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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 June 30, 1998
[ ] 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)
12230 EL CAMINO REAL, SUITE 320, SAN DIEGO, CA 92130
(Address of principal executive offices) (Zip Code)
(619) 509-2777
(Registrant's telephone number, including area code)
431 COLLEGE BLVD., OCEANSIDE, CA 92057
(Address of former principal executive offices)
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: 25,703,646 shares outstanding as of August 13, 1998.
Transitional Small Business Disclosure Format. (check one):
YES [ ] NO [X]
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CINEMASTAR LUXURY THEATERS, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1998 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1998 and 1997 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
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 11
Item 3. Defaults in Senior Securities 11
Item 4. Submission of Matters to a Vote of Securities Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
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June 30,
1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,388,548
Prepaid expenses 122,229
Other current assets 226,559
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TOTAL CURRENT ASSETS 3,737,336
Property and equipment, net 12,647,321
Deposits and other assets 293,964
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TOTAL ASSETS $ 16,678,621
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations $ 258,300
Accounts payable 1,337,833
Accrued expenses 1,464,351
Deferred revenue 228,282
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TOTAL CURRENT LIABILITIES 3,288,766
Long-term debt and capital lease obligations,
net of current portion 1,866,438
Deferred rent liability 3,390,614
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TOTAL LIABILITIES 8,545,818
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STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized shares -
60,000,000; issued and outstanding shares - 25,703,646 22,628,670
Additional paid-in capital 3,626,152
Accumulated deficit (18,122,019)
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TOTAL STOCKHOLDERS' EQUITY 8,132,803
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,678,621
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended June 30,
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1998 1997
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REVENUES:
Admissions $ 4,865,395 $ 3,915,058
Concessions 2,065,181 1,719,006
Other operating revenues 159,401 118,669
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TOTAL REVENUES 7,089,977 5,752,733
COSTS AND EXPENSES:
Film rental and booking costs 2,645,292 2,248,524
Cost of concession supplies 632,593 593,194
Theater operating expenses 3,042,385 2,280,566
Selling, general and administrative expenses 657,221 874,432
Depreciation and amortization 532,208 454,598
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TOTAL COSTS AND EXPENSES 7,509,699 6,451,314
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OPERATING LOSS (419,722) (698,581)
OTHER INCOME (EXPENSE):
Interest expense (76,834) (186,869)
Interest income 39,420 6,553
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TOTAL OTHER EXPENSE (37,414) (180,316)
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LOSS BEFORE PROVISION FOR INCOME TAXES (457,136) (878,897)
PROVISION FOR INCOME TAXES (1,600) --
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NET LOSS $ (458,736) $ (878,897)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.11)
WEIGHTED AVERAGE SHARES 25,703,646 7,790,747
</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)
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Three Months Ended June 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (458,736) $ (878,897)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 532,208 454,598
Deferred rent expense 212,855 212,861
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 129,613 (50,943)
Deposits and other assets (5,938) (82,516)
Accounts payable (334,848) 514,239
Accrued expenses and other liabilities 341,014 613
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NET CASH PROVIDED BY OPERATING ACTIVITIES 416,168 169,955
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (281,638) (1,750,714)
Deposits and other assets -- (332,514)
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NET CASH USED IN INVESTING ACTIVITIES (281,638) (2,083,228)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 2,000,000
Principal payments on long-term debt and capital
lease obligations (227,960) (204,381)
Advances from stockholder, net -- 84,429
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (227,960) 1,880,048
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NET DECREASE IN CASH AND CASH EQUIVALENTS (93,430) (33,225)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,481,978 601,646
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,388,548 $ 568,421
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 76,834 $ 186,869
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Income taxes $ 1,600 --
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SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued upon conversion of debentures -- $ 339,300
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SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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 consolidated financial statements for the year ended March
31, 1998 and footnotes thereto, included in the Company's Annual Report on Form
10-KSB/A which was filed with the Securities and Exchange Commission. Operating
results for the three month period ended June 30, 1998 are not necessarily
indicative of the results of operations that may be expected for the year ending
March 31, 1999.
NOTE 2
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. 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
adopted SFAS No. 130 effective April 1, 1998 and the adoption had no effect on
the Company's financial statements.
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.
NOTE 3
Certain reclassifications have been made to the June, 1997 financial statements
to conform to the June, 1998 presentation.
NOTE 4
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").
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) operating losses
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, calculated in the aggregate 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. The
Company expects to issue the Adjustment Shares in the second fiscal quarter
ended September 30, 1998. To the extent there are (a) operating losses at the
Company's Tijuana and San Bernardino facilities, calculated in the aggregate,
for the three-year period ended December 15, 2000, and (b) expenditures in
connection with the discovery of liabilities, or defense
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and/or settlement of claims, in either case relating to periods prior to August
31, 1997, the Company will be obligated to issue additional Adjustment Shares.
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 June 30, 1997 the Company had seven theater locations with a total of 64
screens. During the twelve months ended June 30, 1998, the Company added 5 new
screens in July 1997 to an existing location and, in November 1997, a new ten
screen theater complex was opened. Thus at June 30, 1998 the Company had 8
locations and 79 screens. These additions resulted in an increase in revenues
and expenses for the three months ended June 30, 1998 compared to June 30, 1997.
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.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997.
Total revenues for the three months ended June 30, 1998 increased 23.2% to
$7,089,977 from $5,752,733 for the three months ended June 30, 1997. The
increase resulted from a 24.3% increase in admissions revenues to $4,865,395 and
a 21.1% increase in concession and other operating revenues to $2,224,582. The
increases in admission revenue and concession and other operating revenue were
due primarily to the increase in the number of theaters and screens. Average
revenues per screen for theaters in operation during both periods declined
slightly, primarily due to the closure, for remodeling, of a six screen facility
for part of fiscal 1999's first quarter.
Film rental and booking costs for the three months ended June 30, 1998 increased
17.6% to $2,645,292 from $2,248,524 for the three months ended June 30, 1997.
The increase was due to the greater revenue generated from more screens. As a
percentage of admissions revenues, film rental and booking costs decreased to
54.4% from 57.4% in the three months ended June 30, 1998 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 June 30, 1998 increased
6.6% to $632,593 from $593,194 for the three months ended June 30, 1997. The
increase was due in part to increased concession costs associated with increased
concession revenues. As a percentage of concession revenues, cost of concession
supplies decreased to 30.6% from 34.5% in the three months ended June 30, 1998
compared to the comparable prior year period, due to the termination during the
quarter of concession lease agreements with its former primary concession
vendor, Pacific Concessions, Inc. ("PCI"). 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
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with the concession suppliers at competitive rates will decrease the Company's
cost of concessions and increase the Company's gross profit margin on concession
sales in future periods.
Theater operating expenses for the three months ended June 30, 1998 increased
33.4% to $3,042,385 from $2,280,566 for the three months ended June 30, 1997. As
a percentage of total revenues, theater operating expenses increased to 42.9%
from 39.6% during the applicable periods. The increase in theater operating
costs was primarily due to the increased costs attributable to the addition of
new theaters, increases due to federally mandated increases in minimum wages and
increased maintenance and repair expenses associated with certain upgrades and
remodels.
Selling, general and administrative expenses for the three months ended June 30,
1998 decreased 24.8% to $657,221 from $874,432 for the three months ended June
30, 1997. As a percentage of revenues, selling, general and administrative
expenses decreased to 9.3% from 15.2% for the three months ended June 30, 1998
compared with the prior comparable period. The decrease is the result of cost
reduction initiatives and of lower international expenses.
Depreciation and amortization for the three months ended June 30, 1998 increased
17.1% to $532,208 from $454,598 for the three months ended June 30, 1997. The
increase was primarily the result of increased depreciation on additional
equipment associated with the opening of the new theaters .
Interest expense for the three months ended June 30, 1998 decreased to $76,834
from $186,869 for the three months ended June 30, 1997. This decrease was
primarily a result of the majority of the Company's debt having been repaid from
the proceeds of the Equity Financing transaction consummated in December 1997.
Interest income for the three months ended June 30, 1998 increased to $39,420
from $6,553 for the three months ended June 30, 1997. This increase is
attributable to changes in cash balances, due to the completion of the Equity
Financing transaction in December 1997.
As a result of the factors discussed above, the net loss for the three months
ended June 30, 1998 was $458,736 or $ .02 per common share, compared to a net
loss of $878,897, or $.11 per common share, for the three months ended June 30,
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 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.
Pursuant to the CAP 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. 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) operating losses experienced by, or costs of closing, the Company's Plaza
Americana 10 facility in Tijuana (now in full operation and achieving operating
profits) and San Bernardino Facility (still in development). The measurement of
the operating losses and/or closing costs for the two facilities is cumulative,
calculated in the aggregate 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. The Company expects to issue the
Adjustment Shares in the second fiscal quarter ended September 30, 1998. To the
extent there are (a) operating losses at the Company's Tijuana and San
Bernardino facilities, calculated in the aggregate, 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, in either case relating
to periods prior to August 31, 1997, the Company will be obligated to issue
additional Adjustment Shares.
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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 June 30, 1998, the aggregate future minimum
lease payments due under non-cancelable operating leases was approximately
$90,000,000. In addition, the Company has signed a lease agreement for a 20
screen facility in San Bernardino, California and a 16 screen facility in
Oceanside, California. 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
June 30, 1998 plus those expected minimum commitments for the proposed theater
locations would aggregate minimum lease commitments of approximately
$161,100,000. 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.
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.
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 and also experienced a net
loss of $458,736 in its first quarter ended June 30, 1998. 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 signed a commitment letter for a $15 million development and acquisition
line from a senior, secured lender sufficient to meet the Company's current
business plan, no definitive agreements have been reached and there can be no
assurance that this or any other financing will be obtained by the Company on
commercially reasonable terms.
During the three months ended June 30, 1998, the Company generated $416,168 from
operating activities, as compared to generating $169,955 cash from operating
activities for the three months ended June 30, 1997. The increase is due to
lower costs of concession supplies as a percentage of concession revenues and
lower selling, general and administrative expenses in the three months ended
June 30, 1998 compared with the three months ended June 30, 1997, partially
offset by higher theater operating expenses.
During the three months ended June 30, 1998, the Company used cash in investing
activities of $281,638, as compared to $2,083,228 for the three months ended
June 30, 1997. The decrease is due to lower purchases of fixed assets during the
three months ended June 30, 1998 compared with the prior comparable period.
During the three months ended June 30, 1998, the Company used net cash of
$227,960 in financing activities, as compared to providing $1,880,048 for the
three months ended June 30, 1997. The cash used in the three months ended June
30, 1998 related to principal repayment of debt and capital lease obligations.
The cash provided in the three months ended June 30, 1997 related to the
proceeds of the issuance of long term debt, partially offset by principal
repayment of debt and capital lease obligations.
At June 30, 1998, the Company held cash, cash equivalents and working capital in
the amounts of $3,388,548 and $448,570, 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 June 30, 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
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taxable income in any post-change period will be subject to certain specified
annual limitations.
At June 30, 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.
Due to the absence of two market makers for its Class B Redeemable Warrants, the
Company had been notified by NASDAQ that these were to be delisted effective
June 27, 1998. NASDAQ subsequently notified the Company that it was now in
compliance with the market maker requirement and that the Class B Redeemable
Warrants would remain listed.
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 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.
PART II -- OTHER INFORMATION
ITEM 1 -- 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.
Management believes the complaint is without merit and the Company will
vigorously defend against this action. Management believes the 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. The Company
believes 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. 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
-10-
<PAGE> 11
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 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 As of June 30, 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 certain anti-dilution provisions in the
Company's Redeemable Warrants and its Class B Redeemable 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 30, 1998 was 2.3622 and the shares of common stock
issuable upon the exercise of each Class B Redeemable Warrant as of June 30,
1998 was 2.3551. Consequently, as of June 30, 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.
ITEM 3 -- DEFAULTS IN SENIOR SECURITIES
None
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matter was submitted to a vote of security holders during the first quarter
of fiscal 1999.
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 June 30, 1998. 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.
-11-
<PAGE> 12
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: August 13, 1998
CinemaStar Luxury Theaters, Inc.
by: /s/ JACK R. CROSBY
--------------------------------------
Jack R. Crosby
Chairman and Chief Executive Officer
(principal executive officer)
by: /s/ NORMAN DOWLING
--------------------------------------
Norman Dowling
Vice President and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND CONSOLIDATED BALANCE
SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,388,548
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,737,336
<PP&E> 18,236,530
<DEPRECIATION> 5,589,209
<TOTAL-ASSETS> 16,678,621
<CURRENT-LIABILITIES> 3,288,766
<BONDS> 0
0
0
<COMMON> 22,628,670
<OTHER-SE> (14,495,867)
<TOTAL-LIABILITY-AND-EQUITY> 16,678,621
<SALES> 7,089,977
<TOTAL-REVENUES> 7,089,977
<CGS> 3,277,885
<TOTAL-COSTS> 7,509,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,834
<INCOME-PRETAX> (457,136)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (458,736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (458,736)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
