty (60 days;
in this case and starting day 91 it will be understood that the contract's
commencement date has begun and consequently the rental payments in the terms
hereof.
3.04 At the termination of this contract, Lessee shall be authorized to
remove all the equipment that he had installed, including in a declared but not
restrained manner all the equipment and materials that are described in
Annexation X hereof. Equipment such as the Lessee's installations cables
including any hidden cables), seats, seat hooks, and the signs and sign
materials that had been installed at his own expense by Lessee. Lessee shall
be liable for any repair of damage to the leased premises affected by the
removal of material and equipment, excepting the use and normal depreciation,
in this case Lessee
<PAGE> 6
should immediately proceed to repair premises to leave them in good condition
to be used for the same purpose for which it was built.
CLAUSE IV
RENT
4.01 Lessee, hereof pacts and agrees that during the term this contract, he
shall make rental payments to Lessor at his offices, located at 9351 Ave.
Ignacio Comomfort, Level 10, Zona Rio in Tijuana, B. C. Mexico, or at any other
address indicated by Lessor, in writing, a percentage rent over Lessee's total
income hereof established, with the understanding that Lessee will pay a
minimum annual rent on account of the percentage rent, for the useful the
premises as follows:
A) PROCEDURE FOR DETERMINING THE MINIMUM ANNUAL RENT. Due to the fact
that a surface for exclusive use has been assigned to Lessee, in which the
movie theaters and service areas will be built, this surface is determined in a
preliminary way in Annex VII hereof, the same referred to in Clause I of this
contract, with the intention to determine concretely the amount of the "minimum
annual rent", the parties convene that the rental payments be determined based
on the following procedure
Once drafts and specifications referred to in Clause II part 2.01-b hereof have
been concluded, the number of square meters which as total surface is subject
to lease will be determined based on the same, the number of square meters
which as total surface shall be subject to lease and in which the leased good
will be built
Consequently the number of square meters of the leased area, will be converted
to square feet, in order to apply the leased value for square feet as
established in the following section:
3.- Once conversion has been made, the resulting table of value will be
applied.
<TABLE>
<S> <C>
a) First year of the term: Monthly payments of $0.95 dollars per square foot.
b) Second year of term: Monthly payments of $1.00 dollar per square foot.
c) Third year of term: Monthly payments of $1.05 dollars per square foot.
d) Fourth year of term: Monthly payments of $1.10 dollars per square foot.
e) Fifth year of term: Monthly payments of $1.15 dollars per square foot.
</TABLE>
f) After the sixth year of this contract's term, the "Minimum Annual
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, Ca. United States of America, from the previous year of the mentioned
price increase.
The amount that results in each of the sections above will be multiplied by
twelve (12) to obtain the minimum annual rent referred to in this clause.
B) The minimum annual rent determined according to the procedure referred
to in the above section, will be paid in twelve (I 2) monthly payments: such
rent shall be paid monthly within the five (5) first natural days of each month,
for any reason it should be the object of retention or reduction of any kind.
<PAGE> 7
C) Once concluded, the drafts and specifications mentioned in clause II,
part 2.01-b hereof, the Parties agree to sign a document that establish the
amount of the minimum monthly rent, and consequently determine the amount of
the corresponding monthly payment, such document in any way will be understood
as a right or prerogative to negotiate rent that as consequence to this
contract be assigned to Lessee nor the right to retain or deny the payment of
the corresponding rent.
D) The minimum annual rent that will be determined according to the
procedure mentioned in this clause, is fixed in square feet, considering the
number of minimum square meters appointed in the mentioned previous draft
according to clause first (1) of this contract, by consequence Lessee will not
be able to take a surface inferior to the one cited in the referred Annex, in
any case the exact amount of square meters in which the good subject to lease
will be built shall be determined in the final drafts as mentioned hereof
E) The amount of the agreed rental payments in this clause, shall be paid
in dollars, currency of the United States of America or its equivalent in Pesos
at the free exchange rate available at the moment of payment, as it is fixed
for retail sales by any credit institution: Mexico's National Bank, S. A.
Bancomer, S. A. or Bital, S. A. at Lessor's choice.
F) According to this contract, the tax for aggregated value (I.V.A.)
that is caused or by any other tax that hereafter be in force and lawfully be
liable to Lessor, will be added to the rent collected.
4.02 If the term of this contract commences in a date different from the
first (1) day of the first (1) month of this lease, the Minimum Annual Rent for
such month will be apportioned and will be added to the next monthly payment
which will be paid according to section 4.01 hereof.
4.03 LESSEE AGREES TO PAY ANNUALLY TO LESSOR from the first year of term of
this contract AN AMOUNT FOR RENTAL PAYMENTS ("PERCENTILE RENT:) that will be
fixed based on the percentages referred to in paragraph 4.08 hereof, which will
be applied to the total annual gross income ( as defined thereafter)
To obtain the new amount of the :"Percentile Rent": stipulated in this section,
this amount will be subtracted from the "Minimum Annual Rent" of the
corresponding year according to the paragraph mentioned above, fixed in the
terms of Section 4.01 hereof
For the effects established in the paragraph that antecedes, the "Minimum Annual
Rent" will be exchanged to Mexican Pesos at the currency rate available the
date in which it was in fact paid.
To obtain the difference between the "Percentile Rent" and the "Minimum Annual
Rent", Lessee shall provide the information and documents indicated by Lessor,
during the month of January of each year, at the latest. The above is without
any prejudice of the other terms and rights which based on this contract have
been appointed in favor of Lessor.
During the first term year of this contract and considering that it may be
irregular, since it may initiate any month of the natural corresponding year,
la Percentile Rent if existing, will be determined during the first irregular
year of the term of this lease taking the percentage provided in part 4.08 of
this clause from the Lessee's gross income from the first twelve complete
months of the term hereof, multiplied by a fraction, which numerator will be
365 (three hundred and sixty five).
<PAGE> 8
4.04 The calculation of the gross income will be made by Lessee at the end
of each calendar year, and the amount payable to Lessor in agreement with this
clause IV, if existing, will be paid by Lessee without previous solicitation, at
the latest 45 (forty five) days after the termination of such calendar year. A
written declaration of the gross income, certified by a Lessee's financial
office, will be submitted to Lessor by Lessee within such period 45 (forty five)
days, together with the amount of the Percentile Rent owed to the Lessor if
existing.
Lessor is liable not to reveal to any person or party different from the
Lessor's mortgage creditors, without previous consent granted in writing by
Lessee himself, this is without prejudice of the right of the Lessor to request
information and documentation considered convenient and to order visits and
inspections to the Lessee as agreed hereof.
4.05 Lessee shall have adequate bookkeeping where gross income shown, from
the movie theaters and any other business installed inside the leased premises,
be this worked directly by Lessee or any other person or company, subsidiary or
alien to his operation, which will be open for inspection and auditing by Lessor
and his representatives in any working hours or days in the Lessee's office,
located at 103-3 Blvd. Abelardo L. Rodriguez, in Tijuana, B. C. Mexico, or at
any other place where Lessee may have his fiscal address. Refusal from Lessee
of allowing Lessor to inspect and audit accounting records will give place for
a conventional fine for the amount established in clause XXII hereof. If
Lessors' audit reveals that the declaration of the gross income presented by
Lessee, has a difference over three per cent (3%), Lessee is liable to Lessor
of paying a reasonable fee for such audit, except what is stipulated in this
paragraph, Lessee will have no obligation what so ever to pay the expenses
related to this audit.
4.06 "Gross Income", as used in this lease, means the total income
generated from all the activities that Lessee performs in the leased premises,
be it credit or cash, activities established in a declarative and not limited
manner, among others, the following: ticket sales to all kinds of shows that be
presented in the leased premises, food and beverages sales, candy, chocolates,
ice-cream, besides the operation of videogames and other income from the
operation of movie theaters in the leased premises by Lessee.
4.07 Gross Income will not include,: merchandise sales for which cash has
been returned or a refund, up to the amount refunded, the sale price of
merchandise returned for exchange by customers, the amount of any tax to
aggregated value, and other in power at the time of commencement of this lease,
including in a declarative but not limiting manner to movie theaters' taxes, and
copyrights; merchandise transferred between business and showrooms owned or
controlled by Lessee which may be canceled by Lessor as losses, besides
regarding all luxury tax, sales and other taxes that may thereafter be in force
only and if Lessee transfers to the movie theater's clients the total amount (o
equivalent percentage)of the gross income of such tax within the following
ninety (90) days.
4.08 For the purpose of determining the "Percentile Rent" established in
point 4.03 hereof, the following percentages will be applied:
a) 10% Ten percent of the gross income obtained by Lessee in the
box-office, with the understanding that from such income may be deducted the
concepts refereed to in point 4.07 of this clause, as well as the rent cost of
those movies which Lessee pay as rent to the distributor, if and when this be
alien to his corporation or a higher percentage (55%) fifty five percent of
box-office income according to contracts and verifying documents.
<PAGE> 9
b) 10% OF THE REST OF ALL THE GROSS INCOME, obtained by the sale of
candy, cafeteria, gift shop, video games and any other income received in the
leased premises or in relation to such.
4.09 The pact Minimum Annual Rent as well as the percentile rent, in any
case will be paid e 91 ninety one days after the date of delivery of the work
of Lessor to Lessee, as stipulated in this contract.
4.10 The Parties agree that in case of the Minimum "Annual Rent" being paid
according to the procedure and established in this clause be higher to the
"Percentile Rent", of the corresponding year, it will be considered then that
the Minimum Annual Rent that had been paid will be for the leasing concerning
the period paid. This may not generate, under any circumstance, any rights from
exchange or refund to Lessee.
4.11 The Parties agree, that from the second day of leasing contract's
term, and in case Lessee receive tri-monthly income inferior to the equivalent
of $1,000.000 (one million dollars U.S. currency), Lessor may authorize in
writing and with delivery from the Lessee, of the corresponding documentation
and receipts, a temporary reduction for trimesters of the Minimum Annual Rent
stipulated in paragraph 4.01 hereof, for effects of the established in this
part it will be considered "Gross Income" those defined in paragraph 4.06
hereof without any deduction.
Such reduction under any circumstance may be higher during the corresponding
term year, in more that 25% twenty five percent of the annual income stipulated
in paragraph 4.01 mentioned before. For this reason it will be a condition for
this reduction to operate, that the trimester income of Lessee be inferior to
the amount mentioned before, with the understanding that the corresponding
adjustment will take place taking into consideration the gross income of the
previous trimester and it will be applicable to the following trimester, in the
corresponding proportion being it revisable every three months.
CLAUSE V
UTILITIES
5.01 Lessor shall provide the lease premises with all the utilities
required for the correct operation and functioning of the Development in which
the movie theaters will be located, in a way that Lessee be in condition to
hire the connection to such services, which he will do at his own expense.
During the term of this lease, Lessee shall be liable for utilities charges,
as well as licenses and permits used in the leased premises.
CLAUSE VI
REPAIR AND MAINTENANCE OF PREMISES
6.01 Lessee, during the term of this lease and at his own expense, shall
conserve and maintain in good conditions the interior of the showrooms, service
areas, hallways, and rest rooms found inside the leased premises as well as
furniture and equipment in good maintenance and operation conditions, except
for the use and normal deterioration.
6.02 Lessor is liable during the term of this lease to maintain the
exterior areas of the leases premises, the exterior of such, including paint,
and all the support structures of the leased premises, the roof and including
in a declarative but not limiting manner, its isolation in a way such that at
any moment be free of leaks, and in good maintenance conditions and operation.
Lessee shall permit Lessor upon the
<PAGE> 10
premises so that Lessor may comply with his maintenance liabilities, at a
mutually agreed time of the day. The Parties in what they are liable shall
observe that all fire and safety regulations are observed in total, in relation
to the leased premises.
Lessor is liable to maintain the public lighting corresponding to the parking
of the Shopping Center turned on, for up to 30 ms. after the ending of the
last show of the movie theaters
6.03 If in any moment, during the term hereof it is required at Lessor's
criteria, structural changes or changes that involve the structural parts of
the movie theaters or floors, walls, columns, beams or any other fixed parts of
such, by reason of any laws or current ordinances, that thereafter be in force,
or by any order or command issued by any government office, department
authority or officer. Such changes shall be made by Lessor at his own expense,
except when they be subject of insurance. In such case, changes shall be
made until the insurance company pays the insures sums, with the least
possible trouble for Lessee, as not to interrupt the use of the premises, with
the apportioned discount on the Annual Minimum Rent for the time in which
Lessee be found deprived of the partial use of the premises.
6.04 Lessee agrees, to maintain the common areas, reasonably clean, free of
waste, trash and obstructions and shall maintain the sewage system of the
areas, in good condition, for this he is liable to incorporate to any lessees'
association or make his the regulations of the premises and consequently in an
independent manner the - - pactadas. He is liable to pay any pro-rate share of
maintenance, and administration fees fixed by whoever be the Complex
Administrator with the objective of maintaining common areas in optimum
operation conditions, in any case he will be liable to accept the internal
regulations of the Development Lessees.
It is agreed in an expressed manner that Lessee is liable to establish a waste
collection system that may be generate in the movie theaters hereof.
CLAUSE II
ALTERATIONS
Lessee shall not without first obtaining a written consent of Lessor, make any
structural alterations to the premises. If Lessor should disapprove or approve
the structural alterations proposed by Lessee, within twenty (20) days after
having received such proposal, this shall be considered as a disapproval from
Lessor. Lessee with previous written authorization from Lessor shall have the
right to at his own expense to make non-structural alterations, improvements or
changes to the premises that he consider necessary or beneficial for the use of
the premises. Lessee shall at his expense pay totally and completely all the
costs, expenses and charges hereof.
CLAUSE VIII
8.01 Any trademark or brand used in any time or placed in the premises by
Lessee shall be Lessor's exclusive property. The initial trademark which
Lessee has intentions of using in the premises "CINEMASTAR LUXURY THEATER,"
under any circumstance shall have the right to use or benefit from such
trademark or brand except with written authorization from Lessee.
CLAUSE IX
BROKERAGE
<PAGE> 11
9.01 Lessor hereof is liable to indemnify and maintain Lessee free of any
claim or suit by brokers' commissions regarding the premises or any other suit
and/or the execution of the present lease.
CLAUSE X
USE OF THE PREMISES
10.01 Lessee shall have the right to use and occupy the premises during the
term of this lease, as a movie theater complex, for the exhibition of movies,
televising, assemblies, fashion shows, vaudeville, drama shows, and theater
plays, operatic and other theater show, exhibits, concerts, public leisure
presentations, in a customary, usual manner, whenever such shows be shown on
screen, using any media, even through live performances.
In the same manner Lessee shall be able to operate a stand for hot dogs sales,
pizzas, candy, soft drinks, popcorn, dry fruit, ice-cream and any other corn
items and any candy items, food or snacks which Lessee determine to be
appropriate for sale in the premises in the movie theaters, as well as for the
sale or rent of toys, video tapes, recordings, tapes, poster or items that are
usual in the movie theaters in The United States of America and in Mexico, and
together with the main usage before mentioned, Lessee shall be able to install
electronic games machines, operated with coins and additions of fun for his
clients' entertainment. All income generate by these means shall be considered
as part of the gross incomes for the effects hereof.
CLAUSE XI
NOISE AND SMELL
11.01 Lessors is liable and agrees that he shall not make nor permit the use
of any space of the rest of the suites, in a way that it will bother the
operation of the movie theaters, be it by smell, noise or any other form and
that such suites owned by Lessor will have the necessary precautions to avoid
such bother from lessees or their guests. It is established that Lessee
acknowledges the location of the premises and the draft design.
CLAUSE XII
LESSOR'S RIGHT TO INSPECTION
Lessor and his agents shall have the right to enter upon the premises during
working days and hours to inspect and examine the premises, such exam and
inspection shall be made without interference with the operations taking place
in the premises, and with a frequency no larger that once every trimester. In
order to enforce this right, Lessor shall advise Lessee in writing at least
three (3) working days before and date requested for the visit. Denial of entry
from Lessee to Lessor for the execution of his right to inspection will cause a
fine as established in Clause XXII.
CLAUSE XIII
SIGNALING
13.01 Lessee, at his own expense with previous agreement with Lessor, shall
have the right at all times during the term hereof, to install, maintain and
operate the billboards, poster, pole signs, ads and
<PAGE> 12
announcements in the interior or the premises, described in Annexation XI
hereof. Lessor grants in this case, his consent for the permanency of such
signs, billboards, posters, and advertisements on the premises from the
commencement and during the term of this lease, and for the same to be removed
at the termination of the lease or any other previous time desired by Lessee.
Lessor shall be able to install in the premises exterior, the billboards
described in Annexation XII. Both Parties agree that in case any billboard be
removed, the Party responsible shall forthwith repair any damage in way that
the appearance of the premises be maintained in excellent condition.
Lessor with the expressed authorization from the competent authorities, shall
place upon the premises a spectacular sign for Lessee to announce the movie
theaters' programming at Surface Plaza level.
13.02 Lessor and Lessee agree that during the term of this lease, the
construction of other signs shall be made in the premises of which the leased
premises are part of, and with the size that does not interfere nor obstruct
the visibility of the signs, billboards or attraction posters that are required
by both Lessor and Lessee, in compliance with this lease contract.
13.03 Lessor shall not use nor permit any person or company to use the
exterior walls or the ceiling for any purpose at all, in the case of Lessee
pretending to use them, he shall obtain a written consent from Lessor, who
shall not deny it irrationally.
13.04 From the time of commencement of the term of this contract, Lessee
can install, maintain and use posters or signs, box office announcements and
billboards on the interior front of the premises, advertising their current and
future attractions. All the erected signs, installed and maintained by Lessee
will be withdrawn by him at the termination of this lease, Lessee is liable for
any damage to the premises caused by the removal of such goods, he is liable at
his own expense to pay for the expenses of the damage originated by this.
CLAUSE XIV
INSURANCE CLAUSE
14.01 INSURANCE OF THE PREMISES Lessee is obliged during the term of this
lease as well as any prorogation or extension hereof, to hire and maintain an
active insurance policy of full coverage against all risks in dollars from The
United States of America, which will protect the commercial value of the
premises. This insurance policy shall appoint the Leasing Company
"Inmobiliaria Lumar, S.C." as first beneficiary, this insurance shall be for
the restoring value, as established annually by appraisement performed by the
valuator chosen jointly by the Parties involved, in case of disagreement on
this the valuator will be designated by the Insurance Company with whom the
policy is contracted. In a declarative but not limiting manner, the insurance
policy shall cover the following: fire, earthquake, rain, floods, hurricanes,
vandalism, explosions, and intentional damage with the following endorsements:
a) Spill of Fire extinguishing equipment.
b) Demolition and removal of rubbish and construction inflation endorsement.
c) Endorsement for loss or damage caused by tremors (earthquakes) superficial
water, explosions and floods, and the rest of risks found in the
endorsement of the so called "All risk Coverage" in Mexico.
<PAGE> 13
14.02 If the movie theaters, inside the premises, were damages or destroyed
by, fire, earthquake, rain, hurricanes, explosion or any other casualties
against which it is required to be insured, at any time during the term hereof,
Lessee with the proper diligence and without any liability, shall request from
the insurance company to proceed for the payment of repairs, restoration and
re-construction of the premises, in case of insured furniture, it shall be left
in the same condition it was before the damage or casualties.
14.03 In the event of damage or destruction resulting in the suspension of
the movie theaters operations, Lessee will not be liable to pay rent until
the movie theaters be restored, repaired or rebuilt, in order for Lessee to
use, operate and continue in full power of the premises, except in the event of
liability from Lessee, his personnel, agents or clients.
14.04 In spite of dispositions of section 14.02 aforesaid, in the event of
destruction or damage of the premises in more than (20%) twenty percent, during
the last year of the term hereof, or during the last year of any extension of
the lease then, either Lessee or Lessor may elect to terminate this lease at
the time of the casualties providing a sixty (60) day notice to the other
party, after the damage or destruction. In the event of termination of the
lease as is established hereof, all the rental payments and other credits
paid in advance for the lease, shall be repaid by Lessor to Lessee, starting
from the date in which the exercise of the option is notified as aforesaid, if
there are no charges to be made against such entries.
14.05 CIVIL LIABILITY INSURANCE. Lessee is liable to acquire and maintain
active a Civil Liability Insurance policy, including property damage and bodily
injury covering Lessee as well as Lessor against property damage and bodily
injury and death of any person or persons happening into or adjacent to the
premises. This insurance shall be for the amount of $1,000,000.00 dollars (One
million dollars currency of the United States of America) approximately
complying with the policies established by the Insurance companies at lessors
satisfaction.
14.06 RENT INSURANCE. In the same manner, lessee is liable to acquire and
maintain active, an insurance policy, during the time of this lease, including
its extensions, if existing, in which the loss leasing company "Inmobiliaria
Lumar, S. C.", shall be designated as Loss Payee, and in which rental payments
be insured, as established herein. The insurance policy should foresee the
termination or suspension hereof, due to loss covered by any insurance. The
policy shall pay the amount corresponding to the rental payments of (12)
twelve months from the date of the casualty.
14.06 Lessee shall pay the premium of the aforesaid policies punctually to
Lessor immediately after issuing of such, which in its case the corresponding
insurance company will pay to Lessor and his mortgage creditors, if existing
such indemnities shall be used to repair, restore and rebuild the premises in
compliance hereof. In this event such indemnities will be used to restore the
income that Lessee should lack to collect in the cases that proceed.
14.07 Lessee under his most strictest liability, agrees to maintain the
operation equipment located in the movie theaters, insured with the Fire
insurance policies with annexed all risk coverage. Insurance shall be for an
amount equal to (100%) one hundred percent of the equipment's replacement
value.
14.08 Lessor shall maintain, if this is in his interest, and insurance that
cover the common areas, which Lessee of future Lessees of the other locals
within the development hereof be not liable to contract.
<PAGE> 14
CLAUSE XV
DEFAULT
1501.- Each one of the following causes shall be considered as default from
Lessee:
1.- If Lessee defaults in the payment of the monthly Minimum Annual Rent,
in compliance with clause IV hereof, and if Lessor does not cure any such
default within ten (10) days after the written notice of default.
2.- If Lessee defaults in the payment of the Percentage Rent within the
term foreseen in Clause IV hereof, or any other payment required thereunder,
within the following fifteen (15) days of the written notice, specifying such
default.
3.- If Lessee defaults any other liability under this lease within thirty
(30) days, following the written notice from Lessor in which such default
appears.
4.- Waiving of the premises for more than five (5) consecutive working days.
5.- The declaration of rental payments, suspension or bankruptcy from
Lessee or his warrantors, or the suits filed against them by their creditors
which remain unsolved for more than sixty (60) days.
6.- the embargo, execution or any other judicial or administrative
domain, due to labor problems, Social Security or fiscal problems that
substantially affect Lessor's assets, which are not solved within a period of
ninety (90) days, after the giving of written notice of the judicial act that
caused it.
7.- If Lessee fails to give proof of all type of insurance stipulated
herein, and fails to submit the corresponding proof of insurance within a
period of maximum ten days from the signature hereof and every year within the
following ten days following the policy's maturity.
15.02 If the corresponding default is not reasonable cured within the dates
fixed in each case or thirty (30) in cases in which term is not specified,
Lessor will have the right as an option and additionally to other rights
granted hereof, or the law including the right to claim damages of the
following:
1.- Rescind this lease contract immediately and evict Lessee from the
premises hereof.
2.- To declare this contract expired and collect the balance for rental
payments until the last year of the term or any of the prorogation periods
being held, as well as declaring matured any other amount owed to Lessor and
collect such immediately. Lessee will be able to pay the rental payments as
they mature.
3.- In the event the demised premises be taken by eminent domain by Lessor
and leased to another Lessee for the rest of the initial term or any extension
of such, and the leasing company had paid in advance the balance of the rent,
Lessor is liable to refund Lessee the apportionate rent paid by the leasing
company without interest for the period of the term of the lease during which
the estate was leased to another Lessee. Such payment shall be made during the
time Lessee pay his monthly rent. In the event of the new rent exceeding the
rent that Lessee should be paying, the difference will be in favor of Lessor as
profit without any right of any kind to Lessee.
<PAGE> 15
15.03 Lessor acknowledges the importance of having parking spaces for
Lessee's clients, so he can operate the demised premises in a convenient
manner in agreeance with the terms and conditions hereof. For this reason he
is liable to grant a discount of 100% one hundred percent of the rates being
applied to the users of the parking are that Lessor will build in the
Development, with the understanding that this benefit shall only be given to
the Lessee's clients who show their parking ticket validated by the movie
theaters cashier, for the reasonable time the movie shows last. It is
established that Lessor will at any time and without requiring agreement from
Lessee, to establish any vouching mechanism that allow him to verify the
correct use of the benefit, established in this clause. Rates for the collect
of leasing will be fixed according to Lessor's criteria, and its modifications
will be freely determined by him.
CLAUSE XVI
SECURITY DEPOSIT AND LESSEE'S GUARANTIES
16.01 Lessee shall obtain, from a Tijuana, B.C. legally established company,
a security bond that guarantee the compliance of the monthly rental payments
foreseen in the Minimum Annual Rent concept, established in Clause IV hereof.
A Security Bond that shall cover the total amount of the rents agreed upon
hereof. In such security bond it will be established that Lessor as
beneficiary will be able to collect from the bond company, the amount of the 30
day- overdue rental payments uncollected from the Lessee or his guarantors.
The security bond policy shall be issued establishing that the Security Bond
company waives the benefits to order, exclusion and division as established by
Law.
Lessor shall be liable to furnish the guaranties necessary for the bond hereof
to be issued in the terms established by Law both parties agree that the annual
premium for the obtainance and maintenance of the bond will be covered by
Lessor, with the understanding that if the corresponding premium has a yearly
value of more than $6,000.00 (six thousand) dollars US. currency, the resulting
differential will be covered by Lessor.
16.02 The company CINEMASTAR LUXURY THEATERS, INC, is liable to issue in the
terms of Annexation XIII, a guaranty document in favor of the lessor
INMOBILIARIA LUMAR, S.C. in which it is constituted as guarantor to the
liabilities assumed by Lessee hereof, consequently being liable due to such
document to respond to any default that Lessee may, especially to the default
in the payment of monthly rents and guarantee annualities. ("Minimum Annual
Rent"). and proportional. (Proportional Rent.
CINEMASTAR LUXURY THEATERS, INC. is equally liable to provide to Lessor or any
other Mexican or foreign financial entity, any commercial and financial
information that allow the viability for a credit, with the understanding that
such information will be for financial purposes and with the discretion that
the case require.
CLAUSE XVII
THE RIGHT TO REMEDY ON DEFAULT
17.01 If Lessee defaults in the performance of any of the covenants or pacts
agreed by him hereof, Lessor without any liability from his part at his choice,
and estranged from any future granted or established by Law, additional action,
present or future, with previous written notice of thirty (30) days in advance
if the Party that is liable has not cured such default within such period may
repair such
<PAGE> 16
default or comply with the covenants or pacts in behalf of the omitted party
the expenses paid in advance or originated by such concepts, shall be
remunerated by the liable Party, with a prior written request, with the
interest generated by the same amounts, calculated from the rate specified in
Section 26.02 hereof from the date of the advance payment or expense made until
the restitution of the same in its full amount.
CLAUSE XVIII
DISPOSITIONS FOR NOTICES
18.01 Any notices, advises, requests and other communications that either
Party require to give, hereof, shall be made in writing and shall be validly
given and delivered personally or by mail, including Federal Express and DHL,
certified or registered, with paid postage and solicited receipt. If such
notice, notification, requirement or any other communication is delivered
personally, such delivery will be considered as definite at the moment of
delivery. If such advise, notification, requirement or any other communication
is delivered by mail, it shall be considered as definitive at the signing of a
receipt or denial of receipt by destinatary or his representative. Such
notifications, advises, requirements or any other communication shall be sent
to the following addresses:
To recipient: CINEMASTAR LUXURY THEATER, S.A. DE C.V.
Abelardo L. Rodriguez Blvd. number 103-C
Tijuana, B.C. MEXICO
ATTN: ATTN: MR. MARCO ANTONIO ALEMAN BONILLA
With copy to: MR. JOHN ELLISON J.
431 College Blvd.
Oceanside California, 92057
To Lessor: INMOBILIARIA LUMAR, S.C.
Ave. Ignacio Comonfort number 9351, 10 floor.
Zona Rio.
Tijuana, B.C. Mexico
Any Party may change his address for the purpose of receiving advises,
notifications, requirements and other communications, by a written advice
delivered in the previously mentioned form to the other Parties hereof
CLAUSE XIX
ASSIGNMENT AND SUBLETTING
19.01- Lessor will be able to assign his rights and liabilities derived
hereof at all times when the assignee and assignor sign a covenant, agreeing to
submit to all the terms and conditions and to comply with all the Lessor's
liabilities, established hereof. Lessee shall have no right to assign his rights
and liabilities derived hereof, nor to sublet the premises. Nevertheless,
Lessor with a written previous notice will be able to transfer of assign this
lease, sublet the demised premises, or any portion of such and grant any
concession or license within the demised premises or sublet an operative
department in the same, to any of the following persons or entities:
(i) to any Lessee's subsidiary or affiliate.
<PAGE> 17
(ii) to any partnership, trust, association, or private person that be
holder of at least SEVENTY FIVE per cent (75% or more of the issued and
circulating shares of Lessee.
In the event of any assignment or subletting hereof, that had been authorized by
Lessor, in accordance with the dispositions of this contract, Lessor or any
other guarantor of Lessee's liabilities, will continue to be liable for the
compliance with this contract, for they will not be liberated from the
liabilities that are derived from this lease, with the understanding that, the
income that the assigning or subletting company will be part of the "Gross
Income perceived by Lessor and shall be computed as income in the terms foreseen
in Clause IV hereof
CLAUSE XXII
CONVENTIONAL PENALTIES
22.01 The following conventional penalties will be applied for daft or
omission in the compliance of the liabilities hereof, for this reason they do
not limit nor exclude in any way the right of the corresponding Party of being
compensated for the damages, including judicial costs and lawyer's fees
resulting of such default.
1.- If Lessee should not permit Lessor to exercise his power to inspect
and audit Lessee's books of Account, as well as the demised premises as
required in sections 4-05 and 12,01, Lessee shall pay Lessor a fine for one
thousand (1,000.00 United States currency, for each day these situations
persists.
2.- If Lessee or his guarantors default in the payment of the minimum
annual rent, or the percentage rent, whatever be the case, in the form and
terms as within the term foreseen in Clause Iv hereof, he shall pay an interest
rate, determined by applying an interest rate for late payment for every day
of default that shall be determined applying the prime rate for inter banking
from the Market in New York, N.Y., for wholesale credit operations known as
PRIME RATE, plus 16 additional points.
CLAUSE XXIII
APPLICABLE LAW AND SEPARATION
23.01 This Lease in all its aspects, shall be ruled by the laws of the State
of Baja California, nothing contained in this contract will be interpreted as
an act contrary to the Law, and in the event of conflict with any disposition
hereof that be affected shall be modified and limited only in the necessary
measure to coincide with the Law.
CLAUSE XXIV
ARBITRATION CLAUSE
24.01 Any dispute, controversy or claim derived or related to the
dispositions and its Annexations hereof, or its interpretation, execution,
compliance, violation and validity, as well as this arbitration clause, in the
city of Tijuana, B.C. Mexico, in accordance with the arbitration rules of the
International Chamber of Commerce (ICC), and supplementary the Commerce Code.
An awarding decree in relation with an arbitration, according to this section,
will be definite and compulsory for the Parties. Any sentence over such award
can be awarded and validated in any corresponding jurisdiction court, even
abroad. The procedure for the arbitration will be carried on in Spanish and
all the documents not written
<PAGE> 18
in this language that are presented by any of the Parties shall be accompanied
by a translation to Spanish.
Any arbitration shall be heard by 3 (three) arbitrator who shall be appointed
in accordance to the ICC regulations or the Code of Commerce in such case.
24.02 If for any reason, it were not possible to apply to arbitration
procedure, above mentioned, to settle the possible conflicts between Lessor and
Lessee and/or Guarantor, the parties submit to the competence and jurisdiction
of the Tijuana, Baja California, Mexico courts, waiving exemption that may
correspond to them due to their present of future address.
CLAUSE XXV
SUBORDINATION
25.01 During the term of this contract, Lessor will have the right to assess
his interests and rights regarding this lease contract for any purpose he chose
convenient and the Lessee shall be subordinated and in this act subordinate his
interests in this contract in the understanding that to whom such assessment be
granted is liable to respect this lease contract and to accept the
corresponding rights. Once Lessee notifies Lessor, in writing, that he has
transferred his interest in this lease contract to any credit institutions, as
guarantee for any debt or any other Lessor liability, Lessor, shall not have
power to modify this contract in the sense of rent reduction, reduction of
term, or modify any substantial liability, without consent from such credit
institution. Such disposition shall be active until the credit institution has
notified Lessee, in writing, that such transfer has concluded, in the sense
that if Lessor does not obtain approval from such credit institution to execute
the change or changes above mentioned, the term modification, shall have no
effect against such credit institution
Additionally, if the credit institution gives written notice, to Lessor,
requesting that the rental payments be made directly to such, Lessee agrees and
understands that, except for the advanced rental payments foreseen herein, he
is liable to make every one of the subsequent rental payments agreed upon
herein to such credit institution or its representative (together with the
overdue current rental payments) up to the date in which such credit
institution notifies Lessee about the authorization to carry out the payment of
rents to Lessor or any other third Party, assigned for this.
Lessor will not be able to collect any rental payments with more then a month
in advance, and Lessee, at Lessor's request shall provide a report saying that
no advance payment has been made. Such document will be compulsory for both
Lessee and the financial institution to which this contract be assigned.
Additionally, the credit institution will not be liable to recognize those
payments made to Lessor hereafter Lessee had received notification requesting,
that such payments be carried out to such credit institution, in the event of
Lessor having to immediately reimburse Lessee, at request, all those payments
that have not been recognized.
CLAUSE XXVI
ATTORNEYS' FEES AND INTEREST
26.01 In the case suit should be brought by a Party to validate any of the
terms and disposition contained herein, the prevailing party shall be entitled
to the payment of his attorney's fees, costs and reasonable expenses, including
in such case the designated arbitrators' fees.
<PAGE> 19
26.02 When this lease establish the payment of interest and this be not
specified, such interests will be calculated in accordance with the Treasury of
the Federation Bonds (28-day CETES) plus fourteen points. Such interest will
accrue from the payment due date and will be paid under the terms of this
lease, until the time of payment.
CLAUSE XXVII
ANNEXATIONS
27.01 All the Annexations described herein will be incorporated to this
contract as are elaborated within the foreseen terms fro each case and will be
considered an integral hereof.
ANNEX I. Title deed.
ANNEX II. Corporation charter.
ANNEX III.. Draft of the `PLAZA AMERICANA' Complex.
ANNEX IV. Cinemastar Luxury Theater, S. A. de C. V. Corporation charter.
ANNEX V. Cinemastar Luxury Theater, INC. charter,
ANNEX VI. Power of Mr. John Ellison Jr. for the signature of the lease
contract and guarantee document.
ANNEX VII. Draft of the area for the demised premises.
ANNEX VIII. Draft of the construction and specifications for the
construction of the Movie Theaters and service areas.
ANNEX IX. Lessor's Construction.
ANNEX X. Lessee's Construction.
ANNEX XI Description of the spaces destined for the placement of
Lessee's signs (interior)
ANNEX XII Description of spaces destined for the placement of Lessor's
signs (exterior)
ANNEX XIII. Guarantee documents issued by Cinemastar Luxury Theater inc.
CLAUSE XXVIII
MODIFICATION OR ADDITION
28.01 No addition, change or modification of this lease will be valid until
it is made in writing and signed by all the Parties herein.
CLAUSE XXIX
<PAGE> 20
CASUALTIES
29.01 Whenever a term be designated hereof for the compliance of a
liability, or a term be designated which any of the Parties hereof should
realize or terminate any act, matter or thing, it will be considered prorogated
for a period such as the number of days in which such Party is hindered for
performing or terminating such act, matter of thing as a result of war,
insurrection, rebellion, national emergency declarations, accidental case, or
other causes beyond the reasonable control of such Party (except financial
disability.
CLAUSE XXX
TITLES
30.01 The titles that appear in the different clauses hereof are only
descriptive and for the convenience of its reference. In the event of any
conflict of any title and the context of the corresponding clause, the title of
the clause should be ignored in the interpretation of this document.
CLAUSE XXXI
COPIES AND LANGUAGE
31.01 Two copies of this contract, in Spanish, are subscribed, of which, once
they are subscribed, will be translated to English, the same once translated
will be once again subscribed by the Parties intervening in this contract. The
copies in Spanish and English will be signed in separate documents. For the
effects of the interpretation and application of this lease, and for any legal
effect, it is understood that, the Spanish version will prevail over the
English version.
CLAUSE XXXII
DAY COMPUTATION
32.01 Except that in the case of the context of this contract specifying the
contrary, any reference to terms or terminations of certain number of days,
this will refer to natural days.
Mr. Gabriel F. Jimenez Codinach, declares that in this act, he has informed Mr.
John Ellison Jr. by verbal translation to English, about the context and legal
effects corresponding to this lease contract, as well as the guarantee document
annexed to this contract, as ANNEX XIII, consequently Mr. Ellison and his
Interpreter acknowledge the context and legal prevalence of this contract, for
this reason they Sign it for all the corresponding legal effects.
<PAGE> 21
IN TESTIMONY OF WHICH the Parties have formalized this lease in Tijuana, Baja
California, Mexico, in the date mentioned at the beginning of this contract,
which is signed by the Parties that intervene in all its pages.
LESSOR
INMOBILIARIA LUMAR, S.C.
MR. LUIS JAVIER FIMBRES ASTIAZARAN
LESSEE
CINEMASTAR LUXURY THEATER, S.A. DE C.V.
MR. MARCO ANTONIO ALEMAN BONILLA
GUARANTOR
CINEMASTAR LUXURY THEATER, INC.
MR. JOHN ELLISON JR.
EXPERT TRANSLATOR
MR. GABRIEL JIMENEZ CODINACH
WITNESSES
<PAGE> 1
EXHIBIT 21
Subsidiaries of CinemaStar Luxury Theaters, Inc.
CinemaStar Luxury Cinemas, Inc., a California corporation, 100% owned
CinemaStar Luxury Theaters, S.A. de C.V., a Mexican corporation, 75% owned
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CinemaStar Luxury Theaters, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement (No. 33-86714) on Form S-8 of our report dated May 23, 1996, relating
to the consolidated financial statements of CinemaStar Luxury Theaters, Inc.,
appearing in the Company's Annual Report on Form 10-KSB for the year ended
March 31, 1996.
BDO Seidman, LLP
Costa Mesa, California
June 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 458,550
<SECURITIES> 0
<RECEIVABLES> 87,605
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,405,663
<PP&E> 8,581,444
<DEPRECIATION> 1,693,740
<TOTAL-ASSETS> 8,950,531
<CURRENT-LIABILITIES> 2,181,477
<BONDS> 3,725,568
0
0
<COMMON> 6,458,586
<OTHER-SE> (4,916,873)
<TOTAL-LIABILITY-AND-EQUITY> 8,950,531
<SALES> 11,524,740
<TOTAL-REVENUES> 11,627,256
<CGS> 5,658,086
<TOTAL-COSTS> 11,863,275
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 400,966
<INCOME-PRETAX> (636,985)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (638,585)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (638,585)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
