<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
February 14, 2000.
Transitional Small Business Disclosure Format. (check one):
YES [ ] NO [X]
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CINEMASTAR LUXURY THEATERS, INC.
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
December 31, 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations
for the three and nine months ended
December 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31,
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 14
Signatures 15
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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>
December 31,
1999
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,714,771
Prepaid expenses 281,275
Other current assets 301,926
--------------
TOTAL CURRENT ASSETS 2,297,972
Property and equipment, net 14,190,711
Deposits and other assets 824,378
--------------
TOTAL ASSETS $ 17,313,061
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations $ 3,100,763
Accounts payable 1,253,894
Accrued liabilities 979,154
Deferred revenue 540,109
--------------
TOTAL CURRENT LIABILITIES 5,873,920
Long-term debt and capital lease obligations,
net of current portion 1,698,087
Deferred rent liability 4,344,617
--------------
TOTAL LIABILITIES 11,916,624
--------------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value;
authorized shares 20,000,000;
issued and outstanding shares 3,864,986 38,650
Additional paid-in capital 26,216,172
Accumulated deficit (20,858,385)
--------------
TOTAL STOCKHOLDERS' EQUITY 5,396,437
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,313,061
==============
</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 December 31, Nine Months ended December 31,
------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Admissions $ 4,449,305 $ 4,663,484 $ 15,183,498 $ 15,252,824
Concessions 1,915,960 1,955,625 6,322,259 6,408,881
Other operating revenues 166,705 168,000 506,902 503,181
---------------- ---------------- ----------------- ------------------
TOTAL REVENUES 6,531,970 6,787,109 22,012,659 22,164,886
---------------- ---------------- ----------------- ------------------
COSTS AND EXPENSES:
Film rental and booking costs 2,421,817 2,474,677 8,365,097 8,153,080
Cost of concession supplies 338,221 328,958 1,159,409 1,382,174
Theater operating expenses 3,419,401 3,050,919 9,638,183 9,260,200
Selling, general and administrative expenses 798,790 897,366 2,368,314 2,382,818
Depreciation and amortization 603,303 613,969 1,800,188 1,727,724
---------------- ---------------- ----------------- ------------------
TOTAL COSTS AND EXPENSES 7,581,531 7,365,889 23,331,191 22,905,996
---------------- ---------------- ----------------- ------------------
OPERATING LOSS (1,049,562) (578,780) (1,318,532) (741,110)
OTHER INCOME (EXPENSE):
Interest expense (135,076) (91,442) (344,018) (246,574)
Interest income 13,562 30,292 53,821 108,712
---------------- ---------------- ----------------- ------------------
TOTAL OTHER EXPENSE (121,515) (61,150) (290,197) (137,862)
---------------- ---------------- ----------------- ------------------
LOSS BEFORE PROVISION FOR INCOME TAXES
INCOME TAXES (1,171,076) (639,930) (1,608,729) (878,972)
PROVISION FOR INCOME TAXES - - - (1,600)
---------------- ---------------- ----------------- ------------------
NET LOSS (1,171,076) (639,930) $ (1,608,729) $ (880,572)
================ ================ ================= ==================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.30) $ (0.17) $ (0.42) $ (0.24)
================ ================ ================= ==================
WEIGHTED AVERAGE SHARES 3,864,986 3,864,986 3,864,986 3,737,725
================ ================ ================= ==================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months ended December 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,608,729) $ (880,572)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,800,189 1,727,724
Deferred rent expense 446,126 557,081
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (45,481) (54,573)
Deposits and other assets 4,011 (8,273)
Accounts payable 282,915 (464,557)
Accrued and other liabilities (936) (22,349
------------------ -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 878,095 854,481
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of minority interest in consolidated subsidiary - (337,146)
Purchases of property and equipment (4,216,185) (575,668)
------------------ -------------------
NET CASH USED IN INVESTING ACTIVITIES (4,216,185) (912,814)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 3,000,000 -
Principal payments on long-term debt and capital
lease obligations (167,537) (300,769)
Payment of debt issuance costs - (376,406)
------------------ -------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,832,463 (677,175)
------------------ -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (505,627) (735,508)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,220,396 3,481,978
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,714,771 $ 2,746,470
================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 208,099 $ 232,878
================== ===================
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
DECEMBER 31, 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 nine month periods
ended December 31, 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 December 31, 1998 financial
statements to conform to the December 31, 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 which opened in 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
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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.
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 $3,000,000 against this
facility as of December 31, 1999 and had 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, which opened in December, 1999. The $2,000,000 standby
letter of credit was cancelled as of December 10, 1999 in accordance with the
lease terms on the San Bernardino 20-screen facility. 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 and are
being amortized over their respective terms.
As of December 31, 1999 the Company was not in compliance with certain of the
covenants contained in its Revolving Credit Facility, and as a result, the
Company is not currently able to borrow against the facility. Management is in
discussions with the lender in order to obtain a waiver and to modify the
agreement. A definitive agreement to waive the December 31, 1999 covenant
violations and to modify the Revolving Credit Facility has not been reached as
of this date. Although management expects an agreement will be reached and the
lender has not attempted to accelerate the due date of any payment obligation
of the Company under the Revolving Credit Facility, the outstanding borrowings
against the facility of $3,000,000 as of December 31, 1999 have been classified
as a current liability in the accompanying consolidated balance sheet.
Management is also in negotiations with its principal shareholder to obtain an
equity infusion of $3.5 million, most likely from the sale of convertible
preferred stock. The proceeds from this equity transaction will be used to
reactivate the Company's Revolving Credit Facility, to fund theater
development, and to meet seasonal working capital requirements.
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 the Company had eight theater locations with a total of 79
screens. At December 31, 1999 the Company had nine theater locations with a
total of 99 screens. The increase was due to the opening of a 20 screen
multi-plex theater in San Bernardino, California in December 1999. The Company
operates one business segment. Such segment has operations in two geographic
regions, California and Northern Mexico. For the nine months ended December 31,
1999 total revenues were $18,204,837 in California and $3,807,822 in Northern
Mexico, compared to $18,567,639 and $3,597,247 for California and Northern
Mexico respectively in the nine months ended December 31, 1998. Total assets for
the California and Northern Mexico regions as at December 31,1999 were
$17,377,904 and $586,685, 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. Further, the Company has
incurred losses of $1,171,076 and $1,608,729 for the three and nine month
periods ended December 31, 1999. There can be no assurance as to whether or when
the Company will achieve profitability. Any substantial profitability will
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depend, among other things, on the Company's ability to continue to grow its
operations through the addition of new screens and its ability to maintain
adequate financing. The Company is not in compliance with certain covenants of
its credit agreement. See Liquidity.
The Company has entered into an agreement for a four-screen expansion to an
existing theater in Riverside, California. The four-screen addition is currently
under construction, and is anticipated to be substantially completed in March
2000. 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 DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998.
Total revenues for the three months ended December 31, 1999 decreased 3.8% to
$6,531,970 compared to $6,787,109 for the prior comparable period. Admission
revenues decreased by $214,179 or 4.6%, and concession sales and other operating
revenues decreased by $40,960, or 1.9%. 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 December 31, 1999 increased by 6.1% to $5.02 compared to the prior
comparable period. International average ticket price for the three months ended
December 31, 1999 increased 18.2% to $3.08 compared to the prior comparable
period. Domestic attendance declined 11.8% to 731,138 and international
attendance declined 11.4% to 253,171 for the three months ended December 31,
1999 compared to the prior comparable period. Domestic per capita concession
revenues for the fiscal three months ended December 31, 1999 increased 6.6% to
$1.98 compared to the prior comparable period. International per capita
concession revenue for the three months ended December 31, 1999 increased 21.8%
to $1.71 compared to the three months ended December 31, 1998.
Film rental and booking costs for the three months ended December 31, 1999
decreased 2.1% to $2,421,817 compared to $2,474,677 for the previous fiscal
year's third quarter. As a percentage of admission revenues, film rental and
booking costs increased to 54.4% for the three months ended December 31, 1999
from 53.1% for the prior comparable period, due to the timing and terms of new
releases in this year's third quarter compared to the prior year.
Cost of concession supplies for the three months ended December 31, 1999
increased 2.8% to $338,221 from $328,958 for the previous year. As a percentage
of concession revenues, cost of concession supplies increased to 17.7% from
16.8% in the three months ended December 31, 1999 compared to the previous year,
due to increases in vendor concession costs.
Theater operating expenses for the three months ended December 31, 1999
increased 15.0% to $3,419,401 compared to $2,972,919 for the previous year. This
increase was due, in part, to the opening of the new theater in December 1999.
As a percentage of total revenues, theater operating expenses increased 8.5% to
52.3% for the three months ended December 31, 1999 compared to 43.8% for the
prior year.
Selling, general and administrative expenses for the three months ended December
31, 1999 decreased 18.1% to $798,790 compared to $975,366 for the previous year.
As a percentage of total revenues, selling, general and administrative costs
decreased to 12.2% from 14.4% due in part to continued cost cutting measures.
Depreciation and amortization for the three months ended December 31, 1999
decreased 1.7% to $603,303 compared to $613,969 for the previous year, due, in
part, to the write off of replaced equipment in the prior year.
Interest expense for the fiscal three months ended December 31, 1999 increased
47.7% to $135,076 compared to $91,442 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 December 31, 1999 decreased to
$13,562 from $30,292 for the three months ended December 31, 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
December 31, 1999 was $1,171,076 compared to net loss of $639,930 for the three
months ended December 31, 1998.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998.
Total revenues for the nine months ended December 31, 1999 decreased 3.8% to
$22,012,659 compared to $22,164,886 for the prior comparable period. Admission
revenues decreased by $69,326 or 0.5%, and concession sales and other operating
revenues decreased by $82,902, or 1.2%. The decrease in admissions revenues is
attributable to a decline in paid attendance partially offset by an increase in
average ticket prices. Domestic average ticket price for the fiscal nine months
ended December 31, 1999 increased by 2.2% to $4.91 compared to $4.80 for the
prior comparable period. International average ticket price for the nine months
ended December 31, 1999 increased 18.8% to $2.95 compared to $2.48 for the prior
comparable period. Domestic attendance declined 3.2% to 2,612,499 and
international attendance declined 13.4% to 799,056 for the nine months ended
December 31, 1999 compared to the prior comparable period. Domestic per capita
concession revenues for the fiscal nine months ended December 31, 1999 decreased
3.5% to $1.82 compared to the prior comparable period. International per capita
concession revenue for the nine months ended December 31, 1999 increased 24.9%
to $1.68 compared to the nine months ended December 31, 1998.
Film rental and booking costs for the nine months ended December 31, 1999
increased 2.6% to $8,365,097 compared to $8,153,080 for the previous fiscal
year's first nine months. As a percentage of admission revenues, film rental and
booking costs increased to 55.1% for the nine months ended December 31, 1999
from 53.5% for the prior comparable period, due to the timing and terms of new
releases in this year's first nine months compared to the prior year.
Cost of concession supplies for the nine months ended December 31, 1999
decreased 16.1% to $1,159,409 from $1,382,174 for the previous year. As a
percentage of concession revenues, cost of concession supplies decreased to
18.3% from 21.6% in the nine months ended December 31, 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 nine months ended December 31, 1999 increased
6.8% to $9,638,183 compared to $9,026,200 for the previous year. This increase
was due, in part, to increases in federally mandated minimum wages and the
opening of the new theater. As a percentage of total revenues, theater operating
expenses increased 3.1% to 43.8% for the nine months ended December 31, 1999
compared to 40.7% for the prior year.
Selling, general and administrative expenses for the nine months ended December
31, 1999 decreased 9.5% to $2,368,314 compared to $2,616,818 for the previous
year due in part to continuing cost cutting measures. As a percentage of total
revenues, selling, general and administrative costs decreased to 10.8%
from 11.8%.
Depreciation and amortization for the nine months ended December 31, 1999
increased 4.2% to $1,800,188 compared to $1,727,724 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 nine months ended December 31, 1999 increased
39.5% to $344,018 compared to $246,574 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 nine months ended December 31, 1999 decreased to $53,821
from $108,712 for the nine months ended December 31, 1998. This decrease is
attributable to changes in cash balances.
As a result of the above factors, the net loss for the nine months ended
December 31, 1999 was $1,608,729 compared to $880,572 for the nine months
ended December 31, 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 which
opened in 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.
The Company leases eight theater properties and various equipment under
non-cancelable operating lease agreements which expire through 2025 and require
various minimum annual rentals. In December the Company opened for business a
new 20 screen leased multi-plex theater in San Bernardino, California. At
December 31, 1999, the aggregate future minimum lease payments due under
non-cancelable operating leases was approximately $126,200,000. In addition, the
Company has signed a lease agreement for the expansion by 4 screens of an
existing theater in Riverside, California. 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 $135,500,000.
Under the terms of the San Bernardino lease, the Company constructed and
equipped the theater building. Costs to the Company to complete and equip the
San Bernardino Facility were approximately $4,500,000, of which the Company has
already paid approximately $3,100,000. Although the theater is open for
business, the Company, the developer, and contractor are still in the process of
completing the final construction "punch lists", meeting certain city
requirements, and authorizing final payments. The landlord 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 met its financing commitments to date to
fund its tenant improvement allowance to the Company, its ability to fund the
balance of 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.
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<PAGE> 11
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 Company has already paid approximately
$800,000. With respect to both projects, costs to complete and equip have
exceeded original estimations. The Company believes the Riverside expansion will
be completed and open for business in March 2000.
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 $3,000,000 against this facility
through December 31, 1999 and has used the facility to secure a standby letter
of credit, with initial terms of one year, totaling $275,000, issued in
accordance with the terms of its lease (as amended) on the San Bernardino
20-screen facility. 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. As of
December 31, 1999 the Company was not in compliance with certain of the
covenants contained in its Revolving Credit Facility, and as a result, the
Company is not currently able to borrow against the facility. Management is in
discussions with the lender in order to obtain a waiver and to modify the
agreement. A definitive agreement to waive the December 31, 1999 covenant
violations and to modify the Revolving Credit Facility has not been reached as
of this date. Although management expects an agreement will be reached and the
lender has not attempted to accelerate the due date of any payment obligation of
the Company under the Revolving Credit Facility, the outstanding borrowings
against the facility of $3,000,000 as of December 31, 1999 have been classified
as a current liability in the accompanying consolidated balance sheet.
Management is also in negotiations with its principal shareholder to obtain an
equity infusion of $3.5 million, most likely from the sale of convertible
preferred stock. The proceeds from this equity transaction will be used to
reactivate the Company's Revolving Credit Facility, to fund theater
development, and to meet seasonal working capital requirements. No assurance
can be given that the negotiations with the Company's lender and principal
shareholder will be successful.
During the nine months ended December 31, 1999, the Company generated cash of
$878,095 from operating activities, as compared to $854,481 for the nine months
ended December 31, 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 nine months ended December 31, 1999, the Company used cash in
investing activities of $4,216,185 as compared to $912,814 for the nine months
ended December 31, 1998. The increase is primarily due the construction of the
20-screen Ultraplex in San Bernardino, California and the 4-screen addition
under construction in Riverside, California.
During the nine months ended December 31, 1999, the Company provided net cash of
$2,832,463 from financing activities, as compared to using net cash of $677,175
for the nine months ended December 31, 1998. The cash provided in the nine
months ended December 31, 1999 related to the drawdown of $3,000,000 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 nine months
ended December 31, 1998 related to principal repayments on long-term debt and
capital lease obligations, and payment of debt issuance costs.
At December 31, 1999, the Company held cash and cash equivalents of $1,714,771
and had a negative working capital of $3,575,948.
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 100%
valuation allowance since realization of such assets is not "more likely than
not" in light of the Company's
11
<PAGE> 12
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. To date
with the advent of the year 2000, there have been no year 2000 issues that have
affected the operation of 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 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 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
12
<PAGE> 13
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
As of December 31, 1999 the Company was not in compliance with certain of the
covenants contained in its Revolving Credit Facility, and as a result, the
Company is not currently able to borrow against the facility. Management is in
discussions with the lender in order to obtain a waiver and to modify the
agreement. A definitive agreement to waive the December 31, 1999 covenant
violations and to modify the Revolving Credit Facility has not been reached as
of this date. Although management expects an agreement will be reached and the
lender has not attempted to accelerate the due date of any payment obligation
of the Company under the Revolving Credit Facility, the outstanding borrowings
against the facility of $3,000,000 as of December 31, 1999 have been classified
as a current liability in the accompanying consolidated balance sheet.
Management is also in negotiations with its principal shareholder to obtain an
equity infusion of $3.5 million, most likely from the sale of convertible
preferred stock. The proceeds from this equity transaction will be used to
reactivate the Company's Revolving Credit Facility, to fund theater
development, and to meet seasonal working capital requirements. No assurance
can be given that the negotiations with the Company's lender and principal
shareholder will be successful.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's 1999 annual meeting of stockholders in October, 1999, the
Company's stockholders voted to (i) approve an amendment to the Company's
Certificate of Incorporation authorizing a reduction in the number of authorized
shares of Common Stock of the Company from 60,000,000 to 20,000,000 shares (the
number of votes cast for this matter was 3,755,388, the number of votes cast
against this matter was 10,764, the number of abstentions was 616, and the
number of broker non-votes was 0), (ii) the appointment of Arthur Andersen LLP
as the Company's independent public accountants for the fiscal year ended March
31, 2000 (the number of votes cast for this matter was 3,666,231, the number of
votes cast against this matter was 96,857, the number of abstentions was 3,680,
and the number of broker non-votes was 0) and (iii) the election to the Board
of Directors of the Company one nominees referenced in the Company's Proxy
Statement, dated as of September 29, 1999, specifically, Messrs. Jack R. Crosby,
Frank J. Moreno, Jack S. Gray, Jr., Thomas G. Rebar, Wayne B. Weisman and
Winston J. Churchill. With respect to the election of directors, the number of
votes cast for, against, abstentions and broker non-votes is indicated on the
following schedule.
Broker
Election of Directors For Withhold Non-Votes Total
- --------------------- --- -------- --------- -----
Jack R. Crosby 3,666,137 100,631 0 3,766,768
Frank J. Moreno 3,661,994 104,774 0 3,766,768
Jack S. Gray, Jr. 3,660,716 106,052 0 3,766,768
Thomas G. Rebar 3,665,994 100,774 0 3,766,768
Wayne B. Weisman 3,665,994 100,774 0 3,766,768
Winston J. Churchill 3,665,994 100,631 0 3,766,625
ITEM 5 -- OTHER INFORMATION
The Board of Directors of the Company appointed Paul W. Hobby as Co-Chief
Executive Officer and Vice Chairman of the Board of Directors, effective October
27, 1999. The Board of Directors also appointed Mr. Don Harnois to the office of
Chief Financial Officer of the Company, filling the vacancy in that office
created by the resignation of Mr. Norman Dowling, which was effective as of
November 1999. The Company entered into an executive compensation agreement with
Mr. Harnois providing for a 3 year term, annual compensation of $120,000, plus a
$10,000 signing bonus and options to purchase 15,000 shares annually for up to
45,000 shares of the Company's common stock over the term of this agreement at
an exercise price equal to the price quoted as of the average closing price of
the Common Stock over he twenty days prior to the date his executive
compensation agreement was executed.
Effective February 8, 2000, Mr. Frank J. Moreno, a member of the
Company's Board of Directors and its President and Chief Operating Officer
resigned from those capacities, although
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<PAGE> 14
he will continue to provide consulting services to the Company on an ad hoc
basis. Mr. Moreno has executed an amendment to his employment contract
reflecting these arrangements, dated as of February 2, 2000, under which he will
continue to be compensated through April 2001 in four equal installments payable
at equal intervals commencing on February 8, 2000 in the amount of $62,500 each
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Item 27. Financial Data Schedule
Exhibit 10.1 Employment Agreement between the Company and Don
Harnois
Exhibit 10.2 Amendment to Frank Moreno Employment Agreement,
dated April 29, 1998
(B) REPORTS ON FORM 8-K
None
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: February 22, 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)
15
<PAGE> 1
EXHIBIT 10.1
CinemaStar Luxury Theaters, Inc.
11230 El Camino Real #320
San Diego, CA 92130
Mr. Don Harnois
2108 Clayton Dr.
Flower Mound, TX 75028
Dear Mr. Harnois:
This Employment Agreement ("Agreement") is made and entered into as of the 3rd
day of January, 2000 (the "Commencement Date"), by and between you ("Employee")
and CinemaStar Luxury Theaters, Inc., a Delaware corporation, as employer
(hereinafter referred to as "CinemaStar"). We have agreed as follows:
1. EMPLOYMENT AND SERVICES:
CinemaStar shall employ Employee and Employee agrees to be employed and perform
his exclusive services for CinemaStar or one of its subsidiaries or related
companies upon the terms and conditions hereinafter set forth. Employee will
serve hereunder as Chief Financial Officer of CinemaStar. In his capacity as
Chief Financial Officer of CinemaStar, Employee shall do and perform all
services, acts or things necessary, advisable or customary to manage and conduct
the business of CinemaStar, and also will perform such services as requested,
from time to time, by the Chief Executive Officer of CinemaStar (the "Chief
Executive Officer").
Employee shall devote his best efforts, energies and abilities and his full
business time, skill and attention (except for permitted vacation periods and
reasonable periods of illness or other incapacity) to the business and affairs
of CinemaStar. Employee shall perform the duties and carry out the
responsibilities assigned to him by the Chief Executive Officer to the best of
his ability, in a diligent, trustworthy, businesslike and efficient manner for
the purpose of advancing the business of CinemaStar. Employee agrees not to
perform services of any kind or nature which would interfere with the
performance of Employee's services hereunder for any third party, or render
services for Employee's own account, in either case which would interfere with
the performance of Employee's services hereunder, and in each case, unless
specifically permitted to do so in writing by the Board or the Chief Executive
Officer.
2. TERM:
The term of this Agreement shall commence on the date hereof and continue for
three (3) years from the date hereof (the "Employment Period"). Notwithstanding
anything to the contrary contained herein, the Employment Period is subject to
termination pursuant to Paragraph 5 below.
EMPLOYEE AGREES AND ACKNOWLEDGES THAT CINEMASTAR HAS NO OBLIGATION TO RENEW THIS
AGREEMENT OR TO CONTINUE EMPLOYEE'S EMPLOYMENT AFTER EXPIRATION OF THE TERM
HEREUNDER, and Employee expressly acknowledges that no promises or
understandings to the contrary have been made or reached.
3. COMPENSATION:
3.1 BASE COMPENSATION:
For all services rendered under this Agreement, CinemaStar shall pay Employee a
base salary at an annual rate of One Hundred Twenty Thousand Dollars ($120,000)
during the Employment Period or at such higher rate as may be determined by the
Board in its sole discretion (the "Base Salary"). The Base Salary shall be
payable in accordance with CinemaStar's policy for regular salaried employees.
CinemaStar is not
<PAGE> 2
obligated to actually utilize Employee's services hereunder, and payment of the
Base Salary will discharge all of CinemaStar's obligations hereunder.
3.2 BONUS COMPENSATION:
Employee shall be eligible to receive bonus compensation, to be determined by
the Board at its sole discretion.
3.3 SIGNING BONUS
Employee shall receive the amount of $10,000 as an unrevocable advance on his
first year bonus, payable upon signing of this agreement.
3.4 WITHHOLDING:
All compensation payable to Employee hereunder is stated in gross amount and
shall be subject to all applicable withholding taxes, other normal payroll
deductions and any other amounts required by law to be withheld.
4. VACATION:
Employee shall be entitled to three (3) weeks paid vacation each fiscal year
with salary, consistent with CinemaStar's policy for all employees of similar
stature and provided that unused vacation time shall not be carried over to
subsequent years.
5. TERMINATION:
Subject to Paragraph 5.2 below, the Employment Period may be terminated by
CinemaStar at any time, with or without cause. No amounts shall be paid or
benefits provided upon any termination of the Employment Period, whether as
liquidated damages, or otherwise, except as specifically provided in Section 5.2
below or under any benefit plan or agreement in which Employee participates or
to which Employee is a party. Employee shall not be entitled to participate in
any severance plan of CinemaStar, except as required by law.
5.1 TERMINATION FOR CAUSE:
CinemaStar may terminate the Employment Period for "cause" (as defined in this
Paragraph 5.1) at any time upon written notice to Employee. In the event of a
termination for cause, CinemaStar shall have no further obligations to Employee
under this Agreement, except payment of the Base Salary and vacation pay accrued
through the date of termination, and CinemaStar shall continue to have all other
rights available hereunder at law or in equity. As used herein, the term "cause"
shall mean any one or combination of the following:
a. The willful failure of Employee to perform his duties or comply with
reasonable directions of the Board that continues after the Board has given
written notice to Employee specifying in reasonable detail the manner in which
Employee has failed to perform such duties or comply with such directions;
b. A material breach by Employee of any of the terms and conditions of this
Agreement;
c. Employee's gross negligence in the performance of his duties hereunder;
d. Employee's conviction of any crime (whether or not involving CinemaStar)
which constitutes a crime of moral turpitude or is punishable by imprisonment of
thirty (30) days or more, PROVIDED, HOWEVER, nothing in this Agreement shall
obligate CinemaStar to pay the Base Salary during any period that Employee is
unable to perform his duties hereunder due to any incarceration;
<PAGE> 3
e. Employee's violation of any rule or regulation of Cinemastar applicable to
other employees of similar stature;
f. Employee's omission or act constituting fraud, dishonesty or
misrepresentation, occurring subsequent to the date hereof;
g. Subject to any applicable federal and state laws, Employee's failure,
inability (including any disability which prevents Employee from performing the
essential functions of his position with reasonable accommodation), or refusal
to perform Employee's duties on an exclusive and full time basis, but in no case
shall such right be exercised until six (6) months from the date of the
commencement of any physical or mental disability. Employee shall be deemed to
be disabled, for purposes of this Agreement, if he is unable to perform, by
reason of physical or mental incapacity, his essential duties or obligations
under this Agreement, for a total period of Twelve (12) weeks in Three Hundred
Sixty (360) days; or
h. Employee's death.
5.2 TERMINATION WITHOUT CAUSE:
If the Employment Period is terminated by CinemaStar without cause (as "cause"
is defined in Paragraph 5.1 above), CinemaStar shall pay to Employee the Base
Salary for the balance of the Employment Period. CinemaStar acknowledges and
agrees that Employee's employment with CinemaStar shall be deemed to have been
terminated by CinemaStar without cause in the event that substantially all of
the assets of CinemaStar are sold, or if there is a change in the control of
CinemaStar, AND the Employee's duties and responsibilities hereunder are
materially altered at any time during the 6-month period following such sale or
change in control. For purposes of this Agreement, "change in control" shall
mean any event whereby any party (or group of affiliated parties), other than
CinemaStar Acquisition, L.L.C. or any of its affiliates, shall have votes
sufficient to elect more than fifty percent (50%) of the Board.
5.3 TERMINATION BY EMPLOYEE:
Employee has the right to terminate the Agreement for any reason, upon sixty
(60) days prior written notice to CinemaStar.
6. BENEFITS:
During the Employment Period, and so long as Employee is not in breach of this
Agreement:
a. CinemaStar shall reimburse Employee for his reasonable and necessary
out-of-pocket business expenses in accordance with its then prevailing policy
for employees of similar stature (which shall include appropriate itemization
and substantiation of expenses incurred). This shall also include any moving
expenses incurred of not more than Seven Thousand Dollars ($7,000).
b. Employee and his dependents shall be entitled to participate in CinemaStar's
basic medical and other benefit plans generally available to employees of
CinemaStar in accordance with the terms of such plans, excluding severance
benefits; and
c. Employee shall be given an automobile allowance of $450.00 per month.
d. Employee shall be entitled to participate in all other benefits afforded to
all other employees, including a 401K program wherein the employer matches the
employee's contribution at the rate of 25% of the first 6% of employee's
contribution to the plan.
e. Employee shall be entitled to purchase 15,000 shares of LUXY stock per year
(at a price quoted as the average closing price of the previous 20 days of LUXY
stock prior to signing this agreement) for a total of 45,000 shares for the term
of this agreement.
<PAGE> 4
Employee further expressly agrees and acknowledges that after termination of the
Employment Period (by CinemaStar with or without cause or by Employee) Employee
shall be entitled to no benefits, except as specifically provided under the
benefit plans referred to herein, subject in all cases to the terms and
conditions of each such plan, and except as required by law.
7. CONFORMITY WITH THE IMMIGRATION REFORM AND CONTROL ACT OF 1986:
As a condition to Employee's employment with CinemaStar, Employee shall furnish,
and will continue to furnish, to CinemaStar all documentation legally sufficient
to establish satisfy the requirements of the Immigration Reform and Control Act
of 1986, with respect to Employee. If Employee fails to provide the required
documentation within the legally-prescribed time limits, Employee's employment
and all contractual obligations hereunder will terminate immediately.
8. CONFIDENTIALITY AND NONCOMPETITION:
a. Employee shall hold in a fiduciary capacity, for the benefit of CinemaStar,
all confidential or proprietary information, knowledge and data of CinemaStar
which Employee may acquire, learn, obtain or develop during his employment by
CinemaStar. Further, Employee shall not, during the Employment Period or after
the termination of such Employment Period, directly or indirectly use,
communicate or divulge for his own benefit or for the benefit of another any
such information, knowledge or data. Employee makes the same commitment with
respect to the secret, confidential or proprietary information, knowledge and
data of affiliates, customers, contractors and others with whom CinemaStar has a
business relationship. The information covered by this protection includes, but
is not limited to matters of a business nature such as trade secrets,
information about finances, costs and profits, business plans, marketing and
advertising plans and strategies, sales results or projections, plans of
CinemaStar to expand its business, personnel information, records, customer
lists, contact persons, customer data, software, sales data, information
regarding any form of product produced, distributed or acquired by CinemaStar,
and/or other confidential or proprietary information belonging to CinemaStar
relating to CinemaStar's business and enterprise (collectively, the
"Confidential Information").
Employee agrees to hold and safeguard the Confidential Information in trust for
CinemaStar, and agrees that he will not, without the prior written consent of
CinemaStar, misappropriate or disclose or make available to anyone for use
outside of CinemaStar, at any time, any of the Confidential Information.
Notwithstanding the foregoing, Employee may disclose Confidential Information if
such information becomes publicly known without fault of Employee, or where
Employee is obligated to disclose such information by operation of law;
provided, however, that if Employee receives a subpoena or other legal process,
or otherwise receives a legally-binding request (whether voluntary or
involuntary) from a third party, the response to which reasonably could result
in the disclosure of Confidential Information, he shall provide notice thereof
to CinemaStar within three (3) business days of such subpoena, legal process or
request. Employee's obligations under this Paragraph 8 with respect to the
Confidential Information will survive expiration or termination of the
Employment Period.
b. Employee shall not at any time during the Employment Period be or become (i)
interested or engaged in any manner, directly or indirectly, either alone or
with any person, firm or corporation now existing or hereafter created, in any
business which is or may be competitive with the business of CinemaStar or (ii)
directly or indirectly a stockholder or officer, director or employee of, or in
any manner associated with, or aid or abet or give information or financial
assistance to, any such business. Employee hereby acknowledges that the
provisions of this subparagraph b. are reasonable and necessary to protect the
legitimate interests of CinemaStar and that any violation of such provisions
would result in irreparable injury to CinemaStar. The provisions of this
subparagraph b. shall not be deemed to prohibit Employee's purchase or
ownership, as a passive investment, of not more than five percent (5%) of the
outstanding capital stock of any corporation whose stock is publicly traded.
<PAGE> 5
c. All records, files, lists, drawings, documents, models, equipment, software
or intellectual property relating to CinemaStar's business shall be returned to
CinemaStar upon the termination of the Employment Period, whether such
termination is at Employee's or CinemaStar's request.
9. NO SOLICITATION OF EMPLOYEES AND CONTRACTORS:
Employee shall not during the Employment Period or for one (1) year thereafter
induce or attempt to induce any employees, contractors or representatives of
CinemaStar (or those of any of its affiliates) to stop working for, contracting
with or representing CinemaStar or any of its affiliates or work for, contract
with or represent any of CinemaStar's competitors.
Employee hereby acknowledges that the provisions of this Paragraph 9 are
reasonable and necessary to protect the legitimate interests of CinemaStar and
that any violation of such provisions would result in irreparable injury to
CinemaStar. In the event of a violation of the provisions of this Paragraph 9,
Employee further agrees that CinemaStar shall, in addition to all other remedies
available to it, be entitled to equitable relief by way of injunction and any
other legal or equitable remedies.
10. RESULTS AND PROCEEDS:
As Employee's employer, CinemaStar shall own all rights in and to the results
and proceeds connected with or arising out of, directly or indirectly,
Employee's services hereunder.
11. OWNERSHIP OF INTELLECTUAL PROPERTY:
a. CinemaStar shall own, and Employee hereby transfers and assigns to it, all
rights, of every kind and character throughout the world, in perpetuity, in and
to any material or ideas and all results and proceeds of Employee's services
hereunder, or conceived of or produced during the term of Employee's employment,
whether the same consists of plans, methods, slogans, product names, ideas or
copyrightable or patentable subject matter.
b. Employee agrees to execute and deliver to CinemaStar such assignments,
certificates of authorship, or other instruments in accordance with standard
industry practice as CinemaStar may require from time to time to evidence
ownership of the results and proceeds of Employee's services. Employee's
agreement to assign to CinemaStar any of Employee's rights as set forth in this
Paragraph 11 does not apply to any invention which qualifies fully as Employee's
invention under the provisions of Section 2870 of the California Labor Code,
where no equipment, supplies, facility, or trade secret information of
CinemaStar was used and which was developed entirely upon Employee's own time,
and which (i) does not relate to the business of CinemaStar or to its actual or
demonstrably anticipated research or development, or (ii) which does not result
from any work performed by Employee for CinemaStar.
c. Employee represents and warrants that except as previously disclosed to
CinemaStar in writing, Employee neither owns nor controls any copyrights or
copyrightable product.
d. Employee agrees that CinemaStar shall have the right, but not the obligation,
to use Employee's name, voice and likeness in connection with any use or
exploitation of the results and proceeds of Employee's services hereunder, and
in connection with advertising, publicity, exhibition, distribution and/or other
exploitation of any of the foregoing. Employee agrees that CinemaStar shall have
the sole and exclusive right to issue publicity concerning Employee with respect
to Employee's employment hereunder and the results and proceeds of Employee's
services hereunder, except neither Employee nor CinemaStar shall issue any press
release or other public announcement with respect to the execution or the terms
of this Agreement without the consent of the other.
12. MISCELLANEOUS:
a. Any notice provided for in this Agreement must be in writing and must be
either (i) personally delivered, (ii) mailed by registered or certified first
class mail, prepaid with return receipt requested,
<PAGE> 6
(iii) sent by a recognized overnight courier service or (iv) sent by facsimile
with a machine generated confirmation, to the recipient at the address indicated
below:
7
IF TO EMPLOYEE:
The address first written above.
IF TO CINEMASTAR:
CinemaStar Luxury Theaters, Inc.
11230 El Camino Real #320
San Diego, CA 92130
Attention: Board of Directors
Telephone:858/509-2777
Facsimile:858/509-9426
with a copy to:
Katten Muchin & Zavis
525 West Monroe
Suite 1600
Chicago, Illinois 60661-3693
Attention:Julie A. Kunetka
Telephone:312/902-5200
Facsimile:312/902-1061
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given (a) on the date
such notice is personally delivered, (b) three (3) days after the date of
mailing if sent by certified or registered mail, (c) one (1) day after the date
such notice is delivered to the overnight courier service if sent by overnight
courier, or (d) the next business day following transmission by facsimile.
b. Whenever possible, each provision of this Agreement will be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or enforcement in any other jurisdiction, but this Agreement will be reformed,
construed and enforced in such jurisdiction as if such invalid, illegal or
unenforceable provision had never been contained herein.
c. This Agreement, those documents expressly referred to herein and other
documents of even date herewith embody the complete agreement and understanding
among the parties and supersede and preempt any prior understandings, agreements
or representations by or among the parties, written or oral, which may have
related to the subject matter hereof in any way.
d. This Agreement may be executed on separate counterparts, each of which is
deemed to be an original and all of which taken together constitute one and the
same agreement and shall become effective when one or more counterparts have
been executed by each of the parties hereto and delivered to the other.
e. This Agreement is intended to bind and inure to the benefit of and be
enforceable by Employee and CinemaStar and their respective successors and
permitted assigns. Employee may not assign any of his rights or obligations
hereunder without the written consent of CinemaStar.
<PAGE> 7
f. The language used in this Agreement will be deemed to be the language chosen
by the parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party hereto.
g. Any provision of this Agreement may be amended or waived only with the prior
written consent of the parties hereto. The waiver by CinemaStar of any breach of
this Agreement by Employee shall not operate or be construed as a waiver of any
subsequent breach by Employee.
h. This Agreement shall be construed and enforced in accordance with, and all
questions concerning the construction, validity, interpretation and performance
of this Agreement shall be governed by, the laws of the State of California,
without giving effect to provisions thereof regarding conflict of laws.
i. The headings and other captions in this Agreement are included solely for
convenience of reference and shall not control the meaning and the
interpretation of any provision of this Agreement.
j. Each of the parties to this Agreement shall execute and deliver any and all
additional papers, documents, and other assurances, and shall do any and all
acts and things reasonably necessary in connection with the performance of their
obligations hereunder and to carry out the intent of the parties to this
Agreement.
k. If CinemaStar or Employee should terminate the Employment Period pursuant to
Paragraph 5 above for any reason, then, notwithstanding such termination, those
provisions contained in Paragraphs 3.3, 5, 6, 8, 9, 10, 11, 12, 13, and 14
hereof shall remain in full force and effect.
13. ALTERNATIVE DISPUTE RESOLUTION:
a. Except for CinemaStar's right to seek immediate injunctive and equitable
relief in accordance with the provisions of Paragraphs 8, 9, and 11 of this
Agreement, the parties agree that all disputes, claims and other matters in
controversy arising out of or relating to this Agreement, or the performance or
breach thereof, shall be submitted to binding arbitration in accordance with the
provisions and procedures of this Paragraph 13. This arbitration requirement
shall include, without limitation, the agreement by Employee to submit to
arbitration any and all claims arising out of any alleged discrimination or
harassment, including, but not limited to, those covered by the California Fair
Employment and Housing Act, the 1961 Civil Rights Act, 42 U.S.C. Section 2000e
("Title VII"), the Age Discrimination in Employment Act, and the Americans With
Disabilities Act.
b. The arbitration provided for in this paragraph shall take place in Los
Angeles County, California, in accordance with the provisions of Title 9,
Sections 1280 ETSEQ. of the California Code of Civil Procedure, except as
provided to the contrary hereunder. The arbitration shall be held before and
decided by a single neutral arbitrator. The single neutral arbitrator shall be
selected in accordance with the Labor Arbitration Rules of the American
Arbitration Association, as amended and effective on January 1, 1996, or by a
process mutually agreed upon by the parties. If no agreement can be reached as
to the process for selecting the arbitrator or if the agreed method fails, the
arbitrator shall be appointed in accordance with the provisions of California
Code of Civil Procedure Section 1281.6.
c. The parties shall mutually agree upon the date and location of the
arbitration, subject to the availability of the arbitrator. If no agreement can
be reached as to the date and location of the arbitration, the arbitrator shall
appoint a time and place in accordance with the provisions of California Code of
Civil Procedure Section 1282.2(a)(1), except that the arbitrator shall give not
less than 30 days notice of the hearing unless the parties mutually agree to
shorten time for notice.
d. The parties shall be entitled to undertake discovery in the arbitration in
accordance with the provisions of subsections (a) through (d) of California Code
of Civil Procedure Section 1283.05. In conjunction with these procedures, the
parties shall be entitled to request and obtain production of documents in
discovery in the arbitration in accordance with the same rights, remedies and
procedures, and shall be subject to all of the same duties, liabilities and
obligations as if the subject matter of the arbitration were pending in a civil
action before a Superior Court of the State of California. The parties hereby
agree that any discovery taken
<PAGE> 8
hereunder shall be permitted without first securing leave of the arbitrator and
shall be kept to a reasonable minimum.
e. The decision of the arbitrator may be confirmed pursuant to the provisions of
California Code of Civil Procedure Section 1285, and shall not be appealable for
any reason, it being understood that a petition to vacate an award for any of
the reasons set forth in California Code of Civil Procedure Section 1286.2 shall
not be permitted.
14. CINEMASTAR CONSULTING SERVICES:
The parties acknowledge that on occasion certain entities affiliated with
CinemaStar may engage CinemaStar as a consultant with respect to certain
activities similar to CinemaStar's business, and Employee's services may be
required in connection therewith. CinemaStar hereby agrees with Employee that
any services requested of Employee by the Board in connection with such
consulting services shall not be deemed a breach under any of the provisions of
this Agreement.
Please indicate your agreement to be bound by the terms of this Agreement by
executing where indicated below.
Very truly yours,
CINEMASTAR LUXURY THEATERS, INC.,
a Delaware corporation
By:
------------------------------------
Paul W. Hobby,
Chairman and Chief Executive Officer
ACKNOWLEDGED AND AGREED TO AS OF
THIS DAY OF , 1999:
/s/
- --------------------------------
DON HARNOIS
<PAGE> 1
EXHIBIT 6.2
[CINEMA STAR LUXURY THEATERS LETTERHEAD LOGO]
February 2, 2000
Mr. Frank Moreno
7573 Navigator Circle
Carlsbad, CA 92009
Dear Frank:
This letter represents a mutually-agreed amendment to your employment agreement
with CinemaStar ("the company") dated April 29, 1998 ("the contract"). Both
parties have been working in good faith towards an amicable resolution of this
matter, and this represents a final compromise.
Both you and the company agree that your duties under the contract should be
modified, and your compensation adjusted accordingly. Neither the term nor the
health benefits are affected by this amendment. Paragraph 1 relating to
Employment and Services is modified to allow you to spend less than your full
business time working on the company's behalf. While the company wishes to
retain access to your talents on an ad-hoc basis, including, but not limited
too, studio relations, film show presence, due diligence for acquisitions and
general corporate matters, the company acknowledges, however, in Mexico that you
will be engaged in other potentially competitive activities that relate to the
film exhibition business. You agree that you shall not compete for any site that
the company is currently considering, specifically the McDonald's site in East
Mexicali, the Florido site in Tijuana, the Rosarito Beach location, or the
Riverside Plaza Mall.
Your compensation under the contract shall be modified as follows: the company
shall pay a total amount to you in lieu of any salary accrued after February 8,
2000 of $250,000 in four equal installments, the first one at February 8, 2000,
with the remaining three payments spaced at equal intervals between February 8,
2000, and April 29, 2001. These payments shall be the total expense to the
company (other than health insurance benefits) over the remaining term of the
contract; you shall forfeit all earned and unearned stock options, car
allowance, future 401 k contributions by the company, and other non health
related benefits.
<PAGE> 2
During the remainder of the contract term neither you nor the company shall
speak ill of each other, and you shall not reveal trade secrets of the company.
It is specifically acknowledged, however, that the company has disclosure
obligations consistent with its publicly traded status, and that the change in
your responsibilities will be acknowledged in that regard.
Your resignation from CinemaStar's board shall also be effective as of February
8, 2000.
Finally, by execution of this document the parties mutually release each other
for all causes of action not based on contractual rights specifically stated in
this amendment, based either in law or equity, relating to your employment with
the company. Your release will also operate for the benefit of individual
principals, investors, board members or agents associated with the company. If
the company fails to make any payment on or before the schedule attached as
Exhibit A hereto, the company shall have five business days to cure such default
after notice by you, thereafter you shall have the right to accelerate all
remaining payments due, with interest accruing at the prime rate from the date
of default.
This obligation of the company shall survive as an obligation of any party
purchasing all or substantially all of the company's stock or assets.
Dated this ___ day of February, 2000.
- ----------------------------- ----------------------------------
Jack R. Crosby, Frank Moreno, individually
for the Company and for his successors and assigns
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,714,771
<SECURITIES> 0
<RECEIVABLES> 0
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<CURRENT-ASSETS> 2,297,972
<PP&E> 23,367,861
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0
0
<COMMON> 38,650
<OTHER-SE> 5,357,787
<TOTAL-LIABILITY-AND-EQUITY> 17,313,061
<SALES> 22,012,659
<TOTAL-REVENUES> 22,012,659
<CGS> 9,524,506
<TOTAL-COSTS> 23,331,191
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 344,018
<INCOME-PRETAX> (1,608,729)
<INCOME-TAX> 0
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<CHANGES> 0
<NET-INCOME> (1,608,729)
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