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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] 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: 6,289,196 shares outstanding as of August 14,
2000.
Transitional Small Business Disclosure Format. (check one):
YES [ ] NO [X]
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CINEMASTAR LUXURY THEATERS, INC.
TABLE OF CONTENTS
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 2000 and 1999 (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 13
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)
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June 30,
2000
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 717,718
Prepaid expenses 203,730
Other current assets 346,115
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TOTAL CURRENT ASSETS 1,267,563
Property and equipment, net 13,327,921
Deposits and other assets 561,528
============
TOTAL ASSETS $ 15,157,012
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 2,000,000
Current portion of long-term debt and capital lease
obligations 29,391
Accounts payable 1,359,462
Accrued liabilities 426,934
Deferred revenue 485,249
------------
TOTAL CURRENT LIABILITIES 4,301,036
Long-term debt and capital lease obligations,
net of current portion 1,693,498
Deferred rent liability 4,763,968
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TOTAL LIABILITIES 10,758,502
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STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value;
authorized shares 20,000,000;
issued and outstanding shares 6,289,196 62,892
Additional paid-in capital 29,665,121
Accumulated deficit (25,329,503)
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TOTAL STOCKHOLDERS' EQUITY 4,398,510
============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,157,012
============
</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)
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Three Months ended June 30,
---------------------------------
2000 1999
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REVENUES:
Admissions $ 4,825,368 $ 5,055,021
Concessions 2,084,307 2,093,434
Other operating revenues 210,476 156,917
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TOTAL REVENUES 7,120,151 7,305,372
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COSTS AND EXPENSES:
Film rental and booking costs 2,445,249 2,902,221
Cost of concession supplies 369,680 375,812
Theater operating expenses 3,632,663 3,046,044
Selling, general and administrative expenses 642,487 732,784
Depreciation and amortization 797,490 597,127
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TOTAL COSTS AND EXPENSES 7,887,569 7,653,988
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OPERATING LOSS (767,418) (348,616)
OTHER INCOME (EXPENSE):
Interest expense (154,179) (93,016)
Interest income 10,861 12,602
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TOTAL OTHER EXPENSE (143,318) (80,414)
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LOSS BEFORE PROVISION FOR INCOME TAXES (910,736) (429,030)
PROVISION FOR INCOME TAXES (62,237) --
----------- -----------
NET LOSS $ (848,499) $ (429,030)
=========== ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.13) $ (0.11)
=========== ===========
WEIGHTED AVERAGE SHARES 6,289,196 3,864,986
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</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>
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Three Months ended June 30,
---------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (848,499) $ (429,030)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 797,490 597,127
Deferred rent expense 197,386 159,589
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (12,662) (89,261)
Deposits and other assets (2,058) 4,427
Accounts payable (1,731,160) 522,317
Accrued and other liabilities (278,053) (272,424)
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,877,556) 492,745
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment -- (1,019,987)
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -- (1,019,987)
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from credit facility borrowings -- 1,000,000
Principal payments on long-term debt and capital
lease obligations (24,922) (51,960)
Common stock issuance costs (26,809) --
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (51,731) 948,040
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,929,287) 420,798
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,646,975 2,220,396
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 717,718 $ 2,641,194
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 116,786 $ 69,683
=========== ===========
Taxes -- --
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</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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, 2000 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 month period ended June 30,
2000 are not necessarily indicative of the results of operations that may be
expected for the year ending March 31, 2001.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 and during the reporting periods. Actual
amounts could differ from those estimates.
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. See Results of
Operations for further discussion.
NOTE 2
The Securities and Exchange Commission has issued Staff Accounting Bulletin No.
101 "Revenue Recognition in Financial Statements" ("SAB 101") which, together
with certain amendments, provides guidance on the application of generally
accepted accounting principles related to revenue recognition in financial
statements. Management believes its presentation of revenues in the Company's
consolidated financial statements is consistent with the revenue recognition
criteria and other principles mandated by SAB 101, and that its adoption will
not have a material financial effect on the Company's consolidated financial
statements. The Company will be required to adopt SAB 101 by the fourth quarter
of fiscal 2001.
NOTE 3
Basic and diluted net 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.
NOTE 4
On September 23, 1997, the Company entered into an agreement (the "CAP
Agreement") with CinemaStar Acquisition Partners, LLC ("CAP") and Reel Partners
LLP ("Reel") whereby Reel provided $3,000,000 of interim debt financing and CAP
acquired a majority equity interest in the Company through a $15 million
purchase of newly issued shares of the Company's Common Stock (the "Equity
Financing"). 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. Concurrent with the execution of the CAP Agreement, the Company also
issued to CAP a warrant to purchase 142,857 shares of common stock at an
exercise price of $5.94 (the "Signing Warrants").
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
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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 the costs of closing, the Company's
Plaza Americana 10 facility in Tijuana (now in full operation and achieving
operating profits) and San Bernardino Facility (opened December 1999). 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.
On March 28, 2000, the Company sold 2,424,158 shares of the Company's common
stock to the Company's principal shareholder, SCP Private Equity Partners, LP
("SCP"). The purchase price was $1.44 per share for an aggregate purchase price
of $3,500,000. Pursuant to the terms of the Stock Purchase Agreement, under
certain circumstances the Company has the option to sell SCP an additional
692,617 shares of common stock at $1.44 per share for an aggregate purchase
price of $1,000,000 at any time until March 28, 2002, so long as there have been
no material adverse changes in the Company, or in the Company's business
subsequent to March 28, 2000. Under the terms of the Stock Purchase Agreement,
the Company granted SCP warrants to purchase an additional 779,194 shares of the
Company's common stock at a price of $1.44 per share. The warrants issued in
conjunction with the Stock Purchase Agreement expire on March 28, 2005. In as
much as the warrants were issued at fair value, no value has been assigned to
these warrants.
NOTE 5
In October 1998, the Company signed a seven year, $15 million Revolving Credit
Agreement with a senior, secured lender. The Revolving Credit Agreement contains
various positive and negative covenants, such as consolidated leverage ratio,
consolidated fixed charge ratio, maximum fixed asset expenditures, consolidated
interest coverage ratio and minimum EBITDA. Borrowings under the Revolving
Credit Agreement are collateralized by the Company's tangible and intangible
assets, and the stock of the Company's wholly owned subsidiaries, Cinemas, Inc.
and CinemaStar International. The Company may elect to borrow under the
Revolving Credit Agreement at either (i) the higher of the lender's reference
rate or the federal funds rate plus 0.50% or (ii) the LIBOR rate, in each case
plus the applicable margin. The Company was required to reduce the amount of
borrowings outstanding under the facility beginning in March 2000.
On April 4, 2000, the Company amended its Revolving Credit Agreement. Under the
terms of the amendment, the total available borrowing was reduced from
$15,000,000 to $5,000,000, and the termination date of credit facility was
changed from August 31, 2005 to December 31, 2000. The amendment required the
Company to complete the $3,500,000 sale of stock to its principal shareholder
and to use $1,000,000 of the proceeds from the sale of the common stock to
reduce the Company's outstanding borrowings on its credit facility from
$3,000,000 to $2,000,000. The amendment waived certain covenant violations and
adjusted certain positive and negative covenants to make them more consistent
with the Company's expected future financial performance.
The Company is able at draw against the facility as of June 30, 2000, as the
Company's leverage ratio is below the maximum established by the April 4, 2000
amendment to the Revolving Credit Agreement. The amount of borrowings available
to the Company under the facility as of June 30, 2000 is not significant, as the
borrowings continue to be limited by the leverage ratio covenant. As of June 30,
2000, the Company had outstanding borrowings of $2,000,000 under the facility.
7
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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.
The Company began the first quarter of fiscal 2001 with nine theaters with a
total of 99 screens. On April 1, 2000, the Company added four stadium-style
auditoriums to its Mission Grove complex in Riverside, California. The addition
raised the total screen count at the Mission Grove location from 14 to 18, and
raised the circuit-wide screen count to 103. On June 30, 2000 the Company closed
its six screen theater in Chula Vista, California, reducing the Company's
theater and screen count to eight and 97, respectively, as of June 30, 2000. The
Company is currently attempting to sell the Chula Vista 6 property. For the
entire first quarter of fiscal 2000, the Company operated eight theaters 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 three months ended
June 30, 2000, total revenues were $5,950,770 in California and $1,169,381 in
Northern Mexico, compared to $6,104,236 and $1,201,136 for California and
Northern Mexico, respectively in the three months ended June 30, 1999. Total
assets for the California and Northern Mexico regions as at June 30, 2000 were
$14,499,881 and $657,131, respectively as compared to total assets of
$15,627,845 and $439,867, for the California and Northern Mexico regions
respectively, as of June 30, 1999.
The Company has generated significant net losses in each fiscal year of its
operations, including net losses of $5,231,252 in the fiscal year ended March
31, 2000 and a net loss of $848,499 in the quarter ended June 30, 2000. As of
June 30, 2000, the Company has an accumulated deficit of approximately
$25,330,000, and a working capital deficiency of approximately $3,033,000.
As of June 30, 2000, the Company held cash and cash equivalents in the amount of
$717,718. The Company is obligated to pay down the $2,000,000 of borrowings
against its credit facility, which terminates on December 31, 2000. Management
can make no assurances as to the Company's ability to pay down its credit
facility debt and fund its working capital requirements over the next twelve
months.
Management plans to improve the Company's liquidity through securing a new debt
facility, either a revolving credit facility or a term loan, from a new senior
lender. The Company's ability to secure a new debt facility will be enhanced if
it is able to complete the sale of one of its theaters and pay off the related
mortgage loan on the property. Management can give no assurances that it will be
able to secure a debt facility on terms favorable to the Company, if at all.
Further, management can give no assurances that it will be able to sell the
theater property.
Management is also in the process of implementing strategies to increase theater
revenues, reduce theater operating expenses, and reduce general and
administrative expenses. To the extent management can increase the Company's
Earnings Before Interest, Depreciation, and Amortization (EBITDA), the Company
will have an increased capacity for borrowing. Management can give no assurances
that its strategies to increase revenues and reduce expenses will be successful,
or that it will be able to significantly improve the Company's EBITDA.
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While the Company believes it could attain profitability with its current
operations, such profitability is contingent on numerous factors, many of which
are outside the control of the Company. Any substantial profitability will
depend on, among other things, the Company's ability to continue to grow its
operations through the addition of new screens.
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 is competitive with respect to these
matters.
These factors, among others, indicate the Company may be unable to continue as a
going concern. The accompanying condensed consolidated financial statements do
not include any adjustments relating to the recoverability and classification of
asset carrying amounts, or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Total revenues for the three months ended June 30, 2000 decreased $185,221 or
2.5% to $7,120,151 from $7,305,372 for the prior year. Admission revenues
decreased $229,653 or 4.5%, concession sales decreased $9,127 or 0.4%, and other
operating revenues increased by $53,559, or 34.1%. The decrease in admissions
and concession revenues is attributable to a decrease in attendance, offset by
modest increases in the average ticket price and concession revenues per patron.
Total attendance decreased 5.6% from the first quarter of last year, however the
average ticket price and the concession revenue per cap increased 1.1% and 5.4%,
respectively, for the first quarter of fiscal 2001 as compared to the first
quarter of fiscal 2000.
Film rental and booking costs for the three months ended June 30, 2000 decreased
$456,972 or 15.8% to $2,445,249 from $2,902,221 for the previous fiscal year's
first quarter. The decrease is attributable to a decrease in admission revenues
and a reduced cost of film relative to last year's first quarter. As a
percentage of admission revenues, film rental and booking costs decreased to
50.7% for the three months ended June 30, 2000 from 57.4% for the three months
ended June 30, 1999, due to the timing and terms of new releases in this year's
first quarter compared to the prior year.
The cost of concession supplies for the three months ended June 30, 2000
decreased $6,132 or 1.6% to $369,680 from $375,812 for the previous year. The
decrease is attributable to a decrease in concession revenues and reduced
concession product costs relative to last year's first quarter. As a percentage
of concession revenues, the cost of concession supplies decreased to 17.7% for
the three months ended June 30, 2000 from 18.0% for the three months ended June
30, 1999.
Theater operating expenses for the three months ended June 30, 1999 increased
$586,619 or 19.3% to $3,632,663 compared to $3,046,044 for the previous year.
This increase in operating expenses was due to the addition of the San
Bernardino 20 complex which opened in December 1999, and the addition of four
screens to the Mission Grove complex in April 2000. As a percentage of total
revenues, theater operating expenses increased by 9.3% to 51.0% for the three
months ended June 30, 2000, compared to 41.7% for the three months ended June
30, 1999.
General and administrative expenses for the three months ended June 30, 2000
decreased $90,297 or 12.3% to $642,487 compared to $732,784 for the previous
year. The decrease is primarily attributable to management's efforts to reduce
general and administrative costs. As a percentage of total revenues, general and
administrative expense decreased by 1.0% to 9.0% for the three months ended June
30, 2000, compared to 10.0% for the three months ended June 30, 1999.
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Depreciation and amortization for the three months ended June 30, 2000 increased
$200,363 or 33.6% to $797,490 compared to $597,127 for the previous year, due to
the increase in the Company's balance of fixed assets as a result of the
addition of the San Bernardino 20 complex and the addition of four screens to
the Mission Grove complex.
Interest expense for the fiscal three months ended June 30, 2000 increased
$61,163 or 65.8% to $154,179 compared to $93,016 for the previous year. This
increase is due to an increase in the Company's average debt balance in the
first quarter of fiscal 2001 as compared to 2000.
Interest income for the three months ended June 30, 2000 decreased $1,741 or
13.8% to $10,861 from $12,602 for the three months ended June 30, 1999. This
decrease is attributable to a decrease in the Company's average cash balance in
the first quarter of fiscal 2001 as compared to 2000.
The net loss for the three months ended June 30, 2000 increased $419,469 or
97.8% to $848,499 from $429,030 for the three months ended June 30, 1999 as a
result of the changes in revenues and expenses described in the preceding
paragraphs.
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 the
development of new theaters and the acquisition of existing theaters.
Historically, new theaters have been financed with internally generated cash
flow, long-term debt, convertible debentures, equity, and facility and equipment
leasing.
On September 23, 1997, the Company entered into an agreement (the "CAP
Agreement") with CinemaStar Acquisition Partners, LLC ("CAP") and Reel Partners
LLP ("Reel") whereby Reel provided $3,000,000 of interim debt financing, and CAP
acquired a majority equity interest in the Company through a $15 million
purchase of newly issued shares of the Company's Common Stock (the "Equity
Financing"). 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. Concurrent with the execution of the CAP Agreement, the Company also
issued to CAP a warrant to purchase 142,857 shares of common stock at an
exercise price of $5.94 (the "Signing Warrants").
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 the costs of
closing, the Company's Plaza Americana 10 facility in Tijuana (now in full
operation and achieving operating profits) and San Bernardino Facility (opened
December 1999). 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.
On March 28, 2000, the Company sold 2,424,158 shares of the Company's common
stock to the Company's principal shareholder, SCP Private Equity Partners, LP
("SCP"). The purchase price was $1.44 per share for an aggregate purchase price
of $3,500,000. Pursuant to the terms of the Stock Purchase Agreement, under
certain circumstances the Company has the option to sell SCP an additional
692,617 shares of common stock at $1.44 per share for an aggregate purchase
price of $1,000,000 at any time until March 28, 2002, so long as there have been
no material adverse changes in the Company, or in the Company's business
subsequent to March 28, 2000. Under the
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terms of the Stock Purchase Agreement, the Company granted SCP warrants to
purchase an additional 779,194 shares of the Company's common stock at a price
of $1.44 per share. The warrants issued in conjunction with the Stock Purchase
Agreement expire on March 28, 2005. In as much as the warrants were issued at
fair value, no value has been assigned to these warrants.
In October 1998, the Company signed a seven year, $15 million Revolving Credit
Agreement with a senior, secured lender. The Revolving Credit Agreement contains
various positive and negative covenants, such as consolidated leverage ratio,
consolidated fixed charge ratio, maximum fixed asset expenditures, consolidated
interest coverage ratio and minimum EBITDA. Borrowings under the Revolving
Credit Agreement are collateralized by the Company's tangible and intangible
assets, and the stock of the Company's wholly-owned subsidiaries, Cinemas, Inc.
and CinemaStar International. The Company may elect to borrow under the
Revolving Credit Agreement at either (i) the higher of the lender's reference
rate or the federal funds rate plus 0.50% or (ii) the LIBOR rate, in each case
plus the applicable margin. The Company was required to reduce the amount of
borrowings outstanding under the facility beginning in March 2000.
On April 4, 2000, the Company amended its Revolving Credit Agreement. Under the
terms of the amendment, the total available borrowing was reduced from
$15,000,000 to $5,000,000, and the termination date of credit facility was
changed from August 31, 2005 to December 31, 2000. The amendment required the
Company to complete the $3,500,000 sale of stock to its principal shareholder,
and to use $1,000,000 of the proceeds from the sale of the common stock to
reduce the Company's outstanding borrowings on its credit facility from
$3,000,000 to $2,000,000. The amendment waived certain covenant violations and
adjusted certain positive and negative covenants to make them more consistent
with the Company's expected future financial performance.
The Company is able at draw against the facility as of June 30, 2000, as the
Company's leverage ratio is below the maximum established by the April 4, 2000
amendment to the Revolving Credit Agreement. The amount of borrowings available
to the Company under the facility as of June 30, 2000 is not significant, as the
borrowings continue to be limited by the leverage ratio covenant. As of June 30,
2000, the Company had outstanding borrowings of $2,000,000 under the facility.
The Company has generated significant net losses in each fiscal year of its
operations, including net losses of $5,231,252 in the fiscal year ended March
31, 2000 and a net loss of $848,499 in the quarter ended June 30, 2000. The
fiscal year ended March 31, 2000 loss included an asset impairment charge of
$2,000,000; therefore the net loss for the year excluding the asset impairment
charge was $3,231,252. There can be no assurance as to when or if the Company
will achieve profitability. While the Company believes it could attain
profitability with its current operations, such profitability is contingent on
numerous factors, many of which are outside the control of the Company. 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.
During the three months ended June 30, 2000, the Company's operating activities
resulted in a net use of cash of $1,961,689, as compared to a net source of cash
of $492,745 for the three months ended June 30, 1999. The primary cause for the
difference in cash used versus generated in the first quarter of fiscal 2001 as
compared to 2000 was an $1,815,293 reduction in the Company's payables during
the first quarter of fiscal 2001. Approximately $1,600,000 of the reduction in
payables was related to the payment of construction expenses that had been
accrued as of March 31, 2000. The $419,469 increase in the first quarter net
loss of the Company in 2001 versus 2000 included increases in non-cash expenses
of $200,363 and $37,797 for depreciation and deferred rent expense,
respectively.
During the three months ended June 30, 2000, the Company's investing activities
resulted in a net source of cash of $84,133, as compared to a net use of cash of
$1,019,987 for the three months ended June 30, 1999. The Company made minor
property dispositions in the first quarter of 2001, where as the Company added
$1,019,987 of property in the first quarter of 2000, primarily related to the
construction of the San Bernardino 20.
During the three months ended June 30, 2000, the Company's financing activities
resulted in a net use of cash of $51,731, as compared to a net source of cash of
$948,040 for the three months ended June 30, 1999. The primary cause for the
difference in cash used versus generated was that the Company only made routine
debt payments in the first quarter of 2001, as compared to the first quarter of
2000 when the Company drew $1,000,000 from its credit facility to fund its
construction projects, which was partially offset by routine debt payments made
by the Company.
As of June 30, 2000, the Company held cash and cash equivalents in the amount of
$717,718. The Company is obligated to pay down the $2,000,000 of borrowings
against its credit facility, which terminates on December 31,
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2000. Management can make no assurances as to the Company's ability to pay down
its credit facility debt, and fund its working capital requirements over the
next twelve months.
Management plans to improve the Company's liquidity through securing a new debt
facility, either a revolving credit facility or a term loan, from a new senior
lender. The Company's ability to secure a new debt facility will be enhanced if
it is able to complete the sale of the Chula Vista 6 property and pay off the
related mortgage on the property. Management can give no assurances that it will
be able to secure a debt facility on terms favorable to the Company, if at all.
Further management can give no assurances that it will be able to sell the Chula
Vista 6 property.
Management is also in the process of implementing strategies to increase theater
revenues, reduce theater operating expenses, and reduce general and
administrative expenses. To the extent management can increase the Company's
Earnings Before Interest Depreciation and Amortization (EBITDA), the Company
will have an increased capacity for borrowing. Management can give no assurances
that its strategies to increase revenues and reduce expenses will be successful,
or that it will be able to significantly improve the Company's EBITDA.
The Company leases eight theater properties and various equipment under
non-cancelable operating lease agreements that 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 Company's former officers, directors,
and stockholders personally guarantee certain of the Company's theater operating
leases. The estimated minimum lease payments due under non-cancelable operating
leases for fiscal year 2001 was approximately $5,501,000. At June 30, 2000, the
aggregate future minimum lease payments due under non-cancelable operating
leases was approximately $99,665,000.
As of March 31, 2000, the Company had total net deferred income tax assets of
approximately $7,192,000. 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.
As of March 31, 2000, the Company had net operating loss carryforwards ("NOL's")
of approximately $15,000,000 and $5,000,000 for Federal and California income
tax purposes, respectively. The Federal NOL's are available to offset future
years taxable income, and they expire in 2007 through 2021 if not utilized prior
to that time. The California NOL's are available to offset future years taxable
income, and they expire in 2000 through 2006 if not utilized prior to that time.
Federal and state tax laws restrict the utilization of these NOL's as a result
of the Company's changes in ownership. The Company's initial public offering and
certain other equity transactions have resulted in an "ownership change" as
defined in Section 382 of the Internal Revenue Code of 1986, as amended. As a
result, the Company's use of its net operating loss carryforwards to offset
taxable income in any post-ownership change period will be subject to certain
specified annual limitations.
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.
CURRENCY FLUCTUATIONS
The Company is subject to the risks of fluctuations in the value of the Mexican
Peso relative to the U.S. dollar. These risks are heightened because a majority
of the revenues in Mexico are collected in Mexican Pesos, but the lease for the
theater complex 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
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the future, and it has taken no steps to guard against these risks.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San
Diego Superior Court 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 and seeks
damages of $1.25 million. The landlord has already leased the property to
another tenant, which the Company believes would mitigate all, or a portion of
the damages sought. Recently, the landlord has entered into an agreement to sell
the property, which will likely change the damage claim of the plaintiff.
Discovery is on hold until completion of the sale transaction. The Company
intends to vigorously defend this action. Management does not believe the
ultimate outcome of this matter will have a material adverse impact on the
Company's financial position or its results of operations.
On March 9, 2000, Russell Seheult, a former director of the Company filed suit
in the Superior Court for the State of California in San Bernardino County. He
alleges the Company has breached its obligation to make weekly payments in the
amount of $1,000 pursuant to a purported consulting agreement between him and
the Company. This matter is in the early stages of discovery, and a trial date
has not been set. Management does not believe the ultimate outcome of this
matter will have a material adverse impact on the Company's financial position
or its results of operations.
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 that the Company believes would
have a material adverse effect on the Company.
ITEM 2 -- CHANGES IN SECURITIES
None
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
Exhibit 10.1 Fourth Amendment and Waiver dated April 4, 2000 to
the Revolving Credit Agreement dated as of October 19,
1998, as amended.
Exhibit 27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 14, 2000
CinemaStar Luxury Theaters, Inc.
by: /s/ Jack R. Crosby
------------------------------------------
Jack R. Crosby
Chairman and Chief Executive Officer
(principal executive officer)
by: /s/ Donald H. Harnois, Jr.
------------------------------------------
Donald H. Harnois, Jr.
Vice President and Chief Financial Officer
(principal financial officer and
principal accounting officer)
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