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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number 0-25252
CINEMASTAR LUXURY THEATERS, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 33-0451054
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12230 EL CAMINO REAL, SUITE 320,
SAN DIEGO, CA 92130
(Address of principal executive offices) (Zip Code)
(858) 509-2777
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ }
Common stock, $0.01 par value: 3,864,986 shares outstanding as of October 15,
1999.
Transitional Small Business Disclosure Format. (check one):
YES [ ] NO [X]
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CINEMASTAR LUXURY THEATERS, INC.
TABLE OF CONTENTS
<TABLE>
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations for the three and six
months ended September 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months ended
September 30, 1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults in Senior Securities 13
Item 4. Submission of Matters to a Vote of Securities Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
1999
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<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,124,922
Prepaid expenses 304,328
Other current assets 255,239
------------
TOTAL CURRENT ASSETS 2,684,489
Property and equipment, net 13,288,470
Deposits and other assets 844,402
------------
TOTAL ASSETS $ 16,817,361
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations $ 182,634
Accounts payable 1,047,187
Accrued liabilities 703,727
Deferred revenue 435,150
------------
TOTAL CURRENT LIABILITIES 2,368,698
Long-term debt and capital lease obligations,
net of current portion 3,672,137
Deferred rent liability 4,209,013
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TOTAL LIABILITIES 10,249,848
------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value;
authorized shares 60,000,000;
issued and outstanding shares 3,864,986 38,650
Additional paid-in capital 26,216,172
Accumulated deficit (19,687,309)
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TOTAL STOCKHOLDERS' EQUITY 6,567,513
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,817,361
============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended September 30, Six Months ended September 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Admissions $ 5,679,172 $ 5,723,946 $ 10,734,193 $ 10,589,340
Concessions 2,312,865 2,388,073 4,406,299 4,453,255
Other operating revenues 183,281 175,781 340,197 335,182
------------ ------------ ------------ ------------
TOTAL REVENUES 8,175,318 8,287,800 15,480,689 15,337,777
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Film rental and booking costs 3,041,058 3,033,112 5,943,280 5,678,404
Cost of concession supplies 445,377 420,622 821,188 1,053,216
Theater operating expenses 3,172,738 3,088,897 6,218,782 6,053,281
Selling, general and administrative
expenses 836,741 906,230 1,569,525 1,641,452
Depreciation and amortization 599,758 581,548 1,196,885 1,113,755
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 8,095,672 8,030,409 15,749,660 15,540,108
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 79,646 257,391 (268,971) (162,331)
OTHER INCOME (EXPENSE):
Interest expense (115,927) (78,299) (208,942) (155,132)
Interest income 27,657 39,000 40,260 78,420
------------ ------------ ------------ ------------
TOTAL OTHER (EXPENSE) (88,270) (39,299) (168,682) (76,712)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (8,624) 218,092 (437,653) (239,043)
PROVISION FOR INCOME TAXES -- -- -- (1,600)
------------ ------------ ------------ ------------
NET INCOME (LOSS) (8,624) 218,092 $ (437,653) $ (240,643)
============ ============ ============ ============
BASIC AND DILUTED NET INCOME (LOSS)
PER SHARE $ (0.00) $ 0.06 $ (0.11) $ (0.07)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES 3,864,986 3,676,239 3,864,986 3,674,095
============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended September 30,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (437,653) $ (240,643)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,196,885 1,113,755
Deferred rent expense 310,522 384,122
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (21,847) (31,059)
Deposits and other assets (2,258) (5,937)
Accounts payable 76,210 (392,693)
Accrued and other liabilities (159,322) 175,155
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NET CASH PROVIDED BY OPERATING ACTIVITIES 962,537 1,002,700
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,946,396) (248,747)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,946,396) (248,747)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 2,000,000 --
Principal payments on long-term debt and capital
lease obligations (111,615) (260,490)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,888,385 (260,490)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (95,474) 493,463
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,220,396 3,481,978
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,124,922 $ 3,975,441
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 184,656 $ 155,132
=========== ===========
Income taxes $ -- $ 1,600
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
NOTE 1
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. For further
information, refer to the audited consolidated financial statements for the
fiscal year ended March 31, 1999 and footnotes thereto, included in the
Company's Annual Report on Form 10-KSB which was filed with the Securities and
Exchange Commission. Operating results for the three and six month periods ended
September 30, 1999 are not necessarily indicative of the results of operations
that may be expected for the year ending March 31, 2000.
NOTE 2
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") issued by the FASB
establishes accounting and reporting standards for derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The effective date for the adoption of SFAS No.
133 was extended to fiscal years beginning after June 15, 2000 with the issuance
of SFAS No. 137. The Company currently expects to adopt the provisions of SFAS
No. 133 on April 1, 2001.
NOTE 3
Certain reclassifications have been made to the September 30, 1998 financial
statements to conform to the September 30, 1999 presentation.
NOTE 4
Basic and diluted net income (loss) per share are computed by dividing net loss
by the weighted average number of common shares outstanding during the years.
Potentially dilutive securities consist of outstanding stock options and
warrants, and are not included in the computation as their inclusion would be
anti-dilutive. All per share information and references to the number of shares
outstanding included herein have been adjusted to reflect the one-for-seven
reverse stock split of the Company's common stock, effected on December 2, 1998.
NOTE 5
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 provided $15,000,000 of equity financing
(the "Equity Financing").
Pursuant to the terms of the CAP Agreement, the Company was and continues to be
obligated to issue additional shares of Common Stock (the "Adjustment Shares")
to CAP. The number of Adjustment Shares to be issued is based upon (i) the
recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain
expenses incurred and paid by the Company in connection with the contemplated
transactions, (iii) any negative cash flow incurred by the Company during the
period commencing August 31, 1997 and ending December 15, 1997, and (iv)
operating losses experienced by, or costs of closing, the Company's Plaza
Americana 10 facility in Tijuana (now in full operation and achieving operating
profits) and San Bernardino Facility (still in development). The measurement of
the operating losses and/or closing costs for the two facilities is cumulative,
calculated in the aggregate and will take place on the earlier to occur of the
closing of each such facility or December 15, 2000. The Company issued 193,037
Adjustment Shares to CAP pursuant to the terms of the CAP Agreement, in
September 1998. To the extent there are (a) operating losses at the Company's
Tijuana and San Bernardino facilities, calculated in the aggregate, for the
three-
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year period ended December 15, 2000, and (b) expenditures in connection with the
discovery of liabilities, or defense and/or settlement of claims, in either case
relating to periods prior to August 31, 1997, the Company will be obligated to
issue additional Adjustment Shares.
NOTE 6
On October 19, 1998, the Company signed a $15 million Seven-Year Revolving
Credit Agreement with a senior, secured lender. The terms of the agreement were
modified in March 1999. This facility will be used primarily to finance the
Company's future developments in accordance with the terms and conditions of the
Revolving Credit Facility. The Company has borrowed $2,000,000 against this
facility as of September 30, 1999 and has used the facility to secure two
standby letters of credit, with initial terms of one year, totaling $2,275,000,
issued in accordance with the terms of its lease (as amended) on the San
Bernardino 20-screen facility, currently under construction. Commitment and
other fees associated with the Revolving Credit Agreement and the standby
letters of credit, totaling approximately $380,000, are included in Other Assets
are being amortized over their respective terms.
NOTE 7
The Company purchased on November 23, 1998 the remaining 25% minority interest
in the Company's Mexican subsidiary, CinemaStar Luxury Theaters, S.A. de C.V.,
for approximately $340,000. This amount is included in Other Assets and is being
amortized over a seven-year period.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information contained
herein, the discussion in this Form 10-QSB contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-QSB should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-QSB.
Where possible, the Company uses words like "believes", "anticipates",
"expects", "plans" and similar expressions to identify such forward looking
statements. The Company's actual results could differ materially from those
discussed here. Factors, risks and uncertainties that could cause or contribute
to such differences include the availability of marketable motion pictures, the
increase of revenues to meet long-term lease obligations and rent increases,
risks inherent in the construction of new theaters, the ability to secure new
locations on favorable terms, intense competition in the industry, dependence on
concession sales and suppliers, earthquakes and other natural disasters and
costs associated with potential changes in management and disputes related
thereto.
At April 1, 1999 and at September 30, 1999 the Company had eight theater
locations with a total of 79 screens. The Company operates one business segment.
Such segment has operations in two geographic regions, California and Northern
Mexico. For the six months ended September 30, 1999 total revenues were
$12,928,643 in California and $2,552,046 in Northern Mexico, compared to
$12,940,407 and $2,437,370 for California and Northern Mexico respectively in
the six months ended September 30, 1998. Total assets for the California and
Northern Mexico regions as at September 30, 1999 were $16,817,361 and $432,644,
respectively.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $1,586,372 and $7,932,011 and in the fiscal
years ended March 31, 1999 and 1998, respectively. There can be no assurance as
to whether or when the Company will achieve profitability. 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.
The Company has entered into agreements pertaining to the development of a
20-screen theater complex and a four-screen expansion to an existing theater
complex in San Bernardino, California and Riverside, California,
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respectively. Additionally, the Company has entered into discussions and / or
negotiations regarding the development of other theater complexes in the United
States and the Republic of Mexico. The building of these and other new theater
complexes is subject to many contingencies, many of which are beyond the
Company's control, including consummation of site purchases or leases, receipt
of necessary government approvals, negotiation of acceptable construction
agreements, the availability of financing and timely completion of construction.
No assurances can be given that the Company will be able to successfully build,
finance or operate any of the new theaters presently contemplated or otherwise.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998.
Total revenues for the three months ended September 30, 1999 decreased 1.4% to
$8,175,318 compared to $8,287,800 for the prior comparable period. Admission
revenues decreased by $44,774, or 0.8%, and concession sales and other operating
revenues decreased by $67,709, or 2.6%. The decrease in admissions revenues is
attributable to a decline in paid attendance, partially offset by an increase in
average ticket price. Domestic average ticket price for the fiscal three months
ended September 30, 1999 increased by 2.1% to $4.93 compared to the prior
comparable period. International average ticket price for the three months ended
September 30, 1999 increased 18.5% to $2.88 compared to the prior comparable
period. Domestic attendance declined 3.5% to 983,505 and international
attendance declined 16% to 288,223 for the three months ended September 30, 1999
compared to the prior comparable period. Domestic per capita concession revenues
for the fiscal three months ended September 30, 1999 decreased 2.1% to $1.83
compared to the prior comparable period. International per capita concession
revenue for the three months ended September 30, 1999 increased 28.7% to $1.70
compared to the three months ended September 30, 1998.
Film rental and booking costs for the three months ended September 30, 1999
increased 0.3% to $3,041,058 compared to $3,033,112 for the previous fiscal
year's first quarter. As a percentage of admission revenues, film rental and
booking costs increased to 53.5% for the three months ended September 30, 1999
from 53.0% for the prior comparable period, due to the timing and terms of new
releases in this year's second quarter compared to the prior year.
Cost of concession supplies for the three months ended September 30, 1999
increased 5.9% to $445,377 from $420,622 for the previous year. As a percentage
of concession revenues, cost of concession supplies increased to 19.3% from
17.6% in the three months ended September 30, 1999 compared to the previous
year, due in part to a greater mix of concession sales in Mexico, which
typically have a higher cost.
Theater operating expenses for the three months ended September 30, 1999
increased 2.7% to $3,172,738 compared to $3,088,897 for the previous year. This
increase was due, in part, to increases in federally mandated minimum wages. As
a percentage of total revenues, theater operating expenses increased 1.5% to
38.8% for the three months ended September 30, 1999 compared to 37.3% for the
prior year.
Selling, general and administrative expenses for the three months ended
September 30, 1999 decreased 7.7% to $836,740 compared to $906,230 for the
previous year. As a percentage of total revenues, selling, general and
administrative costs decreased to 10.2% from 10.8%.
Depreciation and amortization for the three months ended September 30, 1999
increased 3.1% to $599,758 compared to $581,547 for the previous year, due, in
part, to amortization of goodwill associated with the purchase of the remaining
25% equity interest in the Company's Mexican subsidiary in the third quarter of
fiscal year 1999.
Interest expense for the fiscal three months ended September 30, 1999 increased
48.1% to $115,927 compared to $78,298 for the previous year. This increase is
primarily due to the amortization of fees and interest on borrowings related to
the Company's line of credit to fund development of a new theater and expansion
of an existing theater.
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Interest income for the three months ended September 30, 1999 decreased to
$27,657 from $38,999 for the three months ended September 30, 1998. This
decrease is attributable to changes in cash balances.
As a result of the above factors, the net loss for the three months ended
September 30, 1999 was ($8,624) compared to net income of $218,093 for the three
months ended September 30, 1998.
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1998.
Total revenues for the six months ended September 30, 1999 increased 0.7% to
$15,480,689 compared to $15,377,777 for the prior comparable period. Admission
revenues increased by $144,853, or 1.4%, and concession sales and other
operating revenues decreased by $41,940, or 0.9%. The increase in admissions
revenues is attributable to an increase in average ticket price, partially
offset by a decline in paid attendance. Domestic average ticket price for the
fiscal six months ended September 30, 1999 increased by 2.6% to $4.96 compared
to the prior comparable period. International average ticket price for the six
months ended September 30, 1999 increased 19.0% to $2.89 compared to the prior
comparable period. Domestic attendance declined 1.3% to 1,846,526 and
international attendance declined 14.3% to 545,885 for the six months ended
September 30, 1999 compared to the prior comparable period. Domestic per capita
concession revenues for the fiscal six months ended September 30, 1999 decreased
1.7% to $1.87 compared to the prior comparable period. International per capita
concession revenue for the six months ended September 30, 1999 increased 26.3%
to $1.70 compared to the six months ended September 30, 1998.
Film rental and booking costs for the six months ended September 30, 1999
increased 4.7% to $5,943,280 compared to $5,678,404 for the previous fiscal
year's first six months. As a percentage of admission revenues, film rental and
booking costs increased to 55.4% for the six months ended September 30, 1999
from 53.6% for the prior comparable period, due to the timing and terms of new
releases in this year's first six months compared to the prior year.
Cost of concession supplies for the six months ended September 30, 1999
decreased 22.0% to $821,188 from $1,053,216 for the previous year. As a
percentage of concession revenues, cost of concession supplies decreased to
18.6% from 23.7% in the six months ended September 30, 1999 compared to the
previous year, due in part to the termination of concession lease agreements
with PCI, the Company's former primary concession vendor. As of June 15, 1998,
the Company ceased the purchase of concession supplies and services from PCI and
began purchasing concessions supplies on a competitive basis.
Theater operating expenses for the six months ended September 30, 1999 increased
2.7% to $6,218,782 compared to $6,053,281 for the previous year. This increase
was due, in part, to increases in federally mandated minimum wages. As a
percentage of total revenues, theater operating expenses increased 0.8% to 40.2%
for the six months ended September 30, 1999 compared to 39.4% for the prior
year.
Selling, general and administrative expenses for the six months ended September
30, 1999 decreased 4.4% to $1,569,525 compared to $1,641,452 for the previous
year. As a percentage of total revenues, selling, general and administrative
costs decreased to 10.1% from 10.7%.
Depreciation and amortization for the six months ended September 30, 1999
increased 7.5% to $1,196,885 compared to $1,113,754 for the previous year, due,
in part, to amortization of goodwill associated with the purchase of the
remaining 25% equity interest in the Company's Mexican subsidiary in the third
quarter of fiscal year 1999.
Interest expense for the fiscal six months ended September 30, 1999 increased
34.7% to $208,942 compared to $155,298 for the previous year. This increase is
primarily due to the amortization of fees and interest on borrowings related to
the Company's line of credit to fund development of a new theater and expansion
of an existing theater.
Interest income for the six months ended September 30, 1999 decreased to $40,260
from $78,420 for the six months ended September 30, 1998. This decrease is
attributable to changes in cash balances.
As a result of the above factors, the net loss for the six months ended
September 30, 1999 was ($437,653) compared to ($240,643) for the six months
ended September 30, 1998.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, principally through box office
admissions and concession sales. Because its revenues are received in cash prior
to the payment of related expenses, the Company has an operating "float" which
partially finances its operations.
The Company's capital requirements arise principally in connection with new
theater openings and acquisitions of existing theaters. In the past, new theater
openings have 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 signed the CAP Agreement for CAP to
acquire a majority equity interest in the Company through a $15 million purchase
of newly issued shares of the Company's Common Stock. Following stockholder
approval, the Equity Financing transaction was completed on December 15, 1997.
Pursuant to the CAP Agreement, CAP purchased 2,526,352 shares of Common Stock
for a purchase price of $5.94 per share. CAP also received, at closing, warrants
to purchase 232,947 shares of Common Stock at an exercise price of $5.94 per
share. Pursuant to the terms of the CAP Agreement, the Company has and continues
to be obligated to issue Adjustment Shares to CAP. The number of Adjustment
Shares to be issued is based upon (i) the recognition of any liabilities not
disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the
Company in connection with the contemplated transactions, (iii) any negative
cash flow incurred by the Company during the period commencing August 31, 1997
and ending December 15, 1997, and (iv) operating losses experienced by, or costs
of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full
operation and achieving operating profits) and San Bernardino Facility (still in
development). The measurement of the operating losses and/or closing costs for
the two facilities is cumulative, calculated in the aggregate and will take
place on the earlier to occur of the closing of each such facility or December
15, 2000. The Company issued 193,037 Adjustment Shares to CAP pursuant to the
terms of the CAP Agreement, in September 1998. To the extent there are (a)
operating losses at the Company's Tijuana and San Bernardino facilities,
calculated in the aggregate, for the three-year period ended December 15, 2000,
and (b) expenditures in connection with the discovery of liabilities, or defense
and/or settlement of claims, in either case relating to periods prior to August
31, 1997, the Company will be obligated to issue additional Adjustment Shares.
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 September 30, 1999, the aggregate future
minimum lease payments due under non-cancelable operating leases was
approximately $86,000,000. In addition, the Company has signed a lease agreement
for a 20-screen Ultraplex theater in San Bernardino, California and for the
expansion by 4 screens of an existing theater in Riverside, California. The
lease for the San Bernardino Ultraplex will require expected minimum rental
payments aggregating approximately $40,700,000 over the 25-year life of the
lease. The lease for the Riverside expansion will require expected minimum
rental payments aggregating approximately $9,300,000 over the 22-year life of
the lease. Accordingly, existing minimum lease commitments as of March 31, 1999
plus those expected minimum commitments for the proposed theater location and
theater expansion, would aggregate minimum lease commitments of approximately
$136,000,000. Under the terms of the San Bernardino lease, the Company is
obligated to construct and equip the theater building. Costs to the Company to
complete and equip the San Bernardino Facility are estimated at approximately
$4,200,000, of which the Company has already paid approximately $2,700,000. All
necessary zoning and similar approvals have been obtained from the City of San
Bernardino, and the landlord has committed under the lease to make available a
tenant allowance of approximately $9,200,000 to reimburse the Company for a
portion of the cost of constructing and equipping the complex. While the
landlord has financing commitments in place to fund its tenant improvement
allowance to the Company, its ability to fund the tenant improvement allowance
is dependant upon its lender adhering to the terms of their financing
commitments. Therefore, there can be no assurance that the Company will be able
to receive adequate funds from the landlord to complete the construction of the
project. The Company has executed a fixed-price construction contract with a
general contractor, for the construction of the theater project. The Company is
obligated to pay the contractor the full amount due under the contract whether
or not the Company receives reimbursement from the landlord. In addition, the
Company's lease obligations with respect to the San Bernardino Facility are
contingent upon the completion and acceptance of the theater. Under the terms
of the Riverside expansion lease amendment, the Company's obligation with
respect to constructing and equipping the theater is estimated at approximately
$1,900,000, of which the
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Company has already paid approximately $400,000. With respect to both projects,
costs to complete and equip have exceeded original estimations. The Company
believes that the San Bernardino facility will be completed and open for
business in December 1999 and that the Riverside expansion will be completed
and open for business in January 2000.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $1,586,372 and $7,932,011 and in the fiscal
years ended March 31, 1999 and 1998, respectively. There can be no assurance as
to whether or when the Company will achieve profitability. Any substantial
profitability will depend upon numerous factors including the Company's ability
to continue reducing costs and expand through the addition of new screens and
theaters.
The ability of the Company to expand through the development of new theaters,
the expansion of existing theaters or the acquisition of established theaters is
contingent upon numerous factors including the Company's ability to secure new,
third party financing. In this regard, the Company signed on October 19, 1998, a
$15 million Revolving Credit Agreement (the "Revolving Credit Facility") with a
senior, secured lender. The terms of the facility were amended in March and
August 1999. This facility is being used primarily to finance the Company's
future developments in accordance with the terms and conditions of the Revolving
Credit Facility. The Company has borrowed $2,000,000 against this facility
through September 30, 1999 and has used the facility to secure two standby
letters of credit, with initial terms of one year, totaling $2,275,000, issued
in accordance with the terms of its lease (as amended) on the San Bernardino
20-screen facility, currently under construction. Commitment and other fees
associated with the Revolving Credit Facility and the standby letters of credit,
totaling approximately $380,000, are being amortized over their respective
terms. The Revolving Credit Facility is subject to maximum borrowing limits
based on multiples as defined under its terms and conditions. The Revolving
Credit Facility is also subject to various positive and negative covenants. The
Company is in compliance with these covenants as of September 30, 1999.
During the six months ended September 30, 1999, the Company generated cash of
$962,537 from operating activities, as compared to $1,002,700 for the six months
ended September 30, 1998. Reductions in the cost of concession supplies and
selling, general & administrative expenses have been offset by increases in film
rental costs and theater operating costs.
During the six months ended September 30, 1999, the Company used cash in
investing activities of $2,946,396 as compared to $248,747 for the six months
ended September 30, 1998. The increase is primarily due to construction in
progress for the 20-screen Ultraplex in San Bernardino, California.
During the six months ended September 30, 1999, the Company provided net cash of
$1,888,385 from financing activities, as compared to using net cash of $260,490
for the six months ended September 30, 1998. The cash provided in the six months
ended September 30, 1999 related to the drawdown of $2,000,000 against the
Company's Revolving Credit Facility, offset in part by principal payments on
long-term debt and capital lease obligations. The cash used in the six months
ended September 30, 1998 related to principal repayments on long-term debt and
capital lease obligations.
At September 30, 1999, the Company held cash, cash equivalents and working
capital in the amounts of $2,124,922 and $315,791, respectively. Management
believes that cash and cash equivalents, working capital and the $15 million
Revolving Credit Facility will be adequate to fund the existing operations and
capital requirements of the Company during the next twelve months.
As of March 31, 1999, the Company had net operating loss carryforwards ("NOLs")
of approximately $13,250,000 and $6,500,000 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 2019 if not utilized prior
to that time. The California NOLs are available to offset future years taxable
income, and they expire in 1999 through 2004 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, 1999, the Company has total net deferred income tax assets in
excess of $5,900,000. Such potential income tax benefits, a significant portion
of which relates to the NOLs discussed above, have been subjected to a
11
<PAGE> 12
100% valuation allowance since realization of such assets is not "more likely
than not" in light of the Company's recurring losses from operations.
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, including
software and hardware, related to their continuing functionality for the year
2000 and beyond. Based on this review, 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 has implemented new ticketing systems and concessions
systems at each of its locations (an initiative unrelated to year 2000). These
systems are certified as year 2000 compliant. Management believes that the
Company is not dependent on any other internal computer applications for its day
to day operations. The Company has communicated via questionnaire with third
parties with whom it has a material relationship to assess its risk with respect
to year 2000 issues. Not all such third parties have responded. The Company is
not aware at this time of any material year 2000 issues with respect to its
dealings with such third parties. The historical costs to the Company for its
year 2000 preparations have been nominal, future costs are not yet known due to
the Company's ongoing assessments and the Company has not deferred or delayed
any projects or expenditures in anticipation of any year 2000 issues. The
Company believes that its worst case scenario for the change to year 2000 would
be a disruption of film distribution to the Company. Such a disruption could
have a material impact on the Company and its results of operations. The Company
is in the process of finalizing and testing a contingency plan to address any
year 2000 issues such as disruption in film distribution. The Company believes
that its contingency plan will be finalized and tested prior to November 15,
1999.
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 generally collected in Mexican Pesos, but the theater lease payments
are denominated in U.S. dollars. While the Company does not believe it has been
materially adversely effected by currency fluctuations to date, there can be no
assurance it will not be so affected in the future and it has taken no steps to
guard against these risks.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time to time the Company is involved in routine litigation and proceedings
in the ordinary course of its business. Except as disclosed in the Company's
Form 10-QSB for the quarter ended June 30, 1999, the Company is not currently
involved in any other pending litigation matters, which the Company believes
would have a material adverse effect on the Company.
ITEM 2 - CHANGES IN SECURITIES
ONE-FOR-SEVEN REVERSE STOCK SPLIT
The Company completed a one-for-seven reverse stock split of its Common Stock,
effective December 2, 1998. The reverse stock split affects the Company's Common
Stock and all options and warrants that are convertible into the Company's
Common Stock. The number of shares of the Company's Common Stock outstanding
prior to the reverse stock split was 27,054,902 and after the reverse stock
split is 3,864,986.
The reverse stock split also amends the terms of the Company's Redeemable
Warrants and Class B Redeemable Warrants. After giving effect to the reverse
stock split, the number of outstanding and issuable Redeemable
12
<PAGE> 13
Warrants for Common Stock, with a maturity date of February 6, 2000 under the
trading symbol "LUXYW," remains at 4,648,562. The total number of shares of
Common Stock for which such warrants will be exercisable is reduced, however,
to approximately 1,568,704 shares from 10,980,833 shares prior to the reverse
stock split. The number of shares of Common Stock exercisable per each warrant
is reduced to 0.33746 shares per warrant from 2.36220 shares per warrant prior
to the reverse stock split. The price per share upon exercise of the warrants
increases to $17.78, compared to $2.54 prior to the reverse stock split.
After giving effect to the reverse stock split, the number of outstanding and
issuable Class B Redeemable Warrants for Common Stock, with a maturity date of
September 15, 2001 under the trading symbol "LUXYZ," remain at 226,438
outstanding. The total number of shares of Common Stock for which such warrants
will be exercisable is reduced to approximately 76,183 shares from 533,278
shares prior to the reverse stock split. The number of shares of Common Stock
exercisable per each Class B warrant is reduced to 0.33644 shares per warrant
from 2.35507 shares per warrant prior to the stock split. The price per share
upon exercise of the warrants increases to $19.32, compared to $2.76 prior to
the reverse stock split.
ITEM 3 - DEFAULTS IN SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item 27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: October 20, 1999
CinemaStar Luxury Theaters, Inc.
by: /s/ Jack R. Crosby
---------------------------------------------
Jack R. Crosby
Chairman and Chief Executive Officer
(principal executive officer)
by: /s/ Norman Dowling
---------------------------------------------
Norman Dowling
Vice President and Chief Financial Officer
(principal financial officer and
principal accounting officer)
14
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