<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly period ended December 31, 1997
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition
Commission File Number 0-25252
CinemaStar Luxury Theaters, Inc.
(Exact Name of Registrant as specified in its charter)
CALIFORNIA 33-0451054
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
431 COLLEGE BLVD., OCEANSIDE, CA 92057-5435
(Address of principal executive offices) (Zip Code)
(760) 630-2011
(Registrant's telephone number, including area code)
(Former name, former address and formal fiscal year, if changed since last
report)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Common stock, no par value: 25,703,648 shares outstanding as of February 14,
1998.
Transitional Small Business Disclosure Format. (check one):
YES [ ] NO [ X ]
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CINEMASTAR LUXURY THEATERS, INC.
TABLE OF CONTENTS
PAGE NO.
PART I. Financial Information: 3
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheet as of December 31, 1997 3
Condensed Consolidated Statements of Operations for the three
and nine months ended December, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 7
PART II. Other Information 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 4. Submission of Matters to a Vote of Securities Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
December 31, 1997
-----------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 4,697,608
Commissions and other receivables 102,147
Prepaid expenses 202,298
Other current assets 126,169
------------
Total current assets 5,128,222
Property and equipment, net 13,747,840
Deposits and other assets 400,542
------------
TOTAL ASSETS $19,276,604
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt and capital lease
obligations $481,285
Accounts payable 1,907,526
Accrued expenses 979,839
Deferred revenue 256,764
Advances from stockholders 93,006
------------
Total current liabilities 3,718,420
Long-term debt and capital lease obligations, net of
current portion 1,930,903
Deferred rent liability 2,922,326
------------
TOTAL LIABILITIES 8,571,649
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STOCKHOLDERS' EQUITY
Common stock, no par value; 60,000,000 shares
authorized; 25,703,648 shares issued and outstanding 22,926,545
Additional paid-in capital 3,328,376
Accumulated deficit (15,549,966)
------------
TOTAL STOCKHOLDERS' EQUITY 10,704,955
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,276,604
------------
------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31 Nine Months Ended December 31
------------------------------ -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Admissions $ 4,512,741 $ 3,272,867 $ 13,104,417 $ 9,729,781
Concessions 1,668,318 1,404,929 5,457,313 4,060,912
Other operating revenues 121,471 107,767 379,487 302,221
------------ ------------ ------------- -------------
TOTAL REVENUES 6,302,530 4,785,563 18,941,217 14,092,914
------------ ------------ ------------- -------------
COSTS AND EXPENSES:
Film rental and booking costs 2,495,583 1,916,322 7,432,200 5,483,841
Cost of concession supplies 639,889 428,390 1,975,661 1,270,283
Theater operating expenses 2,887,241 1,896,180 7,850,350 5,004,474
Termination fee - concession
lease agreement (1,859,352) -- (1,859,352) --
General & administrative expense 1,395,909 599,681 3,182,021 1,822,195
Depreciation & amortization 473,750 535,336 1,460,105 1,092,405
------------ ------------ ------------- -------------
TOTAL COSTS AND EXPENSES 9,751,724 5,375,909 23,759,689 14,673,198
------------ ------------ ------------- -------------
OPERATING INCOME (LOSS) (3,449,194) (590,346) (4,818,472) (580,284)
------------- ------------ ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 14,098 1,936 23,580 17,094
Interest expense (324,803) (166,492) (693,451) (469,357)
Non-cash interest expense (221,750) -- (328,750) (2,048,997)
------------ ------------ ------------- -------------
TOTAL OTHER (EXPENSE) (532,455) (164,556) (998,621) (2,501,260)
------------ ------------ ------------- -------------
LOSS BEFORE PROVISION FOR
INCOME TAXES (3,981,649) (754,902) (5,817,093) (3,081,544)
PROVISION FOR INCOME TAXES -- (800) (1,600) (2,400)
------------ ------------- ------------- ------------
NET LOSS $ (3,981,649) $ (755,702) $ (5,818,693) $ (3,083,944)
------------ ------------- ------------- -------------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.36) $ (0.11) $ (0.65) $ (0.47)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
SHARES USED IN CALCULATION 11,094,741 6,860,986 8,962,687 6,520,851
</TABLE>
See accompanying notes to condensed consolidated financial statements
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (5,818,693) $ (3,083,944)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,460,105 1,092,405
Deferred rent liability 635,980 577,512
Non-cash interest expense 328,750 2,048,997
Increase (decrease) from changes in:
Commission and other receivables (71,466) (1,788)
Prepaid expenses and other current assets 87,480 (302,267)
Accounts payable (822,284) 1,974,250
Accrued expenses and other liabilities 831,683 (96,625)
Deposits and other assets (19,301) (177,430)
------------- -------------
Cash provided by (used in) operating activities (3,387,746) 2,031,110
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (4,167,753) (5,529,627)
Refundable construction deposit - 600,000
------------- -------------
Cash used in investing activities (4,167,753) (4,929,627)
Cash flows from financing activities:
Principal payments on long term debt and capital
lease obligations (7,935,080) (489,146)
Proceeds from issuance of debt 5,637,104 1,000,000
Proceeds from issuance of convertible debentures - 3,000,000
Proceeds from issuance of common stock, net 13,680,333 -
Proceeds from issuance of common stock warrants, net 212,094 -
Advances from stockholders-net 57,010 60,000
Proceeds from warrant redemptions - 572,112
Payment of debt issuance costs - (504,359)
Repayment of advances from stockholder - (359,000)
------------- -------------
Cash provided by financing activities 11,651,461 3,279,607
------------- -------------
Net increase in cash 4,095,962 381,090
Cash, beginning of period 601,646 458,550
------------- -------------
Cash, end of period 4,697,608 839,640
------------- -------------
</TABLE>
See accompanying notes to condensed consolidated financial statements
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CINEMASTAR LUXURY THEATERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
NOTE 1
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the audited financial
statements for the year ended March 31, 1997, and footnotes thereto, included
in the Company's Annual Report on Form 10-KSB which was filed with the
Securities and Exchange Commission. Operating results for the three and nine
month periods ended December 31, 1997 are not necessarily indicative of the
results of operations that may be expected for the year ending March 31,
1998.
NOTE 2
On April 23, 1997, the Company amended its Concession Lease Agreement with
Pacific Concessions Inc. ("PCI") in exchange for a $2,000,000 loan at an
interest rate of prime plus two percent. The loan was for a period of two
years with monthly interest payments and $1,000,000 principal payments due at
the end of twelve and twenty-four months. This loan was repaid in full with
interest on December 15, 1997. In connection with this financing transaction,
PCI received warrants to purchase 150,000 shares of common stock at an
exercise price per share of $0.848202. As a result of the amended agreements
PCI now supplies concessions to all of the Company's current domestic theater
locations in exchange for specified commissions. On August 29, 1997, an
additional $500,000 was borrowed from PCI as a short-term loan. Such loan was
paid in full with interest on September 24, 1997. In connection with this
loan PCI was issued warrants to purchase 400,000 shares of common stock at an
exercise price per share of $0.848202. In accordance with the terms of the
Concession Lease Agreement, the Company issued notice of termination to PCI
on December 15, 1997 and incurred early termination fees of $1,859,352. After
the expiration of notice periods of five or six months for various theaters,
the Company will no longer be obligated to use PCI for its concession
business.
NOTE 3
On September 23, 1997 the Company signed a definitive agreement for
CinemaStar Acquisition Partners, L.L.C. ("CAP") to acquire a majority equity
interest in the Company through a $15,000,000 purchase of newly issued shares
of the Company's common stock. This transaction was completed on December 15,
1997. Concurrent with the signing of the Stock Purchase Agreement, the
Company received a $3,000,000 bridge loan from Reel Partners, L.L.C. to
complete existing projects and to pay off certain indebtedness. The bridge
loan was convertible into 3,000,000 shares of common stock of the Company at
$1.00 per share. In connection with the bridge loan, the Company issued to
Reel Partners, L.L.C. warrants to purchase 4,500,000 shares of common stock
at an exercise price of $0.848202. 1,500,000 of such warrants were canceled
upon completion of the equity financing transaction with CAP. The bridge loan
was paid in full, without conversion and with interest on December 15, 1997.
The net proceeds of the equity financing have been used by the Company to
retire debt, including the bridge loan, to complete certain capital projects
and for general working capital purposes. The bridge loan proceeds were used
to complete existing projects and for general working capital purposes.
In connection with the signing of the definitive agreement CAP received a
warrant to purchase 1,000,000 shares of common stock at an exercise price of
$0.848202. At closing of the equity financing transaction CAP received a
warrant to purchase 1,630,624 shares of common stock at the same exercise
price. Additionally, pursuant to an agreement between the The Watley Group,
LLC ("Watley") and the Company, Watley received upon closing of the equity
financing a cash fee of $962,250 and simultaneously purchased for cash, for a
purchase price of $0.12 per warrant, warrants to purchase 1,768,446 shares of
Common Stock at an exercise price per share equal to $0.848202. The Company
has been informed that Watley has paid $150,000 of its cash fee to members of
the Investor Group to reimburse such members for legal expenses and other
costs incurred in connection with the negotiation and closing of the equity
financing and bridge loan. The Company has also been informed that all but
750,000 of the warrants issued to Watley have been transferred by Watley as
directed by SCP Private Equity Partners, L.P., the controlling member of CAP
("SCP"). Further, 75,000 shares have been issued to members of the investment
group as partial reimbursement of expenses incurred by such parties in
connection with the transactions.
NOTE 4
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 has not determined the
effect on its financial position or results of operations from the adoption
of this statement.
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 Company does not expect adoption of SFAS 131 to have a
material effect on its results of operations.
NOTE 5
Certain reclassifications have been made to the December, 1996 financial
statements to conform to the December, 1997 presentation.
NOTE 6
Pursuant to the terms of the stock purchase agreements, the Company may be
obligated to issue additional shares of common stock to CAP with respect to
certain expenses, liabilities and operating losses of the Company arising or
disclosed after August 31, 1997 or arising prior to August 31, 1997 and not
disclosed or quantified before August 31, 1997.
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<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and notes thereto
included elsewhere in this Form 10-QSB. Except for the historical information
contained herein, the discussion in this Form 10-QSB contains certain forward
looking statements that involve risks and uncertainties, such as statements
of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Form 10-QSB should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-QSB. 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 costs associated with potential
changes in management and disputes related thereto.
At December 31, 1996 the Company had seven theater locations with a total of
64 screens. During the twelve months ended December 31, 1997, the Company
added in July 1997 five additional screens to an existing location and in
November 1997 added an additional ten screen location. Thus at December 31,
1997 the Company had 8 locations and 79 screens. These additions during the
past twelve months resulted in an increase in revenues and expenses for the
three and nine months ended December 31, 1997 compared to December 31, 1996.
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 1996.
Total revenues for the three months ended December 31, 1997 increased 31.7%
to $6,302,530 from $4,785,563 for the three months ended December 31, 1996.
The increase consisted of a $1,239,874, or 37.9%, increase in admission
revenues and a $277,093, or 18.3%, increase in concession revenues and other
operating revenues. The increases in admission revenue and concession and
other operating revenue were due primarily to the increase in the number of
theaters and screens and, to a lesser extent, an increase in revenues at
certain theaters in existence for both 1996 and 1997, due to greater
attendance.
Film rental and booking costs for the three months ended December 31, 1997
increased 30.2% to $2,495,583 from $ 1,916,322 for the three months ended
December 31, 1996. The increase was due to the greater revenue generated from
more screens and additional revenue at the existing theaters. As a percentage
of admissions revenues, film rental and booking costs decreased to 55.3% from
58.6% in the three months ended December 31, 1997 compared to the comparable
prior year period, in part due to lower film rental cost in the Company's new
location in Tijuana, Mexico.
Cost of concession supplies for the three months ended December 31, 1997
increased 49.4% to $ 639,889 from $428,390 for the three months ended
December 31, 1996. The dollar increase was due in part to increased
concession costs associated with increased
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<PAGE>
concession revenues and was also the result of an amendment to the concession
agreement with the Company's primary concession vendor resulting in higher
concession costs.
Theater operating expenses for the three months ended December 31, 1997
increased 52.3% to $2,887,241 from $1,896,180 for the three months ended
December 31, 1996. The dollar increase in theater operating costs was
primarily due to the increased costs attributable to the addition of new
theaters. Costs also increased due to the increase in minimum wages. As a
percentage of total revenues, theater operating expenses increased to 45.8%
from 39.6% during the applicable periods. The Company is currently conducting
a detailed review of theater operating expenses to identify on-going cost
reduction opportunities, but there can be no assurance such opportunities
exist or will be identified in such review.
Termination fee -- concession lease agreement comprises penalty payments for
notice of early termination of agreements with respect to concession supplies
at the Company's seven domestic locations. Such notice was given on December
15, 1997 and, under the terms of the agreement, will become effective on
either five of six months hence for specific locations. At that time the
Company will not be bound to the existing supplier. While the Company
anticipates that in can achieve an increase in the profitability of its
concession business with a new supplier, no assurance can be given that a new
supplier can be obtained or will provide terms more favorable than those
provided by the existing supplier.
General and administrative expenses for the three months ended December 31,
1997 increased 132.8% to $1,395,909 from $599,681 for the three months ended
December 31, 1996. The increase was primarily due to costs associated with
expansion in Mexico, costs incurred for professional and consulting fees
related to expansion and financing plans and other costs associated with the
expansion of corporate operations. As a percentage of total revenues, general
and administrative expenses increased to 22.1% from 12.5 % during the three
months ended December 31, 1997 compared with the prior comparable period. The
Company is currently conducting a detailed review of general and
administrative expenses to identify on-going expense reduction opportunities,
but there can be no assurance such opportunities exist or will be identified
in such review.
Depreciation and amortization for the three months ended December 31, 1997
decreased 11.5 % to $473,750 from $535,336 for the three months ended
December 31, 1996. The decrease was primarily the result of reduced
amortization of pre-opening costs during the three months ended December 31,
1997 partially offset by increased depreciation on additional equipment
associated with the opening of the new theaters .
Interest expense for the three months ended December 31, 1997 increased to
$324,803 from $166,492 for the three months ended December 31, 1996. This
increase was primarily due to the increased debt incurred by the Company in
its expansion and borrowing of funds for working capital during 1997. The
majority of the Company's debt has been repaid from the proceeds of the
equity financing consummated December 15, 1997.
Non-cash interest expense of $221,750 for the three months ended December 31,
1997 related to debt with detachable warrants, associated with loans from
Reel Partners, L.L.C. ("Reel") and Pacific Concessions, Inc. ("PCI") All such
loans have been paid in full with interest prior to December 31, 1997.
Interest income for the three months ended December 31, 1997 increased to
$14,098 from $1,936 for the three months ended December 31, 1996. This
increase is attributable to higher cash balances in the latter part of the
three months ended December 31, 1997 due to the completion of the Equity
Financing transaction on December 15, 1997.
As a result of the factors discussed above, the net loss for the three months
ended December 31, 1997 was $3,981,649 or $ .36 per common share, compared to
a net loss of $755,702, or $.11 per common share, for the three months ended
December 31, 1996.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 1996.
Total revenues for the nine months ended December 31, 1997 increased 34.4% to
$18,941,217 from $14,092,914 for the nine months ended December 31, 1996. The
increase consisted of a $3,374,636, or 34.7%, increase in admission revenues
and a $1,473,667, or 33.8%, increase in concession and other operating
revenues. The admission revenue and concession and other operating revenue
increase was due to both the increase in the number of theaters and screens
and an increase in attendance.
Film rental and booking costs for the nine months ended December 31, 1997
increased 35.5% to $7,432,200 from $5,483,841 for the nine months ended
December 31, 1996. As a percentage of admissions revenues, film rental and
booking costs increased modestly to 56.7% for the nine months ended December
31, 1997 compared to 56.4% for the comparable prior year period. The increase
was due to higher film rental and booking costs paid on increased admission
revenues resulting from the addition of new screens and increased attendance
at existing theaters, partially offset by lower film rental and booking costs
as a percentage of admissions at the Company's newly opened ten screen
theater in Tijuana, Mexico.
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Cost of concession supplies for the nine months ended December 31, 1997
increased 55.5% to $1,975,661 from $1,270,283 for the nine months ended
December 31, 1996. The dollar increase was due to increased concession costs
associated with higher concession revenues as well as a change in concession
agreements with one of the Company's primary concession vendors resulting in
higher concession costs. As a percentage of concession revenues, concession
costs for the nine months ended December 31, 1997 and December 31, 1996
increased to 36.2% from 31.3%. The increase was primarily due to the higher
concession costs associated with an amendment to the concession agreement
with the Company's primary concession vendor.
Theater operating expenses for the nine months ended December 31, 1997
increased 56.9% to $7,850,350 from $5,004,474 for the nine months ended
December 31, 1996. As a percentage of total revenues, theater operating
expenses increased to 41.4% from 35.5%. The dollar increase was primarily
attributable to the operating costs associated with the new theaters. Costs
also increased due to the increase in minimum wage. The Company is currently
conducting a detailed review of theater operating expenses to identify
on-going cost reduction opportunities, but there can be no assurance such
opportunities exist or will be identified in such review.
Termination fee -- concession lease agreement comprises penalty payments for
notice of early termination of agreements with respect to concession supplies
at the Company's seven domestic locations. Such notice was given on December
15, 1997 and, under the terms of the agreement, will become effective on
either five of six months hence for specific locations. At that time the
Company will not be bound to the existing supplier. While the Company
anticipates that in can achieve an increase in the profitability of its
concession business with a new supplier, no assurance can be given that a new
supplier can be obtained or will provide terms more favorable than those
provided by the existing supplier.
General and administrative expenses for the nine months ended December 31,
1997 increased 74.6% to $3,182,021 from $1,822,195 for the nine months ended
December 31, 1996. The increase was primarily due to costs associated with
expansion in Mexico, costs incurred for consulting fees related to expansion
and financing plans and other costs associated with the expansion of
corporate operations. As a percentage of total revenues, general and
administrative costs increased to 16.8% from 12.9% during the period. The
Company is currently conducting a detailed review of general and
administrative expenses to identify on-going expense reduction opportunities,
but there can be no assurance such opportunities exist or will be identified
in such review.
Depreciation and amortization for the nine months ended December 31, 1997
increased 33.7% to 1,460,105 from $1,092,405 for the nine months ended
December 31, 1996. The increase was primarily the result of depreciation on
additional equipment associated with the opening of the new theaters, and
amortization of pre-opening expenses in the first six months of the period.
Interest expense for the nine months ended December 31, 1997 increased to
$693,451 from $469,357 for the nine months ended December 31, 1996. This
increase was due to the increased debt incurred by the Company in its
expansion and borrowing of funds for working capital.
Non-cash interest expense of $2,048,997 for the nine months ended December
31, 1996 result from issuing debentures which were convertible at a discount
from the market price of the common stock. The non-cash interest recorded on
the convertible debentures was amortized over the periods which the
debentures first became convertible and had no effect on stockholders' equity
and operating income. Non-cash interest expense of $328,750 for the nine
months ended December 31, 1997 related to debt with detachable warrants
associated with loans from Reel Partners, L.L.C. and Pacific Concessions,
Inc. All such loans have been paid in full with interest prior to
December 31, 1997.
Interest income for the nine months ended December 31, 1997 increased to
$23,580 from $17,094 for the nine months ended December 31, 1996. This
increase is attributable to changes in cash balances due to Bridge loan
proceeds and the completion of the Equity Financing transaction on December
15, 1997.
As a result of the factors discussed above, the net loss for the nine months
ended December 31, 1997 increased to $5,818,693 or $ .65 per common share,
from $3,083,944, or $ .47 per common share, for the nine months ended
December 31, 1996.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, principally through box office
admissions and concession sales. Because its revenues are received in cash
prior to the payment of related expenses, the Company has an operating
"float" which partially finances its operations.
The Company's capital requirements arise principally in connection with new
theater openings and acquisitions of existing theaters. In the past new
theater openings have typically been financed with internally generated cash
flow and long-term debt financing arrangements for facilities and equipment.
The Company discovered that it lacked the ability to finance its current
capital obligations through internally generated funds and sought additional
capital. On September 23, 1997, the Company signed a definitive agreement for
CinemaStar Acquisition Partners, L.L.C. ("CAP") to acquire a majority equity
interest in the Company through a $15 million purchase of newly issued shares
of the Company's common stock. Following stockholder approval, the equity
financing transaction was completed on December 15, 1997.
10
<PAGE>
Pursuant to the Stock Purchase Agreement, CAP purchased 17,684,464 shares of
common stock for a purchase price of $0.848202 per share. CAP also received
at closing warrants to purchase 1,630,624 shares of common stock at an
exercise price equal to $0.848202 per share.
Upon execution of the Stock Purchase Agreement, CAP received an additional
warrant to purchase one million shares of common stock at an exercise price
of $0.848202. Additionally, pursuant to an agreement between the The Watley
Group, LLC ("Watley") and the Company, Watley received upon closing of the
Equity Financing a cash fee of $962,250 and simultaneously purchased for
cash, for a purchase price of $0.12 per warrant, warrants to purchase
1,768,446 shares of Common Stock at an exercise price per share equal to
$0.848202. The Company has been informed that Watley has paid $150,000 of its
cash fee to members of the Investor Group to reimburse such members for legal
expenses and other costs incurred in connection with the negotiation and
closing of the equity financing and bridge loan. The Company has also been
informed that all but 750,000 of the warrants issued to Watley have been
transferred by Watley as directed by SCP. Further, 75,000 shares have been
issued to members of the investment group as partial reimbursement of
expenses incurred by such parties in connection with the transactions.
Pursuant to the terms of the Stock Purchase Agreement, the Company may be
obligated to issue additional shares of common stock to CAP with respect to
certain expenses, liabilities and operating losses of the Company arising or
disclosed after August 31, 1997 or arising prior to August 31, 1997 and not
disclosed or quantified before August 31, 1997.
Concurrent with the signing of the Stock Purchase Agreement the Company
received a $3 million bridge loan from Reel to complete existing projects and
to pay off certain indebtedness. The bridge loan was convertible into three
million shares of common stock of the Company at $1.00 per share. In
connection with the bridge loan, the Company issued to Reel warrants to
purchase 4,500,000 shares of Common Stock at an exercise price of $0.848202.
1,500,000 of such warrants were cancelled upon completion of the equity
financing with CAP. The bridge loan was paid back in full, without
conversion and with interest with the proceeds of the equity financing.
On April 23, 1997, the Company amended its Concession Lease Agreement with
Pacific Concessions Inc. (PCI) in exchange for a $2,000,000 loan at an
interest rate of prime plus two percent. The loan was for a period of two
years with monthly interest payments and $1,000,000 principal payments due at
the end of twelve and twenty-four months. This loan was repaid in full with
interest on December 15, 1997. In connection with this financing transaction,
PCI received warrants to purchase 150,000 shares of common stock at an
exercise price per share of $0.848202. As a result of the amended agreements,
PCI now supplies concessions to all of the Company's current domestic theater
locations in exchange for specified commissions. On August 29, 1997, an
additional $500,000 was borrowed from PCI as a short term loan. Such loan was
paid in full with interest on September 24, 1997. In connection with this loan
PCI was issued warrants to purchase 400,000 shares of common stock at an
exercise price per share of $0.848202. In accordance with the terms of the
Concession Lease Agreement, the Company issued notice of termination to PCI on
December 15, 1997 and incurred early termination fees of $1,859,352. After the
expiration of notice periods of five and six months for various theaters
respectively, the Company will no longer be obligated to use PCI for its
concession business.
11
<PAGE>
The Company leases seven theater properties and various equipment under
noncancelable operating lease agreements which expire through 2021 and
require various minimum annual rentals. At December 31, 1997, the aggregate
future minimum lease payments due under noncancelable operating leases was
approximately $83,800,000. The Company has also signed a lease agreement for
one additional theater location. The additional lease will require expected
minimum rental payments aggregating approximately $40,700,000 over the
life of the lease. Accordingly, existing minimum lease commitments as of
December 31, 1997 plus those expected minimum commitments for the proposed
theater locations would aggregate minimum lease commitments of approximately
$124,500,000.
During the nine months ended December 31, 1997, the Company used cash of
$3,387,746 from operating activities, as compared to generating $2,031,110
cash from operating activities for the nine months ended December 31, 1996.
The change is due to factors discussed in "Results of Operations" above,
including increased theater operating expenses resulting from the opening of
new theaters and the expansion of an existing theater, increased general and
administrative expenses as a result of expansion including international
expansion, costs associated with the equity investment and other financing
efforts and cost of penalties related to notice of early termination of
concession lease agreements.
During the nine months ended December 31, 1997, the Company used cash in
investing activities of $4,167,753, as compared to $4,929,627 for the nine
months ended December 31, 1996. The decrease is due to lower purchases of
fixed assets during the nine months ended December 31, 1997 compared with the
prior comparable period.
During the nine months ended December 31, 1997, the Company provided net cash
of $11,651,461 from financing activities, as compared to providing $3,279,607
for the nine months ended December 31, 1996. The cash generated for the nine
months ended December 31, 1997 came primarily from the completion of an
equity financing on December 15, 1997 as well as loans from PCI and Reel,
partially offset by payment in full of all outstanding loans from PCI, Reel
and First National Bank.
The Company, at December 31, 1997, had a working capital surplus of $1,409,802.
The Company's plans for expansion are dependent upon its ability to raise
capital through outside sources. In this regard, the Company has entered into
lease and other binding commitments with respect to the development of 30
additional screens at two locations. Regarding the first location, the Company
has completed and opened a 10 screen theater in Tijuana, Mexico on November
15, 1997. The Company has paid for the equipment at this theater and its
subsidiary, CinemaStar Luxury Theaters, S.A. de C.V. will either purchase or
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 Fianza or bond to secure the payment of rent. Such bond was not able
to be obtained and the landlord, Inmobiliaria Lumar S.A. de C. V., ("Lumar"),
has agreed to accept a pledge of certain of the theater equipment as
collateral to satisfy the lease requirement. This pledge of collateral will
be done through a Trust Agreement with the bank designated by Lumar. The
Company is presently in the process of fulfiling the requirements of Lumar.
Regarding the second location, the Company on December 20, 1996 entered into
a long-term lease for the development of a 20 screen theater in San
Bernardino, California. The estimated cost to equip this theater is between
$2,000,000 and $2,500,000. On November 7, 1997, MDA-San Bernardino
Associates, LLC ("MDA"), the landlord of the Company's San Bernardino
location, 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 remove the Company as tenant. The action was filed because
MDA believed the Company had not satisfied certain financial conditions under
the lease pursuant to which the Company is leasing the property. The Company
filed a response to this action and has subsequently entered into a
Stipulation for Entry of Judgement with MDA. The Company believes it is in a
position to comply with all requirements of such Stipulation for Entry of
Judgement, but unanticipated circumstances could have an adverse effect on
its ability to so comply.
12
<PAGE>
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $509,336, $1,551,002, $2,086,418,
$638,585 and $4,304,370 in the fiscal years ended March 31, 1993, 1994, 1995,
1996 and 1997, respectively. There can be no assurance as to when the Company
will be profitable, if at all.
As of March 31, 1997, the Company had net operating loss carryforwards
("NOLs") of approximately $4,175,000 and $2,080,000 for Federal and
California income tax purposes, respectively. The Federal NOLs are available
to offset future years taxable income and expire in 2006 through 2012, while
the California NOLs are available to offset future years taxable income and
expire in 1998 through 2002. The utilization of these NOLs could be limited
due to restrictions imposed under the Federal and state laws upon a change in
ownership.
At December 31, 1997, the Company has total net deferred income tax assets in
excess of $2,000,000. 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.
13
<PAGE>
On November 7, 1997, the Company received notice that The Nasdaq Stock
Market, Inc. ("NASDAQ") had decided to delist the Company's securities from
trading on the Nasdaq SmallCap Market due to a failure of the Company to meet
applicable listing standards and the Company's failure to demonstrate an
adequate plan of compliance 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.
With the completion of the equity financing with CAP, the Company anticipates
that it will not need additional financing during the next twelve months. If
financing requirements do arise, however, there can be no assurance that the
Company will be able to obtain such financing on acceptable terms. Failure to
obtain required financing could have a material adverse effect on the
financial condition and results of operations of the Company.
Upon completion of the equity financing transaction on December 15, 1997, the
Company paid in full with interest all outstanding loan obligations to First
National Bank, PCI and Reel. Prior thereto the Company had been in violation
of certain loan covenants with respect to its banking facility. Such
violations were cured with the repayment of the Company's obligations. In
addition all arrearages with respect to the Company's lease obligations were
made current as of December 15, 1997.
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 has not determined the
effect on its financial position or results of operations from the adoption
of this statement.
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 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 Company
does not expect adoption of SFAS 131 to have a material effect on its results
of operations.
14
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
On November 7, 1997, MDA-San Bernardino Associates, LLC ("MDA"), the landlord of
the Company's San Bernardino location, 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 remove the Company as tenant. The action
was filed because MDA believed the Company had not satisfied certain financial
conditions under the lease pursuant to which the Company is leasing the
property. The Company filed a response to this action and has subsequently
entered into a Stipulation for Entry of Judgement with MDA. The Company believes
it is in a position to comply with all requirements of such Stipulation for
Entry of Judgement, but unanticipated circumstances could have an adverse
effect on its ability to so comply.
ITEM 2 -- CHANGES IN SECURITIES
ANTI-DILUTION ADJUSTMENTS TO PUBLIC WARRANTS
The terms of the Company's publicly traded Redeemable Warrants and Class B
Redeemable Warrants contain anti-dilution provisions that provide for
adjustments in the exercise price and number of shares issuable upon exercise
of such warrants in the event of issuance of Common Stock (or securities
convertible into Common Stock) at a price per share below the exercise price
of such warrants. Pursuant to such anti-dilution provisions, by September 1,
1997, the exercise price of the Redeemable Warrants and Class B Redeemable
Warrants had been reduced to $5.32 and $5.90, respectively, and the number of
shares of Common Stock issuable upon exercise of each Redeemable Warrant and
Class B Redeemable Warrant had increased to 1.1657318 and 1.1016967 shares of
Common Stock, respectively. As a result of the signing of the September 23,
1997 Stock Purchase Agreement with CAP and the concurrent completion of the
$3,000,000 bridge financing with an affiliate of CAP, the exercise price of
the Company's Redeemable Warrants was reduced from the $5.32 price in effect
immediately prior to such transactions to $3.70 per share. Concurrently, the
number of shares of Common Stock issuable upon exercise of each Redeemable
Warrant was increased from 1.1657318 to 1.6216216 shares of Common Stock.
Similarly, the exercise price of the Class B Redeemable Warrant was
automatically reduced to $4.06 from a pre-Bridge Financing exercise price of
$5.90 and the number of shares of Common Stock issuable upon exercise of each
Class B Redeemable Warrant was increased from 1.1016967 to 1.6009852 shares
of Common Stock.
Upon Closing and the repayment of the $3,000,000 bridge loan from an
affiliate of CAP, the as adjusted exercise price of the Redeemable Warrants
and Class B Redeemable Warrants was automatically adjusted to $2.56 and
$2.78, respectively. Concurrently, the number of shares of Common Stock
issuable upon exercise of each Redeemable Warrant and Class B Redeemable
Warrant was adjusted to 2.34375 and 2.3381295 shares, respectively.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Registrant held a special meeting of Stockholders on December 10, 1997. A
Unified Financing Proposal, (more fully described below) was approved (4,413,468
for; 84,305 against, 13,320 abstain)
(a) Approval of an equity financing transaction (the "Equity Financing")
pursuant to which the Company will issue and sell (i) 17,684,464 shares of
Common Stock (subject to adjustment in certain circumstances) for an
aggregate purchase price of $15,000,000, and (ii) warrants to purchase an
additional 1,630,624 shares of Common Stock at an exercise price of not more
than $0.848202 per share, in accordance with the terms of a Stock Purchase
Agreement, dated as of September 23, 1997, by and among the Company, Reel
Partners, L.L.C. ("Reel Partners"), and CinemaStar Acquisition Partners,
L.L.C.;
(b) Ratification of a bridge financing transaction (the "Bridge Financing")
pursuant to which the Company received $3,000,000 in bridge financing from
Reel Partners and issued and sold (i) a $3,000,000 Convertible Secured
Promissory Note in favor of Reel Partners, that is convertible, at the option
of Reel Partners, into 3,000,000 shares of Company Common Stock (subject to
adjustment in certain circumstances), (ii) warrants to purchase 3,000,000
shares of Company Common Stock at an exercise price of $0.848202 per share,
and (iii) an additional warrant to purchase 1,500,000 shares of Company
Common Stock at an exercise price of $0.848202, which warrant will be
canceled upon consummation of the Equity Financing;
(c) Approval of an amendment and restatement of the Articles of Incorporation
of the Company (the "Amended Articles") which will (i) increase the
authorized number of shares of Company Common Stock from 15,000,000 to
60,000,000 shares, and (ii) eliminate the authorized shares of Company
Preferred Stock, none of which is currently outstanding.; and
(d) Election of the following Director designees: Winston J. Churchill, Jack R.
Crosby, Thomas G. Rebar and Wayne B. Weisman.
ITEM 5 -- OTHER INFORMATION
None
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item 27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed one Report on Form 8-K during the quarter
ended December 31, 1997. It was filed on December 24, 1997 and
reported the completion of an equity financing transaction and
resultant change in control of the Registrant.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: February 17, 1998
CinemaStar Luxury Theaters, Inc.
by: /s/ JAMES VILLANUEVA
-------------------------------
James Villanueva
Executive Vice President
(principal executive officer)
by: /s/ NORMAN DOWLING
--------------------------------
Norman Dowling
Vice President and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
16
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