<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15 (d) OF THE SECURITIES
EXCHANGE ACT 0F 1934.
For the Quarterly period ended September 30, 1996
[ ] Transition report under section 13 or 15 (d) of the Securities Exchange Act
of 1934 for the transition
Commission File Number 0-25252
CinemaStar Luxury Theaters, Inc.
(Exact Name of Registrant as specified in its charter)
California 33-0451054
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
431 College Blvd., Oceanside, CA 92057-5435
(Address of principal executive offices) (Zip Code)
(619) 630-2011
(Registrant's telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 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 [ ]
Common stock, no par value:6,759,944 shares outstanding as of November 12, 1996.
Transitional Small Business Disclosure Format. (check one):
YES
-----
NO X
-----
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
TABLE OF CONTENTS
Page No.
PART I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 1996 3
Condensed Consolidated Statements of Operations for the three
and six months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 7-18
and Results of Operations.
PART II. Other Information
Item 6. Exhibits 19
Signatures 20
2
<PAGE>
PART I. Financial Information
ITEM 1. Financial Statements
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30,
1996
-------------
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 609,526
Commissions and other receivables. . . . . . . . . . . . . . . 128,365
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . 391,014
Other current assets. . . . . . . . . . . . . . . . . . . . . . 139,625
-------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 1,268,530
Property and equipment, net . . . . . . . . . . . . . . . . . . 9,852,821
Preopening costs, net . . . . . . . . . . . . . . . . . . . . . 235,115
Deposits and other assets . . . . . . . . . . . . . . . . . . . 810,450
-------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,166,916
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt and capital lease obligations $ 691,800
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . 1,416,162
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 149,511
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . 53,245
Advances from stockholders. . . . . . . . . . . . . . . . . . . 60,000
-------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 2,370,718
Long-term debt and capital lease obligations, net of current
portion. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,792,402
Convertible debentures . . . . . . . . . . . . . . . . . . . . . 2,000,000
Deferred rent liability. . . . . . . . . . . . . . . . . . . . . 1,914,804
-------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . 10,077,924
-------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 100,000 shares
authorized; Series A redeemable preferred
stock, no par value; 25,000 shares designated;
no shares issued or outstanding. . . . . . . . . . . . . . . . 0
Common stock, no par value; 15,000,000 shares authorized;
6,445,367 shares issued and outstanding. . . . . . . . . . . . 7,285,110
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 2,559,027
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (7,755,145)
-------------
TOTAL STOCKHOLDER'S EQUITY . . . . . . . . . . . . . . . . . . . 2,088,992
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . .$ 12,166,916
-------------
-------------
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Admissions. . . . . . . . . . . . . . . . . $ 3,493,385 $ 2,293,693 $ 6,456,914 $ 4,176,216
Concessions . . . . . . . . . . . . . . . . 1,453,061 862,413 2,655,983 1,628,296
Other operating revenues. . . . . . . . . . 100,502 63,227 194,454 94,322
----------- ------------ ------------ ------------
TOTAL REVENUES. . . . . . . . . . . . . . . 5,046,948 3,219,333 9,307,351 5,898,834
----------- ------------ ------------ ------------
Costs and expenses:
Film rental & booking costs . . . . . . . . 1,963,790 1,259,818 3,567,519 2,317,486
Cost of concession supplies . . . . . . . . 482,909 334,811 841,893 641,164
Theater operating expenses. . . . . . . . . 1,526,949 811,894 2,802,458 1,657,475
General & administrative expenses . . . . . 863,710 526,574 1,528,350 1,048,035
Depreciation & amortization . . . . . . . . 331,428 157,508 557,069 274,739
----------- ------------ ------------ ------------
TOTAL COSTS AND EXPENSES. . . . . . . . . . 5,168,786 3,090,605 9,297,289 5,938,899
----------- ------------ ------------ ------------
OPERATING INCOME (LOSS) . . . . . . . . . . (121,838) 128,728 10,062 (40,065)
----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . 12,514 31,572 15,158 87,001
Interest expense. . . . . . . . . . . . . . (152,204) (102,204) (302,865) (205,725)
Non-cash interest expense related to
convertible debentures. . . . . . . . . . (1,071,429) -- (2,048,997) --
----------- ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE). . . . . . . . (1,211,119) (70,632) (2,336,704) (118,724)
----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . (1,332,957) 58,096 (2,326,642) (158,789)
PROVISION FOR INCOME TAXES. . . . . . . . . (1,600) 0 (1,600) (1,600)
----------- ------------ ------------ ------------
NET INCOME (LOSS) . . . . . . . . . . . . . ($1,334,557) $ 58,096 ($2,328,242) ($160,389)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net income (loss) per common share. . . . . (.21) .01 (.37) (.03)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Weighted average number of common
shares and share equivalents outstanding. . 6,441,512 6,200,000 6,348,514 6,200,000
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
1996 1995
------------- ------------
Cash flows from operating activities;
Net loss. . . . . . . . . . . . . . . . . . . . . ($2,328,242) ($160,389)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . 557,069 274,739
Deferred rent liability . . . . . . . . . . . . . 413,031 127,878
Non-cash interest expense . . . . . . . . . . . . 2,048,997 -
Increase (decrease) from changes in:
Commission and other receivables. . . . . . . . (40,760) (8,645)
Prepaid expenses and other current assets . . . (271,131) 311,000
Accounts payable. . . . . . . . . . . . . . . . 578,022 152,694
Accrued expenses and other liabilities. . . . . (240,048) (141,789)
Deposits and other assets . . . . . . . . . . . (63,705) 1,500
Preopening costs. . . . . . . . . . . . . . . . (97,014) 0
----------- ---------
Cash provided by operating activities . . . . . . 556,219 556,988
----------- ---------
Cash flows from investing activities:
Refund of construction deposit. . . . . . . . . . 600,000 0
Purchases of property and equipment . . . . . . . (3,448,531) (3,504,968)
----------- ---------
Cash used in investing activities . . . . . . . . (2,848,531) (3,504,968)
----------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt. . . . . 500,000 0
Principal payments on long term-debt and capital
lease obligation. . . . . . . . . . . . . . . . (321,899) (214,830)
Proceeds from issuance of convertible debentures. 3,000,000 0
Payment of debt issuance costs. . . . . . . . . . (474,813) 0
Advances from stockholders. . . . . . . . . . . . 60,000 0
Repayment of advances from stockholders . . . . . (320,000) (19,500)
----------- ---------
Cash provided by (used in) financing activities . 2,443,288 (234,330)
----------- ---------
Net increase (decrease) in cash . . . . . . . . . 150,976 (3,182,310)
Cash, beginning of period . . . . . . . . . . . . 458,550 4,091,885
----------- ---------
Cash, end of period . . . . . . . . . . . . . . . $ 609,526 $ 909,575
----------- ---------
----------- ---------
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1
The interim accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-QSB/A.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. For
further information, refer to the audited financial statements for the year
ended March 31, 1996, and footnotes thereto, included in the Company's Annual
Report on Form 10-KSB which was filed with the Securities and Exchange
Commission. Operating results for the three and six month periods ended
September 30, 1996 are not necessarily indicative of the results of operations
that may be expected for the year ending March 31, 1997.
NOTE 2
This Quarterly Report on Form 10-QSB/A is filed to restate the Company's
financial statements for the three and six months ended September 30, 1996. The
Company has since determined that the recognition of non-cash interest expense
should be reported for the three and six months ended September 30, 1996
relating to convertible debentures convertible at a discount to market.
As described in the minutes to March 13, 1997 meeting of the Emerging Issues
Task Force, an SEC Observer addressed issues relating to convertible debt
instruments which are convertible at a discount to the market. The SEC staff
believes that the discount should be accounted for as additional interest
expense. The Company conformed to those views and computed the amount of the
discounts based on the difference between the conversion price and the fair
value of the underlying common stock on the date the respective debentures
were issued. The Company recorded an aggregate of $2,048,997 of additional
paid-in-capital for the discounts related to the embedded interest in the
convertible debentures described in Notes 3 and 4 below. The discounts have
been amortized to interest expense over the period that the respective
debentures are first convertible using the effective interest rate method.
The entire amount ($977,568) related to the debentures described in Note 3
were amortized during the three months ended June 30, 1996 while the entire
amount ($1,071,429) relating to the debentures described in Note 4 were
amortized during the three months ended September 30, 1996. The related
amounts are included in the caption "Non-cash interest expense related to
convertible debentures" in the accompanying statements of operations for the
three and six months ended September 30, 1996. As the discounts have been
fully amortized at September 30, 1996, there is no net effect on
stockholders' equity.
The aggregate affect of such adjustments in the three month and six months ended
September 30, 1996 is summarized below:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1996 Six Months Ended September 30, 1996
------------------------------------- -----------------------------------
(Before Restatement)(After Restatement) (Before Restatement) (After Restatement)
--------------------------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Operating Income (Loss) $ (121,838) $ (121,838) $ 10,062 $ 10,062
Net Loss $ (263,128) $ (1,334,557) $ (279,245) $ (2,328,242)
Net Loss Per Share $ (.04) $ (.21) $ (.04) $ (.37)
</TABLE>
NOTE 3
On each of April 11, 1996 and May 21, 1996, the Company issued a
convertible debenture in the principal amount of $500,000. The debentures
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 and $4.25 per share, respectively. On May 22, 1996,
the April 1996 debenture and accrued interest was converted into 127,152
shares of common stock. On July 3, 1996, the May 1996 debenture and accrued
interest was converted into 118,215 shares of common stock.
NOTE 4
On August 6, 1996, the Company issued a Convertible Debenture in the
principal amount of $1,000,000 to Wales Securities Limited, a Guernsey
corporation ("Wales"), and a second Convertible Debenture in the principal
amount of $1,000,000 to Villandry Investments Ltd., a Guernsey corporation
("Villandry"), in separate transactions pursuant to Regulation S as
promulgated by the Securities and Exchange Commission under the Securities
Act of 1933, as amended. Each Convertible Debenture is convertible into
shares of Common Stock of the Company at a conversion price per share equal
to the lesser of (x) $3.50, or (y) 85% of the average closing bid price of
the Common Stock for the three consecutive trading days immediately preceding
the date of conversion.
The purchasers have agreed that from the date of issuance until after
the forty-fifth day after such date (the "Restricted Period"), any offer,
sale or transfer of the Convertible Debentures or the shares of Common Stock
issuable upon conversion of the Convertible Debentures (including any
interests therein), shall be subject to various restrictions in accordance
with Regulation S.
The Convertible Debentures bear interest at the rate of four percent
(4%) per annum, payable quarterly. If not sooner converted, the principal
amount of the Convertible Debentures is due and payable on the second
anniversary of issuance.
On October 1, 1996 $900,000 worth of debentures were converted to
257,143 shares of common stock and on October 16, 1996 $200,000 worth of
debentures were converted to 57,143 shares of stock and 291 shares of stock
were issued for the payment of interest.
In connection with the issuance of the Convertible Debentures, the
Company issued to Wales a five year warrant to purchase 17,142 shares of
common stock of the Company at an exercise price of $7.00 per share. A
warrant containing identical terms also was issued to Villandry.
6
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Condensed Consolidated Financial Statements and notes
thereto included elsewhere in this Form 10-QSB/A. Except for the historical
information contained herein, the discussion in this Form 10-QSB/A contains
certain forward looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and
intentions. The cautionary statements made in this Form 10-QSB/A should be
read as being applicable to all related forward-looking statements wherever
they appear in this Form 10-QSB/A. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute
to such differences include those discussed in "Risk Factors," as well as
those discussed elsewhere herein.
Three months ended September 30, 1996 compared to three months ended
September 30, 1995.
At September 30, 1995 the company was comprised of four theater
locations with a total of 30 screens. During the twelve months ended
September 30, 1996, the company added two locations with an additional 24
screens. Thus at September 30, 1996 the company is comprised of 6 locations
and 54 screens. The addition of the two theaters resulted in an increase in
revenues and expenses for the six months ended September 30, 1996 compared to
September 30, 1995.
Total revenues for the three months ended September 30, 1996 increased
56.8% to $5,046,948 from $3,219,333 for the three months ended September 30,
1995. The increase consisted of a $1,199,692, or 52.3%, increase in admission
revenues and a $627,923, or 67.8%, increase in concession revenues and other
operating revenues. The admission revenue and concession and other operating
revenue increase for the comparative quarter was due to the increase in the
number of theaters and screens. Total revenues for the existing theaters
owned by the company for the full quarter ended September 30, 1996 compared
to September 30, 1995 declined from $2,181,950 to $1,969,920, a reduction of
$212,030 or 9.7%. This reduction in revenues can be attributed to lower
theater attendance in the months of August and September. Management believes
the reduction was attributed in part to competition from the summer Olympic
games held in Atlanta, Georgia, and the pennant race of the San Diego Padres,
combined with weaker than normal late summer film product.
The revenues from the three months ending September 30, 1996 include
$109,000 one time non-recurring recognition of deferred revenue from prior
periods advanced ticket sales.
Film rental and booking costs for the three months ended September 30,
1996 increased 55.9 % to $1,963,790 from $ 1,259,818 for the three months
ended September 30, 1995. The increase was due to the addition of new
theaters and increases in higher booking costs paid to distributors for
higher grossing early summer movies, such as Twister, The Rock, Eraser,
Hunchback of Notre Dame, and Independence Day.
Cost of concession supplies for the three months ended September 30,
1996 increased 44.2 % to $482,909 from $334,811 for the three months ended
September 30, 1995. The dollar increase was primarily due to increased
concession costs associated with increased concession revenues. As a
percentage of concession revenues, costs of concession supplies for the three
months ended September 30, 1996 and September 30, 1995 decreased to 33.2 %
from 38.8 %. The decrease is attributable to the Company purchasing its own
concessions for new theaters, instead of having its concessions being
subcontracted though a concession vendor.
7
<PAGE>
Theater operating expenses for the three months ended September 30, 1996
increased 88.1 % to $1,526,949 from $811,894 for the three months ended
September 30, 1995. The dollar increase in theater operating costs is
primarily due to the increased costs attributable to the costs associated
with the start up of new theaters. As a percentage of total revenues, theater
operating expenses increased to 30.3% from 25.2 % during the applicable
periods.
General and administrative expenses for the three months ended September
30, 1996 increased 64.0 % to $863,710 from $526,574 for the three months
ended September 30, 1995. The increase is primarily due to additional
advertising and insurance associated with the opening of new theaters as well
as consulting fees and other costs associated with the expansion of corporate
operations. As a percentage of total revenues, general and administrative
expenses increased to 17.1 % from 16.4 % during the three months ended
September 30, 1995.
Depreciation and amortization for the three months ended September 30,
1996 increased 110.4 % to $331,428 from $157,508 for the three months ended
September 30, 1995. The increase is primarily the result of depreciation on
additional equipment associated with the opening of the new theaters and the
amortization of preopening costs during the three months ended September 30,
1996.
Interest expense for the three months ended September 30, 1996 increased
to $152,204 from $102,204 for the three months ended September 30, 1995. This
increase is primarily attributable to the increased debt incurred by the
Company in its expansion.
Interest income for the three months ended September 30, 1996 decreased
to $12,514 from $31,572 for the three months ended September 30, 1995. This
decrease is attributable to lower interest earning balances as the Company
used its funds for expansion. In the prior year, the Company had more
interest earning funds remaining from its initial public offering.
Non-cash interest expense, which was $1,071,429 for the three months
ended September 30, 1996, results from issuing debentures which are
convertible at a discount from the quoted market price of the common stock.
The non-cash interest recorded on the convertible debentures is amortized
over the period which the debentures are first convertible and have no effect
on stockholders' equity. (See Note 2 of Notes to Condensed Consolidated
Financial Statements).
As a result of the factors discussed above, the net loss for the three
months ended September 30, 1996 was $1,334,557 or $ .21 per common share,
compared to a net profit of $58,096, or $.01 per common share, for the three
months ended September 30, 1995.
Six months ended September 30, 1996 compared to six months ended
September 30, 1995.
At September 30, 1995 the Company operated four theater locations with a
total of 30 screens. During the twelve months ended September 30, 1996, the
company added two locations with an additional 24 screens. Thus at September
30, 1996 the Company operated 6 locations with 54 screens. The addition of
the two theaters resulted in an increase in revenues and expenses for the six
months ended September 30, 1996 compared to September 30, 1995.
Total revenues for the six months ended September 30, 1996 increased
57.8% to $9,307,351 from $5,898,834 for the six months ended September 30,
1995. The increase consisted of a $2,280,698, or 54.6%, increase in admission
revenues and a $1,127,819, or 65.4 %, increase in concession and other
operating revenues. The increase in total revenues was due to the opening of
new theaters. Total revenues from existing theaters for the six months ended
September 30, 1996 decreased by $183,349, or 5.3%, compared to revenues in
1995.
Film rental and booking costs for the six months ended September 30,
1996 increased 53.9% to $3,567,519 from $2,317,486 for the six months ended
September 30, 1995. The increase was due to higher film rental and booking
costs paid on increased admission revenues, resulting from the addition of
new theaters.
Cost of concession supplies for the six months ended September 30, 1996
increased 31.3% to $841,893 from $641,164 for the six months ended September
30, 1995. The dollar increase is due to increased
8
<PAGE>
concession costs associated with higher concession revenues. As a percentage of
concession revenues, concession costs for the six months ended September 30,
1996 and September 30, 1995 decreased to 31.7% from 39.4%. The decrease is due
to lower concession costs experienced at the new theaters. A contract with
Pacific Concessions, Inc. ("PCI") for the Company's first three theaters
requires that PCI provide concession supplies in exchange for 40 % of concession
revenues. The Company provides its own concession supplies at the other
theaters.
Theater operating expenses for the six months ended September 30, 1996
increased 69.1% to $2,802,458 from $1,657,475 for the six months ended
September 30, 1995. As a percentage of total revenues, theater operating
expenses increased to 30.1% from 28.1% during the applicable periods. The
dollar increase is primarily attributable to the costs associated with the
new theaters.
General and administrative expenses for the six months ended September
30, 1996 increased 45.8% to $1,528,350 from $1,048,035 for the six months
ended September 30, 1995. The increase is primarily due to additional
advertising and insurance associated with the opening of new theaters,
bonuses and consulting fees and other costs associated with the expansion of
corporate operations. As a percentage of total revenues, general and
administrative costs decreased to 16.4% from 17.8% during the applicable
periods.
Depreciation and amortization for the six months ended September 30,
1996 increased 102.8 % to $557,069 from $274,739 for the six months ended
September 30, 1995. The increase is primarily the result of depreciation on
additional equipment associated with the opening of the new theaters.
Interest expense for the six months ended September 30, 1996 increased
to $302,865 from $205,725 for the six months ended September 30, 1995. This
increase is primarily attributable to the increased debt incurred by the
Company in its expansion.
Interest income for the six months ended September 30, 1996 decreased to
$15,158 from $87,001 for the six months ended September 30, 1995. This
decrease is attributable to lower interest earning balances as the Company
used funds for expansion. In the prior year, the Company had more interest
earning funds remaining from its initial public offering.
Non-cash interest expense, which was $2,048,997 for the six months ended
September 30, 1996, results from issuing debentures which are convertible at
a discount from the quoted market price of the common stock. The non-cash
interest recorded on the convertible debentures is amortized over the period
which the debentures are first convertible and have no effect on
stockholders' equity. (See Note 2 of Notes to Condensed Consolidated
Financial Statements).
As a result of the factors discussed above, the net loss for the six
months ended September 30, 1996 increased to $2,328,242, or $ .37 per common
share, from $160,389, or $.03 per common share, for the six months ended
September 30, 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 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 five theater properties and various equipment under
noncancelable operating lease agreements which expire through 2021 and
require various minimum annual rentals. At September 30, 1996, the aggregate
future minimum lease payments due under noncancelable operating leases was
approximately $53,734,930. As of September 30, 1996 the Company had also
signed lease agreements for four additional theater locations. The new leases
will require expected minimum rental payments aggregating approximately
$85,090,300 over the life of the leases. Accordingly, existing minimum lease
9
<PAGE>
commitments as of September 30, 1996 plus those expected minimum commitments for
the proposed theater locations would aggregate minimum lease commitments of
approximately $138,825,230.
During the six months ended September 30, 1996, the Company generated
cash of $556,217 from operating activities, as compared to generating
$556,988 in cash from operating activities for the six months ended September
30, 1995.
During the six months ended September 30, 1996, the Company used cash in
investing activities of $2,848,531 as compared to $3,504,968 for the six
months ended September 30, 1995. Purchase of equipment for new theaters net
of construction deposit refunds, accounts for the use of cash in investing
activities.
During the six months ended September 30, 1996, the Company provided net
cash of $2,443,290 from financing activities, as compared to using $234,330
for the six months ended September 30, 1995. The cash generated for the six
months ended September 30, 1996 came from four convertible debentures
totaling $3,000,000 and a bank loan for $500,000, partially offset by debt
repayments and costs for the acquisition of the capital. As of September 30,
1996, the Company was in compliance with or had obtained waivers for, all
bank loan covenants.
The Company, at September 30, 1996, had a working capital deficit of
$1,211,188.
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
into 127,152 shares of common stock. On July 3, 1996, the May 1996 debenture
and accrued interest was converted into 118,215 shares of common stock.
On August 6, 1996, the Company issued a Convertible Debenture in the
principal amount of $1,000,000 to Wales Securities Limited, a Guernsey
corporation ("Wales"), and a second Convertible Debenture in the principal
amount of $1,000,000 to Villandry Investments Ltd., a Guernsey corporation
("Villandry"), in separate transactions pursuant to Regulation S as
promulgated by the Securities and Exchange Commission under the Securities
Act of 1933, as amended. Each Convertible Debenture is convertible into
shares of Common Stock of the Company at a conversion price per share equal
to the lesser of (x) $3.50, or (y) 85% of the average closing bid price of
the Common Stock for the three consecutive trading days immediately
proceeding the date of conversion.
The purchasers have agreed that from the date of issuance until after
the forty-fifth day after such date (the "Restricted Period"), any offer,
sale or transfer of the Convertible Debentures or the shares of common stock
issuable upon conversion of the Convertible Debentures (including any
interests therein), shall be subject to various restrictions in accordance
with Regulation S.
The Convertible Debentures bear interest at the rate of four percent
(4%) per annum, payable quarterly. If not sooner converted, the principal
amount of the Convertible Debentures is due and payable on the second
anniversary of issuance.
On October 1, 1996 $900,000 worth of debentures were converted to
257,143 shares of common stock and on October 16, 1996 $200,000 worth of
debentures were converted to 57,143 shares of stock and 291 shares of stock
were issued for the payment of interest.
In connection with the issuance of the Convertible Debentures, the
Company issued to Wales a five year warrant to purchase 17,142 shares of
common stock of the Company at an exercise price of $7.00 per share. A
warrant containing identical terms also was issued to Villandry.
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
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lead to cost increases that could make the funds anticipated to be generated
from the Company's operations together with anticipated additional debt and/or
equity, 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. Additional financing is required, and 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 leases with respect to the development of 55
additional screens at six locations. The capital requirements necessary for
the Company to complete its 1997 fiscal development plans is estimated to be
at least $12,400,000 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's
minimum contractual obligations for the proposed development plans is
approximately $6,000,000, in fiscal 1997 with the balance of the proposed
plans subject to termination by the Company without material adverse
consequences to the Company. The Company believes it can obtain adequate
capital and/or financing resources to sustain operations through the year
ending March 31, 1997.
However, the Company has not obtained any commitments for such financing
and there can be no assurance that the Company will be able to obtain
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.. 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, or to perform its obligations under certain
existing leases for theaters under development.
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. Because of its history of operating losses, limited
equity, and rapid growth plans, the Company has limited options in acquiring
the additional debt and/or equity, and 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. There can be no
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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.
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 September 30, 1996, the Company's total net deferred income tax
assets, a significant portion of which relates to NOLs discussed above, have
been subjected to a 100% valuation allowance since it has been determined
that realization of such assets is not more likely than not in light of the
Company's recurring losses from operations.
RISK FACTORS
Except for the historical information contained herein, the discussion
in this Form 10-QSB contains certain forward-looking statements that involve
risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in
the Form 10-QSB should be read as being applicable in all related forward
looking statements wherever they appear in this Form 10-QSB. The company's
actual results could differ materially from those discussed here. Factors
that could cause or contribute to such differences include those discussed
below, as well as those discussed elsewhere herein, and in the Company's most
recently filed Annual Report on Form 10-KSB.
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.
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 55 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
$12,400,000. 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. The Companies contractual obligation for
the proposed developmental plans is approximately $6,000,000, with the
balance of the proposed plans subject to termination without adverse or
material consequences to the Company. 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, and it is likely the company would be in
default under various leases and other obligations to which it is a party.
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
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addition, certain potential investors have indicated that they will require that
the conversion price adjust based on the current market price of the Company's
common stock. In the event of a significant decline in the market price for the
Company's common stock, such a conversion feature could result in significant
dilution to the Company's existing shareholders. In addition, the Company has
issued securities in offshore transactions pursuant to Regulation S, promulgated
by the Securities and Exchange Commission, and may do so in the future. Because
the purchasers of such securities are free to sell the securities after holding
them for a minimum of 40 days pursuant to Regulation S, sales of securities by
such holders may adversely impact the market price of the Company's common
stock.
Dependence on Films. The ability of the Company to operate successfully
depends upon a number of factors, the most important of which is the
availability of marketable motion pictures. Poor relationships with film
distributors, a disruption in the production of motion pictures or poor
commercial success of motion pictures would have a material adverse effect
upon the Company's business and results of operations.
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.
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.
The Company in the course of such development activities has also become
involved in certain disputes with property owners, resulting in delays in
reimbursement of Construction Expenses. 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.
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.
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.
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Competition. The motion picture exhibition industry is highly
competitive, particularly with respect to licensing films, attracting patrons
and finding new theater sites. There are a number of well-established
competitors with substantially greater financial and other resources than the
Company that operate in Southern California. Many of the Company's
competitors, including United Artists Theaters, Pacific Theaters, and Mann
Theaters, each of which operates one or more theaters in the same geographic
vicinity as the Company's current theaters, have been in existence
significantly longer than the Company and are both better established in the
markets where the Company's theaters are or may be located and better
capitalized than the Company. Competition can also come from other sources
such as television, cable television, pay television, direct satellite
television and video tapes.
Many of the Company's competitors have established, long-term
relationships with the major motion picture distributors (Paramount,
Disney/Touchstone, Warner Brothers, Columbia/Tri-Star, Universal and 20th
Century Fox), who distribute a large percentage of successful films. Although
the Company attempts to identify film licensing zones in which there is no
substantial current competition, there can be no assurance that the Company's
competitors will not develop theaters in the same film zone as the Company's
theaters. To the extent that the Company directly competes with other theater
operators for patrons or for the licensing of first-run films, the Company
may be at a competitive disadvantage.
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.
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, Hawaii 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.
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,
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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.
Control of the Company. As of September 30, 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, Senior 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.
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 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. These theaters
are presently under construction and are expected to open in the Spring of
1997.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.
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
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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.
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.
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.
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's employment agreement is being amended to
increase his salary by $52,000, to reflect compensation previously paid to
him 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. 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
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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. The
Company has 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). 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 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.
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 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
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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 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 or about October 25, 1996, a registration statement filed with the
Securities and Exchange Commission became effective in connection with a
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.
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.
18
<PAGE>
PART II OTHER INFORMATION - OMITTED
ITEM 6 - Exhibits
(a) Exhibits
Item 27.1 Amended Financial Data Schedule
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized
Dated: July 15, 1997
CinemaStar Luxury Theaters, Inc.
by: /s/ JOHN ELLISON, JR.
-----------------------------------------
John Ellison, Jr.
President, Chief Executive Officer
(principal executive officer)
by: /s/ ALAN GROSSBERG
-----------------------------------------
Senior Vice President and Chief Financial
Officer (principal financial officer and
principal accounting officer)
20
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 609,526
<SECURITIES> 0
<RECEIVABLES> 128,365
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,768,531
<PP&E> 17,029,975
<DEPRECIATION> 2,177,154
<TOTAL-ASSETS> 12,166,916
<CURRENT-LIABILITIES> 2,370,718
<BONDS> 2,000,000
0
0
<COMMON> 7,285,110
<OTHER-SE> (5,196,118)
<TOTAL-LIABILITY-AND-EQUITY> 12,166,916
<SALES> 9,307,351
<TOTAL-REVENUES> 9,307,351
<CGS> 4,409,412
<TOTAL-COSTS> 9,297,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,351,862
<INCOME-PRETAX> (2,326,642)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (2,328,242)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,328,242)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
