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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(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 Theaters, 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
(11) Form 10-KSB for the year ended March 31, 1998
</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/A CONTAINS CERTAIN FORWARD LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN
THIS FORM 10-KSB/A SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED
FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS FORM 10-KSB/A. 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:
<TABLE>
<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/A. Except for the historical information
contained herein, the discussion in this Form 10-KSB/A contains certain forward
looking statements that involve risks and uncertainties, such as statements
of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Form 10-KSB/A should be read as being
applicable to all related forward-looking statements wherever they appear in
this Form 10-KSB/A. 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 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, and James J.
Villanueva and Winston J. Churchill did not timely amend, 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, Neil R. Austrian, Jr.,
Jack S. Gray, Jr., Winston J. Churchill, CinemaStar Acquisition Partners,
L.L.C. and SCP Private Equity Partners, L.P. did not timely file a Form 4
Statement of Changes in Beneficial Ownership in connection with stock, stock
options and/or warrants issued to them by the Company during the Company's
fiscal year ended March 31, 1998. Finally, Reel Partners, L.L.C. did not
timely file a Form 5 Annual Statement of Changes in Beneficial Ownership in
connection with the cancellation and/or distribution of the Company's equity
securities 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 the
Company's Form 10-KSB for the fiscal year ended March 31, 1998.
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 R. 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 18,930(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 $250,000 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) Incorporated by reference to Form 10-KSB for the year ended March 31, 1998.
</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 July 10, 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 July 10, 1998
Jack R. Crosby (principal executive officer)
/s/ Norman Dowling Vice President, Chief Financial
- ---------------------- Officer and Assistant Secretary July 10, 1998
Norman Dowling (principal financial officer and
principal accounting officer)
/s/ Frank J. Moreno President, Chief Operating Officer
- ---------------------- and Director July 10, 1998
Frank J. Moreno
/s/ Winston J. Churchill Director July 10, 1998
- ----------------------
Winston J. Churchill
/s/ Wayne B. Weisman Director July 10, 1998
- ----------------------
Wayne B. Weisman
/s/ Thomas G. Rebar Director and Secretary July 10, 1998
- ----------------------
Thomas G. Rebar
/s/ Jack S. Gray, Jr. Vice Chairman of the Board
- ---------------------- of Directors July 10, 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, net of related
transaction costs 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.
SIGNIFICANT CONTRACTS AND AGREEMENTS
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 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 payment 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.
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 Bernardino 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>
