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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, 1998
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)
<TABLE>
<S> <S>
CALIFORNIA 33-0451054
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
12230 EL CAMINO REAL, SUITE 320, SAN DIEGO, CA 92130
(Address of principal executive offices) (Zip Code)
</TABLE>
(619) 509-2777
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
</TABLE>
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 disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.___
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on June 24,
1998 as reported on the NASDAQ Small Capital Market, was approximately
$8,897,000. 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, 1998 totaled $26,050,143.
As of June 24, 1998 Registrant had outstanding 25,703,646 shares of common
stock.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents of CinemaStar Luxury Theatres, Inc. are incorporated
by reference within this filing.
<TABLE>
<C> <S>
(1) Registration Statement No. 33-86716
(2) Form 10-KSB for the year ended March 31, 1995
(3) Form 8-K for April 11, 1996
(4) Form 8-K for June 6, 1996
(5) Form 10-KSB for the year ended March 31, 1996
(6) Form 10-Q for the period ended June 30, 1996
(7) Form 10-Q for the period ended December 31, 1996
(8) Form 8-K filed July 1, 1997
(9) Form 10-KSB for the year ended March 31, 1997
(10) Proxy Statement filed November 17, 1997.
</TABLE>
Transitional Small Business Disclosure Format Yes No X
---- ----
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EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN
THIS FORM 10-KSB CONTAINS CERTAIN FORWARD LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN
THIS FORM 10-KSB SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS FORM 10-KSB. WHERE
POSSIBLE, THE COMPANY USES WORDS LIKE "BELIEVES", "ANTICIPATES", "EXPECTS",
"PLANS" AND SIMILAR EXPRESSIONS TO IDENTIFY SUCH FORWARD LOOKING STATEMENTS.
THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HERE. FACTORS, RISKS AND UNCERTAINTIES THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE THE AVAILABILITY OF MARKETABLE MOTION PICTURES, THE
INCREASE OF REVENUES TO MEET LONG-TERM LEASE OBLIGATIONS AND RENT INCREASES,
RISKS INHERENT IN THE CONSTRUCTION OF NEW THEATERS, THE ABILITY TO SECURE NEW
LOCATIONS ON FAVORABLE TERMS, INTENSE COMPETITION IN THE INDUSTRY, DEPENDENCE
ON CONCESSION SALES AND SUPPLIERS, EARTHQUAKES AND OTHER NATURAL DISASTERS
AND THE ABILITY TO SECURE ADEQUATE FINANCING ON ACCEPTABLE TERMS TO SUPPORT
GROWTH.
PART I
ITEM 1 - DESCRIPTION OF THE BUSINESS
GENERAL
CinemaStar Luxury Theaters, Inc. (the "Company") develops, leases, owns and
operates multi-screen, primarily first-run movie theater locations in
Southern California and Northern Mexico. Approximately 30% of the Company's
revenue is derived from concession sales, under 2% is derived from the
operation of video games and the remainder is derived from theater
admissions. To date, the Company has incurred significant net losses during
each fiscal year in which it has been in operation. The Company currently
operates theaters having a total of 79 screens in San Diego and Riverside
Counties in Southern California and in Tijuana, B.C., Mexico. 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 Galaxy Six Cinemas, a six screen
leased theater complex in Bonsall, California. In May 1993 the Company opened
Chula Vista 10, a ten screen leased theater complex in Chula Vista,
California. The Company acquired Chula Vista 6, a six screen owned complex in
Chula Vista, California in August 1995 that was significantly refurbished in
March 1998. 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 November 1997, the Company's 75%-owned subsidiary in Mexico
opened Plaza Americana 10, a leased ten screen theater in Tijuana, B.C.,
Mexico.
The Company has pursued a strategy of selectively developing and leasing
multi-screen theaters, except for Chula Vista 6, 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 geographic area established by film
distributors in which a given film is allocated to only one theater. The
Company believes that 59 of its 69 screens located in the United States are
located in film zones in which it is the only exhibitor, although there are
not significant barriers to entry for the Company's competition in these film
zones. By developing theaters in film zones in which there are a limited
number of theaters, the Company believes it is able to negotiate more
effectively with motion picture distributors to supply the Company's theaters
with the most desirable 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. While 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 believes that the locations of its theaters, its high-quality
sound systems and projection equipment, its luxurious appointments, such as
comfortable seats and spacious seating configurations, and its carefully
selected and trained staff allows it to attract patrons and provide them with
an enjoyable movie-going experience. The Company's theater complexes
typically contain multiple auditoriums each having 120 to 500 seats, allowing
the Company the flexibility to adjust screening schedules by shifting films
amongst the larger and 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 new theaters in desirable locations,
although it may consider strategic acquisitions of existing theaters or
theater chains.
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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, have been in existence longer than the Company, 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 also can
come from other sources such as cable television and video tapes.
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 offices are located at 12230 El Camino Real, Suite 320, San
Diego, CA 92130 and its telephone number is (619) 509-2777.
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. In recent years, however, alternative 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 effected theater admissions, as evidenced by
the relatively stable motion picture attendance patterns over the past ten
years, approximately 1.0 billion to 1.2 billion per year during this 10-year
period. There can be no assurance, however, 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 in the future.
Historically, 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),
with no single studio dominating the film distribution market. Since 1989,
films distributed by these companies have accounted for between approximately
84% and 96% of annual U.S. admissions revenues.
The motion picture exhibition industry tends to be seasonal, as major film
distributors generally release the films expected to have the greatest
commercial appeal during the summer and the Thanksgiving through year-end
holiday season. The Company believes, however, 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
To attain substantial profitability, the Company believes it must develop new
theaters in new or existing markets, and/or add screens at already developed
locations. Expanding into markets in which it believes it can achieve a
market position as a leading motion picture exhibitor is one of the Company's
key operating strategies. In choosing potential development sites, 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 lease or acquire such sites at a reasonable cost. In the selection of
a potential theater site, the Company also considers whether the size and
demographics of the surrounding population, the accessibility and visibility
of the theater site and economic trends in the surrounding community are
favorable to increased motion picture attendance. The Company determines
whether or not it will own or lease the theater based upon the consideration
of numerous factors including, but not limited to, the ability to finance the
site, the expected performance of the theater and the required involvement of
developers. The Company may develop theaters on a stand-alone basis or as
part of an overall retail, entertainment and/or shopping mall development.
The pursuit of multi-screen theaters is another key element of the Company's
strategy. The Company believes multi-screen theaters reduce its dependence on
any single film, allow it to more effectively respond to demand by adjusting
its screening schedules during the release life of a given film and provide
it with operating efficiencies through staggered film starts that enable the
Company to reduce the amount of total staffing required to show its films.
The Company also attempts to develop and operate conveniently located, high
quality facilities that offer a wide variety of films. To enhance the movie
going experience and attract new and/or repeat patronage, the Company tends
to invest in high-quality sound and projection equipment, luxurious
appointments and a carefully selected staff trained to emphasize service.
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DEVELOPMENT OF THEATERS
Once a potential theater site has been leased or acquired, the Company
formulates a plan to finance and construct the theater. While the Company
generally oversees the design, development and construction of its theaters,
it also utilizes independent architects, building and governmental compliance
consultants and construction project managers. In the case of a newly
developed theater that will be leased by the Company, the landlord or
developer typically provides a construction allowance, with the Company
responsible for the cost of completing construction of the theater. Thus, in
the event that the ultimate cost of the theater is greater than the
allowance, the Company is required to fund any excess.
While the Company believes that its direct oversight of the design and
construction of its theaters provides a certain degree of control over the
quality, cost and timing of construction, the Company remains subject to many
of the risks inherent in the development of real estate, including the risk
of construction cost overruns and delays. Other risks associated with the
development and construction of theaters include the impact of changes in
federal, state or local laws or regulations, labor strikes, adverse weather,
earthquakes and other natural disasters, 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 pending or proposed theater
development in a timely manner or within the proposed cost allowance.
REVENUES
In addition to revenues from box office admissions, the Company receives
revenues from concession sales. These sales historically have constituted
approximately 27% to 32% of the Company's revenues for a given fiscal year.
During each of the Company's 1998 and 1997 fiscal years, concession sales
constituted 29% of the Company's total revenues. During fiscal 1998, the
Company had long-term concession lease agreements with Pacific Concessions,
Inc. ("PCI") for all of its theaters in operation in the United States.
Pursuant to the terms of these agreements, PCI installed and supplied
counters, equipment, paper and food items in a given theater, while the
Company provided the concession space and employees to operate the concession
stands. The concession lease agreements with PCI provided that the Company
receive a percentage of the gross concession revenues generated at a given
theater and PCI received the balance of concession revenues. In accordance
with the provisions of these concession lease agreements (which had terms
ranging from two to ten years), the Company issued notice of termination to
PCI on December 15, 1997, paying early termination fees of $1,859,352 and
taking direct control of its concession operations upon expiration of the
applicable notice periods (either five or six months depending upon the
theater).
The Company also operates video games and skill games at each of its
locations. Most of the proceeds from these operations go to cover video game
purchases and maintenance of the equipment, and therefore no meaningful
profits are derived from this business. Video games do not constitute a
significant portion of the Company's revenues. During fiscal 1998 and 1997,
revenues from video games were $376,441 (1.5% of total revenues) and $309,330
(1.6% of total revenues), respectively.
ADVERTISING AND MARKETING
The Company principally 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 whereby the Company and a film distributor share the cost of
advertising for a feature, including in the advertisements 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 other 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
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. The Company's success in choosing a given film to
license depends to a large extent on its knowledge of trends and historical
film preferences of the residents in markets served by its theaters, as well
as on the extent of the availability of commercially attractive motion
pictures from which to choose.
Films are licensed from both major film distributors and 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), and allocate each available
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film to one theater within that zone. The Company generally attempts to
locate its theaters in film zones in which it is the sole exhibitor 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 in the United States are located in film zones in which it is
the sole exhibitor and that the University Village 10 is the leading theater
in its film zone, although there are no significant barriers to entry in
these film zones for the Company's competitors.
In film zones where the Company is the sole exhibitor, film licenses
generally are obtained by the Company by selecting a film from among those
offered and negotiating directly with the distributor. In film zones where
there are multiple exhibitors, a distributor will 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 which movies
and then that exhibitor will negotiate film rental terms directly with that
distributor. At present, the Company does not bid for films in any of its
markets, although it may be required to do so in the future.
Film licenses entered into under 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 not strong enough to warrant an
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. To date, the
Company has not been required to make any such advance payments, but there is
no assurance that such payments will not be required in the future. Although
not specifically contemplated by the provisions of film licenses, the terms
of film licenses often are adjusted or renegotiated by distributors
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. While many
"independent" distributors provide first run movies to the motion picture
exhibition industry, distribution historically has been dominated by seven
distributors (Warner Brother, Paramount, 20th Century Fox, Universal,
Disney/Touchstone, MGM/UA and Columbia/Tri-Star) that have accounted for
between approximately 84% and 96% of domestic admission revenues since 1989,
and virtually every one of the top grossing films in a given year, since
1989. No single one of these seven major distributors dominates the market.
Disruption in the production of motion pictures by the major studios and/or
independent producers, poor commercial appeal 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, the terms of which can depend on 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.
Many of the Company's competitors, however, 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
traditional theaters. The Company believes that stadium theaters constructed
by competitors in the vicinity of certain of its current theaters, which do
not have stadium seating, may have a detrimental effect on the
competitiveness and profitability of its theaters. In addition, this
trend towards stadium seating increases the cost per screen for a new theater
complex. If this increased cost cannot be passed onto the landlords or
developers in the construction allowance for the Company's future projects,
the Company could be required to contribute a greater amount of the overall
development costs with respect to these projects.
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, are 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, who distribute a large percentage of the
commercially successful films. Although the Company attempts to identify film
licensing zones in
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which there is no substantial competition, there are no real barriers to
entry with respect to a given film zone for the Company's competitors and
there can be no assurance that the Company's competition will not develop
theaters in the same film zones or otherwise in the same 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. As a result, certain of the Company's
competitors have sought to significantly increase their number of theaters
and screens in operation. Continued increase may cause certain markets to
become over-screened, resulting in a negative impact on the earnings of the
theaters located in such markets, including the Company's theaters. This
trend also could have a negative impact on the Company's ability to identify
attractive sites for development.
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 that could make the Company's current theaters obsolete. There
can be no assurance that the Company will be able to incorporate such new
technology or equipment, if any, into its existing or future theaters.
In recent years, alternative motion picture exhibition delivery systems have
been developed for the exhibition of filmed entertainment, including cable
television, video cassettes and pay-per-view. While the impact of such
delivery systems on movie theaters is difficult to determine, 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 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 June 15, 1998, the Company employed 487 persons, of which 61 were
full-time and 426 were part-time employees. Of the Company's employees, 19
are corporate personnel, 42 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.
ITEM 2 - DESCRIPTION OF PROPERTY
PROPERTY
The Company currently operates eight theaters with an aggregate of 79 screens
in San Diego and Riverside Counties, in California and Tijuana, Mexico. Of
the eight theaters, the Company owns the land and building for Chula Vista 6
and the remaining seven are operated pursuant to lease agreements. There is a
mortgage on the owned theater of approximately $1,600,000.
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The Company's leased theaters are subject to lease agreements with original
terms ranging from 15 to 25 years and renewal options for an additional 10 to
15 years. The leases provide for minimum annual rentals and generally require
additional rental payments based on a percentage of revenues over a base
amount. All of the Company's leases are triple net leases, which require the
Company to pay, in addition to rent, the cost of insurance, taxes and a
portion of the lessor's operating expenses. The following is a summary of the
theater specifications as of June 25, 1998:
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<CAPTION>
Theater Name Location Sq. Ft. # of Screens # of Seats Leased/Owned
- ------------ -------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Chula Vista 10(1) Chula Vista, CA 34,000 10 2,178 Leased
(South San Diego County)
Chula Vista 6 Chula Vista, CA 22,500 6 1,424 Owned
(South San Diego County)
Mission Marketplace Oceanside, CA 43,000 13 2,168 Leased
(San Diego County)
Galaxy Six Cinemas Bonsall, California 22,780 6 1,340 Leased
(River Village Shopping Center)
Ultraplex 14 at Mission Grove Riverside, CA 46,000 14 2,743 Leased
(Mission Grove Plaza,
Riverside County)
Perris 10 Perris, CA 35,000 10 1,822 Leased
(Perris Plaza Retail Shopping
Center)
University Village 10 Riverside, CA 42,000 10 2,099 Leased
(adjacent to University of
California at Riverside)
Plaza Americana 10(2) Tijuana, B.C., Mexico 40,000 10 1,853 Leased
(Plaza Americana Shopping Mall)
</TABLE>
In December 1996, the Company signed a long-term lease agreement for the
development of a new 20-screen theater in San Bernardino, California (the
"San Bernardino Facility"). Pursuant to the terms of the lease, lease payments
do not begin until the Company's acceptance of the completed building, which
is not expected, if at all, until after fiscal 1999. Costs to the Company to
complete and equip this facility are estimated at approximately $3,500,000.
The Company currently is in dispute with the landlord of this property over
the status of the lease. See "Legal Proceedings" below.
After March 31, 1998, the Company entered into a long-term lease for the
development of a 16-screen theater in Oceanside, California (the "Oceanside
Facility"). Pursuant to the terms of the lease, lease payments do not begin
until the Company's acceptance of the completed building. Costs to the
Company to complete and equip this facility are estimated at approximately
$3,600,000. Subject to obtaining adequate financing, the Company expects to
begin development of this facility in fiscal 1999, but does not expect
completion of the building until after fiscal 1999.
On June 29, 1998, the Company's corporate office was re-located to 12230 El
Camino Real, Suite 320, San Diego, California 92130 pursuant to a five year
lease (with one option to renew for an additional five years) for
approximately 4,000 square feet at an annual rent commencing at $110,400 and
increasing to $120,000 by year five.
- -----------------------
(1) Leased by the Company's wholly-owned U.S. subsidiary, CinemaStar Luxury
Cinemas, Inc.
(2) Leased by the Company's 75%-owned Mexican subsidiary, CinemaStar Luxury
Theaters, S.A. de C.V.
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ITEM 3 - LEGAL PROCEEDINGS
On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San
Diego Superior Court, Case No. N07870, alleging that the Company breached a
50-year lease relating to commercial real property located in the Rancho Del
Rey Business Center consisting of approximately 35,000 square feet. The
complaint alleges that the lease was terminated as a result of the Company's
failure to perform. The complaint also alleges first year minimum rent of
$174,240. While the Company has not had an opportunity to fully investigate
the claims asserted in the complaint, it intends to vigorously defend this
action. Management believes the Company's termination of the lease in
question was in accordance with its terms, but there is no assurance that the
Company ultimately will prevail in this action. In any event, the Company
understands that the landlord has already leased the property to another
tenant, which would significantly mitigate the damages that could be claimed
by the landlord.
On November 7, 1997, MDA-San Bernardino Associates, LLC ("MDA"), the landlord
of the San Bernardino Facility, filed an action for Unlawful Detainer in the
Municipal Court of the State of California for the County of San Bernardino,
Case No. 184164. The action sought to terminate the Company as tenant. The
action was filed because MDA believed the Company had not satisfied certain
financial conditions under the lease. The Company filed a response to this
action and subsequently entered into a Stipulation for Entry of Judgment with
MDA. The Company believes it is in a position to comply with all requirements
of such Stipulation for Entry of Judgment, but unanticipated circumstances
could have an adverse effect on its ability to so comply. As a result of
MDA's delay in development of the project, the Company has not yet fully
complied with all of the conditions of the Stipulation for Entry of Judgment.
Additionally, management believes that as a result of MDA's failure of
certain conditions precedent in the lease, the lease terminated on its own
terms as early as January 9, 1998. MDA disputes the Company's position. The
Company has informed MDA that if MDA does not fulfill such conditions
precedent immediately, the Company will abandon the project.
In addition, 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 other 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 1998 to a vote of
security holders.
9
<PAGE>
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. Due to the absence of two market makers for the securities, the
Company has been informed that NASDAQ has delisted the Class B Redeemable
Warrants as of June 27, 1998. The Company believes that it will be able to
obtain a second market maker for the Class B Redeemable Warrants and has
requested a hearing with NASDAQ. The delisting currently is postponed
pending the results of the hearing. No assurance can be given, however, that
the Company will be able to obtain a second market maker or prevail at the
hearing.
<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,
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 0.25 0.25
Fourth Quarter 3.13 1.00 1.13 0.28 1.00 0.25
1998
First Quarter 1.69 0.56 0.63 0.13 1.00 0.06
Second Quarter 1.38 0.75 0.41 0.13 0.19 0.16
Third Quarter 1.25 0.50 0.50 0.06 0.88 0.17
Fourth Quarter 1.63 1.00 0.47 0.16 0.81 0.56
</TABLE>
As of June 24, 1998, the Company had 143 shareholders of record.
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 OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and notes thereto
included elsewhere in this Form 10-KSB. Except for the historical information
contained herein, the discussion in this Form 10-KSB contains certain forward
looking statements that involve risks and uncertainties, such as statements
of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Form 10-KSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-KSB. Where possible, the Company uses words like "believes",
"anticipates", "expects", "plans" and similar expressions to identify such
forward looking statements. The Company's actual results could differ
materially from those discussed here. Factors, risks and uncertainties that
could cause or contribute to such differences include the availability of
marketable motion pictures, the increase of revenues to meet long-term lease
obligations and rent increases, risks inherent in the construction of new
theaters, the ability to secure new locations on favorable terms, intense
competition in the industry, dependence on concession sales and suppliers,
earthquakes and other natural disasters and the ability to secure adequate
financing on acceptable terms to support growth.
RESULTS OF OPERATIONS
As of March 31, 1997 the Company had seven theater locations with a total of
64 screens. During the twelve months ended March 31, 1998, the Company added
five additional screens to an existing location and a new ten screen
location, increasing the Company's theaters to eight locations and 79
screens. These additions resulted in an increase in revenues and expenses for
the twelve months ended March 31, 1998 compared to March 31, 1997. In
addition, several transactions resulted in significant, non-recurring charges
to operations. Of the $7,932,011 net loss incurred by the Company in fiscal
year 1998, approximately $3,200,000 is due to non-recurring charges to
operations, discussed in detail below. An additional approximate
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<PAGE>
$2,200,000 is comprised of professional fees, cash interest expense,
international start-up and organizational costs and consulting fees, all of
which management expects will decrease in fiscal 1999. There can be no
assurance, however, that such decrease will occur or any decrease in such
expenses will not be temporary.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $4,304,370 and $7,932,011 in the fiscal
years ended March 31, 1997 and 1998, respectively. There can be no assurance
as to whether or when the Company will achieve profitability. While the
Company believes it could attain profitability with its current operations,
any substantial profitability will depend, among other things, on the
Company's ability to continue to grow its operations through the addition of
new screens and the success of management's cost reduction efforts.
The ability of the Company to expand and add new screens either through the
development of new theaters, the expansion of existing theaters or the
acquisition of new theaters is contingent upon, among other things, the
Company's obtaining new, third party financing to fund such growth. While the
Company is attempting to secure an acquisition line from a senior, secured
lender sufficient to meet the Company's current business plan, no definitive
agreements have been reached and there is no assurance that this or any other
financing will be obtained by the Company on commercially reasonable terms.
The Company has entered into agreements, negotiations and/or discussions
pertaining to the development of a 20 screen theater complex and a 16 screen
theater complex in San Bernardino, California and Oceanside, California,
respectively. Additionally, the Company has entered into negotiations
regarding the development of other theater complexes in the United States and
the Republic of Mexico. The building of these and other new theater complexes
is subject to many contingencies, many of which are beyond the Company's
control, including consummation of site purchases or leases, receipt of
necessary government approvals, negotiation of acceptable construction
agreements, the availability of financing and timely completion of
construction. No assurances can be given that the Company will be able to
successfully build, finance or operate any of the new theaters presently
contemplated or otherwise.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997.
Total revenues for the year ended March 31, 1998 increased 32.7% to
$26,050,143 compared to $19,631,621 for the previous fiscal year. The
addition of new theaters and screens during fiscal 1998 and fiscal 1997
accounted for approximately $6,130,000 or 95.5% of the total increase in
revenues. Admission revenues increased by $4,396,912, or 32.4%, and
concession sales and other operating revenues increased by $2,021,610, or
33.4%. Admission revenue per screen increased slightly, approximately 3%,
from $252,000 per screen in fiscal 1997 to $259,000 per screen in fiscal 1998.
Film rental and booking costs for the year ended March 31, 1998 increased
30.9% to $9,943,669 compared to $7,593,600 for the previous fiscal year. The
increase in film rental and booking costs, usually paid as a percentage of
admission revenues, resulted from the increase in number of screens discussed
above. As a percentage of admission revenues, film rental and booking costs
remained fairly constant from fiscal 1997 to fiscal 1998, decreasing from
55.9% to 55.3%.
Due mainly to costs associated with the additional concession sales discussed
above, the cost of concession supplies for the year increased 54.0% from
$1,822,651 in fiscal 1997 to $2,807,020 in fiscal 1998. As a percentage of
concession revenues, concession costs for the year ended March 31, 1998
increased to 37.1% from 32.0% for the year ended March 31, 1997. The
percentage increase was the result of modifications to concession lease
agreements with PCI granted in connection with loans obtained by the Company
from PCI. See "Liquidity and Capital Resources." As of June 15, 1998, the
Company ceased using PCI to provide concession operations at any of its
theaters and began operating such concessions itself. Management believes
that contracting directly with the concession suppliers at competitive rates
will materially decrease the Company's cost of concessions and increase the
Company's gross profit margin on concession sales in future years. The
inability to continue obtaining favorable terms from concession suppliers,
however, would have an adverse impact on this anticipated increase in profits
from concession sales.
Theater operating expenses for the year ended March 31, 1998 increased 67.5%
to $10,882,570 compared to $6,497,574 for the previous fiscal year. This
increase was due, in part, to the addition of new theaters and the increase
in federally mandated minimum wages. In addition, the Company recorded
expenses in fiscal 1998 for certain additional rent obligations, common area
maintenance expense and property tax liabilities related to operations of
certain theater complexes. As a percentage of total revenues,
theater operating expenses increased 8.7%, from 33.1% in fiscal 1997 to 41.8%
in fiscal 1998.
Selling, general and administrative expenses for the year ended March 31,
1998 increased 13.2% to $4,140,810 compared to $3,655,916 for the previous
fiscal year. While a portion of the increase was due to increased overhead
and advertising and promotion costs incurred in connection with the opening
and operating of new theaters, as a percentage of total revenues, selling,
general and administrative costs
11
<PAGE>
decreased to 15.9% from 18.6%. Selling, general and administrative expenses
for fiscal 1998 also included approximately $600,000 of professional fees,
approximately $300,000 from international start-up and organizational
expenses and approximately $520,000 in consulting fees, all of which
management expects will decrease in fiscal 1999. There can be no assurance,
however, that such decrease will occur or any decrease in such expenses will
not be temporary.
The Company incurred in fiscal 1998 a one-time charge in the amount of
$1,859,352 resulting from the termination of concession lease agreements with
PCI. In accordance with the provisions of these concession lease agreements
(which had terms ranging from two to ten years), the Company issued notice of
termination to PCI on December 15, 1997, paid the full amount of the
termination fee and took direct control of its concession operations upon
expiration of the applicable notice periods (either five or six months,
depending upon the theater).
The Company incurred in fiscal 1998 a one-time expense of $1,056,224 in
connection with the settlement of certain management contracts previously
entered into with four former officers and directors of the Company and the
settlement of certain other matters amongst the parties. The Company effected
the settlement by making aggregate cash payments of $875,000, forgiving
outstanding loans and remaining as guarantor on a personal loan. The
settlement agreement also contains mutual general releases of the parties
with respect to all prior known and unknown claims.
Depreciation and amortization for the year ended March 31, 1998 increased
38.2% to $2,255,251 compared to $1,631,534 for the previous fiscal year, due
to the depreciation of furnishings, fixtures and equipment purchased for the
new theaters opened or expanded in fiscal 1998 and a charge of $250,000 to
write-down certain assets.
Non-cash interest expense for fiscal 1998, totaling $328,750, resulted from
the issuance of debt with detachable warrants and represents the value of the
detachable warrants. This debt was paid in full with interest prior to March
1998. The non-cash interest expense of $2,048,997 for fiscal 1997 was
incurred in connection with the issuance of debentures that were convertible
at a discount from the market price of the common stock, all of which became
convertible in fiscal 1997.
Interest expense for the fiscal year ended March 31, 1998 increased to
$777,655 or 14% compared to $678,041 for the previous fiscal year. The
increase resulted from higher than average of debt levels with higher than
average interest rates. The majority of the Company's debt has been repaid
from the proceeds of the equity transactions consummated on December 15,
1997. Management believes that the Company's remaining debt is at
commercially reasonable rates. In addition, any new debt financing obtained
by the Company is not likely to be required until at least the fourth quarter
of fiscal 1999. No assurance can be given, however, that the Company will be
able to obtain any additional debt, on more favorable terms or otherwise, or
maintain such lower debt levels.
Interest income for the twelve months ended March 31, 1998 increased to
$70,747 from $36,940 for the twelve months ended March 31, 1997. This
increase is attributable to changes in cash balances resulting from the
various bridge loan proceeds and the completion of the equity financing
transaction on December 15, 1997. See "Liquidity and Capital Resources."
As a result of the above factors, the net loss for the year ended March 31,
1998 increased 84.3% to $7,932,011 from $4,304,370 for the fiscal year ended
March 31, 1997.
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 been financed with internally generated cash flow,
long-term debt financing or leasing arrangements of facilities and equipment,
the offering to the public of equity securities and the private placement of
convertible debentures. During fiscal 1998, however, the Company determined
that it lacked the resources necessary to finance its current capital
obligations through traditional sources and sought additional capital through
alternative financing sources. On September 23, 1997, the Company entered
12
<PAGE>
into a definitive agreement (the "CAP Agreement") with CinemaStar Acquisition
Partners, L.L.C. ("CAP") and Reel Partners L.L.P. ("Reel") whereby Reel
provided $3,000,000 of interim debt financing (the "Bridge Loan") and CAP was
to provide $15,000,000 of equity financing (the "Equity Financing").
The Watley Group, LLC ("Watley") was engaged by the Company to facilitate the
transactions contemplated in the CAP Agreement. In connection with this
engagement, the Company paid to Watley on December 15, 1997 a cash fee in the
amount of $962,250. Concurrently, Watley acquired from the Company for
$212,250 warrants to purchase 1,768,446 shares of the Company's common stock
at an exercise price of $0.848202 per share (the "Watley Warrants"). The
Company has been informed that Watley paid $150,000 of its cash fee and
transferred warrants to acquire 1,018,446 shares of the Company's common
stock to certain affiliates of CAP and/or Reel for the purpose of reimbursing
them for legal and other expenses incurred in connection with the
transactions contemplated in the CAP Agreement. Prior to execution of the CAP
Agreement, the Company issued 75,000 shares of common stock (the "Reel
Shares") to affiliates of Reel for the purpose of reimbursing that entity for
legal and other costs incurred in connection with the transaction and as
inducement for the continuation of negotiations with respect to the Bridge
Loan.
The Bridge Loan provided the Company with the funds necessary to meet certain
of its current obligations and to repay certain indebtedness. In connection
with the Bridge Loan, the Company issued to Reel detachable warrants to
purchase 4,500,000 shares of common stock at an exercise price of $0.848202.
Pursuant to the terms of the CAP Agreement, 1,500,000 of such warrants were
canceled upon the successful consummation of the Equity Financing. Therefore,
warrants to purchase an aggregate of 3,000,000 shares of common stock at an
exercise price of $.848202 (the "Bridge Warrants") were issued to Reel in
connection with the Bridge Loan. The Bridge Loan was paid in full with
interest on December 15, 1997 from proceeds of the Equity Financing.
Concurrent with the execution of the CAP Agreement, the Company issued to CAP
a warrant to purchase 1,000,000 shares of common stock at an exercise price
of $0.848202 (the "Signing Warrants"). On December 15, 1997, CAP consummated
the Equity Financing, purchasing 17,684,464 shares of common stock at a
purchase price of $0.848202 per share, and pursuant to the CAP Agreement the
Company issued to CAP warrants to purchase an additional 1,630,624 shares of
common stock at an exercise price of $0.848202 per share (together with the
Signing Warrants, the "CAP Warrants").
Pursuant to the terms of the CAP Agreement, the Company is obligated to issue
additional shares of common stock (the "Adjustment Shares") to CAP. The
number of Adjustment Shares to be issued is based upon (i) the recognition of
any liabilities not disclosed as of August 31, 1997, (ii) certain expenses
incurred and paid by the Company in connection with the contemplated
transactions, (iii) any negative cash flow incurred by the Company during the
period commencing August 31, 1997 and ending December 15, 1997, and (iv)
negative cash flow experienced by, or costs of closing, the Company's Plaza
Americana 10 facility in Tijuana (now in full operation) and San Bernardino
Facility (still in development). The measurement of the operating losses
and/or closing costs for the two facilities is cumulative and will take place
on the earlier to occur of the closing of each such facility or December 15,
2000. The Company and CAP have agreed that 1,351,256 Adjustment Shares shall
be issued by the Company to CAP pursuant to the terms of the CAP Agreement as
of June 29, 1998. To the extent there are (a) operating losses at the
Company's Tijuana and/or San Bernardino facilities for the three-year period
ended December 15, 2000, and (b) expenditures in connection with the
discovery of liabilities, or defense and/or settlement of claims such as the
lease disputes described at "Legal Proceedings" above, in either case
relating to periods prior to August 31, 1997, the Company will be obligated
to issue additional Adjustment Shares.
On April 23, 1997, PCI provided the Company with a $2,000,000 loan (the
"Initial PCI Loan") in exchange for the Company amending the concession lease
agreements with PCI. In connection with the Initial PCI Loan, the Company
issued warrants to PCI to purchase 100,000 shares of common stock at an
exercise price per share equal to the lower of $.9344 or the average of the
closing price of the Company's common stock the five days prior to any
exercise of such warrants. As a result of the amendments to the concession
lease agreements, PCI assumed direct responsibility for the concession
operations at each of the Company's domestic theaters, and PCI paid to the
Company a commission on concession sales generated. On December 15, 1997, the
Initial PCI Loan was paid in full with interest and the concession lease
agreements were terminated in accordance with the provisions thereof.
On August 29, 1997, PCI loaned to the Company an additional $500,000 (the
"Second PCI Loan") on a short-term basis. In connection with the Second PCI
Loan, the Company issued warrants to PCI to purchase 400,000 shares of common
stock at an exercise price per share equal to the lower of $.9344 or the
average closing price of the Company's common stock for the five days prior
to any exercise of such warrants (together with the warrant exercisable for
100,000 shares of common stock described above, the "PCI Warrants"). The
Second PCI Loan was paid in full with interest on September 24, 1997.
As of June 24, 1998, the Company had reserved for issuance upon exercise of
outstanding or issuable warrants an aggregate of 19,856,849 shares of common
stock. Issuance of equity securities for consideration below the applicable
exercise price triggers
13
<PAGE>
certain anti-dilution provisions in the Company's Redeemable Warrants, the
Company's Class B Redeemable Warrants and the Reel Warrants, the CAP Warrants
and the Watley Warrants.
In fiscal year 1998, the following events triggered the anti-dilution
provisions of the Redeemable Warrants and the Class B Redeemable Warrants (1)
the issuance of 1,100,000 stock options each having an exercise price of
$.875, (2) the issuance of 17,684,464 shares of common stock in the Equity
Financing for a price per share equal to $.848202, (3) the issuance of the
500,000 PCI Warrants having an exercise price of $.9344, (4) the issuance of
the 75,000 Reel Shares at a price per share of $.666, and (5) the issuance of
the Watley Warrants, the CAP Warrants and the Reel Warrants, totaling
7,399,070 and each having an exercise price of $.848202 per share. After
giving effect to these events, other events occurring prior to the 1998
fiscal year, the issuance of an additional 330,000 stock options at an
exercise price of $.875 per share in April, 1998 and the obligation to issue
1,351,256 Adjustment Shares for no additional consideration, the shares of
common stock issuable upon exercise of each Redeemable Warrant as of June 22,
1998 was 2.3622 and the shares of common stock issuable upon the exercise of
each Class B Redeemable Warrant as of June 22, 1998 was 2.3551. Consequently,
as of June 22, 1998, an aggregate of 10,980,833 shares of common stock are
issuable upon exercise of the outstanding Redeemable Warrants at an exercise
price of $2.54 per share and an aggregate of 533,278 shares of common stock
are issuable upon exercise of the outstanding Class B Redeemable Warrants at
an exercise price of $2.76 per share.
In fiscal year 1998, the following event triggered the anti-dilution
provisions of the Reel Warrants, the CAP Warrants and the Watley Warrants:
the issuance of 1,100,000 stock options each having an exercise price of
$.875. After giving effect to this event, the issuance of an additional
330,000 stock options at an exercise price of $.875 per share in April, 1998,
and the obligation to issue 1,351,256 Adjustment Shares for no additional
consideration, the aggregate number of shares of common stock issuable
pursuant to these warrants as of June 22, 1998 increased by 235,718 shares to
7,634,788 and the exercise price per share with respect thereto decreased
$.0262 to $.822014.
On November 15, 1997, the Company completed and opened a 10 screen theater in
Tijuana, Mexico. The Company owns the equipment used at this theater and its
subsidiary, CinemaStar Luxury Theaters, S.A. de C.V. will lease this
equipment from the Company. Pursuant to terms of the operating lease for the
premises, CinemaStar Luxury Theaters, S.A. de C.V. was to obtain a bond to
secure the payment of rent. Such bond was not obtained, and the landlord,
Inmobiliaria Lumar S.A. de C. V., ("Lumar"), has agreed to accept a pledge of
certain of the theater equipment used in the Tijuana theater as collateral to
satisfy the lease requirement. This pledge of collateral will be effected
through a Trust Agreement with a bank designated by Lumar. The Company is
presently in the process of fulfilling the requirements of Lumar with regards
to the pledge.
The Company leases seven theater properties and various equipment under
non-cancelable operating lease agreements which expire through 2021 and
require various minimum annual rentals. At March 31, 1998, the aggregate
future minimum lease payments due under non-cancelable operating leases was
approximately $90,800,000. In addition, the Company signed a lease agreement
for the San Bernardino Facility prior to March 31, 1998 and for the Oceanside
Facility thereafter. The lease for the San Bernardino Facility will require
expected minimum rental payments aggregating approximately $40,700,000 over
the 25-year life of the lease and the lease for the Oceanside Facility will
require expected minimum rental payments aggregating approximately
$30,425,000 over the 25-year life of the lease. Accordingly, existing minimum
lease commitments as of March 31, 1998 plus those expected minimum
commitments for the proposed theater locations would aggregate minimum lease
commitments of approximately $161,900,000. Costs to the Company to complete
and equip the San Bernardino Facility and the Oceanside Facility are
estimated at approximately $3,500,000 and $3,600,000, respectively. The
Company's ability to develop these projects is dependent upon several
factors, including the performance of the landlord/developer under the leases
in the construction of the facilities and the Company's ability to obtain
satisfactory financing for the projects. In addition, the status of the lease
for the San Bernardino Facility is in dispute. See "Legal Proceedings" above.
Therefore, there can be no assurance that the Company will be able to
complete these projects. In addition, because lease payments do not begin
until acceptance of a completed building by the Company, it is not assured
that the foregoing obligations with respect to a given project will
materialize.
During the twelve months ended March 31, 1998, the Company used cash of
$4,656,211 from operating activities, as compared to generating cash from
operating activities of $1,827,943 for the twelve months ended March 31,
1997. This difference is due to factors discussed in "Results of Operations"
above, including increased theater operating expenses, the opening of a new
theater and the expansion and renovation of existing theaters, increased
selling, general and administrative expenses as a result of domestic and
international expansion, costs associated with the Bridge Loan, cost incurred
in connection with other financing efforts, costs of settlement of management
contracts and costs of penalties related to notice of early termination of
concession lease agreements.
During the twelve months ended March 31, 1998, the Company used cash in
investing activities of $4,112,950 as compared to $4,728,763 for the twelve
months ended March 31, 1997. The principal use of cash in fiscal 1998 was
purchases of property and equipment for the newly constructed theater and the
expansion and renovation of existing theaters. The decrease from fiscal 1997
is due to lower purchases of fixed assets
14
<PAGE>
during the twelve months ended March 31, 1998 compared with the prior
comparable period, during which more theaters had been opened.
During the fiscal year ended March 31, 1998, the financing activities
described above provided the Company with $11,649,493 from financing
activities. The net proceeds of $13,154,053 from the issuance of common stock
and $738,375 from the issuance of common stock warrants provided by the Equity
Financing on December 15, 1997 was partially offset by the repayment of
certain bank debt and loans to the Company from PCI and Reel.
At March 31, 1998, the Company held cash, cash equivalents and working
capital in the amounts of $3,481,978 and $453,497, respectively. Management
believes that cash, cash equivalents and working capital should be adequate
to fund the existing operations of the Company during fiscal 1999. However,
should the Company require additional financing, there can be no assurance
that the Company will be able to obtain such financing on reasonable terms,
and a failure to obtain such financing could have a material adverse effect
on the financial condition and results of operations of the Company.
As of March 31, 1998, the Company had net operating loss carryforwards
("NOLs") of approximately $11,000,000 and $5,500,000 for Federal and
California income tax purposes, respectively. The Federal NOLs are available
to offset future years taxable income, and they expire in 2006 through 2013
if not utilized prior to that time. The California NOLs are available to
offset future years taxable income, and they expire in 1999 through 2003 if
not utilized prior to that time. The annual utilization of NOLs will be
limited in accordance with restrictions imposed under the Federal and state
laws as a result of changes in ownership. The Company's initial public
offering and certain other equity transactions 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 will be
subject to certain specified annual limitations.
At March 31, 1998, the Company has total net deferred income tax assets in
excess of $4,900,000. 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.
On November 7, 1997, the Company received notice that The Nasdaq Stock
Market, Inc. ("NASDAQ") was taking action to delist the Company's common
stock from trading on the Nasdaq SmallCap Market due to a failure of the
Company to meet applicable listing standards and demonstrate an adequate plan
for complying with such listing standards in the future. On November 12,
1997, the Company appealed this decision and attended a hearing before a
Listing Panel. Such appeal was successful, and on January 13, 1998, the
Company was informed by NASDAQ that it was in compliance with the listing
standards and would remain listed assuming continued compliance. If the
Company is not able to maintain continued compliance with the listing
standards (including maintaining a trading price per share for its common
stock in excess of $1.00) and NASDAQ ultimately delists the Company's common
stock, the liquidity of such common stock could be adversely affected.
In addition, due to the absence of two market makers for its Class B
Redeemable Warrants, the Company has been notified by NASDAQ that these have
been delisted effective June 27, 1998. The Company believes it will be able
to obtain a second market maker for the Class B Redeemable Warrants and has a
requested a hearing with NASDAQ. The delisting is currently postponed pending
the results of the hearing. No assurances can be given, however, that the
Company will be able to obtain a second market maker or prevail at the
hearing.
SEASONALITY
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 are released during the summer and the
Thanksgiving through year-end holiday season. The unexpected emergence of a
hit film during other periods can alter this 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.
YEAR 2000
The Company has performed a review of its computer applications related to
their continuing functionality for the year 2000 and beyond. The Company does
not believe that it has material exposure with respect to the year 2000 issue
in regards to its computer applications. The Company does not expect that the
cost of any modifications will cause reported financial information not to be
indicative of future operating results or financial condition. The year 2000
issue may impact the operations of the Company indirectly
15
<PAGE>
by affecting the operations of its suppliers, business partners, customers
and other parties that provide significant services to the Company. The
Company expects to complete during fiscal 1999 a review of potential year
2000 issues with these parties. The Company currently is unable to predict
the extent that the year 2000 will have on these parties and, consequently,
on the Company.
CURRENCY FLUCTUATIONS
The Company is subject to the risks of fluctuations in the Mexican Peso with
respect to the U.S. dollar. These risks are heightened because revenues in
Mexico are collected in Mexican Pesos, but the lease is denominated in U.S.
dollars. While the Company does not believe it has been materially adversely
effected by currency fluctuations to date, there can be no assurance it will
not be so affected in the future and it has taken no steps to guard against
these risks.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Company does not expect
adoption of SFAS No. 130 to have any effect on its results of operations.
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") issued by
the FASB is effective for financial statements with fiscal years beginning
after December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The adoption of SFAS No. 131 will have no effect on the Company's
results of operations.
In April of 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of
Start-up Activities. SOP 98-5 requires costs of start-up activities to be
expensed when incurred. The Company has adopted this practice, which has not
had a material impact on its results of operations.
ITEM 7 - FINANCIAL STATEMENTS
The Company's audited consolidated financial statements for the years ended
March 31, 1998 and 1997 are presented immediately following on pages F-1 to
F-17.
ITEM 8 - CHANGE IN CERTIFYING ACCOUNTANT.
On April 16, 1998, the Company dismissed BDO Seidman, LLP as its independent
public accountants. Such dismissal was approved by the Company's Audit
Committee. In connection with the audits for the two most recent fiscal years
and through April 16, 1998, there have been no disagreements with BDO
Seidman, LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if
not resolved to the satisfaction of BDO Seidman, LLP would have caused them
to make reference thereto in their report on the consolidated financial
statements for such years. The Company engaged Arthur Andersen LLP as its new
independent public accountants as of April 16, 1998.
16
<PAGE>
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information concerning the Company's
current directors and executive officers:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AGE
- ---- -------------------- ---
<S> <C> <C>
Jack R. Crosby Director; Chairman of the Board of Directors and Chief Executive Officer 71
Frank J. Moreno Director; President and Chief Operating Officer 58
Jack S. Gray, Jr. Director; Vice Chairman of the Board of Directors 41
Thomas G. Rebar Director and Member of the Compensation and Audit Committees; Secretary 35
Wayne B. Weisman Director and Member of the Compensation and Audit Committees 42
Winston J. Churchill Director and Member of the Compensation Committee 57
Norman Dowling Chief Financial Officer, Vice President and Assistant Secretary 35
James J. Villanueva Executive Vice President 35
Neil R. Austrian, Jr. Executive Vice President 33
</TABLE>
- --------------------
JACK R. CROSBY has been Chairman of the Board of Directors of the Company
since December 1997 and Chief Executive Officer of the Company since
February 1998. Mr. Crosby was Chairman of the Board of Directors of the
Tescorp, Inc., a publicly traded company which owns and operates cable
television systems in Argentina, since its inception in 1980, and was Chief
Executive Officer from 1991 until it was sold in February, 1998. Mr. Crosby
is the General Partner of Rust Group, L.P., a Texas limited partnership
holding certain of Mr. Crosby's business assets, and he is the president of
Rust Investment Corp., the general partner of Rust Capital, Ltd. ("Rust
Capital"), an investment limited partnership with its headquarters in Austin,
Texas. Mr. Crosby presently serves as a director of Prime Venture I ("Prime
Venture") of Austin, Texas. Prime Venture and its affiliates own and operate
cable television systems in Las Vegas, Nevada. Mr. Crosby also serves as a
director of three other publicly traded companies: National Dentex
Corporation, a manufacturer of dental appliances, DSI Toys, Inc., a toy
manufacturer and distributor, and Heartland Wireless Communications, Inc., a
wireless television company. From 1982 through early 1985, he served as a
director of Orion Pictures. As a principal of Rust Group, L.P., Mr. Crosby
participated in the purchase of selected motion picture theaters from Wometco
Theaters, Inc. in 1990 before selling them in 1994.
FRANK J. MORENO has been a Director of the Company since April 1998 and
President and Chief Operating Officer of the Company since February 1998, and
served as a consultant to the Company in December 1997 through February 1998.
Prior to joining the Company, Mr. Moreno was the President and Chief
Executive Officer of Theater Acquisitions L.P., a privately-owned company
formed by Jack Crosby and Mr. Moreno in 1990 to purchase selected movie
theaters in Florida and Puerto Rico from Wometco Enterprises Inc. Under
Moreno's leadership, Theater Acquisitions L.P. expanded the circuit and
significantly increased its operating performance before being sold in 1994.
Mr. Moreno has significant experience in the movie exhibition industry.
JACK S. GRAY, JR. has been a Director and Vice Chairman of the Board of
Directors of the Company since April 1998. Prior to that, he served as
President and Chief Operating Officer of Tescorp, Inc., a NASDAQ traded
company, from March 1991 until February 1998. Mr. Gray has acted as partner,
officer and/or director of Rust Group, L.P. and/or its affiliates since 1983.
THOMAS G. REBAR has been a Director and Member of the Compensation and Audit
Committees of the Company since December 1997 and Secretary of the Company
since April 1998. Mr. Rebar is also Managing Director of SCP Private Equity
Management, L.P., the general partner of SCP, a private equity investment
fund, which position he has held since June 1996. From 1989 until joining SCP
in 1996, Mr. Rebar served as Senior Vice President of Charterhouse Inc., an
investment banking firm. Prior to joining Charterhouse, Inc., Mr. Rebar was a
member of the corporate finance department at Bankers Trust Company.
WAYNE B. WEISMAN has been a Director and Member of the Compensation and Audit
Committees of the Company since December 1997. Mr. Weisman has been a partner
of SCP Private Equity Management, L.P., the general partner of SCP, since the
inception of SCP in 1996. Since 1991, Mr. Weisman has served as Vice
President of CIP Capital Management, Inc., the general partner of CIP
Capital,
17
<PAGE>
L.P., a small business investment company, or in a similar capacity in the
predecessors to such entities. From 1992 to 1994, he served as a director and
Executive Vice President of Affinity Biotech. Inc., and Vice President and
General Counsel of its successor, IBAH, Inc. From 1987 to 1990, Mr. Weisman
ran an independent investment management and advisory firm. He formerly
practiced law with the Philadelphia firm of Saul, Ewing, Remick & Saul. Mr.
Weisman is currently a director of Microleague Multimedia, Inc., a publicly
traded publisher of multimedia products.
WINSTON J. CHURCHILL has been a Director and Member of the Compensation
Committee of the Company since December 1997. Mr. Churchill has been the
Managing General Partner of SCP Private Equity Management, L.P., the general
partner of SCP, since SCP's inception in 1996. Mr. Churchill founded
Churchill Investment Partners, Inc. in 1989 and CIP Capital, Inc. in 1990,
each of which is an investment and venture capital fund, and continues to be
a principal of each. From 1989 to 1993 he served as Chairman of the Finance
Committee of the $24 billion Pennsylvania Public School Employees' Retirement
System. From 1984 to 1989, Mr. Churchill was a general partner of Bradford
Associates, a private investment firm in Princeton, New Jersey. Prior to that
time, he practiced law at the Philadelphia firm of Saul, Ewing, Remick & Saul
for 16 years and was a member of its executive committee. Mr. Churchill is
Chairman of the Board of Directors of Central Sprinkler Corporation, a
manufacturer and distributor of automatic fire sprinkler systems and
components, and IBAH, Inc., a publicly traded clinical research company for
the medical and biotechnology industry.
NORMAN DOWLING has served as Vice President of the Company since December
1997 and as Chief Financial Officer and Assistant Secretary of the Company
since November 1997. Prior to that, Mr. Dowling served as Director of Finance
of Advanced Marketing Services, Inc., a publicly traded distributor of books
and media products, from October 1993 until November 1997, and as Controller
and then Director of Development and Acquisitions of Medical Imaging Centers
of America, Inc. from May 1990 until October 1993. Mr. Dowling's professional
experience also includes six years with the public accounting firm, Ernst &
Young.
JAMES J. VILLANUEVA has served as Executive Vice President of the Company
since December 1997. He has been a partner of Rust Group, L.P. since
1997. For the five years prior to his association with Rust Group, L.P.,
Mr. Villanueva was Vice President of Bastion Capital Corporation.
NEIL R. AUSTRIAN, JR. has served as Executive Vice President of the
Company since April 1998. He has been a partner of the Rust Group since
March 1998. Prior to that, he served as Chief Financial Officer and
Senior Vice President of Tescorp, Inc. from August 1997 until February
1998, and as Vice President of Tescorp, Inc. from October 1994 until
August 1997. Mr. Austrian was also an associate of Rust Capital, Ltd.
from October 1988 until October 1994. Mr. Austrian is currently a
director of Software Publishing Corporation Holdings, Inc.
There were eleven meetings of the Board of Directors of the Company during
the last fiscal year. Each director attended at least 75% or more of the
aggregate number of meetings of the Board of Directors and committees of the
Board of Directors on which he served which were held during the last fiscal
year.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who own more than
10% of a registered class of the Company's equity securities to file various
reports with the Securities Exchange Commission and the National Association
of Securities Dealers concerning their holdings of, and transactions in,
securities of the Company. Copies of these filings must be furnished to the
Company.
Based on a review of the copies of such forms furnished to the Company, the
Company notes that each of Frank J. Moreno, Jack S. Gray, Jr., Neil R.
Austrian, Jr., CinemaStar Acquisition Partners, L.L.C., SCP Private Equity
Partners, L.P. and Reel Partners, L.L.C. did not timely file a Form 3 Initial
Statement of Beneficial Ownership of Securities in connection with becoming
directors and/or officers of the Company or becoming 10% shareholders in the
Company. Similarly, Jack R. Crosby, Norman Dowling, James J. Villanueva and
Winston J. Churchill did not timely file a Form 4 Statement of Changes in
Beneficial Ownership in connection with stock options and/or warrants issued
to them by the Company during the Company's fiscal year ended March 31, 1998.
The Company has been informed that each of Messrs. Moreno, Gray, Austrian,
Crosby, Dowling, Villanueva and Churchill, and the entities of CinemaStar
Acquisition Partners, L.L.C., Reel Partners, L.L.C. and SCP Private Equity
Partners, L.P. will file the requisite notices within fifteen (15) days of
the filing of this Form 10-KSB.
18
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the
chief executive officer and all other executive officers of the Company whose
salary and bonus exceeded an annual rate of $100,000 during the fiscal year
ended March 31, 1998 or is expected to exceed $100,000 in fiscal 1999. The
table is divided into the current chief executive officers and other current
executive officers, on the one hand, and the former chief executive officer
and other former executive officers, on the other. The former executive
officers served during the fiscal year ended March 31, 1998, but resigned on
March 25, 1998, pursuant to the Settlement Agreement with the Company
described under "Employment and Consulting Agreements" below.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards
Annual Compensation ------------
------------------------ Securities
Name and All Other Annual Underlying
Principal Position Fiscal Year Ended Salary Bonus Compensation(3) Options/SARs
- ------------------ ----------------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS:
Jack S. Crosby....................... 1998 $0(2) 0(1) 500,000(1)
Chairman of the Board of Directors 1997 $0 0
and Chief Executive Officer 1996 $0 0
Frank J. Moreno...................... 1998 $57,531(4) 0(1)(5) 500,000(1)
President and Chief Operating 1997 $0 0
Officer 1996 $0 0
Norman Dowling....................... 1998 $36,345(6) 0(1)(5) 100,000(1)
Chief Financial Officer and Vice 1997 $0 0
President 1996 $0 0
Jack S. Gray, Jr..................... 1998 $0(2) 0(1) 0(1)(7)
Vice Chairman of the Board of 1997 $0 0
Directors 1996 $0 0
Neil R. Austrian, Jr................. 1998 $0(2) 0(1) 0(1)(7)
Executive Vice President 1997 $0 0
1996 $0 0
FORMER EXECUTIVE
OFFICERS: (13)
John Ellison, Jr..................... 1998 $314,166(8) $0 0
President and Chief Executive 1997 $181,944 $50,000 0
Officer 1996 $167,620 $50,000 0
Alan Grossberg....................... 1998 $702,210(8) $0 0
Acting Chief Financial Officer 1997 $182,640(9) $30,000 0
and Executive Vice President 1996 $196,273(10) $15,000 0
Jerry Willits........................ 1998 $290,571(8) $0 0
Vice President 1997 $88,935 $15,000 0
1996 $77,500 $ 7,500 0
Jon Meloan........................... 1998 $182,312(8) $0 (3) 0
Vice President 1997 $62,400 $10,000 (3) 2,000
1996 $50,000 $0 (3) 5,180
</TABLE>
- --------------------
(1) Pursuant to their stock option agreements, each of the current
executive officers is entitled to a bonus, payable when the
applicable tax payment is due, equal to the difference in the amount
of federal income tax the executive officer is required to pay
19
<PAGE>
upon exercising his options if, and to the extent, such options had
been considered incentive stock options for federal income tax
purposes.
(2) Pursuant to Compensation Committee and Board of Directors
consents, each dated April 29, 1998, Jack R. Crosby is to receive
an annual salary of $175,000, Jack S. Gray, Jr. is to receive an
annual salary of $100,000 and Neil R. Austrian, Jr. is to receive
an annual salary of $100,000.
(3) Perquisites and other personal benefits did not in the
aggregate reach the lesser of $50,000 or 10% of the total of
annual salary and bonus reported in this table for any named
executive officer.
(4) Includes salary and consulting fees paid in fiscal 1998. Pursuant to
the Employment Agreement by and between the Company and Frank J.
Moreno, dated April 29, 1998, Mr. Moreno is to receive an annual
salary of $250,000.
(5) Pursuant to the Employment Agreement by and between the Company and
Frank J. Moreno, dated April 29, 1998, and the Employment Agreement by
and between Norman Dowling and the Company dated June 18, 1998, Mr.
Moreno and Mr. Dowling may be awarded bonus compensation at the
discretion of the Board of Directors.
(6) Pursuant to the Employment Agreement by and between the Company
and Norman Dowling dated June 18, 1998, Mr. Dowling is to receive an
annual salary of $105,000.
(7) Pursuant to the Compensation Committee and Board of Directors
consents, each dated April 29, 1998, Jack S. Gray, Jr. and Neil R.
Austrian, Jr. were each granted options to acquire 150,000 shares of
the Company's common stock as of that date.
(8) Includes an aggregate of $875,000 cash payments made by the Company
pursuant to the Settlement Agreement described below. The Settlement
Agreement also provided for a total of $172,696 plus interest in
debt forgiveness and personal loan guarantees. See "Employment and
Consulting Agreements."
(9) Includes $40,000 paid to Mr. Grossberg pursuant to the terms of a
Film Booking Agreement pursuant to which Mr. Grossberg previously
provided film booking services to the Company.
(10) Includes $52,000 paid to Mr. Grossberg pursuant to the terms of a
Film Booking Agreement pursuant to which Mr. Grossberg previously
provided film booking services to the Company.
OPTION GRANTS DURING FISCAL 1998
The following table sets out the stock options that were granted to the
executive officers identified in the Summary Compensation Table during the
fiscal year ended March 31, 1998:
<TABLE>
<CAPTION>
OPTION GRANTS DURING FISCAL 1998
Number of Securities Underlying % of Total Options Granted to Exercise or Base Expiration
Name Options Granted Employees in Fiscal Year Price ($/Sh) Date
- ---- ------------------------- ------------------------------ ------------ ----
<S> <C> <C> <C> <C>
Jack R. Crosby 500,000 45.45% $.875 12/15/2007
Frank J. Moreno 500,000 45.45% $.875 12/15/2007
Norman Dowling 100,000 9.1 % $.875 12/15/2007
</TABLE>
20
<PAGE>
OPTION EXERCISES IN FISCAL 1998 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options which
were exercised during, or held at the end of, fiscal 1998 by the executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
OPTION EXERCISES AND YEAR-END VALUE TABLE(1)
Number of Unexercised Value of Unexercised
Options at Fiscal Year End In-the-Money Options
-------------------------- at Fiscal Year End(2)
------------------------
Shares
Acquired on Value
Name(4) Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT EXECUTIVE OFFICERS:
Jack R. Crosby 0 $0 0 500,000 $0 $62,500
Frank Moreno 0 $0 0 500,000 $0 $62,500
Norman Dowling 0 $0 0 100,000 $0 $12,500
FORMER EXECUTIVE OFFICERS:
John Ellison, Jr. 0 $0 88,125(3) 0 $0 $0
Alan Grossberg 0 $0 88,125(3) 0 $0 $0
Jerry Willits 0 $0 11,750(3) 0 $0 $0
Jon Meloan 0 $0 (3) 0 $0 $0
</TABLE>
- --------------------
(1) There were no option exercises during fiscal 1998. All
options granted to current executive officers vest over a
three-year period beginning December 16, 1997.
(2) Valued based on an assumed price of $1.00 per share of common stock.
(3) These options expired as of June 25, 1998.
STOCK OPTIONS
In December 1997, the Company adopted the CinemaStar Luxury Theaters, Inc.
Stock Option Plan (the "1997 Option Plan") under which a maximum of 2,885,960
shares of common stock of the Company may be issued pursuant to incentive and
non-qualified stock options grants to officers, key employees or consultants
of the Company. As of June 24, 1998, there were 1,431,500 options issued and
outstanding under the 1997 Option Plan.
The 1997 Option Plan is administered by a committee comprised of three (3)
members of the Board of Directors (or such other number as determined by the
Board of Directors) and shall be comprised of such number of "disinterested
persons" as is necessary to meet the requirements of Rule 16b-3 of the
Exchange Act and such number of "outside directors" as is necessary to meet
the requirements of Section 162(m) of the Internal Revenue Code of 1986, as
amended. This committee has authority to determine employees to whom options
will be granted, the timing and manner of grants of options, the exercise
price, the number of shares covered by and all of the terms of options, and
all other determinations necessary or advisable for administration of the
1997 Option Plan. The 1997 Option Plan is subject to shareholder approval
only to the extent of qualifying options issued thereunder as incentive stock
options.
The exercise price for the shares subject to any incentive stock option
granted under the 1997 Option Plan shall not be less than 100% of the fair
market value of the shares of common stock of the Company on the date the
option is granted. No option shall be exercisable after the earliest of the
following: the expiration of 10 years after the date the option is granted;
three months after the date the optionee's employment with the Company
terminates, if termination is by the Company for any reason without cause;
immediately upon the voluntary termination by the optionee of the optionee's
employment with the Company or the termination of the optionee's employment
with the Company by the Company for cause; or one year after the date the
optionee's employment terminates, if termination is a result of death or
permanent disability. The vesting schedule for options issued under the 1997
Option Plan is determined by the committee. All options granted to date under
this Plan vest over a three-year period beginning December 16, 1997, with full
acceleration on a change in control.
21
<PAGE>
In July 1994, the Company adopted the CinemaStar Luxury Theaters, Inc. Stock
Option Plan (the "1994 Option Plan") under which a maximum of 587,500 shares
of common stock of the Company could be issued pursuant to incentive and
non-qualified stock options granted to officers, key employees or consultants
of the Company. Most of the options granted under this 1994 Option Plan have
expired or been terminated. Pursuant to a Board of Directors consent, any
outstanding options under the 1994 Option Plan have been transferred to the
1997 Option Plan.
COMPENSATION OF DIRECTORS
Prior to June 3, 1995, directors received no cash compensation for serving on
the Board of Directors. In June, 1995, the Board of Directors approved
payment of $1,000 per director for each meeting attended. On April 29, 1998,
the Board of Directors approved payment of $1,000 per director for each
meeting, or committee meeting, attended; provided such director does not draw
a salary from the Company in his or her capacity as an employee of the
Company. It is anticipated that there will be not less than four meetings per
year to coincide with review and approval of quarterly and annual financial
statement filings.
In fiscal 1998, there were eleven meetings of the Board of Directors.
In the fiscal years ended March 31, 1998 and 1997, Russell Seheult
received $52,000 and $43,200 in consulting fees. In August 1994, the Company
entered into a five year consulting agreement with Mr. Seheult which was
extended in December 1996 for five years from December 1996. Mr. Seheult was
granted options to purchase 176,250 shares of common stock under the
Company's Stock Option Plan at a price of $2.55 per share in July 1994. On
December 16, 1997, Mr. Seheult resigned as a director and ceased providing
consulting services. As a result, all of Mr. Seheult's options have expired
and the Company has stopped making payments under the consulting agreement.
Mr. Seheult remains as a guarantor on certain of the Company's long-term
theater leases.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective April 29, 1998, the Company entered into a three-year employment
agreement with Frank J. Moreno, pursuant to which Mr. Moreno's annual base
salary of $105,000 is subject to increase at the discretion of the Board of
Directors. In addition, Mr. Moreno may receive an annual bonus at the
discretion of the Board of Directors. Mr. Moreno also receives an automobile
allowance of $650 per month. The employment agreement also gives Mr. Moreno
the right to participate in any and all group medical and other benefit plans
generally available to employees of the Company. Under the employment
agreement, Mr. Moreno shall be compensated for his out-of-pocket relocation
costs and up to $20,000 in connection with the sale of his home. The
employment agreement also acknowledges that the Company granted Mr. Moreno
options to acquire 500,000 shares of the Company's common stock on December
16, 1997. In the event Mr. Moreno is terminated by the Company without cause,
he is entitled to his base salary for the remainder of the three-year period.
Effective June 18, 1998, the Company entered into a one-year employment
agreement with Norman Dowling providing for an annual base salary of $105,000
and an annual bonus at the discretion of the Board of Directors. Mr. Dowling
also receives an automobile allowance of $450 per month. The employment
agreement also gives Mr. Dowling the right to participate in any and all
group medical and other benefit plans generally available to employees of the
Company. The employment agreement also acknowledges that the Company granted
Mr. Dowling options to acquire 100,000 shares of the Company's common stock
on December 16, 1997. In the event Mr. Dowling is terminated by the Company
without cause, as defined in the employment agreement, he is entitled to his
base salary for the remainder of the one-year period.
Alan Grossberg, John Ellison, Jr., Jon Meloan and Jerry Willits resigned from
their management and/or Board of Directors positions of the Company and the
Company's entities on March 25, 1998. Effective March 26, 1998, the Company
entered into a settlement agreement with John Ellison, Jr., Alan Grossberg,
Jerry Willits and Jon Meloan (the "Settlement Agreement"). Pursuant to this
Settlement Agreement, the employment agreements between the Company and each
of Messrs. Ellison, Grossberg, Willits and Meloan (the "Former Management"),
which agreements provided for extensive severance and other payments upon the
termination thereof, were terminated and the Company agreed to pay to the
Former Management a settlement payment in the gross amount of $875,000 cash.
The Company also agreed to forgive indebtedness and to assume responsibility
for the repayment of sums owed personally, in amounts aggregating $172,679
plus interest. The Settlement Agreement also (i) obligates the Company to use
its best reasonable efforts to release the Former Management from their
obligations under any personal guarantees made for the benefit of the Company
or its entities and (ii) has the parties release each other with respect to
all known or unknown prior claims.
22
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
PRINCIPAL SHAREHOLDERS
The Company has outstanding voting securities consisting of only common
stock, of which 25,703,646 shares were outstanding as of the close of
business day on June 24, 1998. The following table sets forth certain
information regarding the beneficial ownership of the Company's common stock
as of the close of business day on June 24, 1998 as to (a) each director, (b)
each executive officer identified in the Summary Compensation Table above,
(c) all executive officers and directors of the Company as a group, and (d)
each person known to the Company to beneficially own five percent or more of
the outstanding shares of Company's common stock.
<TABLE>
<CAPTION>
As of June 24, 1998
-------------------------------
Number of Percent of
Title of Class Beneficial Owner(1) Shares(2) Class(2)
--------- --------
<S> <C> <C> <C>
CURRENT DIRECTORS AND/OR EXECUTIVE OFFICERS:
common Jack R. Crosby 75,000(3)(4) *
common Frank J. Moreno 45,000(5) *
common Jack S. Gray, Jr. 700,000(6)(7) 2.65
common Thomas Rebar -0- -0-
common Wayne B. Weisman -0- -0-
common Winston J. Churchill 23,484,790(8) 74.55
common Norman Dowling -0-(9) -0-
common Neil R. Austrian, Jr. 100,000(10) *
ALL CURRENT DIRECTORS AND EXECUTIVE 24,759,290(8)(11) 77.47
OFFICERS AS A GROUP (9 PERSONS)
FORMER DIRECTORS AND/OR EXECUTIVE OFFICERS:
common John Ellison, Jr. 794,810(12) 3.09
common Alan Grossberg 714,600(13) 2.78
common Jerry Willits 86,765(14) *
common Jon Meloan 0(15) 0
common Russell Seheult 573,020(16) 2.18
FIVE PERCENT SHAREHOLDERS:
common CinemaStar Acquisition Partners, L.L.C. 21,666,344(17) 72.99
common SCP Private Equity Partners, L.P. 23,484,790(18) 77.97
</TABLE>
- --------------------
* Items marked with an asterisk comprise less than 1% of the total
outstanding common stock of the Company.
(1) The address of each of Messrs. Moreno and Dowling is c/o the Company
at 12230 El Camino Real, Suite 320, San Diego, California 92130. The
address of each of Messrs. Crosby, Gray and Austrian is c/o Rust
Capital, Ltd., 327 Congress Avenue, Suite 200, Austin, Texas 78701.
The address of each of Messrs. Churchill, Rebar and Weisman and SCP
Private Equity Partners, L.P. and CinemaStar Acquisition Partners,
L.L.C. is c/o SCP Private Equity Partners, L.P., 800 The Safeguard
Building, 435 Devon Park Drive, Wayne, Pennsylvania 19087.
(2) Shares of common stock which a person has the right to acquire
within 60 days are deemed outstanding in calculating the percentage
ownership of such person, but are not deemed outstanding as to any
other person. Percentages are calculated based on 25,703,646 shares
of common stock issued and outstanding as of June 24, 1998.
23
<PAGE>
(3) Consists of the 75,000 Reel Shares.
(4) Excludes 500,000 options, granted under the 1997 Option Plan, to
acquire the Company's common stock, exercisable after sixty days
from June 24, 1998.
(5) Excludes 500,000 options, granted under the 1997 Option Plan, to
acquire the Company's common stock, which are exercisable after sixty
days from June 24, 1998.
(6) Excludes 150,000 options, granted under the 1997 Option Plan, to
acquire the Company's common stock, which are exercisable after sixty
days from June 24, 1998.
(7) Includes warrants held by Sharp Irrevocable Intervivos Trust, with
respect to which Mr. Gray is a trustee.
(8) Includes 17,684,464 shares owned by CAP, the 1,351,256 Adjustment
Shares to be issued to CAP, the 2,630,624 CAP Warrants, 1,000,000 of
the Reel Warrants (held by SCP as transferee thereof) and 818,446 of
the Watley Warrants (held by SCP as transferee thereof), each with
respect to which Mr. Churchill has voting and investment control.
(9) Excludes 100,000 options, granted under the 1997 Option Plan, to
acquire the Company's common stock, which are exercisable after sixty
days from June 24, 1998.
(10) Consists of 100,000 of the Reel Warrants (held by Mr. Austrian as
transferee). Excludes 150,000 options, granted under the 1997 Option
Plan, to acquire the Company's common stock, which are exercisable
after sixty days from June 24, 1998.
(11) Includes 100,000 of the Reel Warrants held by Mr. Austrian as
transferee, and 154,500 of the Reel Warrants and 200,000 of the Watley
Warrants held by the James J. Villanueva Family Trust as transferee
thereof with respect to which Mr. Villanueva is a trustee.
(12) Excludes 88,125 options to acquire the Company's common stock granted
under the 1994 Option Plan, which expired as of June 25, 1998.
(13) Excludes 88,125 options to acquire the Company's common stock
granted under the 1994 Option Plan, which expired as of June 25,
1998, and 320,900 shares of common stock beneficially owned by Mr.
Grossberg's former wife with respect to which Mr. Grossberg has no
beneficial ownership but exercises voting control pursuant to the
terms of a divorce settlement.
(14) Excludes 11,750 options to acquire the Company's common stock granted
under the 1994 Option Plan, which expired as of June 25, 1998.
(15) Excludes 18,930 options to acquire the Company's common stock granted
under the 1994 Option Plan, which expired as of June 25, 1998.
(16) Excludes 176,250 options to acquire the Company's common stock granted
under the 1994 Option Plan, which expired as of June 25, 1998.
(17) Includes 1,351,256 issuable Adjustment Shares and the 2,630,624 CAP
Warrants.
(18) Includes 17,684,464 shares owned by CAP, 1,351,256 Adjustment Shares to
be issued to CAP, the 2,630,624 CAP Warrants, 1,000,000 of the Reel
Warrants held by SCP as transferee thereof and 818,446 of the Watley
Warrants held by SCP as transferee thereof, each with respect to which
SCP has voting and investment control.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits with
respect to the lease of the Chula Vista 10, and Eileen Seheult the former wife
of Russell Seheult, with respect to certain lease and bank obligations incurred
or guaranteed by Mr. and Ms. Seheult on behalf of the Company) have personally
guaranteed, on a joint and several basis, all significant obligations of the
Company pursuant to its theater leases and certain loans. Certain of these
obligations of the Company are secured by real or personal property pledged by
such individuals. The Company, pursuant to the Settlement Agreement described
above, has agreed to use its reasonable best efforts to obtain the releases of
Mr. Ellison, Mr. Willits and Mr. Grossberg from their obligations under any
personal guarantees made for the benefit of the Company or its entities. To
date, no such releases have been obtained. See "Executive Compensation --
Employment and Consulting Agreements." As of March 31, 1998, such guaranteed
obligations involved aggregate future payments by the Company of
$131,000,000.
24
<PAGE>
In April 1996, the Company formed its 75%-owned subsidiary, CinemaStar Luxury
Theaters, S.A. de C. V. ("CinemaStar Mexico"). The remaining 25% ownership
interest in CinemaStar Mexico is held by Atlantico y Asociados S.A. de C.V.,
a Mexican corporation. CinemaStar Mexico leases and operates the Plaza
Americana 10 facility in Tijuana. CinemaStar Mexico leases equipment and
obtains technical services and support from the Company, in each case for
payment that the Company believes is fair value. In addition, the Company has
agreed to pledge certain theater equipment, owned by the Company and leased
by CinemaStar Mexico, to secure the lease obligations of CinemaStar Mexico to
the landlord of Plaza Americana 10.
The Company incurred in fiscal 1998 an expense of $1,056,224 in connection with
the settlement of certain management contracts previously entered into with four
former officers and directors of the Company and the settlement of certain other
matters amongst the parties. The Company effected the settlement by making
aggregate cash payments of $875,000, forgiving outstanding loans and remaining
as guarantor on a personal loan. The settlement agreement also contains mutual
general releases of the parties with respect to all prior known and unknown
claims.
In April 1996, John Ellison, Jr. and Russell Seheult jointly obtained a personal
line of credit with Union Bank of California. From April 1996 until June 1997,
Mr. Seheult and Mr. Ellison borrowed funds under the line of credit and advanced
certain of the funds to the Company. Pursuant to an arrangement between the
Company and Union Bank, payments on the loan were made directly to Union Bank by
the Company. In early June 1997, such line of credit was not renewed by Mr.
Ellison and Mr. Seheult and, as a result, Union Bank debited the Company's
account at Union Bank for approximately $99,000, the outstanding principal
balance of the line of credit as of the date of termination. On June 19, 1997,
Messrs. Ellison and Seheult entered into a Business Note with Union Bank in the
aggregate principal amount of $99,043 the proceeds of which were credited to
the Company. Such note bears interest at a rate of 10.25% per annum and calls
for 60 equal payments of interest and principal of approximately $2,100 per
month. Pursuant to the Settlement Agreement described above, the Company agreed
to assume Mr. Ellison's obligations under such note. See "Executive Compensation
- -- Employment and Consulting Agreements." As of March 31, 1998, the outstanding
balance of principal and interest on such note was approximately $87,000.
This loan was paid in full with interest by the Company subsequent to March
31, 1998.
Pursuant to the terms of a loan agreement, dated April 1, 1996, between the
Company and John Ellison, Jr., the Company agreed to loan the sum of $1,000 per
week to Mr. Ellison commencing on Friday, April 5, 1996. As of January 2, 1998,
the outstanding balance of principal on such loan was $92,000, plus interest.
Pursuant to the Settlement Agreement described above, the Company agreed to
release Mr. Ellison's obligations with respect to these loans. See "Executive
Compensation - Employment and Consulting Agreements."
The Company made loans in the principal amount of $19,500 to Jon Meloan from
July 1996 through February 1997. As of March 31, 1997, Mr. Meloan executed a
promissory note, dated March 31, 1997, in the principal amount of $21,095
which represents the total principal amount of such loans with accrued
interest at a rate of 8% per annum through the date of such note. Such note
was due and payable in full on August 15, 1998. As of March 26, 1998, the
outstanding balance of principal and interest on such note was $21,095, from
which the Company agreed to release Mr. Meloan pursuant to the Settlement
Agreement described above. In addition, the Company also has agreed, pursuant
to the Settlement Agreement, to assume the obligations of Mr. Meloan with
respect to a loan in the aggregate principal amount of $22,600 made by a bank
to Mr. Meloan. See "Executive Compensation -- Employment and Consulting
Agreements." This loan was paid in full with interest by the Company
subsequent to March 31, 1998.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" for a listing of those exhibits included in this filing.
<TABLE>
<CAPTION>
Exhibit Description
Number
- ------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company, as amended (10)
3.2 Amended and Restated Bylaws of the Company (9)
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)
25
<PAGE>
4.11 Offshore Warrant Agreement 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)
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)
26
<PAGE>
10.46 MDA-San Bernardino 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). (9)
10.48 Employment Agreement of Jon Meloan (9)
10.49 Agreement terminating lease dated May 11, 1996 between the Company and
Espacios de Zapopan, S.A. de C.V. (9)
10.50 Agreement Terminating Sublease, dated July 18,1996, between the Company and Coconut Grove Marketplace (9)
10.51 City of San Marcos letter re: Notice of Cancellation of June 25, 1996 CinemaStar
Ground Lease (9)
10.52 First Amendment to Lease, dated May 5, 1997, between Pacific Oceanside Holdings, L.P. and the Company (9)
10.53 Amendment to Loan Agreement, dated as of April 23, 1997, between the Company and Pacific
Concessions, Inc. (9)
10.54 Letter of Intent, dated June 24, 1997, by and between Rust Capital Ltd. and CinemaStar Luxury Theaters, Inc. (8)
10.55 Stock Purchase Agreement by and among the Company, Reel Partners, L.L.C. and CinemaStar Acquisition Partners,
L.L.C., dated September 23, 1997. (10)
10.56 First Bridge Warrant from Company to Reel Partners, L.L.C., dated September 23, 1997. (10)
10.57 CinemaStar Luxury Theaters, Inc. Stock Option Plan, dated December 16, 1997 (11)
10.58 Form of Stock Option Agreement, as of December 16, 1997 (11)
10.59 Employment Agreement by and between the Company and Frank Moreno, dated April 29, 1998 (11)
10.60 Employment Agreement by and between the Company and Norman Dowling, dated June 18, 1998 (11)
10.61 Lease Agreement by and between the Company and Landgrant Corporation dated as of April 15, 1998
(Ocean View Plaza) (11)
21 Subsidiaries of the Company (11)
23.1 Consent of BDO Seidman, LLP (11)
27 Financial Data Schedule (11)
- -------------------------------------------------------------
(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
(9) Incorporated by reference to Form 10-KSB for the year ended March 31, 1997.
(10) Incorporated by reference to the Proxy Statement filed November 17, 1997.
(11) Filed herewith.
</TABLE>
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the last quarter of the period
covered by this report:
1. On April 3, 1998, the Company filed a Form 8-K for a reportable
event on March 30, 1998. On March 30, 1998, the Company issued a
press release announcing the resignation of its management team of
John Ellison, Jr., Alan Grossberg, Jerry Willits and Jon Meloan,
pursuant to a separation package including a collective payment by
the Company to the resigned management team of $875,000 in cash
and loan forgiveness of about $200,000, and the hiring of its new
management team of Jack Crosby and Frank Moreno.
The following report on Form 8-K was filed subsequent to the fiscal year ended
March 31, 1998:
1. On April 29, 1998, the Company filed a Form 8-K for a reportable
event on April 16, 1998. On April 16, 1998, the Company dismissed
BDO Seidman, LLP as its independent accountants and engaged Arthur
Andersen LLP as its new accountants. The Company acknowledged that
there had been no disagreements with BDO Seidman, LLP on any
matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
27
<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/ Jack R. Crosby
---------------------------
Jack R. Crosby, Chairman Dated June 26, 1998
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:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- --------- -------- ----
<S> <C> <C>
/s/ Jack R. Crosby Chairman of the Board of Directors
- --------------------- and Chief Executive Officer June 26, 1998
Jack R. Crosby (principal executive officer)
/s/ Norman Dowling Vice President, Chief Financial
- ---------------------- Officer and Assistant Secretary June 29, 1998
Norman Dowling (principal financial officer and
principal accounting officer)
/s/ Frank J. Moreno President, Chief Operating Officer
- ---------------------- and Director June 29, 1998
Frank J. Moreno
/s/ Winston J. Churchill Director June 26, 1998
- ----------------------
Winston J. Churchill
/s/ Wayne B. Weisman Director June 29, 1998
- ----------------------
Wayne B. Weisman
/s/ Thomas G. Rebar Director and Secretary June 26, 1998
- ----------------------
Thomas G. Rebar
/s/ Jack S. Gray, Jr. Vice Chairman of the Board
- ---------------------- of Directors June 26, 1998
Jack S. Gray, Jr.
</TABLE>
28
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Public Accountants F-2
Consolidated Balance Sheets as of March 31, 1998 and 1997. F-3
Consolidated Statements of Operations for the years ended March 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for the years ended March 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CinemaStar Luxury Theaters, Inc.:
We have audited the accompanying consolidated balance sheet of CinemaStar
Luxury Theaters, Inc. (a California corporation) and subsidiaries as of March
31, 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides 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, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
San Diego, California
June 22, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
The Board of Directors
CinemaStar Luxury Theaters, Inc.
We have audited the accompanying consolidated balance sheet of CinemaStar
Luxury Theaters, Inc. and Subsidiaries as of March 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides 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
the results of their operations and their cash flows for the year then ended,
in conformity with generally accepted accounting principles.
The accompanying 1997 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 11 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 11.
The accompanying 1997 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
F-2
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,481,978 $ 601,646
Prepaid expenses 153,504 207,369
Other current assets (Note 9) 324,897 239,259
----------- -----------
TOTAL CURRENT ASSETS 3,960,379 1,048,274
Property and equipment, net (Note 3) 12,897,891 10,929,846
Advances to affiliates (Note 7) - 114,528
Deposits and other assets 288,026 341,063
----------- -----------
TOTAL ASSETS $ 17,146,296 $12,433,711
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations (Note 4) $ 483,258 $ 3,927,339
Accounts payable 1,672,682 2,729,810
Accrued expenses 1,129,846 311,381
Deferred revenue 221,772 132,940
----------- -----------
TOTAL CURRENT LIABILITIES 3,507,558 7,101,470
Long-term debt and capital lease obligations,
net of current portion (Note 4) 1,869,442 1,132,824
Deferred rent liability (Note 6) 3,177,758 2,286,346
----------- -----------
TOTAL LIABILITIES 8,554,758 10,520,640
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized
shares - 60,000,000 in 1998 and 15,000,000
in 1997; issued and outstanding
shares - 25,703,646 in 1998 and 7,362,406
in 1997 (Note 8) 22,628,670 9,085,317
Additional paid-in capital (Notes 4 and 8) 3,626,152 2,559,027
Accumulated deficit (17,663,284) (9,731,273)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 8,591,538 1,913,071
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,146,296 $12,433,711
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Admissions $17,982,479 $13,585,567
Concessions 7,556,529 5,690,567
Other operating revenues 511,135 355,487
----------- -----------
TOTAL REVENUES 26,050,143 19,631,621
----------- -----------
COSTS AND EXPENSES:
Film rental and booking costs 9,943,669 7,593,600
Cost of concession supplies 2,807,020 1,822,651
Theater operating expenses 10,882,570 6,497,574
Selling, general and administrative expenses 4,140,810 3,655,916
Termination fee - concession lease agreement (Note 6) 1,859,352 -
Settlement costs - management contracts (Notes 6 and 7) 1,056,224 -
Depreciation and amortization 2,255,251 1,631,534
----------- -----------
TOTAL COSTS AND EXPENSES 32,944,896 21,201,275
----------- -----------
OPERATING LOSS (6,894,753) (1,569,654)
----------- -----------
OTHER INCOME (EXPENSE):
Non-cash interest expense (Notes 4 and 8) (328,750) (2,048,997)
Interest expense (777,655) (678,041)
Other expense - (43,018)
Interest income 70,747 36,940
----------- -----------
TOTAL OTHER EXPENSE (1,035,658) (2,733,116)
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES (7,930,411) (4,302,770)
PROVISION FOR INCOME TAXES (NOTE 5) (1,600) (1,600)
----------- -----------
NET LOSS $(7,932,011) $(4,304,370)
----------- -----------
----------- -----------
BASIC AND DILUTED NET LOSS PER SHARE $(0.61) $(0.61)
----------- -----------
----------- -----------
WEIGHTED AVERAGE SHARES 13,090,594 7,099,000
----------- -----------
----------- -----------
</TABLE>
F-4
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
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 226,438 560,011 - - 560,011
Issuance of common stock upon
conversion of convertible
debentures 930,764 2,049,843 - - 2,049,843
Issuance of common stock for interest
on convertible debentures 5,204 16,877 - - 16,877
Additional paid-in capital related
to debenture embedded
interest - - 2,048,997 - 2,048,997
Net loss - - - (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
Issuance of common stock upon
conversion of convertible
debentures 581,776 339,300 - - 339,300
Additional paid-in capital related
to warrant embedded interest - - 328,750 - 328,750
Additional paid-in capital related
to issuance of warrants - - 738,375 - 738,375
Issuance of common stock for services
rendered 75,000 50,000 - - 50,000
Issuance of common stock for
services rendered 17,684,464 13,154,053 - - 13,154,053
Net loss - - - (7,932,011) (7,932,011)
---------- ----------- ----------- ------------ ----------
Balance, March 31, 1998 25,703,646 $22,628,670 $ 3,626,152 $(17,663,284) $8,591,538
---------- ----------- ----------- ------------ ----------
---------- ----------- ----------- ------------ ----------
</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,
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(7,932,011) $(4,304,370)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,255,251 1,631,534
Non-cash interest expense 328,750 2,048,997
Interest on debentures paid in
common stock - 16,877
Deferred rent expense 891,413 784,573
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (31,774) (143,684)
Advances to affiliates - (97,028)
Deposits and other assets (57,309) (2,143)
Accounts payable (1,057,129) 1,891,670
Accrued expenses and other liabilities 946,598 1,517
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (4,656,211) 1,827,943
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,112,950) (5,328,763)
Refundable construction deposit - 600,000
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,112,950) (4,728,763)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 5,724,655 1,000,000
Principal payments on long-term debt and capital
lease obligations (8,082,118) (595,938)
Advances from stockholder, net 114,528 (320,000)
Proceeds from issuance of convertible debentures - 3,000,000
Proceeds from issuance of common stock, net 13,154,053 -
Proceeds from issuance of common stock warrants, net 738,375 -
Proceeds from exercise of common stock warrants, net - 560,011
Payment of debt issuance costs - (600,157)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,649,493 3,043,916
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,880,332 143,096
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 601,646 458,550
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,481,978 $601,646
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $775,655 $678,408
---------- ----------
---------- ----------
Income taxes $1,600 $1,600
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued upon conversion of debentures $339,300 $2,049,843
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND COMPANY OPERATIONS
NATURE OF BUSINESS
CinemaStar Luxury Theaters, Inc. ("Theaters, Inc.") and CinemaStar Luxury
Cinemas, Inc. ("Cinemas, Inc."), a wholly-owned subsidiary of Theaters, 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. These
Companies currently operate seven theaters having a total of 69 screens in
San Diego County and Riverside County, California.
CinemaStar Luxury Theaters, S.A. de C.V. ("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, 1998,
CinemaStar International had one theater having 10 screens in operation in
Tijuana, B.C., Mexico.
COMPANY OPERATIONS AND RISK FACTORS
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $4,304,370 and $7,932,011 in the fiscal
years ended March 31, 1997 and 1998, respectively. While the Company
believes it can achieve profitability with its current operations, any
substantial profitability will depend on the Company's ability to continue to
grow its operations through the addition of new screens and on the success of
management's cost reduction efforts. There can be no assurance as to whether
or when the Company will achieve profitability.
The ability of the Company to expand and add new screens either through the
development of new theaters, the expansions of existing theaters or the
acquisition of new theaters is contingent upon, among other things, the
Company's obtaining new, third party financing to fund such growth. While the
Company is attempting to secure an acquisition line from a senior, secured
lender sufficient to meet the Company's current business plan, no definitive
agreements have been reached and there is no assurance this or any other
financing will be obtained by the Company on commercially reasonable terms.
The Company has entered into agreements, negotiations and/or discussions
pertaining to the development of a 20-screen theater complex and 16-screen
theater complex in San Bernardino, California and Oceanside, California,
respectively. Additionally, the Company has entered into negotiations
regarding the development of other theater complexes in the United States and
the Republic of Mexico. The building of these and other new theater complexes
is subject to many contingencies, many of which are beyond the Company's
control, including consummation of site purchases or leases, receipt of
necessary government approvals, negotiation of acceptable construction
agreements, the availability of financing and timely completion of
construction. No assurances can be made that the Company will be able to
successfully build, finance or operate any of the new theaters presently
contemplated or otherwise.
In the case of a newly developed theater that will be leased by the Company,
the landlord or developer typically provides a construction allowance, with
the Company responsible for the cost of completing construction of the
theater. Thus, in the event that the ultimate cost of the theater is greater
than the allowance, the Company is required to fund any excess. While the
Company believes that its direct oversight of the design and construction of
its theaters provides a certain degree of control over the quality, cost and
timing of construction, the Company remains subject to many of the risks
inherent in the development of real estate, including the risk of
construction cost overruns and delays. Other risks associated with the
development and construction of theaters include the impact of changes in
federal, state or local laws or regulations, strikes, adverse weather,
earthquakes and other natural disasters, 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 pending or proposed theater
development in a timely manner or within the proposed cost allowance.
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. 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.
Further, the motion picture exhibition industry is highly competitive,
particularly with respect to film licensing, the terms of which can depend on
seating capacity, location and configuration of the exhibitor's theaters, the
quality of projection and sound equipment, the comfort and quality of
theaters and ticket prices. Many of the Company's competitors have been in
existence significantly longer than the Company and are better established in
the markets where the Company's theaters are or may be located and are better
capitalized than the Company. These and other factors, including the poor
commercial success of motion pictures or the Company's inability to attract
and retain key management personnel, could have a material adverse effect on
the Company's business and results of its operations. At this time, however,
the Company believes that it has good working relationships with its
distributors and competes favorably with respect to these factors.
The Company operates a leased 10 screen theater in Tijuana, Mexico through
its 75%-owned subsidiary, CinemaStar International. The operation of this
theater in Mexico subjects the Company to the attendant risks of doing
business internationally, including fluctuations in foreign currency, changes
in foreign laws and regulations, political turmoil and uncertain and volatile
economic conditions.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Theaters, Inc., its wholly-owned subsidiary Cinemas, Inc., and its 75%-owned
subsidiary 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 Theaters, Inc. 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 and gift certificate sales are recorded as deferred
revenue and are recognized when group tickets or gift certificates are used
or expire.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be a cash equivalent. At March 31, 1998, cash
equivalents consisted of a certificate of deposit at a bank and, at March 31,
1997, of money market funds at a bank.
PROPERTY AND EQUIPMENT
Property and equipment are 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 to 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.
LONG LIVED ASSETS
On a regular basis, the Company evaluates and assesses its assets for impairment
under the guidelines of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of". The criteria used for these evaluations include management's
estimate of the assets' continuing ability to generate income from operations
and positive cash flows in future periods, as well as the strategic significance
of the assets to the Company's business activities.
DEFERRED RENT LIABILITY
Substantially all of the Company's leases include a rental escalation
provision over the term of the lease. 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.
PRE-OPENING COSTS
In fiscal 1997, the Company capitalized, and amortized, pre-opening costs
related to new theaters. In fiscal 1998, the Company expensed all such
unamortized costs that previously had been capitalized and current
pre-opening costs related to new theaters are expensed as incurred.
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 temporary differences between financial statement and income tax bases of
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
NET LOSS PER SHARE
Basic and diluted net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the years. Common
share equivalents consist of outstanding stock options and warrants, and are not
included in the computation as their inclusion would be antidilutive.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Company does not expect
adoption of SFAS No. 130 to have any effect on its results of operations.
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131") issued by
the FASB is effective for financial statements with fiscal years beginning
after December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The adoption of SFAS No. 131 will have no effect on the Company's
results of operations.
In April of 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up
Activities. SOP 98-5 requires costs of start-up activities to be expensed when
incurred. The Company has adopted this practice, which has not had a material
impact on its results of operations.
STOCK-BASED COMPENSATION
The Company elected to adopt the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly the Company will continue to account for its
stock based compensation plans under the provisions of APB No. 25.
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 1997 financial statements to
conform to the 1998 presentation.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Land $960,000 $960,000
Furniture, fixtures and equipment 9,834,646 6,792,207
Building 2,169,798 2,169,798
Leasehold improvements 3,106,099 2,036,875
Equipment held under capital lease obligations 1,951,327 1,951,327
----------- -----------
18,021,870 13,910,207
Accumulated depreciation and amortization (5,123,979) (2,980,361)
----------- -----------
$12,897,891 $10,929,846
----------- -----------
----------- -----------
</TABLE>
Included in accumulated depreciation and amortization is approximately
$1,236,000 and $966,000 of amortization related to equipment held under
capital lease obligations at March 31, 1998 and 1997, respectively.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Obligations under long-term debt and capital lease arrangements are as follows:
<TABLE>
<CAPTION>
March 31,
---------
1998 1997
---- ----
<S> <C> <C>
Mortgage note payable to bank; interest
at LIBOR plus 5.4% (11.0% at March 31,
1998). Monthly payments of principal and
interest are $15,212 at March 31, 1998. The
note matures in February 2026 and is
collateralized by a deed of trust
and is guaranteed by certain former
officers/directors/stockholders of the
Company. $1,581,389 $1,589,254
Notes payable to bank; interest at prime
plus 2% These notes have been repaid in
full with interest. - 1,339,286
Notes payable to supplier; interest at
prime plus 2%. These notes have been repaid
in full with interest. - 808,338
Convertible debentures bearing interest at
4% per annum and due August 1998. These
debentures were converted in April 1997. - 350,000
Unsecured note payable to former
stockholder for stock repurchase and
employment settlement, interest at 6%
and was payable in monthly principal
and interest payments of $5,000 through
March 1998. This note has been repaid in
full with interest. - 56,873
Capitalized lease obligation discounted at
18.9%, payable in monthly installments of
$25,101, including interest. Lease matures
March 2000. 215,895 404,207
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS -- CONTINUED
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. 202,462 282,868
Capitalized lease obligation discounted at
5.25%, payable in monthly installments of
$2,060, including interest. Lease matures
March 2009. 205,112 218,679
Other 147,842 10,658
---------- -----------
2,352,700 5,060,163
Current portion (483,258) (3,927,339)
---------- -----------
$1,869,442 $1,132,824
---------- -----------
---------- -----------
</TABLE>
Aggregate principal maturities of long-term debt and capital lease
obligations are as follows:
<TABLE>
<CAPTION>
Year Ending Long-term Capital
March 31, Debt Leases Total
- --------- ---- ------ -----
<S> <C> <C> <C>
1999 $147,456 $416,584 $564,040
2000 9,729 140,266 149,995
2001 10,353 27,339 37,692
2002 11,551 24,720 36,271
2003 12,888 24,720 37,608
Thereafter 1,529,002 144,200 1,673,202
--------- ------- ---------
Total minimum payments 1,720,979 777,829 2,498,808
Amount representing interest on
leases - (146,108) (146,108)
--------- ------- ---------
Total long-term debt and present
value of minimum lease payments $1,720,979 $631,721 $2,352,700
--------- ------- ---------
--------- ------- ---------
</TABLE>
The Company completed two offshore placements of 4% convertible debentures in
fiscal 1997, in the principal amount of $500,000 each, due in April and May,
1999. The debentures were convertible after 40 days into shares of common stock
at a discount to the market price of the common stock on the date of issuance.
In fiscal 1997, the Company also completed two offshore placements of 4%
convertible debentures in the principal amount of $1,000,000 each, which
debentures were convertible into shares of common stock at a discount to the
market price of the common stock on the date of issuance. In connection with the
issuance of these debentures, warrants, exercisable for five years at a price of
$7.00 per share, to purchase 34,284 shares of the Company's common stock were
issued. As of March 31, 1997 principal aggregating $2,650,000 of the debentures
had been converted into 930,674 shares of common stock and in April 1997 the
remaining $350,000 of principal of the convertible debentures plus accrued
interest was converted into 581,776 shares of common stock. The discount of
$2,048,997, based on the difference between the conversion price and the fair
value of the underlying common stock on the date of the respective debenture
issuances, was amortized to non-cash interest expense in fiscal 1997.
5. INCOME TAXES
For the years ended March 31, 1998 and 1997, 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 as of March 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 612,000 $ 396,000
Net operating loss carryforwards 3,311,000 1,182,000
Deferred rent liability 1,016,000 463,000
Accrued expenses and other 28,000 45,000
----------- -----------
Total deferred income tax assets 4,967,000 2,086,000
Valuation allowance (4,967,000) (2,051,000)
----------- -----------
Net deferred income tax assets - 35,000
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. INCOME TAXES -- CONTINUED
Deferred tax liabilities:
Pre-opening costs - 35,000
-----------
Net deferred income taxes $ - $ -
------- -----------
------- -----------
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Federal statutory rate (34.00)% (34.00)%
State income taxes, net of federal benefit 0.02 0.04
Effect of foreign operations - 1.49
Non-deductible expenses 5.51 16.45
Net operating loss carryforward with
no tax benefit realized 28.49 16.06
----- -----
Effective income tax rate 0.02% 0.04%
------- -------
------- -------
</TABLE>
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 and other deferred tax
assets, 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.
At March 31, 1998, the Company has net operating loss carryforwards ("NOLs")
of approximately $11,000,000 and $5,500,000 for federal and state purposes,
respectively. The NOLs are available to offset future taxable income. The
federal NOLs expire in 2006 through 2013, while the state NOLs expire in 1999
through 2003.
The utilization of these NOLs is limited due to restrictions imposed under
the federal and state laws resulting from a change in ownership.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San
Diego Superior Court alleging that the Company breached a 50-year lease relating
to commercial real property located in the Rancho Del Rey Business Center
consisting of approximately 35,000 square feet. The complaint alleges that the
lease was terminated as a result of the Company's failure to perform. The
complaint also alleges first year minimum rent of $174,240. While the Company
has not had an opportunity to fully investigate the claims asserted in the
complaint, it intends to vigorously defend this action. Management believes the
Company's termination of the lease in question was in accordance with its terms,
but there is no assurance that the Company ultimately will prevail in this
action. In any event, the Company understands that the landlord has already
leased the property to another tenant, which would significantly mitigate the
damages that could be claimed by the landlord.
On November 7, 1997, MDA-San Bernardino Associates, LLC ("MDA"), the landlord of
the San Bernardino Facility, filed an action for Unlawful Detainer in the
Municipal Court of the State of California for the County of San Bernardino.
The action sought to terminate the Company as tenant. The action was filed
because MDA believed the Company had not satisfied certain financial conditions
under the lease. The Company filed a response to this action and subsequently
entered into a Stipulation for Entry of Judgment with MDA. The Company believes
it is in a position to comply with all requirements of such Stipulation for
Entry of Judgment, but unanticipated circumstances could have an adverse effect
on its ability to so comply. As a result of MDA's delay in development of the
project, the Company has not yet fully complied with all of the conditions of
the Stipulation for Entry of Judgment. Additionally, management believes that
as a result of MDA's failure of certain conditions precedent in the lease, the
lease terminated on its own terms as early as January 9, 1998. MDA disputes
the Company's position. The Company has informed MDA that if MDA does not
fulfill such conditions precedent immediately, the Company will abandon the
project.
In addition, 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 other pending litigation matters which the Company
believes would have a material adverse effect on the Company.
The Company does not believe that it can be determined at this time whether a
loss is likely to occur in connection with the above-described disputes, or that
any such loss currently is quantifiable. Accordingly, no provision has been
made in the accompanying consolidated financial statements for any adjustment
that might be necessary should an unfavorable outcome occur in the
above-described matters.
OPERATING LEASES
The Company leases seven theater properties and various equipment under
non-cancelable operating lease agreements which expire between the years 2000
and 2021 and require various minimum annual rentals. 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 former officers/directors and stockholders. The Company has agreed
to pledge certain of the theater equipment used in the Tijuana theater as
collateral to satisfy certain lease requirements.
During the years ended March 31, 1998 and 1997, the Company incurred rent
expense under operating leases of approximately $3,735,000 and $2,642,000
respectively. The Company did not incur any percentage rental expense above
the base rental charges during either of the years ended March 31, 1998 and
1997.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. COMMITMENTS AND CONTINGENCIES--OPERATING LEASES -- CONTINUED
At March 31, 1998, the aggregate future minimum lease payments due under
these non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending Theater Equipment
March 31, Leases Leases Total
--------- ------- ------- -----
<S> <C> <C> <C>
1999 $ 3,173,940 $32,869 $ 3,206,809
2000 3,340,626 18,479 3,359,105
2001 3,520,590 - 3,520,590
2002 3,693,536 - 3,693,536
2003 3,883,363 - 3,883,363
Thereafter 73,170,013 - 73,170,013
---------- -------- ----------
Total minimum lease payments $90,782,068 $51,348 $90,833,416
---------- -------- ----------
---------- -------- ----------
</TABLE>
The commitments in the table above represent the minimum cash payments
required under the leases. For financial statement purposes, rent expense is
recorded on a straight-line basis over the life of the lease. As such,
because of lower lease payments in the early years of the lease terms,
financial statement expense is greater than cash payments. For the years
ended March 31, 1998 and 1997, rent expense charged to operations exceeded
cash payment requirements by approximately $890,000 and $780,000 and resulted
in an increase to the deferred rent liability by the same amount.
As of March 31, 1998, the Company had a signed lease agreement for the San
Bernardino Facility, a new theater location, and subsequently signed a lease
agreement for another new theater location, the Oceanside Facility. These
leases have initial terms of 25 years and lease payments begin upon the
occupancy of the theater location. The lease for the San Bernardino Facility,
guaranteed by certain of the Company's former officers/stockholders, will
require expected minimum rental payments aggregating approximately
$40,700,000 over the life of the lease and the lease for the Oceanside
Facility will require expected minimum rental payments aggregating
approximately $30,425,000 over the 25-year life of the lease, in each case
beginning upon acceptance of a completed building by the Company.
Accordingly, existing minimum lease commitments as of March 31, 1998 plus
those expected minimum commitments for the proposed theater locations would
aggregate minimum lease commitments of approximately $161,900,000. Costs to
the Company to complete and equip the San Bernardino Facility and the
Oceanside Facility are estimated at approximately $3,500,000 and $3,600,000
respectively. The Company's ability to develop these projects is dependent
upon several factors, including the performance of the landlord/developer
under the leases in the construction of the facilities and the Company's
ability to obtain satisfactory financing for the projects. In addition, the
status of the lease for the San Bernadine Facility is in dispute. Therefore,
there can be no assurance that the Company will be able to complete these
projects.
Subsequent to March 31, 1998, the Company's corporate office was re-located
to 12230 El Camino Real, Suite 320, San Diego, California 92130 pursuant to a
five year lease (with one option to renew for an additional five years) for
approximately 4,000 square feet at an annual rent commencing at $110,400 and
increasing to $120,000 by year five.
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.
7. RELATED PARTY TRANSACTIONS
The Company had the following related party transactions during the 1997 and
1998 fiscal years:
John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits with
respect to the lease of the Chula Vista 10, and Eileen Seheult the former wife
of Russell Seheult, with respect to certain lease and bank obligations incurred
or guaranteed by Mr. and Ms. Seheult on behalf of the Company) have personally
guaranteed, on a joint and several basis, all significant obligations of the
Company pursuant to its theater leases and certain loans. Certain of these
obligations of the Company are secured by real or personal property pledged by
such individuals. The Company, pursuant to the settlement agreement described
below, has agreed to use its reasonable best efforts to obtain the releases of
Mr. Ellison, Mr. Willits and Mr. Grossberg from their obligations under any
personal guarantees made for the benefit of the Company or its entities. To
date, no such releases have been obtained As of March 31, 1998, such guaranteed
obligations involved aggregate future payments by the Company of $131,000,000.
In April 1996, the Company formed its 75%-owned subsidiary, CinemaStar Luxury
Theaters, S.A. de C. V. ("CinemaStar Mexico"). The remaining 25% ownership
interest in CinemaStar Mexico is held by Atlantico y Asociados S.A. de C.V., a
Mexican corporation. CinemaStar Mexico leases and operates the Plaza Americana
10 facility in Tijuana. CinemaStar Mexico leases equipment and obtains
technical services and support from the Company, in each case for payment that
the Company believes is fair value. In addition, the Company has agreed to
pledge certain theater equipment, owned by the Company and leased by CinemaStar
Mexico, to secure the lease obligations of CinemaStar Mexico to the landlord of
Plaza Americana 10.
The Company incurred in fiscal 1998 an expense of $1,056,224 in connection with
the settlement of certain management contracts previously entered into with four
former officers and directors of the Company and the settlement of certain other
matters amongst the parties. The Company effected the settlement by making
aggregate cash payments of $875,000, forgiving outstanding loans and remaining
as guarantor on a personal loan. The settlement agreement also contains mutual
general releases of the parties with respect to all prior known and unknown
claims.
In April 1996, John Ellison, Jr. and Russell Seheult jointly obtained a personal
line of credit with Union Bank of California. From April 1996 until June 1997,
Mr. Seheult and Mr. Ellison borrowed funds under the line of credit and advanced
certain of the funds to the Company. Pursuant to an arrangement between the
Company and Union Bank, payments on the loan were made directly to Union Bank by
the Company. In early June 1997, such line of credit was not renewed by Mr.
Ellison and Mr. Seheult and, as a result, Union Bank debited the Company's
account at Union Bank for approximately $99,000, the outstanding principal
balance of the line of credit as of the date of termination. On June 19, 1997,
Messrs. Ellison and Seheult entered into a Business Note with Union Bank in the
aggregate principal amount of $99,043, the proceeds of which were credited to
the Company. Such note bears interest at a rate of 10.25% per annum and calls
for 60 equal payments of interest and principal of approximately $2,100 per
month. Pursuant to the settlement agreement described above, the Company agreed
to assume Mr. Ellison's obligations under such note. As of March 31, 1998, the
outstanding balance of principal and interest on such note was approximately
$87,000. This loan was paid in full with interest subsequent to March 31, 1998.
Pursuant to the terms of a loan agreement, dated April 1 1996, between the
Company and John Ellison, Jr., the Company agreed to loan the sum of $1,000 per
week to Mr. Ellison commencing on Friday, April 5, 1996. As of January 2, 1998,
the outstanding balance of principal on such loan was $92,000, plus interest.
Pursuant to the settlement agreement described above, the Company agreed to
release Mr. Ellison's obligations with respect to these loans.
The Company made loans in the principal amount of $19,500 to Jon Meloan from
July 1996 through February 1997. As of March 31, 1997, Mr. Meloan executed a
promissory note, dated March 31, 1997, in the principal amount of $21,095 which
represents the total principal amount of such loans with accrued interest at a
rate of 8% per annum through the date of such note. Such note was due and
payable in full on August 15, 1998. As of March 26, 1998, the outstanding
balance of principal and interest on such note was $21,095, from which the
Company agreed to release Mr. Meloan pursuant to the settlement agreement
described above. In addition, the Company agreed, pursuant to the settlement
agreement, to assume the obligations of Mr. Meloan with respect to a loan in the
aggregate principal amount of $22,600 made by a bank to Mr. Meloan. This loan
was paid in full with interest subsequent to March 31, 1998.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of March 31, 1997, the Company had authorized for issuance shares of
preferred stock. The Company eliminated its preferred stock pursuant to a
vote of shareholders on December 10, 1997. None of the Company's preferred
stock has been outstanding at any time.
COMMON STOCK AND COMMON STOCK WARRANTS
On September 23, 1997, the Company entered into a definitive agreement (the "CAP
Agreement") with CinemaStar Acquisition Partners, L.L.C. ("CAP") and Reel
Partners L.L.P. ("Reel") whereby Reel provided $3,000,000 of interim debt
financing (the "Bridge Loan") and CAP was to provide $15,000,000 of equity
financing (the "Equity Financing").
The Watley Group, LLC ("Watley") was engaged by the Company to facilitate the
transactions contemplated in the CAP Agreement. In connection with this
engagement, the Company paid to Watley on December 15, 1997 a cash fee in the
amount of $962,250. Concurrently, Watley acquired from the Company for
$212,250 warrants to purchase 1,768,446 shares of the Company's common stock
at an exercise price of $0.848202 per share (the "Watley Warrants"). Prior to
execution of the CAP Agreement, the Company issued 75,000 shares of common
stock (the "Reel Shares") to affiliates of Reel for the purpose of
reimbursing that entity for legal and other costs incurred in connection with
the transaction and as inducement for the continuation of negotiations with
respect to the Bridge Loan.
The Bridge Loan provided the Company with the funds necessary to meet certain of
its current obligations and to repay certain indebtedness. In connection with
the Bridge Loan, the Company issued to Reel detachable warrants to purchase
4,500,000 shares of common stock at an exercise price of $0.848202. Pursuant to
the terms of the CAP Agreement, 1,500,000 of such warrants were canceled upon
the successful consummation of the Equity Financing. Therefore, warrants to
purchase an aggregate of 3,000,000 shares of common stock at an exercise price
of $.848202 (the "Bridge Warrants") were issued to Reel in connection with the
Bridge Loan. The Bridge Loan was paid in full with interest on December 15,
1997 from proceeds of the Equity Financing. Non-cash interest expense of
$328,750 was recorded in fiscal 1998 with respect to the issuance of the Bridge
Warrants and the PCI Warrants discussed below.
Concurrent with the execution of the CAP Agreement, the Company issued to CAP a
warrant to purchase 1,000,000 shares of common stock at an exercise price of
$0.848202 (the "Signing Warrants"). On December 15, 1997, CAP consummated the
Equity Financing, purchasing 17,684,464 shares of common stock at a purchase
price of $0.848202 per share, and pursuant to the CAP Agreement the Company
issued to CAP warrants to purchase an additional 1,630,624 shares of common
stock at an exercise price of $0.848202 per share (together with the Signing
Warrants, the "CAP Warrants").
Pursuant to the terms of the CAP Agreement, the Company is obligated to issue
additional shares of common stock (the "Adjustment Shares") to CAP. The number
of Adjustment Shares to be issued is based upon (i) the recognition of any
liabilities not disclosed as of August 31, 1997, (ii) certain expenses incurred
and paid by the Company in connection with the contemplated transactions, (iii)
any negative cash flow incurred by the Company during the period commencing
August 31, 1997 and ending December 15, 1997, and (iv) negative cash flow
experienced by, or costs of closing, the Company's Plaza Americana 10 facility
in Tijuana (now in full operation) and San Bernardino Facility (still in
development). The measurement of the operating losses and/or closing costs for
the two facilities is cumulative and will take place on the earlier to occur of
the closing of each such facility or December 15, 2000. The Company and CAP
have agreed that 1,351,256 Adjustment Shares shall be issued by the Company to
CAP pursuant to the terms of the CAP Agreement as of June 29, 1998. To the
extent there are (a) operating losses at the Company's Tijuana and/or San
Bernardino facilities for the three-year period ended December 15, 2000, and (b)
expenditures in connection with the discovery of liabilities, or defense and/or
settlement of claims such as the lease disputes described at Note 6, in either
case relating to periods prior to August 31, 1997, the Company will be obligated
to issue additional Adjustment Shares.
On April 23, 1997, Pacific Concessions, Inc. ("PCI") provided the Company
with a $2,000,000 loan (the "Initial PCI Loan") in exchange for the Company
amending the concession lease agreements with PCI. In connection with the
Initial PCI Loan, the Company issued warrants to PCI to purchase 100,000
shares of common stock at an exercise price per share equal to the lower of
$.9344 or the average of the closing price of the Company's common stock the
five days prior to any exercise of such warrants. As a result of the
amendments to the concession lease agreements, PCI assumed direct
responsibility for the concession operations at each of the Company's
domestic theaters, and PCI paid to the Company a commission on concession
sales generated. On December 15, 1997, the Initial PCI Loan was paid in full
with interest and the concession lease agreements were terminated in
accordance with the provisions thereof.
On August 29, 1997, PCI loaned to the Company an additional $500,000 (the
"Second PCI Loan"). In connection with the Second PCI Loan, the Company
issued warrants to PCI to purchase 400,000 shares of common stock at an
exercise price per share equal to the lower of $.9344 or the average closing
price of the Company's common stock for the five days prior to any exercise
of such warrants (together with the warrant exercisable for 100,000 shares of
common stock described above, the "PCI Warrants"). The Second PCI Loan was
paid in full with interest on September 24, 1997.
As of June 22, 1998, the Company had reserved for issuance upon exercise of
outstanding or issuable warrants an aggregate of 19,865,827 shares of common
stock. Issuance of equity securities for consideration below the applicable
exercise price triggers certain anti-dilution provisions in the Company's
Redeemable Warrants, the Company's Class B Redeemable Warrants and the Reel
Warrants, the CAP Warrants and the Watley Warrants.
In fiscal year 1998, the following events triggered the anti-dilution provisions
of the Redeemable Warrants and the Class B Redeemable Warrants (1) the issuance
of 1,100,000 stock options each having an exercise price of $.875, (2) the
issuance of 17,684,464 shares of common stock in the Equity Financing for a
price per share equal to $.848202, (3) the issuance of the 500,000 PCI Warrants
having an exercise price of $.9344, (4) the issuance of the 75,000 Reel Shares
at a price per share of $.666, and (5) the issuance of the Watley Warrants, the
CAP Warrants and the Reel Warrants, totaling 7,399,070 and each having an
exercise price of $.848202 per share. After giving effect to these events,
other events occurring prior to the 1998 fiscal year, the issuance of an
additional 330,000 stock options at an exercise price of $.875 per share in
April, 1998 and the obligation to issue 1,351,256 Adjustment Shares for no
additional consideration, the shares of common stock issuable upon exercise of
each Redeemable Warrant as of June 22, 1998 was 2.3622 and the shares of common
stock issuable upon the exercise of each Class B Redeemable Warrant as of June
22, 1998 was 2.3551. Consequently, as of June 22, 1998, an aggregate of
10,980,833 shares of common stock are issuable upon exercise of the outstanding
Redeemable Warrants at an exercise price of $2.54 per share and an aggregate of
533,278 shares of common stock are issuable upon exercise of the outstanding
Class B Redeemable Warrants at an exercise price of $2.76 per share.
In fiscal year 1998, the following event triggered the anti-dilution provisions
of the Reel Warrants, the CAP Warrants and the Watley Warrants: the issuance of
1,100,000 stock options each having an exercise price of $.875. After giving
effect to this event, the issuance of an additional 330,000 stock options at an
exercise price of $.875 per share in April, 1998 and the obligation to issue
1,351,256 Adjustment Shares for no additional consideration, the aggregate
number of shares of common stock issuable pursuant to these warrants as of June
22, 1998 increased by 235,718 shares to 7,634,788 and the exercise price per
share with respect thereto decreased $.0262 to $.822014.
The following tables set forth the number of issuable or outstanding warrants as
to March 31, 1998 and June 22, 1998, respectively:
<TABLE>
<CAPTION>
As of March 31, 1998
--------------------
Common Exercise Fully Diluted
Number of Shares per Price per Common Stock
Warrant Warrants Warrant Share Issuable
- ------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Redeemable Warrants 4,648,562 2.307692 $ 2.6000 10,727,451
(Outstanding and Issuable)
Class B
Redeemable Warrants 226,438 2.296820 $ 2.8300 520,087
PCI Warrants 500,000 1.000000 $ 0.9344 500,000
CAP Warrants,
Reel Warrants and
Watley Warrants 7,399,070 1.000000 $ 0.8482 7,399,070
$ 0.8440 to
Other 216,928 1.000000 $ 7.5000 216,928
</TABLE>
<TABLE>
<CAPTION>
As of June 22, 1998
--------------------
Common Exercise Fully Diluted
Number of Shares per Price per Common Stock
Warrant Warrants Warrant Share Issuable
- ------- -------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Redeemable Warrants 4,648,562 2.36220 $ 2.5400 10,980,833
(Outstanding and Issuable)
Class B
Redeemable Warrants 226,438 2.35507 $ 2.7600 533,278
PCI Warrants 500,000 1.000000 $ 0.9344 500,000
CAP Warrants,
Reel Warrants and
Watley Warrants 7,399,070 1.031858 $ 0.8220 7,634,788
$ 0.8440 to
Other Warrants 216,928 1.000000 $ 7.5000 216,928
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. OTHER CURRENT ASSETS
Included in other current assets at March 31, 1998 was $247,000, representing
a receivable with respect to a construction allowance from a landlord. Such
amount was paid to the Company subsequent to March 31, 1998.
10. 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
reserved 587,500 shares of common stock for the granting of incentive stock
options and non-qualified stock options. In December 1997 the Board of
Directors approved the formation of the New CinemaStar Luxury Theaters, Inc.
Stock Option Plan, which by resolution of the Board of Directors replaces the
previous plan. The Board of Directors reserved 2,885,960 shares of common
stock for the granting of incentive stock options and non-qualified stock
options. Options generally vest over a period of three years, at an exercise
price determined by the compensation committee, and must be exercised within
ten years from the date of grant.
A summary of all stock option activity follows:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
Weighted-Average Weighted-Average
Shares Exercised Price Shares Exercise Price
------ --------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 400,805 $2.81 395,305 $2.75
Cancelled (399,305) - - -
Granted 1,100,000 0.88 5,500 7.38
--------- ---- ----- ----
Outstanding at
end of year 1,101,500 $0.89 400,805 $2.81
--------- ---- ----- ----
--------- ---- ----- ----
Options exercisable
at year end 1,500 $7.38 400,805 $2.81
Weighted-average fair value
of options granted during
the year $ 1.04 $ 1.44
</TABLE>
Information relating to stock options at March 31, 1998 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Exercise Price Weighted Average Weighted Average
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. STOCK OPTIONS -- CONTINUED
Per Share Shares Life (Year) Exercise Price Shares Exercise Price
- --------- ------ ----------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$0.88 1,100,000 9.6 $0.88 - $ -
$7.38 1,500 8.3 $7.38 1,500 $7.38
$0.88 to 7.38 1,101,500 9.6 $0.89 1,500 $7.38
--------- --- ----- ----- ------
--------- --- ----- ----- ------
</TABLE>
In April, 1998, the Company issued an additional 330,000 stock options at an
exercise price of $.875 per share.
SFAS No. 123 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 SFAS No. 123. The Company estimated 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 1998 and 1997: 0% dividend yield; expected volatility of 13% for
1998 and 1997; risk free interest rates of 6% for 1998 and 1997; and expected
lives of 3 years.
Under the accounting provisions of SFAS No. 123, the Company's net loss and
net loss per share would have been substantially the same as that reflected
in the accompanying consolidated statements of operations.
11. GOING CONCERN
The accompanying consolidated financial statements as of March 31, 1997 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 raised substantial doubt about the Company's ability to continue as
a going concern as of March 31, 1997.
In response to the conditions described above, the Company has sought
additional financing to assist in funding its ongoing operations. On June 24,
1997, the Company signed a letter of intent to sell $15 million of newly
issued common stock. Management intended to use approximately $10 million of
the proceeds to repay the majority of the Company's long-term debt. The
remaining proceeds would be used to continue opening new theater locations
and for general working capital purposes. As the letter of intent was subject
to certain conditions and a vote by the Company's current stockholders at
June 24, 1997 there was no assurance that this transaction would ultimately
be consummated.
As discussed in Note 8, the Company completed an equity financing of $15
million on December 15, 1997. The proceeds of such financing were used to
repay the majority of the Company's long-term debt, including the debt and
related early termination penalties associated with its concession lease
agreements (see Note 6). The remaining proceeds will be used for general
working capital purposes. The Company believes that this infusion of cash
will provide for improved profitability and a positive cash flow in future
years due to a reduction in interest expense and a reduction of concession
costs. Management believes that as of March 31, 1998, cash and cash
equivalents are adequate to fund operations through fiscal 1999.
The financial statements as of March 31, 1997 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 such uncertainty. Accordingly, the report of the
independent certified public accountants with respect to the Company's
consolidated financial statements as of March 31, 1997 contained an
explanatory paragraph calling attention to this matter.
F-17
<PAGE>
INDEX TO EXHIBITS
DESCRIPTION OF EXHIBITS
<TABLE>
<C> <S>
10.57 CinemaStar Luxury Theaters, Inc. Stock Option Plan, dated December 16, 1997
10.58 Form of Stock Option Agreement, as of December 16, 1997
10.59 Employment Agreement by and between the Company and Frank Moreno, dated April 29, 1998
10.60 Employment Agreement by and between the Company and Norman Dowling, dated June 18, 1998
10.61 Lease Agreement by and between the Company and Landgrant Corporation dated as of
April 15, 1998 (Ocean View Plaza)
21 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
27 Financial Data Schedule
</TABLE>
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
STOCK OPTION PLAN
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I ESTABLISHMENT. . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Committee Structure. . . . . . . . . . . . . . . . . . . . 4
3.2 Committee Authority. . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV STOCK UNDERLYING OPTIONS . . . . . . . . . . . . . . . . . 6
4.1 Number of Shares . . . . . . . . . . . . . . . . . . . . . 6
4.2 Release of Shares. . . . . . . . . . . . . . . . . . . . . 6
4.3 Restrictions on Shares . . . . . . . . . . . . . . . . . . 6
4.4 Shareholder Rights . . . . . . . . . . . . . . . . . . . . 7
4.5 Anti-Dilution. . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE V ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE VI OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.2 Grant. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.3 Terms and Conditions . . . . . . . . . . . . . . . . . . . 8
6.4 Exercisability . . . . . . . . . . . . . . . . . . . . . .10
6.5 Cashing Out of Option. . . . . . . . . . . . . . . . . . .11
ARTICLE VII PROVISIONS APPLICABLE TO STOCK ACQUIRED
UNDER OPTIONS . . . . . . . . . . . . . . . . . . . . 11
7.1 Transfer of Shares . . . . . . . . . . . . . . . . . . . .11
7.2 Limited Transfer During Offering . . . . . . . . . . . . .12
7.3 Committee Discretion . . . . . . . . . . . . . . . . . . .12
7.4 No Company Obligation. . . . . . . . . . . . . . . . . . .12
-i-
<PAGE>
ARTICLE VIII CHANGE IN CONTROL PROVISIONS . . . . . . . . . . . . . . .12
8.1 Impact of Event. . . . . . . . . . . . . . . . . . . . . .12
8.2 Definition of Change in Control. . . . . . . . . . . . . .13
ARTICLE IX MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . .13
9.1 Amendments and Termination . . . . . . . . . . . . . . . .13
9.2 Unfunded Status of Plan. . . . . . . . . . . . . . . . . .14
9.3 General Provisions . . . . . . . . . . . . . . . . . . . .14
9.4 Mitigation of Excise Tax . . . . . . . . . . . . . . . . .15
9.5 Rights with Respect to Continuance of
Employment . . . . . . . . . . . . . . . . . . . . . . .16
9.6 Withholding. . . . . . . . . . . . . . . . . . . . . . . .16
9.7 Delay. . . . . . . . . . . . . . . . . . . . . . . . . . .16
9.8 Headings . . . . . . . . . . . . . . . . . . . . . . . . .16
9.9 Severability . . . . . . . . . . . . . . . . . . . . . . .16
9.10 Successors and Assigns . . . . . . . . . . . . . . . . . .16
9.11 Entire Option Agreement. . . . . . . . . . . . . . . . . .17
9.12 Other Company Plans. . . . . . . . . . . . . . . . . . . .17
</TABLE>
-ii-
<PAGE>
CINEMASTAR LUXURY THEATERS, INC.
STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT
The CinemaStar Luxury Theaters, Inc. Stock Option Plan is hereby
established by CinemaStar Luxury Theares, Inc. to promote its overall
financial objectives by allowing certain directors, officers, employees and
other persons to participate in its long-term growth. This Plan and the
grant of options hereunder is expressly conditioned upon the approval of this
Plan by the holders of a majority of the Company's common stock entitled to
vote on matters submitted to the Company's shareholders to the extent
required, and solely, to insure that any Incentive Stock Option granted
hereunder will qualify as such. This Plan is adopted by the Company effective
as of December 16, 1997.
ARTICLE II
DEFINITIONS
For purposes of this Plan, the following terms are defined as set forth
below:
"AFFILIATE" means, with respect to the Company, any individual,
corporation, partnership, association, joint-stock company, trust,
unincorporated association or other entity that (i) directly or indirectly is
controlled by, controls or is under common control with the Company or (ii)
from time to time is otherwise designated as an "Affiliate" for purposes
hereunder by the Committee.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means any act or omission that permits the Company or an
Affiliate to terminate a written agreement or arrangement between a
Participant and the Company or such Affiliate for "cause" as defined in such
agreement or arrangement, or if there is no such agreement or arrangement (or
"cause" is not defined therein), then Cause shall mean any act or omission
(i) that violates the Company's or an Affiliate's established practices,
policies or guidelines applicable to a Participant, (ii) that constitutes
willful misconduct, dishonesty or fraud, (iii) that constitutes competing
with the Company, either directly or indirectly, including accepting
employment with a competitor of the Company within three (3) months of
termination of Participant's employment with the Company for any reason or
(iv) that is materially detrimental to the best interests of the Company or
any Affiliate. The determination of Cause for purposes of this Plan shall be
made in the sole and absolute discretion of the Committee and shall not be
construed to be an admission of cause for any other purpose.
<PAGE>
"CODE" means the Internal Revenue Code of 1986, as amended, final
Treasury Regulations thereunder and any subsequent Internal Revenue Code.
"COMMISSION" means the Securities and Exchange Commission or any
successor agency.
"COMMITTEE" means the person or persons appointed by the Board to
administer this Plan, as further described in SECTION 3.1 below.
"COMMON STOCK" means shares of the Company's Common Stock, whether
presently or hereafter issued, any other stock or security resulting from
adjustment thereof as described in SECTION 4.5 below or the common stock of
any successor to the Company that is designated by the Committee as "Common
Stock" for the purpose of this Plan.
"COMPANY" means CinemaStar Luxury Theaters, Inc., a California
corporation, any successor or assignee corporation or corporations into which
the Company may be merged, changed or consolidated; any corporation for whose
securities the securities of the Company shall be exchanged; or any assignee
of or successor to substantially all of the assets of the Company.
"CAP ENTITIES" means CinemaStar Acquisition Partners, L.L.C., a Delaware
limited liability company, and any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated association or other
entity (other than the Company and its Affiliates) that (i) directly or
indirectly controls, is controlled by or is under common control with
CinemaStar Acquisition Partners, L.L.C. (other than the Company and its
direct Affiliates) or (ii) from time to time is otherwise designated as a
"CAP Entity" for purposes hereunder by the Committee.
"CAP INTEREST" means (i) the beneficial ownership (which, for purposes
of this Plan, shall have the meaning set forth in Rule 13d-3 promulgated
under the Exchange Act) of, or the pecuniary interest (within the meaning of
Rule 16a-1 promulgated under the Exchange Act) in, the outstanding voting
securities of the Company or an Affiliate, which securities are entitled to
vote generally in matters submitted to the Company's shareholders for a vote
held by the CAP Entities, or (ii) such other securities as may be otherwise
designated as a "CAP Interest" for purposes hereunder by the Committee.
"DISABILITY" means any situation that permits the Company or an
Affiliate to terminate a written agreement or arrangement between a
Participant and the Company or such Affiliate due to "disability" as defined
in such agreement or arrangement, or if there is no such agreement or
arrangement (or "disability" is not defined therein), then Disability shall
mean (i) a mental or physical illness that entitles the Participant to
receive benefits under any long term disability plan of the Company or any
Affiliate under which the Participant is covered or (ii) a mental or physical
illness that renders a Participant totally and permanently incapable of
performing the Participant's duties for the Company or an Affiliate.
Notwithstanding the foregoing, a Disability shall not qualify under this Plan
if it is the result of (a) a willfully self-inflicted injury or willfully
self-induced sickness, or (b) an injury or disease contracted, suffered, or
incurred,
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while participating in a criminal offense. The determination of Disability
for purposes of this Plan shall be made in the sole and absolute discretion
of the Committee and shall not be construed to be an admission of disability
for any other purpose.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
"FAIR MARKET VALUE" means the value of the Common Stock, in each case
without regard as to whether the Common Stock is restricted, illiquid or
represents a minority interest (unless expressly provided otherwise in an
Option Agreement), determined, at the option of the Committee, as either 1)
the closing price of the Common Stock on the date of grant, as reported by
the NASDAQ SmallCap Market, or (2) the average of the closing price of the
Common Stock on each of the ten (10) days for which such quotations are
reported preceding the relevant date, as reported by the NASDAQ SmallCap
Market.
"INCENTIVE STOCK OPTION" means any Option intended to be and designated
as an "incentive stock option" within the meaning of Section 422 of the Code.
"NONQUALIFIED STOCK OPTION" means any Option other than an Incentive
Stock Option.
"OPTION" means an option granted under this Plan and an Option
Agreement, as more particularly described in ARTICLE VI below.
"OPTION AGREEMENT" means any and all agreement(s) entered into pursuant
to this Plan pursuant to which an Option is granted to a Participant.
"OPTION PERIOD" means the period during which the Option shall be or
become exercisable in accordance with an Option Agreement and/or ARTICLE VI
below.
"OPTION PRICE" means the price at which Common Stock may be purchased
upon the exercise of an Option as provided in an Option Agreement and subject
to SECTION 6.3 below.
"PARTICIPANT" means (i) a person who satisfies the eligibility
conditions of ARTICLE V below and to whom an Option has been granted by the
Committee under this Plan, (ii) an appointed Representative of a Participant,
(iii) a trust for the benefit of the Participant, the Participant's parents,
spouse or descendants, or (iv) a custodian under a uniform gifts to minors
act or similar statute for the benefit of the Participant's descendants, in
each case to the extent permitted by the Committee and consistent with Rule
16b-3. Notwithstanding the foregoing, the term "Termination of Employment"
shall mean the Termination of Employment of the original Participant and not
such Representative, trust or custodian.
"PLAN" means the CinemaStar Luxury Theaters, Inc. Stock Option Plan as
herein set forth and as may be amended from time to time.
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"PUBLIC OFFERING" means the initial public offering of shares of the
Company's common stock under the Securities Act.
"REPRESENTATIVE" means (i) the person or entity lawfully acting as the
executor or administrator of a Participant's estate, (ii) the person or
entity lawfully acting as the guardian or temporary guardian of a
Participant, (iii) the person or entity that is the beneficiary of a
Participant upon or following such Participant's death, or (iv) any person to
whom an Option has been transferred pursuant to a domestic relations order;
provided that only one of the foregoing shall be a Representative at any
point in time as determined under applicable law and as recognized by the
Committee in its sole and absolute discretion.
"RULE 16b-3" means Rule 16b-3, as promulgated under the Exchange Act, as
amended from time to time, or any successor thereto.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"TERMINATION OF EMPLOYMENT" means the occurrence of any act or event,
whether pursuant to a written employment agreement or otherwise, that
actually or effectively causes or results in a person ceasing to be an
officer, independent contractor, director or employee of the Company or of
any Affiliate, or to be an officer, independent contractor, director or
employee of any entity that provides services to the Company or any
Affiliate, including, without limitation, death, Disability, dismissal with
or without Cause or resignation. In addition, Termination of Employment shall
be deemed to have occurred with respect to an employee of an Affiliate if
such Affiliate shall cease to be an Affiliate and the Participant shall not
immediately thereafter become an employee of the Company or another Affiliate.
ARTICLE III
ADMINISTRATION
3.1 COMMITTEE STRUCTURE. This Plan shall be administered by a
Committee comprised of three members of the Board (or such other number as
determined by the Board) and shall be comprised of such number of
"disinterested persons" as is necessary to meet the requirements of Rule
16b-3 and such number of "outside directors" as is necessary to meet the
requirements of Section 162(m) of the Code. A member of the Committee shall
not be eligible to receive any grant of an Option hereunder, or any grant or
award of any equity securities pursuant to any other plan of the Company or
any plan of an Affiliate, for one year prior to, during and for one year
following such member's service on the Committee, unless the grant of such
Option and the terms and conditions thereof shall be approved by a majority
of the members of the full Board meeting the criteria set forth in the
immediately preceding sentence. A member of the Committee shall not exercise
any discretion respecting awards to, or decisions affecting, himself or
herself under this Plan. At all meetings of the Committee, members entitled
to cast a majority of the votes of the entire Committee shall constitute a
quorum for the transaction of
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business and the act of members entitled to cast a majority of the votes
present at any meeting at which there is a quorum shall be the act of the
Committee. The Committee shall in all respects be subject to the provisions
of the Company's charter documents and bylaws pertaining to committees of the
Board. The Committee may be the Compensation Committee of the Board,
provided that such Compensation Committee otherwise meets the criteria set
forth for the Committee hereunder.
3.2 COMMITTEE AUTHORITY. Subject to SECTION 3.1 above and the other
terms of this Plan, the Committee shall have the authority, among other
things, to:
(i) select those persons to whom Options may be granted from time to
time;
(ii) determine whether and to what extent Options are to be granted
hereunder;
(iii) determine the amount of Common Stock underlying an Option;
(iv) determine the terms and conditions of any Option (including, but
not limited to, the Option Period, the amount, form and manner of payment of
the Option Price, any exercise restriction or limitation and any exercise
acceleration, forfeiture or waiver regarding any Option and the underlying
Common Stock);
(v) adjust the terms and conditions, at any time or from time to
time, of any Option or Option Agreement, subject to the limitations of
SECTION 9.1 below;
(vi) determine what securities law requirements are applicable to this
Plan, the Options and the issuance of Common Stock upon the exercise of an
Option and to require that appropriate action be taken by a Participant with
respect to such requirements;
(vii) cancel outstanding Options, with the consent of the Participant
or as otherwise provided in this Plan or an Option Agreement;
(viii) require as a condition of the exercise of an Option or the
issuance or transfer of underlying Common Stock, the withholding from a
Participant of the amount of any federal, state or local taxes as may be
necessary in order for the Company or any other employer to obtain a
deduction or as may be otherwise required by law;
(ix) determine whether and with what effect an individual has incurred
a Termination of Employment;
(x) determine whether the Company or any other person has a right or
obligation to purchase Common Stock or Options from a Participant and, if so,
the terms and conditions of such purchase;
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(xi) determine the restrictions or limitations on the transfer of
Common Stock issued upon exercise of an Option; and
(xii) to appoint and compensate agents, counsel, auditors or other
specialists to aid it in the discharge of its duties hereunder.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing this Plan as it
shall, from time to time, deem advisable, to interpret the terms and
provisions of this Plan and any Option issued under this Plan (and any Option
Agreement) and to otherwise supervise the administration of this Plan. The
Committee's policies and procedures may differ with respect to Options
granted at different times.
Unless otherwise specifically provided herein, any determination made by
the Committee pursuant to the provisions of this Plan shall be made in its
sole and absolute discretion, and in the case of any determination relating
to an Option, may be made at the time of the grant of the Option or, unless
in contravention of any express term of this Plan or an Option Agreement, at
any time thereafter. All decisions made by the Committee pursuant to the
provisions of this Plan shall be final and binding on all persons, including
the Company, Affiliates and Participants. Any determination shall not be
subject to DE NOVO review if challenged in court.
ARTICLE IV
STOCK UNDERLYING OPTIONS
4.1 NUMBER OF SHARES. Subject to the adjustment under SECTION 4.5
below, the total amount of Common Stock reserved and available for
distribution upon the exercise of Options granted under this Plan shall be
Two Million Eight Hundred Eighty-Five Thousand Nine Hundred Sixty (2,885,960)
shares, which shares will have been authorized for issuance upon the approval
of this Plan by the Company's shareholders. Such shares may consist, in
whole or in part, of authorized and unissued shares or treasury shares.
4.2 RELEASE OF SHARES. If any Common Stock previously issuable upon
the exercise of an Option ceases to be subject to such Option, if any Common
Stock subject to any Option is forfeited or if any Option otherwise
terminates without the issuance of any Common Stock being made to a
Participant, then any and all such Common Stock, in the sole and absolute
discretion of the Committee, again may be made available for distribution
upon the exercise of Options granted under this Plan.
4.3 RESTRICTIONS ON SHARES. Common Stock issued upon exercise of an
Option shall be subject to the terms and conditions specified herein and to
such other terms, conditions and restrictions as the Committee in its sole
and absolute discretion may determine or provide in the Option Agreement.
The Company shall not be required to issue or deliver any certificates for
Common Stock, cash or other property upon exercise of an Option unless (i) a
registration
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statement under the Securities Act is effective with respect to such issuance
or delivery or, in the opinion of counsel acceptable to the Committee, an
exemption under the Securities Act with respect thereto is available and (ii)
any applicable withholding obligation is satisfied in order for the Company
or an Affiliate to obtain a deduction with respect to the exercise of an
Option. The Company may cause any certificate representing Common Stock to
be properly marked with a legend or other notation reflecting the limitations
on transfer of such Common Stock as provided in this Plan or as the Committee
may otherwise require. The Committee may require any person exercising an
Option to make such representations and furnish such information as it may
consider appropriate in connection with the issuance or delivery of the
Common Stock in compliance with applicable law or otherwise. Fractional
shares shall not be delivered, but shall be rounded to the next lower whole
number of shares.
4.4 SHAREHOLDER RIGHTS. No person shall have any rights of a
shareholder as to Common Stock underlying an Option until such Common Stock
has been recorded on the Company's official shareholder records as having
been issued or transferred. Subject to SECTION 4.3 above, the Company will
issue Common Stock upon exercise of an Option within thirty (30) days
following such exercise and the Participant will not be treated as a
shareholder for any purpose whatsoever prior to such issuance. No adjustment
shall be made for cash dividends or other rights with respect to Common Stock
if the applicable record date is prior to the date such Common Stock is
recorded as issued or transferred in the Company's official shareholder
records, except as provided herein or in an Option Agreement.
4.5 ANTI-DILUTION. In the event of (i) any Company stock dividend,
stock split, combination or exchange of shares, recapitalization or other
change in the capital structure of the Company, corporate separation or
division of the Company (including, but not limited to, a split-up, spin-off,
split-off or distribution to Company shareholders other than a normal cash
dividend), (ii) the sale by the Company of all or a substantial portion of
its assets (measured on either a stand-alone or consolidated basis), (iii) a
reorganization, rights offering, partial or complete liquidation, or (iv) any
other corporate transaction, Company share offering or event involving the
Company and having an effect similar to any of the foregoing, the Committee
shall adjust or substitute, as the case may be, the Common Stock available
upon exercise of Options to be granted hereunder, the Common Stock underlying
outstanding Options, the Option Price of outstanding Options and any other
characteristics or terms of the Options as the Committee shall deem necessary
or appropriate to account equitably for the effects of such changes to the
Participants; provided, however, that any fractional shares resulting from
such adjustment shall be eliminated by rounding to the next lower whole
number of shares with appropriate payment for such fractional share as shall
reasonably be determined by the Committee.
ARTICLE V
ELIGIBILITY
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<PAGE>
Except as herein provided, officers, directors, employees, independent
contractors or other service providers of the Company or any Affiliate
including, without limitation, the officers, directors and employees of any
other entity which provides services to the Company or any Affiliate, who
shall be in a position, in the opinion of the Committee, to make
contributions to the growth, management, protection and success of the
Company and its Affiliates shall be eligible to participate in this Plan. In
making any selection of persons to be granted Options and in determining the
terms of the Options, the Committee may give consideration to the functions
and responsibilities of the person's contribution to the Company and its
Affiliates, the value of the individual's service to the Company and its
Affiliates and such other factors deemed relevant by the Committee. The
Committee, in its sole and absolute discretion, from time to time may
designate persons otherwise eligible to participate in this Plan as
ineligible to so participate.
ARTICLE VI
OPTIONS
6.1 GENERAL. The Committee may grant Options at any time and from
time to time, alone or in addition to other Options, as either Incentive
Stock Options or Nonqualified Stock Options. An Option shall entitle the
Participant to receive Common Stock upon exercise of such Option, subject to
the Participant's satisfaction in full of any conditions, restrictions or
limitations imposed in accordance with this Plan or an Option Agreement (the
terms and provisions of which may differ from other Option Agreements)
including without limitation, the form and manner of payment of the Option
Price.
6.2 GRANT. The grant of each Option shall be evidenced by an Option
Agreement in a form determined by the Committee, which shall embody the terms
and conditions of such Option and which shall be subject to the express terms
and conditions set forth in this Plan. Only a person who is a common-law
employee of the Company or a subsidiary of the Company (as such terms are
defined in Section 424 of the Code) on the date of grant shall be eligible to
be granted an Option which is intended to be and is an Incentive Stock
Option. Notwithstanding anything in this Plan to the contrary, no term of
this Plan relating to Incentive Stock Options shall be interpreted, amended
or altered, nor shall any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any Incentive
Stock Option under such Section 422. No Options shall be granted to a
Participant during any calendar year, if the Committee believes Section
162(m) of the Code may be applicable to such Participant and if the exercise
of such Options would result in a loss of deductions under Section 162(m) of
the Code.
6.3 TERMS AND CONDITIONS. Options shall be subject to such terms and
conditions as shall be determined by the Committee, including the following:
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(i) OPTION PERIOD. The Option Period of each Option shall be
fixed by the Committee provided that no Nonqualified Stock Option shall be
exercisable for more than ten (10) years after the date the Option is granted.
In the case of an Incentive Stock Option, the Option Period shall not exceed
(10) years from the date of grant or, in the case of an individual who owns more
than ten percent (10%) of the combined voting power of all stock of the Company
or a corporation which is a parent corporation or any subsidiary of the Company
(each as defined in Section 424 of the Code), five (5) years from the date of
grant. No Option shall be granted more than ten (10) years from the effective
date of this Plan.
(ii) OPTION PRICE. The Option Price shall be determined by the
Committee. If such Option is intended to qualify as an Incentive Stock Option,
the Option Price per share shall be not less than the Fair Market Value per
share on the date the Option is granted, or where granted to an individual who
owns or who is deemed to own stock possessing more than ten percent (10%) of the
combined voting power of all stock of the Company or a corporation which is a
parent corporation or any subsidiary of the Company (each as defined in Section
424 of the Code), not less than one hundred ten percent (110%) of such Fair
Market Value per share.
(iii) EXERCISE. Subject to SECTION 6.4 and ARTICLE VIII below,
Options shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. The Committee may at any
time accelerate the exercisability of any Option. Exercises of Options held by
Participants who are actually or potentially subject to Section 16(b) of the
Exchange Act shall comply with the "window period" provisions of Rule 16b-3, to
the extent applicable.
(iv) METHOD OF EXERCISE. Subject to the provisions of this
ARTICLE VI, a Participant may exercise Options, in whole or in part, at any time
during the Option Period by the delivery to the Company of written notice in the
form attached to such Participant's Option Agreement. Such notice shall be
accompanied by payment in full of the Option Price by cash or check or such
other form of payment as the Company may accept. If approved by the Committee,
payment in full or in part may also be made (a) by delivering Common Stock
already owned by the Participant having a total Fair Market Value on the date of
such delivery equal to the Option Price; (b) by the execution and delivery of a
note or other evidence of indebtedness (and any security agreement thereunder)
satisfactory to the Committee and permitted in accordance with SECTION 6.3(v)
below; (c) by authorizing the Company to retain Common Stock which would
otherwise be issuable upon exercise of the Option having a total Fair Market
Value on the date of delivery equal to the Option Price; (d) by the delivery of
cash by a broker-dealer to whom the Participant has submitted a notice of
exercise (in accordance with Part 220, Chapter II, Title 12 of the Code of
Federal Regulations, so-called "cashless exercise"); or (e) by any combination
of the foregoing. In the case of an Incentive Stock Option, the payment of the
Option Price in the form of already owned shares of Common Stock may be
authorized only at the time the Option is granted. No Common Stock shall be
issued until full payment therefor has been made.
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(v) COMPANY LOAN OR GUARANTEE. Upon the exercise of any Option
and subject to the pertinent Option Agreement and the sole and absolute
discretion of the Committee, the Company may at the request of the Participant:
(a) lend to the Participant, with recourse, an amount equal to such
portion of the Option Price as the Committee may determine; or
(b) guarantee a loan obtained by the Participant from a third-party for
the purpose of tendering the Option Price.
The terms and conditions of any loan or guarantee, including the term, interest
rate, and any security interest thereunder, shall be determined by the
Committee, except that no extension of credit or guarantee shall obligate the
Company for an amount to exceed the lesser of (x) the aggregate Fair Market
Value of the Common Stock on the date of exercise less the aggregate par value
of the Common Stock to be purchased upon the exercise of the Option, or (y) the
amount permitted under applicable laws or the regulations and rules of the
Federal Reserve Board and any other governmental agency.
(vi) NON-TRANSFERABILITY OF OPTIONS. Except as provided herein or
in an Option Agreement, no Option shall be transferable by the Participant other
than by will or by the laws of descent and distribution, and all Options shall
be exercisable during the Participant's lifetime only by the Participant. If
the Committee adopts Securities Exchange Act Release 34-28869 of the Commission,
the Committee may permit an Option to be transferred pursuant to a domestic
relations order which would be a "qualified domestic relations order" as defined
in Section 414 of the Code if such Section 414 applied to the Option, but only
to the extent consistent with an Option's intended status as an Incentive Stock
Option.
6.4 EXERCISABILITY.
(i) VESTING. Unless terminated or accelerated as set forth
herein or in an Option Agreement, Options shall be exercisable in accordance
with the following schedule:
<TABLE>
<CAPTION>
Percentage of an Option
Grant Date Anniversary Exercisable
---------------------- ------------------------
<S> <C>
On or after the first anniversary 33.33%
of the date of grant
On or after the second anniversary 66.67%
of the date of grant
On or after the third anniversary 100%
of the date of grant
</TABLE>
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(ii) TERMINATION BY REASON OF DEATH. Unless otherwise provided in
an Option Agreement or determined by the Committee, if a Participant incurs a
Termination of Employment due to death, then any unexpired and unexercised
Option held by such Participant shall thereafter be exercisable (but only to the
extent such Option is otherwise exercisable on the date of death) only until the
earlier of (a) the first anniversary of the date of such death, or (b) the
expiration of the Option Period.
(iii) TERMINATION BY REASON OF DISABILITY. Unless otherwise
provided in an Option Agreement or determined by the Committee, if a Participant
incurs a Termination of Employment due to a Disability, then any unexpired and
unexercised Option held by such Participant shall thereafter be fully
exercisable (but only to the extent such Option is otherwise exercisable on the
date of determination of Disability) by the Participant only until the earlier
of (a) the first anniversary of the date of determination of Disability, or (b)
the expiration of the Option Period. A Participant's death at any time
following a Termination of Employment due to Disability shall not affect the
foregoing. If, upon Termination of Employment by reason of Disability, an
Incentive Stock Option is exercised after the expiration of the exercise periods
that apply for purposes of Section 422 of the Code, such Option will thereafter
be treated as a Nonqualified Stock Option.
(iv) OTHER TERMINATION. Unless otherwise provided in an Option
Agreement or determined by the Committee, if a Participant incurs a Termination
of Employment due to dismissal of the Participant without Cause, then any
unexpired and unexercised Option held by such Participant shall thereafter be
fully exercisable (but only to the extent such Option is otherwise exercisable
on the date of determination of such Termination of Employment) by the
Participant only until the earlier of (a) the three month anniversary of the
date of Termination of Employment or (b) the expiration of the Option Period.
If the Participant incurs a Termination of Employment that is either voluntary
on the part of the Participant or is due to a dismissal of Participant with
Cause, the Option (whether vested or unvested) shall terminate immediately and,
to the extent not exercised prior to such Termination of Employment, shall no
longer be exercisable in whole or in part. The death or Disability of a
Participant after a Termination of Employment otherwise provided in this
subsection (iv) shall not extend the time otherwise permitted to exercise an
Option or affect the termination of an Option.
6.5 CASHING OUT OF OPTION. On receipt of written notice of exercise,
the Committee may elect to cash out all or any part the Option to be exercised
by paying the Participant an amount, in cash or Common Stock, equal to the
excess of the Fair Market Value of the Common Stock that is subject to the
exercise over the Option Price of such Common Stock. Cash outs relating to
Options held by Participants who are actually or potentially subject to Section
16(b) of the Exchange Act shall comply with the "window period" provisions of
Rule 16b-3, to the extent applicable.
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ARTICLE VII
PROVISIONS APPLICABLE TO STOCK ACQUIRED UNDER OPTIONS
7.1 TRANSFER OF SHARES. The Common Stock received pursuant to an
Option shall at all times be subject to those transfer and repurchase
restrictions set forth in the Option Agreement and otherwise set forth herein;
provided that a Participant may at any time make a transfer of Common Stock
received pursuant to the exercise of an Option to his or her parents, spouse or
descendants or to any trust for the benefit of the foregoing or to a custodian
under a uniform gifts to minors act or similar statute for the benefit of any of
the Participant's descendants. Any transfer of Common Stock received pursuant
to the exercise of an Option shall not be permitted or valid unless and until
the transferee agrees to be bound by the provisions of this Plan, and any
provision respecting Common Stock under the Option Agreement, provided that
"Termination of Employment" shall continue to refer to the Termination of
Employment of the original Participant.
7.2 LIMITED TRANSFER DURING OFFERING. If there is an effective
registration statement under the Securities Act pursuant to which Common Stock
shall be offered for sale in an underwritten offering, a Participant shall not,
during the period requested by the underwriters managing the registered public
offering, effect any public sale or distribution of shares received directly or
indirectly pursuant to an exercise of an Option.
7.3 COMMITTEE DISCRETION. The Committee may in its sole and absolute
discretion include in any Option Agreement an obligation that the Company
purchase a Participant's Common Stock received upon the exercise of an Option
(including the purchase of any unexercised Options which have not expired), or
may obligate a Participant to sell Common Stock to the Company upon such terms
and conditions as the Committee may determine in its sole and absolute
discretion and set forth in an Option Agreement. The provisions of this ARTICLE
VII shall be construed by the Committee in its sole and absolute discretion, and
shall be subject to such other terms and conditions as the Committee may from
time to time determine. Notwithstanding any provision in this Plan to the
contrary, upon determination by the Committee, the Company may assign its right
to purchase Common Stock pursuant to this ARTICLE VII, whereupon the assignee of
such right shall have all the rights, duties and obligations of the Company with
respect to purchase of Common Stock.
7.4 NO COMPANY OBLIGATION. None of the Company, any Affiliate, any CAP
Entity or the Committee shall have any duty or obligation to affirmatively
disclose to a record or beneficial holder of Common Stock or an Option, and such
holder shall have no right to be advised of, any material information regarding
the Company, any Affiliate or any CAP Entity at any time prior to, upon or in
connection with receipt or the exercise of an Option or the Company's purchase
of Common Stock or an Option from such holder in accordance with the terms
hereof.
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ARTICLE VIII
CHANGE IN CONTROL PROVISIONS
8.1 IMPACT OF EVENT. Notwithstanding anything in this Plan to the
contrary, if a "Change in Control" (as defined in SECTION 8.2 below) shall
occur, any Options outstanding as of the date of such Change in Control and not
then exercisable shall become fully exercisable; provided that the Committee may
elect to cash out all or any portion of such outstanding Options by paying the
Participant an amount (in cash, Common Stock or such other property as the
Committee may deem appropriate) equal to the excess of the price per share (net
of expenses) being paid, or, in the case of a Corporate Transaction, available
for distribution to holders of the Common Stock determined on a fully diluted
basis, in connection with such Change in Control.
8.2 DEFINITION OF CHANGE IN CONTROL. For purposes of this Plan, a
"Change in Control" shall mean the happening of any of the following events:
(i) An acquisition (other than in a Public Offering) by any
individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2)
of the Exchange Act (a "Person") of the beneficial ownership (within the meaning
of Rule 13(d)-3 promulgated under the Exchange Act) of the then outstanding
shares of common stock of the Company (the "Outstanding Company Common Stock")
or the combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities") that would result in the CAP Entities
beneficially owning less than thirty percent (30%) of the Outstanding Company
Common Stock or less than thirty percent (30%) of the Outstanding Company Voting
Securities; or
(ii) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, complete liquidation or dissolution of
the Company, the sale or disposition of all or substantially all of the assets
of the Company or similar corporate transaction (in each case, a "Corporate
Transaction") or, if consummation of such Corporate Transaction is subject, at
the time of such approval by shareholders, to the consent of any government or
governmental agency, the obtaining of such consent (either explicitly or
implicitly), excluding the following: (a) any consummation of a Corporate
Transaction with any subsidiary of the Company or by an employee benefit plan
(or related trust) sponsored or maintained by the Company or an Affiliate, (b)
any acquisition by or consummation of a Corporate Transaction with a CAP Entity,
(c) the consummation of a Corporate Transaction with any Person that directly or
indirectly beneficially owned, immediately prior to such Corporate Transaction,
twenty percent (20%) or more of the Outstanding Company Common Stock or
Outstanding Company Voting Securities, and (d) any Corporate Transaction where
the majority of the voting securities of the entity resulting from such
Corporate Transaction is held by Persons holding in the aggregate the majority
of the Outstanding Company Voting Securities immediately prior to such Corporate
Transaction.
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ARTICLE IX
MISCELLANEOUS
9.1 AMENDMENTS AND TERMINATION. The Board may amend, alter, or
discontinue this Plan at any time, but no amendment, alteration or
discontinuation shall be made that would (i) impair the rights of a Participant
under a Option theretofore granted without the Participant's consent, except to
the extent such an amendment would cause this Plan to qualify for the exemption
provided by Rule 16b-3 or (ii) disqualify this Plan from the exemption provided
by Rule 16b-3. In addition, no such amendment shall be made without the
approval of a majority of the Company's shareholders to the extent such approval
is required by law or agreement.
The Committee may amend this Plan at any time provided that (a) no
amendment shall impair the rights of any Participant under any Option
theretofore granted without the Participant's consent, (b) no amendment shall
disqualify this Plan from the exemption provided by Rule 16b-3, and (c) any
amendment shall be subject to the approval or rejection of the Board.
The Committee may amend the terms of any Option, provided that no such
amendment shall impair the rights of any Participant without the Participant's
consent, except an amendment made to cause this Plan or an Option to qualify for
the exemption provided by Rule 16b-3. The Committee may also substitute new
Options for previously granted Options, including previously granted Options
having higher Option Prices, but no such substitution shall be made that would
impair the rights of Participants under such Option theretofore granted without
the Participant's consent.
Subject to the above provisions, the Board shall have authority to amend
this Plan to take into account changes in law and tax and accounting rules, as
well as other developments and to grant Options which qualify for beneficial
treatment under such rules without shareholder approval.
9.2 UNFUNDED STATUS OF PLAN. It is intended that this Plan be an
"unfunded" plan for incentive and deferred compensation. The Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under this Plan to deliver Common Stock or make payments; so long as
(unless the Committee otherwise determines) the existence of such trusts or
other arrangements is consistent with the "unfunded" status of this Plan.
9.3 GENERAL PROVISIONS.
(i) REPRESENTATION. The Committee may require each person
purchasing or receiving shares pursuant to an Option to represent to and agree
with the Company in writing that such person is acquiring the shares without a
view to the distribution or transfer thereof. The certificates for such shares
may include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
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<PAGE>
(ii) NO ADDITIONAL OBLIGATION. Nothing contained in this Plan
shall prevent the Company or an Affiliate from adopting other or additional
compensation arrangements for its employees, directors or other persons or
entities eligible to participate in this Plan.
(iii) WITHHOLDING. A Participant shall pay to the Company (or
other entity identified by the Committee), or make arrangements satisfactory to
the Company (or other entity identified by the Committee) regarding the payment
of, any Federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount required in order for the Company or an
Affiliate to obtain a current deduction, immediately upon the request of the
Company. Unless otherwise determined by the Committee, withholding obligations
may be settled with Common Stock, including Common Stock that is part of the
Option that gives rise to the withholding requirement provided that any
applicable requirements under Section 16 of the Exchange Act are satisfied. The
obligations of the Company under this Plan shall be conditional on such payment
or arrangements, and the Company and its Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment
otherwise due to the Participant.
(iv) REPRESENTATION. The Committee shall establish such
procedures as it deems appropriate for a Participant to designate a
Representative to whom any amounts otherwise payable the Participant are to be
paid upon such Participant's death.
(v) CONTROLLING LAW. This Plan and all Options made and actions
taken hereunder and under any Option Agreement shall be governed by and
construed in accordance with the laws of the State of California (other than its
law respecting choice of law). This Plan shall be construed to comply with all
applicable law, and to avoid liability to the Company, any Affiliate, any CAP
Entity, any member of the Committee, any member of the Board or any Participant,
including, without limitation, liability under Section 16(b) of the Exchange
Act.
(vi) OFFSET. Any amounts owed to the Company or an Affiliate by
the Participant of whatever nature may be offset by the Company from the value
of any Common Stock, cash or other thing of value under this Plan or an Option
Agreement to be transferred to the Participant, and no Common Stock, cash or
other thing of value under this Plan or an Option Agreement shall be transferred
unless and until all disputes between the Company and the Participant have been
fully and finally resolved and the Participant has waived all claims to such
against the Company or an Affiliate.
9.4 MITIGATION OF EXCISE TAX. If any payment or right accruing to a
Participant under this Plan (without the application of this SECTION 9.4),
either alone or together with other payments or rights accruing to the
Participant from the Company or an Affiliate ("Total Payments") would constitute
a "parachute payment" (as defined in Section 280G of the Code and regulations
thereunder), such payment or right shall be reduced to the largest amount or
greatest right that will result in no portion of the amount payable or right
accruing under this Plan being subject to an excise tax under Section 4999 of
the Code or being disallowed as a deduction under Section 280G of the Code. The
determination of whether any reduction in the rights or
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<PAGE>
payments under this Plan is to apply shall be made by the Committee in good
faith after consultation with the Participant, and such determination shall
be conclusive and binding on the Participant. The Participant shall
cooperate in good faith with the Committee in making such determination and
providing the necessary information for this purpose. The foregoing
provisions of this SECTION 9.4 shall apply with respect to any person only if
after reduction for any applicable federal excise tax imposed by Section 4999
of the Code and federal income tax imposed by the Code, the Total Payments
accruing to such person would be less than the amount of the Total Payments
as reduced, if applicable, under the foregoing provisions of this Plan and
after reduction for only federal income taxes.
9.5 RIGHTS WITH RESPECT TO CONTINUANCE OF EMPLOYMENT. Nothing
contained herein shall be deemed to alter the relationship, contractual or
otherwise, between the Company or an Affiliate and a Participant. Nothing
contained herein shall be construed to constitute a contract of employment
between the Company or an Affiliate and a Participant. Neither the Company nor
any Affiliate shall have any obligation to retain the Participant in its employ
or service as a result of this Plan. There shall be no inference as to the
length of employment or service hereby, and the Company or an Affiliate reserves
the same rights to terminate the Participant's employment or service as existed
prior to the individual becoming a Participant in this Plan.
9.6 WITHHOLDING. If the Participant disposes of Common Stock acquired
pursuant to an Incentive Stock Option in any transaction considered to be a
disqualifying transaction under the Code, the Participant must give written
notice of such transfer and the Company shall have the right to deduct any taxes
required by law to be withheld from any amounts otherwise payable to the
Participant.
9.7 DELAY. If at any time a Participant is subject to "short-swing"
liability under Section 16 of the Exchange Act, any time period provided for
under this Plan or an Option Agreement to the extent necessary to avoid the
imposition of liability shall be suspended and delayed during the period the
Participant would be subject to such liability, but not more than six (6) months
and one (1) day and not to exceed the Option Period. The Company shall have the
right to suspend or delay any time period described in this Plan or an Option
Agreement if the Committee shall determine that the action may constitute a
violation of any law or result in liability under any law to the Company, an
Affiliate or a shareholder of the Company until such time as the action required
or permitted shall not constitute a violation of law or result in liability to
the Company, an Affiliate or a shareholder of the Company. The Committee shall
have the discretion to suspend the application of the provisions of this Plan
required solely to comply with Rule 16b-3 if the Committee shall determine that
Rule 16b-3 does not apply to this Plan.
9.8 HEADINGS. The headings contained in this Plan are for reference
purposes only and shall not affect the meaning or interpretation of this Plan.
9.9 SEVERABILITY. If any provision of this Plan shall for any reason
be held to be invalid or unenforceable, such invalidity or unenforceability
shall not effect any other provision
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<PAGE>
hereby, and this Plan shall be construed as if such invalid or unenforceable
provision were omitted.
9.10 SUCCESSORS AND ASSIGNS. This Plan shall inure to the benefit of
and be binding upon each successor and assign of the Company. All obligations
imposed upon a Participant, and all rights granted to the Company hereunder,
shall be binding upon the Participant's heirs, legal representatives and
successors.
9.11 ENTIRE OPTION AGREEMENT. This Plan and the Option Agreement
constitute the entire agreement with respect to the subject matter hereof and
thereof, provided that in the event of any inconsistency between this Plan and
the Option Agreement, the terms and conditions of this Plan shall control.
9.12 OTHER COMPANY PLANS. Nothing contained herein shall prevent the
Company from establishing other incentive plans in which Participants in the
Plan may also participate. No Option granted under this Plan shall be considered
as compensation in calculating any insurance, pension or other benefit for which
a Participant is eligible unless any such insurance, pension or other benefit is
granted under a plan that expressly provides that compensation under this Plan
(and specifying the type of such compensation) shall be considered as
compensation under such plan, or except where the Board expressly determines
that inclusion of an Option or any portion of an Option should be made to
accurately reflect competitive compensation practices or to recognize that an
Option has been granted in lieu of a portion of competitive annual cash
compensation.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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<PAGE>
In witness whereof, the undersigned has executed this Plan effective as of
December 16, 1997.
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ Jack R. Crosby
-------------------------------------
Jack R. Crosby, Chairman
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<PAGE>
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT effective as of
______________________ ("Grant Date"), between CinemaStar
Luxury Theaters, Inc., a California corporation (the
"Company"), and ____________________, (the "Participant").
WHEREAS, the Company desires, by affording the Participant an
opportunity to purchase shares of the Company's Common Stock as hereinafter
provided, to carry out the purposes of the CinemaStar Luxury Theaters, Inc.
Stock Option Plan (the "Plan");
WHEREAS, the Committee has duly made all determinations necessary or
appropriate to the grants hereunder; and
WHEREAS, all capitalized terms not otherwise defined herein shall have
the meaning given such term in the Plan.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter set forth and for other good and valuable
consideration, receipt of which is hereby acknowledged, the parties hereto
have agreed, and do hereby agree, as follows:
1. GRANT OF OPTION.
(a) The Company hereby grants to the Participant, as a matter of
separate agreement and not in lieu of salary or any other compensation for
services, the right and option (the "Option") to purchase _____________
shares of the Common Stock of the Company ("Option Shares") on the terms and
conditions herein set forth.
(b) For each of the Option Shares purchased, the Participant shall pay
to the Company $_____________ per share (the "Option Price"). Accordingly,
the aggregate Option Price to exercise all of the Option is $_____________
("Aggregate Option Price").
(c) Options shall be exercisable in accordance with the following
schedule: [to come]
(d) The Option granted hereunder is designated as a Nonqualified Stock
Option. Nevertheless, the Company shall pay Participant a bonus, in the
year(s) Participant exercises the Option equal to the difference in the
amount of federal income tax the Participant is required to pay upon such
exercise and the amount Participant would have been required to pay upon such
exercise if the Option had been an Incentive Stock Option.
<PAGE>
(e) The Company shall not be required to issue any fractional Option
Shares.
2. EXERCISE.
The Option shall be exercisable during the Participant's lifetime only
by the Participant (or his or her guardian or legal representative), and
after the Participant's death only by a Representative. The Option may be
exercised only by the delivery to the Company of a properly completed written
notice, in form satisfactory to the Committee, which notice shall specify the
number of Option Shares to be purchased and the aggregate Option Price for
such shares, together with payment in full of such aggregate Option Price.
Manner of payment of the Option Price shall be determined by the Committee at
the time of exercise, in its sole discretion. If any part of the payment of
the Option Price is made in shares of Common Stock, such shares shall be
valued by using their Fair Market Value as of their date of delivery. Prior
to the issuance of Common Stock upon exercise, and as a condition thereto,
Participant shall enter into an Exercise Agreement in the form attached as
EXHIBIT A hereto.
The Option shall not be exercised unless there has been compliance with
all the preceding provisions of this Paragraph 2, and, for all purposes of
this Stock Option Agreement, the date of the exercise of the Option shall be
the date upon which there is compliance with all such requirements.
3. PAYMENT OF WITHHOLDING TAXES.
If the Company is obligated to withhold an amount on account of any tax
imposed as a result of the exercise of the Option, the Participant shall be
required to pay such amount to the Company, as provided in the Plan.
4. REQUIREMENTS OF LAW; REGISTRATION AND TRANSFER REQUIREMENTS.
The Company shall not be required to sell or issue any shares under the
Option if the issuance of such shares shall constitute a violation of any
provision of any law or regulation of any governmental authority. This
Option and each and every obligation of the Company hereunder are subject to
the requirement that the Option may not be exercised or performed, in whole
or in part, unless and until the Option Shares are listed, registered or
qualified, properly marked with a legend or other notation, or otherwise
restricted, as is provided for in the Plan.
5. PLAN.
Notwithstanding any other provision of this Stock Option Agreement, the
Option is granted pursuant to the Plan, as in effect on the date hereof, and
is subject to all the terms and conditions of the Plan, as the same may be
amended from time to time; provided, however, that no amendment to either the
Plan or this Stock Option
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<PAGE>
Agreement shall deprive the Participant, without the Participant's consent,
of the Option or of any of Participant's rights under this Stock Option
Agreement. The interpretation and construction by the Committee of the Plan,
this Stock Option Agreement, the Option, and such rules and regulations as
may be adopted by the Committee for the purpose of administering the Plan,
shall be final and binding upon the Participant. Until the Option shall
expire, terminate or be exercised in full, the Company shall, upon written
request therefor, send a copy of the Plan, in its then-current form, to the
Participant or any other person or entity then entitled to exercise the
Option.
Participant hereby acknowledges receipt of a copy of the Plan.
6. SHAREHOLDER RIGHTS.
Until the Option shall have been duly exercised to purchase such Option
Shares and such shares have been officially recorded as issued on the Company's
official shareholder records, no person or entity shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of any Option Shares,
and adjustments for dividends or otherwise shall be made only if the record date
therefor is subsequent to the date such shares are recorded and after the date
of exercise and without duplication of any adjustment.
7. EMPLOYMENT RIGHTS.
No provision of this Stock Option Agreement or of the Option granted
hereunder shall give the Participant any right to continue in the employ of
the Company or any of its Affiliates, create any inference as to the length
of employment of the Participant, affect the right of the Company or its
Affiliates to Terminate the Employment of the Participant, with or without
Cause, or give the Participant any right to participate in any employee
welfare or benefit plan or other program (other than the Plan) of the Company
or any of its Affiliates.
8. DISCLOSURE RIGHTS.
The Company shall have no duty or obligation to affirmatively disclose
to the Participant or a Representative, and the Participant or Representative
shall have no right to be advised of, any material information regarding the
Company or an Affiliate at any time prior to, upon or in connection with the
exercise of an Option or the Company's purchase of Common Stock in accordance
with the terms of this Stock Option Agreement.
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<PAGE>
9. GOVERNING LAW.
This Stock Option Agreement and the Option granted hereunder shall be
governed by, and construed and enforced in accordance with, the laws of the
State of California (other than its laws respecting choice of law).
10. ENTIRE AGREEMENT.
This Stock Option Agreement, together with the Plan, constitute the
entire obligation of the parties hereto with respect to the subject matter
hereof and shall supersede any prior expressions of intent or understanding
with respect to this transaction.
11. AMENDMENT.
Any amendment to this Stock Option Agreement shall be in writing and
signed by the Company and the Participant.
12. WAIVER; CUMULATIVE RIGHTS.
The failure or delay of either party to require performance by the other
party of any provision hereof shall not affect its right to require
performance of such provision unless and until such performance has been
waived in writing. Each and every right hereunder is cumulative and may be
exercised in part or in whole from time to time.
13. COUNTERPARTS.
This Stock Option Agreement may be signed in two counterparts, each of
which shall be an original, but both of which shall constitute but one and
the same instrument.
14. NOTICES.
Any notice which either party hereto may be required or permitted to
give the other shall be in writing and may be delivered personally or by
mail, postage prepaid, addressed to the President of the Company, 431 College
Boulevard, Oceanside, California 92057-5435, and the Participant at his
address as shown on the Company's payroll records, or to such other address
as the Participant, by notice to the Company, may designate in writing from
time to time.
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<PAGE>
15. HEADINGS.
The headings contained in this Stock Option Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Stock Option Agreement.
16. SEVERABILITY.
If any provision of this Stock Option Agreement shall for any reason be
held to be invalid or unenforceable, such invalidity or unenforceability
shall not effect any other provision hereof, and this Stock Option Agreement
shall be construed as if such invalid or unenforceable provision were omitted.
17. SUCCESSORS AND ASSIGNS.
This Stock Option Agreement shall inure to the benefit of and be binding
upon each successor and assign of the Company. All obligations imposed upon
the Participant or a Representative, and all rights granted to the Company
hereunder, shall be binding upon the Participant's or the Representative's
heirs, legal representatives and successors.
18. CONDITIONAL GRANT.
This Option is granted upon the conditions and the Option Shares
hereunder shall be forfeited unless each and any person who is a spouse of
the Participant at any time on or after the Grant Date (including any person
who becomes a spouse after the Grant Date) executes a Consent of Spouse in
the form attached as EXHIBIT B hereto, unless the Committee shall waive
either such condition.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Stock Option Agreement
to be duly executed by an officer thereunto duly authorized, and the
Participant has hereunto set his hand, all effective as of the day and year
first above written.
CINEMASTAR LUXURY THEATERS, INC.
By:
---------------------------------
Its:
----------------------------
PARTICIPANT:
-------------------------------------
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<PAGE>
EXHIBIT A
EXERCISE AGREEMENT
FOR EXERCISING STOCK OPTION GRANTED
UNDER THE
CINEMASTAR LUXURY THEATERS, INC. STOCK OPTION PLAN
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<PAGE>
INSTRUCTIONS
FOR EXERCISING STOCK OPTION GRANTED
UNDER THE
CINEMASTAR LUXURY THEATERS, INC. STOCK OPTION PLAN
GENERAL:
In order to exercise your Option granted under the CinemaStar Luxury
Theaters, Inc. Stock Option Plan ("Plan") pursuant to your Stock Option
Agreement, please complete and sign the attached Exercise Agreement
("Exercise Agreement"). On the Exercise Agreement, you should indicate the
manner in which you will pay (1) the exercise price of the Option ("Option
Price") and (2) any required withholding taxes, which manner shall be
acceptable to the Committee in its sole discretion.
Participants who are directors of the Company, who are officers of the
Company subject to the provisions of Section 16 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and/or who beneficially own (as
defined in rules issued under such Section 16) over ten percent of the
outstanding Shares of the Company (collectively the "Insiders"), are subject
to the reporting and short-swing profits recapture rules under such Section
16. Therefore, before exercising any Stock Options or making any other
elections or transactions with respect to Stock Options (and stock acquired
upon exercise thereof) under the Plan, these participants should consult with
their legal advisors regarding the Section 16 implications.
If you have any questions regarding this Exercise Agreement, please
contact _____________________________.
ENDORSEMENT:
1. Cash: If you are paying the Option Price or arranging for payment of tax
withholding by certified check or casher's check, checks should be made
payable to _______________________________________________.
2. Stock Certificate: If you are paying the Option Price or arranging for
payment of tax withholding by delivering a stock certificate the stock
certificate should be properly endorsed as follows.
a. The record holder of the stock certificate being surrendered should
sign and date the stock certificate on the reverse side. The
signature should correspond exactly (including misspellings) with the
name shown on the front side of the stock certificate.
- If the stock certificate being surrendered is held of record in
joint tenancy, both joint tenants must sign.
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<PAGE>
- If the endorsement is by a corporation or by a person acting in a
fiduciary or other representative capacity, proper evidence of
the authority of the person making the endorsement should be
included with the stock certificate being surrendered.
b. If the stock certificate being surrendered represents a larger number
of shares of Common Stock than are being surrendered as the Option
Price (i.e., having a Fair Market Value on the date the Option is
exercised in excess of the Option Price), indicate on the reverse side
of the stock certificate the number of shares of Common Stock being
transferred to the Company pursuant to the exercise of the Option. A
new certificate representing any excess shares of Common Stock will be
issued in the name appearing on the surrendered stock certificate and
delivered to you by the transfer agent for the Company.
c. The method of delivery of a stock certificate representing Common
Stock is at the option and risk of the holder of such certificates.
If a stock certificate is sent by mail, insured registered mail is
recommended.
DEFINED TERMS:
Each term defined in the Plan or a Stock Option Agreement shall, when
capitalized herein, have the same meaning for the purpose of this Exercise
Agreement as given to it in the Plan or the Stock Option Agreement. The Plan
and the Stock Option Agreement shall control if there is any conflict between
the Plan (or the Stock Option Agreement) and this Exercise Agreement, and as
to all matters not provided in this Exercise Agreement.
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<PAGE>
EXERCISE AGREEMENT
This Exercise Agreement is made by and between CinemaStar Luxury
Theaters, Inc. ("Company") and ___________________________ ("Participant").
The Participant entered into a Stock Option Agreement, dated
__________________, in accordance with the CinemaStar Luxury Theaters, Inc.
Stock Option Plan ("Plan").
The Participant desires to exercise the Option on the following terms
and conditions:
1. GENERAL. Each term defined in the Plan or a Stock Option Agreement
shall, when capitalized herein, have the same meaning for the purpose of this
Exercise Agreement as given to it in the Plan or the Stock Option Agreement.
The Plan and the Stock Option Agreement shall control if there is any
conflict between the Plan (or the Stock Option Agreement) and this Exercise
Agreement, and as to all matters not provided in this Exercise Agreement.
2. EXERCISE. Subject to the terms of this Exercise Agreement, the
Participant hereby elects to exercise the Option with respect to _________
Option Shares at the Option Price of $_________ per Option Share (as set
forth in the Stock Option Agreement). The exercise pursuant hereto shall
reduce the number of shares subject to the Stock Option Agreement by the same
amount.
3. CONSIDERATION. The Option Shares to be received pursuant to this
Exercise Agreement are being transferred in consideration for (PLEASE CHECK
THE APPLICABLE OPTION PAYMENT PROVISION):
a. ___ cash in the amount of $_________ (the Option Price). Enclosed
herewith is a / / certified check or / / cashier's check for
this amount.
b. ___ delivery of valid and enforceable stock certificate(s)
representing shares of Common Stock and endorsed for transfer to
the Company, in accordance with the Instructions accompanying
this Exercise Agreement.
c. ___ the Company reducing the number of Option Shares to be issued and
delivered to the Participant upon such exercise.
d. ___ cash by a broker-dealer to whom the holder of the Option has
submitted an irrevocable notice of exercise.
e. ___ any combination of (a), (b), (c) or (d) having an aggregate Fair
Market Value equal to the aggregate Option Price.
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Describe any combination: ____________________________________
____________________________________________________________
___________________________________________________________.
4. WITHHOLDING. Because the Company is obligated to withhold an
amount presently or an estimated amount in the future on account of any tax
(including employment taxes) imposed as a result of the exercise of this
Option, the Participant does hereby (PLEASE CHECK THE APPLICABLE TAX
WITHHOLDING PROVISION):
a. ___ request that the Company withhold and not transfer or issue to
the Participant by virtue of this exercise, that number of Option
Shares having an aggregate Fair Market Value equal to the
Company's federal, state or local tax withholding obligations
with respect to the exercise of the Option.
b. ___ (if the Participant is an employee of the Company as of the date
hereof) authorize the Company to withhold from my future
paychecks such amounts, in addition to any other amounts to be
withheld from such paychecks, equal to the Company's federal,
state or local tax withholding obligations with respect to the
exercise of the Option.
c. ___ deliver a certified check or cashier's check to the Company equal
to the Company's federal, state or local tax withholding
obligations with respect to the exercise of the Option, as
reported to the Participant by the Company.
5. RESOLUTION OF DISPUTE. Any dispute or disagreement which shall
arise under, as a result of, or in any way relate to the interpretation or
construction of this Exercise Agreement shall be determined by the Committee,
or in the event the Plan shall at the time be administered by the Board of
Directors of the Company (or any successor corporation), then by such Board
of Directors. Any such determination made hereunder shall be final, binding
and conclusive for all purposes.
6. RULE 144 SALES. If any Insider wishes to dispose of any Option
Shares in accordance with Rule 144 under the Act or otherwise, the Insider
shall promptly notify the Company of such intended disposition and shall
deliver to the Company at or prior to the time of such disposition such
documentation as the Company may reasonably request in connection with such
sale and, in the case of a disposition pursuant to Rule 144, shall deliver to
the Company an executed copy of any notice on Form 144 required to be filed
with the Securities and Exchange Commission.
7. PLAN. The Participant represents and warrants that he or she has
received a copy of the Plan.
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<PAGE>
8. SUCCESSORS AND ASSIGNS. This Exercise Agreement shall inure to the
benefit of and be binding upon each successor and assignee of the Participant
and the Company.
9. CHOICE OF LAWS. This Exercise Agreement shall be governed by and
construed in accordance with the laws of the State pursuant to which the Plan
and Stock Option Agreement shall be governed and construed.
10. ENTIRE EXERCISE AGREEMENT. This Exercise Agreement, together with
the Plan and the Stock Option Agreement, constitute the entire obligation of
the parties hereto with respect to the subject matter hereof and shall
supersede any prior expressions of intent or understanding with respect to
this exercise of your Option.
11. PRIOR AFFIRMATION. The Participant represents, warrants and
affirms all matters to which he represented, warranted or affirmed in the
Stock Option Agreement, and nothing in this Exercise Agreement shall derogate
the Participant's representations, warranties or affirmations in the Stock
Option Agreement.
CINEMASTAR LUXURY THEATERS, INC.
PARTICIPANT:
By:
----------------------------------
Title:
- ---------------------------- --------------------------
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EXHIBIT B
CONSENT OF SPOUSE (FOR COMMUNITY PROPERTY STATES ONLY)
I am the spouse of the Participant, and I acknowledge that I have read
the Stock Option Agreement and the Plan and know their contents. I
understand and agree that the Option and the Option Shares, including my
community property interest in them, are subject to the terms and conditions
of the Stock Option Agreement and the Plan, which shall be controlling in all
events and binding upon me. I hereby consent to the terms of the Stock
Option Agreement and the Plan and to their application to my community
property interest in the Option and in the Option Shares.
I further grant my spouse, the Participant, an irrevocable Power of
Attorney to execute any documents which may be required or appropriate in
connection with or under this Stock Option Agreement or the Plan, including,
but not limited to, a notice of exercise and withholding form with respect to
any transfers of shares. This Power of Attorney is coupled with an interest
and shall be irrevocable and survive my death or incapacity, and any action
by my spouse shall be binding on my estate, executor, heirs and assigns.
DATED: ,
--------------------- ----- -----------------------------------
STATE OF ________________)
) SS:
COUNTY OF _______________)
On the __ day of __________________________, ____, _______________________
appeared before me and acknowledged and executed the foregoing instrument.
-----------------------------------
NOTARY PUBLIC
My commission expires:
------------
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CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
Frank Moreno
CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
Dear Mr. Moreno:
This Employment Agreement ("Agreement") is made and entered into as of
the 29th day of April, 1998 (the "Commencement Date"), by and between you
("Employee") and CinemaStar Luxury Theaters, Inc., a California corporation,
as employer (hereinafter referred to as "CinemaStar"). We have agreed as
follows:
1. EMPLOYMENT AND SERVICES:
CinemaStar shall employ Employee and Employee agrees to be employed and
perform his exclusive services for CinemaStar or one of its subsidiaries or
related companies upon the terms and conditions hereinafter set forth.
Employee will serve hereunder as President and Chief Operating Officer of
CinemaStar. In his capacity as President and Chief Operating Officer of
CinemaStar, Employee shall do and perform all services, acts or things
necessary, advisable or customary to manage and conduct the business of
CinemaStar, and also will perform such services as requested, from time to
time, by the Chief Executive Officer or the Board of Directors of
CinemaStar, or any compensation committee thereof (the "Board").
Employee shall devote his best efforts, energies and abilities and his full
business time, skill and attention (except for permitted vacation periods
and reasonable periods of illness or other incapacity) to the business and
affairs of CinemaStar. Employee shall perform the duties and carry out the
responsibilities assigned to him by the Chief Executive Officer or the
Board to the best of his ability, in a diligent, trustworthy, businesslike
and efficient manner for the purpose of advancing the business of
CinemaStar. Employee agrees not to perform services of any kind or nature
which would interfere with the performance of Employee's services hereunder
for any third party, or render services for Employee's own account, in
either case which would interfere with the performance of Employee's
services hereunder, and in each case, unless specifically permitted to do
so in writing by the Chief Executive Officer or the Board.
Simultaneous with the execution hereof, the Board will appoint Employee to
serve as a director of CinemaStar, filling a current vacancy. Thereafter,
for so long as Employee shall serve as the Chief Operating Officer of
CinemaStar, he shall be nominated to serve as a director of CinemaStar, and
subject only to the annual shareholder vote electing directors, shall so
serve as a director. Immediately upon any termination of the
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Employment Period, for any reason, Employee shall be deemed to have
resigned from any and all positions he may hold on the Board, without
any further action by any party.
2. TERM:
The term of this Agreement shall commence on the date hereof and continue
until the third anniversary of the date hereof (the "Employment Period").
Notwithstanding anything to the contrary contained herein, the Employment
Period is subject to termination pursuant to Paragraph 5 below.
EMPLOYEE AGREES AND ACKNOWLEDGES THAT CINEMASTAR HAS NO OBLIGATION TO RENEW
THIS AGREEMENT OR TO CONTINUE EMPLOYEE'S EMPLOYMENT AFTER EXPIRATION OF THE
TERM HEREUNDER, and Employee expressly acknowledges that no promises or
understandings to the contrary have been made or reached.
3. COMPENSATION:
3.1 BASE COMPENSATION:
For all services rendered under this Agreement, CinemaStar shall pay
Employee a base salary at an annual rate of Two Hundred Fifty Thousand
Dollars ($250,000.00), or at such higher rate as may be determined by the
Board in its sole discretion (the "Base Salary"). The Base Salary shall be
payable in accordance with CinemaStar's policy for regular salaried
employees. CinemaStar is not obligated to actually utilize Employee's
services hereunder, and payment of the Base Salary will discharge all of
CinemaStar's obligations hereunder.
3.2 BONUS COMPENSATION:
Employee shall be eligible to receive bonus compensation, to be determined
by the Board at its sole discretion.
3.3 WITHHOLDING:
All compensation payable to Employee hereunder is stated in gross amount
and shall be subject to all applicable withholding taxes, other normal
payroll deductions and any other amounts required by law to be withheld.
3.4 OPTIONS:
Employee has been granted options to acquire Five Hundred Thousand
(500,000) shares of CinemaStar's common stock at an exercise price of $.875
per share, which options shall vest over a 3-year period (one-third on each
of the first three anniversaries of the date hereof) and shall be subject
to the other terms and conditions of the Stock Option Plan of CinemaStar
dated as of December 16, 1997.
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4. VACATION:
Employee shall be entitled to up to three (3) weeks paid vacation each
fiscal year with salary, consistent with CinemaStar's policy for all
employees of similar stature and provided that unused vacation time shall
not be carried over to subsequent years.
5. TERMINATION:
Subject to Paragraph 5.2 below, the Employment Period may be terminated by
CinemaStar at any time, with or without cause. No amounts shall be paid or
benefits provided upon any termination of the Employment Period, whether as
liquidated damages, or otherwise, except as specifically provided in
Section 5.2 below or under any benefit plan or agreement in which Employee
participates or to which Employee is a party. Employee shall not be
entitled to participate in any severance plan of CinemaStar, except as
required by law.
5.1 TERMINATION FOR CAUSE:
CinemaStar may terminate the Employment Period for "cause" (as defined in
this Paragraph 5.1) at any time upon written notice to Employee. In the
event of a termination for cause, CinemaStar shall have no further
obligations to Employee under this Agreement, except payment of the Base
Salary and vacation pay accrued through the date of termination, and
CinemaStar shall continue to have all other rights available hereunder at
law or in equity. As used herein, the term "cause" shall mean any one or
combination of the following:
a. The willful failure of Employee to perform his duties or comply with
reasonable directions of the Chief Executive Officer or the Board that
continues after the Chief Executive Officer or the Board has given
written notice to Employee specifying in reasonable detail the manner
in which Employee has failed to perform such duties or comply with
such directions;
b. A material breach by Employee of any of the terms and conditions of
this Agreement;
c. Employee's gross negligence in the performance of his duties
hereunder;
d. Employee's conviction of any crime (whether or not involving
CinemaStar) which constitutes a crime of moral turpitude or is
punishable by imprisonment of thirty (30) days or more, PROVIDED,
HOWEVER, nothing in this Agreement shall obligate CinemaStar to pay
the Base Salary during any period that Employee is unable to perform
his duties hereunder due to any incarceration;
e. Employee's violation of any rule or regulation of Cinemastar
applicable to other employees of similar stature;
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f. Employee's omission or act constituting fraud, dishonesty or
misrepresentation, occurring subsequent to the date hereof;
g. Subject to any applicable federal and state laws, Employee's failure,
inability (including any disability which prevents Employee from
performing the essential functions of his position with reasonable
accommodation), or refusal to perform Employee's duties on an
exclusive and full time basis, but in no case shall such right be
exercised until six (6) months from the date of the commencement of
any physical or mental disability. Employee shall be deemed to be
disabled, for purposes of this Agreement, if he is unable to perform,
by reason of physical or mental incapacity, his essential duties or
obligations under this Agreement, for a total period of Twelve (12)
weeks in Three Hundred Sixty (360) days; or
h. Employee's death.
5.2 TERMINATION WITHOUT CAUSE:
If the Employment Period is terminated by CinemaStar without cause (as
"cause" is defined in Paragraph 5.1 above), CinemaStar shall pay to
Employee the Base Salary for the balance of the Employment Period.
CinemaStar acknowledges and agrees that Employee's employment with
CinemaStar shall be deemed to have been terminated by CinemaStar without
cause in the event that substantially all of the assets of CinemaStar are
sold, or if there is a change in the control of CinemaStar, AND the
Employee's duties and responsibilities hereunder are materially altered at
any time during the 6-month period following such sale or change in
control. For purposes of this Agreement, "change in control" shall mean
any event whereby any party (or group of affiliated parties), other than
CinemaStar Acquisition, L.L.C. or any of its affiliates, shall have votes
sufficient to elect more than fifty percent (50%) of the Board.
5.3 TERMINATION BY EMPLOYEE:
Employee has the right to terminate the Agreement for any reason, upon
sixty (60) days prior written notice to CinemaStar.
6. BENEFITS:
During the Employment Period, and so long as Employee is not in breach of
this Agreement:
a. CinemaStar shall reimburse Employee for his reasonable and necessary
out-of-pocket business expenses in accordance with its then prevailing
policy for employees of similar stature (which shall include
appropriate itemization and substantiation of expenses incurred);
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b. Employee and his dependents shall be entitled to participate in
CinemaStar's basic medical and other benefit plans generally available
to employees of CinemaStar in accordance with the terms of such plans,
excluding severance benefits; and
c. Employee shall be entitled to receive a monthly car allowance of Six
Hundred Fifty Dollars ($650), or shall be provided with an automobile
of comparable quality to that currently provided to Employee by
CinemaStar.
d. CinemaStar shall reimburse Employee for his reasonable out-of-pocket
moving expenses incurred to relocate Employee and his family to
Southern California.
e. In connection with the above-described relocation and the related sale
of Employee's residence, CinemaStar shall pay Employee an amount equal
to the lesser of (i) fifty percent (50%) of the excess, if any, of the
original purchase price of Employee's current residential home and the
actual final sales price of such home (less any broker commissions),
or (ii) $20,000, in either case within 30 days of Employee's request
therefore and upon Employee providing reasonably acceptable
documentation of such original purchase price and such final sales
price.
Employee further expressly agrees and acknowledges that after termination
of the Employment Period (by CinemaStar with or without cause or by
Employee) Employee shall be entitled to no benefits, except as specifically
provided under the benefit plans referred to herein, subject in all cases
to the terms and conditions of each such plan, and except as required by
law.
7. CONFORMITY WITH THE IMMIGRATION REFORM AND CONTROL ACT OF 1986:
As a condition to Employee's employment with CinemaStar, Employee shall
furnish, and will continue to furnish, to CinemaStar all documentation
legally sufficient to establish satisfy the requirements of the Immigration
Reform and Control Act of 1986, with respect to Employee. If Employee
fails to provide the required documentation within the legally-prescribed
time limits, Employee's employment and all contractual obligations
hereunder will terminate immediately.
8. CONFIDENTIALITY AND NONCOMPETITION:
a. Employee shall hold in a fiduciary capacity, for the benefit of
CinemaStar, all confidential or proprietary information, knowledge and
data of CinemaStar which Employee may acquire, learn, obtain or
develop during his employment by CinemaStar. Further, Employee shall
not, during the Employment Period or after the termination of such
Employment Period, directly or indirectly use, communicate or divulge
for his own benefit or for the benefit of another any such
information, knowledge or data. Employee makes the same commitment
with respect to the secret, confidential or proprietary information,
knowledge and data of affiliates, customers, contractors and others
with whom CinemaStar has a
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business relationship. The information covered by this protection
includes, but is not limited to matters of a business nature such as
trade secrets, information about finances, costs and profits, business
plans, marketing and advertising plans and strategies, sales results
or projections, plans of CinemaStar to expand its business, personnel
information, records, customer lists, contact persons, customer data,
software, sales data, information regarding any form of product
produced, distributed or acquired by CinemaStar, and/or other
confidential or proprietary information belonging to CinemaStar
relating to CinemaStar's business and enterprise (collectively, the
"Confidential Information").
Employee agrees to hold and safeguard the Confidential Information in
trust for CinemaStar, and agrees that he will not, without the prior
written consent of CinemaStar, misappropriate or disclose or make
available to anyone for use outside of CinemaStar, at any time, any of
the Confidential Information. Notwithstanding the foregoing, Employee
may disclose Confidential Information if such information becomes
publicly known without fault of Employee, or where Employee is
obligated to disclose such information by operation of law; provided,
however, that if Employee receives a subpoena or other legal process,
or otherwise receives a legally-binding request (whether voluntary or
involuntary) from a third party, the response to which reasonably
could result in the disclosure of Confidential Information, he shall
provide notice thereof to CinemaStar within three (3) business days of
such subpoena, legal process or request. Employee's obligations under
this Paragraph 8 with respect to the Confidential Information will
survive expiration or termination of the Employment Period.
b. Employee shall not at any time during the Employment Period be or
become (i) interested or engaged in any manner, directly or
indirectly, either alone or with any person, firm or corporation now
existing or hereafter created, in any business which is or may be
competitive with the business of CinemaStar or (ii) directly or
indirectly a stockholder or officer, director or employee of, or in
any manner associated with, or aid or abet or give information or
financial assistance to, any such business. Employee hereby
acknowledges that the provisions of this subparagraph b. are
reasonable and necessary to protect the legitimate interests of
CinemaStar and that any violation of such provisions would result in
irreparable injury to CinemaStar. The provisions of this subparagraph
b. shall not be deemed to prohibit Employee's purchase or ownership,
as a passive investment, of not more than five percent (5%) of the
outstanding capital stock of any corporation whose stock is publicly
traded.
c. All records, files, lists, drawings, documents, models, equipment,
software or intellectual property relating to CinemaStar's business
shall be returned to CinemaStar upon the termination of the Employment
Period, whether such termination is at Employee's or CinemaStar's
request.
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9. NO SOLICITATION OF EMPLOYEES AND CONTRACTORS:
Employee shall not during the Employment Period or for one (1) year
thereafter induce or attempt to induce any employees, contractors or
representatives of CinemaStar (or those of any of its affiliates) to stop
working for, contracting with or representing CinemaStar or any of its
affiliates or work for, contract with or represent any of CinemaStar's
competitors.
Employee hereby acknowledges that the provisions of this Paragraph 9 are
reasonable and necessary to protect the legitimate interests of CinemaStar
and that any violation of such provisions would result in irreparable
injury to CinemaStar. In the event of a violation of the provisions of
this Paragraph 9, Employee further agrees that CinemaStar shall, in
addition to all other remedies available to it, be entitled to equitable
relief by way of injunction and any other legal or equitable remedies.
10. RESULTS AND PROCEEDS:
As Employee's employer, CinemaStar shall own all rights in and to the
results and proceeds connected with or arising out of, directly or
indirectly, Employee's services hereunder.
11. OWNERSHIP OF INTELLECTUAL PROPERTY:
a. CinemaStar shall own, and Employee hereby transfers and assigns to it,
all rights, of every kind and character throughout the world, in
perpetuity, in and to any material or ideas and all results and
proceeds of Employee's services hereunder, or conceived of or produced
during the term of Employee's employment, whether the same consists of
plans, methods, slogans, product names, ideas or copyrightable or
patentable subject matter.
b. Employee agrees to execute and deliver to CinemaStar such assignments,
certificates of authorship, or other instruments in accordance with
standard industry practice as CinemaStar may require from time to time
to evidence ownership of the results and proceeds of Employee's
services. Employee's agreement to assign to CinemaStar any of
Employee's rights as set forth in this Paragraph 11 does not apply to
any invention which qualifies fully as Employee's invention under the
provisions of Section 2870 of the California Labor Code, where no
equipment, supplies, facility, or trade secret information of
CinemaStar was used and which was developed entirely upon Employee's
own time, and which (i) does not relate to the business of CinemaStar
or to its actual or demonstrably anticipated research or development,
or (ii) which does not result from any work performed by Employee for
CinemaStar.
c. Employee represents and warrants that except as previously disclosed
to CinemaStar in writing, Employee neither owns nor controls any
copyrights or copyrightable product.
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d. Employee agrees that CinemaStar shall have the right, but not the
obligation, to use Employee's name, voice and likeness in connection
with any use or exploitation of the results and proceeds of Employee's
services hereunder, and in connection with advertising, publicity,
exhibition, distribution and/or other exploitation of any of the
foregoing. Employee agrees that CinemaStar shall have the sole and
exclusive right to issue publicity concerning Employee with respect to
Employee's employment hereunder and the results and proceeds of
Employee's services hereunder, except neither Employee nor CinemaStar
shall issue any press release or other public announcement with
respect to the execution or the terms of this Agreement without the
consent of the other.
12. SERVICES UNIQUE:
Employee recognizes that due to his status as an experienced senior
executive of the movie theater industry, his services hereunder are of a
special, unique, unusual, extraordinary and intellectual character, giving
them a peculiar value, the loss of which CinemaStar cannot be reasonably or
adequately compensated for in damages. In the event of a breach of this
Agreement by Employee (particularly, but without limitation, with respect
to the provisions hereof relating to the exclusivity of Employee's
services), CinemaStar shall, in addition to all other remedies available to
it, be entitled to equitable relief by way of injunction and any other
legal or equitable remedies. This provision shall not be construed as a
waiver of the rights which CinemaStar may have for damages under this
Agreement or otherwise, and all of CinemaStar's rights and remedies shall
be unrestricted.
13. MISCELLANEOUS:
a. Any notice provided for in this Agreement must be in writing and must
be either (i) personally delivered, (ii) mailed by registered or
certified first class mail, prepaid with return receipt requested,
(iii) sent by a recognized overnight courier service or (iv) sent by
facsimile with a machine generated confirmation, to the recipient at
the address indicated below:
IF TO EMPLOYEE:
The address first written above.
Telephone: 760/630-2011
Facsimile: 760/630-8593
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IF TO CINEMASTAR:
CinemaStar Luxury Theaters, Inc.
431 College boulevard
Oceanside, CA 92057
Attention: Board of Directors
Telephone: 760/630-2011
Facsimile: 760/630-8593
with a copy to:
Katten Muchin & Zavis
525 West Monroe
Suite 1600
Chicago, Illinois 60661-3693
Attention: Julie A. Kunetka
Telephone: 312/902-5200
Facsimile: 312/902-1061
or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the
sending party. Any notice under this Agreement will be deemed to have
been given (a) on the date such notice is personally delivered, (b)
three (3) days after the date of mailing if sent by certified or
registered mail, (c) one (1) day after the date such notice is
delivered to the overnight courier service if sent by overnight
courier, or (d) the next business day following transmission by
facsimile.
b. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or enforcement in
any other jurisdiction, but this Agreement will be reformed, construed
and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
c. This Agreement, those documents expressly referred to herein and other
documents of even date herewith embody the complete agreement and
understanding among the parties and supersede and preempt any prior
understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way.
d. This Agreement may be executed on separate counterparts, each of which
is deemed to be an original and all of which taken together constitute
one and the same agreement and shall become effective when one or more
counterparts have
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been executed by each of the parties hereto and delivered to the
other.
e. This Agreement is intended to bind and inure to the benefit of and be
enforceable by Employee and CinemaStar and their respective successors
and permitted assigns. Employee may not assign any of his rights or
obligations hereunder without the written consent of CinemaStar.
f. The language used in this Agreement will be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no
rule of strict construction will be applied against any party hereto.
g. Any provision of this Agreement may be amended or waived only with the
prior written consent of the parties hereto. The waiver by CinemaStar
of any breach of this Agreement by Employee shall not operate or be
construed as a waiver of any subsequent breach by Employee.
h. This Agreement shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation
and performance of this Agreement shall be governed by, the laws of
the State of California, without giving effect to provisions thereof
regarding conflict of laws.
i. The headings and other captions in this Agreement are included solely
for convenience of reference and shall not control the meaning and the
interpretation of any provision of this Agreement.
j. Each of the parties to this Agreement shall execute and deliver any
and all additional papers, documents, and other assurances, and shall
do any and all acts and things reasonably necessary in connection with
the performance of their obligations hereunder and to carry out the
intent of the parties to this Agreement.
k. If CinemaStar or Employee should terminate the Employment Period
pursuant to Paragraph 5 above for any reason, then, notwithstanding
such termination, those provisions contained in Paragraphs 3.3, 5, 6,
8, 9, 10, 11, 12, 13, 14 and 15 hereof shall remain in full force and
effect.
14. ALTERNATIVE DISPUTE RESOLUTION:
a. Except for CinemaStar's right to seek immediate injunctive and
equitable relief in accordance with the provisions of Paragraphs 8, 9,
11 and 12 of this Agreement, the parties agree that all disputes,
claims and other matters in controversy arising out of or relating to
this Agreement, or the performance or breach thereof, shall be
submitted to binding arbitration in accordance with the provisions and
procedures of this Paragraph 14. This arbitration requirement shall
include, without limitation, the agreement by Employee to submit to
arbitration any and all claims arising out of any alleged
discrimination or harassment, including, but not limited to, those
covered by the California Fair Employment and Housing Act, the
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1961 Civil Rights Act, 42 U.S.C. Section 2000e ("Title VII"), the Age
Discrimination in Employment Act, and the Americans With Disabilities
Act.
b. The arbitration provided for in this paragraph shall take place in Los
Angeles County, California, in accordance with the provisions of Title
9, Sections 1280 ETSEQ. of the California Code of Civil Procedure,
except as provided to the contrary hereunder. The arbitration shall
be held before and decided by a single neutral arbitrator. The single
neutral arbitrator shall be selected in accordance with the Labor
Arbitration Rules of the American Arbitration Association, as amended
and effective on January 1, 1996, or by a process mutually agreed upon
by the parties. If no agreement can be reached as to the process for
selecting the arbitrator or if the agreed method fails, the arbitrator
shall be appointed in accordance with the provisions of California
Code of Civil Procedure Section 1281.6.
c. The parties shall mutually agree upon the date and location of the
arbitration, subject to the availability of the arbitrator. If no
agreement can be reached as to the date and location of the
arbitration, the arbitrator shall appoint a time and place in
accordance with the provisions of California Code of Civil Procedure
Section 1282.2(a)(1), except that the arbitrator shall give not less
than 30 days notice of the hearing unless the parties mutually agree
to shorten time for notice.
d. The parties shall be entitled to undertake discovery in the
arbitration in accordance with the provisions of subsections (a)
through (d) of California Code of Civil Procedure Section 1283.05. In
conjunction with these procedures, the parties shall be entitled to
request and obtain production of documents in discovery in the
arbitration in accordance with the same rights, remedies and
procedures, and shall be subject to all of the same duties,
liabilities and obligations as if the subject matter of the
arbitration were pending in a civil action before a Superior Court of
the State of California. The parties hereby agree that any discovery
taken hereunder shall be permitted without first securing leave of the
arbitrator and shall be kept to a reasonable minimum.
e. The decision of the arbitrator may be confirmed pursuant to the
provisions of California Code of Civil Procedure Section 1285, and
shall not be appealable for any reason, it being understood that a
petition to vacate an award for any of the reasons set forth in
California Code of Civil Procedure Section 1286.2 shall not be
permitted.
15. CINEMASTAR CONSULTING SERVICES:
The parties acknowledge that on occasion certain entities affiliated with
CinemaStar may engage CinemaStar as a consultant with respect to certain
activities similar to CinemaStar's business, and Employee's services may be
required in connection therewith. CinemaStar hereby agrees with Employee
that any services requested of Employee by the Chief Executive Officer or
the Board in connection with such consulting services shall not be deemed a
breach under any of the provisions of this Agreement.
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Please indicate your agreement to be bound by the terms of this
Agreement by executing where indicated below.
Very truly yours,
CINEMASTAR LUXURY THEATERS, INC.,
a California corporation
By: /s/ Jack R. Crosby
-------------------------------------
Jack R. Crosby,
Chairman and Chief Executive Officer
ACKNOWLEDGED AND AGREED TO AS OF
THIS 29th DAY OF APRIL, 1998:
/s/ Frank Moreno
- -----------------------------------
FRANK MORENO
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CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
Norman Dowling
CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
Dear Mr. Dowling:
This Employment Agreement ("Agreement") is made and entered into as of the
18th day of June, 1998 (the "Commencement Date"), by and between you
("Employee") and CinemaStar Luxury Theaters, Inc., a California corporation, as
employer (hereinafter referred to as "CinemaStar"). We have agreed as follows:
1. EMPLOYMENT AND SERVICES:
CinemaStar shall employ Employee and Employee agrees to be employed and
perform his exclusive services for CinemaStar or one of its subsidiaries or
related companies upon the terms and conditions hereinafter set forth.
Employee will serve hereunder as Vice President and Chief Financial Officer
of CinemaStar. In his capacity as Vice President and Chief Financial
Officer of CinemaStar, Employee shall do and perform all services, acts or
things necessary, advisable or customary to manage and conduct the business
of CinemaStar, and also will perform such services as requested, from time
to time, by the Board of Directors of CinemaStar (the "Board") or the Chief
Operating Officer of CinemaStar (the "Chief Operating Officer").
Employee shall devote his best efforts, energies and abilities and his full
business time, skill and attention (except for permitted vacation periods
and reasonable periods of illness or other incapacity) to the business and
affairs of CinemaStar. Employee shall perform the duties and carry out the
responsibilities assigned to him by the Board and the Chief Operating
Officer to the best of his ability, in a diligent, trustworthy,
businesslike and efficient manner for the purpose of advancing the business
of CinemaStar. Employee agrees not to perform services of any kind or
nature which would interfere with the performance of Employee's services
hereunder for any third party, or render services for Employee's own
account, in either case which would interfere with the performance of
Employee's services hereunder, and in each case, unless specifically
permitted to do so in writing by the Board or the Chief Operating Officer.
2. TERM:
The term of this Agreement shall commence on the date hereof and continue
for one (1) year from the date hereof (the "Employment Period").
Notwithstanding anything to the
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contrary contained herein, the Employment Period is subject to
termination pursuant to Paragraph 5 below.
EMPLOYEE AGREES AND ACKNOWLEDGES THAT CINEMASTAR HAS NO OBLIGATION TO RENEW
THIS AGREEMENT OR TO CONTINUE EMPLOYEE'S EMPLOYMENT AFTER EXPIRATION OF THE
TERM HEREUNDER, and Employee expressly acknowledges that no promises or
understandings to the contrary have been made or reached.
3. COMPENSATION:
3.1 BASE COMPENSATION:
For all services rendered under this Agreement, CinemaStar shall pay
Employee a base salary at an annual rate of One Hundred Five Thousand
Dollars ($105,000) during the Employment Period or at such higher rate as
may be determined by the Board in its sole discretion (the "Base Salary").
The Base Salary shall be payable in accordance with CinemaStar's policy for
regular salaried employees. CinemaStar is not obligated to actually
utilize Employee's services hereunder, and payment of the Base Salary will
discharge all of CinemaStar's obligations hereunder.
3.2 BONUS COMPENSATION:
Employee shall be eligible to receive bonus compensation, to be determined
by the Board at its sole discretion.
3.3 WITHHOLDING:
All compensation payable to Employee hereunder is stated in gross amount
and shall be subject to all applicable withholding taxes, other normal
payroll deductions and any other amounts required by law to be withheld.
3.4 OPTIONS:
Employee has been granted options to acquire one hundred thousand (100,000)
shares of CinemaStar's common stock at an exercise price equal to the fair
market value of the shares as of December 16, 1997, the date of grant,
which options shall vest over a 3-year-period (one-third on each of the
first three anniversaries of the date hereof) and shall be subject to the
other terms and conditions of the Stock Option Plan of CinemaStar dated as
of December 16, 1997.
4. VACATION:
Employee shall be entitled to up to three (3) weeks paid vacation each
fiscal year with salary, consistent with CinemaStar's policy for all
employees of similar stature and provided that unused vacation time shall
not be carried over to subsequent years.
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5. TERMINATION:
Subject to Paragraph 5.2 below, the Employment Period may be terminated by
CinemaStar at any time, with or without cause. No amounts shall be paid or
benefits provided upon any termination of the Employment Period, whether as
liquidated damages, or otherwise, except as specifically provided in
Section 5.2 below or under any benefit plan or agreement in which Employee
participates or to which Employee is a party. Employee shall not be
entitled to participate in any severance plan of CinemaStar, except as
required by law.
5.1 TERMINATION FOR CAUSE:
CinemaStar may terminate the Employment Period for "cause" (as defined in
this Paragraph 5.1) at any time upon written notice to Employee. In the
event of a termination for cause, CinemaStar shall have no further
obligations to Employee under this Agreement, except payment of the Base
Salary and vacation pay accrued through the date of termination, and
CinemaStar shall continue to have all other rights available hereunder at
law or in equity. As used herein, the term "cause" shall mean any one or
combination of the following:
a. The willful failure of Employee to perform his duties or comply with
reasonable directions of the Board that continues after the Board has
given written notice to Employee specifying in reasonable detail the
manner in which Employee has failed to perform such duties or comply
with such directions;
b. A material breach by Employee of any of the terms and conditions of
this Agreement;
c. Employee's gross negligence in the performance of his duties
hereunder;
d. Employee's conviction of any crime (whether or not involving
CinemaStar) which constitutes a crime of moral turpitude or is
punishable by imprisonment of thirty (30) days or more, PROVIDED,
HOWEVER, nothing in this Agreement shall obligate CinemaStar to pay
the Base Salary during any period that Employee is unable to perform
his duties hereunder due to any incarceration;
e. Employee's violation of any rule or regulation of Cinemastar
applicable to other employees of similar stature;
f. Employee's omission or act constituting fraud, dishonesty or
misrepresentation, occurring subsequent to the date hereof;
g. Subject to any applicable federal and state laws, Employee's failure,
inability (including any disability which prevents Employee from
performing the essential functions of his position with reasonable
accommodation), or refusal to perform Employee's duties on an
exclusive and full time basis, but in no case shall such
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right be exercised until six (6) months from the date of the
commencement of any physical or mental disability. Employee shall be
deemed to be disabled, for purposes of this Agreement, if he is unable
to perform, by reason of physical or mental incapacity, his essential
duties or obligations under this Agreement, for a total period of
Twelve (12) weeks in Three Hundred Sixty (360) days; or
h. Employee's death.
5.2 TERMINATION WITHOUT CAUSE:
If the Employment Period is terminated by CinemaStar without cause (as
"cause" is defined in Paragraph 5.1 above), CinemaStar shall pay to
Employee the Base Salary for the balance of the Employment Period.
CinemaStar acknowledges and agrees that Employee's employment with
CinemaStar shall be deemed to have been terminated by CinemaStar without
cause in the event that substantially all of the assets of CinemaStar are
sold, or if there is a change in the control of CinemaStar, AND the
Employee's duties and responsibilities hereunder are materially altered at
any time during the 6-month period following such sale or change in
control. For purposes of this Agreement, "change in control" shall mean
any event whereby any party (or group of affiliated parties), other than
CinemaStar Acquisition, L.L.C. or any of its affiliates, shall have votes
sufficient to elect more than fifty percent (50%) of the Board.
5.3 TERMINATION BY EMPLOYEE:
Employee has the right to terminate the Agreement for any reason, upon
sixty (60) days prior written notice to CinemaStar.
6. BENEFITS:
During the Employment Period, and so long as Employee is not in breach of
this Agreement:
a. CinemaStar shall reimburse Employee for his reasonable and necessary
out-of-pocket business expenses in accordance with its then prevailing
policy for employees of similar stature (which shall include
appropriate itemization and substantiation of expenses incurred);
b. Employee and his dependents shall be entitled to participate in
CinemaStar's basic medical and other benefit plans generally available
to employees of CinemaStar in accordance with the terms of such plans,
excluding severance benefits; and
c. Employee shall be entitled to receive a monthly car allowance of Four
Hundred Fifty Dollars ($450) during the Employment Period, or shall be
provided with an automobile of comparable quality to that currently
provided to Employee by
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CinemaStar.
Employee further expressly agrees and acknowledges that after termination
of the Employment Period (by CinemaStar with or without cause or by
Employee) Employee shall be entitled to no benefits, except as specifically
provided under the benefit plans referred to herein, subject in all cases
to the terms and conditions of each such plan, and except as required by
law.
7. CONFORMITY WITH THE IMMIGRATION REFORM AND CONTROL ACT OF 1986:
As a condition to Employee's employment with CinemaStar, Employee shall
furnish, and will continue to furnish, to CinemaStar all documentation
legally sufficient to establish satisfy the requirements of the Immigration
Reform and Control Act of 1986, with respect to Employee. If Employee
fails to provide the required documentation within the legally-prescribed
time limits, Employee's employment and all contractual obligations
hereunder will terminate immediately.
8. CONFIDENTIALITY AND NONCOMPETITION:
a. Employee shall hold in a fiduciary capacity, for the benefit of
CinemaStar, all confidential or proprietary information, knowledge and
data of CinemaStar which Employee may acquire, learn, obtain or
develop during his employment by CinemaStar. Further, Employee shall
not, during the Employment Period or after the termination of such
Employment Period, directly or indirectly use, communicate or divulge
for his own benefit or for the benefit of another any such
information, knowledge or data. Employee makes the same commitment
with respect to the secret, confidential or proprietary information,
knowledge and data of affiliates, customers, contractors and others
with whom CinemaStar has a business relationship. The information
covered by this protection includes, but is not limited to matters of
a business nature such as trade secrets, information about finances,
costs and profits, business plans, marketing and advertising plans and
strategies, sales results or projections, plans of CinemaStar to
expand its business, personnel information, records, customer lists,
contact persons, customer data, software, sales data, information
regarding any form of product produced, distributed or acquired by
CinemaStar, and/or other confidential or proprietary information
belonging to CinemaStar relating to CinemaStar's business and
enterprise (collectively, the "Confidential Information").
Employee agrees to hold and safeguard the Confidential Information in
trust for CinemaStar, and agrees that he will not, without the prior
written consent of CinemaStar, misappropriate or disclose or make
available to anyone for use outside of CinemaStar, at any time, any of
the Confidential Information. Notwithstanding the foregoing, Employee
may disclose Confidential Information if such information becomes
publicly known without fault of Employee, or where Employee is
obligated to disclose such information by operation of law; provided,
however, that if Employee receives a subpoena or other legal process,
or
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otherwise receives a legally-binding request (whether voluntary or
involuntary) from a third party, the response to which reasonably
could result in the disclosure of Confidential Information, he shall
provide notice thereof to CinemaStar within three (3) business days of
such subpoena, legal process or request. Employee's obligations under
this Paragraph 8 with respect to the Confidential Information will
survive expiration or termination of the Employment Period.
b. Employee shall not at any time during the Employment Period be or
become (i) interested or engaged in any manner, directly or
indirectly, either alone or with any person, firm or corporation now
existing or hereafter created, in any business which is or may be
competitive with the business of CinemaStar or (ii) directly or
indirectly a stockholder or officer, director or employee of, or in
any manner associated with, or aid or abet or give information or
financial assistance to, any such business. Employee hereby
acknowledges that the provisions of this subparagraph b. are
reasonable and necessary to protect the legitimate interests of
CinemaStar and that any violation of such provisions would result in
irreparable injury to CinemaStar. The provisions of this subparagraph
b. shall not be deemed to prohibit Employee's purchase or ownership,
as a passive investment, of not more than five percent (5%) of the
outstanding capital stock of any corporation whose stock is publicly
traded.
c. All records, files, lists, drawings, documents, models, equipment,
software or intellectual property relating to CinemaStar's business
shall be returned to CinemaStar upon the termination of the Employment
Period, whether such termination is at Employee's or CinemaStar's
request.
9. NO SOLICITATION OF EMPLOYEES AND CONTRACTORS:
Employee shall not during the Employment Period or for one (1) year
thereafter induce or attempt to induce any employees, contractors or
representatives of CinemaStar (or those of any of its affiliates) to stop
working for, contracting with or representing CinemaStar or any of its
affiliates or work for, contract with or represent any of CinemaStar's
competitors.
Employee hereby acknowledges that the provisions of this Paragraph 9 are
reasonable and necessary to protect the legitimate interests of CinemaStar
and that any violation of such provisions would result in irreparable
injury to CinemaStar. In the event of a violation of the provisions of
this Paragraph 9, Employee further agrees that CinemaStar shall, in
addition to all other remedies available to it, be entitled to equitable
relief by way of injunction and any other legal or equitable remedies.
10. RESULTS AND PROCEEDS:
As Employee's employer, CinemaStar shall own all rights in and to the
results and proceeds connected with or arising out of, directly or
indirectly, Employee's services hereunder.
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<PAGE>
11. OWNERSHIP OF INTELLECTUAL PROPERTY:
a. CinemaStar shall own, and Employee hereby transfers and assigns to it,
all rights, of every kind and character throughout the world, in
perpetuity, in and to any material or ideas and all results and
proceeds of Employee's services hereunder, or conceived of or produced
during the term of Employee's employment, whether the same consists of
plans, methods, slogans, product names, ideas or copyrightable or
patentable subject matter.
b. Employee agrees to execute and deliver to CinemaStar such assignments,
certificates of authorship, or other instruments in accordance with
standard industry practice as CinemaStar may require from time to time
to evidence ownership of the results and proceeds of Employee's
services. Employee's agreement to assign to CinemaStar any of
Employee's rights as set forth in this Paragraph 11 does not apply to
any invention which qualifies fully as Employee's invention under the
provisions of Section 2870 of the California Labor Code, where no
equipment, supplies, facility, or trade secret information of
CinemaStar was used and which was developed entirely upon Employee's
own time, and which (i) does not relate to the business of CinemaStar
or to its actual or demonstrably anticipated research or development,
or (ii) which does not result from any work performed by Employee for
CinemaStar.
c. Employee represents and warrants that except as previously disclosed
to CinemaStar in writing, Employee neither owns nor controls any
copyrights or copyrightable product.
d. Employee agrees that CinemaStar shall have the right, but not the
obligation, to use Employee's name, voice and likeness in connection
with any use or exploitation of the results and proceeds of Employee's
services hereunder, and in connection with advertising, publicity,
exhibition, distribution and/or other exploitation of any of the
foregoing. Employee agrees that CinemaStar shall have the sole and
exclusive right to issue publicity concerning Employee with respect to
Employee's employment hereunder and the results and proceeds of
Employee's services hereunder, except neither Employee nor CinemaStar
shall issue any press release or other public announcement with
respect to the execution or the terms of this Agreement without the
consent of the other.
12. MISCELLANEOUS:
a. Any notice provided for in this Agreement must be in writing and must
be either (i) personally delivered, (ii) mailed by registered or
certified first class mail, prepaid with return receipt requested,
(iii) sent by a recognized overnight courier service or (iv) sent by
facsimile with a machine generated confirmation, to the recipient at
the address indicated below:
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IF TO EMPLOYEE:
The address first written above.
Telephone: 760/630-2011
Facsimile: 760/630-8593
IF TO CINEMASTAR:
CinemaStar Luxury Theaters, Inc.
431 College boulevard
Oceanside, CA 92057
Attention: Board of Directors
Telephone: 760/630-2011
Facsimile: 760/630-8593
with a copy to:
Katten Muchin & Zavis
525 West Monroe
Suite 1600
Chicago, Illinois 60661-3693
Attention: Julie A. Kunetka
Telephone: 312/902-5200
Facsimile: 312/902-1061
or such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the
sending party. Any notice under this Agreement will be deemed to have
been given (a) on the date such notice is personally delivered, (b)
three (3) days after the date of mailing if sent by certified or
registered mail, (c) one (1) day after the date such notice is
delivered to the overnight courier service if sent by overnight
courier, or (d) the next business day following transmission by
facsimile.
b. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or enforcement in
any other jurisdiction, but this Agreement will be reformed, construed
and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
c. This Agreement, those documents expressly referred to herein and other
documents of even date herewith embody the complete agreement and
understanding among the parties and supersede and preempt any prior
8
<PAGE>
understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way.
d. This Agreement may be executed on separate counterparts, each of which
is deemed to be an original and all of which taken together constitute
one and the same agreement and shall become effective when one or more
counterparts have been executed by each of the parties hereto and
delivered to the other.
e. This Agreement is intended to bind and inure to the benefit of and be
enforceable by Employee and CinemaStar and their respective successors
and permitted assigns. Employee may not assign any of his rights or
obligations hereunder without the written consent of CinemaStar.
f. The language used in this Agreement will be deemed to be the language
chosen by the parties hereto to express their mutual intent, and no
rule of strict construction will be applied against any party hereto.
g. Any provision of this Agreement may be amended or waived only with the
prior written consent of the parties hereto. The waiver by CinemaStar
of any breach of this Agreement by Employee shall not operate or be
construed as a waiver of any subsequent breach by Employee.
h. This Agreement shall be construed and enforced in accordance with, and
all questions concerning the construction, validity, interpretation
and performance of this Agreement shall be governed by, the laws of
the State of California, without giving effect to provisions thereof
regarding conflict of laws.
i. The headings and other captions in this Agreement are included solely
for convenience of reference and shall not control the meaning and the
interpretation of any provision of this Agreement.
j. Each of the parties to this Agreement shall execute and deliver any
and all additional papers, documents, and other assurances, and shall
do any and all acts and things reasonably necessary in connection with
the performance of their obligations hereunder and to carry out the
intent of the parties to this Agreement.
k. If CinemaStar or Employee should terminate the Employment Period
pursuant to Paragraph 5 above for any reason, then, notwithstanding
such termination, those provisions contained in Paragraphs 3.3, 5, 6,
8, 9, 10, 11, 12, 13, and 14 hereof shall remain in full force and
effect.
13. ALTERNATIVE DISPUTE RESOLUTION:
a. Except for CinemaStar's right to seek immediate injunctive and
equitable relief in accordance with the provisions of Paragraphs 8, 9,
and 11 of this Agreement, the parties agree that all disputes, claims
and other matters in controversy arising out
9
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of or relating to this Agreement, or the performance or breach
thereof, shall be submitted to binding arbitration in accordance with
the provisions and procedures of this Paragraph 13. This arbitration
requirement shall include, without limitation, the agreement by
Employee to submit to arbitration any and all claims arising out of
any alleged discrimination or harassment, including, but not limited
to, those covered by the California Fair Employment and Housing Act,
the 1961 Civil Rights Act, 42 U.S.C. Section 2000e ("Title VII"), the
Age Discrimination in Employment Act, and the Americans With
Disabilities Act.
b. The arbitration provided for in this paragraph shall take place in Los
Angeles County, California, in accordance with the provisions of Title
9, Sections 1280 ETSEQ. of the California Code of Civil Procedure,
except as provided to the contrary hereunder. The arbitration shall
be held before and decided by a single neutral arbitrator. The single
neutral arbitrator shall be selected in accordance with the Labor
Arbitration Rules of the American Arbitration Association, as amended
and effective on January 1, 1996, or by a process mutually agreed upon
by the parties. If no agreement can be reached as to the process for
selecting the arbitrator or if the agreed method fails, the arbitrator
shall be appointed in accordance with the provisions of California
Code of Civil Procedure Section 1281.6.
c. The parties shall mutually agree upon the date and location of the
arbitration, subject to the availability of the arbitrator. If no
agreement can be reached as to the date and location of the
arbitration, the arbitrator shall appoint a time and place in
accordance with the provisions of California Code of Civil Procedure
Section 1282.2(a)(1), except that the arbitrator shall give not less
than 30 days notice of the hearing unless the parties mutually agree
to shorten time for notice.
d. The parties shall be entitled to undertake discovery in the
arbitration in accordance with the provisions of subsections (a)
through (d) of California Code of Civil Procedure Section 1283.05. In
conjunction with these procedures, the parties shall be entitled to
request and obtain production of documents in discovery in the
arbitration in accordance with the same rights, remedies and
procedures, and shall be subject to all of the same duties,
liabilities and obligations as if the subject matter of the
arbitration were pending in a civil action before a Superior Court of
the State of California. The parties hereby agree that any discovery
taken hereunder shall be permitted without first securing leave of the
arbitrator and shall be kept to a reasonable minimum.
e. The decision of the arbitrator may be confirmed pursuant to the
provisions of California Code of Civil Procedure Section 1285, and
shall not be appealable for any reason, it being understood that a
petition to vacate an award for any of the reasons set forth in
California Code of Civil Procedure Section 1286.2 shall not be
permitted.
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14. CINEMASTAR CONSULTING SERVICES:
The parties acknowledge that on occasion certain entities affiliated with
CinemaStar may engage CinemaStar as a consultant with respect to certain
activities similar to CinemaStar's business, and Employee's services may be
required in connection therewith. CinemaStar hereby agrees with Employee
that any services requested of Employee by the Board in connection with
such consulting services shall not be deemed a breach under any of the
provisions of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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Please indicate your agreement to be bound by the terms of this Agreement
by executing where indicated below.
Very truly yours,
CINEMASTAR LUXURY THEATERS, INC.,
a California corporation
By: /s/ Jack R. Crosby
------------------------------------
Jack R. Crosby,
Chairman and Chief Executive Officer
ACKNOWLEDGED AND AGREED TO AS OF
THIS 23rd DAY OF JUNE, 1998:
/s/ Norman Dowling
- ----------------------------
NORMAN DOWLING
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OCEAN VIEW PLAZA
A Shopping Center by
LANDGRANT
WITH
CINEMA STAR LUXURY THEATERS, INC.,
a California corporation
dba CINEMA STAR THEATERS
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C>
1 Fundamental Lease Provisions. . . . . . . . . . . . . . . . . . . . . . . .
2 Premises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 Term of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 Rental. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 Definition of "Net Sales" . . . . . . . . . . . . . . . . . . . . . . . . .
6 Possession and Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 Taxes, Insurance and Title of Premises. . . . . . . . . . . . . . . . . . .
8 Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 Mechanics' Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 Tenant's Right to Make Improvements, Property, and Fixtures . . . . . . . .
11 Repairs, Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 Indemnity and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . .
13 Occupancy Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .
14 Defaults by Tenant; Remedies. . . . . . . . . . . . . . . . . . . . . . . .
15 Defaults by Landlord; Remedies. . . . . . . . . . . . . . . . . . . . . . .
16 Abandonment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17 Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18 Reconstruction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20 Sale or Mortgage by Landlord. . . . . . . . . . . . . . . . . . . . . . . .
21 Subordination; Attornment . . . . . . . . . . . . . . . . . . . . . . . . .
22 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Holding Over. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . .
25 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26 General Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27 Conditions to Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXHIBITS
Site Plan of the Shopping Center . . . . . . . . . . . . . . . . . . . . . . . . A
Description of the Premises. . . . . . . . . . . . . . . . . . . . . . . . . . . B
Construction of Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . C
Tenant's Estoppel Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . D
Subordination Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . E
Confirmation of Term of Lease. . . . . . . . . . . . . . . . . . . . . . . . . . F
</TABLE>
<PAGE>
LEASE AGREEMENT
This Lease Agreement ("Lease"), effective as of April 15, 1998
("Effective Date"), is executed by and between the Landlord and Tenant
identified below.
IN CONSIDERATION OF THE RENTS AND COVENANTS hereinafter set forth, the
Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the
Premises upon the following terms and conditions:
ARTICLE 1
FUNDAMENTAL LEASE PROVISIONS
1.1 PARTIES
LANDLORD: The Landlord of the Premises is LANDGRANT CORPORATION, a
California corporation. All required notices and other communications shall be
sent to: LandGrant Corporation, 12625 High Bluff Drive, Suite 212, San Diego,
California 92130. Telephone Number (619) 481-0094.
TENANT: The Tenant of the Premises is Cinema Star Luxury Theaters, Inc., a
California corporation.
Tenant shall open for business under the trade name "Cinema Star Theaters," and
shall thereafter have the right to use any trade name under which Tenant is
doing business from time to time.
All required notices and other communications shall be sent to: Cinema Star
Luxury Theaters, Inc., Attn: Jim Villanueva, 431 College Boulevard, Oceanside,
California 92057.
Telephone Number: (760) 630-2011
1.2 PREMISES
The Premises made subject to this Lease shall be the tenant building of
approximately 50,000 square feet (but not less than 45,000 square feet) to be
constructed as a part of Landlord's Work in accordance with Exhibit C hereto
("Building" or "Building Improvements") and the parcel on which the Building
will be located as said parcel shall be agreed between Landlord as described in
Section 2.1 hereof ("Tenant Parcel"). The Premises are located on the northwest
corner of Mission Avenue and Canyon Drive in Ocean View Plaza, Oceanside,
California ("Shopping Center").
1.3 TERM
LEASE TERM: Twenty-five (25) Years
COMMENCEMENT DATE: See Section 3.1
RENT START DATE: See Section 4.1
OTHER: Five (5) five (5) year Options to Extend [see Addendum]
1.4 RENT
MINIMUM ANNUAL RENTAL: The Minimum Annual Rental is Nine Hundred Thousand
Dollars ($900,000.00), which is computed as $18.00 per square foot of Floor Area
of the Building Improvements. Minimum Annual Rental is payable as stated in
Section 4.1.
COST OF LIVING ADJUSTMENTS: Adjusted periodically during the Lease Term
on the anniversary of the Commencement Date as follows:
<TABLE>
<S> <C> <C>
Years 2 thru 5 $1,000,000.00 ($20.00 per square foot of Building)
Years 6 thru 10 $1,100,000.00 ($22.00 per square foot of Building)
Years 11 thru 15 $1,210,000.00 ($24.20 per square foot of Building)
Years 16 thru 20 $1,331,000.00 ($26.62 per square foot of Building)
Years 21 thru 25 $1,464,100.00 ($29.28 per square foot of Building)
</TABLE>
Notwithstanding anything to the contrary contained in this Lease,
Tenant's obligation to pay Minimum Annual Rental hereunder shall be abated for
one (1) full month following the Rent Start Date. It is expressly understood
that Tenant shall pay all other charges under this Lease during said one (1)
month period, and that Tenant shall be obligated to commence payment of Minimum
Annual Rental in full beginning on the first day following such one (1) month
period.
Page 1
<PAGE>
PERCENTAGE RENTAL: Tenant shall pay as Percentage Rental nine percent (9%)
of its "Net Sales" above Twelve Million Dollars ($12,000,000.00) per year, all
as more specifically described in Section 4.3 hereof.
ADDITIONAL RENTAL: Any and all sums of money or charges required to be
paid by Tenant pursuant to the provisions of this Lease shall be paid as
"Additional Rent".
1.5 SECURITY DEPOSIT AND FIRST MONTH'S MINIMUM ANNUAL RENTAL
Tenant shall pay a Security Deposit of Seventy Five Thousand Dollars
($75,000.00) upon execution of the Lease, Said amount shall be held in an
interest bearing account, and shall, absent default by Tenant, be applied
against the payment of Minimum Annual Rental due on the thirty-seventh (37th)
month following the Rent Start Date, all as more particularly described in
Section 4.7 hereof.
1.6 USE OF PREMISES
Tenant shall initially open for business as a Cinema Star Theater
exhibiting commercial motion pictures and selling items typically found in
Cinema Star Theaters in California, and shall thereafter use the Premises for
any legal commercial use not in violation of zoning or other governmental laws,
rules and regulations, or the CC&R's (as defined in Section 7.1 hereof), and not
be in violation of any then-existing agreements between Landlord and any other
tenants or owners in the Shopping Center ("Permitted Use"). Tenant shall have
the non-exclusive right to use the Tenant Parcel for parking for customers of
Tenant's business in the Building. Tenant shall use the Premises for no other
use or purpose. Tenant shall also have the non-exclusive right to use the
remainder of the Shopping Center for parking by its customers and employees, and
other tenants/owners of the Shopping Center shall have a non-exclusive right to
use the Tenant Parcel all as more particularly described in the Declaration
defined in Section 7.1 hereof.
1.7 EXHIBITS TO LEASE. The following drawings and special provisions are
attached hereto as exhibits and made a part of this Lease:
EXHIBIT A - General site plan of the Shopping Center which Landlord and
others intend to construct or cause to be constructed on real property located
in the City of Oceanside, County of San Diego and State of California. Said
site plan shows, among other things, the principal improvements of which the
Shopping Center will be composed, subject to the provisions of Section 8.7
hereof.
EXHIBIT B - Description of the Premises.
EXHIBIT C - Construction of Improvements.
EXHIBIT D - Tenant's Estoppel Certificate
EXHIBIT E - Subordination Agreement
EXHIBIT F - Confirmation of Term of Lease
1.8 CONSTRUCTION OF LEASE PROVISIONS. The foregoing provisions of this Article
1 summarize for convenience only certain key terms of the Lease delineated more
fully in the Articles and Sections referenced therein. In the event of a
conflict between the provisions of this Article 1 and the balance of the Lease,
the latter shall control.
ARTICLE 2
PREMISES
2.1 DEMISE AND DESCRIPTION. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord, at the rental and upon the covenants and conditions
hereinafter set forth, the commercial space referred to herein as the "Premises"
in Article 1 hereto. Landlord and Tenant shall agree on the size and
configuration of the Tenant Parcel which shall be approximately 315,000 square
feet, and Landlord shall have the agreed-upon Tenant Parcel segregated as a
separate tax lot as more particularly provided in Section 7.2 hereof. The
Building shall be constructed in accordance with Exhibit C, and shall be subject
to measurement upon completion as provided in Section 4.1 hereof.
2.2 FLOOR AREA. The term "Floor Area" as used throughout this Lease shall mean
and include the square footage of all areas for exclusive use and occupancy by
any tenant of Landlord or other Owner in the Shopping Center, measured from the
exterior surface of building walls and extensions thereof, in the case of the
perimeter of the Premises, and from the center line of demising partitions
between the Premises and those adjacent tenants. In addition, if Tenant is
operating a restaurant or other food service facility and utilizing outdoor
seating areas, "Floor Area" shall include the square footage of such outdoor
seating area. The Floor Area shall include, without limitation, restrooms,
mezzanines, warehousing or storage areas, clerical or office areas and any
employee areas.
Page 2
<PAGE>
ARTICLE 3
TERM OF LEASE
3.1 DEFINITIONS. This Lease shall be effective as of the "Effective Date"
which is defined as the earlier of the date Landlord and Tenant execute the
Lease or the date Tenant enters onto the Premises with Landlord's consent. The
term of this Lease ("Lease Term") shall commence on the "Commencement Date"
defined herein and shall continue thereafter
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for the period specified in Article 1, unless sooner terminated as hereinafter
provided in this Lease. The "Commencement Date" means the first day of the
month following the earlier of (a) ninety (90) days after Landlord delivers to
Tenant the Notice of Substantial Completion described in Section 3.2 or (b) the
date Tenant opens for business, unless otherwise stipulated in Exhibit F.
Notwithstanding the foregoing, the ninety (90) day period referenced in clause
(a) hereof shall be extended one day for each day after Landlord's delivery to
Tenant of the Notice of Substantial Completion that the completion of Tenant's
Work is delayed as a result of a breach by Landlord of its obligations
hereunder, or an event described in Section 26.5 hereof, provided, however, that
the Commencement Date shall not be extended as aforesaid until Landlord has
received written notice from Tenant describing the delay. Except as otherwise
specifically stated in this Lease or in any subsequent amendments hereto, the
terms and conditions of this Lease shall remain in effect during any extension,
renewal or holdover of the original Lease Term.
3.2 DELIVERY AND ACCEPTANCE OF THE PREMISES. Landlord agrees to deliver to
Tenant, and Tenant agrees to accept from Landlord, possession of the Premises
forthwith upon delivery by Landlord to Tenant of the Notice of Substantial
Completion defined in paragraph 1g of Exhibit C. Notification by Landlord's
architect ("Project Architect") of the substantial completion of the Premises in
accordance with said Exhibit C shall be conclusive and binding upon the parties
hereto. Tenant shall commence the construction of Tenant's Work as described in
Exhibit C promptly upon substantial completion of the Premises and shall
diligently prosecute such construction to completion and shall open the Premises
for business concurrently with the date specified for commencement of Minimum
Annual Rental.
Landlord intends to commence construction of Landlord's Work in accordance
with the Construction Schedule attached hereto as Schedule 2 to Exhibit C
("Construction Schedule") and covenants and agrees to diligently and in good
faith pursue the completion of Landlord's Work on or before the date reflected
on said schedule. "Commence construction" for purposes hereof shall mean that
Landlord has begun grading of the Premises, and is reflect on the Construction
Schedule as "Mobilize and Start Construction." In the event Landlord has not
commenced construction on or before July 1, 1999, Tenant shall have the right,
but not the obligation, upon written notice to Landlord, to begin and complete
construction of Landlord's Work, and in such event Landlord shall reimburse
Tenant for the reasonable Construction Cost (as defined in Exhibit C) incurred
by Tenant for such work in an amount not to exceed Landlord's Construction
Contribution defined in Exhibit C hereto, with interest thereon from the date
Tenant has commenced construction until the date of payment. Tenant's right to
begin construction as provided hereinabove shall be delayed one day for every
day Landlord is delayed from commencing construction as a result of an
occurrence described in Section 26.5 hereof, or that Landlord is delayed in such
commencement by Tenant's acts or failures to act.
Landlord intends to deliver the Notice of Substantial Completion in
accordance with the Construction Schedule. However, in the event Landlord has
not delivered the Notice of Substantial Completion to Tenant on or before
November 15, 1999, Tenant shall have the right, but not the obligation, to take
over and complete construction of Landlord's Work, and in such event Landlord
shall reimburse Tenant for the reasonable Construction Cost incurred by Tenant
for such work in an amount not to exceed the difference between (i) the Landlord
Construction Contribution with interest thereon from the date Tenant commences
completion of Landlord's Work until the date of payment, at the interest rate
specified in Section 14.7 hereof, and (ii) the amount of Construction Costs
incurred by Landlord prior to the date Tenant commenced construction pursuant
hereto. Tenant's right to begin construction as provided hereinabove shall be
delayed one day for every day Landlord is delayed from commencing construction
as a result of an occurrence described in Section 26.5 hereof, or that Landlord
is delayed in such commencement by Tenant's acts or failures to act..
3.3 CONFIRMATION OF FLOOR AREA AND OF TERM OF LEASE AND CERTIFICATE OF
OCCUPANCY. Tenant will execute and deliver to Landlord within ten (10) days
after Tenant opens for business a certificate substantially in the form of
Exhibit F (the "Confirmation of Term of Lease"), indicating thereon any
exceptions thereto which may exist at that time. Failure of Tenant to execute
and deliver the Confirmation of Term of Lease shall constitute an acceptance of
the Premises and an acknowledgment by Tenant that the statements included in
Exhibit F are true and correct, without exception. Within the earlier of ten
(10) days after completion of construction of Tenant's Work, as described in
Exhibit C, or ten (10) days after Tenant's opening for business, Tenant shall
deliver to Landlord the Certificate of Occupancy for the Premises issued by the
appropriate governmental agency.
3.4 OPTION TO EXTEND TERM. Landlord hereby grants to Tenant the option to
extend the term of the Lease for five (5) additional periods of five (5) years
each ("Option Terms"), subject to the following conditions:
(a) METHOD OF EXERCISE OF OPTION. Tenant shall exercise each option by
delivering to Landlord written notice of its intent to exercise the applicable
option not earlier than six (6) months, and not later than four (4) months,
prior to commencement of the applicable Option Term. Tenant shall have no right
to exercise its option during any time when Tenant is in default under the
Lease.
(b) COMMENCEMENT OF OPTION TERM. If the option is exercised pursuant to
subparagraph a hereof, the Option Term shall commence upon the expiration of the
preceding term, whether it be the initial term or an Option Term.
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(c) MINIMUM ANNUAL RENTAL. Minimum Annual Rental during each Option Term
shall be as follows:
<TABLE>
<S> <C> <C>
Option Years 26 thru 30 $1,610,500.00 ($32.21 per square foot of Building)
Option Years 31 thru 35 $1,771,500.00 ($35.43 per square foot of Building)
Option Years 36 thru 40 $1,948,500.00 ($38.97 per square foot of Building)
Option Years 41 thru 45 $2,143,500.00 ($42.87 per square foot of Building)
Option Years 46 thru 50 $2,358,000.00 ($47.16 per square foot of Building)
</TABLE>
(d) NO LANDLORD'S WORK. In the event Tenant exercises the option, Tenant
agrees to take the Premises in an "as is" condition with no obligation on the
part of the Landlord to undertake any work with regard to the Premises.
(e) NO ASSIGNMENT. The option granted herein shall be personal to the
original Tenant, may be exercised only by the original Tenant while it is
occupying the Premises, and may not be exercised by or assigned to any party
(including, but not limited to, any sublessee or lender) except to a transferee
otherwise permitted or approved by Landlord pursuant to Article 13 hereof.
(f) FAILURE TO TIMELY EXERCISE. Tenant's failure to timely exercise the
option for any Option Term shall nullify the option for all subsequent Option
Terms.
(g) GENERAL. All terms and conditions of the Lease shall remain in full
force and effect during any Option Term, except that the provisions of this
Section 3.4 shall control over any inconsistent provisions of the Lease.
3.5 SURRENDER OF THE PREMISES. Tenant will surrender possession of the
Premises to Landlord at the expiration of the Lease Term or the earlier
termination of this Lease.
ARTICLE 4
RENTAL
4.1 MINIMUM ANNUAL RENTAL. Tenant agrees to pay as rental for the use and
occupancy of the Premises the Minimum Annual Rental specified in Article 1;
although the Minimum Annual Rental is based on the Floor Area of the Building,
it shall be the total Minimum Annual Rental due for both the Building and
Tenant's Parcel. Minimum Annual Rental shall be calculated by multiplying the
Minimum Annual Rental per square foot listed in Sections 1.4 and 3.4(c) hereof
times the square feet of the Floor Area determined as provided in paragraph 9 of
Exhibit C hereto.
Tenant shall pay Minimum Annual Rental in twelve (12) equal monthly
installments during each year, in advance, on the first day of each calendar
month, without setoff, deduction, prior notice or demand, commencing on a date
("Rent Start Date") which shall be the earlier of (a) ninety (90) days after
Landlord delivers to Tenant the Notice of Substantial Completion described in
Section 3.2 or (b) the date Tenant opens for business, unless a different date
is specified in Article 1 or Exhibit F. Notwithstanding the foregoing, the
ninety (90) day period referenced in clause (a) hereof shall be extended one day
for each day after Landlord's delivery to Tenant of the Notice of Substantial
Completion that the completion of Tenant's Work is delayed as a result of a
breach by Landlord of its obligations hereunder, or an event described in
Section 26.5 hereof, provided, however, that the Rent Start Date shall not be
extended as aforesaid until Landlord has received written notice from Tenant
describing the delay. In the event Landlord and Tenant have not agreed or
settled upon the actual measurement of the Floor Area of the Building as of the
Rent Start Date, then until such time as the actual Floor Area has been
determined, Tenant shall pay Minimum Annual Rental in the amounts set forth in
Section 1.4, and if the Floor Area is determined at such later date to be
greater than the Floor Area specified in Section 1.2, Tenant shall pay the
additional amount due within thirty (30) days following the date of
determination, and if the Floor Area is determined to be less than the Floor
Area specified in Section 1.2, Landlord shall credit the amount of such
overpayment against Tenant's account hereunder. Should the rental period
commence on a day other than the first day of a calendar month, then the rental
for such first fractional month shall be computed on a daily basis for the
period from the date of commencement to the end of such calendar month and at an
amount equal to one three-hundred sixtieth (1/360th) of the said annual rental
for each such day, and thereafter shall be computed and paid as aforesaid.
4.2 [Intentionally Deleted.]
4.3 PERCENTAGE RENTAL. In addition to the Minimum Annual Rental and other
sums hereinabove specified, Tenant shall pay as Percentage Rental the product of
the percentage set forth in Section 1.4 multiplied by the amount by which
Tenant's Net Sales (as the term "Net Sales" is defined in Section 4.8) made from
or upon the Premises during each calendar year exceeds Twelve Million Dollars
($12,000,000.00) (hereinafter "Breakpoint") for such calendar year (hereinafter
"Percentage Rental"). Said Percentage Rental shall be computed each calendar
quarter and, on or before the twentieth (20th) day of the calendar month
immediately following the close of each calendar quarter, Tenant shall pay to
Landlord the product of the percentage set forth in Section 1.4 multiplied by
the amount by which Tenant's Net Sales made during such
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calendar quarter exceeds Three Million Dollars ($3,000,000.00)
[Breakpoint DIVIDED BY 4]. Notwithstanding the foregoing, in the event at any
time during the original Lease Term or any Option Term then in effect, Tenant
is entitled to a full or partial abatement of Minimum Annual Rental pursuant
to any provisions of this Lease, then the dollar amount of the Breakpoint
shall be reduced in the same proportion that Minimum Annual Rental is so
abated.
On or before February 1 of each calendar year Tenant shall deliver to Landlord a
statement certified by Tenant as accurate indicating the total Net Sales of
Tenant during said calendar year and the amounts paid to Landlord as Percentage
Rental; and thereupon an adjustment shall be made with respect to said rental as
follows: If Tenant shall have paid to Landlord an amount greater than Tenant is
required to pay as Percentage Rental for such calendar year under the terms
hereof, Tenant shall be entitled to a credit against Tenant's next payment of
Percentage Rental for the amount of such overpayment; or, if Tenant shall have
paid an amount less than the Percentage Rental required to be paid hereunder,
then Tenant shall pay such difference to Landlord concurrently with Tenant's
delivery of the annual statement.
During any partial calendar year, Tenant shall pay Percentage Rental quarterly
as described hereinabove, but such quarterly payments shall not be subject to
reconciliation at the end of the calendar year.
4.4 STATEMENT OF NET SALES. Tenant agrees to furnish or cause to be furnished
to Landlord a statement of Net Sales of Tenant within twenty (20) days after the
close of each calendar month, and an annual statement, including a monthly
breakdown of Net Sales within thirty (30) days after the close of each calendar
year. Such statements shall include, among other appropriate items, Tenant's
Gross Sales (as the term "Gross Sales" is defined in Section 4.8), and all
deductions or exclusions therefrom and Tenant's Net Sales. Such statements
shall be signed by Tenant. Tenant shall record at the time of sale, in the
presence of the customer, all receipts from sales or other transactions, whether
cash or credit, in a cash register or registers having a sealed and continuous
tape which cumulates and consecutively numbers all purchases. Tenant shall keep
(a) full and accurate books of account and records in accordance with Generally
Accepted Accounting Principles consistently applied, including, without
limitation, a sales journal, general ledger, and all bank account statements
showing deposits of Gross Sales revenue, (b) all such cash register receipts
with regard to Gross Sales and Net Sales, credits, refunds and other pertinent
transactions made from or upon the Premises (including the Gross Sales of any
subtenant, licensee or concessionaire) and (c) detailed original records of any
exclusions or deductions from Gross Sales (including any exclusions or
deductions from Gross Sales of any subtenant, licensee or concessionaire). Such
books, receipts and records shall be kept for a period of three (3) years after
the close of each calendar year and shall be available for inspection and audit
by Landlord and its representatives at the Premises at all times during regular
business hours. In addition, upon request of Landlord, Tenant agrees to furnish
Landlord a copy of Tenant's State and Local Sales and Use Tax Returns, if
required in the State where the Shopping Center is situated. The receipt by
Landlord of any statement or any payment of Percentage Rental for any period
shall not bind it as to the correctness of the statement or the payment.
Landlord shall, within three (3) years after the receipt of any such statement,
be entitled to an audit of such Gross Sales and Net Sales (including the Gross
Sales and Net Sales of any subtenant, licensee or concessionaire). Such audit
shall be conducted either by Landlord or by a certified public accountant to be
designated by Landlord during normal business hours at the principal place of
business of Tenant. If it shall be determined as a result of such audit that
there has been a deficiency in the payment of Percentage Rental, then such
deficiency shall become immediately due and payable with interest at the rate
specified in Section 14.7 from the date when said payment should have been made.
In addition, if Tenant understates Net Sales by more than two percent (2%) and
if Landlord is entitled to any additional Percentage Rental as a result of said
understatement, or if such audit shows that Tenant has failed to maintain the
books of account and records required by this Section so that Landlord is unable
to verify the accuracy of Tenant's statement then Tenant shall pay to Landlord
all reasonable costs and expenses (including all reasonable auditor and attorney
fees) which may be incurred by Landlord in conducting such audit and collecting
such underpayment, if any. If Tenant understates Net Sales by more than six
percent (6%), then, in addition to Landlord's aforesaid rights, Landlord may
terminate this Lease. Any information gained from such statements or inspection
shall be confidential and shall not be disclosed other than to carry out the
purposes hereof; provided, however, Landlord shall be permitted to divulge the
contents of any such statements in connection with any contemplated sales,
transfers, assignments, encumbrances or financing arrangements of Landlord's
interest in the Premises or in connection with any administrative or judicial
proceedings in which Landlord is involved where Landlord may be required to
divulge such information.
4.5 ADDITIONAL RENT. Tenant shall pay, as Additional Rent, all sums of money
required to be paid pursuant to the terms of this Lease, including, but not
limited to those sums referenced in Articles 4, 7, and 11, herein collectively
referred to as "Additional Rent". If such amounts or charges are not paid at
the time provided in this Lease, they shall nevertheless be collectible as
Additional Rent with the next installment of Minimum Annual Rental thereafter
falling due, but nothing herein contained shall be deemed to suspend or delay
the payment of any amount of money or charge at the time the same becomes due
and payable hereunder or to limit any other remedy of Landlord. All amounts of
Minimum Annual Rental and Additional Rent payable in a given month shall be
deemed to comprise a single rental obligation of Tenant to Landlord.
4.6 FAILURE TO PAY ITEMS REQUIRED UNDER ARTICLE 4. If Tenant fails to pay,
when the same is due and payable, the Minimum Annual Rental or any Additional
Rent, such unpaid amounts shall bear interest at the rate specified in Section
14.7 from the date due to the date of payment and computed on the basis of
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monthly compounding with actual days elapsed compared to a 360-day year. In
addition to such interest, Tenant acknowledges that the late payment by Tenant
of any monthly rental will cause Landlord to incur certain costs and expenses
not contemplated under this Lease, the exact amount of which costs being
extremely difficult or impracticable to fix. Such costs and expenses will
include, without limitation, administrative and collection costs, and processing
and accounting expenses. Therefore, if any such installment is not received by
Landlord from Tenant when due, Tenant shall immediately pay to Landlord a late
charge of five percent (5%) of the past due amount. Landlord and Tenant agree
that this late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for its loss caused by Tenant's
nonpayment. Should Tenant pay said late charge but fail to pay
contemporaneously therewith all unpaid amounts of Minimum Annual Rental and
Additional Rent Landlord's acceptance of this late charge shall not constitute a
waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent
Landlord from exercising all other rights and remedies available to Landlord
under this Lease or under Law.
4.7 SECURITY DEPOSIT. On or before the Effective Date, Tenant shall deposit
with Landlord the sum specified in Article 1 as "Security Deposit". Landlord
shall deposit the Security Deposit in a segregated interest bearing account in
either a Federally insured commercial bank or a savings and loan institution,
and the interest thereon shall remain in the account and be deemed a part of the
Security Deposit for all purposes hereof. Said deposit shall be held by
Landlord as security for the faithful performance by Tenant of all of its
obligations under this Lease. The Security Deposit shall not be mortgaged,
assigned, transferred or encumbered by Tenant without the prior written consent
of Landlord and any such act on the part of Tenant shall be without force and
effect and shall not be binding upon Landlord. If any of the rents herein
reserved or any other sum payable by Tenant to Landlord shall be overdue and
unpaid as of the end of the cure period therefor as provided in Section 14.2
hereof, or should Landlord make payments on behalf of Tenant, or if Tenant
shall fail, beyond the applicable cure period therefor, to perform any of the
terms of this Lease, then Landlord may, at its option and without prejudice to
any other remedy which Landlord may have on account thereof, appropriate and
apply said entire Security Deposit or so much thereof as may be necessary to
compensate Landlord for Minimum Annual Rental or Additional Rent, loss or damage
sustained by Landlord as a result thereof, and Tenant shall forthwith upon
demand restore said Security Deposit to the original sum deposited. Provided
that as of the end of the thirty-sixth (36th) month following the Rent Start
Date, Tenant is not in default, and has not been in default uncured beyond the
notice period, then Landlord shall apply the Security Deposit being held
hereunder (including any interest which has accrued since the date of its
deposit) against the payment of Minimum Annual Rental due on the thirty-seventh
(37th) month following the Rent Start Date, and if the amount of the Security
Deposit including interest exceeds the amount due on the thirty-seventh (37th)
month, then the excess shall be applied against amounts due for the thirty-eight
(38th) month. If, as of the end of such thirty-sixth (36th) month, Tenant is
in, or has been in default, then Landlord shall retain the entire Security
Deposit until the expiration or earlier termination of the Lease Term at which
time the Security Deposit (plus any interest which has accrued thereon, or so
much of said total Security Deposit as has not been applied as otherwise
provided herein) shall be refunded in full to Tenant within forty-five (45)
days after the expiration or earlier termination of the Lease Term. In the
event of bankruptcy or other debtor-creditor proceedings against Tenant, the
Security Deposit shall be deemed to be applied first to the payment of rent and
other charges due Landlord for all periods prior to filing of such proceedings.
Landlord may deliver the funds deposited hereunder by Tenant to the purchaser or
assignee of Landlord's interest in the Premises in the event that such interest
is transferred and thereupon Landlord shall be discharged from any further
liability with respect to such Security Deposit, and this provision shall also
apply to any subsequent transfer of Landlord's interest in the Premises.
4.8 DEFINITION OF NET SALES. The term "Gross Sales" of Tenant, as used in this
Lease, is defined to be the actual gross sales price of all movie ticket sales
for movies shown at the Premises by Tenant, its subtenants, licensees and
concessionaires, whether for cash or on credit and whether made by store
personnel, outside ticket vendors, or by approved vending machines or by
electronic, telephonic, video, computer, or other technology-based system,
whether existing now or developed in the future, located at the Premises or
generating orders therefor. The term "Net Sales" of Tenant, as used in this
Lease, is defined to be Gross Sales, excluding the following:
(a) Cash refunds made to customers, or credit refunds, in the ordinary
course of business, to the extent the initial sale was previously reported as
Net Sales hereunder, and the amount of discounts granted to non-profit or other
groups, provided, however, that the full amount of the sales price has been
included in Net Sales;
(b) Sales taxes, so-called luxury taxes, consumers' excise taxes, gross
receipts taxes and other similar taxes now or hereafter imposed upon the sale of
merchandise or services, but only if collected separately from the selling price
of movie admission and collected from customers;
(c) Gift certificates, or like vouchers, until such time as the same shall
have been converted into a sale by redemption.
All sales originating at the Premises shall be considered as made and completed
therein, even though bookkeeping and payment of the account may be transferred
to another place for collection and even though
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actual filling of the sale or service order and actual delivery of the
merchandise may be made from a place other than the Premises.
ARTICLE 5
NET LEASE; TRUE LEASE
It is the intention of the parties hereto that the obligations of Tenant
hereunder shall be separate and independent covenants and agreements, and that
Minimum Annual Rental, Additional Rent and all other sums payable by Tenant
hereunder shall continue to be payable in all events, and that the obligations
of Tenant hereunder shall continue unaffected, unless the requirement to pay or
perform the same shall have been terminated pursuant to an express provision of
this Lease. This is a net Lease and Minimum Annual Rental, Additional Rent and
all other sums payable hereunder by Tenant shall be paid without notice or
demand, and without setoff, counterclaim, recoupment, abatement, suspension,
deferment, diminution, deduction, reduction or defense, except as otherwise
specifically set forth herein. Tenant shall pay all operating expenses related
to use, occupancy, management, maintenance, repair, operation or possession of
the Premises, and to the extent required hereunder, taxes and insurance costs.
This Lease shall not terminate and Tenant shall not have any right to terminate
this Lease, during the Lease Term (except as otherwise expressly provided
herein).
Tenant agrees that, except as otherwise expressly provided herein, it shall
not take any action to terminate, reject, rescind or avoid this Lease,
notwithstanding (i) the bankruptcy, insolvency, reorganization, composition,
readjustment, liquidation, dissolution, winding-up, or other proceeding
affecting Landlord, Tenant or any assignee or subtenant of Tenant, (ii) the
exercise of any remedy, including foreclosure, under the mortgage, or (iii) any
action with respect to this Lease (including the disaffirmance hereof) which may
be taken by Landlord under the Federal Bankruptcy Code or by any trustee,
receiver or liquidator of Landlord or by any court under the Federal Bankruptcy
Code or otherwise, or (iv) the condition of the Premises (except to the extent
Tenant's action as it relates to this clause (iv) is being taken as a result of
actions of Landlord). Tenant waives all rights which are not expressly stated
herein but which may now or hereafter otherwise be conferred by law to quit,
terminate or surrender this Lease or any of the Premises, to any setoff,
counterclaim, recoupment, abatement, suspension, deferment, diminution,
deduction, reduction or defense of or to Minimum Annual Rental, Additional Rent
or any other sums payable under this Lease, except as otherwise expressly
provided herein; and for any statutory lien or offset right against Landlord or
its property.
ARTICLE 6
POSSESSION AND USE
6.1 PERMITTED USES. Tenant shall use the Premises solely for the purposes and
under the trade name specified in Article 1. At Tenant's sole expense, Tenant
shall procure, maintain and hold available for Landlord's inspection any
governmental license or permit required for the proper and lawful conduct of
Tenant's business.
6.2 DUTIES AND PROHIBITED CONDUCT. Tenant shall not use, or permit any person
or persons to use, the Premises for the sale or display of pornography or
drug-oriented paraphernalia or to use the Premises or any part thereof as a
massage parlor, adult bookstore or second-hand store or to conduct an auction,
distress, fire, bankruptcy or going-out-of business sale. Notwithstanding the
foregoing, the display of various sexual or drug oriented matters in a film
being shown at the Premises, which is a film that is generally shown at major
retail theaters operated by major commercial theater operators and/or the sale
of posters or movie memorabilia related to such films will not be deemed in
violation of the foregoing; "major retail theaters" and "major commercial
theater operators" as used herein shall mean theaters and operators generally
operating in community shopping centers and showing primarily first run films
such as those operating as of the date of this Lease as AMC, Edwards Theaters,
and Pacific Theatres, and other theaters generally found in family oriented
shopping centers and specializing in foreign films and "art" films, such as
theaters currently operating in San Diego County as Landmark Theaters. Tenant
shall not use the Premises, occupy, or permit any of the Premises to be used or
occupied, nor do or permit anything to be done in or on any of the Premises, in
a manner which would (i) make void or voidable any insurance which Tenant is
required hereunder to maintain then in force with respect to any of the
Premises, (ii) affect in any manner the ability of Tenant to obtain any
insurance which Tenant is required to furnish hereunder, (iii) cause any injury
or damage to any Fixtures or improvements to the Tenant Parcel unless pursuant
to Improvements permitted under Article 10 hereof or as required to effectively
maintain the Tenant Parcel as required in Section 8.2 hereof, (iv) constitute a
public or private nuisance or waste, or (v) violate any of the laws of the
United States of America, or the laws, ordinances, regulations and requirements
of the State, County and City where the Shopping Center is situated, or of other
lawful authorities. Tenant shall keep the Premises, and every part thereof, in a
clean and wholesome condition, free from any objectionable noises, odors or
nuisances, and shall comply with all health and police regulations in all
respects.
6.3 TENANT'S OPERATION IN THE PREMISES. Tenant covenants to perform the
Tenant's Work in accordance with the provisions of this Lease, and on or before
the Rent Start Date to open with the entire Building fully fixturized, stocked
and staffed for full operation of the Permitted Use. Thereafter, in the event
Tenant fails to continuously operate the Permitted Use from all or substantially
all of the Building for a period of twelve (12) consecutive months, then, in
addition to any other legal remedy available to Landlord, Landlord
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may, at any time following the end of such twelve (12) month period terminate
this Lease upon written notice to Tenant. Any Personal Property or Fixtures
belonging to Tenant and left on the Premises thirty (30) days following the
termination date specified in Landlord's notice, shall be deemed abandoned.
In such case, Landlord may dispose of said Personal Property in any manner
provided by the laws of California and is hereby relieved of all liability
for doing so.
6.4 NEW LOCATIONS FOR TENANT. Tenant agrees that it will not, during the first
five (5) years after Tenant opens for business, directly or indirectly, lease,
operate or own any similar type of business (not so operated and owned on the
Effective Date of this Lease) within a radius of three (3) miles from the
location of the Premises. Without limiting Landlord's remedies in the event
Tenant should violate this covenant, Landlord may, at its option and for so long
as Tenant is operating said other business, include the net sales of such other
business in the Net Sales made from the Premises for the purpose of computing
the Percentage Rental due hereunder. Tenant will provide Landlord with a
statement of Tenant's Net Sales, in accordance with the provisions of Section
4.4, for each such prohibited business location operated by Tenant in violation
of the foregoing radius restriction. After the aforementioned period, Tenant may
operate another business with the aforementioned radius provided: (a) Tenant
gives Landlord written notice of its intention to operate such business and the
location and anticipated opening date of such business and (b) within thirty
(30) days of the date of said written notice, Landlord and Tenant shall enter
into a written amendment to this Lease adjusting the Minimum Annual Rental
payable under Section 4.1. Said Minimum Annual Rental shall be adjusted as
follows: from the statements of Net Sales as submitted by Tenant under Section
4.4, Landlord shall compute an amount which represents the highest amount of
annual Percentage Rental paid or payable by Tenant under Section 4.3, during any
consecutive twelve (12) month period occurring within the sixty (60) months
immediately preceding said amendment, and this amount, if any, shall be added to
the amount specified in Article 1 as Minimum Annual Rental, and this resulting
sum shall thereafter be the Minimum Annual Rental payable hereunder. The
effective date for payment of the adjusted Minimum Annual Rental shall be the
first day of the calendar month following the opening of Tenant's other
business.
6.5 NEW LOCATIONS FOR LANDLORD. Landlord agrees that it will not, during the
first three (3) years after Tenant opens for business (but only so long as
Tenant remains open for business), directly or indirectly, lease, operate or own
any similar type of business (not so operated and owned on the Effective Date of
this Lease) within a radius of three (3) miles from the location of the
Premises.
6.6 USE OF NAME OF SHOPPING CENTER. Tenant shall use the name of the Shopping
Center in which the Premises are located in all Tenant's advertising in
connection with Tenant's business at the Premises and for no other purpose,
except with Landlord's consent. Tenant shall not have or acquire any property
right or interest in the name of the Shopping Center. Landlord reserves the
right to change the name, title, or address of the Shopping Center or the
address of the Premises at any time, and Tenant waives all claims for damages
caused by any such change.
6.7 HAZARDOUS MATERIALS.
(a) DEFINITIONS. As used herein, "Hazardous Materials Laws" means any and
all federal, state or local laws, ordinances, rules, decrees, orders,
regulations or court decisions relating to hazardous substances, hazardous
materials, hazardous waste, toxic substances, environmental conditions on, under
or about the Premises, or soil and ground water conditions, including, but not
limited to, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), as amended, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. Section 6901, et
seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the California Hazardous Waste Control Act, Cal. Health and Safety Code
Section 25100, et seq., the Carpenter-Presley-Tanner Hazardous Substances
Account Act, Cal. Health and Safety Code Section 25300, et seq., the Safe
Drinking Water and Toxic Enforcement Act, Cal. Health and Safety Code Section
25249.5, et seq., the Porter-Cologne Water Quality Control Act, Cal. Water Code
Section 13000, et. seq., any amendments to and any regulations promulgated
pursuant to the foregoing, and any similar federal, state or local laws,
ordinances, rules, decrees, orders or regulations. As used herein, "Hazardous
Materials" means any chemical, compound, substance, pollutant, containment or
other material that: (a) is defined as a hazardous substance, hazardous
material, hazardous waste or toxic substance under any Hazardous Materials Law;
or (b) is controlled or governed by any Hazardous Materials Law or gives rise to
any reporting, notice or publication requirements thereunder.
(b) USE. Tenant shall not allow any Hazardous Material to be used,
generated, manufactured, released, stored or disposed of on, under or about, or
transported from, the Premises or the Shopping Center, unless such use is: (a)
specifically disclosed to and approved by Landlord in writing prior to such use;
(b) conducted in compliance with the provisions of this Section; and (c)
conducted in compliance with the requirements and recommendations of Landlord's
and Tenant's insurers based upon prudent industry practices regarding management
of Hazardous Materials. Landlord may approve such use subject to reasonable
conditions to protect the Premises and Landlord's interests. Notwithstanding
the foregoing, Landlord hereby consents to Tenant's use, storage or disposal of
products containing small quantities of Hazardous Materials, which products are
of a type customarily found in offices and households (such as aerosol cans
containing insecticides, toner for copies, paints, paint remover, and the like),
provided that Tenant shall handle, use, store and dispose of such Hazardous
Materials in a safe and lawful manner and shall not allow such Hazardous
Materials to contaminate the Premises. If Landlord's consent is required for an
assignment of the Lease or a sublease of the Premises, Landlord shall have the
right to refuse such consent
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if, in Landlord's reasonable judgment, the possibility of a release of
Hazardous Materials is materially increased as a result of the assignment or
sublease or if Landlord does not receive reasonable assurances that the new
tenant or subtenant has the experience and the financial ability to remedy a
violation of Hazardous Materials and fulfill its obligations under this
Section 6.7.
(c) COMPLIANCE WITH LAWS. Tenant shall strictly comply with, and shall
maintain the Premises in compliance with, all Hazardous Materials Laws. Tenant
shall obtain and maintain in full force and effect all permits, licenses and
other governmental approvals required for Tenant's operations on the Premises
under any Hazardous Materials Laws and shall comply with all terms and
conditions thereof. At Landlord's request, Tenant shall deliver copies of, or
allow Landlord to inspect, all such permits, licenses and approvals. Tenant
shall, at Tenant's expense, perform any monitoring, investigation, clean-up,
removal, detoxification, preparation of closure or other required plans and any
other remedial work (collectively, "Remedial Work") required as a result of any
release or discharge of Hazardous Materials affecting the Premises or the
Shopping Center or any violation of Hazardous Materials Laws by Tenant or any
assignee or sublessee of Tenant or their respective agents, contractors,
employees, licensees or invitees. Landlord shall have the right to intervene in
any governmental action or proceeding involving any Remedial Work, and to
approve performance of the work, or, at Landlord's option, after reasonable
notice to Tenant, to remedy any violation by Tenant and require reimbursement
from Tenant for costs incurred by Landlord in connection with such remedy, in
order to protect Landlord's interests.
(d) NOTICE; REPORTING. Tenant shall notify Landlord, in writing, within
five (5) days after any of the following: (i) Tenant has knowledge, or has
reasonable cause to believe that any Hazardous Material has been released,
discharged or is located on, under or about the Premises, whether or not the
Hazardous Material is in quantities that would otherwise be reportable to a
public agency; (ii) Tenant receives any order of a governmental agency requiring
any Remedial Work pursuant to any Hazardous Materials Laws; (iii) Tenant
receives any warning, notice of inspection, notice of violation or alleged
violation, or Tenant receives notice or knowledge of any proceeding,
investigation or enforcement action, pursuant to any Hazardous Materials Laws;
or (iv) Tenant receives notice or knowledge of any claims made or threatened by
any third party against Tenant or the Premises relating to any loss or injury
resulting from Hazardous Materials. Tenant shall deliver to Landlord copies of
all test results, reports, spill prevention plans, and business or management
plans required to be filed with any governmental agency pursuant to any
Hazardous Materials Laws; however, Landlord shall have no obligation to review
the same nor shall Landlord have any liability as to the adequacy of any actions
taken by Tenant.
(e) TERMINATION/EXPIRATION. Upon termination or expiration of this Lease,
Tenant shall, at its sole expense, remove any equipment, improvements or storage
facilities utilized in connection with any Hazardous Materials and shall clean
up, detoxify, repair and otherwise restore the Premises to a condition free of
Hazardous Materials, provided, however, that Tenant's obligations as aforesaid
shall specifically exclude the obligation to remove equipment, improvements or
facilities or restore the Premises as a result of conditions which existed or
arose prior to Tenant's entry onto the Premises, or which initially arose on the
balance of the Shopping Center.
(f) INDEMNITY. Tenant shall indemnify, protect, defend and hold Landlord
(and its partners and their respective officers, directors, employees and
agents) harmless from and against any and all claims, costs, expenses, suits,
judgments, actions, investigations, proceedings and liabilities arising out of
or in connection with any breach of any provisions of this Section or directly
or indirectly arising out of the use, generation, storage, release, disposal or
transportation of Hazardous Materials by Tenant, or any sublessee or assignee of
Tenant, or their respective agents, contractors, employees, licensees, or
invitees, on, under or about the Premises during the Lease Term, including, but
not limited to, all foreseeable and unforeseeable consequential damages
(excluding lost profits) and the cost of any Remedial Work. Neither the consent
by Landlord to the use, generation, storage, release, disposal or transportation
of Hazardous Materials nor the strict compliance with all Hazardous Materials
Laws shall excuse Tenant from Tenant's indemnification obligations pursuant to
this Section. The foregoing indemnity shall be in addition to and not a
limitation of the indemnification provisions of Section 12.1 of the Lease.
Tenant's obligations pursuant to this Section shall survive the termination or
expiration of the Lease.
(g) LANDLORD'S REPRESENTATIONS AS TO HAZARDOUS MATERIALS. Landlord
represents and warrants to the best of Landlord's actual knowledge without
independent investigation that there are no Hazardous Materials on or about the
Shopping Center, and there are no Hazardous Materials which may impact the
Shopping Center, and Landlord agrees to indemnify and hold Tenant harmless for
costs of any Remedial Work required as a result of (i) any discharge or release
of Hazardous Materials or any violation of Hazardous Materials Laws prior to
commencement of the Lease affecting the Premises, or (ii) any discharge or
release of Hazardous Materials or any violation of Hazardous Materials Laws by
Landlord or its agents, contractors, or employees affecting the Premises or the
Shopping Center. In the event Landlord causes a Phase I Environmental Audit to
be performed, Landlord shall provide Tenant with a copy of the resulting
report.
ARTICLE 7
TAXES AND TITLE OF PREMISES
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7.1 TITLE OF PREMISES. Tenant acknowledges that as of the Effective Date the
Premises are subject to the following: (a) covenants, conditions, restrictions,
easements, mortgages or deeds of trust, any ground lease of record, any
rights-of-ways of record, and any other matters or documents of record,
including without limitation that certain Declaration of Restrictions and Grant
of Easements being recorded simultaneously herewith ("Declaration") (hereinafter
referred to collectively as "CC&R's"): (b) zoning laws of the City, County and
State where the Shopping Center is located; and (c) general and special taxes
not delinquent. Except as permitted by this Lease, from and after the Effective
Date, Tenant and all persons in possession of the Premises, shall not encumber
the Premises, whether involuntarily or otherwise. As to its leasehold estate,
Tenant and all persons in possession thereof will conform to and will not
violate the terms of the aforementioned CC&R's or said matters of record. Tenant
acknowledges and agrees that Landlord, as an Owner pursuant to the Declaration,
has delegated its responsibilities as Owner of the Tenant Parcel to Tenant for
the Term of the Lease commencing as of the Commencement Date hereof,
specifically excluding, however, the rights of Declarant thereunder which are
not similarly shared by other Owners such as approval rights or reserved rights.
Tenant acknowledges that any first mortgagee or first deed of trust trustee or
beneficiary has the right to subordinate at any time its interest in this Lease
and the leasehold estate to that of Tenant, without Tenant's consent. Tenant
acknowledges that this Lease is subordinate to the CC&R's and any amendments or
modifications thereof. Notwithstanding the foregoing, if the CC&R's are not of
record as of the Effective Date, then this Lease shall automatically become
subordinate to the CC&R's upon recordation of said CC&R's and Tenant further
agrees to execute and return to Landlord, within ten (10) days after written
demand therefor by Landlord, an agreement in recordable form (substantially in
the form of Exhibit E) subordinating this Lease to said CC&R's, provided,
however, that Tenant's obligation to subordinate to ground leases, mortgages,
deeds of trust, and other security instruments, and to execute Exhibit E in
connection therewith, shall be governed by the provisions of Section 21.1
hereof.
7.2 PROPERTY TAXES. Tenant agrees to pay, or cause to be paid before
delinquency (i) all taxes, assessments, license fees, and public charges levied,
assessed, or imposed, or which may become payable during the Term upon the
Premises (including both the Building Improvements and the Tenant Parcel and any
and all improvements thereon), and upon any fixtures, furniture, appliances, and
personal property installed or located on the Premises; and (ii) transfer,
transaction, sales, rental, gross receipts, license or similar taxes or charges
measured by rent received by Landlord with respect to the Premises. Landlord
shall, after receipt of any tax bill or other notice of tax due on Premises,
furnish Tenant with a copy of such bill or notice. Tenant shall pay all of such
taxes when due and, on demand, shall furnish to Landlord receipts evidencing
such payment. Taxes for first and last years shall be prorated between
Landlord and Tenant.
Landlord shall furnish Tenant with a legal description of the Tenant
Parcel, and shall have the Tenant Parcel segregated as a separate tax lot, and
Tenant shall pay all real estate taxes directly to the taxing authority. In
the event Landlord, after using its best efforts to have the Tenant Parcel
segregated as a separate tax lot is unable to do so and provides Tenant with
evidence reasonably satisfactory to Tenant of its efforts to create the Tenant
Parcel as a separate tax lot, Tenant shall have the right to have the Tenant
Parcel segregated as a separate tax lot.
In the event both Landlord and Tenant are unable to have the Tenant Parcel
segregated as a separate tax lot or until real estate taxes are so segregated,
the taxes allocable to the Premises shall be ascertained from the records of the
Tax Assessor by adding (i) the product of multiplying the applicable tax rate by
the assessed value of the Building Improvements and any inventory, trade
fixtures, machinery, equipment or other personal property included in the
assessed value, plus (ii) the product of multiplying (A) the applicable tax rate
by (B) the assessed value of all land assessed under the applicable assessment
by (c) a fraction, the numerator of which shall be the square footage of the
Tenant Parcel and the denominator of which shall be the square footage of all
land assessed under the applicable assessment. In the event taxes are to be
allocated as provided in this paragraph, Landlord shall submit a statement of
Tenant's share of such taxes with appropriate supporting information to Tenant
at least sixty (60) days before the date when such taxes can last be paid within
any fine, penalty, interest or cost being added for non-payment, and Tenant
shall pay such amount to Landlord prior to such date. Landlord shall in such
event cause the taxes on the Premises to be paid before any fine, penalty,
interest or cost for nonpayment may be added and shall promptly furnish written
evidence of payment to Tenant.
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ARTICLE 8
COMMON AREA
8.1 DEFINITION OF COMMON AREA. The term "Common Area" shall include all
areas within the Shopping Center outside the exterior boundaries of the
buildings situated thereon, including, but not limited to, streets,
driveways, parking areas, truckways, delivery passages, loading doors,
sidewalks, ramps, open and closed courts and malls, landscaped and planted
areas, exterior stairways, bus stops, retaining and decorative walls and
planters, and other areas provided by Landlord and/or other owners of
portions of the Shopping Center for the general use, convenience and benefit
of Landlord, other persons entitled to occupy Floor Area in the Shopping
Center and/or their customers, patrons, employees and invitees. The Common
Area shall also include any off-site areas which must be maintained by the
Shopping Center owners pursuant to governmental conditions of approval of
subdivision and/or development of the Shopping Centers. Landlord reserves
the right to make changes at any time and from time to time in the size,
shape, location, number and extent of the Common Area including the Common
Area of the Premises, or any of them, provided, however, that Landlord shall
make no changes to the Common Area of the Premises without Tenant's prior
written approval, such approval not to be unreasonably withheld or delayed.
Notwithstanding the foregoing, Landlord and Tenant hereby acknowledge and
agree that Tenant's rights and obligations to maintain the Common Area of the
Premises as described herein are granted to and accepted by Tenant in
Tenant's capacity as Designated Parcel Operator under the Declaration, and
agree that pursuant to the terms of the Declaration, Operator thereunder
shall have the right to perform Tenant's obligations hereunder if Tenant
fails to perform such obligations following written notice from Operator, and
that Operator shall have the right to terminate Tenant's designation as
Designated Parcel Operator, all as more particularly described in the
Declaration. In the event of any such termination, Operator shall maintain
Tenant's Parcel, and Tenant, as designated Owner of the Tenant Parcel, shall
pay its Allocable Share of Common Area Maintenance Costs to Operator, all as
more particularly described in the Declaration.
8.2 COMMON AREA MAINTENANCE OF TENANT'S PARCEL. Tenant shall cause at
Tenant's expense the Common Area of Tenant's Parcel to be kept in good and
clean condition and repair, in accordance with good standards and practices
typical of comparable shopping centers in the general area of the Shopping
Center. Tenant shall perform repairs, replacements and improvements so as
to maintain substantially the type and quality of improvements installed by
Landlord as part of the original improvements. Maintenance shall include,
but not be limited to, the following: providing water, electricity and other
common utilities; sweeping; janitorial services; trash and refuse removal;
replacing of asphalt, paving, bumpers, curbs, striping and other parking lot
repairs; repairs and replacement of pylon and monument signs and directional
signs on Tenant's Parcel, lighting, perimeter walls, sidewalks, storm
drainage, planters, landscaping, and the irrigation system; slope
maintenance; any fire protection systems, providing security guards if Tenant
deems necessary, and any other items of repair, replacement and/or
maintenance that may be needed from time to time to properly operate, manage
and maintain the Common Area of Tenant's Parcel.
8.3 COMMON AREA MAINTENANCE OF REMAINDER OF SHOPPING CENTER. Landlord
shall maintain the remaining parcels of the Shopping Center in a condition
consistent with Tenant's obligations hereunder, or in the event that Landlord
does not maintain all of the areas in the Shopping Center because other
tenant(s) or owner(s) of the Shopping Center maintains their respective
Common Area, then, for the length of time such condition may exist,
Landlord's responsibility shall be to maintain and repair only those portions
of the Common Area not maintained by such other owner(s) or tenant(s).
Tenant acknowledges and agrees that the remaining parcels of the Shopping
Center may be unimproved land until such time as said parcels are developed
for use for specific tenants or owners; provided, however, that Landlord
shall grade and/or landscape said remaining parcels until such time as they
are developed for use by specific tenants or owners, such grading and/or
landscaping to be done in a manner which does not adversely affect Tenant's
operation of the Premises. Landlord shall be responsible to pay all operating
expenses related to use, occupancy, management, maintenance, repair,
operation, or possession of the balance of the Shopping Center, including
taxes and insurance costs.
8.4 CONTROL OF COMMON AREA OF TENANT'S PARCEL. Tenant shall have the right
at any time and from time to time to exclude and restrain any person from use
or occupancy on the Tenant Parcel, excepting, however, bona fide customers,
patrons and service suppliers of other owners or tenants in the Shopping
Center who make use of said areas in accordance with the provisions of the
Declaration. The rights of Tenant with respect to the Common Area of the
Tenant Parcel shall at all times be subject to the rights of Landlord, the
other tenants of Landlord and the other owners of the Shopping Center to use
the same in common with Tenant as provided in the Declaration. It shall be
the duty of Tenant to keep all of the Common Area of the Tenant Parcel free
and clear of any obstructions created or permitted by Tenant or resulting
from Tenant's operation and to permit the use of any of the Common Area only
for normal parking and ingress and egress by the customers, patrons and
service suppliers of Tenant or other occupants of the Shopping Center as
provided in the Declaration, provided, however, that Tenant shall have the
right to conduct special events in the parking lot adjacent to the Building
consistent with its operation of the Building as a retail operation
exhibiting commercial motion pictures subject to the following conditions:
(a) any such event shall be conducted within the areas cross-hatched on
Exhibit A hereto, (b) no one event shall use more than 1,000 square feet of
the Common Area of Tenant's Parcel, (c) Tenant shall conduct no more than
four (4) such events per calendar year, (d) no one event shall exceed two (2)
weeks in duration, (e) such events shall be
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held at Tenant's sole cost and expense, and shall be conducted in a manner so
as to not unreasonably disturb the operation of the balance of the Shopping
Center.
8.5 RULES AND REGULATIONS. Tenant shall abide by the rules and regulations
governing the Shopping Center which may be promulgated from time to time
pursuant to the provisions of the Declaration, provided, however, that Tenant
shall have the right to approve such rules and regulations, such approval not
to be unreasonably withheld. Such rules and regulations shall be
nondiscriminatory, and may specify, without limitation, when and where
Tenant, and other tenants/owners of the Shopping Center and their employees
may park their vehicles in the Common Area of the Shopping Center, provided,
however, that parking for all tenants and employees of the Shopping Center
shall not be located solely on the portion of the Premises which constitutes
the Common Area of Tenant's Parcel. Landlord agrees that there shall be no
charge for parking within the Shopping Center.
8.6 [Intentionally Deleted.]
8.7 SITE PLAN/REMODEL. Landlord may expand, reduce, remove, remodel, or
refurbish ("remodel") portions of the Shopping Center, provided, however,
that Landlord shall make no changes to the Common Area of the Premises
without Tenant's prior written approval, such approval not to be unreasonably
withheld or delayed. Tenant acknowledges that the remodeling may include
changes and additions to the pipes, conduits and ducts, or other structural
and nonstructural installations in the Premises where desirable to serve the
Common Areas and other premises in the Shopping Center or to facilitate the
expansion or alteration of the Shopping Center (including without limitation,
the construction and erection of columns and support facilities). The
remodeling will be done in accordance with design specifications prepared by
the Project Architect and reviewed and approved by Landlord. Copies of such
specifications will be made available to Tenant, and Tenant shall have the
right to review and approve any alterations which are being made to the
Premises, such approval not to be unreasonably withheld or delayed. Tenant
agrees that Tenant will not, through any act or omission, in any way impede,
delay or prevent the completion of such remodeling in a timely manner.
Landlord agrees that the initial construction and any subsequent remodel of
the Shopping Center shall provide parking for the Shopping Center as required
by law. As part of the design specifications or otherwise, in order to
rejuvenate the Shopping Center, a new exterior tenant sign criteria may be
developed. Within sixty (60) days after Tenant's receipt of written notice
of said new sign criteria, Tenant shall, at Tenant's expense, remove all
existing exterior signs and replace the same with new signs in accordance
with the new sign criteria. Notwithstanding the foregoing, Tenant shall have
the right to approve any modification to the Shopping Center which alters the
Building Area limit lines, the Maximum Building Area, or the maximum building
height above the heights permitted pursuant to the Declaration, access to
Tenant's Parcel or Building, or the number of parking spaces located on
Tenant's Parcel.
ARTICLE 9
MECHANICS' LIENS
9.1 MECHANICS' LIENS. Tenant agrees that it will pay, or cause to be paid,
all costs for work done by it, or caused to be done by it, on the Premises,
and Tenant will keep the Premises free and clear of all mechanics' liens and
other such liens on account of work done for Tenant or persons claiming under
Tenant. Tenant agrees to and shall indemnify, defend and hold Landlord
harmless from any and all liability, loss, damage, costs, attorney fees and
all other expenses on account of claims of lien of laborers or materialmen or
others for work performed or materials or supplies furnished for Tenant or
persons claiming under Tenant.
9.2 CONTEST OF LIEN. If Tenant shall desire to contest any claim of such
mechanics' lien, it shall furnish Landlord adequate security for the value or
in the amount of the claim, plus estimated costs and interest, or a bond of a
responsible corporate surety in such amount, conditioned on the discharge of
the lien. If a final judgment establishing the validity or existence of a
lien for any amount is entered, Tenant shall immediately pay and satisfy the
same.
9.3 RIGHT TO CURE. If Tenant shall be in default in paying any charge for
which a mechanics' lien claim and suit to foreclose the lien have been filed,
and shall not have given Landlord security to protect the property and
Landlord from liability for such claim of lien, Landlord may (but shall not
be so required to) pay said claim and any costs, and the amount so paid,
together with reasonable attorney fees incurred in connection therewith,
shall be immediately due and owing from Tenant to Landlord, and Tenant shall
pay the same to Landlord with interest at the rate specified in Section 14.7
from the dates of Landlord's payments.
9.4 NOTICE OF LIEN. Should any claim of lien be filed against the Premises
or any action against the Premises or any action affecting the title to such
property be commenced, the party receiving notice of such lien or action
shall forthwith give the other party written notice thereof.
9.5 NOTICE OF NONRESPONSIBILITY. Landlord or its representatives shall have
the right to go upon and inspect the Premises at all reasonable times and
shall have the right to post and keep posted thereon notices of
nonresponsibility or such other notices which Landlord may deem to be proper
for the protection of Landlord's interest in the Premises. Tenant shall,
before the commencement of any work which might result
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in any such lien, give to Landlord written notice of its intention to do so
in sufficient time to enable posting of such notices.
ARTICLE 10
TENANT'S RIGHT TO MAKE IMPROVEMENTS;
PERSONAL PROPERTY; AND FIXTURES
10.1 IMPROVEMENTS. At Tenant's own expense, after giving Landlord notice in
writing of its intentions to do so and without limiting Tenant's right to
remove and/or replace Personal Property in accordance with Article 10,
Section 10.3, Tenant may, from time to time after completion of all work in
accordance with Exhibit C, make such permanent and nonstructural alterations,
replacements, additions, changes, and/or improvements (collectively referred
to in this Lease as "Improvements") to Tenant's Work previously completed in
accordance with Exhibit C or to prior Improvements as Tenant may find
necessary or convenient for its purposes, provided that the value of the
Premises is not thereby diminished; provided, however, no Improvements shall
be made to any storefront, mechanical, electrical or plumbing systems, the
exterior walls or roof of the Building without obtaining the prior written
approval of Landlord. Tenant shall have the right to erect a mezzanine in
the Building at its own expense, subject to the provisions of Section 10.2
hereof, and provided that there shall be no effect on the parking
requirements for the Shopping Center as a result thereof. Notwithstanding the
foregoing, in no event shall Tenant make or cause to be made any penetration
into or through the roof or floor of the Building without obtaining the
prior written approval of Landlord. Tenant agrees to reimburse Landlord
for all costs and expenses (including, without limitation, any architect
and/or engineer fees) incurred by Landlord in approving or disapproving
Tenant's plans for Improvements. Tenant shall be liable for and shall
indemnify and defend Landlord and other tenants at the Shopping Center from
any claim, demand, lien, loss, damage or expense, including reasonable
attorney fees and costs, arising from any Improvements permitted under this
Article 10. Within thirty (30) days after completing its Improvements,
Tenant shall certify to Landlord in writing Tenant's actual cost of
constructing its Improvements.
10.2 CONSTRUCTION REQUIREMENTS. All Improvements to be made to the Premises
which require the approval of Landlord shall be made under the supervision of
a competent architect or licensed structural engineer and made in accordance
with plans and specifications prepared in conformity with the structural,
mechanical, electrical, design and quality standards, requirements and/or
criteria specified in Exhibit C and approved in writing by Landlord before
commencement of the work. All work with respect to any Improvements must be
done in a good and workmanlike manner and diligently prosecuted to completion
to the end that the Premises shall at all times be a complete unit except
during the period of work. Upon completion of such work, Tenant shall have
recorded in the office of the County Recorder where the Shopping Center is
located a Notice of Completion, as required or permitted by law, and Tenant
shall deliver to Landlord, within ten (10) days after completion of said
work, a copy of the building permit with respect thereto. Upon the
expiration or earlier termination of this Lease, such Improvements shall not
be removed by Tenant but shall become a part of the Premises. Any such
Improvements shall be performed and done strictly in accordance with the laws
and ordinances relating thereto. In performing the work of any such
Improvements, Tenant shall have the work performed in such a manner as not to
obstruct access to the premises of any other tenant in the Shopping Center.
10.3 PERSONAL PROPERTY. All of Tenant's trade fixtures, furniture,
furnishings, signs, merchandise, and other personal property not permanently
affixed to the Premises (collectively referred to as "Personal Property" in
this Lease) must be new or like-new when installed in, or attached to, the
Premises by Tenant. Subject to the provisions of Section 10.5, any such
Personal Property shall remain the property of Tenant, and Tenant shall have
the right to remove such property at the expiration or earlier termination of
this Lease. Tenant shall, at its expense, immediately repair any damage
occasioned to the Premises by reason of the removal of any such Personal
Property.
10.4 FIXTURES. Tenant's Improvements (as described in Section 10.1) and
Tenant Required Improvements which are a part of Landlord's Work (as
described in Exhibit C) are collectively referred to in this Lease as
"Fixtures" and shall become the property of Landlord upon expiration or
earlier termination of this Lease.
10.5 LANDLORD'S SECURITY INTEREST. Tenant hereby grants Landlord a security
interest in Tenant's Fixtures and Personal Property located on the Premises
to secure Tenant's performance of any and all of Tenant's obligations under
this Lease. To perfect said security interest, Tenant agrees to execute and
deliver to Landlord such financing statements required by the applicable
Uniform Commercial Code as Landlord may request. Landlord's rights and
remedies with respect to this Section 10.5 shall be as set forth in the
applicable Uniform Commercial Code. Notwithstanding anything to the contrary
contained herein, upon Tenant's written request therefor, on a form prepared
by Landlord, Landlord shall subordinate its rights in such Personal Property
of Tenant to the rights of any trade fixture or equipment seller, lender or
lessor which is providing financing for Tenant's Personal Property in the
Premises ("Lender") but only so long as Tenant is indebted to such Lender.
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10.6 PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes
(including sales and use taxes), assessments, license fees and public charges
levied, assessed or imposed upon its business operation as well as upon its
merchandise, Fixtures and Personal Property. In the event any such items of
property are assessed with property of Landlord, then, and in such event,
such assessment shall be divided between Landlord and Tenant to the extent
that Tenant shall pay only its equitable portion of such assessment.
10.7 SIGNS.
(a) BUILDING SIGN. Prior to opening for business in the Premises
Tenant shall design, fabricate and install, at Tenant's expense, on the front
of the Building Improvements a storefront sign consistent with the sign
criteria developed by Landlord for the Shopping Center ("Sign Criteria") and
subject to all governmental approvals; Tenant shall have the right to approve
the Sign Criteria, such approval not to be unreasonably withheld or delayed.
(b) PYLON SIGN. Subject to governmental approvals, Landlord shall
construct a pylon sign at an entrance to the Shopping Center designated by
Landlord ("Pylon Sign") and Tenant shall install its trade name on both sides
of the first and highest position of such pylon sign. Other tenants of the
Shopping Center shall be entitled to have a position on the Pylon Sign and,
if available, on other pylon signs of the Shopping Center. Tenant agrees
that Tenant, at Tenant's sole expense, shall design and install Tenant's
sign in the sign panel designated by Landlord ("Tenant's Sign") in accordance
with the provisions of all governmental laws, rules and regulations and the
Tenant-approved Sign Criteria, and that such sign shall be subject to
Landlord's approval. Tenant shall maintain, repair and as necessary, replace
Tenant's Sign. If for any reason for any period of time Tenant does not
display Tenant's trade name on Tenant's Sign, Tenant shall cover that portion
of the sign with white plexiglass or such other substance as shall be
reasonably satisfactory to Landlord. If at any time for any reason Tenant
does not display its trade name on Tenant's Sign for sixty (60) days or more,
Landlord may, upon written notice to Tenant, re-lease such sign to such party
and upon such terms and conditions as Landlord shall choose in Landlord's
sole discretion. Tenant shall pay its pro rata share of the cost of design
and construction of the Pylon Sign which share shall be based on the square
footage of Tenant's Sign divided by the square footage of all sign panel
space on the Pylon Sign. Tenant shall maintain, repair and, if necessary,
replace the Pylon Sign, provided, however, that Tenant shall be entitled to
reimbursement from other tenants/owners whose names are on sign panels of the
Pylon Sign in an amount equal to the square footage of such owner/tenant's
sign panel(s) divided by the square footage of all sign panels which are
occupied on the sign at the time such expenses are incurred. All such other
tenant/owners shall be responsible to maintain, repair and replace their
individual tenant signs.
(c) MONUMENT SIGN. In addition, Tenant shall be entitled, at Tenant's
expense, to design, fabricate and install a monument sign for displaying
movie titles. Said monument sign shall be subject in all respects to
Landlord's approval, all governmental approvals, and Sign Criteria. In the
event Tenant does not use the Monument Sign for a period of ninety (90)
consecutive days, Landlord shall have the right, upon thirty (30) days notice
to Tenant to allow other tenants in the Shopping Center to use said Monument
Sign for temporary periods until Tenant delivers written notice to Landlord
of its intent to again use the Monument Sign.
ARTICLE 11
REPAIRS; MAINTENANCE
11.1 TENANT'S OBLIGATIONS. Tenant agrees at all times from and after
delivery of the Building Improvements, at its own cost and expense, to
repair, maintain in good and tenantable condition and replace, as necessary,
the Building Improvements and every part thereof, including, without
limitation, the following: the roof, exterior walls, structural parts of the
Building Improvements (including the structural floor), all meters, pipes,
conduits, equipment, components and facilities within the Tenant Parcel
(except as the appropriate utility company has assumed these duties)
including without limitation, maintenance, repair, and replacement of the
HVAC system, all Fixtures and other equipment installed in the Premises; all
exterior and interior glass installed in the Premises; all signs, lock and
closing devices; all window sashes, casements and frames; doors and door
frames; floor coverings; and all such items of repair, maintenance,
alteration, improvement or reconstruction as may be required at any time or
from time to time by a governmental agency having jurisdiction thereof. All
replacements made by Tenant in accordance with this Section 11.1 shall be of
like size, kind and quality to the items replaced and shall be subject to
Landlord's approval; Tenant shall paint and otherwise refurbish the exterior
of the Building Improvements no less than once every seven (7) years of the
Lease Term. Tenant shall make all improvements necessary to comply with the
Declaration and with any laws, ordinances, rules or regulations of any public
authority, the Insurance Service Office or any similar body (except any such
laws, ordinances, rules or regulations which were required to be performed
prior to the date of the Notice of Substantial Completion which items shall
be performed by Landlord in accordance with its obligations under Exhibit C
hereto). Upon surrender of the Premises, Tenant shall deliver the Premises,
including the Building Improvements, to Landlord in good order, condition
and state of repair, subject to ordinary wear and tear and loss by fire or
other casualty if Tenant is not otherwise required to restore or repair such
loss pursuant to the terms hereof.
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11.2 [Intentionally Deleted.]
11.3 TENANT'S FAILURE TO MAINTAIN; LANDLORD RIGHT TO ENTER. Tenant agrees to
permit Landlord, or its authorized representatives, to enter the Premises at
all times during usual business hours to inspect the same, and if Tenant
refuses or neglects to repair, replace, or maintain the Building
Improvements, or any part thereof, as required hereinabove, in a manner
reasonably satisfactory to Landlord, Landlord shall have the right, upon
giving Tenant reasonable written notice of its election to do so, to make
such repairs or perform such maintenance on behalf of and for the account of
Tenant. Nothing herein contained shall imply any duty on the part of
Landlord to do any such work which, under any provision of this Lease, Tenant
may be required to do, nor shall Landlord's performance of any repairs on
behalf of Tenant constitute a waiver of Tenant's default in failing to do the
same. If Landlord makes or causes any such repairs to be made or performed,
as provided herein, Tenant shall pay the cost thereof to Landlord, plus an
administrative fee of fifteen percent (15%) as Additional Rent, promptly
upon receipt of an invoice therefor.
11.4 [Intentionally Deleted.]
ARTICLE 12
INDEMNITY AND INSURANCE
12.1 INDEMNITY BY TENANT. Landlord shall not be liable for, and Tenant shall
indemnify, hold harmless and defend Landlord from any claim, demand,
liability, judgment, award, fine, mechanics' lien or other lien, loss,
damage, expense, charge or cost of any kind or character (including actual
attorney fees and court costs) arising directly or indirectly from (a) any
labor dispute involving Tenant or its contractors and agents or (b) the
construction, repair, alteration, maintenance, improvement, use, occupancy or
enjoyment of the Premises or any other portion of the Shopping Center by
Tenant, Tenant's assignees and/or subtenants and their respective
contractors, agents, licensees or invitees (hereinafter referred to as
"Claims"), including without limitation, Claims caused by the concurrent
negligent act or omission, whether active or passive, of Landlord or its
agents; provided, however, Tenant shall have no obligation to defend or
indemnify Landlord from Claims caused by the sole negligence, or willful or
criminal act of Landlord or its agents. Notwithstanding anything to the
contrary contained herein, in the event of Claim asserting Landlord's
concurrent negligence, Landlord may elect to defend itself against such
Claim, in which event each party shall pay any amounts awarded against it as
determined by judicial proceeding and each shall pay its own attorney's fees.
In the event Landlord does not elect to tender its own defense, Tenant shall
defend and indemnify Landlord as described herein, provided, however, that
Landlord shall reimburse Tenant to the extent that damages are awarded to a
third party as a result of Landlord's negligence, and in such event, in the
same proportion which the amount of the award related to Landlord's
negligence bears to the total amount awarded to such third party; Landlord
shall also reimburse Tenant for reasonable attorneys fees and costs incurred
by Tenant in connection with any such Claim, such reimbursement to be in the
same proportion which Landlord is reimbursing Tenant related to Landlord's
negligence as aforesaid.
12.2 LANDLORD'S INSURANCE OBLIGATION. At all times from and after the
Effective Date that Landlord is responsible to maintain portions of the
Common Area of the Shopping Center pursuant to Section 8.2 hereof, Landlord
shall maintain in effect a policy or policies of public liability insurance
providing protection bodily injury , death, and property damage arising from
Landlord's ownership and/or operation such portion of the Shopping Center
with coverage limits at least equal to those Tenant is required to maintain
in accordance with Section 12.3(a).
12.3 TENANT'S INSURANCE OBLIGATION. Tenant further covenants and agrees that
from and after the earlier of substantial completion of the Premises or
Tenant's entry onto the Premises with Landlord's consent, Tenant will carry
and maintain, at its sole cost and expense, the following types of insurance,
in the amounts specified and in the form hereinafter provided for:
(a) PUBLIC LIABILITY. Contractual and comprehensive general liability
insurance for bodily injury, death and property damage with coverage limits
of not less than One Million Dollars ($1,000,000) combined each occurrence
and in the aggregate insuring against any and all liability of the insured
with respect to said Premises or arising out of the maintenance, use or
occupancy thereof. All such bodily injury liability insurance and property
damage liability insurance shall specifically insure the performance by
Tenant of that part of the indemnity agreement contained in Section 12.1
relating to liability for injury to or death of persons and damage to
property.
(b) WORKER'S COMPENSATION. Statutory amount of workers' compensation
insurance required by the State in which the Shopping Center is located for
the benefit of Tenant's employees.
(c) INTERRUPTION INSURANCE. Interruption insurance, against loss or
damage resulting from the risks under Articles 18 Reconstruction, and 19
Condemnation in an amount equal to the aggregate of one (1) year's
requirements of (i) Minimum Annual Rental, (ii) the amounts payable by Tenant
for Additional Rent, and (iii) insurance premiums necessary to comply with
this Section 12.3.
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(d) EQUIPMENT. Machinery insurance on all air conditioning equipment
and systems exclusively serving the Premises. If said equipment and the
damage it may cause are not covered by Tenant's "All Risk" insurance (as
specified in subparagraph (e), below), then the insurance specified in this
subparagraph (d) shall be in an amount not less than Five Hundred Thousand
Dollars ($500,000). If Tenant requires boilers or other pressure vessels to
serve the Premises, they shall also be insured in the amount required by this
subparagraph (d).
(d) ALL RISK. Insurance against loss or damage covering (1) the
Building Improvements, (2) all other improvements to Tenant's Parcel, (3)
"Fixtures" as defined in Article 10, Section 10.4), including the items
specified as "Tenant's Work" in Exhibit C, and (4) "Personal Property" (as
defined in Article 10, Section 10.3) from time to time, in, on or upon the
Premises, under an All Risk policy (which shall include windstorm, flood, and
earthquake coverage if the Premises is located in an area in which such
hazards are customarily insured against by prudent commercial property
owners), which may contain such exclusions as are standard in the industry,
in amounts to prevent Landlord or Tenant from becoming a co-insurer under the
applicable policies, and in any event in amounts not less than the actual
replacement cost of all such items (excluding footings and foundations and
parts of the Improvements which are not insurable). Notwithstanding anything
herein to the contrary, if the cost of earthquake coverage is greater for any
insurance period than the cost customarily paid by prudent commercial
property owners, Tenant may elect to discontinue (or not to carry) earthquake
coverage for such period provided, however, that prior to discontinuing (or
failing to initially contract for) earthquake insurance Tenant shall notify
Landlord in writing of the amount Tenant can demonstrate is customarily paid
as aforesaid ("Customary Cost"), and shall provide three (3) bids Tenant has
obtained for such insurance. Within thirty (30) days following receipt of
any such notice from Tenant, Landlord shall have the right, but not the
obligation, to obtain earthquake coverage as required hereunder in which
event Tenant shall pay the Customary Cost to Landlord within thirty (30) days
after receipt of invoice therefor, and Landlord shall pay the excess if any.
At the end of any insurance period for which Tenant is not carrying
earthquake insurance or in which Landlord is paying the excess cost, Tenant
shall again be obligated to carry earthquake insurance or to provide notice
and bids as aforesaid for the next succeeding insurance period. All policy
proceeds shall be used for the repair or replacement of the property damaged
or destroyed.
All policies of insurance provided for herein shall be issued by insurance
companies with a general policyholder's rating of not less than A and a
financial rating of not less than Class X as rated in the most current
available "Best's" Insurance Reports, qualified to do business in the State
where the Shopping Center is located. All such policies shall be issued in
the name of the Landlord, Tenant, and Landlord's mortgagees or beneficiaries,
which policies shall be for the mutual and joint benefit and protection of
Landlord, Tenant and said mortgagees or beneficiaries. Executed copies of
such policies of insurance or certificates thereof shall be delivered to
Landlord prior to the earlier of delivery of the Premises, or Tenant's entry
onto the Premises with Landlord's consent, and thereafter copies of renewal
policies or certificates thereof shall be delivered to Landlord within thirty
(30) days prior to the expiration of the term of each such policy. As often
as any such policy shall expire or terminate, renewal or additional policies
shall be procured and maintained by Tenant in like manner and to like extent.
All policies of insurance delivered to Landlord must contain a provision
that the company writing said policy will give to Landlord twenty (20) days'
notice in writing in advance of any cancellation, lapse, reduction or other
adverse change respecting such insurance. All public liability, property
damage and other casualty policies shall be written as primary policies, not
contributing with or secondary to coverage which Landlord may carry.
Tenant's obligations to carry the insurance provided for above may be
satisfied by inclusion of the Premises within the coverage of a so-called
blanket policy or policies of insurance carried and maintained by Tenant;
provided, however, that Landlord and Landlord's mortgagees or beneficiaries
shall be named as additional insureds thereunder as their interests may
appear and that the coverage afforded Landlord will not be reduced or
diminished by reason of the use of such blanket policies of insurance, and
provided further that the requirements set forth herein are otherwise
satisfied. Tenant agrees to permit Landlord at all reasonable times to
inspect any policies of insurance of Tenant which Tenant has not delivered to
Landlord.
12.4 MUTUAL WAIVERS OF RIGHTS. Landlord (for itself and its insurer, and to
the extent and on condition that Tenant carries and maintains the insurance
at all times required under Section 12.3) hereby waives any rights, including
rights or subrogation, and Tenant (for itself and its insurer, and to the
extent and on the condition that Landlord carries and maintains the insurance
at all times required under Section 12.2) hereby waives any rights, including
rights of subrogation, each may have against the other, and Tenant (for
itself and its insurer) hereby waives any rights, including rights of
subrogation, it may have against any of the parties to the CC&R's referred to
in Article 7 and against other tenants in the Shopping Center (provided such
other tenants have waived such rights against Tenant) for compensation of any
loss or damage occasioned to Landlord or Tenant, as the case may be, with
regard to their respective property, the Premises, its contents or portions
of the Shopping Center, arising from any risk generally covered by All Risk
insurance Tenant shall carry and maintain under Section 12.2 and 12.3 hereof.
Each party shall cause each insurance policy obtained by it to provide that
the insurer waives all right of recovery by way of subrogation against the
other party in connection with any damage covered by such policy. The
foregoing waivers shall be operative only so long as available in the State
where the Shopping Center is located and so long as no policy is invalidated
thereby.
12.5 [Intentionally Deleted.]
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ARTICLE 13
ASSIGNMENT OR SUBLEASE
13.1 PROHIBITION. Tenant shall not assign, convey, mortgage, pledge,
encumber or otherwise transfer this Lease or any interest therein, sublet the
Premises or any part thereof, or permit the use or occupancy of the Premises
or any part thereof by anyone other than Tenant ("transfer"), without
receiving Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed. A transfer by operation of law, merger or
consolidation, or a change in the controlling partnership interest in Tenant
or in the controlling ownership of the voting stock of Tenant or any direct
or indirect parent of Tenant shall be deemed an assignment for purposes of
this Article 13, provided, however, that notwithstanding the foregoing Tenant
shall have the right, without the prior written consent of Landlord, to enter
into a transfer with a corporation which: (i) is a wholly owned subsidiary
of Tenant; or (ii) is a corporation of which Tenant owns in excess of fifty
percent (50%) of the outstanding capital stock; or (iii) merges or
consolidates with Tenant, where Tenant is the surviving entity. Any transfer
pursuant to (i), (ii) or (iii) ("Approved Transfer")above shall be subject to
the following conditions: (a) Tenant shall remain fully liable during the
unexpired Lease Term and any Option Terms; (b) any such transfer shall be
subject to all of the terms, covenants and conditions of this Lease and any
such transferee shall expressly assume for the benefit of Landlord the
obligations of Tenant under this Lease by a document reasonably satisfactory
to Landlord; (c) the resulting entity pursuant to (iii) above shall have a
net worth equal to or greater than Tenant's net worth at the date of Tenant's
request for consent; (d) Tenant shall give Landlord notice of such transfer
at least twenty (20) days prior to its effective date; and (e) Tenant shall
reimburse Landlord for Landlord's reasonable documentation fees incurred in
conjunction with the processing and preparation of documentation for any such
transfer.
Tenant shall, in writing, request consent to any transfer other than an
Approved Transfer, at least ninety (90) days prior to the anticipated
effective date of the transfer, and shall provide to Landlord information
regarding the identity of the proposed transferee and its net worth and
previous business experience including recent copies of current financial
statements, and within sixty (60) days following Landlord's receipt of such
written request and related information, Landlord shall, in writing, (i)
approve the proposed transfer, (ii) reject the proposed transfer or (iii)
exercise its option to cancel as described in Section 13.2 hereof. It shall
be reasonable for Landlord to refuse consent to a proposed transfer if (1) in
Landlord's reasonable business judgment, the present net worth of the
transferee is less than the greater of (i) the net worth of Tenant at the
Effective Date or (ii) the net worth of Tenant at the date of Tenant's
request for consent, or (2) if in Landlord's reasonable business judgment,
the Percentage Rental under Section 4.3 hereof that Landlord reasonably
anticipates receiving from the transferee is less than that which Landlord
has received from Tenant, or (3) in Landlord's reasonable business judgment,
the transferee lacks sufficient business reputation or experience to operate
a successful business of the type and quality permitted under the Lease, or
(4) the transferee's contemplated use of the Premises following the transfer
conflicts with the Permitted Use, or (5) the proposed transfer would breach
any covenant of Landlord respecting any other lease, financing agreement, or
other agreement relating to the Shopping Center. Any purported transfer,
encumbrance, pledge, mortgage, assignment or subletting (other than an
Approved Transfer) without Landlord's written consent shall be void and of no
force or effect. In the event of an assignment expressly approved by
Landlord in writing as provided hereinabove, Tenant shall be not be liable
for obligations which arise related to occupancy or enjoyment of the
Premises following the effective date of the assignment. Except as provided
herein with respect to an assignment specifically approved by Landlord, in
the event of any assignment, subletting, transfer or occupancy by someone
other than Tenant, whether or not expressly or implicitly by Landlord, Tenant
shall, nevertheless, at all times, remain fully responsible and jointly and
severally liable for the payment of the rent and for compliance with all
other obligations imposed upon Tenant under the terms, provisions and
covenants of this Lease. Any assignment or sublease shall contain a provision
whereby the assignee or subtenant agrees to comply with and be bound by all
of the terms, covenants, conditions, provisions and agreements of this Lease,
and Tenant shall deliver to Landlord, promptly after execution, an executed
copy of each assignment or sublease and an agreement of compliance by each
assignee or subtenant in form and substance acceptable to Landlord. Any
sublease shall also contain a provision that in the event of default by
Tenant hereunder and a termination of this Lease by Landlord, such subtenant
shall, at Landlord's option, attorn to Landlord as if Landlord were the
landlord under the sublease. Notwithstanding anything herein to the
contrary, Landlord specifically agrees that Tenant shall have the right to
assign this Lease to a major theater operator (which shall mean an operator
which has 500 or more screens in operation), subject to Landlord's prior
written consent as provided hereinabove, provided, however, that Tenant shall
remain liable hereunder, unless Landlord otherwise specifically agrees in
writing at the time of Tenant's request.
13.2 OPTION TO CANCEL. Upon receipt of Tenant's written request for
Landlord's consent to subletting, assignment, transfer or occupancy by
someone other than Tenant, Landlord shall have the option to cancel this
Lease as of the date the requested subletting, assignment, transfer or
occupancy by someone other than Tenant is to be effective. Landlord shall
exercise its option to cancel this Lease by written notice to Tenant within
sixty (60)days after Landlord receives Tenant's request for Landlord's
consent. In the event Landlord elects to cancel the Lease pursuant hereto
during the initial Lease Term Landlord shall pay to Tenant as of the
effective date of the transfer, the unamortized cost of Tenant's Work
amortized on a straight line basis over the initial Lease Term
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13.3 RIGHT TO COLLECT RENTS DIRECTLY. Upon the occurrence of an "event of
default" as set forth in Section 14 hereof, if all or any part of the
Premises is then assigned, sublet, transferred or occupied by someone other
than Tenant, then, in addition to any other remedies provided in this Lease
or provided by law, Landlord, at its option, may collect directly from the
assignee, subtenant, transferee or occupant all rent becoming due to Tenant
by reason of the assignment, sublease, transfer or occupancy. Any collection
directly by Landlord from the assignee or subtenant shall not be construed to
constitute a novation or a release of Tenant from the further performance of
its obligations under this Lease.
13.4 EXCESS RENT. If Tenant assigns this Lease or sublets all or a portion
of the Premises for an amount in excess of the Minimum Annual Rental (or the
pro rata share of Minimum Annual Rental in the case of a sublease of a
portion of the Premises), then Tenant shall pay to Landlord, as rent, fifty
percent (50%) of such excess received by Tenant.
ARTICLE 14
DEFAULTS BY TENANT; REMEDIES
14.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute a default by Tenant and a breach of this Lease:
(a) Failing or refusing to pay any amount of Minimum Annual Rental or
Additional Rent when due in accordance with the provisions of this Lease;
(b) [Intentionally deleted.]
(c) Failing or refusing to perform fully and promptly any covenant or
condition of this Lease, other than those specified in subparagraph (a)
above, the breach of which Tenant is capable of curing after reasonable
notice from Landlord; or
(d) Entering into a transfer of Tenant's interest in the Lease or the
Premises contrary to the provisions of Article 13; or understating Gross
Sales by more than six percent (6%), as set forth in Article 4, Section 4.4;
and committing any other breach of the Lease which is not capable of cure.
14.2 NOTICES. Following the occurrence of any of the defaults specified in
subparagraphs (a), (b) and (c) of Section 14.1, Landlord shall give Tenant,
and any subtenant, a written notice specifying the nature of the default and
the provisions of this Lease breached and demanding that Tenant, and any
subtenant, either fully cure each such default within the time period
specified in the correspondingly lettered subparagraphs below or quit the
Premises and surrender the same to Landlord:
(a) For nonpayment of Minimum Annual Rental or Additional Rent, five
(5) days;
(b) For a curable default, a reasonable period not to exceed ten (10)
days, provided, however, that if such default cannot be cured within said
time period, Tenant shall be deemed to have cured such default if Tenant so
notifies Landlord in writing, commences cure of the default within said time
period, and thereafter diligently and in good faith continues with and
actually completes said cure; and
(c) With regard to those noncurable defaults specified in subparagraph
(d) of Section 14.1, Landlord shall give Tenant, and any subtenant, a written
notice specifying the nature of the default and the provisions of this Lease
breached and Landlord shall have the right to demand in said notice that
Tenant quit the Premises within five (5) days.
To the extent permitted by applicable State law, the time periods provided in
this Section 14.2 for cure of Tenant's defaults under this Lease or for
surrender of the Premises shall be in lieu of, and not in addition to, any
similar time periods described by applicable State law as a condition
precedent to the commencement of legal action against Tenant for possession
of the Premises.
14.3 LANDLORD'S RIGHTS AND REMEDIES. Should Tenant fail to cure within the
time periods specified in Section 14.2 any default specified in subparagraph
(a), (b) or (c) of Section 14.1, or fail to quit the Premises in accordance
with subparagraph (c) of Section 14.2 with respect to any default specified
in subparagraph (d) of Section 14.1, Landlord may exercise any of the
following rights without further notice or demand of any kind to Tenant or
any other person, except as required by applicable State law:
(a) The right of Landlord to terminate this Lease and Tenant's right to
possession of the Premises and to reenter the Premises, take possession
thereof and remove all persons therefrom, following which Tenant shall have
no further claim thereon or hereunder;
(b) The right of Landlord, without terminating this Lease and Tenant's
right to possession of the Premises, to reenter the Premises and occupy the
whole or any part thereof for and on account of Tenant
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and to collect any unpaid rentals and other charges, which have become
payable, or which may thereafter become payable; or
(c) The right of Landlord, even though it may have reentered the
Premises, in accordance with subparagraph (b) of this Section 14.3, to elect
thereafter to terminate this Lease and Tenant's right to possession of the
Premises.
Should Landlord have reentered the Premises under the provisions of
subparagraph (b) of this Section 14.3, Landlord shall not be deemed to have
terminated this Lease, the liability of Tenant to pay rental or other charges
thereafter accruing, or Tenant's liability for damages under any of the
provisions hereof, by any such reentry or by any action, in unlawful detainer
or otherwise, to obtain possession of the Premises, unless Landlord shall
have notified Tenant in writing that it has so elected to terminate this
Lease and Tenant's right to possession. Tenant further covenants that the
service by Landlord of any notice pursuant to the unlawful detainer statutes
of the State where the Shopping Center is located and the surrender of
possession pursuant to such notice shall not (unless Landlord elects to the
contrary at the time of, or at any time subsequent to, the serving of such
notice and such election is evidenced by a written notice to Tenant) be
deemed to be a termination of this Lease. In the event of any reentry or
taking possession of the Premises as aforesaid, Landlord shall have the
right, but not the obligation, to remove therefrom all or any part of the
Fixtures or Personal Property located therein and to place the same in
storage at a public warehouse at the expense and risk of Tenant. The rights
and remedies given to Landlord in this Section 14.3 shall be additional and
supplemental to all other rights or remedies which Landlord may have under
laws in force when the default occurs.
14.4 LANDLORD'S DAMAGES. Should Landlord terminate this Lease and Tenant's
right to possession of the Premises, pursuant to the provisions of
subparagraph (a) or (c) of Section 14.3 or the provisions of Article 17,
Section 17.1, Landlord may recover from Tenant as damages, all of the
following:
(a) The worth at the time of award of any unpaid rental that had been
earned at the time of such termination;
(b) The worth at the time of award of the amount by which the unpaid
rental that would have been earned after termination until the time of award
exceeds the amount of such rental loss Tenant proves could have been
reasonably avoided;
(c) The worth at the time of award of the amount by which the unpaid
rental for the balance of the Lease Term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided;
(d) Any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom, including, without limitation, any costs or expense
incurred by Landlord in (i) retaking possession of the Premises, including
reasonable attorney fees therefor, (ii) maintaining or preserving the
Premises after such default, (iii) preparing the Premises for reletting to a
new tenant, including repairs or alterations to the Premises for such
reletting, (iv) leasing commissions, and (v) any other costs necessary or
appropriate to relet the Premises; and
(e) At Landlord's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by the laws of
the State where the Shopping Center is located.
As used in subparagraphs (a) and (b) of the Section 14.4, the "worth at the
time of award" is computed by allowing interest at the maximum rate allowed
by the usury or similar law, if any, of the State in which the Shopping
Center is located. As used in subparagraph (c) of this Section 14.4, "the
worth at the time of award" is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
All rental, other than Minimum Annual Rental shall, for the purposes of
calculating any amount due under the provisions of subparagraph (c) of this
Section 14.4, be computed on the basis of the average monthly amount thereof
accruing during the immediately preceding sixty (60) month period, except
that, if it becomes necessary to compute such rental before such a sixty (60)
month period has occurred, then such rental shall be computed on the basis of
the average monthly amount hereof accruing during such shorter period.
14.5 FIXTURES AND PERSONAL PROPERTY. Without limitation to Landlord's rights
under Article 10, in the event of Tenant's default, all of Tenant's
merchandise, Fixtures and Personal Property shall remain on the Premises and,
continuing during the length of said default, Landlord shall have the right
to take the exclusive possession of same and to use the same free of rent or
charge until all defaults have been cured or, at its option, to require
Tenant to remove same forthwith.
14.6 NO WAIVER. The waiver by Landlord of any breach of any term, covenant or
condition contained in this Lease shall not be deemed to be a waiver of such
term, covenant or condition of any subsequent breach thereof, or of any other
term, covenant or condition contained in this Lease. Landlord's subsequent
acceptance of partial rental or performance by Tenant shall not be deemed to
be an accord and satisfaction
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or a waiver of any preceding breach by Tenant of any term, covenant or
condition of this Lease or of any right of Landlord to a forfeiture of the
Lease by reason of such breach, regardless of Landlord's knowledge of such
preceding breach at the time of Landlord's acceptance. No term, covenant or
condition of this Lease shall be deemed to have been waived by Landlord
unless such waiver be in writing and signed by Landlord.
Notwithstanding anything to the contrary contained in this Article 14, Tenant
waives (to the fullest extent permitted under law) any written notice (other
than such notice as this Article 14 specifically requires) which any statute
or law now or hereafter in force prescribes be given Tenant.
14.7 INTEREST. Any amounts due from Tenant under the provisions of this
Lease which are not paid when due shall bear interest at the rate of two
percent (2%) over the prime rate charged from time to time by Wells Fargo
Bank (San Diego office), but not to exceed the maximum rate which Landlord is
permitted by law to charge.
ARTICLE 15
DEFAULTS BY LANDLORD; REMEDIES
15.1 DEFAULTS BY LANDLORD. If Landlord shall neglect or fail to perform or
observe any of the terms, covenants, or conditions contained in this Lease on
its part to be performed or observed within thirty (30) days after written
notice of default or, when more than thirty (30) days shall be required
because of the nature of the default, if Landlord shall fail to proceed
diligently to cure such default after written notice thereof, then Landlord
shall be liable to Tenant for any and all damages sustained by Tenant as a
result of Landlord's breach; provided, however, it is expressly understood
and agreed that (a) any money judgment resulting from any default or other
claim arising under this Lease shall be satisfied only out of the current
rents, issues, profits and other income Landlord receives from its operation
of the Shopping Center, net of all current operating expenses if any paid by
Landlord, and debt service associated with said operation ("Net Income" for
purposes of this Article 15 only), (b) no other real, personal or mixed
property of Landlord, wherever located, shall be subject to levy on any such
judgment obtained against Landlord, and (c) if such Net Income is
insufficient to satisfy such judgment, Tenant will not institute any further
action, suit, claim or demand, in law or in equity, against Landlord for or
on the account of such deficiency, and (d) such neglect or failure shall not
constitute consent by Landlord for Tenant to perform or observe such terms,
covenants or conditions at Landlord's expense. Tenant hereby waives, to the
extent permitted under law, any right to satisfy said money judgment against
Landlord except from Net Income.
15.2 MORTGAGEE NOTICE AND RIGHT TO CURE. If the Premises or any part thereof
are at any time subject to any mortgage or deed of trust and this Lease or
the rentals due from Tenant hereunder are assigned to the mortgagee or trust
deed holder ("Mortgagee"), Tenant agrees to give each Mortgagee, by
registered mail, a copy of any notice of default served upon Landlord,
provided that Tenant has been previously notified in writing of the address
of such Mortgagee. Tenant further agrees that if Landlord fails to cure such
default within the time provided for in this Lease, then the Mortgagee shall
have an additional thirty (30) days within which to cure such default, or if
such default cannot reasonably be cured within that time, then such
additional time as may be necessary if, within said 30-day period, any
Mortgagee has commenced and is diligently pursuing the remedies necessary to
cure the default (including but not limited to commencement of foreclosure
proceedings if necessary to affect such cure), in which event this Lease
shall not be terminated while such remedies are being so diligently pursued.
If and when the Mortgagee has made performance on behalf of Landlord, such
default shall be deemed cured.
ARTICLE 16
ABANDONMENT
[Intentionally Deleted.]
ARTICLE 17
BANKRUPTCY; INVOLUNTARY TRANSFERS
17.1 RIGHT OF TERMINATION. Should any of the following events occur,
Landlord may terminate this Lease and any interest of Tenant therein,
effective with the commencement of the event:
(a) Proceedings are instituted whereby all, or substantially all, of
Tenant's assets are placed in the hands of a receiver, trustee or assignee
for the benefit of Tenant's creditors, and such proceedings continue for at
least thirty (30) days;
(b) Any creditor of Tenant institutes judicial or administrative
process to execute on, attach or otherwise seize any of Tenant's merchandise,
Fixtures or Personal Property, located on the Premises and
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Tenant fails to discharge, set aside, exonerate by posting a bond, or
otherwise obtain a release of such property within thirty (60) days;
(c) A petition is filed for an order of relief under the Federal
Bankruptcy Code or for an order or decree of insolvency or reorganization or
rearrangement under any state or federal law, and is not dismissed within
thirty (60) days;
(d) Tenant makes a bulk sale of all, or substantially all, of Tenant's
merchandise, Fixtures or Personal Property located on the Premises, except in
accordance with Article 10, Section 10.1, or except in a permitted Occupancy
Transaction under Article 13, and fails to replace the same with similar
items of equal or greater value and utility within three (3) days; or
(e) [Intentionally deleted.]
(f) [Intentionally deleted.]
Landlord may require Tenant to deliver periodic financial statements and
other information reasonably required by Landlord in order to verify Tenant's
current net worth. If a court of competent jurisdiction determines that any
of the foregoing events is not a default under this Lease, and a trustee is
appointed to take possession (or if Tenant remains a debtor in possession),
and such trustee or Tenant transfers Tenant's interest hereunder, then
Landlord shall receive, as Additional Rent, the difference between the rent
(or other consideration) paid in connection with such transfer and the rent
payable by Tenant hereunder. Any assignee pursuant to the provisions of any
bankruptcy law shall be deemed without further act to have assumed all of the
obligations of the Tenant hereunder arising on or after the date of such
assignment. Any such assignee shall upon demand execute and deliver to
Landlord an instrument confirming such assumption. This is a lease of real
property in a shopping center within the meaning of Section 365(b)(3) of the
Bankruptcy Code, 11 U.S.C. Section 101 ET. SEQ.
17.2 REQUEST FOR INFORMATION. Within ten (10) days after Landlord's request
therefor, Tenant or Guarantor of this Lease shall provide Landlord and
Landlord's mortgagee or proposed mortgagee, as Landlord shall specify, such
financial, legal and business information concerning any of the events
described in Section 17.1 as Landlord may request, provided, however, that
Tenant shall not be required to provide such information more than two (2)
times in any one calendar year.
ARTICLE 18
RECONSTRUCTION
18.1 DAMAGE, DESTRUCTION.
(a) Tenant shall give Landlord immediate notice of any casualty loss.
Tenant shall adjust, collect and compromise any and all claims, with the
consent of Landlord and Landlord's mortgagee or trust deed holder ("Lender"),
such consent not to be unreasonably withheld or delayed, and Landlord and
Lender shall have the right to join with Tenant therein. All proceeds of any
insurance shall be payable to a Trustee which shall be as federally insured
bank or other financial institution, selected by Landlord and Tenant and
reasonably satisfactory to Lender (the "Trustee"). If the Premises shall be
covered by a mortgage, Lender, if it so desires, shall be the Trustee. Each
insurer is hereby authorized and directed to make payment under said policies
directly to such Trustee instead of to Landlord and Tenant jointly; and
Tenant hereby appoints such Trustee as Tenant's attorney-in-fact to endorse
any draft therefor for the purposes set forth in this Lease after approval by
Tenant of such Trustee, if Trustee is other than Lender.
(b) In the event of any casualty (whether or not insured against)
resulting in damage to the Premises or any part thereof, the Term shall
nevertheless continue and there shall be no abatement or reduction of Minimum
Annual Rental, Additional Rent or any other sums payable by Tenant hereunder.
The entire proceeds paid as a result of any property casualty payable under
insurance required under Article 12, less any actual and reasonable expenses
incurred by Landlord or Tenant in collecting such proceeds ("Net Proceeds")
of such insurance payment shall be retained by the above-mentioned Trustee
and, promptly after such casualty and receipt of the Net Proceeds by the
Trustee, Tenant shall commence and diligently continue to perform the
restoration to the Premises. Upon payment to Trustee of such Net Proceeds,
the Trustee shall, to the extent available, make the Net Proceeds available
to Tenant for restoration, in accordance with the provisions of Section 18.2.
Tenant shall to the extent of available insurance proceeds promptly complete
restoration of the Premises as nearly as possible to their value, condition
and character immediately prior to such damage ("Restoration")(including
Tenant's making any desired Alterations allowed hereunder) and the Net
Proceeds of such loss shall thereupon be payable to Tenant, subject to the
provisions of Section 18.2 hereof.
18.2 RESTORATION. The Net Proceeds shall be disbursed by the Trustee in
accordance with the following conditions:
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(a) At the time of any disbursement, no event of default shall exist
(regardless of whether Tenant shall have received notice and an opportunity
to cure) and no construction, mechanics' or materialmen's liens shall have
been filed and remain undischarged and unbonded.
(b) If the cost of Restoration exceeds $100,000, then prior to
commencement of the Restoration, the architects, contracts, contractors,
plans and specifications for Restoration shall have been approved by Landlord
and Lender, which approval shall not be unreasonably withheld or delayed.
(c) Each request for disbursement shall be accompanied by a certificate
of Tenant, signed by the President, Treasurer or any Vice President of
Tenant, describing the work for which payment is requested, stating the cost
incurred in connection therewith and stating that Tenant has not previously
received payment for such work and the certificate to be delivered by Tenant
upon completion of the work shall, in addition, state that the work has been
completed and complies with the applicable requirements of this Lease.
(d) Disbursements shall be made from time to time in an amount not
exceeding the cost of the work completed since the last disbursement upon
receipt of (1) satisfactory evidence, including architects' certificates of
the stage of completion, of the estimated cost of completion and of
performance of the work to date in a good and workmanlike manner in
accordance with the contracts, plans and specifications, (2) waivers of
liens, (3) a satisfactory bring down of title insurance, and (4) other
evidence of cost and payment so that Landlord can verify that the amounts
disbursed from time to time are represented by work that is completed in
place and free and clear of mechanics', construction and materialmen's lien
claims.
(e) The Trustee may retain ten percent of the Net Proceeds until the
Restoration is fully completed in the reasonable judgment of the Lender.
(f) The Net Proceeds shall be kept in a separate interest-bearing
federally insured account by the Trustee or by Lender.
Any sum held by Trustee which remains upon completion of Restoration and
payment in full of all amounts due with respect thereto, shall be paid to
Landlord.
18.3 LAST YEAR OF TERM. If, during the last year of the Lease Term (or any
extension thereof), the Premises are damaged to the extent of twenty-five
percent (25%) or more of their replacement value, either Landlord or Tenant
may terminate this Lease by giving at least thirty (30) days prior written
notice to the other within thirty (30) days after the date of the damage.
However, if Tenant, within ten (10) days after receipt of any such notice
from Landlord, gives written notice to Landlord agreeing to exercise an
option to extend which would otherwise have been available to Tenant at the
end of the last year , extending the Lease Term for a period of five years
from the end of such last year in accordance with the terms of said Option,
then the Lease shall not terminate, and Tenant shall restore the Premises as
provided herein. If the Lease is terminated pursuant to this Section 18.3,
all Net Proceeds shall be paid to Landlord.
ARTICLE 19
CONDEMNATION
19.1 CONDEMNATION. If more than twenty-five percent (25%) of either the
Building Improvements or Tenant's Parcel is taken or sold under such threat,
or the amount of parking available in the Shopping Center following any such
taking is insufficient to meet the governmental parking requirements for
Tenant's operation in the Premises as it exists as of the effective date of
such condemnation, then in any such case, either Landlord or Tenant may
terminate this Lease as of the date that the condemning authority takes
possession by delivery of written notice of such election within twenty (20)
days after such party has been notified of the taking or, in the absence
thereof, within twenty (20) days after the condemning authority shall have
taken possession.
19.2 CONTINUATION OF LEASE AFTER CONDEMNATION. If this Lease is not
terminated by Landlord or Tenant, it shall remain in full force and effect as
to the portion of the Premises remaining; provided, however, that the Minimum
Annual Rental shall be reduced in proportion to the reduction of the Floor
Area of the Premises. Rental due hereunder shall not otherwise be abated or
reduced. In the event the Lease remains in full force and effect as to the
portion remaining, Tenant shall, at Tenant's expense, restore the Premises
to a complete unit of like quality and character, except as to size, as
existed prior to the date on which the condemning authority took possession,
provided, however, that Tenant's obligation to restore the Premises is
limited to the extent of condemnation proceeds made available to Tenant as
provided hereinbelow.
19.3 RESTORATION AND ALLOCATION OF CONDEMNATION AWARD. Subject to the
provisions of this Article 19, Tenant hereby irrevocably assigns to Lender or
to Landlord, in that order, any award or payment in respect to any
Condemnation of the Premises, except that nothing in this Lease shall be
deemed to require (i) the assignment to Landlord or Lender of any award or
payment on account of Tenant's leasehold interest hereunder, Tenant's trade
fixtures, or other tangible personal property, moving expenses and similar
claims, if available, to the extent Tenant shall have right to make a
separate claim therefor against the condemnor or (ii) any act or circumstance
that impairs Tenant's right to any such award or payment.
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In the event the Lease is terminated pursuant to Section 19.1 hereof,
the entire award in the condemnation proceeding shall be paid to Lender, or
if there is no Lender, to Landlord or, if the amount of such award is greater
than the amount owing to Lender, the excess shall be paid to Landlord .
In the event the Lease is not terminated, the amount of the
condemnation award shall be retained by Landlord, and Landlord and Lender
shall, to the extent received, make that portion of the award (after
deducting therefrom all expenses incurred in the collection thereof) ("Net
Award") equal to the cost of Restoration, available to Tenant for
Restoration, in accordance with the provisions of Section 18.2 hereinabove
(using "Net Award" in lieu of "Net Proceeds" for purposes hereof), and
promptly after such Condemnation, Tenant shall commence and diligently
continue to perform the Restoration of the Premises. Upon completion of the
Restoration the amount of the Net Award which remains shall be the property
of Lender or Landlord in that order.
ARTICLE 20
SALE OR MORTGAGE BY LANDLORD
20.1 SALE OR MORTGAGE. From and after the Effective Date, Landlord may at
any time, without the consent of Tenant, sell, purchase, exchange, transfer,
assign, lease or convey Landlord's interest in whole or in part, in the
Lease, the Premises, the realty underlying the Premises and/or any portion of
or interest in the realty or improvements in the Shopping Center
(collectively referred to in Article 20 and 21 as "Sale").
20.2 RELEASE ON SALE. From and after a Sale, Landlord shall be released from
all liability toward Tenant and Tenant's successors and assigns arising from
this Lease because of any act, occurrence or omission of Landlord occurring
after such Sale, provided Landlord's purchaser or assignee expressly assumes
Landlord's duties and covenants under this Lease.
20.3 ESTOPPEL CERTIFICATE. Tenant shall at any time during the Term of this
Lease, within five (5) days of written notice from Landlord, execute and
deliver to Landlord a statement in writing, substantially in the form
attached hereto as Exhibit D, certifying that this Lease is unmodified and
in full force and effect or, if modified, stating the nature of such
modification. Tenant's statement shall include other details requested by
Landlord, such as the date to which rent and other charges are paid, Tenant's
knowledge concerning any outstanding defaults with respect to Landlord's
obligations under this Lease and the nature of such defaults if there are
claims. Any such statement may be relied upon conclusively by any
prospective purchaser or encumbrancer of the Premises. Tenant's failure to
deliver such statements within such time shall be conclusive upon Tenant that
this Lease is in full force and effect, except to the extent any modification
has been represented by Landlord, and that there are no uncured defaults in
the Landlord's performance, and that not more than one month's rent has been
paid in advance.
ARTICLE 21
SUBORDINATION; ATTORNMENT
21.1 SUBORDINATION. This lease is junior and subordinate to all ground
leases, mortgages, deeds of trust, and other security instruments now or
hereafter affecting the property of which the Premises are a part and to all
advances made on the security thereof, and to all renewals, modifications,
consolidations, replacements and extensions thereof. If any mortgagee, first
trustee or ground lessor elects to have this Lease prior to the lien of its
mortgage, deed of trust or ground lease, and gives written notice thereof to
Tenant, this Lease shall be deemed prior thereto. Within ten (10) days after
the receipt of a written request from Landlord, from any first mortgagee or
first deed of trust trustee or beneficiary of Landlord, or from any lessor of
Landlord, Tenant will, in writing, subordinate its rights under this Lease to
the lien or security interest of the first mortgage, the first deed of trust
(including all future advances made thereunder, subsequent to the Effective
Date of this Lease), or the interest of any lease in which Landlord is the
lessee, as such may burden the Premises or any building hereafter placed upon
the land of which the Premises are a part. Notwithstanding the foregoing or
any other provision of this Lease, Tenant's obligation to subordinate its
rights hereunder shall be conditioned upon Tenant's receipt from any party
seeking such superior position of a non-disturbance agreement to the effect
that so long as Tenant pays the rentals due under this Lease and otherwise
complies with the terms hereof, Tenant's occupancy hereunder shall not be
disturbed. Tenant shall agree to attorn directly to any such party.
21.2 ATTORNMENT. In the event any proceedings are brought for foreclosure,
or in the event of the exercise of the power of sale under any mortgage or
deed of trust made by Landlord covering the Premises or the expiration or
earlier termination of any ground lease or master lease in which Landlord is
the lessee, Tenant shall attorn to the purchaser upon any such foreclosure or
sale or the lessor of any such lease and recognize such purchaser or lessor
as Landlord under this Lease.
21.3 SUBORDINATION OF LEASE TO CERTAIN AGREEMENTS WITH THIRD PARTIES. Upon
the request of Landlord, Tenant will subordinate its rights hereunder to any
Declaration of Restrictions and Grant of Easements or any other operation and
reciprocal easement agreement for access and parking between
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Landlord and the Owner(s) of any property located within or adjacent to the
Shopping Center whenever, in the reasonable discretion of Landlord, it is
determined that any such agreement would be beneficial to the use and
operation of the Shopping Center.
21.4 EXECUTION OF DOCUMENTS. Tenant, upon request of any party in interest,
shall execute promptly such instruments and certificates to carry out the
intent of this Article 21 as shall be requested by Landlord.
ARTICLE 22
QUIET ENJOYMENT
22.1 LANDLORD'S COVENANT. If Tenant is not in breach under the covenants
made in this Lease, Landlord covenants that Tenant shall have peaceful and
quiet enjoyment of the Premises without hindrance on the part of Landlord.
Landlord will defend Tenant in the peaceful and quiet enjoyment of the
Premises against claims of all persons claiming through or under the Landlord.
ARTICLE 23
HOLDING OVER
23.1 EFFECT OF HOLDING OVER. If Tenant remains in possession of the Premises
after the expiration of the term of this Lease without executing a new Lease,
or after Landlord has declared a forfeiture by reason of a default by Tenant,
then such holding over shall be construed as a tenancy from month to month,
subject to all the conditions, provisions and obligations of this Lease
insofar as they are applicable to a month-to-month tenancy. The Minimum
Annual Rental payable during any period of holding over should be equal to
one hundred fifty percent (150%) of the Minimum Annual Rental payable during
the period immediately preceding Tenant's holding over.
ARTICLE 24
LIMITATION OF LIABILITY
24.1 AGREEMENT BY TENANT.
(a) In consideration of the execution of this Lease by Landlord, Tenant
agrees that if Landlord assigns its interest hereunder to a partnership, then
in the event of any actual or alleged failure, breach, or default hereunder
by said partnership:
(i) The sole and exclusive remedy shall be against the
partnership and its partnership assets;
(ii) No partner of Landlord should be sued or named as a party in
any suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(iii) No service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the
partnership);
(iv) No partner of Landlord shall be required to answer or
otherwise plead to any service of process;
(v) No judgment will be taken against any partner of Landlord;
(vi) Any judgment taken against any partner of Landlord may be
vacated and set aside at any time without hearing;
(vii) The covenants and agreements are enforceable both by
Landlord and also by any partner of Landlord.
(b) Tenant agrees that each of the foregoing covenants and agreements
shall be applicable to any covenant or agreement either expressly contained
in this Lease or imposed by statute or at common law.
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ARTICLE 25
NOTICES
25.1 NOTICES. Whenever in this Lease it shall be required or permitted that
notice or demand be given or served by either party to this Lease to or on
the other, such notice or demand shall be in writing, mailed by certified
mail, or personally delivered, or forwarded by overnight courier for next
business day delivery, to the other party at the addresses specified in
Article 1. Notices personally delivered shall be deemed given on the date of
delivery. Mailed notices shall be sent by United States Postal Service,
certified mail, return receipt requested, postage prepaid and shall be deemed
to have been given on the date of the receipted signature, or on the date the
receipt is returned to the noticing party as undeliverable. Notices sent by
overnight courier, next business day delivery, shall be deemed delivered on
the next business day, as evidenced by a receipt of delivery provided by the
courier service. Either party may, by written notice delivered pursuant to
this provision, at any time designate a different address to which notices
shall be sent.
ARTICLE 26
GENERAL PROVISIONS
26.1 GOVERNING LAW. The laws of the state in which the Shopping Center is
located shall govern the validity, performance and enforcement of this Lease.
26.2 INVALIDITY. If any provision of this Lease is determined to be void by
any court of competent jurisdiction, such determination shall not affect any
other provision of this Lease and such other provisions shall remain in full
force and effect. If any provisions of this Lease are capable of two
constructions, one which would render the provision void and one which would
render the provision valid, the provision shall be interpreted in the manner
which would render it valid.
26.3 PAYMENTS. Except as may otherwise be expressly stated, each payment
required to be made by Tenant shall be in addition to and not in substitution
for other payments to be made by Tenant.
26.4 TIME OF ESSENCE. Time is of the essence of each and every provision of
this Lease.
26.5 FORCE MAJEURE. Any prevention, delay or stoppage due to strikes,
lockouts, labor disputes, acts of God; inability to obtain labor, materials
or reasonable substitutes therefor, governmental restrictions, regulations,
or controls including delays caused by governmental authorities or inability
to obtain required governmental approvals, judicial orders, enemy or hostile
governmental action, civil commotion, fire or other casualty, adverse weather
conditions, and other causes beyond the reasonable control of the party
obligated to perform, shall excuse the performance by such party for a period
equal to that resulting from such prevention, delay or stoppage, except those
obligations of Tenant to pay Minimum Annual Rental and Additional Rent
pursuant to the terms of this Lease ( provided, however, that the
commencement of the obligation to pay Minimum Annual Rental and Additional
Rent shall be subject to the provisions of this paragraph as more
particularly described in Sections 3.1 and 4.1 hereof).
26.6 BROKERS. Tenant warrants that it has had no dealings with any real
estate broker or agent in connection with the negotiation and/or execution of
the Lease except Business Real Estate Brokerage Co. In the event any broker
other than the brokers acknowledged in writing by Landlord make claim for
monies owed, Tenant shall hold Landlord harmless therefrom. Any such claims
or demands or requests should be made subject to the indemnity provision of
Section 12.1.
26.7 ATTORNEY'S FEES. If either party commences any legal action or
proceeding to enforce, interpret or construe this Lease, the prevailing party
shall be entitled to recover from the other party reasonable attorneys' fees
and court costs, as determined by the court. "Legal action or proceeding"
includes a declaratory relief action and any bankruptcy or insolvency
proceedings. If Landlord is involuntarily made a party defendant to any
litigation relating to this Lease or the Premises by reason of any act or
omission of Tenant, then Tenant shall hold Landlord harmless from any loss,
cost or expense, including reasonable attorney's fees and expenses as a part
of the judgment resulting therefrom.
26.8 ENTIRE AGREEMENT. This Lease and its exhibits contain all of the
agreements and conditions made between the parties with respect to the hiring
of the Premises and may not be modified orally or in any other manner other
than by a written instrument signed by all the parties to this Lease.
26.9 LIABILITY OF SUCCESSORS. The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of all of the
parties hereto and all of the parties hereto shall be jointly and severally
liable for the covenants contained herein.
ARTICLE 27
CONDITIONS TO LEASE
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27.1 CONDITIONS TO LEASE. Notwithstanding anything herein to the contrary,
this Lease is contingent upon Landlord obtaining financing for construction
of the Shopping Center, all approvals required by governmental authorities,
and all other approvals necessary to implement the provisions of this Lease.
If Landlord does not obtain such financing and all such approvals, this Lease
shall be terminated upon notice from Landlord to Tenant. Further, Landlord
and Tenant acknowledge that as of the date of this Lease, Landlord is in
escrow to buy, but does not own hold fee title to the Shopping Center, and
that both Landlord and Tenant's performance hereunder shall be conditioned
upon Landlord's obtaining title. Landlord and Tenant agree that neither
party shall be obligated to perform its obligations hereunder until such time
as Landlord obtains title to the Shopping Center, and in the event it is
determined that Landlord will be unable to obtain title to the Shopping
Center, then either party shall have the right to terminate this Lease upon
written notice to the other. In the event of a termination of the Lease as
provided hereinabove, the Lease shall be deemed null and void, and Landlord
and Tenant shall have no further rights or obligations to each other
hereunder except that Landlord shall return any deposits previously delivered
from Tenant to Landlord pursuant hereto. In the event of any such
termination, Landlord and Tenant shall each pay the costs incurred by it, or
its employees, contractors, consultants or other agents. Landlord shall
satisfy the foregoing contingencies within one (1) year following the
execution of this Lease. In the event that such conditions have not been
satisfied by such date, Landlord, at its option, may elect to extend the
period for satisfying such contingencies for an additional forty-five (45)
days, subject to Landlord agreeing to reimburse Tenant for all costs incurred
by or for Tenant in connection with implementing this Lease during such
45-day period, including, without limitation, the preparation of plans,
specifications, tests and other such items. In the event Landlord elects not
to pay such expenses, Tenant may agree to extend the contingency period or to
terminate the Lease, as Tenant so elects and in its sole discretion.
ARTICLE 28
MEMORANDUM OF LEASE
This Lease Agreement shall not be recorded, but a Memorandum of this
Lease Agreement, in a form acceptable to both Landlord and Tenant shall be
executed and acknowledged by the parties and recorded in the county in which
the Premises are located, at Tenant's expense.
IN WITNESS WHEREOF, the Landlord and Tenant have duly executed this Lease as
of the day and year first above written.
<TABLE>
<CAPTION>
TENANT: LANDLORD:
<S> <C>
CINEMA STAR LUXURY THEATERS, INC. LANDGRANT CORPORATION
a California corporation a California corporation
By: /s/ Frank Moreno By: /s/ Sam Marasco
----------------------------------- -------------------------------
Signature Title: President
Frank Moreno ----------------------------
-----------------------------------
Name By: Chris Smith
-------------------------------
President & COO Title: Executive Vice President
----------------------------------- ---------------------------
Title
By: /s/ Norman Dowling
-----------------------------------
Signature
Norman Dowling
-----------------------------------
Name
Vice President & CFO
-----------------------------------
Title
</TABLE>
Page 27
<PAGE>
EXHIBIT A
SITE PLAN OF THE SHOPPING CENTER
Exhibit A-2
<PAGE>
EXHIBIT B
DESCRIPTION OF THE PREMISES
[To Be Provided]
Exhibit B-1
<PAGE>
EXHIBIT C
CONSTRUCTION OF IMPROVEMENTS
THESE CONSTRUCTION OF IMPROVEMENTS provisions are made a part of the
Lease (the "Lease") between Landlord and Tenant to which these CONSTRUCTION
OF IMPROVEMENTS provisions are attached as EXHIBIT C. Except as specifically
provided in this EXHIBIT C, defined terms shall have the meanings assigned
them in the Lease.
1. LANDLORD'S WORK. As a condition to Tenant's obligations under the
Lease, Landlord shall be responsible for the full completion, at Landlord's
sole cost and expense (subject to paragraph 10 hereof), of all of the
following (collectively, "Landlord's Work"):
a. GRADING. Landlord shall, at Landlord's sole cost and expense,
cause the land in the Tenant Parcel to be cut, filled and graded (the
"Grading Work") in accordance with final plans which have been approved by
Tenant in writing, such approval not to be unreasonably withheld (the
"Grading Plans"). The Grading Plans shall not be materially changed by
Landlord or Tenant without the prior consent of the other, which consent
shall not be unreasonably withheld or delayed. Tenant shall be provided with
a copy of the prepared foundation soils test results. Landlord agrees to
obtain all necessary permits for the Grading Work and to cause its contractor
to promptly commence and diligently pursue the Grading Work in accordance
with the Grading Plans. Subject to the provisions of paragraph 8 hereof,
Landlord covenants and agrees (i) to use reasonable efforts and due diligence
to complete the Grading Work, as herein contemplated, in accordance with the
Grading Plans; and (ii) to obtain approval for all curb cuts indicated on the
Grading Plans. Landlord agrees to keep Tenant advised on a regular basis as
to Landlord's progress in completing the Grading Work.
b. SITE WORK. Landlord, at its sole cost and expense, shall
cause a contractor licensed in the State of California to complete (i) the
construction and installation of the parking areas and all paving (including
heavy-duty paving) and curbing for parking areas (including sidewalk curbs
and sidewalks in front of the Building), vehicular access and service roads,
driveways, walkways, landscaping and parking lot lighting within the Tenant
Parcel prior to Tenant's opening for business; and (ii) the construction and
installation to the Building, of utility lines sufficient for Tenant's
initial Permitted Use for telephone, permanent electricity, sanitary sewer,
domestic water, fire protection water (if required by the City of Oceanside),
with a fire sprinkler detector check, vault and post indicator valve, and the
completion of the storm water drainage system, all prior to the delivery of
the Building to Tenant; and (iii) the construction and installation of a
pylon sign and, at Landlord's election, other site identification signage
prior to Tenant's opening for business, subject to Tenant's paying for its
sign panel thereon, and for its pro rata share of the cost of the pylon sign
as more particularly described in Section 10.7 of the Lease (it being agreed
that Tenant shall be responsible to construct at Tenant's election and
expense, a Monument Sign, more specifically described in Section 10.7 of the
Lease, and that said Monument Sign is not a part of Site Work)(the work
described in (i), (ii) and (iii) collectively referred to as the "Site
Work"). Landlord's plans and specifications for the Site Work shall be
prepared at Landlord's direction and sole expense, and shall be subject to
the prior written approval of Tenant not to be unreasonably withheld or
delayed. The Landlord's plans and specifications shall contain the intended
location of utility lines to be installed for the Building. No change shall
be made to any such locations unless mutually approved by both parties hereto.
c. PAD SURVEY. Landlord shall complete the Grading Work for the
land in substantial conformance with the Grading Plans, and shall promptly
thereafter cause a certified survey to be made of the footprint area of the
Building (the "Pad Survey"). The Pad Survey shall be promptly provided to
Tenant and shall include the certification by Landlord's surveyor as to the
line and grade, and a certification by Landlord's soils engineer as to soil
compaction. Tenant shall have the right to verify the accuracy of the
certifications.
d. BUILDING CONSTRUCTION. Promptly following completion of the
Grading and delivery of the certified Pad Survey and upon receipt of all
required permits and approvals therefor, Landlord shall commence and pursue
with due diligence to completion the construction of the Tenant Building; the
expense of such construction to be paid as provided in paragraph 10 hereof.
Tenant's Building shall be constructed in a good and workmanlike manner in
compliance with all applicable laws, and in accordance with plans and
specifications prepared by Landlord and Tenant in accordance with this
Paragraph 1(d). The Tenant Building will consist of a "Building Shell" and
"Tenant-Required Improvements," each as hereinafter defined. In the
construction of the Tenant Building Landlord shall endeavor to achieve a
reasonable balance among cost, schedule and quality.
i. Landlord shall, at its expense as part of Landlord's
Construction Contribution, prepare or cause the preparation of the plans,
specifications and working drawings for the "Building Shell" described in
SCHEDULE 1 attached hereto. The Building Shell shall be based on the
Tenant's Concept Plan (consisting of a building footprint) and Tenant's
Design Information defined in paragraph 1(d)(iii) hereof. Tenant shall have
the right to approve Landlord's plans, specifications and working drawings
Exhibit C-2
<PAGE>
in accordance with paragraph 1(i) hereof. Landlord shall separately provide
building elevations to Tenant which Tenant shall review and approve in
accordance with the Construction Schedule attached hereto as SCHEDULE 2
("Construction Schedule").
ii. Tenant shall, at its sole expense without reimbursement,
prepare or cause the preparation of the plans, specifications and working
drawings for the "Tenant-Required Improvements" which are listed in Schedule
3 hereto. Tenant shall cause the plans, specifications and working drawings
of the Tenant-Required Improvements to be delivered to Landlord on or before
the date set forth for such delivery in the Construction Schedule attached
hereto. Landlord will have the right to approve and price the plans,
specifications and working drawings, which approval shall not be unreasonably
withheld or delayed.
iii. In connection with the preparation of the Building Shell,
Tenant shall deliver the following information (collectively, "Tenant Design
Information") to Landlord's architect in sufficient time for Landlord's
architect to incorporate them into Landlord's plans and deliver the working
drawings for the Building Shell within the time frame shown on the
Construction Schedule:
SCHEMATIC INFO
- Programming information for box office and exterior
queuing design.
- Required clear ceiling heights in theaters.
- Tenant approval of exterior design of Tenant Building.
DD INFO
- CADD floor plans.
- HVAC equipment specifications and locations.
- Floor slab block out areas and preferred slab expansion
joint locations.
- Structural support requirements and locations for any
TI improvements to be supported or braced from the
Building Shell structure.
- Anticipated electric service requirements.
CD INFO
- Sewer connection requirements.
- Specifications for illuminated exterior signage.
- Trash compactor specs- compactor pad and electrical
conduit stubbed to compactor location; compactor and
installation is by Tenant.
- Anticipated water, sprinkler and gas service
requirements.
- Tenant approval of DD package.
e. PERMITS. Landlord at its sole expense shall obtain or cause
to be obtained all building permits, licenses and other governmental
approvals required for the construction of the Site Work. Landlord, at its
sole expense as part of the Landlord Construction Contribution, shall obtain
or cause to be obtained all building permits, licenses and other governmental
approvals required for the construction of the Building Shell. Tenant, at
the cost of Landlord as part of the Landlord Construction Contribution,
shall obtain or cause to be obtained all building permits required to permit
the construction of the Tenant-Required Improvements. Landlord shall be
responsible for obtaining final sign-off from building inspectors on the
construction of the Building Shell and the Tenant-Required Improvements. The
parties contemplate that, following such sign-off, Tenant shall cause the
installation of FF&E (defined in paragraph 2(a) hereof). Following the
completion of such installation, Landlord and Tenant shall assist and
cooperate with each other in obtaining a preliminary and final certificate of
occupancy for the Premises.
f. INSPECTIONS. During the course of construction of the
Landlord's Work, Tenant may, in cooperation with Landlord's contractor, enter
the Premises and the Tenant Parcel for purposes of inspecting the Landlord's
Work; Tenant may bring its consultants and representatives for purposes of
such inspection(s), so long as such parties cooperate with Landlord's
contractor and do not interfere with or delay completion of Landlord's Work.
Exhibit C-3
<PAGE>
g. SUBSTANTIAL COMPLETION OF LANDLORD'S WORK. Landlord's Work as
to the Site Work and the Building Improvements shall be deemed substantially
complete when it has been completed or performed per the terms and conditions
of this Lease, subject only to a "punch-list" of minor and immaterial items
which are capable of completion within thirty (30) days thereafter and which
do not interfere with Tenant's ability to reasonably complete Tenant's Work
within 90 days thereafter, and Landlord and Landlord's architect have so
notified Tenant in writing (such notice shall be referred to as the "Notice
of Substantial Completion"). In the event both Landlord and Tenant are
working in the Premises at the same time, each agrees to cause its contractor
to reasonably cooperate with the other contractor.
h. FINAL COMPLETION. Landlord shall cause final completion of
the Tenant Building in a lien-free condition to occur within thirty (30) days
after the date of the Notice of Substantial Completion.
i. SHELL BUILDING PLANS AND SPECIFICATIONS. Landlord and Tenant
shall cooperate with each other so as to allow Landlord to have plans,
specifications and working drawings prepared for the Building Shell pursuant
to Section 1(d), above, as soon as reasonably practicable. Tenant shall have
thirty (30) days following receipt of such plans and specifications in which
to approve or disapprove the same in writing. Tenant must identify with
reasonable specificity any grounds for disapproval, and Landlord shall
re-submit revised plans and specifications to Tenant, attempting to address
in good faith Tenant's grounds for disapproval, within ten (10) business days
after receipt of Tenant's written disapproval. Tenant shall have then ten
(10) business days after receipt of the revised plans and specifications to
approve or disapprove the same in writing, and again must identify any
grounds for disapproval with reasonable specificity. In the event there are
remaining grounds for disapproval Landlord and Tenant shall promptly meet and
diligently and in good faith work toward resolving the dispute. Landlord
shall solicit and receive bids from no fewer than three (3) subcontractors
for each subtrade (including any one subcontractor in each subtrade which
Tenant has identified prior to the plans being bid) and shall deliver such
bids to Tenant for informational purposes only. Landlord shall provide
Tenant with a copy of each bid package concurrent with Landlord's
distribution of bid packages to subcontractors. Landlord will select the
lowest responsible and qualified bidder. Tenant shall have no right to
approve the bidder selected by Landlord. Once all subcontracts have been let
for the Building Shell, Landlord shall provide Tenant with the total of all
subcontract prices for the Building Shell. Once all subcontracts for the
Tenant Required Improvements have been let, Landlord shall provide Tenant
with the total of all subcontract prices for the Tenant Required Improvements
and the total Construction Cost (as such term is defined in paragraph 10
hereof). Once the subcontracts have been let, all change orders which
materially affect the subcontract price or the plans and specifications will
be subject to the prior written approval of Tenant which will not be
unreasonably withheld. Tenant will provide its written approval or its
disapproval (which will identify with specificity any grounds for
disapproval) within three (3) days from Tenant's architect's receipt of such
change order and, if such change order results in an increase in cost over
Landlord's Contribution, shall pay the amount of such change order within
fifteen (15) days after receipt of an invoice therefor. Landlord's
contractor shall be HBD Construction ("HBD"), which shall receive an overhead
and profit fee of five percent (5%) and general conditions commensurate with
the project. All subcontractors shall be bondable, be experienced in the
trade for which they are being considered and be independent companies
unrelated to either Landlord or the general contractor. In the event that
Tenant expresses its concern as to any subcontractor in writing with reasons
therefor, Landlord will reasonably consider such request and, if reasonably
appropriate, will disqualify said potential subcontractor from bidding.
j. TENANT'S COMPLIANCE WITH CONSTRUCTION SCHEDULE. Except as
specifically provided in this EXHIBIT C, Tenant shall perform all acts which
Tenant is required to perform pursuant to this EXHIBIT C and the Lease or on
the Construction Schedule, on or before the date specified for the completion
of such act in the Construction Schedule, provided, however, that Tenant's
obligation hereunder shall be subject to the provisions of paragraph 8
hereof, and to delays caused by delay or failure to act by Landlord.
k. COMMENCEMENT AND COMPLETION OF LANDLORD'S WORK. Landlord
agrees to commence and complete construction of Landlord's Work within the
time periods more particularly described in Section 3.2 of the Lease.
2. TENANT'S WORK. Upon Landlord's delivery of the Notice of
Substantial Completion, Tenant shall be responsible for the full completion
of all of the following (collectively, "Tenant's Work").
a. TENANT'S FF&E. Tenant shall pay for and install its
storefront sign, a monument sign (at Tenant's election and as more fully
described in Section 10.7(c) of the Lease), furniture, trade fixtures and
trade equipment ("FF&E") for the Building.
b. PLANS AND SPECIFICATIONS. Tenant shall, at its sole cost,
prepare all plans, specifications and working drawings for Tenant's FF&E.
c. PERMITS. Tenant shall obtain or cause to be obtained all
building permits, licenses or other governmental approvals which may be
required to permit the construction and installation of Tenant's FF&E.
Landlord shall assist and cooperate with Tenant in obtaining such permits,
licenses or approvals.
Exhibit C-4
<PAGE>
d. OPENING NOTICE TO LANDLORD. So that Landlord will be able to
coordinate timely completion of Landlord's Work within the Tenant Parcel,
Tenant shall give Landlord at least ten (10) business days prior notice of
Tenant's intended date of opening for business.
3. INTENTIONALLY OMITTED.
4. PERFORMANCE OF LANDLORD AND TENANT WORK. Both Landlord and Tenant
shall each use their respective best efforts to cause the Landlord Work and
Tenant Work to be performed in a good, workmanlike, and expeditious manner,
and in compliance with all laws, rules, regulations, ordinances, permits,
approvals, and licenses of governmental authorities having jurisdiction over
the Shopping Center. Landlord and Tenant will each use their best efforts to
take or cause to be taken all necessary and appropriate measures to minimize
any disruption or inconvenience caused by or affecting the performance of
each other's work hereunder and shall cooperate with the other to the extent
construction activities overlap.
5. INDEMNITY. Each party shall defend, indemnify, and hold the other
harmless from any and all claims, demands, debts, liabilities, actions, costs
or expenses, including without limitation attorneys' fees arising from each
other's (including each other's agents', independent contractors', and
employees') performance of their respective work under this EXHIBIT C, but
not including those caused by the negligence of the other.
6. INSURANCE. All contractors and subcontractors performing
Landlord's Work or Tenant's Work shall carry workers' compensation insurance
covering all of their respective employees, as well as commercial general
liability insurance, including replacement coverage, property damage,
liability assumed by contract, and comprehensive business automobile
liability insurance. The general contractors shall also carry builders' all
risk insurance. All such liability insurance shall provide single limit
coverage of at least $2,000,000 for the general contractors and $1,000,000
for each subcontractor, per occurrence (except for workers' compensation,
which shall have limits as provided by law). All insurance for contractors
and subcontractors for Tenant's Work shall name Landlord as additional
insured, and all insurance for contractors and subcontractors for Landlord's
Work shall name Tenant as additional insured. Landlord and Tenant shall each
provide the other with certificates of insurance evidencing such coverage
prior to the commencement of any work hereunder. All insurance shall contain
provisions prohibiting cancellation or reduction in coverage prior to the
giving of at least 30 days prior written notice by the canceling insurer to
the party named as additional insured.
7. CONSTRUCTION EASEMENT. Landlord hereby grants to Tenant a
construction easement over the Tenant Parcel to be utilized for ingress and
egress of vehicles transporting construction materials, equipment, and
persons employed in connection with the performance of the Tenant's Work
required hereunder and for temporary storage of materials and vehicles being
utilized in connection with the performance of such work.
8. FORCE MAJEURE. The date for completion of the obligations of both
Landlord and Tenant hereunder shall be extended (but not excused) by the
period of time taken by delays described in Section 26.5 of the Lease.
9. MEASUREMENT UPON COMPLETION. Landlord and Tenant intend to use the
same architect for purposes of Landlord's Work and Tenant's Work hereunder
("architect of record"). Upon completion of Landlord's Work, the architect
of record shall measure and determine the Floor Area of the Building. In
the event Landlord and Tenant do not use the same architect, Tenant shall
have the Floor Area of the Premises measured and determined by Tenant's
architect, and Landlord shall have the right to dispute such calculation. In
the event Landlord and Tenant are unable to agree on the calculation of the
Floor Area, the two architects shall appoint a third architect, and the
three (3) architects shall meet and agree upon the appropriate Floor Area
calculation.
10. LANDLORD CONSTRUCTION CONTRIBUTION. Landlord shall contribute up
to Ninety Dollars ($90.00 ) per square foot of the agreed upon square footage
of the Building ("Landlord's Construction Contribution") toward the
construction cost of the Building Shell and the Tenant-Required Improvements.
Construction cost shall mean any and all costs associated with the
construction of the Building Shell and Tenant-Required Improvements
("Construction Costs") including without limitation the cost of exterior
lighting of the building, trash enclosures, the costs of architects and
engineers, consultants, and any other costs related to plan preparation
(except as otherwise specifically provided herein), the costs of equipment,
material and labor; contractor's overhead and profit fee, and the general
conditions fees, field overhead and fees; testing and inspection costs; sales
and use taxes (but not real property taxes); bonds; building permits, plan
check fees or other governmental fees; utility tap fees and/or utility
deposits.
Landlord shall have no obligation hereunder or under the construction
contract to pay Construction Costs over the amount of the Landlord's
Construction Contribution; any and all additional costs and expenses
relating thereto shall be the sole obligation of the Tenant. Upon
determination of bid amounts for the completion of the Building Shell and
Tenant-Required Improvements, Landlord shall provide to Tenant a statement of
the total amount of the those bids and the total amount of the Construction
Costs; if the Construction Costs exceed the Landlord's Construction
Contribution, Tenant shall pay the amount of any such excess prior to
Landlord's commencement of construction of the Tenant-Required Improvements,
provided, however, that if the Construction Costs exceed $100 per square foot
Tenant shall have the right within five
Exhibit C-5
<PAGE>
(5) days following receipt of Landlord's statement to notify Landlord (a) of
specific items Tenant requires, at Tenant's cost, to be re-bid, (b) that
Tenant shall, at Tenant's sole expense revise the working drawings, or (c)
that Tenant shall pay the excess amount as shown on Landlord's statement. If
Tenant elects either (a) or (b) hereinabove, Landlord and Tenant shall
diligently and in good faith work toward agreeing on the total Construction
Cost within the next thirty (30) days following Tenant's election.
Exhibit C-6
<PAGE>
SCHEDULE 1 TO EXHIBIT C
BUILDING SHELL DESCRIPTION
The Building Shell will include ancillary improvements to the Parcel
consisting of walkways, pedestrian entrances and exits from the Building,
ramps and loading areas (if any). The Building Shell will have irregular
dimensions and will have a total Floor Area of approximately 50,000 square
feet.
Building Shell scope shall include and be limited to the following:
<TABLE>
<C> <S>
1. Exterior finish, flashings, etc., as required to provide a water
resistant enclosure. Exterior skin will be painted 7/8" cement
plaster over insulated exterior walls.
2. Exterior doors and storefront (excluding box office windows).
3. The roof and wall structural frames will be fire-proofed as required.
4. Roof complete with drains, roof hatch and curbed openings for TI
mechanical units. The roof shall be designed to accommodate the
weight and location of the TI mechanical units as provided by the
Tenant. Curbs are to be installed as part of the Building Shell.
5. Tenant signage and any TI components which will be suspended,
supported and/or braced by the Building Shell frame. All support
requirements for Tenant Required Improvements will be provided by the
Tenant.
6. Main First Floor Electrical Room with meter and main switch gear.
Size of service will be provided by the Tenant.
7. Exterior building and soffit lighting.
8. Below slab sewer lines stubbed to blocked out floor areas. Size of
service will be provided by the Tenant. Fixture venting and the exact
location of plumbing fixtures, floor sinks, etc., will be the
responsibility of the Tenant.
9. Water and sprinkler service will be stubbed into the building. Size
of services will be provided by the Tenant. Interior piping is the
responsibility of the Tenant.
10. Interior floor finish will be concrete with portions of the slab
omitted to accommodate TI fixturization. Slab block out areas will be
provided by the Tenant.
11. Interior walls will be limited to the Electrical Room enclosure.
12. Pneumatic tube will be documented by others but installed as part of
the Building Shell.
13. Fire proofing for structure.
14. Step-down transformer.
</TABLE>
Exhibit C-7
<PAGE>
SCHEDULE 2 TO EXHIBIT C
CONSTRUCTION SCHEDULE
[TO BE PROVIDED]
Exhibit C-8
<PAGE>
SCHEDULE 3 TO EXHIBIT C
TENANT-REQUIRED IMPROVEMENTS
1. Structure for stadium seating, with fireproofing (seats to be provided by
Tenant as a part of Tenant's Work).
2. Interior walls and finishes (draperies to be provided by Tenant as a part
of Tenant's Work).
3. Ceiling.
4. Floor finishes, slab block out areas.
5. Restroom fixtures, plumbing lines except roof drains
6. All building mechanical and electrical items, interior (Tenant to provide
sound system, projection equipment, and screens as a part of Tenant's Work)
7. Finish carpentry.
8. Concession areas (Tenant to provide all concession and box office equipment
as a part of Tenant's Work)
Tenant shall be responsible to provide and install as Tenant's Work, at
Tenant's sole cost and expense, all furniture, fixtures and equipment,
including without limitation, those items specified in the parenthetical
phrases hereinabove)
Exhibit C-9
<PAGE>
EXHIBIT D
TENANT'S CERTIFICATE
STATEMENT OF TENANT REGARDING LEASE
Date: , 19
---------------------------- --
Re: Address
----------------------------
---------------------------------------
For Premises in:
Gentlemen:
It is our understanding that you have committed to place a mortgage loan
upon the subject premises and, as a condition precedent thereof, have
required this certification by the undersigned.
The undersigned, as Tenant under that certain Lease dated
__________________, 19_____, made and entered into between
___________________________________________________________, as Landlord and
the undersigned, as Tenant, hereby ratifies said Lease and certifies that the
undersigned has entered into occupancy of the premises described in said
Lease on __________________, 19_____, the undersigned opened for business on
__________________, 19 , the Commencement Date of the Lease Term is
__________________, 19______ and the Minimum Annual Rental in the monthly
amount of $__________________ was payable from __________________, 19______
(the "Rent Start Date"); that said Lease is in full force and effect and has
not been assigned, modified, supplemented or amended in any way (except by
agreement(s) dated __________________, 19______); that the same represents
the entire agreement between the parties as to this leasing; that the term of
said Lease expires on __________________, 19______, subject to Tenant's
rights to extend the term for ____ additional periods of five (5) years each
as provided in the Lease; that all conditions under said Lease to be
performed by Landlord have been satisfied, including, but without limitation,
all co-tenancy requirements thereunder, all required contributions by
Landlord to Tenant on account of Tenant's improvements have been received,
and to the best of Tenant's actual knowledge, there are on this date no
existing defenses or offsets which the undersigned has against the
enforcement of said Lease by Landlord; that no rental has been paid more than
one (1) month in advance and no security (other than a security deposit in
the amount of $__________________) has been deposited with Landlord; and that
the Minimum Annual Rental for __________________, 19______, has been paid.
Very truly yours,
TENANT
---------------------------------
---------------------------------
Exhibit D-1
<PAGE>
EXHIBIT E
WHEN RECORDED RETURN TO:
- ----------------------------------------
c/o LandGrant
12625 High Bluff Drive, Suite 212
San Diego, CA 92130
Attn:
----------------------------------
SUBORDINATION AGREEMENT
_____________________________, Tenant named in that certain Lease dated
___________________, 19__, wherein Tenant leases from
_______________________________________, as Landlord, certain premises which
are part of a shopping center known as ___________________________, the
location of said shopping center being more particularly described in Exhibit
"A" attached hereto and made a part hereof, hereby subordinates said Lease
and its interest in said premises to that certain
_____________________________________________________ dated _______________,
19__, entered into by and between________________________,
____________________, and recorded on ____________________, 19__, under File
No. ______Page No._____ in the Official Public Records of the County of
_______________, State of ____________.
Dated this ___________day of ______________, 19___.
TENANT:
-------------------------------
By:
--------------------------------
Title:
--------------------------------
By:
--------------------------------
Title:
--------------------------------
[NOTARIAL ACKNOWLEDGMENT]
Exhibit E-1
<PAGE>
EXHIBIT F
CONFIRMATION OF TERM OF LEASE
This Confirmation of Term of Lease is made ________________________, 19
___, between LANDGRANT CORPORATION, a California corporation, ("Landlord"),
and Cinema Star Luxury Theaters, Inc., a California corporation,, ("Tenant"),
who agree as follows:
1. Landlord and Tenant entered into a lease dated
________________________, 19 ___, in which Landlord leased to Tenant and
Tenant leased from Landlord the premises described in Paragraph 1.2 of the
Lease (the "Premises"). The Floor Area of the Building Improvements is
agreed to be: _______________________ square feet. The Minimum Annual Rental
for the Lease Term and the Option Terms shall therefore be as follows:
2. Pursuant to Paragraph 1.3 of the Lease, Landlord and Tenant agree
to confirm the Commencement Date and Expiration Date of the Term, and the
Rent Start Date, as follows:
a. __________________________ 19 ___, is the Commencement Date of
the Term of the Lease;
b. __________________________ 19 ___, is the Expiration Date of
the Term of Lease;
c. __________________________ 19 ___, is the Rent Start Date
under the Lease;
<TABLE>
<CAPTION>
TENANT: LANDLORD:
<S> <C>
CINEMA STAR LUXURY THEATERS, INC., LANDGRANT CORPORATION,
a California corporation a California corporation
By: By:
----------------------------------- ----------------------------------
Signature Title:
-------------------------------
-----------------------------------
Name By:
-------------------------------
----------------------------------- Title:
Title -------------------------------
By:
- -------------------------------------
Signature
- -------------------------------------
Name
- -------------------------------------
Title
</TABLE>
Exhibit F-1
<PAGE>
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>
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,
relating to the 1997 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, 1998. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
BDO Seidman, LLP
Costa Mesa, California
June 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,481,978
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0
0
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</TABLE>
