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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-25252
CINEMASTAR LUXURY THEATERS, INC.
(Name of Small Business Issuer in its charter)
CALIFORNIA 33-0451054
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
431 College Blvd., Oceanside, CA 92057-5435
(Address of principal executive offices) (Zip Code)
(760) 630-2011
(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
Class B Redeemable Warrants
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_____
----- -----
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 July 10,
1997 as reported on the NASDAQ Small Capital Market, was approximately
$5,428,000. 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, 1997 totaled $19,631,621.
As of July 10, 1997 Registrant had outstanding 7,944,182 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 1997 Annual Meeting of Shareholders which
will be filed with the Securities and Exchange Commission within 120 days after
the close of the 1997 fiscal year.
Transitional Small Business Disclosure Format Yes _____ No X
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Page 1 of XX Pages
Exhibit Index appears on Page XX
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PART I
ITEM 1 - DESCRIPTION OF THE 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 69
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 July 1997 the Company added five more screens to
this theater. 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, in
August 1996 a ten screen leased theater in Perris California and in November
1996 a ten screen leased theater in Riverside California. In addition,
CinemaStar Luxury Theaters, S.A. de C.V., a 75% owned subsidiary of the Company,
is developing 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 zone. 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 59 of its 69 screens
are located in film zones in which it presently is the only exhibitor. 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, 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 500
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 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,
results of operations, and/or liquidity.
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 (760) 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, results of operations,
and/or liquidity.
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 have the greatest
commercial appeal during the summer and the Thanksgiving through 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. The Company believes that 59 of it's 69 screens
are located in film licensing zones in which it currently is the only
exhibitor. 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
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efficiencies through staggered film starts that enable the Company to reduce the
amount of staffing required to show its films.
FOCUS ON PATRON SATISFACTION. The Company attempts to develop and operate
conveniently located, high quality facilities that offer a wide variety of
films. To enhance the movie going experience, the Company typically invests in
high-quality sound and projection equipment, luxurious appointments and a
carefully selected and trained staff which emphasizes service.
THEATER OPERATIONS
DEVELOPMENT OF THEATERS. The Company generally oversees the design, development
and construction of the theaters that it leases. In this regard, the Company's
primary concerns are to identify potential theater sites 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, with an agreed upon
construction allowance to be paid by the developer. 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
construction allowance. In the event that the square footage cost is greater
than the allowance, the Company is required to fund any shortfall.
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 the proposed cost allowance. Costs incurred in the construction of the
two most recently opened theaters have significantly exceeded the construction
allowances and the Company is obligated for these additional costs.
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 1997 and 1996, concession sales constituted 29.0% and 27.9% of the
Company's total revenues, respectively. The Company's theaters offer a wide
range of concession choices. The Company currently has long-term concession
agreements with Pacific Concessions, Inc. for all of its theaters currently in
operation. 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 a pecentage of the gross concession
revenues generated at a given theater and Pacific Concessions, Inc. receives the
remainder. The concession agreements have terms ranging from two to ten years
and may be terminated by the Company prior to the expiration of the term upon
payment of an early termination fee. 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.
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VIDEO GAMES - The Company operates video games and skill games at each of its
locations. The proceeds cover video game purchases and maintenance of the
equipment. Video games do not constitute a significant portion of the
Company's revenues. During fiscal 1997 and 1996, revenues from video games
were $309,330 (1.6% 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 free movies, discounted tickets,
community charity activities, 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 have the option to preview and
evaluate upcoming films on the basis of cast, director, plot, performance of
similar films, 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.
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 59 of its 69 screens are located in film
zones in which it currently is the sole exhibitor, and that the University
Village 10 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. The Company currently does not bid for films in any of its
markets, although it may be required to do so in the future. However, because
the Company is smaller than most of its competitors, the Company believes
that its film licensing costs are higher than its competitors.
Film licenses entered into in a negotiated 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. 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 extremely promising, or if the distributor
believes the Company's financial position is
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not strong enough to warrant extension of credit, it may require the Company
to make advance payments of film rental fees in order to obtain a license for a
film. The Company has not been required to make any advance payments, but there
is no assurance that due to the Company's current financial position such
payments will not be required in the future. 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.
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.
However, many of the Company's competitors are constructing new theaters
utilizing "stadium" seating in which each row is a step higher than the one
in front of it. Such "stadium" theaters are more expensive to construct than
the Company's traditional theaters. The Company believes that "stadium"
theaters constructed by competitors in the vicinity of its theaters may have
a detrimental effect on the competitiveness and profitability of its theaters.
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
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.
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In recent years, alternative motion picture exhibition delivery systems
have been developed for the exhibition of filmed entertainment, including cable
television, video cassettes and pay-per-view. While the impact of such delivery
systems on movie theaters is difficult to determine precisely, there can be no
assurance that they will not adversely impact attendance at the Company's
theaters. Movie theaters also face competition from other forms of
entertainment competing for the public's leisure time and disposable income.
GOVERNMENT REGULATION
The distribution of motion pictures is in large part regulated by federal
and state antitrust laws and has been the subject of numerous antitrust cases.
The Company has never been a party to any of such cases but its licensing
operations are subject to decrees issued in connection with such cases. Consent
decrees resulting from these cases, which predate the formation of the Company,
bind certain major film distributors and require the films of such distributors
to be offered and licensed to exhibitors, including the Company, on a
film-by-film and theater-by-theater basis. Consequently, exhibitors cannot
assure themselves of a supply of films by entering into long-term arrangements
with the major distributors, but must negotiate for licenses on a film-by-film
and theater-by-theater basis.
The federal Americans with Disabilities Act (the "ADA") prohibits
discrimination on the basis of disability in public accommodations and
employment. The ADA became effective as to public accommodations in January
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 is paid at the federal minimum wage and, accordingly,
further increases in the minimum wage would increase the Company's labor costs.
In connection with the construction of its theaters, the Company, its
contractors or landlords will be subject to the building permit and other
requirements of local zoning and other laws and regulations. The Company does
not anticipate that compliance with such laws and regulations will have a
material adverse effect on its business.
EMPLOYEES
As of July 10, 1997, the Company employed 378 persons, of which 52 were
full-time and 326 were part-time employees. Of the Company's employees, 25 are
corporate personnel, 27 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; DOUBT ABOUT ABILITY TO CONTINUE AS A GOING CONCERN.
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 $4,304,370 and $638,585 in the fiscal years ended
March 31, 1997 and 1996, respectively. The Company's independent certified
public accountants have highlighted the uncertainty related to substantial
doubt about the Company's ability to continue as a going concern in their
independent auditors' report. The Company requires an immediate infusion of
cash in order to meet its current obligations and continue operations. The
Company's failure to obtain sufficient additional financing within the
requisite time frame could make it impossible for the Company to continue
operations, force the Company to seek protection under federal bankruptcy
law, and/or affect the Company's listing on the Nasdaq Small Cap Market.
NEED FOR ADDITIONAL FINANCING; USE OF CASH. The Company has had aggressive
expansion plans. In
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this regard, the Company has entered into lease and other binding commitments
with respect to the development of 40 additional screens at three locations
during fiscal 1998. The capital requirements necessary for the Company to
complete its development plans is estimated to be at least $10,750,000. 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 1998. 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, results of operations, and/or liquidity will be materially and
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 were convertible into common stock of the Company at
a conversion price that was significantly lower than the price at which the
Company's common stock was 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
has entered into a letter of intent for $15 million of Equity financing that
will, if completed, result in significant dilution of current shareholders.
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, results of operations, and/or liquidity. 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's business, results of
operations, and/or liquidity. 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 allowance 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
allowance. 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 construction allowance. The Company has experienced
costs materially in excess of its allowances in two theaters 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 allowance allocated to it will likely have a material
adverse effect on the Company's business, results of operations, and/or
liquidity. 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's business, results of operations, and/or liquidity. 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
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its theaters. There can be no assurance that the Company will be able to locate
suitable locations for its theaters, and even if the Company can locate suitable
locations to lease, its current financial condition may prevent it from
obtaining favorable lease terms. 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's business, results of operations,
and/or liquidity.
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
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 cassettes.
Many of the Company's competitors have established, long-term relationships
with the major motion picture distributors (Paramount, Disney/Touchstone, Warner
Brothers, Columbia/Tri-Star, Universal and 20th Century Fox), who distribute a
large percentage of successful films. Although the Company attempts to identify
film licensing zones in which there is no substantial current competition, there
can be no assurance that the Company's competitors will not develop theaters in
the same film zone as the Company's theaters. To the extent that the Company
directly competes with other theater operators for patrons or for the licensing
of first-run films, the Company may be at a competitive disadvantage. See
"Business -- Overview of Movie Exhibition Industry" and "Business -- Film
Licensing."
Although the Company attempts to develop theaters in geographic areas that
it believes have the potential to generate sufficient current and future box
office attendance and revenues, adverse economic or demographic developments,
over which the Company has no control, could have a material adverse effect on
box office revenues and attendance at the Company's theaters. In addition,
there can be no assurance that new theaters will not be developed near the
Company's theaters, which development might alter existing film zones and might
have a material adverse effect on the Company's revenues and earnings. In
addition, future advancements in motion picture exhibition technology and
equipment may result in the development of costly state-of-the-art theaters by
the Company's competitors which may make the Company's current theaters
obsolete. There can be no assurance that the Company will be financially able
to pay for or able to incorporate such new technology or equipment, if any, into
its existing or future theaters.
In recent years, alternative motion picture exhibition delivery systems
have been developed for the exhibition of filmed entertainment, including cable
television, direct satellite delivery, video cassettes and pay-per-view. An
expansion of such delivery systems could have a material adverse effect on
motion picture attendance in general and upon the Company's business, results of
operations, and/or liquidity. See "Business -- Competition."
GEOGRAPHIC CONCENTRATION. Each of the Company's current theaters is
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 these areas 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 29.0% and
27.9% of the Company's total revenues in the fiscal years ended March 31,
1997 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 lobby concession stands located in all of the
Company's theaters. The Company's long term concession agreements with
Pacific Concessions may be terminated by the Company prior to the expiration
of their respective terms only upon payment of a substantial early
termination fee. See "Business -- Theater Operations -Additional Revenue
Sources."
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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 July 10, 1997, the current officers and
directors of the Company own approximately 27.3% of the Common Stock (17.1%
assuming exercise in full of the redeemable warrants). 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. Certain officers and directors in the past have obtained loans
secured by their shareholdings and the sale of shares from margin calls may
from time to time have adversely affected, and may in the future adversely
affect, the market price of the Company's securities.
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 Operating 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. In December 1996 the
Company amended the five-year employment agreements with each of Messr.
Ellison, Grossberg and Willits. The amendments provide for each employment
agreement to expire in December 2001. 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. The
Company's anticipated equity financing transaction with Rust Capital, Ltd.
could result in a significant change in the management of the Company. See
"Liquidity and Capital Resources".
EXPANSION; MANAGEMENT OF GROWTH. The Company's plan of operation calls for
the 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, the Company will be required to increase the
depth of its financial, administrative, and theater management staffs. 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. Given the Company's recent performance
and financial condition, hiring qualified executives and professional staff is
difficult. 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. Construction is in progress on a leased
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. The long-term lease is guaranteed by the Company. Under this lease
rent is paid in U.S. dollars. Completion of this theater in Mexico, or the
development of theaters in other foreign countries, will subject the Company
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
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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.
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 and amended in
December 1996, or April 1997 the Company has employment agreements through
December 2001, or April 2002 with each of John Ellison, Jr., Alan Grossberg
Jerry Willits and Jon Meloan, pursuant to which their annual salaries are
$197,106, $197,860 $94,380 and $90,000, respectively, some of which are
subject to annual increases of between 10% and 12%. Mr. Grossberg's
employment agreement has been 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, Mr. Grossberg, Mr.
Willits or Mr. Meloan 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, Willits, and Meloan
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. If the anticipated financing with Rust
Capital, Ltd. is completed, it is anticipated that the foregoing compensation
agreements will be amended.
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. From time to
time the minimum bid price has been below $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 Company's Common
Stock, Redeemable Warrants and Class B Redeemable Warrants (collectively, 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
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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, 1997, the Company had net operating loss carryforwards of
approximately $4,175,000 for federal income tax purposes, which may be utilized
through 2006 to 2012, and approximately $2,080,000 for state income tax
purposes, which may be utilized through 1998 to 2002 (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, REDEEMABLE WARRANT, AND CLASS B
REDEEMABLE WARRANT PRICES. 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 chose to exercise the Redeemable Warrants.
On or about November 15, 1996, the Warrant Reduction Offer expired. Each of
226,438 Redeemable Warrants had been converted to one share of common stock and
one Class B Redeemable Warrant. Under the terms of the Warrant Reduction Offer,
$3.50 was received by the Company for each warrant converted to common stock and
a Class B Redeemable Warrant. Thus $792,533 of additional capital before
expenses was acquired.
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 AND CLASS B REDEEMABLE WARRANTS. The Redeemable Warrants and Class B
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 Class B 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 and Class B Redeemable Warrants. Although the Company
has undertaken to use its best efforts to have all of the shares of Common Stock
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issuable upon exercise of the Redeemable Warrants and Class B 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 and Class B Redeemable Warrants, there is no assurance that it will be
able to do so. The value of the Redeemable Warrants and Class B Redeemable
Warrants may be greatly reduced if a current prospectus covering the Common
Stock issuable upon the exercise of the Redeemable Warrants or Class B
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 or Class B Redeemable Warrants then reside.
Investors may purchase the Redeemable Warrants and Class B Redeemable
Warrants in the secondary market or may move to jurisdictions in which the
shares underlying the Redeemable Warrants or Class B Redeemable Warrants are not
registered or qualified during the period that the Redeemable Warrants and Class
B Redeemable Warrants are exercisable. In such event, the Company will be unable
to issue shares to those persons desiring to exercise their Redeemable Warrants
or Class B 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 and Class B Redeemable Warrants would have no choice but to attempt to
sell the Redeemable Warrants and Class B Redeemable Warrants in a jurisdiction
where such sale is permissible or allow them to expire unexercised.
SPECULATIVE NATURE OF REDEEMABLE WARRANTS AND CLASS B REDEEMABLE
WARRANTS; ADVERSE EFFECT OF POSSIBLE REDEMPTION OF REDEEMABLE WARRANTS OR
CLASS B REDEEMABLE WARRANTS. The Redeemable Warrants and Class B 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.
Specifically, holders of the Class B Redeemable Warrants may exercise their
right to acquire Common Stock and pay an exercise price of $6.50 per share,
subject to adjustment in the event of certain dilutive events, on or prior to
September 15, 2001, after which date any unexercised Class B 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 prices of the Redeemable Warrants or Class B Redeemable Warrants,
and consequently, whether it will ever be profitable for holders of the
Redeemable Warrants or Class B Redeemable Warrants to exercise them.
The Redeemable Warrants and Class B 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 or Class B 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 or Class B Redeemable Warrants could force the
holders thereof to exercise them and pay the exercise price at a time when it
may be disadvantageous for such holders to do so, to sell the Redeemable
Warrants and Class B Redeemable Warrants at the current market price when they
might otherwise wish to hold them , or to accept the redemption price, which may
be substantially less than the market value of the Redeemable Warrants and Class
B Redeemable Warrants at the time of redemption. The holders of the Redeemable
Warrants and Class B Redeemable Warrants will automatically forfeit their rights
to purchase shares of Common Stock if they are redeemed before being exercised.
The Company anticipates that the sale of shares to Rust Capital, Ltd.
(See Management's Discussion and Analysis for Plan of Operations --
"Liquidity and Capital Resources") would result in a significant reduction in
the exercise price of the Company's Redeemable Warrants and Class B
Redeemable Warrants in accordance with the anti-dilution provisions of such
warrant agreements. The precise amount of the reduction in the exercise
price will not be known until the final terms of the sale of shares have been
determined.
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.
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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 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 6,
2000. Class B Redeemable Warrants entitle the holder to purchase up to an
aggregate of 226,438 shares of common stock at any time through September 15,
2001. 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 or Class B 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 400,805 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.
CAUTIONARY STATEMENT
This Annual Report contains forward looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, with respect
to the financial condition, results of operations, and business of the
Company and its subsidiary (collectively, unless the context otherwise
requires). Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially and adversely from those
set forth in the forward-looking statements, including without limitation the
risks and uncertainties described from time to time in the Company's public
announcements and SEC filings, including without limitation the 10-QSB and
10-KSB, respectively. The Company does not undertake to update any written or
oral forward-looking statement that may be made from time to time by or on
behalf of the Company.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company currently operates seven theaters with an aggregate of 69
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:
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 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.
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The Chula Vista 10 theater is leased by CinemaStar Luxury 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 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 borrowed $1,600,000 using this theater as security.
MISSION MARKETPLACE (OCEANSIDE, CALIFORNIA)--The Mission Marketplace site
is the Company's first theater complex. The theater originally consisted of
an eight screen, 28,000 square foot complex having a total seating capacity
of 1,496 persons and it contained multiple concession stands and a
computerized ticketing system. In July 1997, the Company expanded this
location by building an additional five screens and increasing its box office
and concessions facilities. This expansion to thirteen screens created the
largest multiscreen theater in the North San Diego county area consisting of
approximately 43,000 sq. ft. and 2,203 seats. Although the project has been
completed, only partial financing has been obtained and an inability to
obtain financing for the balance would have a material adverse effect upon
the Company's business, results of operations, and/or liquidity. See
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources".
Individual theater sizes range from 108 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."
Because of the expansion, the Company entered into a new lease commencing
on January 31, 1997 for the Mission Marketplace theater complex from Pacific
Oceanside Holdings, L.P. The initial term of such lease is for approximately 20
years, expiring September 30, 2016, with two separate options to extend for a
period of 60 months and then 59 months. The minimum annual rent is $485,568 and
upon completion of the addition is $647,232 for the first five years and is
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. This lease was amended on May 1, 1997
to lease additional space next to the theater. The amended lease calls for the
lease of an additional 2,409 sq. ft. of space for one year with a one year
option. The annual rent of the additional space the first year is $31,800 with a
5% increase for the second year. This space is currently being used for
additional corporate offices. The performance by the Company of its obligations
under the Mission Marketplace lease is guaranteed by certain shareholders and
officers of the Company.
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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 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).
PERRIS 10 (PERRIS, CALIFORNIA)--Pursuant to a lease dated February 15,
1996, the Company agreed to lease from the Coudures Family Limited Partnership,
premises consisting of 35,000 square feet of floor area, located at the Perris
Plaza Retail Shopping Center, in Perris, 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: $26,000 in Year 1; $32,000 in
Year 2; $35,000 in Year 3; $39,000 in Year 4; $44,000 in Year 5. Beginning with
year six, and every fifth year thereafter, the minimum rent shall be increased
by the lessor of (i) Ten Percent (10%), or (ii) the cost of living increase.
The Company shall also pay Ten Percent (10%) of gross box office receipts (but
no percentage rent is paid on "90/10" films) plus six percent of all gross
receipts from concessions and other sales of any type. To date this theater has
not met the Company's expectations regarding attendance and revenue and is
unprofitable. The Company is continually evaluating the situation and
attempting to develop means to increase attendance and revenue, including the
lowering of admission and concession prices.
UNIVERSITY VILLAGE 10, (RIVERSIDE, CALIFORNIA)--Pursuant to a lease dated
July 14, 1995, the Company agreed to lease from the University Village, LLC,
premises consisting of 42,000 square feet of floor area, located 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: $31,000 in Year 1; $36,000 in Year 2; $36,000 in Year 3; $40,000 in
Year 4; $44,000 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
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(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.
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. Because the Company has not
secured the required financing for the developments there can be no assurance
that any of these theaters will be successfully completed or operated by the
Company.
SAN BERNARDINO, CALIFORNIA ----Pursuant to a ground lease dated December
20, 1996, with MDA-San Bernardino Associates, L.L.C. the Company agreed to lease
land in San Bernardino, California to build a twenty screen theater complex
featuring stadium seating. The term is for twenty-five years with two five year
extensions. The minimum annual rent is $1,334,400 for the first five years.
Thereafter the minimum annual rent is increased by 10% every fifth year of the
initial term beginning in lease year six, and by the greater of fair rental
value or 10% at the commencement of each extension. In addition, the Company
will be required to pay 8% of gross sales from box office sales (excluding 90/10
films) and 5% of gross sales from concession sales to the extent such amounts
exceed the minimum rent. The Company is required to build an approximately
80,000 sq. ft. building and the landlord will provide a tenant allowance of $115
per sq. ft. not to exceed $9,200,000. As a result of the Company's financial
condition, there is a substantial risk that the Company will be unable to
perform its obligations under the lease and develop this theater.
SAN MARCOS, CALIFORNIA ---- In June 1996, the Company entered into a
fifty-five year ground lease with the City of San Marcos to build a one story
cinema building of approximately 40,000 sq. ft. with no more than 2,000
seats. The Company is responsible for building and paying for the entire
construction as well as purchasing and installing the furniture, fixtures and
equipment. It is estimated that the cost of this ten screen theater and its
improvements will be $6,000,000. The annual base rent for the ground lease
for the first year is $180,000 and it increases by $10,000 per year for the
next four years. Years 6-10 the annual base rent is $246,400, and the rent
increases approximately 12% every five years. In addition the Company will
pay a percentage rent of 4% of all sales including admissions and concessions
to the extent the percentage rent is greater than the base rent. The Company
has been notified by the lessor that the lease has been terminated because
the Company has not complied with the specific "project schedule" as outlined
in the lease. The Company is disputing the termination on the basis that the
project schedule was amended and the Company has complied with this amended
project schedule. However, there can be no assurance that the Company will be
successful in reinstating the lease.
MEXICO
In July 1994, certain officers and directors of the Company contributed
to the Company their 60% ownership interest in Nickelodeon Theaters, S.A. de
C.V., a Mexican corporation ("Nickelodeon Mexico"). An additional 15%
ownership interest in Nickelodeon Mexico was returned to the Company by a
previous shareholder for consideration of payment to him of legal fees
amounting to approximately $30,000, subsequently reduced to $15,000. In March
1996, the Company decided to dissolve Nickelodeon Theaters S.A. de C.V. In
April 1996, a new Mexican corporation was formed and named CinemaStar Luxury
Theaters, S.A. de C.V. ("CinemaStar Mexico"). The Company obtained a 75%
ownership interest in CinemaStar Mexico. The remaining 25% ownership
interest is held by Atlantico y Asociados S.A. de C.V., a Mexican
corporation. CinemaStar Mexico is developing one theater site in Tijuana,
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 $1,500,000. 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
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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. The lease calls for the rent to be paid in U.S.
dollars while the revenue of the theater will be in Mexican pesos. Due to the
history of the Mexican inflationary economy and the uncertainty regarding the
possibility of a Mexican currency devaluation the results of operations of
the theater may be materially and adversely affected. Construction has begun
with an expected opening date in the fall of 1997. However, financing has
not yet been arranged for this project. The inability to obtain financing
could delay or prevent the opening of this theater. CinemaStar Luxury
Theaters, Inc. has guaranteed the lease of its 75% owned subsidiary,
CinemaStar Luxury Theaters, S.A. de C.V. See "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources".
TERMINATED LEASES
KONA, HAWAII -- In July 1996 the Company entered into a Sublease with
Coconut Grove Marketplace to develop a 25,000 sq. ft. theater in Kona,
Hawaii. In June 1997, the Company decided not to proceed with the project and
as a result the Sublease between the parties was terminated. Each of the
parties was released and discharged from any and all obligations, duties, and
liabilities under the Sublease. The Company believes that the expenses
incurred by the Company for this project were not material.
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 sq.
ft., 1700 seat theater complex was to be built in Thousand Oaks, California.
The Company had until July 30, 1996 to obtain construction financing. The
Company was unable to obtain construction financing and terminated the lease.
The Company believes that the expenses incurred by the Company for this
project were not material.
GUADALAJARA, MEXICO --- In April 1996 CinemaStar Mexico entered into a
lease with Espacios de Zapopan, S.A. de C.V. for a 40,000 sq. ft. theater in
Guadalajara, Mexico. In June 1997, the Company determined that it was not in
its best interest to continue the development of the project. The parties
entered into an agreement that released CinemaStar Mexico from all
obligations of the April 1996 lease without additional payment. The Company
believes that the expenses incurred by the Company for this project were not
material.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 1997 to a vote
of security holders.
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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, LUXYW and LUXYZ). 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>
Class B
Common Redeemable Redeemable
Stock Warrants Warrants
(LUXY) (LUXYW) (LUXYZ)
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31,
1996
First Quarter $4.25 $2.75 $1.41 $0.56 $- $-
Second Quarter 6.25 3.62 1.59 0.62 - -
Third Quarter 7.47 4.50 1.84 0.87 - -
Fourth Quarter 8.25 4.50 2.63 1.34 - -
1997
First Quarter 8.44 6.00 3.19 2.13 - -
Second Quarter 7.75 5.13 2.88 1.19 - -
Third Quarter 5.50 2.38 1.63 0.88 .25 .25
Fourth Quarter 3.13 1.00 1.13 0.28 1.00 1.00
</TABLE>
The Company as of July 10, 1997 had 83 shareholders of record. The Company
believes that such number substantially understates 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
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996.
Total revenues for the year ended March 31, 1997 increased 70.3% to
$19,631,621 from $11,524,740 for the year ended March 31, 1996. New theaters
opened in fiscal 1997 and opened during the last week of fiscal 1996
accounted for $7,410,752 of the increase in total revenues. The increase
consisted of a $5,497,375, or 68.0%, increase in admission revenues and a
$2,609,506, or 75.9%, increase in concession sales and other operating
revenues.
Film rental and booking costs for the year ended March 31, 1997 increased
72.4% to $7,593,600 from $4,405,483 for the year ended March 31, 1996. The
increase was due to additional film rental and
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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, 1997 increased to 55.9% from 54.5% for the year ended March 31,
1996.
Cost of concession supplies for the year ended March 31, 1997 increased
45.5% to $1,822,651 from $1,252,603 for the year ended March 31, 1996. 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, 1997 decreased to 32.0% from 39.0% for the year
ended March 31, 1996. The decrease is due to concession sales at the Chula
Vista 6, the Ultraplex 14 at Mission Grove, the Perris Plaza 10 and the
University Village 10. 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 commission.
In April 1997, the Company entered into a concession lease agreement with
Pacific Concessions Inc. to provide concessions for a commission at the Chula
Vista 6, the Ultraplex 14 at Mission Grove the Perris Plaza 10, and the
University Village 10.
Theater operating expenses for the year ended March 31, 1997 increased
87.1% to $6,497,574 from $3,473,009 for the year ended March 31, 1996 because
the Company opened new theaters. As a percentage of total revenues, theater
operating expenses increased to 33.1% from 30.1% during the applicable
periods, because certain theaters have not met the Company's expectations as
to costs and revenues.
General and administrative expenses for the year ended March 31, 1997
increased 69.4% to $3,655,916 from $2,157,803 for the year ended March 31,
1996, primarily as a result of the increased overhead and advertising costs
incurred in connection with the opening and operating of new theaters. As a
percentage of total revenues, general and administrative costs decreased to
18.6% from 18.7% during the applicable periods.
Depreciation and amortization for the year ended March 31, 1997 increased
184.1% to $1,631,534 from $574,377 for the year ended March 31, 1996, primarily
due to additional equipment purchased for the new theaters, and related
amortization of preopening costs.
Interest expense for the year ended March 31, 1997 increased to $678,041
from $400,966 for the year ended March 31, 1996 primarily as a result of
increased interest associated with the higher debt levels and a full year of
mortgage interest on the Chula Vista 6 theater acquired during the prior year.
Non-cash interest expense of $2,048,997 for the year ended March 31, 1997
results from issuing debentures which are convertible at a discount from the
market price of the common stock. The non-cash interest recorded on the
convertible debentures is amortized over the periods which the debentures
first become convertible and have no effect on stockholders' equity and
operating income. (See Note 6 of Notes to Consolidated Financial Statements.)
As a result of the above, the net loss for the year ended March 31, 1997
increased to $4,304,370 from $638,585 for the year ended March 31, 1996.
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. In the past new theater
openings have typically been financed with internally generated cash flow and
long-term debt financing arrangements for facilities and equipment. The Company
believes that it lacks the ability to finance its current capital obligations
through internally generated funds and is seeking additional capital. On June
24, 1997, the Company signed a non-binding letter of intent to sell $15 million
of newly issued common stock to Rust Capital, Ltd. Upon completion of the
transaction, Rust Capital, Ltd. would own no less than 51% of the Company's
common stock. With the
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additional $15 million the Company would have enough funds to complete
current capital obligations, pay off a portion of long-term debt, and have
working capital sufficient to continue its expansion plans. As the letter of
intent is subject to various conditions and approval by the Company's current
stockholders, there can be no assurance that this transaction will be
consummated. Failure of the Company to consummate this transaction would have
a material adverse effect on the Company's business, results of operations
and/or liquidity, and raises substantial doubt about the Company's ability to
continue as a going concern.
On April 23, 1997, the Company amended its Concession Lease Agreement
with Pacific Concessions Inc. (PCI) in exchange for a $2,000,000 loan at an
interest rate of prime plus two percent. The loan is for a period of two
years with monthly interest payments and $1,000,000 principal payments due at
the end of twelve and tweny-four months. As a result of the amended
agreements PCI now supplies concessions to all of the current theaters in
exchange for specified commissions which will result in a reduction in the
profitability of concession sales by the Company.
The Company's current credit agreements with its bank contain certain
financial covenants which the Company is required to meet. At March 31, 1997
and currently the Company is not in compliance with certain covenants. The
bank has agreed to forbear any adverse action pending the outcome of the
proposed Rust Capital Ltd. transaction. If the Rust Capital Ltd. transaction
is consummated by September 30, 1997, it is expected the bank will waive the
related covenants. If the transaction is not consummated the Company will
continue to be out of compliance with the bank credit agreements and there
can be no assurance that the bank will not declare the credit agreement in
default and require immediate payment of the outstanding balance. At March
31, 1997 the outstanding balance due was $1,339,286.
The Company also is in violation of certain covenants in several other
financing agreements; these covenants prohibit the Company from incurring
other indebtedness or further encumbering property, and/or require security
interests to be of first priority. No event of default has been declared to
date. The financers could terminate equipment leases, accelerate loans,
foreclose the Chula Vista 6 property and take other remedial actions. In such
an event the Company would be unable to continue some or all of its
operations, and its business, results of operations and/or liquidity would be
materially and adversely affected. The Company is attempting to obtain
waivers of these violations, although no assurance can be given that it will
obtain any or all of these waivers.
The Company leases six theater properties and various equipment under
noncancelable operating lease agreements which expire through 2021 and require
various minimum annual rentals. At March 31, 1997, the aggregate future minimum
lease payments due under noncancelable operating leases was approximately
$83,000,000. The Company has also signed lease agreements for three additional
theater locations. The new leases will require expected minimum rental payments
aggregating approximately $73,000,000 over the life of the leases. Accordingly,
existing minimum lease commitments as of March 31, 1997 plus those expected
minimum commitments for the proposed theater locations would aggregate minimum
lease commitments of approximately $156,000,000.
During the year ended March 31, 1997, the Company generated cash of
$1,827,943 from operating activities, as compared to $320,052 for the year
ended March 31, 1996, primarily due to an increase in accounts payable.
During the year ended March 31, 1997, the Company used cash for investing
activities of $4,728,763, as compared to $5,908,736 for the year ended March
31, 1996. The decrease in the use of cash for investing activities for the
year ended March 31, 1997 primarily resulted from the refund of a
construction deposit which was paid during the year ended March 31, 1996.
During the year ended March 31, 1997, the Company generated net cash of
$3,043,916 from financing activities as compared to $1,955,349 for the year
ended March 31, 1996. The significant cash
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<PAGE>
provided in 1997 resulted from the issuance of $3,000,000 of convertible
debentures. As of April 25, 1997, all $3,000,000 of debentures (and related
interest thereon) had been converted into 1,517,744 shares of common stock at
conversion prices ranging from $0.53 to $4.25 per share with an average
conversion price of $3.20 per share.
At March 31, 1997, the Company had $601,646 of cash on hand and a working
capital deficiency of $6,053,196.
The Company's plans for expansion are dependent upon its ability to raise
capital through outside sources. In this regard, the Company has entered
into lease and other binding commitments with respect to the development of
40 additional screens at three locations. The capital requirements necessary
for the Company to complete its development plans is estimated to be at least
$10,750,000 in fiscal 1998. Included in these amounts are screens currently
under construction in Tijuana, Mexico. Such developments will require the
Company to raise substantial amounts of new financing, in the form of
additional equity or loan financing, during fiscal 1998. 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, results of operations
and/or liquidity 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.
During 1997, the Company financed its expansion activities through the
private placement of $3,000,000 of convertible debentures, all of which were
converted into an aggregate 1,517,744 shares as of April 25, 1997 (including
related interest thereon). On April 11, 1996 and May 21, 1996, the Company
issued two convertible debentures in the principal amount of $500,000,
aggregating $1,000,000. On August 6, 1996, the Company issued two
convertible debentures in the principal amount of $1,000,000 (aggregating
$2,000,000) in separate transactions pursuant to Regulation S as promulgated
by the Securities and Exchange Commission under the Securities Act of 1933,
as amended. In connection with the issuance of the convertible debentures,
the Company issued five year warrants to purchase 34,284 shares of common
stock of the Company at an exercise price of $7.00 per share.
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,
$638,585 and $4,304,370 in the fiscal years ended March 31, 1993, 1994, 1995,
1996 and 1997, respectively. There can be no assurance as to when the
Company will be profitable, if at all. Continuing losses would have a
material adverse effect on the liquidity and operations of the Company. In
addition, the Company may encounter difficulties in obtaining the necessary
debt and/or equity financing and complying with the conditions and covenants
of its loan and other agreements. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern
(see Note 3 of Notes to Consolidated Financial Statements).
As of March 31, 1997, the Company has net operating loss carryforwards
("NOLs") of approximately $4,175,000 and $2,080,000 for Federal and California
income tax purposes, respectively. The Federal NOLs are available to offset
future years taxable income and expire in 2006 through 2012, while the
California NOLs are available to offset future years taxable income and expire
in 1998 through 2002. 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, 1997, the Company has total net deferred income tax assets
of approximately $2,051,000. Such potential income tax benefits, a
significant portion of which relates to the 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.
Because of the Company's present financial condition, normal sources of
external financing may
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<PAGE>
not be available to the Company in the future, including additional private
placements of convertible debentures. The Company has identified potential
sources of financing other than Rust Capital Ltd., however if the Rust
Capital, Ltd. financing is not consummated there can be no assurance that the
other potential sources will consummate any proposed financing and therefore
it is uncertain whether any additional financing will be available to the
Company in the future.
As a result of its operating losses, the Company requires an immediate
infusion of cash in order to meet its current obligations and continue
operations. The Company believes that negative consequences will result with
its creditors if additional cash is not obtained in the very near future.
The Company's failure to obtain sufficient additional financing within the
requisite time frame could make it impossible for the Company to continue
operations, force the Company to seek protection under Federal bankruptcy
law, and/or affect the Company's listing on the Nasdaq Small Cap Market.
The Company anticipates that it will need approximately $15,000,000 of
additional financing during the next twelve months. This estimate, which is
subject to change without notice, assumes that the Company is able to achieve
its current revenue and expense projections for the second quarter of fiscal
1998 and succeeding quarters, without material variance. There can be no
assurance, however, that these assumpitons will prove correct or that changes
affecting the Company's operating expenses, capital expenditures, business
strategy, supplier credit arrangements, and other matters will not result in
the expenditure of any available resources before the end of such twelve
month period. Thereafter, the Company may require additional equity and or
debt financing from third party sources. Moreover, the Company's cash
requirements may vary materially from those now planned because of changes in
the Company's business or capital expenditure plans, or acquisitions or
dispositions of businesses or assets and/or other factors.
As a consequence of its recent operating losses and its financial
condition, the Company is currently in violation of loan covenants in its
banking facility. The Company is in ongoing discussions with its bank
regarding what actions are to be taken as a result of the covenant
violations. The bank has temporarily waived the violations, but in the future
could accelerate the indebtedness or take certain other actions in order to
protect its interests.
NEW ACCOUNTING STANDARD
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"). This pronouncement
provides a different method of calculating earnings per share than is
currently used in accordance with APB Opinion 15, "Earnings Per Share." FAS
128 provides for the calculation of Basic and Diluted earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. This pronouncement is
effective for fiscal years and interim periods ending after December 15,
1997; early adoption is not permitted. The Company does not believe that the
adoption of this pronouncement will have a material impact on the net loss
per share presented in the accompanying statements of operations.
ITEM 7 - FINANCIAL STATEMENTS
The Company's audited Financial Statements for the years ended March 31,
1997 and 1996 are presented immediately following on pages F-1 to F-20.
23
<PAGE>
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 1997
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, 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 1997
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, 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 1997
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, 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 1997
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission within 120 days after the end of fiscal 1997, for information
relating to Certain Relationships and Related Transactions. Such information is
incorporated herein by reference.
24
<PAGE>
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 July 15, 1997
and Chief Executive Officer
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:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ John Ellison, Jr. President, Chief Executive
--------------------- Officer and Director (principal July 15, 1997
John Ellison, Jr. executive officer)
/s/ Alan Grossberg Chief Financial Officer, Senior
---------------------- Vice President, and Director July 15, 1997
Alan Grossberg
/s/ Jerry Willits Vice President and Director July 15, 1997
----------------------
Jerry Willits
/s/ Jon Meloan General Counsel, Secretary and July 15, 1997
---------------------- Director
Jon Meloan
/s/ Russell Seheult Director and July 15, 1997
---------------------- Chairman of the Board
Russell Seheult
25
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants . . . . . . . . . . . F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996. . . . . . . . F-3
Consolidated Statements of Operations for the years ended March 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1997 and 1996 . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended March 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-8
F-1
<PAGE>
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. and Subsidiaries as of March 31, 1997 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, 1997. 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. and Subsidiaries as of March 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the two years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to
the consolidated financial statements, the Company has had recurring losses,
including an operating loss of $1,569,654 for the year ended March 31, 1997, has
a working capital deficiency of $6,053,196 and an accumulated deficit of
$9,731,273 as of March 31, 1997, and is not in compliance with certain loan and
lease covenants. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
BDO SEIDMAN, LLP
Costa Mesa, California
June 4, 1997, except as to Note 14,
which is as of June 24, 1997.
F-2
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS (Note 5)
Current Assets:
Cash $ 601,646 $ 458,550
Commission and other receivables 30,681 70,105
Refundable construction deposit - 600,000
Prepaid expenses (Note 8) 207,369 181,000
Other current assets 208,578 78,508
------------ ------------
Total current assets 1,048,274 1,388,163
Property and equipment, net (Notes 4 and 5) 10,929,846 6,887,704
Advances to affiliates (Note 9) 114,528 17,500
Preopening costs 110,346 211,756
Deposits and other assets (Note 8) 230,717 445,408
------------ ------------
Total assets $ 12,433,711 $ 8,950,531
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease
obligations (Note 5) $ 3,927,339 $ 580,533
Accounts payable 2,729,810 838,140
Accrued expenses 311,381 147,779
Accrued consulting fees (Note 8) - 150,000
Deferred revenue 132,940 145,025
Advances from stockholder (Note 9) - 320,000
------------ ------------
Total current liabilities 7,101,470 2,181,477
Long-term debt and capital lease obligations,
net of current portion (Note 5) 1,132,824 3,725,568
Deferred rent liability (Note 8) 2,286,346 1,501,773
------------ ------------
Total liabilities 10,520,640 7,408,818
------------ ------------
Commitments and Contingencies (Notes 3, 8, 9 and 14)
Subsequent Events (Notes 5, 6 and 14)
Stockholders' Equity (Notes 10, 11, 13 and 14):
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; authorized shares - 15,000,000;
issued and outstanding shares - 7,362,406 in 1997
and 6,200,000 in 1996 9,085,317 6,458,586
Additional paid-in capital 2,559,027 510,030
Accumulated deficit (9,731,273) (5,426,903)
------------ ------------
Total stockholders' equity 1,913,071 1,541,713
------------ ------------
Total liabilities and stockholders' equity $ 12,433,711 $ 8,950,531
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
----------------------------
1997 1996
------------- ------------
Revenues:
Admissions $ 13,585,567 $ 8,088,192
Concessions 5,690,567 3,210,477
Other operating revenues 355,487 226,071
------------- ------------
Total revenues 19,631,621 11,524,740
------------- ------------
Costs and expenses:
Film rental and booking costs 7,593,600 4,405,483
Cost of concession supplies 1,822,651 1,252,603
Theater operating expenses 6,497,574 3,473,009
General and administrative expenses 3,655,916 2,157,803
Depreciation and amortization 1,631,534 574,377
------------- ------------
Total costs and expenses 21,201,275 11,863,275
------------- ------------
Operating loss (1,569,654) (338,535)
------------- ------------
Other income (expense):
Non-cash interest expense related
to convertible debentures (Notes 6 and 13) (2,048,997) -
Interest expense (678,041) (400,966)
Other expense (43,018) -
Interest income 36,940 102,516
------------- ------------
Total other expense (2,733,116) (298,450)
------------- ------------
Loss before provision for income taxes (4,302,770) (636,985)
Provision for income taxes (Note 7) (1,600) (1,600)
------------- ------------
Net loss $ (4,304,370) $ (638,585)
------------- ------------
------------- ------------
Net loss per common share $ (.61) $ (.10)
------------- ------------
------------- ------------
Weighted average number of common shares
and share equivalents outstanding 7,099,000 6,200,000
------------- ------------
------------- ------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended March 31, 1997 and 1996
------------------------------------------------------------------------
Additional
Common Stock Paid-in Accumulated
---------------------------
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1995 6,200,000 $ 6,458,586 $ 410,030 $ (4,788,318) $ 2,080,298
Issuance of common stock warrants
(Notes 8 and 10) - - 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
Issuance of common stock upon
exercise of warrants (Note 10) 226,438 560,011 - - 560,011
Issuance of common stock upon
conversion of convertible
debentures (Note 6) 930,764 2,049,843 - - 2,049,843
Issuance of common stock for interest
on convertible debentures (Note 6) 5,204 16,877 - - 16,877
Additional paid-in capital related
to debenture embedded
interest (Notes 6 and 13) - - 2,048,997 - 2,048,997
Net loss for the year - - - (4,304,370) (4,304,370)
------------ ------------ ------------ ------------ ------------
Balance, March 31, 1997 7,362,406 $ 9,085,317 $ 2,559,027 $ (9,731,273) $ 1,913,071
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,304,370) $ (638,585)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,631,534 574,377
Non-cash interest expense related to
convertible debentures 2,048,997 -
Interest on debentures paid in
common stock 16,877 -
Deferred rent liability 784,573 255,757
Changes in operating assets and liabilities:
Commission and other receivables 39,424 (45,909)
Prepaid expenses and other current assets (183,108) (44,264)
Preopening costs (216,834) (211,756)
Advances to affiliates (97,028) (17,500)
Deposits and other assets 214,691 (46,609)
Accounts payable 1,891,670 368,491
Accrued expenses and other liabilities 1,517 126,050
------------ ------------
Cash provided by operating activities 1,827,943 320,052
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (5,328,763) (5,308,736)
Refundable construction deposit 600,000 (600,000)
------------ ------------
Cash used in investing activities (4,728,763) (5,908,736)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,000,000 2,100,000
Principal payments on long-term debt and capital
lease obligations (595,938) (464,651)
Advances from stockholder - 450,000
Repayment of advances from stockholder (320,000) (130,000)
Proceeds from issuance of convertible debentures 3,000,000 -
Proceeds from exercise of common stock warrants, net 560,011 -
Payment of debt issuance costs (600,157) -
------------ ------------
Cash provided by financing activities 3,043,916 1,955,349
------------ ------------
Net increase (decrease) in cash 143,096 (3,633,335)
Cash, beginning of year 458,550 4,091,885
------------ ------------
Cash, end of year $ 601,646 $ 458,550
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
------------------------
1997 1996
----------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 678,408 $ 400,966
----------- ---------
----------- ---------
Income taxes $ 1,600 $ 1,600
----------- ---------
----------- ---------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued upon conversion of debentures $ 2,049,843 $ -
----------- ---------
----------- ---------
Additional paid-in capital related to debenture
embedded interest $ 2,048,997 $ -
----------- ---------
----------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements 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." All
material intercompany transactions and balances have been eliminated in
consolidation.
CinemaStar International was a 60%-owned subsidiary of Theaters, Inc. through
June 1995 at which time the Company acquired an additional 15% 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 RECOGNITION
The Company recognizes revenues from ticket and concessions 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.
CASH
The Company maintained cash deposits in certain accounts for which the balance
was in excess of the Federal Deposit Insurance Corporation limits. At March 31,
1997 and 1996, uninsured cash amounts were approximately $495,000 and $170,000,
respectively.
COMMISSION RECEIVABLE
Commissions receivable represent amounts due from a 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 EQUIPMENT
Property and equipment is recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets which range from 3-27 years. Leasehold improvements and equipment
held under capital leases are amortized over the lesser of the related lease
terms or the estimated useful lives of the related asset. Repairs and
maintenance are charged to expense as incurred.
F-8
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED RENT LIABILITY
Deferred rent liability represents the difference between base rentals paid
under the Company's operating lease agreements and the expense recorded in the
statement 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.
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 basis 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 PER SHARE
Net loss per share is computed by dividing net loss by 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. Primary loss per share
approximates fully diluted loss per share for all periods presented.
NEW ACCOUNTING STANDARD
In March 1997, the FASB issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("FAS 128"). This pronouncement provides a different
method of calculating earnings per share than is currently used in accordance
with APB Opinion 15, "Earnings Per Share." FAS 128 provides for the calculation
of Basic and Diluted earnings per share. Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. This pronouncement is effective for fiscal years and interim periods
ending after December 15, 1997; early adoption is not permitted. The Company
does not believe that the adoption of this pronouncement will have a material
impact on the net loss per share presented in the accompanying statements of
operations.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its stock-based compensation
plans. Accordingly, no compensation cost is recognized for its employee stock
option plans, unless the exercise price of options granted is less than fair
market value on the date of grant. The Company has adopted the disclosure
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (Note 11).
F-9
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, consisting of
receivables, accounts 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 1996 financial statements to
conform to the 1997 presentation.
2. NATURE OF BUSINESS
Theaters, Inc. and Cinemas, Inc. were incorporated in 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 seven theaters having a
total of 69 screens in San Diego County and Riverside County, California.
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, 1997, 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.
3. GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. A number of factors,
including the Company's history of recurring losses, an operating loss of
$1,569,654 for the year ended March 31, 1997, a working capital deficiency of
$6,053,196 and an accumulated deficit of $9,731,273 as of March 31, 1997, and
an inability to comply with certain loan and lease covenants (see Note
5) raise substantial doubt about the Company's ability to continue as a going
concern.
The net loss for the year ended March 31, 1997 aggregating $4,304,370 can be
attributed primarily to the non-cash interest expense related to the convertible
debentures issued at a discount to market, costs associated with opening and
operating the Company's new theater locations and to the continuing inability of
the Company's existing theaters to produce operating income in excess of
general and administrative expenses.
F-10
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. GOING CONCERN (CONTINUED)
In response to the conditions described above, the Company has sought additional
financing to assist in funding its on-going operations. As discussed in Note
14, the Company has signed a letter of intent to sell $15 million of newly
issued common stock to Rust Capital, Ltd. Management intends to use
approximately $10 million of the proceeds to repay the majority of the Company's
long-term debt, including the debt and related early termination penalties
associated with its concession agreements (see Note 8). The remaining proceeds
would be used to continue opening new theater locations and for general working
capital purposes. The Company believes that this infusion of capital would
provide for improved profitability and a positive cash flow in future years due
to a reduction of interest expense, a reduction of concession costs, and new
theater operations contributing to operating income without increasing general
and administrative expenses. As the letter of intent is subject to certain
conditions and a vote by the Company's current stockholders, there can be no
assurance that this transaction will ultimately be consummated.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31,
--------------------------
1997 1996
------------ -----------
Land $ 960,000 $ 960,000
Furniture, fixtures and equipment 6,792,207 3,156,814
Building 2,169,798 2,169,798
Leasehold improvements 2,036,875 347,409
Equipment held under capital lease obligations 1,951,327 1,947,423
------------ -----------
13,910,207 8,581,444
Accumulated depreciation and amortization (2,980,361) (1,693,740)
------------ -----------
$ 10,929,846 $ 6,887,704
------------ -----------
------------ -----------
Included in accumulated depreciation and amortization is approximately $966,000
and $688,000 of amortization related to equipment held under capital lease
obligations at March 31, 1997 and 1996, respectively.
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Obligations under long-term debt and capital lease arrangements are as follows:
March 31,
--------------------------
1997 1996
------------ ------------
Mortgage note payable to bank; interest is
at LIBOR plus 5.4% (11.13% at March 31, 1997).
Monthly payments of principal
and interest are $12,246 at March 31, 1997.
The note matures in February 2026 and is
collateralized by a deed of trust (Note 12)
and is guaranteed by certain
officers/directors/stockholders of the Company. $ 1,589,254 $ 1,588,865
F-11
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Notes payable to bank; interest is at prime plus 2%
(10.5% at March 31, 1997). Principal payments of
$5,952 plus accrued interest are payable monthly
on each of the three notes. Notes are secured by
substantially all assets of the Company and mature
in April through September 2003. 1,339,286 500,000
Notes payable to supplier; interest is at prime
plus 2% (10.5% at March 31, 1997). 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. 808,338 1,024,007
Convertible debentures bearing interest at 4% per
annum and due August 1998 (Note 6). 350,000 -
Unsecured note payable to former stockholder for
stock repurchase and employment settlement. Note
bears interest at 6% and is payable in monthly
principal and interest payments of $5,000
through March 1998. 56,873 111,664
Capitalized lease obligation discounted at 18.9%,
payable in monthly installments of $25,101,
including interest. Lease matures March 2000. 404,207 478,936
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. 282,868 347,354
Capitalized lease obligation discounted at 5.25%,
payable in monthly installments of $2,060,
including interest. Lease matures March 1999. 218,679 231,555
Other 10,658 23,720
------------ ------------
5,060,163 4,306,101
Current portion (3,927,339) (580,533)
------------ ------------
$ 1,132,824 $ 3,725,568
------------ ------------
------------ ------------
Aggregate principal maturities of long-term debt and capital lease obligations
are as follows:
Year Ending Long-term Capital
March 31, Debt Leases Total
- ----------- ----------- ---------- -----------
1998 $ 3,223,711 $ 990,192 $ 4,213,903
1999 613,247 28,969 642,216
2000 182,787 26,889 209,676
2001 124,005 26,452 150,457
2002 -- 24,270 24,270
Thereafter -- 171,430 171,430
----------- ---------- -----------
Total minimum payments 4,143,750 1,268,202 5,411,952
Amount representing interest on
leases - (351,789) (351,789)
----------- ---------- -----------
Total long-term debt and present
value of minimum lease payments $ 4,143,750 $ 916,413 $ 5,060,163
----------- ---------- -----------
----------- ---------- -----------
In April 1997, the Company entered into an amendment to the notes payable to
supplier (the "Supplier"). Pursuant to the amendment, the Company borrowed an
additional $2,000,000 from the Supplier under a secured promissory note
bearing interest at prime plus 2% through the maturity date of April 1999.
Additionally, the amendment modifies the concession agreement (see Note 8)
between the Company and the Supplier to include all seven of the Company's
existing theaters.
The notes payable to bank contain certain covenants which require the Company
to maintain specified financial ratios and other conditions. At March 31,
1997, the Company was in default of certain of these loan covenants. The
Company has been in negotiations with the bank for the purpose of obtaining
the necessary waivers for the loan covenants and restructuring the terms of
the credit agreements. The Company believes that a satisfactory
restructuring can be achieved, but because the outcome of the negotiations
cannot be predicted, the outstanding balance of the notes payable to bank at
March 31, 1997 has been reclassified to current.
The Company is also in violation of certain covenants in several other
financing agreements; these covenants prohibit the Company from incurring
other indebtedness or further encumbering property, and/or require security
interests to be of first priority. No event of default has been declared to
date. The financers could terminate equipment leases, accelerate loans,
foreclose the Chula Vista 6 property and take other remedial actions. In such
an event the Company would be unable to continue some or all of its
operations, and its business, results of operations and/or liquidity would be
materially and adversely affected. The Company is attempting to obtain
waivers of these violations, although no assurance can be given that it will
obtain any or all of these waivers. The outstanding balances of these other
financing agreements as of March 31, 1997 have been reclassified to current.
F-12
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. CONVERTIBLE DEBENTURES
The Company completed two offshore placements of 4% convertible debentures in
April and May 1996, in the principal amount of $500,000 each, due April and May
1999. The debentures were convertible after 40 days into shares of common stock
at a conversion price of $3.95 and $4.25 per share which were at a discount to
the market price of the common stock on the date of issuance.
In August 1996, the Company completed two additional offshore placements of 4%
convertible debentures in the principal amount of $1,000,000 each, due August
1998. The debentures were convertible after 45 days into shares of common stock
at a conversion price equal to the lesser of $3.50 or 85% of the average closing
bid price of the common stock for the three consecutive trading days prior to
conversion. In connection with the issuance of the convertible debentures,
warrants to purchase 34,284 shares of the Company's common stock were issued to
the investment banker as additional compensation. The warrants are
exercisable for five years from the date of issuance at a price of $7.00 per
share (Note 10).
As of March 31, 1997, principal aggregating $2,650,000 of the debentures had
been converted into 930,764 shares of common stock at prices ranging from
$.92 to $4.25. Stockholders' equity was increased by the full amount of the
debentures converted less the unamortized debt issuance costs. In addition,
5,204 shares of common stock were issued for $16,877 of interest payable on
the convertible debentures. Subsequent to year end, the remaining $350,000
of principal of the convertible debentures plus accrued interest was
converted into 581,776 shares of common stock.
As discussed in Note 13, the SEC Staff believes that convertible debenture
instruments which are convertible at a discount to market should be accounted
for by treating such discount as additional interest expense that is amortized
over the period from the date of issuance of the debt security until the date
that the security is first convertible. The Company computed the amount of the
discount 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. Based on this treatment, the Company recorded additional
paid-in-capital of $2,048,997 for the discounts related to the embedded interest
in the convertible debentures. The entire discount of $2,048,997 has been
amortized to interest expense and is included in the accompanying statement of
operations for the year ended March 31, 1997.
7. INCOME TAXES
For the years ended March 31, 1997 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:
March 31,
--------------------------
1997 1996
----------- -----------
Deferred tax assets:
Depreciation and amortization $ 396,000 $ 211,000
Net operating loss carryforwards 1,182,000 1,018,000
Deferred rent liability 463,000 253,000
Business start-up expenses 4,000 37,000
Accrued expenses and other 41,000 24,000
----------- -----------
Total deferred income tax assets 2,086,000 1,543,000
Valuation allowance (2,051,000) (1,476,000)
----------- -----------
Net deferred income tax assets 35,000 67,000
Deferred tax liabilities:
Preopening costs 35,000 67,000
----------- -----------
Net deferred income taxes $ - $ -
----------- -----------
----------- -----------
F-13
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the Company's effective income
tax rate is as follows:
Years Ended March 31,
----------------------
1997 1996
------- -------
Federal statutory rate (34.00)% (34.00)%
State income taxes, net of federal benefit 0.04 0.25
Effect of foreign operations 1.49 5.92
Non-deductible expenses 16.45 4.94
Net operating loss carryforward with
no tax benefit realized 16.06 23.14
------- -------
Effective income tax rate 0.04% 0.25%
------- -------
------- -------
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. As a result of
the Company's continued losses and uncertainties surrounding the realization of
the net operating loss carryforward, management has determined that the
realization of the deferred tax assets is not more likely than not.
Accordingly, a 100% valuation allowance has been recorded against the net
deferred income tax assets. The net change in the valuation allowance for the
years ended March 31, 1997 and 1996 was an increase of $575,000 and a decrease
of $142,000, respectively.
At March 31, 1997, the Company has net operating loss carryforwards ("NOLs") of
approximately $4,175,000 and $2,080,000 for federal and state purposes,
respectively. The NOLs are available to offset future taxable income. The
federal NOLs expire in 2006 through 2012, while the state NOLs expire in 1998
through 2002.
The utilization of these NOLs is limited due to restrictions imposed under the
federal and state laws upon a change in ownership.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases six theater properties and various equipment under
non-cancelable operating lease agreements which expire between March 2009 and
March 2021 and require various minimum annual rentals. The Company also leases
various equipment under non-cancelable operating lease agreements which expire
through February 2000. Several of the theater leases provide for renewal
options to extend the leases for additional five-to-ten year periods. Certain
theater leases also require the payment of property taxes, normal maintenance
and insurance on the properties and additional rents based on percentages of
gross theater and concession revenues in excess of various specified revenue
levels. Certain of the theater operating leases are also personally guaranteed
by certain of the Company's officers/stockholders.
During the years ended March 31, 1997 and 1996, the Company incurred rent
expense under operating leases of approximately $2,642,000 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, 1997 and 1996.
F-14
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At March 31, 1997, the aggregate future minimum lease payments due under these
non-cancelable operating leases are as follows:
Year Ending Theater Equipment
March 31, Leases Leases Total
- ----------- ------------- ----------- ------------
1998 $ 2,668,846 $ 55,498 $ 2,724,344
1999 2,914,948 32,869 2,947,817
2000 3,074,512 18,479 3,092,991
2001 3,227,058 - 3,227,058
2002 3,329,248 - 3,329,248
Thereafter 67,824,253 - 67,824,253
------------- ----------- ------------
Total minimum lease payments $ 83,038,865 $ 106,846 $ 83,145,711
------------- ----------- ------------
------------- ----------- ------------
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, 1997 and
1996, rent expense charged to operations exceeded cash payment requirements by
$784,573 and $255,757 and resulted in an increase to the deferred rent liability
for the same amount.
The Company has signed lease agreements (including one ground lease) for three
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. The new leases,
which will be guaranteed by certain of the Company's officers/stockholders, will
require expected minimum rental payments aggregating approximately $73,000,000
over the life of the leases. Accordingly, existing minimum lease commitments as
of March 31, 1997 plus those expected minimum commitments for the proposed
theater locations would aggregate minimum lease commitments of approximately
$156,000,000.
CONCESSIONS
The Company operates concession stands at four 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 $808,338
and $1,024,007 as of March 31, 1997 and 1996 under note payable arrangements
(Note 5). 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. In April
1997, the Company entered into an agreement whereby the Company agreed to use
this supplier to provide concession supplies to all of the Company's theater
locations (see Note 5).
EMPLOYMENT AGREEMENTS
The Company has employment agreements, through December 2001, with four of
the Company's officers/stockholders pursuant to which their aggregate annual
salaries are approximately $580,000, subject to annual increases of between
10% and 12%. Certain of these officers 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.
F-15
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
required a cash payment 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. The Company estimated the value of the warrant to be $100,000
and recorded such amount as additional paid-in capital. During fiscal 1997, the
Company agreed with the consultant to cancel the common stock warrants (Note
10).
The consideration for the consulting services, aggregating $350,000, has been
recorded in prepaid expenses and other assets. Such amount is being amortized
on a straight-line basis over the two-year period of the consulting agreement.
SEASONALITY
The Company's business is 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.
9. RELATED PARTY TRANSACTIONS
The Company has the following related party transactions:
- - The Company paid a fee of $1,000 per week through December 1996 to a
company wholly-owned by an officer/director/stockholder of the Company
which provided film buying and booking services to the Company. Such
expense aggregated $35,000 and $52,000 for the years ended March 31, 1997
and 1996, respectively.
- - Commencing August 1994 and as amended in December 1996, the Company pays a
consulting fee of $52,000 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 (Notes 5 and 8).
- - 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.
- - During 1997 and 1996, the Company advanced amounts to certain stockholders
and officers, of which $114,528 remained outstanding at March 31, 1997
bearing interest at 8% per annum and maturing through 2003.
F-16
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company has 100,000 shares of no par preferred stock which 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. 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.
COMMON STOCK WARRANTS
In September 1996, the Company provided holders of its Redeemable Warrants a
limited offer which expired in October 1996. That offer allowed holders to
redeem such warrants to purchase the Company's common stock at $3.50 and also
to receive one Class B Redeemable Warrant. Each Class B Redeemable Warrant
entitles the registered holder thereof to purchase one share of Common Stock
at an exercise price of $6.50 per share through September 2001. A total of
226,438 Redeemable Warrants were redeemed in accordance with this limited
offer.
As of March 31, 1997, the Company has reserved 4,532,846 shares of common stock
for the exercise of outstanding warrants. A summary of all common stock warrant
activity follows:
<TABLE>
<CAPTION>
Redeemable Warrants Class B Redeemable Warrants
-------------------------- --------------------------
Number Number
of Shares Exercise Price of Shares Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1995 4,725,000 $ 5.52 - -
Issued 400,000 6.50 - -
--------- ------------- --------- -------------
Outstanding at March 31, 1996 5,125,000 5.52-6.50 - -
Issued 34,284 7.00 226,438 $ 6.50
Canceled (400,000) 6.50 - -
Exercised (226,438) 3.50 - -
--------- ------------- --------- -------------
Outstanding at March 31, 1997 4,532,846 $ 5.52-7.00 226,438 $ 6.50
--------- ------------- --------- -------------
--------- ------------- --------- -------------
</TABLE>
The exercise price of warrants issued prior to March 31, 1995 have been reduced
in connection with certain anti-dilution provisions of the warrant agreements.
All references to exercise prices for these warrants have been adjusted on a
retroactive basis in the schedule above.
F-17
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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 immediately or
over a period of three years and must be exercised within ten years from the
date of grant.
A summary of all stock option activity follows:
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
-------------------------- -------------------------
Weighted-Average Weighted-Average
Shares Exercised Price Shares Exercise Price
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 395,305 $ 2.75 376,000 $ 2.55
Granted 5,500 7.38 19,305 6.56
------- -------- ------- --------
Outstanding at
end of year 400,805 $ 2.81 395,305 $ 2.75
------- -------- ------- --------
------- -------- ------- --------
Options exercisable
at year end 400,805 $ 2.81 385,305 $ 2.67
Weighted-average fair value
of options granted during
the year $ 1.44 $ 1.48
</TABLE>
Information relating to stock options at March 31, 1997 summarized by exercise
price are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------
Exercise Price Weighted Average Weighted Average
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- --------- -------- ----------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.55 376,000 7.3 $ 2.55 376,000 $ 2.55
$ 5.56 10,000 8.4 $ 5.56 10,000 $ 5.56
$ 7.38 5,500 9.3 $ 7.38 5,500 $ 7.38
$ 7.63 9,305 9.0 $ 7.63 9,305 $ 7.63
-------- -------
$ 2.55 to 7.63 400,805 7.4 $ 2.81 400,805 $ 2.81
-------- -------
-------- -------
</TABLE>
Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation," requires the Company to provide pro forma information
regarding net income and earnings per share as if such compensation cost for the
Company's stock option plan had been determined in accordance with the fair
value based method prescribed in FAS 123. The Company estimates the fair value
of each stock option at the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1997
and 1996: 0% dividend yield; expected volatility of 13% for 1997 and 16% and
24% for 1996; risk free interest rates of 6% for 1997 and 7% for 1996; and
expected lives of 3 years.
Under the accounting provisions of FAS 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below:
Years Ended March 31,
-------------------------------
1997 1996
----------- -----------
Net loss:
As reported $(4,304,370) $ (638,585)
Pro forma $(4,312,290) $ (667,122)
Net loss per share:
As reported $ (.61) $ (.10)
Pro forma $ (.61) $ (.11)
F-18
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. 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, 1995 are as follows:
Year Ended
March 31, 1996
--------------
Total revenues $ 12,095,000
Net loss $ (576,000)
Net loss per common share $ (.09)
In January 1996, the Company obtained a $1,600,000 loan collateralized by a deed
of trust on Chula Vista-6 (Note 5).
13. FOURTH QUARTER ADJUSTMENT
The Company originally accounted for its convertible debentures (Note 6) in
accordance with APB Opinion 14, "Accounting for Convertible Debt and Debt Issued
with Stock Purchase Warrants." As described in the minutes to the 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 that is amortized over the period from the date of
issuance of the debt security until the date the security is first convertible.
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.
Accordingly, the Company recorded an aggregate of $2,048,997 of non-cash
interest expense related to the embedded interest in the convertible debentures.
The Company did not become aware of the position of the SEC staff until the
fourth quarter of fiscal 1997, and as such, recorded the entire $2,048,997 in
the fourth quarter of fiscal 1997. Had the Company been aware of this position
on the date of issuance of the convertible debentures, it would have recorded
$977,568 and $1,071,429 of this expense in the first and second quarters of
fiscal 1997, respectively. The effect if these amounts had been recorded in the
proper quarter rather than in the fourth quarter is as follows:
Aggregate Effect On
-------------------------------------------------------
Net Income
Quarter Ended Interest Expense Net Income Per Share
------------------ ---------------- ---------------- ----------
June 30, 1996 $ 977,568 $ (977,568) $ (.16)
September 30, 1996 1,071,429 (1,071,429) (.17)
March 31, 1997 (2,048,997) 2,048,997 .29
----------- --------------- --------
Total $ - $ - $ -
----------- --------------- --------
----------- --------------- --------
F-19
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. FOURTH QUARTER ADJUSTMENT (CONTINUED)
The Company considers these amounts to be material and therefore has restated
its financial statements for each quarterly period on Form 10-QSB/A during the
year ended March 31, 1997.
14. SUBSEQUENT EVENT
On June 24, 1997, the Company signed a letter of intent to sell $15,000,000
of newly issued common stock to Rust Capital, Ltd. (the "Buyer"). The
proposed agreement would allow the Buyer to purchase at least 51% of the
Company's common stock upon completion of the transaction, which is subject
to certain conditions and a vote by the current stockholders. The Company
expects the transaction to be completed during the second quarter of fiscal
year 1998, however there can be no assurance that this transaction will
ultimately be consummated.
F-20
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
Number -----------
- ------
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended (1)
3.2 Amended and Restated Bylaws of the Company
4.1 Specimen Stock Certificate of the Company (1)
4.2 Form of Redeemable Warrant Agreement (with form of certificate
attached) (1)
4.3 Form of Underwriter's Warrant Agreement (with form of certificate
attached) (1)
4.4 Form of Bridge Warrant (1)
4.5 Form of Acknowledgment and Agreement of Warrant Holder (1)
4.6 Form of Class B Warrant Agreement (with form of certificate attached)
(5)
4.7 $500,000 Debenture (3)
4.8 $500,000 Debenture (4)
4.9 Offshore Securities Subscription Agreement between the Company and
Wales Securities Limited, dated August 6, 1996 (6)
4.10 Offshore Securities Subscription Agreement between the Company and
Villandry Investments Ltd., dated August 6, 1996 (6)
4.11 Offshore Warrant Agreemeent between the Company and Swan Alley
(Nominees) Limited, nominee of Wales Securities Limited (6)
4.12 Offshore Warrant Agreement between the Company and Swan Alley
(Nominees) Limited, nominee of Villandry Investments Ltd. (6)
10.1 Employment Agreement of John Ellison, Jr. (1)
10.2 Employment Agreement of Alan Grossberg (1)
10.3 Employment Agreement of Jerry Willits (1)
10.4 Consulting Agreement of Russell Seheult (1)
10.5 Film Booking Agreement between the Company and Alan Grossberg (1)
10.6 Form of Indemnification Agreement with officers and directors (1)
10.7 Nickelodeon Theater Co., Inc. Stock Option Plan (1)
10.8 Placement Agent Agreement between the Company and A.S. Goldmen & Co.,
Inc. as amended (1)
10.9 Equipment Purchase and Ride Film Rental Agreement, dated August 8,
1994, between the Company and Cinema Ride, Inc., as amended (1)
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 (1)
10.11 Form of Financial Advisory and Consulting Agreement between the
Company and the A.S. Goldmen Co., Inc. (1)
10.12 Lease Agreement, dated April 30, 1991, between Nickelodeon Cinemas,
Inc. and Homart Development Co. (1)
10.13 Lease, dated November 21, 1990, between the Company and Blue Ravine
Associates, Inc. (now Pacific Oceanside Holdings, L.P.) (1)
10.13.1 First Amendment to Lease, dated July 14, 1995 between the Company and
Pacific Oceanside Holdings, L.P. (1)
10.14 Real Property Lease Agreement between the Company and Gary E. Elam,
Receiver (1)
10.15 Equipment Purchase Agreement between the Company and Gary E. Elam,
Receiver (1)
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 (1)
10.17 Lease Agreement, dated October 12, 1993, between the Company and
Oceanside Cornerstone, Inc. (1)
10.18 Lease, dated October 19, 1994, between the Company and Glenwood Buena
Park Limited Partnership (1)
10.19 Purchase Agreement with United Artist (2)
10.20 Newbury Park Center Lease, dated July 12, 1994, between the Company
and Newbury Park Group (1)
10.21 Agreement, dated July 12, 1994, between the Company and Newbury Park
Group, as amended (5)
10.22 Agreements with Pacific Concessions (1)
<PAGE>
Exhibit Description
Number -----------
- ------
10.23 Letter of Intent, dated August 5, 1994, between Southland Consulting
and the Company (1)
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 (1)
10.25 Lease Agreement, dated July 11, 1995 between the Company and Buena
Park Cinema Center Limited Partnership (1)
10.26 Lease Agreement, dated August 1, 1995 between the Company and Mission
Grove Plaza, L.P. (1)
10.27 Lease Agreement, dated July 14, 1995 between the Company and
University Village, LLC (1)
10.28 Ground Lease, dated August 5, 1995 between the Company and Craig W.
Clark (1)
10.29 Lease Agreement, dated February 15, 1996 with the Coudures Family
Limited Partnership (5)
10.30 Adjustable Rate Note, dated January 23, 1996 (1)
10.31 Settlement Agreement and Release of Claims, dated April 27, 1995,
between the Company and Viacom International, Inc. (1)
10.32 First National Bank Promissory Note, dated March 1, 1996, for $500,000
(5)
10.33 First National Bank Promissory Note, dated May 28, 1996, for $500,000
(5)
10.34 First National Bank Business Loan Agreement, dated May 28, 1996 (5)
10.35 Consulting Agreement with The Boston Group, L.P., dated February 12,
1996 (5)
10.36 400,000 Warrant Issued to The Boston Group, L.P., dated February 12,
1996 (5)
10.37 Lease Agreement, dated May 11, 1996, between the Company and Espacios
de Zapopan, S.A. de C.V. (5)
10.38 Lease Agreement, dated June 14, 1996, between the Company and
Inmobiliaria Lunar, S.C. (5)
10.39 Ground Lease with the City of San Marcos dated June 25, 1996 (6)
10.40 Coconut Grove Marketplace Sublease Agreement (6)
10.41 Amendment to Alan Grossberg Employment Agreement (7)
10.42 Amendment to Russell Seheult Consulting Agreement (7)
10.43 Amendment to John Ellison, Jr. Employment Agreement (7)
10.44 Amendment to Jerry Willits Employment Agreement (7)
10.45 Pacific Oceanside Holdings, L.P. Lease Agreement (7)
10.46 MDA-San Bernadino Associates, L.L.C. Lease Agreement (7)
10.47 Amendment to Concession Lease Agreement, dated April 23, 1997,
between the Company and Pacific Concessions, Inc. (Portions have been
omitted pursuant to a request for confidential treatment under Rule
24b-2 of the Securities Exchange Act of 1934).
10.48 Employment Agreement of Jon Meloan
10.49 Agreement terminating lease dated May 11, 1996 between the Company and
Espacios de Zapopan, S.A. de C.V.
10.50 Agreement Terminating Sublease, dated July 18,1996, between the Company
and Coconut Grove Marketplace
10.51 City of San Marcos letter re: Notice of Cancellation of June 25, 1996
CinemaStar Ground Lease
10.52 First Amendment to Lease, dated May 5, 1997, between Pacific
Oceanside Holdings, L.P. and the Company
10.53 Amendment to Loan Agreement, dated as of April 23, 1997, between the
Company and Pacific Concessions, Inc.
10.54 Letter of Intent, dated June 24, 1997, by and between Rust Capital
Ltd. and Cinemastar Luxury Theaters, Inc.(8)
21 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
27 Financial Data Schedule
____________________
(1) Incorporated by reference to the exhibits filed with Registration
Statement No. 33-86716.
(2) Incorporated by reference to Form 10-KSB for the year ended March 31,
1995.
(3) Incorporated by reference to Form 8-K for April 11, 1996.
(4) Incorporated by reference to Form 8-K for June 6, 1996.
(5) Incorporated by reference to Form 10-KSB for the year ended March 31,
1996.
(6) Incorporated by reference to Form 10-Q for the period ended June 30,
1996.
(7) Incorporated by reference to Form 10-Q for the period ended December
31, 1996.
(8) Incorporated by reference to Form 8-K filed July 1, 1997
(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.
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
CINEMASTAR LUXURY THEATERS, INC.
(A CALIFORNIA CORPORATION)
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICES. The board of directors shall fix the
location of the principal executive office of the corporation at any place
within or outside the State of California. If the principal executive office
is located outside this state, and the corporation has one or more business
offices in this state, the board of directors shall fix and designate a
principal business office in the State of California.
SECTION 2. OTHER OFFICES. The board of directors may establish other
business offices at any place or places where the corporation is qualified to
do business.
ARTICLE II
MEETING OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of shareholders shall be held
at any place within or outside the State of California designated by the
board of directors. In the absence of any such designation, shareholders'
meetings shall be held at the principal executive office of the corporation.
SECTION 2. ANNUAL MEETINGS. Annual meetings of the shareholders of the
Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings shall be held at
such place, time and date as the Board shall determine by resolution.
SECTION 3. SPECIAL MEETING. A special meeting of the shareholders may
be called at any time by (i) the board of directors, (ii) the chairman of the
board, (iii) the president or (iv) one or more shareholders holding shares in
the aggregate entitled to cast not less than ten percent (10%) of the votes
at that meeting.
If a special meeting is called by any person or persons other than the
board of directors, the request shall be in writing, specifying the time of
such meeting and the general nature of the business proposed to be
transacted. Such request shall be delivered personally, sent by registered
mail, or sent by telegraphic or other facsimile transmission to the chairman
of the board, the president, any vice president or the
<PAGE>
secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote (in
accordance with the provisions of Sections 4 and 5 of this Article II) that a
meeting will be held at the time requested by the person or persons calling
the meeting, not less than thirty-five (35) nor more than sixty (60) days
after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this
Section 3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be
held.
SECTION 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 5 of
this Article II not less than ten (10) (or, if sent by third class mail,
thirty (30)) days, nor more than sixty (60) days before the date of the
meeting. The notice shall specify the place, date and hour of the meeting
and (i) in the case of a special meeting, the general nature of the business
to be transacted, or (ii) in the case of the annual meeting, those matters
which the board of directors, at the time of giving the notice, intends to
present for action by shareholders. The notice of any meeting at which
directors are to be elected shall include the name of any nominee or nominees
whom, at the time of the notice, the board of directors intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect
financial interest, pursuant to Section 310 of the California Corporations
Code, (ii) an amendment of the articles of incorporation, pursuant to Section
902 of that Code, (iii) a reorganization of the corporation, pursuant to
Section 1201 of that Code, (iv) a voluntary dissolution of the corporation,
pursuant to Section 1900 of that Code, or (v) a distribution in dissolution
other than in accordance with the rights of outstanding preferred shares,
pursuant to Section 2007 of that Code, the notice shall also state the
general nature of that proposal.
SECTION 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either (i) personally, (ii) by
first-class mail, (iii) if the corporation has outstanding shares held of
record by 500 or more persons (determined as provided in Section 605 of the
California Corporations Code) on the record date for the shareholders'
meeting, by third-class mail, or (iv) by any other means of written
communication. Such notice shall be addressed to each shareholder at the
address of that shareholder appearing on the books of the corporation or
given to the corporation by that shareholder for the purpose of notice. If
no such address appears on the corporation's books or is given, notice shall
be deemed to have been given if sent to that shareholder by first-mail or by
telegraphic or other written communication to the corporation's principal
executive office, or if published at least once in a newspaper of general
circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally,
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deposited in the mail, or sent by telegram, telecopier or other means of
written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the
shareholder at that address, all future notices or reports shall be deemed to
have been duly given (without further mailing) if they are available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the secretary, assistant secretary
or any transfer agent of the corporation giving the notice, and shall be
filed and maintained in the minute book of the corporation.
SECTION 6. QUORUM. The presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting of shareholders
shall constitute a quorum for the transaction of business. The shareholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum, if any action taken (other
than adjournment) is approved by at least a majority of the shares required
to constitute a quorum.
SECTION 7. ADJOURNED MEETING; NOTICE. Any shareholders' meeting,
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of a majority of the shares represented at that
meeting, either in person or by proxy, but in the absence of a quorum, no
other business may be transacted at that meeting, except as provided in
Section 6 of this Article II.
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting
if the time and place are announced at a meeting at which the adjournment is
taken, unless a new record date for the adjourned meeting is fixed, or unless
the adjournment is for more than forty-five (45) days from the date set for
the original meeting, in which case the board of directors shall set a new
record date. Notice of any such adjourned meeting shall be given to each
shareholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Sections 4 and 5 of this Article II. At any adjourned
meeting the corporation may transact any business which might have been
transacted at the original meeting.
SECTION 8. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section
11 of this Article II, subject to the provisions of Sections 702 to 704,
inclusive, of the California Corporations Code (relating to voting shares
held by a fiduciary, in the name of a
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corporation or in joint ownership). The shareholders' vote may be by voice
vote or by ballot; provided, however, that any election for directors must be
by ballot if demanded by any shareholder before the voting has begun. On any
matter other than election of directors, any shareholder may vote part of the
shares in favor of the proposal and refrain from voting the remaining shares
or vote them against the proposal, but, if the shareholder fails to specify
the number of shares which the shareholder is voting affirmatively, it will
be conclusively presumed that the shareholder's approving vote is with
respect to all shares that the shareholder is entitled to vote. If a quorum
is present, the affirmative vote of the majority of the shares represented at
the meeting and entitled to vote on any matter (other than the election of
directors) shall be the act of the shareholders, unless the vote of a greater
number or voting by classes is required by California General Corporation Law
or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any one (1)
or more candidates a number of votes greater than the number of the
shareholder's shares) unless the candidates' names have been placed in
nomination prior to commencement of the voting and a shareholder has given
notice prior to commencement of the voting of the shareholder's intention to
cumulate votes. If any shareholder has given such a notice, then every
shareholder entitled to vote may cumulate votes for candidates in nomination
and give one (1) candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which that shareholder's
shares are entitled, or distribute the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder deems fit.
The candidates receiving the highest number of votes, up to the number of
directors to be elected, shall be elected.
SECTION 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The
transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though a
meeting had been duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting, or an approval of the minutes. The waiver of notice or consent need
not specify either the business to be transacted or the purpose of any annual
or special meeting of shareholders, except that if action is taken or
proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 4 of this Article II, the waiver of notice or
consent shall state the general nature of the proposal. All such waivers,
consents or approvals shall be filed with the corporate records or made a
part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened, and except that attendance at a
meeting is not a waiver of any right
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<PAGE>
to object to the consideration of matters not included in the notice of the
meeting if that objection is expressly made at the meeting.
SECTION 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT MEETING. Any
action which may be taken at any annual or Special meeting of shareholders
may be taken without a meeting and without prior notice, if a consent in
writing is prepared, setting forth the action so taken, signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted. In the case
of election of directors, such a consent shall be effective only if signed by
the holders of all outstanding shares entitled to vote for the election of
directors; provided, however, that a director may be elected at any time to
fill a vacancy on the board of directors that has not been filled by the
directors, by the written consent of the holders of a majority of the
outstanding shares entitled to vote for the election of directors. All such
consents shall be filed with the secretary of the corporation and shall be
maintained in the corporate records. Any shareholder giving a written
consent, or the shareholder's proxy holder(s), or a transferee of the shares,
or a personal representative of the shareholder or their respective proxy
holder(s), may revoke the consent by a writing received by the secretary of
the corporation before written consents of the number of shares required to
authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the secretary shall give prompt
notice of the corporate action approved by the shareholders without a
meeting. This notice shall be given in the manner specified in Section 5 of
this Article II. In the case of approval of (i) contracts or transactions in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the California Corporations Code, (ii) indemnification of
agents of the corporation, pursuant to Section 317 of that Code, (iii) a
reorganization of the corporation, pursuant to Section 1201 of that Code, or
(iv) a distribution in dissolution other than in accordance with the rights
of outstanding preferred shares, pursuant to Section 2007 of that Code, the
notice shall be given at least ten (10) days before the consummation of any
action authorized by that approval.
SECTION 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of
any meeting or to vote or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days
before the date of any such meeting nor more than sixty (60) days before any
such action without a meeting, and in this event only shareholders of record
on the date so fixed are entitled to notice and to vote or to give consents,
as the case may be, notwithstanding any transfer of any shares after the
record date, except as otherwise required by law.
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<PAGE>
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on
the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first
written consent is given, or (ii) when prior action of the board has been
taken, shall be at the close of business on the day on which the board adopts
the resolution relating to that action, or the sixtieth (60th) day before the
date of such other action, whichever is later.
SECTION 12. PROXIES. Every person entitled to vote for directors or on
any other matter shall have the right to do so either in person or by one (1)
or more agents authorized by a written proxy signed by the person and filed
with the secretary of the corporation. A proxy shall be deemed signed if the
shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney in fact. A validly executed proxy which does not
state that it is irrevocable shall continue in full force and effect unless
(i) revoked by the person executing it, before the vote pursuant to that
proxy, by a writing delivered to the corporation stating that the proxy is
revoked, or by a subsequent proxy executed by, or attendance at the meeting
and voting in person by, the person executing the proxy; or (ii) written
notice of the death or incapacity of the maker of that proxy is received by
the corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11)
months from the date of the proxy, unless otherwise provided in the proxy.
The revocability of a proxy that states on its face that it is irrevocable
shall be governed by the provisions of Sections 705(e) and 705(f) of the
California Corporations Code.
SECTION 13. INSPECTORS OF ELECTION. Before any meeting of
shareholders, the board of directors may appoint any persons (other than
nominees for office) to act as inspectors of election at the meeting or its
adjournment. If no inspectors of election are so appointed, the chairman of
the meeting may, and on the request of any shareholder or shareholder's proxy
shall, appoint inspectors of election at the meeting. The number of
inspectors shall be either one (1) or three (3). If inspectors are appointed
at a meeting on the request of one (1) or more shareholders or proxies, the
holders of a majority of shares or their proxies present at the meeting shall
determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
the chairman of the meeting may, and upon the request of any shareholder or a
shareholder's proxy shall, appoint a person to fill that vacancy.
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<PAGE>
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum and
the authenticity, validity and effect of proxies;
(b) Receive votes, ballots or consents;
(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
SECTION 14. BUSINESS CONDUCTED AT, AND SHAREHOLDER PROPOSALS FOR,
MEETINGS OF THE SHAREHOLDERS.
(a) At an annual or special meeting of the shareholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before a shareholders' annual or special
meeting, business must be (i) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the board of directors;
(ii) otherwise properly brought before the meeting by or at the direction of
the board of directors; or (iii) otherwise properly brought before the
meeting by a shareholder. In addition to any other applicable requirements,
and subject to any limitations on business which may be proposed or
transacted at such meeting, for business to be properly brought before an
annual or special meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the secretary of the corporation. To be
timely with respect to an annual meeting, a shareholder's notice must be
received at the principal executive office of the Corporation not less than
sixty (60) days nor more than one hundred twenty (120) days prior to the date
of such annual meeting; provided, however, that in event that the first
public disclosure (whether by mailing of a notice to shareholders or to an
exchange on which the stock of the Corporation is listed, by press release or
otherwise) of the date of the annual meeting is made less than sixty-five
(65) days prior to the date of the meeting, notice by the shareholder will be
timely received not later than the close of business on the tenth (10th) day
following the day on which such public disclosure was first made. To be
timely with respect to a special meeting, a shareholder's notice must be
received at the principal executive office of the corporation not later than
the close of business on the tenth (10th) day following the day on which the
first public
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<PAGE>
disclosure (whether by mailing of a notice to shareholders or to an exchange
on which the stock of the Corporation is listed, by press release or
otherwise) of the date of the special meeting is made.
(b) A shareholder's notice to the Secretary shall set forth, as to each
matter the shareholder proposes to bring before the annual or special
meeting; (i) a reasonably detailed description of any proposal to be made at
such meeting; (ii) the name and address, as they appear on the Corporation's
stock register, of the shareholder proposing such business; (iii) the class
and number of shares of capital stock of the Corporation which are
beneficially owned by the shareholder; (iv) any material interest of the
shareholder in such business; and (v) such other information relating to the
shareholder or the proposal as is required to be disclosed under the rules of
the Securities and Exchange Commission governing the solicitation of proxies
whether or not such proxies are in fact solicited by the shareholder.
Notwithstanding anything in these Bylaws to the contrary, no business shall
be conducted at an annual or special shareholders' meeting except in
accordance with the procedures set forth in this Section 14; provided,
however, that nothing in this Section 14 shall be deemed to preclude
discussion by any shareholder of any business properly brought before the
annual or special meeting in accordance with said procedures. The chairman
of an annual or special meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 14, and if he
should so determine, any such business not properly brought before the
meeting shall not be transacted.
Section 15. CONDUCT OF MEETING. The chairman of a meeting of the
shareholders, as determined pursuant to Article V of these Bylaws, shall
conduct such meeting in a businesslike and fair manner, but shall not be
obligated to follow any technical, formal, or parliamentary rules or
principles of procedure. The chairman's ruling on procedural matters shall be
conclusive and binding on all shareholders, unless at the time of a ruling a
request for a vote is made to the shareholders entitled to vote and
represented in person or by proxy at the meeting, in which case the decision
of a majority of such shares shall be conclusive and binding on all
shareholders. Without limiting the generality of the foregoing, the chairman
shall have all of the powers usually vested in the chairman of a meeting of
shareholders.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. Subject to the provisions of the California General
Corporation Law and any limitations in the articles of incorporation and
these Bylaws relating to action required to be approved by the shareholders
or by the outstanding shares, the business and affairs of the corporation
shall be managed and all corporate powers shall be exercised by or under the
direction of the board of directors.
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SECTION 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of
directors of the corporation shall not be less than four (4) nor more than
seven (7). The exact number of directors shall be five (5) until changed,
within the limits specified above, by a resolution amending this Section 2,
duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number fixed
without provision for an indefinite number, by a duly adopted amendment to
the articles of incorporation or by an amendment to this bylaw duly adopted
by the vote or written consent of holders of a majority of the outstanding
shares entitled to vote. No amendment may change the stated maximum number
of authorized directors to a number greater than two (2) times the stated
minimum number of directors minus one (1).
SECTION 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall
be elected at each annual meeting of the shareholders to hold office until
the next annual meeting. At each election the persons receiving the greatest
number of votes, up to the number of directors then to be elected, shall be
the persons then elected. Each director, including a director elected to
fill a vacancy, shall hold office until the expiration of the term for which
elected and until a successor has been elected and qualified.
SECTION 4. VACANCIES. Vacancies in the board of directors may be
filled by a majority of the remaining directors, though less than a quorum,
or by a sole remaining director, except that a vacancy created by the removal
of a director by the vote or written consent of the shareholders or by court
order may be filled only by the vote of a majority of the shares entitled to
vote represented at a duly held meeting at which a quorum is present, or by
the written consent of holders of a majority of the outstanding shares
entitled to vote. Each director so elected shall hold office until the next
annual meeting of the shareholders and until a successor has been elected and
qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the board of directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or
convicted of a felony, (iii) if the authorized number of directors is
increased, or (iv) if the shareholders fail, at any meeting of shareholders
at which any director or directors are elected, to elect the number of
directors to be voted for at that meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
by written consent (other than to fill a vacancy created by removal) shall
require the consent of a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of
directors, unless the notice specifies a later time for that resignation to
become effective. If the resignation of a
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director is effective at a future time, the board of directors may elect a
successor to take office when the resignation becomes effective.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
SECTION 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular
meetings of the board of directors may be held at any place within or outside
the State of California that has been designated from time to time by
resolution of the board. In the absence of such designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of California that has been designated in the notice of meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation. Any meeting, regular or special, may be held by
conference telephone or similar communication equipment, so long as all
directors participating in the meeting can hear one another, and all such
directors shall be deemed to be present in person at the meeting.
SECTION 6. ANNUAL MEETING. Immediately following each annual meeting
of shareholders, the board of directors shall hold a regular meeting for the
purpose of organization, any desired election of officers and the transaction
of other business. Notice of this meeting shall not be required.
SECTION 7. OTHER REGULAR MEETINGS. Other regular meetings of the board
of directors shall be held without call at such time as shall, from time to
time, be fixed by the board of directors. Such regular meeting may be held
without notice.
SECTION 8. SPECIAL MEETINGS. Special meetings of the board of
directors for any purpose or purposes shall be called at any time by the
chairman of the board, the president, any vice president, the secretary or
any two (2) directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, or telecopier, addressed to each director at that
director's address as it is shown on the records of the corporation. In case
the notice is mailed, it shall be deposited in the United States mail at
least four (4) days before the time of the holding of the meeting. In case
the notice is delivered personally or by telephone, telegram or telecopier,
it shall be received at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may
be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose of
the meeting or the place if the meeting is to be held at the principal
executive office of the corporation.
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SECTION 9. QUORUM. A majority of the authorized number of directors
shall constitute a quorum for the transaction of business, except to adjourn
as provided in Section 11 of this Article III. Every act or decision done or
made by a majority of the directors present at a meeting duly held at which a
quorum is present shall be regarded as the act of the board of directors,
subject to the provisions of Section 310 of the California Corporations Code
(as to approval of contracts or transactions in which a director has a direct
or indirect material financial interest), Section 311 of that Code (as to
appointment of committees), and Section 317(e) of that Code (as to
indemnification of directors). A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for that meeting.
SECTION 10. WAIVER OF NOTICE. The transactions of any meeting of the
board of directors, however called and noticed or wherever held, shall be as
valid as a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting or
an approval of the minutes. The waiver of notice or consent need not specify
the purpose of the meeting. All such waivers, consents and approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting. Notice of a meeting shall also be deemed given to any director who
attends the meeting without protesting before or at its commencement, the
lack of notice to that director.
SECTION 11. ADJOURNMENT. A majority of the directors present, whether
or not constituting a quorum, may adjourn any meeting to another time and
place.
SECTION 12. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given, unless the meeting is
adjourned for more than twenty-four (24) hours, in which case notice of the
time and place shall be given before the time of the adjourned meeting, in
the manner specified in Section 8 of this Article III, to the directors who
were not present at the time of the adjournment.
SECTION 13. ACTION WITHOUT MEETING. Any action required or permitted
to be taken by the board of directors may be taken without a meeting, if all
members of the board shall individually or collectively consent in writing to
that action. Such action by written consent shall have the same force and
effect as a unanimous vote of the board of directors. Such written consent
or consents shall be filed with the minutes of the proceedings of the board.
SECTION 14. FEES AND COMPENSATION OF DIRECTORS. Subject to any
limitations imposed by law, directors and members of committees may receive
such compensation, if any, for their services, and such reimbursement of
expenses, as may be fixed or determined by resolution of the board. This
Section 14 shall not be construed to preclude any director from serving the
corporation in any other capacity as an officer,
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agent, employee or otherwise, and receiving additional compensation for those
services.
SECTION 15. NOTICE OF DIRECTOR NOMINATIONS.
(a) Only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors of the corporation.
Nominations of persons for election to the board of directors may be made at
a meeting of shareholders (i) by or at the direction of the board of
directors by any nominating committee or person appointed by the board of
directors or (ii) by any shareholder of the corporation entitled to vote for
the election of directors at the meeting who complies with the notice
procedures set forth in this Section 15. In addition to any other applicable
requirements, and subject to any limitations on business which may be
proposed or transacted at such meeting, such shareholder nominations, other
than those made by or at the direction of the board of directors, shall be
made pursuant to timely notice in writing to the secretary of the corporation
of the shareholder's intention to make such nomination. To be timely with
respect to an annual meeting, such a shareholder's notice must be received at
the principal executive office of the Corporation not less than sixty (60)
days nor more than one hundred and twenty (120) days prior to the date of
such annual meeting; provided, however, that in the event that the first
public disclosure (whether by mailing of a notice to shareholders or to the
exchange on which the stock of the Corporation is listed, by press release or
otherwise) of the date of the annual meeting is made less than sixty-five
(65) days prior to the date of the meeting, notice by the shareholder will be
timely if received not later than the close of business on the tenth (10th)
day following the day on which such public disclosure was first made. To be
timely with respect to a special meeting, a shareholder's notice must be
received at the principal executive office of the Corporation not later than
the close of business on the tenth (10th) day following the day on which the
first public disclosure (whether by mailing of a notice to shareholders or to
the exchange on which the stock of Corporation is listed, by press release or
otherwise) of the date of the special meeting is made.
(b) Such shareholder's notice shall set forth (i) as to each person
whom the shareholder proposes to nominate for election or re-election as a
director, (A) the name, age, business address and residence address of the
person; (B) the principal occupation or employment of the person; (C) the
class and number of shares of capital stock of the corporation which are
beneficially owned by the person; and (D) such other information relating to
the person as would be required under the rules of the Securities and
Exchange Commission in a proxy statement soliciting proxies for the election
of such person whether or not such proxies are in fact solicited for the
election of such person; and (ii) as to the shareholder giving the notice (A)
the name and address, as they appear on the corporation's stock register, of
the shareholder; (B) the class and number of shares of capital stock of the
corporation which are beneficially owned by the shareholder; and (C) such
other information relating to the shareholder or the nomination required to
be disclosed under the rules of the Securities and Exchange
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Commission governing the solicitation of proxies whether or not such proxies
are in fact solicited by the shareholder. Such notice must also include a
signed consent of each such nominee to serve as a director of the
corporation, if elected or re-elected. The corporation may require any
proposed nominee to furnish such other information as may reasonably be
required by the corporation to determine the eligibility for election as a
director of the corporation. In the event that a person is validly
designated as a nominee in accordance with the procedures specified above and
shall thereafter become unable or unwilling to stand for election to the
board of directors, the board of directors or the shareholder who proposed
such nominee, as the case may be, may designate a substitute nominee;
provided, however, that in the case of persons not nominated by the board of
directors, such a substitution may only be made if notice as provided above
in this Section 15 is received at the principal executive office of the
corporation no later than the earlier of (A) thirty (30) days prior to the
date of the annual meeting or (B) ten (10) days after the shareholder
proposing the original nominee has learned that such original nominee has
become unable or unwilling to stand for election. The chairman of the
meeting shall, if the facts warrant, determine and declare to the meeting
that a director nomination was not made in accordance with the foregoing
procedure, and if he should so determine, the defective nomination shall be
disregarded.
ARTICLE IV
COMMITTEES
SECTION 1. COMMITTEES OF DIRECTORS. The board of directors may, by
resolution adopted by a majority of the authorized number of directors,
designate one (1) or more committees, each consisting of two (2) or more
directors, to serve at the pleasure of the board. The board may designate
one (1) or more directors as alternate members of any committee who may
replace any absent member at any meeting of the committee. Any committee, to
the extent provided in the resolution of the board, shall have all the
authority of the board, except with respect to:
(a) the approval of any action which (i) under the General Corporation
Law of California, also requires shareholders' approval or approval of the
outstanding shares, or (ii) under other applicable law, requires approval by
the shareholders;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the
board or on any committee;
(d) the amendment or repeal of bylaws or the adoption of new bylaws;
(e) the amendment or repeal of any resolution of the board of directors
which by its express terms is not so amendable or repealable;
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(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board
of directors; or
(g) the appointment of any other committees of the board of directors
or the members of these committees.
SECTION 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Sections 5 (place of meeting), 7 (regular meetings), 8 (special
meetings and notice), 9 (quorum), 10 (waiver of notice), 11 (adjournment), 12
(notice of adjournment) and 13 (action without meeting) of Article III of
these Bylaws, with such changes in context of those bylaws as are necessary
to substitute the committee and its members for the board of directors and
its members, except that the time of regular meetings of committees may be
determined either by resolution of the board of directors or by resolution of
the committee; special meetings of committees may also be called by
resolution of the board of directors; and notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may
adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
SECTION 1. OFFICERS. The officers of the corporation shall be a
president, a secretary and a chief financial officer. The corporation may
also have, at the discretion of the board of directors, a chairman of the
board, one (1) or more vice presidents, one (1) or more assistant
secretaries, one (1) or more assistant treasurers and such other officers as
may be appointed in accordance with the provisions of Section 3 of this
Article V. Any number of offices may be held by the same person.
SECTION 2. ELECTION OF OFFICERS. The officers of the corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article V, shall be chosen by the board of
directors, and each shall serve at the pleasure of the board, subject to the
rights, if any, of an officer under any contract of employment.
SECTION 3. SUBORDINATE OFFICERS. The board of directors may appoint,
and may empower the president to appoint, such other officers as the business
of the corporation may require, each of whom shall hold office for such
period, have such authority and perform such duties as are provided in the
bylaws or as the board of directors may from time to time determine.
SECTION 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either
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with or without cause, by the board of directors, at any regular or special
meeting of the board, or by any officer upon whom such power of removal may
be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any such resignation shall take effect at the date of the
receipt of that notice or at any later time specified in that notice; and,
unless otherwise specified in that notice, the acceptance of the resignation
shall not be necessary to make it effective. Any resignation is without
prejudice to the rights, if any, of the corporation under any contract to
which the officer is a party.
SECTION 5. VACANCIES IN OFFICE. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be
filled in the manner prescribed in these bylaws for regular appointments to
that office.
SECTION 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such
an officer is elected, shall, if present, preside at meetings of the board of
directors and exercise and perform such other powers and duties as may be
from time to time assigned to such officer by the board of directors or
prescribed by the bylaws. If there is no president, the chairman of the
board shall in addition be the chief executive officer of the corporation and
shall have the powers and duties prescribed in Section 7 of this Article V.
SECTION 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the board of directors to the chairman of the board, if there
is such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and affairs of the
corporation. The president shall preside at all meetings of the shareholders
and, in the absence of the chairman of the board, or if there is none, at all
meetings of the board of directors. He shall be ex-officio a member of all
the standing committees, including the executive committee, if any, and shall
have the general powers and duties of management usually vested in the office
of president of a corporation, and shall have such other powers and duties as
may be prescribed by the board of directors or the bylaws.
SECTION 8. VICE PRESIDENT. In the absence or disability of the
president, the vice presidents, if any, in order of their rank as fixed by
the board of directors or, if not ranked, a vice president designated by the
board of directors, shall perform all the duties of the president, and when
so acting shall have all the powers of, and be subject to all the
restrictions upon, the president. The vice presidents shall have such other
powers and perform such other duties as, from time to time, may be prescribed
for them respectively by the board of directors or the bylaws, and the
president or the chairman of the board.
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SECTION 9. SECRETARY. The secretary shall keep or cause to be kept, at
the principal executive office or such other place as the board of directors
may direct, a book of minutes of all meetings and actions of directors,
committees of directors and shareholders, with the time and place of holding,
whether regular or special, and, if special, how authorized, the notice
given, the names of those present at directors' meetings, the number of
shares present or represented at shareholders' meetings and the proceedings.
The secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the corporation's transfer agent or
registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all
shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates issued for the same, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all the
meetings of the shareholders and of the board of directors required by the
bylaws to be given. The secretary shall keep the seal of the corporation, if
one is adopted, in safe custody, and shall have such other powers and perform
such other duties as may be prescribed by the board of directors or by the
bylaws.
SECTION 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of
the corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares. The
books of account shall at all reasonable times be open to inspection by any
director.
The chief financial officer shall deposit all monies and other valuables
in the name and to the credit of the corporation with such depositories as
may be designated by the board of directors. He shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to
the president and directors, upon request, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or the bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
SECTION 1. DEFINITIONS. For the purposes of this Article, the
following terms have the following meaning:
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(a) "agent" means any person who is or was a director, officer,
employee, trustee or other agent of this corporation, or that, being or
having been such a director, officer, employee, trustee or other agent, he or
she is or was serving at the request of this corporation as a director,
officer, employee, trustee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, or was a
director, officer, employee or agent of a foreign or domestic corporation
which was a predecessor corporation of this corporation or of another
enterprise at the request of such predecessor corporation;
(b) "proceeding" means any threatened, pending or completed action,
proceeding or investigation, whether civil, criminal or administrative;
(c) "expenses" include, without limitation, attorneys' fees and any
expenses of establishing a right to indemnification under Section 5 of this
Article;
(d) references to "the corporation" include all constituent
corporations absorbed in a consolidation or merger as well as the resulting
or surviving corporation, so that any person who is or was a director,
officer, employee, trustee, or other agent of such a constituent corporation
or who, being or having been such a director, officer, employee, trustee, or
other agent, is or was serving at the request of such constituent corporation
as a director, officer, employee, trustee or other agent of another
corporation as a director, officer, employee, trustee or other agent of
another corporation, partnership, joint venture, trust or other enterprise
shall stand in the same position under the provisions of this Article with
respect to the resulting or surviving corporation as such person would if he
or she had served the resulting or surviving corporation in the same capacity;
(e) references to "other enterprise" shall include employee benefit
plans;
(f) references to "fines" shall include any excise taxes assessed on a
person with respect to any employee benefit plan; and
(g) references to "serving at the request of the corporation" shall
include any service by an agent of the corporation as director, officer,
employee, trustee or agent of the corporation which imposes duties on, or
involves services by, such agent with respect to any employee benefit plan,
its participants, or beneficiaries; and a person who acted in good faith and
in a manner he or she reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the corporation"
as referred to in this Article.
SECTION 2. ACTION, ETC. OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. This corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any proceeding, whether external
or internal to this corporation (other than a judicial action or suit brought
by or in the right of the Corporation), by reason
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of the fact that such person is or was an agent of this corporation, against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred by him or her in connection with such proceeding, or any
appeal therein, if such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of this
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of
any proceeding -- whether by judgment, order, settlement, conviction, or upon
a plea of NOLO CONTENDERE or its equivalent -- shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he or she reasonably believed to be in or not opposed to the best interests
of this corporation, and, with respect to any criminal action or proceeding,
that such person had reasonable cause to believe that his or her conduct was
unlawful.
SECTION 3. ACTIONS, ETC. BY OR IN THE RIGHT OF THE CORPORATION. This
corporation shall indemnify any person who was or is a party, or is
threatened to be made a party, to any proceeding by or in the right of this
corporation to procure a judgment in its favor because that person is or was
an agent of this corporation, against expenses actually and reasonably
incurred by that person in connection with the defense, settlement or appeal
of that action if that person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
Corporation. No indemnification shall be made under this Section 3 in
respect of any claim, issue or matter as to which that person shall have been
adjudged to be liable for gross negligence or willful misconduct in the
performance of that person's duty to this corporation, unless and only to the
extent that the court in which that action was brought shall determine upon
application that, in view of all the circumstances of the case, that person
is fairly and reasonably entitled to indemnity for the expenses which the
court shall determine.
SECTION 4. DETERMINATION OF RIGHT OF INDEMNIFICATION. Any
indemnification under Section 2 or 3 (unless ordered by a court) shall be
made by this corporation unless a determination is reasonably and promptly
made (i) by the board by a majority vote of a quorum consisting of directors
who were not parties to such proceeding, or (ii) if such a quorum is not
obtainable, or, even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
shareholders, that such person acted in bad faith and in a manner that such
person did not believe to be in or not opposed to the best interests of this
corporation, or, with respect to any criminal proceeding, that such person
believed or had reasonable cause to believe that his conduct was unlawful.
SECTION 5. INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding the other provisions of this Article, to the extent that an
agent of this corporation has been successful on the merits or otherwise,
including, without limitation, the dismissal of an action without prejudice
or the settlement of an action without admission of liability, in defense of
any proceeding or in defense of any claim, issue or
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matter therein, or on appeal from any such proceeding, action, claim or
matter, such agent shall be indemnified against all expenses incurred in
connection therewith.
SECTION 6. ADVANCES OF EXPENSES. Except as limited by Section 7 of
this Article, costs, charges and expenses incurred by any agent of the
corporation in any proceeding or any appeal therefrom shall be paid by the
corporation in advance of the final disposition of such matter, if said agent
shall undertake to repay such amount in the event that it is ultimately
determined, as provided herein, that such person is not entitled to
indemnification. Notwithstanding the foregoing, no advance shall be made by
this corporation if a determination is reasonably and promptly made by the
board of directors by a majority vote of a quorum of disinterested directors,
or (if such a quorum is not obtainable or, even if obtainable, a quorum of
disinterested directors so directs) by independent legal counsel in a written
opinion, that, based upon the facts known to the board or counsel at the time
such determination is made, such person acted in bad faith and in a manner
that such person did not believe to be in or not opposed to the best
interests of the corporation, or, with respect to any criminal proceeding,
that such person believed or had reasonable cause to believe his conduct was
unlawful. In no event shall any advance be made in instances where the board
or independent legal counsel reasonably determines that such person
deliberately breached his or her duty to the corporation or its shareholders.
SECTION 7. RIGHT OF AGENT TO INDEMNIFICATION UPON APPLICATION;
PROCEDURE UPON APPLICATION. Any indemnification under Sections 2, 3 and 5,
or advance under Section 6 of this Article, shall be made promptly, and in
any event within ninety (90) days, upon the written request of an agent of
the corporation, unless with respect to applications under Sections 2, 3 or
6, a determination is reasonably and promptly made by the board of directors
by a majority vote of a quorum of disinterested directors that such agent
acted in a manner set forth in such Sections as to justify the corporation
not indemnifying or making an advance to the agent. In the event no quorum
of disinterested directors is obtainable, the board of directors shall
promptly direct that independent legal counsel shall decide whether the agent
acted in the manner set forth in such Sections as to justify the corporation
not indemnifying or making an advance to the agent. The right to
indemnification or advances as granted by this Article shall be enforceable
by the agent in any court of competent jurisdiction, if the board or
independent legal counsel denies the claim, in whole or in part, or if no
disposition of such claim is made within ninety days. The agent's costs and
expenses incurred in connection with successfully establishing his or her
right to indemnification, in whole or in part, in any such proceeding shall
also be indemnified by the corporation.
SECTION 8. OTHER RIGHTS AND REMEDIES. The indemnification provided by
this Article shall not be deemed exclusive of, and shall not affect, any
other rights to which an agent of this corporation seeking indemnification
may be entitled under any law, Bylaw, or charter provision, agreement, vote
of shareholders or disinterested directors or otherwise, both as to action in
his or her official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to
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be an agent of the corporation and shall inure to the benefit of the heirs,
executors and administrators of such a person. All rights to indemnification
under this Article shall be deemed to be provided by a contract between the
corporation and the agent who serves in such capacity at any time while these
bylaws and other relevant provisions of the general corporation law and other
applicable law, if any, are in effect. Any repeal or modification thereof
shall not affect any rights or obligations then existing.
SECTION 9. INSURANCE. Upon resolution passed by the board, the
corporation may purchase and maintain insurance on behalf of any person who
is or was an agent of the corporation against any liability asserted against
such person and incurred by him or her in any such capacity, or arising out
of his or her status as such, whether or not the corporation would have the
power to indemnify such person against such liability under the provisions of
this Article. The corporation may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of
credit) to ensure the payment of such sums as may become necessary to effect
indemnification as provided herein.
SECTION 10. SAVINGS CLAUSE. If this Article or any portion thereof
shall be invalidated on any ground by any court of competent jurisdiction,
then the corporation shall nevertheless indemnify each agent as to expenses,
judgments, fines and amounts paid in settlement with respect to any action,
suit, appeal, proceeding or investigation, whether civil, criminal or
administrative, and whether internal or external, including a grand jury
proceeding and an action or suit brought by or in the right of the
corporation, to the full extent permitted by any applicable portion of this
Article that shall not have been invalidated, or by any other applicable law.
ARTICLE VII
RECORDS AND REPORTS
SECTION 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The
corporation shall keep at its principal executive office, or at the office of
its transfer agent or registrar, if either is appointed and as determined by
resolution of the board of directors, a record of its shareholders, giving
the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation holding at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation may (i) inspect and copy the records of shareholders' names and
addresses and shareholdings during usual business hours on five (5) days
prior written demand on the corporation, and (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such
transfer agent's usual charges for such list, a list of the shareholders'
names and addresses who are entitled to vote for the election of directors,
and their shareholdings, as of the most recent record date for which that
list has been compiled or as of a date specified by the shareholder after the
date of demand.
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This list shall be made available to any such shareholder by the transfer
agent on or before the later of five (5) days after the demand is received or
the date specified in the demand as of the date on which the list is to be
compiled. The record of shareholders shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate. Any inspection and copying under this Section 1 may be made in
person or by an agent or attorney of the shareholder or holder of a voting
trust certificate making the demand.
SECTION 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall
keep at its principal executive office, or if its principal executive office
is not in the State of California, at its principal business office in this
state, the original or a copy of the bylaws as amended to date, which shall
be open to inspection by the shareholders at all reasonable times during
office hours. If the principal executive office of the corporation is
outside the State of California and the corporation has no principal business
office in this state, the secretary shall, upon the written request of any
shareholder, furnish to that shareholder a copy of the bylaws as amended to
date.
SECTION 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The
accounting books and records and minutes of proceedings of the shareholders
and the board of directors and any committee or committees of the board of
directors shall be kept at such place or places designated by the board of
directors, or, in the absence of such designation, at the principal executive
office of the corporation. The minutes shall be kept in written form and the
accounting books and records shall be kept either in written form or in any
other form capable of being converted into written form. The minutes and
accounting books and records shall be open to inspection upon the written
demand of any shareholder or holder of a voting trust certificate, at any
reasonable time during usual business hours, for a purpose reasonably related
to the holder's interests as a shareholder or as the holder of a voting trust
certificate. The inspection may be made in person or by an agent or attorney
and shall include the right to copy and make extracts. These rights of
inspection shall extend to the records of each subsidiary corporation of the
corporation.
SECTION 4. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records
and documents of every kind and the physical properties of the corporation
and each of its subsidiary corporations. This inspection by a director may
be made in person or by an agent or attorney and the right of inspection
includes the right to copy and make extracts of documents.
SECTION 5. ANNUAL REPORT TO SHAREHOLDERS. The annual report to
shareholders referred to in Section 1501 of the California General
Corporation Law is expressly dispensed with, but nothing herein shall be
interpreted as prohibiting the board of
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directors from issuing annual or other periodic reports to the shareholders
of the corporation as they consider appropriate.
ARTICLE VIII
GENERAL CORPORATE MATTERS
SECTION 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For
purposes of determining the shareholders entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action (other than action
by shareholders by written consent without a meeting), the board of directors
may fix, in advance, a record date, which shall not be more than sixty (60)
days before any such action, and in that case only shareholders of record on
the date so fixed are entitled to receive the dividend, distribution or
allotment of rights or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares after the record date so fixed,
except as otherwise provided in the California General Corporation Law.
If the board of directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or
the sixtieth (60th) day before the date of that action, whichever is later.
SECTION 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts or other orders for payment of money, notes or other evidences of
indebtedness, issued in the name of or payable to the corporation, shall be
signed or endorsed by such person or persons and in such manner as, from time
to time, shall be determined by resolution of the board of directors.
SECTION 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation, and this authority may be general or confined to specific
instances; and, unless so authorized or ratified by the board of directors or
within the agency power of an officer, no officer, agent or employee shall
have any power or authority to bind the corporation by any contract or
engagement or to pledge its credit or to render it liable for any purpose or
for any amount.
SECTION 4. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of the capital stock of the corporation shall be issued to each
shareholder when any of these shares are fully paid, and the board of
directors may authorize the issuance of certificates or shares as partly paid
provided that these certificates shall state the amount of the consideration
to be paid for them and the amount paid. All certificates shall be signed in
the name of the corporation by the chairman of the board, the president or
vice president and by the chief financial officer, an assistant treasurer,
the secretary or
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any assistant secretary, certifying the number of shares and the class or
series of shares owned by the shareholder. Any or all of the signatures on
the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed on a
certificate shall have ceased to be that officer, transfer agent or registrar
before that certificate is issued, it may be issued by the corporation with
the same effect as if that person were an officer, transfer agent or
registrar at the date of issue.
SECTION 5. LOST CERTIFICATES. Except as provided in this Section 5, no
new certificates for shares shall be issued to replace an old certificate
unless the latter is surrendered to the corporation and cancelled at the same
time. The board of directors may, in case any share certificate or
certificate for any other security is lost, stolen or destroyed, authorize
the issuance of a replacement certificate on such terms and conditions as the
board may require, including provision for indemnification of the corporation
secured by a bond or other adequate security sufficient to protect the
corporation against any claim that may be made against it, including any
expense or liability, on account of the alleged loss, theft or destruction of
the certificate or the issuance of the replacement certificates.
SECTION 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
chairman of the board, the president, any vice president, or any other person
authorized by resolution of the board of directors or by any of the foregoing
designated officers, is authorized to vote on behalf of the corporation any
and all shares of any other corporation or corporations, foreign or domestic,
standing in the name of the corporation. The authority granted to these
officers to vote or represent on behalf of the corporation any and all shares
held by the corporation in any other corporation or corporations may be
exercised either by such officers in person or by any other person authorized
so to do by proxy duly executed by these officers.
SECTION 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in
the California General Corporation Law shall govern the construction of these
bylaws. Without limiting the generality of this provision, wherever the
context so indicates, the singular number shall include the plural, the
plural number shall include the singular, and the term "person" shall include
both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
SECTION 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or
these bylaws may be amended or repealed by the vote or written consent of
holders of a majority of the outstanding shares entitled to vote.
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SECTION 2. AMENDMENT BY DIRECTORS. Subject to the right of
shareholders as provided in Section 1 of this Article IX to adopt, amend or
repeal bylaws, bylaws may be adopted, amended or repealed by the board of
directors; provided, however, that the board of directors may adopt a bylaw
or amendment of a bylaw changing the authorized number of directors only for
the purpose of fixing the exact number of directors within the limits
specified in the articles of incorporation or in Section 2 of Article III of
these bylaws.
ARTICLE X
EMERGENCY PROVISIONS
SECTION 1. GENERAL. The provisions of this Article shall be
operative only during a national emergency declared by the President of the
United States or the person performing the President's functions, or in the
event of a nuclear, atomic, or other attack on the United States or a
disaster making it impossible or impracticable for the corporation to conduct
its business without recourse to the provisions of this Article. Said
provisions in such event shall override all other Bylaws of the corporation
in conflict with any provisions of this Article, and shall remain operative
so long as it remains impossible or impracticable to continue the business of
the corporation otherwise, but thereafter shall be inoperative; provided that
all actions taken in good faith pursuant to such provisions shall thereafter
remain in full force and effect unless and until revoked by action taken
pursuant to the provisions of the Bylaws other than those contained in this
Article.
SECTION 2. UNAVAILABLE DIRECTORS. All directors of the corporation
who are not available to perform their duties as directors by reason of
physical or mental incapacity or for any other reason or who are unwilling to
perform their duties or whose whereabouts are unknown shall automatically
cease to be directors, with like effect as if such persons had resigned as
directors, so long as such unavailability continues.
SECTION 3. AUTHORIZED NUMBER OF DIRECTORS. The authorized number of
directors shall be the number of directors remaining after eliminating those
who have ceased to be directors pursuant to Section 2 of this Article, or the
minimum number required by law, whichever is greater.
SECTION 4. QUORUM. The number of directors necessary to constitute
a quorum shall be one-third of the authorized number of directors as
specified in Section 3 of this Article, or such other minimum number as,
pursuant to the law or lawful decree then in force, it is possible for the
Bylaws of the corporation to specify.
SECTION 5. CREATION OF EMERGENCY COMMITTEE. In the event the number
of directors remaining after eliminating those who have ceased to be
directors pursuant to Section 2 of this Article is less than the minimum
number of authorized directors
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required by law, then until the appointment of additional directors to make
up such required minimum, all the powers and authorities which the board of
directors could by law delegate, including all powers and authorities which
the board of directors could delegate to a committee, shall be automatically
vested in an emergency committee, and the emergency committee shall
thereafter manage the affairs of the corporation pursuant to such powers and
authorities and shall have all such other powers and authorities as may by
law or lawful decree be conferred on any person or body of persons during a
period of emergency.
SECTION 6. CONSTITUTION OF EMERGENCY COMMITTEE. The emergency
committee shall consist of all the directors remaining after eliminating
those who have ceased to be directors pursuant to Section 2 of this Article,
provided that such remaining directors are not less than three in number. In
the event such remaining directors are less than three in number, the
emergency committee shall consist of three persons, who shall be the
remaining director or directors and either one or two officers or employees
of the corporation, as the remaining director or directors may in writing
designate. If there is no remaining director, the emergency committee shall
consist of the three most senior officers of the corporation who are
available to serve, and if and to the extent that officers are not available,
the most senior employees of the corporation. Seniority shall be determined
in accordance with any designation of seniority in the minutes of the
proceedings of the board of directors, and in the absence of such
designation, shall be determined by rate of remuneration. In the event that
there are no remaining directors and no officers or employees of the
corporation available, the emergency committee shall consist of three persons
designated in writing by the shareholder owning the largest number of shares
of record as of the date of the last record date.
SECTION 7. POWERS OF EMERGENCY COMMITTEE. The emergency committee,
once appointed, shall govern its own procedures and shall have the power to
increase the number of members thereof beyond the original number, and in the
event of a vacancy or vacancies therein, arising at any time, the remaining
member or members of the emergency committee shall have the power to fill
such vacancy or vacancies. In the event at any time after its appointment
all members shall die or resign or become unavailable to act for any reason
whatsoever, a new emergency committee shall be appointed in accordance with
the foregoing provisions of this Article.
SECTION 8. DIRECTORS BECOMING AVAILABLE. Any person who has ceased
to be a director pursuant to the provisions of Section 2 of this Article and
who thereafter becomes available to serve as a director shall automatically
become a member of the emergency committee.
SECTION 9. ELECTION OF BOARD OF DIRECTORS. The emergency committee
shall, as soon after its appointment as is practicable, take all requisite
action to secure the election of a board of directors, and upon election all
the powers and authorities of the emergency committee shall cease.
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SECTION 10. TERMINATION OF EMERGENCY COMMITTEE. In the event, after
the appointment of any emergency committee, a sufficient number of persons
who ceased to be directors pursuant to Section 2 of this Article become
available to serve as directors, so that if they had not ceased to be
directors as aforesaid, there would be enough directors to constitute the
minimum number of directors required by law, then all such persons shall
automatically be deemed to be reappointed as directors and the powers and
authorities of the emergency committee shall end.
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*THIS INFORMATION HAS BEEN OMMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 24b-2 WHICH HAS BEEN FILED SEPARATELY WITH THE
COMMISSION.
AMENDMENT TO CONCESSION LEASE AGREEMENT
THIS AMENDMENT TO CONCESSION LEASE AGREEMENT, entered into as of April 23,
1997, between PACIFIC CONCESSIONS, INC., a California corporation ("Tenant"),
and CINEMASTAR LUXURY THEATERS, INC., a California corporation formerly known
as Nickelodeon Theater Co., Inc. ("Landlord"), is made with reference to the
following facts:
RECITALS
A. Tenant and Landlord entered into a Concession Lease Agreement (as
amended, the "Lease") dated March 6, 1992, whereby Landlord granted to Tenant
an exclusive sublease to the concession area within the Mission Marketplace
Theatre located at Mission and College Boulevard, Oceanside, California, and,
under an amendment to the Lease, the concession area within the Galaxy 6
Cinemas located at the River Village Shopping Center, Bonsall, California.
Any capitalized terms not defined herein that are defined in the Lease shall
have the meanings set forth in the Lease.
B. Tenant and Landlord desire to amend the Lease to include as
additional theatres thereunder the Chula Vista 6 located in Chula Vista,
California, the Ultraplex 14 at Mission Grove located in Riverside,
California, the Ultraplex 10 at University Village in Riverside, California,
and the Ultraplex 10 at Perris in Perris, California (the "Additional
Theatres"), pursuant to the terms hereof.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. ADDITION OF THEATRES. Recital A of the Lease shall be amended
in its entirety as follows:
Landlord owns or leases and operates the following theatres
(the "Theatres").
Mission Marketplace Theatre
431 College Boulevard
Oceanside, California 92003 ("Mission Marketplace Theatre");
Galaxy 6 Cinemas
5256 S. Mission Road
Bonsall, California 92003 (the "Bonsall Theatre");
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Chula Vista 6
320 Third Avenue
Chula Vista, California 91910 (the "Chula Vista 6");
Ultraplex 10 at University Village
1201 University Avenue
Riverside, California 92507 (the "University Village Theatre");
Ultraplex 10 at Perris
1688 N. Perris Boulevard
Perris, California 92571 (the "Perris Theatre");
Ultraplex 14 at Mission Grove
121 East Alesandro
Riverside, California 92508 (the"Ultraplex 14");
The Chula Vista 6, the University Village Theatre, the Perris
Theatre, and the Ultraplex 14 are collectively referred to as
the "Additional Theatres".
2. TERM
Section 3 of the Lease shall be amended in its entirety as
follows:
3. Term:
a. The term of this Agreement shall commence
on (i) the date hereof as to the Mission Marketplace Theatre; (ii)
May 8, 1992, as to the Bonsall Theatre; and (iii) May 1, 1997, as
to the Additional Theatres. Subject to the provisions of Section
3.b, the term of this Agreement as to the Mission Marketplace
Theatre and the Bonsall Theatre shall continue until the later of
(a) November 7, 2000 (the "Expiration Date"), or (b) one year
after all indebtedness under the Loan Agreement (as hereafter
defined) has been paid in full; provided that the term may be
further extended as outlined below. Subject to the provisions of
Section 3.c, the term of this Agreement as to the Additional
Theatres shall continue until the later of (1) the date that
aggregate Net Concession Sales reaches $ * (the "Threshold
Amount") for the Theatres and the theatre known as the Chula
Vista 10 in Chula Vista, California, during the period after May
1, 1997, and continuing as to each such theatre as long as Tenant
remains the tenant of the Concessions Areas under this
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Agreement or the Concession Lease Agreement between CinemaStar
Luxury Cinemas, Inc., and Tenant dated February 22, 1993, as
applicable, or (2) the date on which Landlord pays all accrued
interest and principal under the Secured Promissory Note dated
April 23, 1997, in the original principal amount of $2,000,000
made by Landlord payable to Tenant (the "$2,000,000 Promissory
Note"); provided, however, that the term as to all Theatres shall
be further extended as follows (the "Extended Term"); If prior to
April 24, 1998, Landlord fails to repay Tenant principal of at
least $1,000,000, and accrued interest, under the $2,000,000
Promissory Note, then the term as to the Additional Theatres
shall be extended for six months; if the entire principal and
accrued interest is not paid prior to April 24, 1999, then the
term as to the Mission Marketplace Theatre and the Bonsall
Theatre shall be extended 18 months and the term as to the
Additional Theatres shall be extended an additional 12 months; if
the entire principal and accrued interest is not paid prior to
each subsequent April 24 thereafter, then on each such
anniversary, the term as to all Theatres shall be extended an
additional 12 months. Nothing herein shall affect the terms of
the $2,000,000 Promissory Note and any rights and remedies of
Tenant thereunder.
b. Landlord may terminate this Agreement early as to either
of the Mission Marketplace Theatre or the Bonsall Theatre if
Landlord is not then in default under any term or provision of
this Agreeement by giving Tenant at least three months' prior
written notice of such early termination, and upon payment of the
following sums at least 10 days prior to the effective date of
the termination:
(i) All amounts owing to Tenant pursuant to paragraph
8(s) hereof as to the Theatre to be terminated;
(ii) The loan, if any, outstanding under the Loan
Agreement made with respect to the Theatre to be terminated, i.e.,
the Promissory Note, dated March 6, 1992, in the original
principal amount of $600,000 for the Mission Marketplace Theatre,
or the Promissory Note, dated as of May 8, 1992, in the original
principal amount of $300,000 for the Bonsall Theatre.
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(iii) An early termination fee equal to *
of the average monthly Net Concession Sales for the
immediatedly preceding twelve-month period attributable to the
Theatre to be terminated, multiplied by the number of total or
partial months remaining until the expiration date, *
(iv) An amount equal to $ *(as to the Mission
Marketplace Theatre) or $ *(as to the Bonsall Theatre)
multiplied by the number of total or partial months remaining
until the Expiration Date; and
(v) All principal and accrued interest under the
$2,000,000 Promissory Note.
The application of the foregoing formula is
demonstrated as follows:
c. If Landlord (i) pays Tenants all amounts when due
under the $2,000,000 Promissory Note, and (ii) fails to reach the
Threshold Amount by October 31, 1999, then Landlord may
thereafter terminate this Agreement as to the Additional Theatres
upon thirty (30) days' prior written notice to Tenant if Landlord
pays to Tenant on the effective date of termination *percent
of the difference between the Threshold Amount, and the amount of
Net Concession Sales actually earned at the theatres, the sales of
which are included in the Threshold Amount. Furthermore, at any
time during
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the term of this Agreement Landlord may elect to terminate this
Agreement early as to any or all Additional Theatres if Landlord
first gives Tenant three months' prior written notice of such
early termination, and if Landlord pays to Tenant the Prorated
Portion of the following amounts at least (10) days prior to the
termination date:
(i) all amounts owing under the $2,000,000
Promissory Note; and
(ii) *
As used herein, "Prorated Portion" means a fraction, (A) the
numerator of which is the Net Concession Sales, for the
Additional Theatre or Additional Theatres which Landlord elects
to have terminated from this Agreement, for the twelve-month
period immediately preceding the effective termination date, and
(B) the denominator of which is the aggregate Net Concession
Sales, for all Additional Theatres which remain subject to this
Agreement as of the day immediately preceding the effective
termination date, for the twelve-month period immediately
preceding the effective termination date.
Notwithstanding the foregoing, (i) the minimum payment under
subparagraph 3.c (ii) shall be $ * per theatre if the
early termination option is exercised as to less than all of the
Additional Theatres, and (ii) if Landlord elects to terminate
this Agreement concurently as to all Additional Theatres, the
total payment under subparagraph 3.c (ii) shall be *
Furthermore, concurrently herewith Landlord shall issue to Tenant
warrants to purchase 100,000 shares of Common Stock of Landlord,
exercisable gy Tenant upon the early termination of this
Agreement as to an Additional Theatre under this Section 3.c.
d. Tenant agrees that, if Landlord exercises its
right to terminate this Agreement early as to any of the Theatres
pursuant to Section 3.b. or 3.c., and Landlord wishes to add
additional theatres under this Agreement, Tenant will do the
following:
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(i) Negotiate in good faith for the
amendment of this Agreement to include such additional theatres;
and
(ii) Permit such additional theatres to be
substituted for the Theatres which Landlord has caused to be
terminated from this Agreement for the purpose of calculating
aggregate Net Concession Sales for all theatres as provided in
Section 3.a, provided that such substituted theatres shall be
located in the continental United States and shall have Net
Concession Sales comparable to the terminated theatre.
3. COMMISSION PAYMENTS. Section 5.a of the Lease is amended
to provide that as to the Additional Theatres only, the commissions payable
by Tenant under Section 5.a shall be equal to * percent * of Net
Concession Sales (other than the sales of special products).
4. CAFE SALES. The lease is amended to provide that
nothwithstanding any provision of the Lease to the contrary, as to the
Additional Theatres only, Landlord may provide for the sale of food and
beverage items in the cafe areas of those Theatres, provided that the cafe
areas are clearly separated from the Concession Areas and the food and
beverage items offered in the cafe areas are not the same as or similar to
the items sold by Tenant in the Concession Areas. If Landlord wishes to sell
items in the cafe areas that are the same as or similar to the items sold by
Tenant in the Concession Areas, then those items shall be provided solely by
Tenant and those sales shall be included as Net Concession Sales under the
Lease.
5. NEW THEATRES. Upon at least two weeks' prior written notice to
Tenant, Landlord may add other theatres in the continental United States as
Additional Theatres hereunder if those other theatres are not covered under
the Lease or any other concession lease agreement with Tenant, subject to the
consent of Tenant, which consent shall not be unreasonabley withheld.
6. MODIFICATION OF TENANT OBLIGATIONS. The Lease is amended to
provide that Tenant shall have no obligation to Landlord as to the Additional
Theatres only under the following provisions of Section 9 e,f and g.
7. NO OTHER AMENDMENTS. Except as amended hereby, the Lease remains
in full force and effect.
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IN WITNESS WHEREOF, the parties have executed this Amendment to
Concession Lease Agreement as of the date first written above.
PACIFIC CONCESSIONS, INC., a
California corporation
By: /s/ ALAN KATES
-------------------------------
Alan Kates, President
"Tenant"
CINEMASTAR LUXURY THEATERS, INC.,
a California corporation
By: /s/ JOHN ELLISON, JR.
---------------------------------
John Ellison, Jr., President
"Landlord"
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the first
day of April, 1997, by and between CinemaStar Luxury Theaters, Inc., a
California corporation (hereinafter the "Company"), and Jon Meloan, an
individual (hereinafter "Employee").
W I T N E S S E T H
WHEREAS, the Company desires to retain the services of the Employee, and
the Employee is willing to be an employee of the Company, on the terms and
subject to the conditions hereinafter set forth.
NOW, THEREFORE, for and in consideration of the mutual promises herein
contained, the parties hereto hereby agree as follows:
1. ENGAGEMENT; NATURE OF DUTIES. Company hereby engages Employee, for
the period hereinafter set forth, to serve as and hold the office of Vice
President, Secretary and General Counsel, and to perform the duties of such
offices as directed by the Board of Directors of the Company. Employee agrees
to serve in such capacities and to do and perform the services, acts, or
things necessary to carry out the duties of such offices, and such other
duties (including service as an officer and/or director of any subsidiary of
the Company, not inconsistent with such office and Employee's position as an
executive officer of the Company, as Company and Employee may mutually agree.
Employee shall report only to the President of the Company.
2. TERM. The term of employment pursuant to this Agreement shall be
for a period of five (5) years, commencing on the date of this Agreement (the
"Commencement Date"), unless sooner terminated in accordance with the
provisions hereof (the "Term").
3. PERFORMANCE OF DUTIES. Employee shall devote his best efforts and
his entire business time and attention to his duties hereunder. The Employee
shall not accept or undertake any other employment with any person, firm or
entity other than the Company (regardless of whether such other person, firm,
or entity is in competition with the Company or any of its subsidiaries)
without first having obtained the approval of the Board of Directors of the
Company, which shall be given in the Company's sole and absolute discretion.
Employee shall perform his duties hereunder primarily in the San Diego,
California area, it being understood that Employee's
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duties hereunder may require travel. Employee shall not be required to
relocate without his consent.
4. COMPENSATION.
(a) BASE SALARY. Company shall pay to Employee a base salary in
the amount of Ninety Thousand Dollars ($90,000) per year (the "Base Salary"),
payable in periodic installments in accordance with Company's prevailing
policy for compensating personnel, but not less often than semi-monthly. The
Company may, but shall not be obligated to, increase Employee's salary at any
time, in the Company's sole and absolute discretion.
(b) DISCRETIONARY BONUS. In addition to the Base Salary, and any
and all other compensation, profit-sharing participation, benefits or other
amounts due to or receivable by Employee pursuant to this Agreement, Employee
may receive, in the sole and absolute discretion of the Company, an annual
bonus in such amount and on such terms as are determined by the Company.
5. EXPENSE REIMBURSEMENT. The Company shall pay, or if Employee shall
have paid, shall reimburse to Employee, any and all reasonable expenses
incurred by him or for his account in the performance of his duties
hereunder, subject only to Employee providing appropriate documentation for
such expenses; provided, however, that Employee shall not be entitled to
reimbursement for any expense in excess of $500 without the prior approval of
the President or Senior Executive Vice President of the Company.
6. MEDICAL AND LIFE INSURANCE; PENSION BENEFITS. Employee shall have
the right to participate in any and all group, life, disability income,
health or accident insurance programs that are in effect during the period of
Employee's employment hereunder, subject only to any eligibility restrictions
of such programs. Coverage under any group health insurance shall also cover
Employee's spouse. Employee shall also have the right to participate in any
and all employee retirement benefits plan or profit-sharing plan which
Company maintains for its personnel, and in effect at any time during the
period of Employee's employment hereunder, subject only to any eligibility
restrictions of such plans.
In addition to the foregoing, the Company shall purchase and
maintain (or reimburse Employee for any premiums paid under) life insurance
on the life of Employee providing for a death benefit to Employee or his
beneficiaries of at least $100,000; provided, however, that the Company shall
only be required to maintain or reimburse Employee for premiums under such
life insurance policy to the extent that Employee is insurable and such
policy can be purchased at a standard rate.
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7. VACATION. During each year of the Term, Employee shall be entitled
to 3 weeks without deduction in pay. Such vacation shall be taken at such
time or times during the applicable year as may be mutually determined by
Employee and Company. Any additional vacation period shall be determined by
Company consistent with the general customs and practices of the Company
applicable to its personnel.
8. TERMINATION.
8.1 TERMINATION EVENTS. Employee's employment and the
obligations of the Company, including, without limitation, the obligation of
the Company to pay Employee any unearned Base Salary or Bonus, shall
terminate upon the earliest to occur of:
8.1.1 March 31, 2003;
8.1.2 Employee's death or disability;
8.1.3 The termination of Employee's employment "for
Cause" as described in Section 8.2;
8.1.4 The termination of Employee's employment by
Employee, including retirement; and
8.2 TERMINATION FOR CAUSE. The following acts, events or
omissions shall constitute "cause" to terminate Employee's employment during
the term of this Agreement:
8.2.1 The gross neglect or willful dereliction or the
breach of any of Employee's duties, covenants, agreements or obligations
hereunder. Unless the acts on the part of Employee warrant immediate
termination, Employee will be given written notice of the gross neglect,
willful dereliction or breach of duty and be given a 30-day period to correct
the situation.
8.2.2 The engagement by Employee in material dishonest or
fraudulent conduct or behavior or disclosure of confidential information
other than in connection with the performance of Employee's duties hereunder.
8.2.3 Employee's conviction of a felony involving
dishonesty, fraud or other similar acts.
8.3 PRORATIONS. Any compensation payable to Employee hereunder
shall be prorated through the Termination Date.
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8.4 DISABILITY. Disability means physical or mental illness
resulting in Employee's absence on a full-time basis from Employee's duties
with the Company for ninety (90) consecutive calendar days.
9. INDEMNIFICATION. The Company shall indemnify, defend and hold
Employee harmless from and against any and all claims, demands, suits,
obligations, liabilities, actions, losses, costs, expenses, fines or
penalties (collectively, "Claims") which may now or hereafter be pending,
threatened or commenced against or incurred by Employee relating to or in any
way resulting from Employee's performance of his duties, hereunder, or any
action or failure to act of Employee in connection with such duties, except
for those Claims which arise from Employee's dishonesty, bad faith or gross
negligence or deliberate dereliction of duty, to the fullest extent permitted
by the Company's by-laws and California law. Employee's rights under this
Section 9 shall be in addition to, and not in lieu of, any and all other
rights of Employee under applicable law or any agreement with the Company
regarding indemnification.
10. CONFIDENTIAL INFORMATION.
(a) As used in this Agreement, "Confidential Information" means
any and all information disclosed to Employee or which Employee gains
knowledge of as a consequence of or through Employee's employment by Company
(including information conceived, originated, discovered or developed by
Employee) about Company's products, processes, and services, including
information relating to research, development, inventions, purchasing,
accounting, marketing, merchandising, selling, trade secrets, customer or
supplier lists, which information the Company maintains as confidential.
(b) Except as required in Employee's duties to Company and then
only with Company's prior written consent, Employee will not, directly or
indirectly, use for Employee's own benefit or the benefit of others, or
disseminate, disclose, lecture upon or publish articles concerning, any
Confidential Information either during or at any time after the term of this
Agreement.
(c) All documents, papers, notes, notebooks, memoranda, computer
files, and other written electronic records of any kind by Company, shall
remain the property of Company at all times. Upon the termination of
Employee's employment with Company, all
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documents, papers, notes, notebooks, memoranda, computer files and other
written or electronic records in Employee's possession, whether prepared by
Employee or others will be left with Company.
11. NOTICES. Any and all notices which are required or permitted to be
given by any party to any other party hereunder shall be given in writing,
sent by registered or certified mail, electronic communications (including
telegram or facsimile) followed by a confirmation letter sent by registered
or certified mail, postage prepaid, return receipt requested, or delivered by
hand or messenger service with the charges therefor prepaid, addressed to
such party as follows:
(a) Notices to the Employee: Jon Meloan
2581 Daisy Lane
Fallbrook, CA 92028
(b) Notice to the Company: CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
or to such other address as the parties shall from time to time give notice
of in accordance with this Section. Notices sent in accordance with this
Section shall be deemed effective on the date of dispatch, and an affidavit
of mailing or dispatch, executed under penalty of perjury, shall be deemed
presumptive evidence of the date of dispatch.
12. ENTIRE AGREEMENT AND MODIFICATIONS. This Agreement constitutes the
entire understanding between the parties pertaining to the subject matter
hereof and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written. There are no warranties,
representations or other agreements between the parties, in connection with
the subject matter hereof, except as specifically set forth herein. No
supplement, modification, waiver or termination of this Agreement shall be
binding unless made in writing and executed by the party thereto to be bound.
13. WAIVERS. No term, condition or provision of this Agreement may be
waived except by an express written instrument to such effect signed by the
party to whom the benefit of such term, condition or provision runs. No such
waiver of any term, condition or provision of this Agreement shall be deemed
a waiver of any other term, condition or provision, irrespective of
similarity, or shall constitute a continuing waiver of the same term,
condition or provision, unless otherwise expressly provided. No failure or
delay on the part of any party in exercising any right, power or
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privilege under any term, condition or provision of this Agreement shall
operate as a waiver thereof, nor shall a single or partial exercise thereof
preclude any other or further exercise of any other right, power or privilege.
14. SEVERABILITY. In the event any one or more of the terms,
conditions or provisions contained in this Agreement should be found in a
final award or judgment rendered by any court or arbitrator or panel of
arbitrators of competent jurisdiction to be invalid, illegal or unenforceable
in any respect, the validity, legality and enforceability of the remaining
terms, conditions and provisions contained herein shall not in any way be
affected or impaired thereby, and this Agreement shall be interpreted and
construed as if such term, condition or provision, to the extent the same
shall have been held invalid, illegal, or unenforceable, had never been
contained herein, provided that such interpretation and construction is
consistent with the intent of the parties as expressed in this Agreement.
15. HEADINGS. The headings of the Articles and Sections contained in
this Agreement are included herein for reference purposes only, solely for
the convenience of the parties hereto, and shall not in any way be deemed to
affect the meaning, interpretation or applicability of this Agreement or any
term, condition or provision hereof.
16. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, notwithstanding the
fact that one or more counterparts hereof may be executed outside of the
state, or one or more of the obligations of the parties hereunder are to be
performed outside of the state.
17. ATTORNEYS' FEES. In the event that any party to this Agreement
shall commence any suit, action, arbitration or other proceeding to interpret
this Agreement, or determine or enforce any right or obligation created
hereby, including but not limited to any action for rescission of this
Agreement or for a determination that this Agreement is void or ineffective
AB INITIO, the prevailing party in such action shall recover such party's
costs and expenses incurred in connection therewith, including attorney's
fees and costs of appeal, if any. Any court, arbitrator or panel of
arbitrators shall, in entering any judgment or making any award in any such
suit, action, arbitration or other proceeding, in addition to any and all
other relief awarded to such prevailing party, include in such judgment or
award such party's costs and expenses as provided in this Section 17.
18. EXECUTION AND COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when so
6
<PAGE>
executed and delivered shall be deemed an original, and such counterparts
together shall constitute only one instrument. Any or all of such
counterparts may be executed within or outside the State of California. Any
one of such counterparts shall be sufficient for the purpose of proving the
existence and terms of this Agreement, and no party shall be required to
produce an original or all of such counterparts in making such proof.
19. COVENANT OF FURTHER ASSURANCES. All parties to this Agreement
shall, upon request, perform any and all acts and execute and deliver any and
all certificates, instruments and other documents that may be necessary or
appropriate to carry out any of the terms, conditions and provisions hereof
or to carry out the intent of this Agreement.
20. REMEDIES CUMULATIVE. Each and all of the several rights and
remedies provided for in this Agreement shall be construed as being
cumulative and no one of them shall be deemed to be exclusive of the others
or of any right or remedy allowed by law or equity, and pursuit of any one
remedy, or a waiver of any other remedy.
21. BINDING EFFECT. Subject to the restrictions in Section 25 hereof
respecting assignments, this Agreement shall inure to the benefit of and be
binding upon all of the parties hereto and their respective executors,
administrators, successors and permitted assigns.
22. COMPLIANCE WITH LAWS. Nothing contained in this Agreement shall be
construed to require the commission of any act contrary to law, and whenever
there is a conflict between any term, condition or provision of this
Agreement and any present or future statute, law, ordinance or regulation
contrary to which the parties have no legal right to contract, the latter
shall prevail, but in such event the term, condition or provision of this
Agreement affected shall be curtailed and limited only to the extent
necessary to bring it within the requirement of the law, provided that such
construction is consistent with the intent of the parties as expressed in
this Agreement.
23. GENDER. As used in this Agreement, the masculine, feminine or
neuter gender, and the singular or plural number, shall be deemed to include
the others whenever the context so indicates.
24. NO THIRD PARTY BENEFIT. Nothing contained in this Agreement shall
be deemed to confer any right or benefit on any person who is not a party to
this Agreement.
7
<PAGE>
25. ASSIGNMENT. Neither party may assign this Agreement, or any rights
hereunder, without the prior express consent of the other party.
26. ARBITRATION. Any claim arising out of or relating to this
Agreement, or the breach thereof, or Employee's employment by Company, or the
termination of Employee's employment by Company, shall be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, and judgment upon the award
entered by the arbitrator(s) may be entered in any court having jurisdiction
thereof.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of the day and year first above written.
"Company"
CinemaStar Luxury Theaters, Inc.,
a California corporation
By: /s/ JOHN ELLISON, JR.
----------------------
John Ellison, Jr.
President & Chief
Executive Officer
"Employee"
/s/ JON MELOAN
- -------------------------
Jon Meloan
8
<PAGE>
CONVENIO PARA DAR POR TERMINADO EL CONTRATO DE ARRENDAMIENTO QUE FUE
CELEBRADO EL DIA 25 DE ABRIL DE 1996, EN EL QUE CONCURRIERON POR UNA PRIMERA
PARTE ESPACIOS DE ZAPOPAN, S.A. DE C.V. REPRESENTADA POR EL SR. LIC. MIGUEL
ANGEL DOMINGUEZ MORALES, COMO ADMINISTRADOR UNICO DE LA SOCIEDAD, Y CON EL
CARACTER DE "ARRENDADOR", POR UNA SEGUNDA PARTE LA EMPRESA CINEMASTAR LUXURY
THEATER, S.A. DE C.V., REPRESENTADA POR EL LIC. MARCO ANTONIO ALEMAN BONILLA,
COMO ADMINISTRADOR UNICO DE LA SOCIEDAD, EN SU CARACTER DE "ARRENDATARIO", Y
POR UNA TERCERA PARTE LA EMPRESA CINEMASTAR LUXURY THEATER INC, REPRESENTADA
POR EL SENOR JOHN ELLISON JR. EN SU CARACTER DE APODERADO ESPECIAL, ESTE
ULTIMO POR DESCONOCER EL IDIOMA ESPANOL FUE ASISTIDO POR EL SR. LIC. GABRIEL
JIMENEZ CODINACH COMO PERITO INTERPRETE, ESTE CONVENIO SE CELEBRA POR TODAS
LAS PARTES Y CON EL MISMO CARACTER CON EL QUE PARTICIPARON EN EL CONTRATO DE
ARRENDAMIENTO ANTES CITADO, EL CUAL SE CELEBRA DE CONFORMIDAD CON LAS
SIGUIENTES DECLACRACIONES Y CLAUSULAS.
DECLARACIONES
1.- Declaran las empresas ESPACIOS DE ZAPOPAN, S.A. DE C.V. en su
caracter de arrendador, CINEMASTAR LUXURY THEATER, S.A. DE C.V. en su
caracter de arrendatario y CINEMASTAR LUXURY THEATER INC, en su caracter de
garante lo siguiente:
A)- Que con fecha 25 de Abril de 1996 celebraron un contrato de
arrendamiento, sujeto a las condiciones y terminos que el propio contrato de
arrendamiento senala.
B)- Que por no convenir a sus intereses los declarantes han acordado
dar por terminado el contrato de arrendamiento antes mencionado, sin ninguna
responsabilidad de las parte que en el intervinieron y de acueurdo a las
siguientes:
CLAUSULAS
PRIMERA - La empresa ESPACIOS DE ZAPOPAN, S.A. DE C.V. en su caracter de
arrendador, la empresa CINEMASTAR LUXURY THEATER, S.A. DE C.V. en su caracter
de arrendatario y la empresa CINEMASTAR LUXURY THEATER, INC. en su caracter
de garante, de conformidad con lo previsio en el articulo 2140 fraccion 11
del codigo civil del Estado de Jalisco, acuerdan dar por terminado el
contrato de arrendamiento que celebraron las partes antes mencionadas el dia
25 de Abril de 1996.
SEGUNDA - Como consecuencia de lo anterior las partes se relevan
reciprocamente de las obligaciones asumidas en el contrato de arrendamiento
antes mencionado y sus consecuencias, manifestando no reservarse ninguna
accion ni derecho para ejercitar una en contra de la otra y renunciando en
todo caso y desde este momento al ejercicio de cualquiera de ellas.
<PAGE>
TERCERA - A partir de la firma de este convenio el arrendador queda en
completa libertad para propalar la celebracion de cualquiar contrato o acto
juridico que impique la posesion o disposicion del inmueble materia del
arrendamiento lo que podra realizar sin ninguna responsabilidad de su parte.
CUARTA - Como consquiencia de la celebracion de este convenio, el arrendador
se compromete y obliga a restituir la cantidad de usd, $50,000.00 (cincuenta
mil dolares moneda de los Estados Unidos de America), la cual fue recibida
por concepto de deposito en garantia en los terminos previstos en la clausula
XXX del contrato de arrendamiento a que antes se ha hecho referencia, en un
plazo maximo de diez dias habiles a partir de la fecha de firma de este
convenio.
QUINTA - Para la interpretacion y cumplimiento de los pactos contenidos en el
presente convenio las partes se someten a la jurisdiccion y competencia de
los tribunales competentes de la Ciudad de Guadalajara, Jalisco, renunciando
expresamente al fuero de la competencia que pudiera conrresponderles en razon
de su domicilio presente o futuro.
Participa en este convenio el Lic. Gabriel Jimenez Codinach en su caracter de
perito traductor quien manifesto que en este acto que le hace saber al Sr.
John Ellison Jr. el contenido del presente documento mediante la traduccion
al idioma Ingles por lo que en consecuencia ambos son conocedores de su
contenido y alcance legal, motivo por el cual lo firman de conformidad para
todos los efectos legales correspondientes.
Este convenio se firma a los 19 dias del mes de Junio de 1997 en la Ciudad de
Guadalajara, Jalisco.
ARRENDADOR
Firma ilegible
ESPACIOS DE ZAPOPAN, S.A. DE C.V.
LTC. MIGUEL ANGEL DOMINGUEZ MORALES
ARRENDATARIO
Firma ilegible
CINEMASTAR LUXURY THEATER, S.A. DE C.V.
LTC. MARCO ANTONIO ALEMAN BON[caad 147]ILLA
EL GARANTE
Firma ilegible
CINEMASTAR LUXURY TEHATER, INC.
SR. JOHN ELLISON JR.
PERITO TRADUCTOR
Firma ilegible
LIC. GABRIEL JIMENEZ CODINACH
TESTIGOS
Firma ilegible Firma ilegible
<PAGE>
THE CONTRACT OF LEASE DATED APRIL 25, 1996 BETWEEN CINEMASTAR LUXURY
THEATERS, S.A. DE C.V. (CINEMASTAR MEXICO) AND ESPACIOS DE ZAPOPAN, S.A. DE
C.V. (ZAPOPAN) IS TO BE TERMINATED IN ACCORDANCE WITH THE FOLLOWING CLAUSES:
DECLARATIONS
1. Zapopan in its character as landlord and CinemaStar Mexico in its
character as tenant and CinemaStar Luxury Theaters, Inc. (CinemaStar
U.S.) in its character as guarantor declare as follows:
A. A lease contract was entered into on April 25, 1996.
B. The declarants have agreed to terminate this lease contract
aforementioned the parties to which will bear no
responsibility according to the following:
CLAUSES
FIRST- Zapopan as landlord, CinemaStar Mexico as tenant and CinemaStar
U.S. as guarantor, in accordance with the provisions of article 2140 section
II, of the Code of the State of Jalisco, agree to terminate the lease contract
of April 25, 1996.
SECOND- As a consequence of the foregoing the parties are relieved of all
of the responsibilities that were assumed under the lease contract
aforementioned and their consequences, recognizing that no action or right is
reserved against the other party and all obligations are henceforth
relinquished in every case.
THIRD- From the signing of this release, the landlord is at complete
liberty to enter into any contract or juridical act regarding the possession
or disposition of the leased premises that it chooses without responsibility
on its part.
FOURTH- As a consequence of this (termination) agreement, the landlord
compromises and becomes obligated to repay the $50,000.00 U.S., deposit made
in accordance with clause XXX. Such repayment will be made within 10 days of
the signing of this release.
FIFTH- For the interpretation and compliance of the provisions contained
in this release, the parties submit to the jurisdiction of the competent
tribunal of the City of Guadalajara, Jalisco.
Participating in this release is Gabriel Jimenez Codinach as translator who
acknowledges that John Ellison, Jr. is aware of the contents of this document
which was translated to him in English which as a consequence has made him
aware of all of the corresponding legal effects.
This agreement is signed on the 19th of June, 1997 in the City of
Guadalajara, Jalisco.
<PAGE>
[Letterhead]
June 9, 1997
BY CERTIFIED MAIL
RETURN RECEIPT REQUESTED
Cinemastar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, CA 92057
Attn: John Ellison, Jr.
Re: Coconut Grove Marketplace Sublease Agreement Dated July 18, 1996
----------------------------------------------------------------
Dear Mr. Ellison:
As a follow up to my letter of May 8, 1997, I am writing to advise you that
my clients understand that you have contacted their real estate broker,
Gregory Ogin, and have advised Mr. Ogin that Cinemastar will not be providing
the letter of credit requested by City Bank and, further, that Cinemastar is
not exercising its right to void the termination of the Sublease Agreement by
my clients as set forth in my letter of May 8, 1997 by agreeing to pay the
full cost and expense of the Cinemastar building in excess of $85.00 per
square foot.
Therefore, the purpose of this letter is to advise you that my clients,
Messrs. Brian Anderson and Melvin Shapiro, deem the Cinemastar Coconut Grove
Marketplace Sublease Agreement dated July 18, 1996 terminated as of this date
and the parties released and discharged from any and all of their
obligations, duties and liabilities under the Sublease.
<PAGE>
Cinemastar Luxury Theaters, Inc.
June 9, 1997
Page 2
My clients consider it unfortunate that Cinemastar was unable to work with
them to make Cinemastar theater a part of the Coconut Marketplace project.
Very truly yours,
/s/ S.V. (Bud) Quitiquit
SVQ:sw
cc: Mr. Mel Shapiro
Mr. Brian Anderson
Mr. Gregory Ogin
<PAGE>
[LETTERHEAD]
VIA FACSIMILE (760) 630-8593
25 June 1997 & U.S. MAIL (Certified, Return Receipt Requested)
John Ellison, Jr.
CINEMASTAR LUXURY THEATERS, INC.
431 College Blvd.
Oceanside, CA 92057
RE: CITY OF SAN MARCOS
NOTICE OF CANCELLATION OF 06-25-96 CINEMASTAR GROUND LEASE
- --------------------------------------------------------------------------------
Dear Mr. Ellison:
By way of introduction, this firm serves as City Attorney for the City of San
Marcos ("the City"). This letter concerns that certain Ground Lease dated 25
June 1996 by and between the City and Cinema Star Luxury Theaters, Inc. ("the
Lease").
Pursuant to Sections 20.1 and 2.2(b)(iv) of the Lease, this constitutes
written notice to CinemaStar Luxury Theaters, Inc. that the City, as
Landlord, has exercised its right to cancel the Lease by reason of the
failure of CinemaStar Luxury Theaters to timely meet its obligations. In
accordance with Section 2.2(b)(iv), the parties are henceforth released from
any further obligation to the other.
Please be further advised that should you have questions regarding this
notice or the now-canceled Lease, they are to be directed to the undersigned
and not to the City or to its agents and employees.
Sincerely,
/s/ Helen Holmes Peak
HELEN HOLMES PEAK
cc: City Manager
Deputy City Manager
Charlie Abdi, Koll Real Estate Group
Jon Meloan, Esq., CinemaStar (Certified, Return Receipt Requested)
<PAGE>
MISSION MARKETPLACE
FIRST AMENDMENT TO LEASE
This FIRST Amendment to Lease ("FIRST Amendment") is made, for reference
purposes only, this 5TH DAY OF MAY, 1997, between PACIFIC OCEANSIDE HOLDINGS,
L.P., a CALIFORNIA LIMITED PARTNERSHIP ("Landlord") and CINEMASTAR LUXURY
THEATRE COMPANY, INC., a CALIFORNIA CORPORATION ("Tenant") with reference to
the following facts:
RECITALS
A. Landlord and Tenant entered into that certain Lease dated JANUARY
31, 1997.
B. The parties desire to amend the Lease as set forth in this FIRST
Amendment.
C. All capitalized terms used in this FIRST Amendment unless
specifically defined herein shall have the same meaning as the capitalized
terms used in the Lease.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which
are expressly acknowledged, Landlord and Tenant agree as follows:
AGREEMENT
1. EFFECTIVE DATE. This First Amendment shall be deemed effective as of
MAY 1, 1997 (the "Effective Date").
2. LEASE TERM. One (1) year (beginning on the Effective Date) with a
One (1) option to renew for One (1) year.
3. LEASE OF ADDITIONAL SPACE. On the Effective Date the Premises shall
be deemed to include that certain additional space in the Shopping
Center consisting of approximately 2,409 square feet of rentable floor
area, designated as 427 College Blvd., Suite L, Oceanside, CA 92057.
4. TENANT'S PRO RATA SHARE OF LEASE EXPENSES. On the Effective Date,
Tenant's Pro Rata Share of Lease Expenses shall be adjusted in
accordance with Section 8.2 of the Lease.
5. BASIC MONTHLY RENT. On the Effective Date, Tenant's Basic Monthly
Rent for the Additional Space shall be as follows:
DATE BASIC MONTHLY BASIC MONTHLY RENT (U.S.F.) NNN
---- ------------- -------------------------------
5-1-97 - 4-30-98 $2,649.90 $1.1000
(*)5-1-98 - 4-30-99 $2,770.35 $1.1500
(*)Renewal Option
6. TENANT CERTIFICATION. By execution of this FIRST Amendment, Tenant
hereby certifies that as of the date hereof, and to the best of
Tenant's knowledge, that Landlord is not in default of the performance
of its obligations pursuant to the Leases, and Tenant has no claim,
defense, or offset with respect to the Lease.
7. CONFIRMATION. Except, as and to the extent modified by this FIRST
Amendment to Lease all provisions of the Lease shall remain in full
force and effect. In the event of a conflict between the terms of the
Lease and the terms of this Amendment, the terms in this Amendment
shall control.
IN WITNESS WHEREOF, Landlord and Tenant agree to the foregoing as evidenced
by affixing their signatures below.
<PAGE>
LANDLORD: Pacific Oceanside Holdings, L.P.,
a California limited partnership
By: American Assets, Inc. as Agent
By: /s/ Jamie Cronemeyer
---------------------------------------
Jamie Cronemeyer
Its: Vice President, Commercial Real Estate
Date: 5/28/97
---------------------------------------
TENANT: CinemaStar Luxury Theatre Company, Inc.,
a California corporation
By: /s/ Alan M. Grossberg
---------------------------------------
Alan M. Grossberg
Its: Senior Vice President, and Chief Operating Officer
Date:
---------------------------------------
CONSENT OF GUARANTOR(S)
The undersigned guarantor(s) hereby consent(s) to the foregoing and confirm(s)
and reaffirms that he/she/they remain(s) liable for the full performance of
all terms, convenants and conditions of the Lease as amended hereby.
GUARANTOR John Ellison, Jr., Alan M. Grossberg, Jerry Willits,
Russell Scheuh
By: /s/ John Ellison, Jr.
---------------------------------------
John Ellison, Jr.
By: /s/ Alan M. Grossberg
---------------------------------------
Alan M. Grossberg
By: /s/ Jerry Willits
---------------------------------------
Jerry Willits
By: /s/ Russell Seheult
---------------------------------------
Russell Seheult
Date:
---------------------------------------
<PAGE>
AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT, entered into as of April 23, 1997,
between PACIFIC CONCESSIONS, INC., a California corporation ("Lender"), and
CINEMASTAR LUXURY THEATERS, INC., a California corporation formerly known as
Nickelodeon Theatre Co.,Inc. ("Borrower"), is made with reference to the
following facts:
RECITALS
A. Lender and Borrower entered into a Loan Agreement dated as of March
6, 1992 (as amended, the "Loan Agreement").
B. Borrower desires to borrow from Lender an additional $2,000,000
under the Loan Agreement, and Lender is willing to lend such upon the terms
and conditions set forth below.
NOW, THEREFORE, the parties agree as follows:
AGREEMENT
1. ADDITIONAL ADVANCE. Lender shall loan to Borrower the sum of
$2,000,000 as an additional advance (the "$2,000,000 Additional Advance")
under the Loan Agreement and subject to the terms of the Loan Agreement. The
$2,000,000 Additional Advance shall be included in the Loan Amount (as
defined in the Loan Agreement).
2. DISBURSEMENT OF ADDITIONAL ADVANCE. Lender shall disburse the
$2,000,000 Additional Advance to Borrower upon Lender's receipt of the
following documents in form and substance satisfactory to Lender executed by
the appropriate parties:
a. Secured Promissory note in the original principal amount of
$2,000,000 (the "$2,000,000 Note");
b. Amendment to Security Agreement (CinemaStar Luxury Theaters,
Inc.);
c. Amendment to Security Agreement (CinemaStar Luxury Cinemas, Inc.);
d. Amendment to Concession Lease Agreement;
e. Acknowledgement of Continuing Guaranty executed by John Ellison,
Jr., Alan Grossberg, Russell Scheult, and Jerry Willits;
<PAGE>
f. Financing Statements, including fixture fillings, as requested by
Lender;
g. Collateral Assignment of Lease as to the Ultraplex 14 at Mission
Grove in Riverside, California; the Galaxy G Cinemas in Bonsall, California;
the Ultraplex 10 at Perris in Perris, California; the Ultraplex 10 at
University Village in Riverside, California, all executed by Borrower;
h. Warrant Certificate executed in connection with the Amendment to
Concession Lease Agreement;
i. Deed of Trust encumbering the real property known as the Chula
Vista 6 located in Chula Vista, California;
j. Corporate resolutions certified by Borrower's President, approving
the transactions referred to herein; and
k. Opinion of Borrower's counsel.
3. PROMISSORY NOTE. The $2,000,000 Additional Advance shall be evidenced
by the $2,000,000 Note. Borrower shall repay the $2,000,000 Additional
Advance, together with interest thereon, in accordance with the terms and
conditions set forth in the $2,000,000 Note.
4. EXISTING PROMISSORY NOTES. The installment payments under the
promissory note in the principal amount of $600,000 dated March 6,1992, and
the promissory note in the principal amount of $300,000 dated May 8, 1992,
are determined in part by the amount of gross concession sales (less sales
taxes collected) under the Concession Lease Agreement (as amended, the
"Concession Lease") between Borrower and Lender dated March 6, 1992. For
purposes of determining the installment payments under those notes, the gross
concession sales from any Additional Theaters (as defined in the Amendment to
Concession Lease dated the date hereof) shall not be included.
5. REPRESENTATIONS AND WARRANTIES. Borrower hereby makes all of the
representations and warranties contained in the Loan Agreement as if made on
the date hereof.
6. NO OTHER AMENDMENTS. Except as amended hereby, the Loan Agreement
remains in full force and effect.
7. CONFIDENTIALITY. Borrower shall maintain in strictest confidence this
Amendment and the documents and transactions referred to herein, except as
otherwise required by law or to its bank, accountants, and attorneys as
reasonably necessary. If Borrower is required by law to disclose certain
documents and information concerning Borrower's transactions with Lender, it
shall do so only to the extent required by law and
<PAGE>
shall first give Lender written notice of a proposed disclosure. Any
disclosure by Borrower of confidential information in any legal action
between the parties pertaining to this Amendment and documents and
transactions referred to herein shall not be a breach of this paragraph.
IN WITNESS WHEREOF, the parties have executed this Amendment to Loan
Agreement as of the date first written above.
PACIFIC CONCESSIONS, INC., a
California corporation
By /s/ Alan Kates
--------------------------------
Alan Kates, President
"Lender"
CINEMASTER LUXURY THEATERS, INC.,
a California corporation
By /s/ John Ellison, Jr.
--------------------------------
John Ellison, Jr., President
"Borrower"
<PAGE>
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
<PAGE>
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 June 4, 1997, except
as to Note 14, which is as of June 24, 1997, 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, 1997.
Our report contains an explanatory paragraph regarding the Company's ability
to continue as a going concern.
BDO Seidman, LLP
Costa Mesa, California
July 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 601,646
<SECURITIES> 0
<RECEIVABLES> 30,681
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,048,274
<PP&E> 13,910,207
<DEPRECIATION> 2,980,361
<TOTAL-ASSETS> 12,433,711
<CURRENT-LIABILITIES> 7,101,470
<BONDS> 0
0
0
<COMMON> 9,085,317
<OTHER-SE> (7,172,246)
<TOTAL-LIABILITY-AND-EQUITY> 12,433,711
<SALES> 19,631,621
<TOTAL-REVENUES> 19,631,621
<CGS> 15,913,825
<TOTAL-COSTS> 21,201,275
<OTHER-EXPENSES> 43,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,727,038
<INCOME-PRETAX> (4,302,770)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,304,370)
<EPS-PRIMARY> (.61)
<EPS-DILUTED> (.61)
</TABLE>
