<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 0-25252
CINEMASTAR LUXURY THEATERS, INC.
(Name of Small Business Issuer in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 33-0451054
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
12230 EL CAMINO REAL, SUITE 320, SAN DIEGO, CA 92130
(Address of principal executive offices) (Zip Code)
</TABLE>
(858) 509-2777
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
<S> <C>
Title of each class Name of each exchange on which registered
None None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, par $0.01
Class B Redeemable Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [ X ] NO [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the common stock on June 23,
2000 as reported on the NASDAQ Small Capital Market, was approximately
$6,485,733. Shares of common stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
The Registrant's revenues for the year ended March 31, 2000 totaled $27,964,206.
As of June 23, 2000 Registrant had outstanding 6,289,196 shares of common stock,
$0.01 par value.
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The following documents of CinemaStar Luxury Theaters, Inc. are incorporated by
reference within this filing.
(1) Registration Statement No. 33-86716.
(2) Form 10-KSB for the year ended March 31, 1995.
(3) Form 8-K for June 6, 1996.
(4) Form 10-KSB for the year ended March 31, 1996.
(5) Form 10-Q for the period ended June 30, 1996.
(6) Form 10-Q for the period ended December 31, 1996.
(7) Form 8-K filed July 1, 1997
(8) Form 10-KSB for the year ended March 31, 1997.
(9) Proxy Statement filed November 17, 1997.
(10) Form 10-KSB for the year ended March 31, 1998.
(11) Form 10-QSB for the period ended June 30, 1998.
(12) Form 10-QSB for the period ended September 30, 1998.
(13) Proxy Statement filed October 23, 1998.
(14) Form 10-QSB for the period ended December 31, 1998
(15) Form 10-KSB for the period ended March 31, 1999
(16) Form 10-QSB for the period ended June 30, 1999
(17) Form 10-QSB for the period ended September 30 , 1999
(18) Proxy Statement filed September 29, 1999
(19) Form 10-QSB for the period ended December 31, 1999
Transitional Small Business Disclosure Format Yes [ ] No [X]
2
<PAGE> 3
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS
FORM 10-KSB CONTAINS CERTAIN FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS FORM 10-KSB
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS FORM 10-KSB. WHERE POSSIBLE, THE COMPANY USES WORDS
LIKE "BELIEVES", "ANTICIPATES", "EXPECTS", "PLANS" AND SIMILAR EXPRESSIONS TO
IDENTIFY SUCH FORWARD LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS, RISKS AND UNCERTAINTIES
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THE AVAILABILITY OF
MARKETABLE MOTION PICTURES, THE INCREASE OF REVENUES TO MEET LONG-TERM LEASE
OBLIGATIONS AND RENT INCREASES, RISKS INHERENT IN THE CONSTRUCTION OF NEW
THEATERS, THE ABILITY TO SECURE NEW LOCATIONS ON FAVORABLE TERMS, INTENSE
COMPETITION IN THE INDUSTRY, DEPENDENCE ON CONCESSION SALES AND SUPPLIERS,
EARTHQUAKES AND OTHER NATURAL DISASTERS AND THE ABILITY TO SECURE ADEQUATE
FINANCING ON ACCEPTABLE TERMS TO SUPPORT GROWTH.
PART I
ITEM 1 - DESCRIPTION OF THE BUSINESS
GENERAL
CinemaStar Luxury Theaters, Inc. (the "Company") was incorporated in the state
of California in April 1989 under the name Nickelodeon Theater Co., Inc. The
Company adopted its current name in August 1995. The Company reincorporated in
the state of Delaware in December 1998. The Company's corporate offices are
located at 12230 El Camino Real, Suite 320, San Diego, CA 92130, and its phone
number is (858) 509-2777. The Company also maintains executive offices in
Austin, Texas.
The Company owns and operates multi-screen movie theaters in Southern California
and Northern Mexico. Approximately 69% of the Company's revenues are derived
from the sale of movie tickets, 29% from concession sales, and approximately 2%
from the operation of video games and other revenues. To date, the Company has
incurred net losses during each fiscal year in which it has been in operation.
The Company currently operates nine theaters with a total of 103 screens.
- The Company's first theater, an eight-screen complex in Oceanside,
California, opened in November 1991. In July 1997 the Company added
five screens to this theater.
- In May 1992 the Company acquired the Galaxy Six Cinemas, a
six-screen theater in Bonsall, California
- In May 1993 the Company opened Chula Vista 10, a ten-screen complex
in Chula Vista, California
- The Company acquired the Chula Vista 6, a six-screen complex in
downtown Chula Vista, California, in August 1995. This theater was
renovated in March 1998.
- In March 1996 the Company opened a 14-screen theater in the Mission
Grove Mall in Riverside, California. In April 2000 the Company added
4-screens to this complex.
- In August 1996 the Company opened a ten-screen theater in Perris,
California
- In November 1996 the Company opened a ten-screen theater adjacent to
the University of California at Riverside, in Riverside, California
- In November 1997, the Company's then 75%-owned subsidiary in Mexico
opened Plaza Americana 10, a ten-screen theater in Tijuana, B.C.,
Mexico. The Company acquired the remaining 25% equity interest in
this subsidiary in December 1998.
- In December 1999 the Company opened the Empire 20, a twenty screen
megaplex in San Bernardino, California
The Company has pursued a strategy of selectively developing and leasing, or
purchasing multi-screen theaters. All the Company's theaters, except for the
Chula Vista 6, are leased properties. In evaluating potential theater projects ,
the Company attempts to locate sites in which it believes it can achieve a
leading market position as the sole or leading exhibitor in the targeted film
zone. Film zones are geographic areas established by film distributors. A film
is generally allocated to only one theater per film zone. Film zones may be
changed at any time for a variety of reasons, most of which are outside the
control of the Company.
3
<PAGE> 4
The Company believes that 83 of the 93 screens located in the United States are
located in film zones in which it is the only exhibitor, although there are not
significant barriers to entry to prevent the Company's competitors from entering
these film zones. By developing theaters in film zones in which there are a
limited number of existing theaters, the Company believes it is able to
negotiate more effectively with motion picture distributors to supply the
Company's theaters with the most desirable films. While the Company believes it
can favorably compete with respect to the licensing of films, poor relationships
with film distributors, disruptions in the production of motion pictures, or
poor quality film product can have a material adverse effect upon the Company's
business, results of operations and/or liquidity.
The Company believes that convenient theater locations, high-quality sound
systems and projection equipment, luxurious and comfortable environments, and
carefully selected and trained staff enables the Company to attract patrons and
provide them with an enjoyable movie-going experience. The Company's theater
complexes contain multiple auditoriums each having 118 to 500 seats, which
allows the Company to adjust screening schedules and to shift films between the
larger and smaller auditoriums within a complex in response to audience demand.
The Company expects that its future growth will be dependent upon its ability to
develop new theaters in desirable locations, although it may consider strategic
acquisitions of existing theaters or theater chains.
The motion picture exhibition industry is highly competitive, particularly with
respect to licensing films, attracting patrons and locating new theater sites.
Many of the Company's competitors, including AMC, Regal Theaters, Pacific
Theaters, and Edwards Cinemas , have been in existence longer than the Company,
and are better established in the markets in which the Company's theaters are or
may be located. Many of the Company's competitors are better capitalized than
the Company and have better access to capital than the Company.
FISCAL YEAR 2000 DEVELOPMENTS
THEATER ADDITIONS
On December 10, 1999, the Company opened its newest theater, a twenty screen
complex in downtown San Bernardino, California. The theater is fully
state-of-the-art, featuring stadium seating, and high quality projection and
sound systems. The theater provides its patrons with a luxurious and comfortable
environment featuring such amenities as a spacious lobby, modern concession
stands, comfortable highback seating, and excellent site lines as a result of
the theater's stadium seating design. The theater complex contains approximately
80,000 square feet, and is a focal point of the City of San Bernardino's
downtown redevelopment efforts. The Company is working with the City of San
Bernardino and the developers for the complex to add restaurants and retail
shops on the pads sites adjacent to the theater.
On April 14, 2000, the Company completed the expansion of its Mission Grove
theater from 14 to 18 screens. The four screen expansion features stadium
seating, high-back love seats, retractable cup holders, and state-of-the-art
projection and sound equipment. The expansion, which encompasses approximately
20,000 square feet, includes a full service concession stand in addition to the
four new stadium auditoriums. The expansion of the Mission Grove complex further
solidifies CinemaStar's position as the leading theater operator in Riverside
County.
THEATER DISPOSITION
The Company has signed an agreement to sell its six-screen complex on Third
Avenue in Chula Vista, California. The prospective purchaser is the World
Harvest Christian Center ("the Church"), a community-oriented, local church
which has been based in Chula Vista since 1987, and which has over 500 members
in its congregation. The proposed gross sale price is $1,700,000. The Church is
currently performing its due diligence, and has applied to the City of Chula
Vista for a conditional use permit which will be necessary for the Church to
operate at that location. The Company anticipates closing the sale in either the
late summer or early fall of this year, however management can not provide any
assurances as to when or if this sale transaction will be completed.
As a result of the addition of two new megaplexes to the Chula Vista market,
this theater is no longer able to perform at a level sufficient to warrant
continued operation. Further, the property is encumbered with a mortgage of
approximately $1,500,000 as of March 31, 2000. This mortgage limits the
Company's ability to draw down additional funds from its existing credit
facility, therefore limiting the Company's access to the capital it needs to
pursue new growth opportunities. Accordingly the
4
<PAGE> 5
Company is attempting to sell this theater. The sale of this theater and the pay
down of the related mortgage loan is essential to the Company's ability to
execute its near-term business strategies.
SALE OF COMMON STOCK
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, also 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 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.
The proceeds from the sale of the common stock have been, or will be used to
fund the Company's construction obligations related to the new San Bernardino
theater and the Mission Grove theater expansion, to reduce the Company's
borrowings under its revolving credit facility, and to meet seasonal working
capital needs.
CREDIT FACILITY AMENDMENT
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 unable at draw against the facility as of March 31, 2000, as the
Company's leverage ratio exceeds the maximum established by the April 4, 2000
amendment to the Revolving Credit Agreement. The Company will be able to draw
down on the credit facility once its leverage ratio is under the maximum
specified by the amendment, however, the amount of borrowings the Company
anticipates becoming available is not expected to be significant, as the
borrowings will continue to be limited by the leverage ratio covenant.
SUMMARY OF FISCAL YEAR 2000 OPERATING RESULTS
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $5,231,252 and $1,586,372 in the fiscal
years ended March 31, 2000 and 1999, respectively. The fiscal year 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.
In an effort to improve operating results, the Company has enhanced and
tightened its management team, reduced corporate overhead, and improved its
balance sheet by the addition of $3,500,000 of common equity. The Company is
also positioning itself to attempt to take advantage of cyclical opportunities
in the distressed domestic motion picture exhibition industry. Certain aspects
of the motion picture exhibition industry outside the Company's control, such as
the quality and commercial appeal of the film product released by Hollywood, may
negatively impact the Company financial performance, however, management has
identified certain trends that may positively impact the Company financial
performance, including:
- The pace of new construction in the industry seems to have peaked
due to rising interest rates and a lack of development capital, and
- The growth characteristic in the Company's home region remains very
strong
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 such as
those identified above, and other 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.
5
<PAGE> 6
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company held cash and cash equivalents in the amount
of $2,646,975. Over the near term, the Company will have to fund its remaining
obligations of approximately $1,700,000 related to the San Bernardino and
Mission Grove construction projects. The Company is also 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 meet its construction obligations, 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.
ASSET IMPAIRMENT CHARGE
On a regular basis, the Company evaluates and assesses its assets for impairment
under the guidelines of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). The criteria used for these evaluations include
management's estimate of the assets' continuing ability to generate income from
operations and positive cash flows in future periods, including the potential
proceeds from disposition of the property, as well as the strategic significance
of the assets to the Company's business activities. Based upon the Company's
review of its portfolio of theater assets in accordance with SFAS 121, the
Company recorded a $2,000,000 loss related to the impairment of certain theater
assets in the fourth quarter of fiscal year 2000. Approximately $1,800,000 of
the impairment loss relates to the Company's write down of the value of the
Chula Vista 6 property, which the Company is in the process of selling.
OVERVIEW OF MOVIE EXHIBITION INDUSTRY
Participants in the domestic motion picture exhibition industry vary
substantially in size, from small independent operators of single screen
theaters to large national chains of multi-screen theaters, some of which are
affiliated with entertainment conglomerates. In an effort to achieve greater
operating efficiencies, many theater operators have emphasized the development
of multi-screen theater complexes over the past decade, as evidenced by an
increase in the total number of screens in the United States, as well as an
increase in the average number of screens per location.
The movie industry saw another record year in calendar 1999 with total U.S.
boxoffice grosses reaching $7.45 billion, a 7% increase over 1998 boxoffice
grosses of $6.95 billion. The number of moviegoers in 1999 was approximately
1.465 billion. The record year was the result of an extraordinarily strong slate
of summer films, including Star Wars: Episode I The Phantom Menace, The Sixth
Sense, and Austin Powers, The Spy Who Shagged Me. Films that generate gross
boxoffice receipts of $100 million or more are considered "blockbusters", and in
1999, Hollywood released 18 "blockbuster" films, which was also set an industry
record.
Despite the proliferation of distribution channels for motion pictures,
theatrical exhibition remains the initial and primary distribution channel. A
movie's success "on the big screen" is the primary determinant of that movie's
eventual success in secondary distribution channels such as cable, video, and
exhibition in international markets. The emergence of secondary distribution
channels has actually helped the theater industry, as the downstream markets for
major motion pictures generate additional revenues for the film studios, who can
then invest their increased earnings in producing a greater number of big
budget, potential blockbuster films. A survey completed by the National
Association of Theater Owners shows that U.S. theater attendance has remained
relatively steady within a range of 1.1 billion to 1.5 billion per year over the
past 10 years.
6
<PAGE> 7
There can be no assurance, however, that new or alternative forms of
entertainment or motion picture delivery systems will not adversely impact
motion picture attendance in general or at the Company's theaters in particular,
in the future.
Movie theaters have consistently offered high quality family entertainment at a
relatively low cost, which has also supported the steady growth of the
exhibition industry. Over the last decade, the average cost of a first-run movie
ticket has increased at a rate less than the Consumer Price Index. At the same
time, the cost of attending professional sporting events has escalated at a far
greater rate. The continued high perceived value of the movie-going experience
has enabled the theater industry to remain relatively resistant to recession and
other economic downturns.
Current demographic trends also favor the movie exhibition industry. The
"screenager" population, or persons aged 12-19, represents the largest theater
customer base, generating approximately 30 percent of total boxoffice receipts.
This age group, the offspring of the "Baby Boomers," is growing twice as fast as
the overall U.S. population. In addition to the rapid growth of this age group,
screenagers have more disposable income than their parents had at their age, and
attend movies more frequently. These moviegoers have a strong preference for
theaters that offer a high quality presentation and modern amenities such as
stadium seating.
Historically, the motion picture industry's largest producers and distributors
have been the major studios (Paramount, Disney/Miramax/Touchstone, Warner Bros.,
Columbia/Tri-Star, Universal, 20th Century Fox MGM/UA and Dreamworks), with no
single studio dominating the film distribution market. Since 1989, films
distributed by these companies have accounted for between approximately 84% and
96% of annual U.S. boxoffice revenues.
The motion picture exhibition industry tends to be seasonal, as major film
distributors generally release the films expected to have the greatest
commercial appeal during the summer and during the Thanksgiving through year-end
holiday season. The Company believes, however, that this seasonality has been
reduced in recent years as studios have begun to release major motion pictures
somewhat more evenly throughout the year.
The theater industry experienced an unprecedented period of growth in the
mid-to-late nineties, often referred to as the "re-screening of America", during
which theater chains built large, multi-screen theater complexes, with anywhere
from 14 to 30 screens. When a theater has 14 or more screens, it has the ability
to show multiple prints of the latest releases at staggered start times. In
addition to an increased number of screens, the theater companies added other
amenities such as snack bars and game rooms, which positioned the theaters as
entertainment destinations for the entire family. The concept is that a family
could go to a megaplex theater, be reasonably assured that one of the movies
they wanted to see (adults and children perhaps selecting different movies)
would be starting relatively soon, and if there was any free time before or
after the movie, the patrons could play video games, or grab a snack, cup of
coffee, or desert.
The growth initiated by the theater companies attracted the attention of Wall
Street, and even more money was poured into the industry to further fuel the
construction of new theaters. Eventually, by the late 1990's, the market became
oversaturated, as the number of domestic screens jumped from 22,921 in 1989 to
34,781 in 1999 according to an article published by Paul Kagan Associates. Many
of the newest theaters built have not met the theater companies' performance
expectations, and many of the older, smaller theaters, which for years provided
steady, reliable cash flow, are being forced to close as they cannot compete
with the new, large theater megaplexes.
The theater industry as a whole is experiencing a widespread economic downturn.
Many publicly held theater companies' stocks are trading at historical lows.
Because of the recent poor financial performance of theater companies, a very
limited amount of new capital is being invested in the theater industry. The
market saturation and increased competition brought about by the theater
building boom of the 1990's has resulted in reduced theater operating cash flow.
The lack of new capital coupled with declining operating cash flow will greatly
limit the construction of new theaters in the near term.
BUSINESS STRATEGY
CinemaStar did not participate in the 1990's building boom which gripped the
theater industry as actively as many of its competitors, and accordingly, the
Company is not burdened with the excessive amounts of debt that have typically
accompanied aggressive capital expansion. CinemaStar is however subject to the
increased competition that resulted from the construction of new theaters. The
components of management's strategy in this time of fierce competition in the
theater
7
<PAGE> 8
industry are:
- Maximize the revenue generated by its existing theaters - this
involves efforts to increase attendance and foot traffic in the
developments where the Company has theaters, and take advantage of
opportunities to maximize ticket, concession and other revenues
- Minimize theater operating costs - this involves examining all
aspects of the theaters' operations to identify opportunities to
reduce costs or gain efficiencies without reducing the level of
customer service
- Minimize general and administrative expense - this involves
reviewing the processes and functions performed in the Company's
headquarters, and reducing costs by limiting activity to only
value-added activities
- Disposition of underperforming theaters - the Company will continue
to review the operational performance of each of its theaters in an
effort to identify opportunities to improve operating results. To
the extent it is determined a particular theater will no longer be
able to achieve satisfactory operating results, the Company will
develop and pursue a strategy to dispose of that theater
- Limit the development of new domestic theater properties, utilize
operating cash flow to reduce the Company's debt, and position the
Company to take advantage of development opportunities once the
over-screened condition in the domestic market subsides.
- The Company will attempt to expand outside domestic borders. This
expansion is premised on the Company being able to identify viable
opportunities, and the Company's ability to negotiate financing,
leasing and/or operating agreements on terms favorable to the
Company.
OPERATIONS
REVENUES
A majority of the Company's revenues are from the sale of movie tickets. Ticket
sales have represented 68.5% and 68.8% of the Company's total revenues in fiscal
2000 and 1999, respectively. In addition to revenues from box office admissions,
the Company receives revenues from concession sales. During the Company's 2000
and 1999 fiscal years, concession sales constituted 29.0% and 28.8% of the
Company's total revenues respectively.
The Company also operates video and skill games at each of its locations. Video
games do not constitute a significant portion of the Company's revenues. During
fiscal 2000 and 1999, revenues from video games were $442,207, or 1.6% of total
revenues) and $445,956 (1.6% of total revenues), respectively. During fiscal
1999, the Company entered into a screen-advertising contract for all of its
domestic theaters. In fiscal 1999, the Company also entered into a contract that
allowed for the installation of automated teller machines at selected theaters.
Revenues from these contracts are not material.
FILM LICENSING
The Company licenses films from distributors on a film-by-film and
theater-by-theater basis. Prior to negotiating for a film license,
representatives of the Company generally have the option to preview and evaluate
upcoming films. The Company's success in choosing a given film to license
depends to a large extent on its knowledge of the trends and historical film
preferences of the residents in the markets served by its theaters. The
availability of commercially appealing motion pictures films from which to
choose varies from month to month, and from year to year.
Films are licensed from both major film distributors and independent film
distributors that generally distribute films for smaller production companies.
Film distributors typically establish geographic film licensing zones that
generally encompass a radius from three to six miles in metropolitan and
suburban markets (depending primarily on population density), and allocate each
available film to one theater within that zone. The Company generally attempts
to locate its theaters in film zones in which it is the sole exhibitor or
leading exhibitor, thereby permitting the Company to show the most commercially
appealing films in these zones. The Company believes that 83 of its 93 screens
in the United States are located in film zones in which it is the sole
exhibitor, however there are no significant barriers to entry to prevent the
Company's competitors from entering these film zones.
In film zones where the Company is the sole exhibitor, the Company generally
obtains film licenses by selecting a film from among those offered and
negotiating directly with the distributor. In film zones where there are
multiple exhibitors, a distributor will either require the exhibitors in the
zone to bid for a film or will allocate films among the exhibitors in the film
zone. When films are licensed under the allocation process, a distributor will
choose which exhibitor is offered which movies
8
<PAGE> 9
and then that exhibitor will negotiate film rental terms directly with that
distributor. At present, the Company does not bid for films in any of its
markets, although it may be required to do so in the future.
Film licenses are entered into under a negotiated process that typically
specifies rental fees based on the higher of a gross-receipts formula, or
theater admissions revenue formula. Under a gross-receipts formula, the
distributor receives a specified percentage of box office receipts from the
licensed film with the percentage declining over the term of the film's run.
First run film rental fees usually begin at approximately 70% of box office
receipts for the licensed film and gradually decline, over a period of four to
seven weeks, to as low as 30% of box office receipts. Under a theater admissions
revenue formula (commonly known as a "90/10" clause), the distributor receives a
specified percentage (i.e., 90%) of the excess of box office receipts for a
given film over a negotiated allowance for theater expenses.
If the distributor deems a film to be extremely promising, or if the distributor
believes the Company's financial position is not strong enough to warrant an
extension of credit, it may require the Company to make advance payments of film
rental fees in order to obtain a license for a film. To date, the Company has
not been required to make any such advance payments, but there is no assurance
that such payments will not be required in the future. Although not specifically
contemplated by the provisions of film licenses, the terms of film licenses
often are adjusted or renegotiated by distributors subsequent to the initial
release of the film. The Company's film licensing cost was $10,188,451 and
$9,989,353 in 2000 and 1999, respectively.
The Company's business is dependent upon the availability of marketable motion
pictures and its relationships with distributors. While many "independent"
distributors provide first-run movies to the motion picture exhibition industry,
distribution historically has been dominated by a limited number of major
companies. Warner Brother, Paramount, 20th Century Fox, Universal,
Disney/Miramax/Touchstone, MGM/UA, Columbia/Tri-Star and Dreamworks have
accounted for between approximately 84% and 96% of domestic admission revenues
since 1989, and virtually every one of the top grossing films in a given year,
since 1989. No single distributor dominates the market. Disruption in the
production of motion pictures by the major studios and/or independent producers,
poor commercial appeal of motion pictures or poor relationships with
distributors would have a material adverse effect upon the Company's business
and results of operations.
CONCESSIONS
CinemaStar believes offering a wide variety of fresh, delicious snacks and
beverages is important in ensuring the patrons have an enjoyable movie-going
experience. CinemaStar strives to offer an inviting mix of products; in addition
to the traditional popcorn, candy and soda, CinemaStar offers hot dogs, nachos,
pretzels, ice cream, and non-carbonated beverages. Most items come in a variety
of sizes to suit all appetites, and certain products are offered in convenient,
affordable combinations or "combo's". The concession stands are adequately
staffed with friendly, efficient cast members to ensure quick service.
ADVERTISING AND MARKETING
The primary vehicle for theater advertising is print media, usually in the form
of the movie listings page of local newspapers. The advertisements produced by
the Company include a listing of the movies, the showtimes, and an address and
phone number for the theater. CinemaStar also lists movie showtimes and theater
information on its company website. Movie distributors launch multi-million
dollar, nationwide advertising campaigns to promote new and upcoming releases.
These nationwide campaigns encompass television, radio, print, and now Internet
media to create word-of-mouth and to generate public interest in their films.
CinemaStar also participates in cooperative or "co-op advertising" programs with
all major film distributors. In co-op advertising programs, the theater company
and the film distributor share the cost of a quarter or half page print
advertisement for a single film that also includes a small advertisement
indicating which local theaters are showing the film. The other primary
advertising medium for feature films is through the use of "trailers", which are
the short clips or previews typically shown in theaters before the start of the
featured movie.
CinemaStar actively markets its new theaters through grand opening promotions,
including "VIP" pre-opening parties, newspaper, and radio advertising. Other
promotional events, such as live concerts or celebrity appearances or are also
staged, and often generate free local media coverage. Promotional costs are
expensed by the Company as incurred.
CUSTOMER SATISFACTION / QUALITY CONTROL
CinemaStar emphasizes patron satisfaction in all aspects of its operations. The
auditoriums are clean and modern, and feature top quality projection and sound
as well as stadium-style seating. The Company strives to secure a variety of
film product to
9
<PAGE> 10
accommodate a wide spectrum of moviegoers. The concession stands offer a
generous selection of delicious snacks and beverages, are conveniently located,
and are adequately staffed to limit the amount of time patrons have to wait in
line. Game rooms offer the latest and most popular video games. CinemaStar
performs a series of periodic reviews of all aspects of its operations to ensure
the Company offers its customers superior service and a high quality
presentation.
THEATER MANAGEMENT
CinemaStar is committed to having each theater managed by professional,
courteous and knowledgeable managers. Typically, a theater will have one general
manager, two or three assistant managers, and approximately 40 cast members, a
vast majority of which work part time. The theater managers are incentivized to
maximize revenues, control costs, and achieve certain customer satisfaction and
operational performance goals. The theaters' cast members are also included in
certain incentive programs. All theater employees are charged with ensuring
customer satisfaction and are given a fair amount of latitude to guarantee each
customer has an enjoyable movie going experience. CinemaStar also employs a
corporate trainer whose role is to rotate through each of the theaters in the
Company's circuit to provide orientation training to new employees, and ongoing
training to existing managers and cast members.
CENTRALIZED CORPORATE OPERATIONS
CinemaStar centralizes many of its functions in its corporate office, including
film licensing, concession purchasing, marketing, human resources, and
accounting. This enables CinemaStar to operate a large number of theaters while
incurring minimal general and administrative expense.
THEATER DEVELOPMENT
Once a potential theater site has been identified, the Company formulates a plan
to finance and construct the theater. The Company generally oversees the design,
development and construction of its theaters, and utilizes independent
architects, building consultants and general contractors. In the case of newly
developed theaters that will be leased by the Company, the landlord or developer
typically provides a construction allowance, and the Company is responsible for
the cost of completing the construction including any cost overruns.
While the Company believes that its direct oversight of the design and
construction of its theaters provides a certain degree of control over the
quality, cost and timing of construction, the Company remains subject to many of
the risks inherent in the development of real estate, including the risk of
construction cost overruns and delays. Other risks associated with the
development and construction of theaters include the impact of changes in
federal, state, and local laws and regulations, labor union actions, adverse
weather, earthquakes and other natural disasters, materials shortages, and
increases in the costs of labor and materials. There can be no assurance that
the Company will be able to successfully complete any pending or proposed
theater development in a timely manner or within the budgeted cost allowance.
COMPETITION
Participants in the domestic motion picture exhibition industry vary
substantially in size, from small independent operators of a single screen
theater to large national chains of multi-screen theaters affiliated with
entertainment conglomerates. Many of the Company's competitors, including AMC,
Regal Theaters, Pacific Theaters, and Edwards Cinemas have been in existence
significantly longer than the Company, are better established in the markets
where the Company's theaters are or may be located, and are better capitalized
than the Company. The Company also competes with these other exhibitors for
potential theater sites.
Many of the Company's competitors have established long-term relationships with
the major motion picture distributors, who distribute a large percentage of the
commercially successful films. Although the Company attempts to identify film
licensing zones in which there is no substantial competition, there are no real
barriers to entry with respect to a given film zone for the Company's
competitors, and there can be no assurance that the Company's competition will
not develop theaters in the same film zones or in the same geographic vicinity
as the Company's theaters.
The motion picture exhibition industry is highly competitive, particularly with
respect to patrons and film licensing. The ability to attract patrons is
dependent upon factors such as the availability of popular films, the location
of theaters, the comfort and quality of theaters and ticket prices. The ability
to license a particular film is dependent on the seating capacity, location and
prestige of an exhibitor's theaters, the quality of projection and sound
equipment at the theaters, and the exhibitor's ability and willingness to
promote the film. The Company believes that it competes favorably with respect
to each of these factors.
10
<PAGE> 11
The trend in the motion picture exhibition industry over the past several years
has been to construct toward larger, multi-screen theater complexes having 16 to
24 screens, which are often part of larger family entertainment/retail. As a
result, certain of the Company's competitors have significantly increased their
number of theaters and screens in operation. Continued theater construction has
caused certain markets in which the Company operates to become over-screened.
The resulting market saturation has negatively impacted the operating results
and related cash flows of the Company theaters in those certain markets. This
construction trend has also made it difficult for the Company's to identify
attractive sites for new theater development.
Many of the Company's competitors have constructed new theaters with stadium
seating, a design that ensures each row is a step higher than the one in front
of it. Such stadium theaters are more expensive to construct than traditional
theaters. The Company believes that stadium theaters constructed by competitors
in the vicinity of certain of its current theaters which do not have stadium
seating have, and will continue to negatively impact the operating results and
related cash flows of its theaters. Stadium seating increases the construction
cost per screen for new theater complexes. The increased construction costs must
be borne by the theater operators, dramatically raising theater companies
investment on a per screen basis.
Future advancements in motion picture exhibition technology and equipment may
result in the development of state-of-the-art theaters by the Company's
competitors that could make the Company's current theaters obsolete. There can
be no assurance that the Company will be able to incorporate such new technology
or equipment, if any, into its existing or future theaters.
Despite the proliferation of distribution channels, theatrical exhibition
remains the initial and primary distribution channel for major motion pictures.
A movie's success "on the big screen" is the primary determinant of that movie's
eventual success in secondary distribution channels such as cable, video, and
exhibition in international markets. The emergence of secondary distribution
channels has actually helped the theater industry, as the downstream markets for
major motion pictures generate additional revenues for the film studios, who can
then invest their increased earnings in producing a greater number of big
budget, potential blockbuster films. A survey completed by the National
Association of Theater Owners shows that U.S. theater attendance has remained
relatively steady within a range of 1.1 billion to 1.5 billion per year over the
past 10 years. There can be no assurance, however, that new or alternative forms
of entertainment or motion picture delivery systems will not adversely impact
motion picture attendance in general, or at the Company's theaters in
particular, in the future.
GOVERNMENT REGULATION
The distribution of motion pictures is regulated by federal and state antitrust
laws, and has been the subject of numerous antitrust cases. The Company has
never been a party to any such case but its licensing operations are subject to
decrees issued in connection with such cases. Consent decrees resulting from
these cases, which predate the formation of the Company, bind certain major film
distributors and require the films of such distributors to be offered and
licensed to exhibitors, including the Company, on a film-by-film and
theater-by-theater basis. Consequently, exhibitors cannot assure themselves of a
supply of films by entering into long-term arrangements with the major
distributors, but must negotiate for licenses on a film-by-film and
theater-by-theater basis.
The Americans with Disabilities Act (the "ADA") prohibits discrimination on the
basis of disability in public accommodations and employment. The ADA became
effective as to public accommodations in January 1992 and as to employment in
July 1992. The Company designs its theaters so that they are in conformity with
the ADA and it believes that its existing theaters are in substantial compliance
with all currently applicable regulations relating to accommodations for the
disabled. The Company intends to comply with future regulations relating to
accommodating the needs of the disabled and the Company does not currently
anticipate that such compliance will have a material adverse effect on the
Company.
The Company's theater operations are also subject to federal, state and local
laws governing such matters as wages, working conditions, citizenship, health
and sanitation requirements and licensing. A significant portion of the
Company's employees are paid at the State of California's mandated minimum wage
rate and, accordingly, further increases in the State's minimum wage rate will
increase the Company's labor costs.
When constructing theaters, the Company, its contractors, and landlords are
subject to local and state building codes and other local zoning laws and
regulations. The Company does not anticipate that compliance with such laws and
regulations will have
11
<PAGE> 12
a material adverse effect on the Company's business, or its ability to develop
new theaters.
EMPLOYEES
As of June 23, 2000, the Company employed 411 persons, of whom 54 were full-time
and 357 were part-time employees. Of the Company's employees, 19 are corporate
office personnel, 35 are theater management personnel and the remainder are
theater staff members. The Company is not subject to any union or collective
bargaining agreements, except in Mexico where 65 of the Company's theater staff
employees are under a local union contract. The Company considers its relations
with its employees to be good.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company currently operates eight theaters with an aggregate of 93 screens in
the San Diego and Riverside Counties of California, and one theater with 10
screens in Tijuana, B.C., Mexico. The Company owns the land and building for the
Chula Vista 6 theater. There is a mortgage on the Chula Vista 6 theater of
approximately $1,560,000 as of March 31, 2000.
The Company's operates eight theaters pursuant to lease agreements. The leases
have original terms ranging from 15 to 25 years, with renewal options for an
additional 10 to 15 years. The leases provide for minimum annual rent payments
and percentage rent payments if the theater's revenue exceeds a certain amount.
All of the Company's leases are triple net leases, which require the Company to
pay insurance, property taxes and a portion of the lessor's operating or common
area maintenance expenses. The following is a summary of the Company's theater
properties as of June 23, 2000:
<TABLE>
<CAPTION>
# of
Theater Name Location Sq. Ft. Screens # of Seats Leased/Owned
------------ -------- ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Chula Vista 10 (1) Chula Vista, CA 34,000 10 2,178 Leased
(South San Diego County)
Chula Vista 6 Chula Vista, CA 22,500 6 1,424 Owned
(South San Diego County)
Mission Marketplace 13 Oceanside, CA 43,000 13 2,168 Leased
(North San Diego County)
Galaxy Six Cinemas Bonsall, California 22,780 6 1,340 Leased
(North San Diego County)
Mission Grove 18 (2) Riverside, CA 66,000 18 3,943 Leased
(Mission Grove Plaza,
Riverside County)
Perris 10 Perris, CA 35,000 10 1,822 Leased
(Perris Plaza Retail
Shopping Center)
University Village 10 Riverside, CA 42,000 10 2,099 Leased
(adjacent to University of
California in Riverside, CA)
Plaza Americana 10 (3) Tijuana, B.C., Mexico 40,000 10 1,853 Leased
(Plaza Americana Shopping
Mall)
San Bernardino 20 San Bernardino, CA 80,000 20 4,158 Leased
(San Bernardino County)
</TABLE>
12
<PAGE> 13
(1) Leased by the Company's wholly owned U.S. subsidiary, CinemaStar Luxury
Cinemas, Inc.
(2) The Company completed a four screen addition to this theater in April
2000, which increased the number of screens from 14 to 18 screens
(3) Leased by the Company's wholly owned Mexican subsidiary, CinemaStar
Luxury Theaters, S.A. de C.V.
ITEM 3 - 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of fiscal 2000 to a vote of
security holders.
13
<PAGE> 14
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Small Cap Market (Symbol:
LUXY). The table below shows the high and low bid prices as reported by the
NASDAQ. The bid prices represent inter-dealer quotations, without adjustments
for retail mark-ups, markdowns or commissions, and may not necessarily represent
actual transactions. The prices for the Company's common stock have been
adjusted to reflect the impact of a one-for-seven reverse stock split, effective
December 2, 1998.
COMMON
STOCK
(LUXY)
HIGH LOW
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
<S> <C> <C>
1999
First Quarter $10.29 $6.13
Second Quarter 9.63 5.91
Third Quarter 7.00 4.38
Fourth Quarter 6.88 3.53
2000
First Quarter $6.00 $2.63
Second Quarter 4.66 3.25
Third Quarter 3.91 1.84
Fourth Quarter 2.56 1.06
</TABLE>
As of June 23, 2000, the Company had approximately 108 shareholders of record.
The Company has also issued two classes of warrants for the purchase of the
Company's common stock: the Redeemable Warrants and the Class B Redeemable
Warrants. NASDAQ has delisted the Redeemable Warrants (LUXYW.OB) as of December
14, 1998 due to the absence of two market makers for the securities. The
Redeemable Warrants (LUXYW.OB) expired on February 6, 2000. NASDAQ has also
delisted the Class B Redeemable Warrants (LUXYZ.OB) as of June 27, 1998 due to
the absence of two market makers for the securities. The Class B Redeemable
Warrants may now trade on the over-the-counter ("OTC") market, upon application
by market makers. The Class B Redeemable Warrants Expire on September 15, 2001.
The Company has not paid any dividends since its inception and does not
anticipate paying any dividends in the foreseeable future. Earnings of the
Company, if any, are expected to be retained for use in expanding the Company's
business. The payment of dividends is within the discretion of the Board of
Directors of the Company and will depend upon the Company's earnings, if any,
capital requirements, financial condition and such other factors as the Board of
Directors may consider relevant.
ONE-FOR-SEVEN REVERSE STOCK SPLIT AND DELAWARE REINCORPORATION
The Company completed a one-for-seven reverse stock split of its Common Stock,
effective December 2, 1998. The reverse stock split affected 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 was 3,864,986. All references to shares in this form 10-KSB
have been restated to reflect the one-for-seven reverse stock split. The Company
reincorporated in Delaware effective December 1, 1998. As a result, the
Company's common stock has a par value of $0.01. Previously the Company's common
stock had no par value.
14
<PAGE> 15
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and notes thereto included elsewhere
in this Form 10-KSB. Except for the historical information contained herein, the
discussion in this Form 10-KSB contains certain forward looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Form 10-KSB should be read as being applicable to all related forward-looking
statements wherever they appear in this Form 10-KSB. Where possible, the Company
uses words like "believes", "anticipates", "expects", "plans" and similar
expressions to identify such forward looking statements. The Company's actual
results could differ materially from those discussed here. Factors, risks and
uncertainties that could cause or contribute to such differences include the
availability of marketable motion pictures, the increase of revenues to meet
long-term lease obligations and rent increases, risks inherent in the
construction of new theaters, the ability to secure new locations on favorable
terms, intense competition in the industry, dependence on concession sales and
suppliers, earthquakes and other natural disasters and the ability to secure
adequate financing on acceptable terms to support growth.
RESULTS OF OPERATIONS
The Company began fiscal year 2000 with eight theaters for a total of 79
screens. In December of 1999, CinemaStar opened a twenty screen complex in San
Bernardino, California, which brought the total number of screens as of March
31, 2000 to ninety-nine. For all of fiscal year 1999, the Company operated eight
theaters with a total of 79 screens. The increased attendance resulting from the
opening of the San Bernardino complex was offset by decreased attendance in
certain of the other more competitive markets where the Company operates. The
net effect of the attendance increases and decreases were relatively flat
revenues, but higher theater operating costs in 2000 as compared to 1999.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $5,231,252 and $1,586,372 in the fiscal
years ended March 31, 2000 and 1999, respectively. The fiscal year 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 whether or when the Company will achieve profitability. While
the Company believes it could attain profitability with its current operations,
such profitability is contingent on many factors such as the availability of
marketable motion pictures, and management's on-going efforts to improve theater
operating results and reduce general and administrative expenses. Any
substantial profitability will depend, among other things, on the Company's
ability to grow its operations through the addition of new screens.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999.
Total revenues for the year ended March 31, 2000 increased 0.8% to $27,964,206
compared to $27,736,337 for the previous fiscal year. Admission revenues
increased by $89,346, or 0.5%, and concession sales and other operating revenues
increased by $138,523, or 1.6%. The increase in revenues attributable to the
opening of the new twenty screen theater in San Bernardino was substantially
offset by revenue decreases at certain of the Company's other theaters.
Same theater domestic admissions and other revenues declined in the current year
compared to the prior year, despite a 6.6% increase in domestic ticket prices.
The decline in domestic revenues is primarily attributable to increased
competition in selected markets where the Company operates. Domestic per capita
concession revenues for the fiscal year ended March 31, 2000 decreased 4.3% to
$1.77.
International revenues increased by $185,954 as a result of increased admission
and concession prices. The international average ticket price for the fiscal
year 2000 was $3.00, versus $2.52 in 1999, an increase of 19.1%. International
per capita concession revenue for the year ended March 31, 2000 increased 24.6%
to $1.72 from $1.38 in 1999.
15
<PAGE> 16
Film rental and booking costs for the year ended March 31, 2000 increased 2.0%
to $10,188,451 compared to $9,989,353 for the previous fiscal year. The increase
in film rental and booking costs was primarily due to both increased film costs
attributable to the new twenty screen theater, and to higher film rates paid to
distributors in 2000 versus 1999. As a percentage of admission revenues, film
rental and booking costs increased 0.08% from 52.1% to 52.9%.
The cost of concession supplies for the year ended March 31, 2000 decreased 9.5%
to $1,510,671 from $1,669,388 for the previous fiscal year. As a percentage of
concession revenues, the cost of concession supplies decreased to 18.6% in the
year ended March 31, 2000 compared 20.9% in the previous fiscal year. This
reduction is primarily attributable to the Company's ability to negotiate price
reductions with several of its concession vendors.
Theater operating expenses for the year ended March 31, 2000 increased 9.5% to
$12,971,782 compared to $11,844,008 for the previous fiscal year. This increase
was due primarily to the increase in rent and other costs associated with
opening and operating the new twenty screen theater in San Bernardino.
Pre-opening costs for the San Bernardino theater totaling approximately $123,000
are included in fiscal year 2000 theater operating expense. As a percentage of
total revenues, theater operating expenses increased 3.7%, from 42.7% in fiscal
1999 to 46.4%in fiscal 2000.
General and administrative expenses for the year ended March 31, 2000 remained
relatively flat at $3,347,845 compared to $3,295,739 for the previous fiscal
year. As a percentage of total revenues, general and administrative costs
decreased to 11.7% from 11.9%. The decrease results from management's continued
cost reduction efforts during the year.
Depreciation and amortization for the year ended March 31, 2000 increased 4.6%
to $2,439,844 compared to $2,331,503 for the previous fiscal year. The increase
is due to the depreciation of assets placed in service during fiscal year 2000.
On a regular basis, the Company evaluates and assesses its assets for impairment
under the guidelines of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). The criteria used for these evaluations include
management's estimate of the assets' continuing ability to generate income from
operations and positive cash flows in future periods, including the potential
proceeds from disposition of the property, as well as the strategic significance
of the assets to the Company's business activities. Based upon the Company's
review of its portfolio of theater assets in accordance with SFAS 121, the
Company recorded a $2,000,000 loss related to the impairment of certain theater
assets in the fourth quarter of fiscal year 2000. Approximately $1,800,000 of
the impairment loss relates to the Company's write down of the value of the
Chula Vista 6 property, which the Company is in the process of selling.
Interest expense for the fiscal year ended March 31, 2000 increased 70.5% to
$501,751 compared to $294,319 for the previous fiscal year. This increase was
primarily the result of increased borrowings during the year. Non-cash interest
expense related to the amortization of the Company's deferred financing costs.
The increase in fiscal year 2000 is a result of the acceleration of the maturity
date of the Company's credit facility from August 2005 to December 31, 2000.
Interest income for the year ended March 31, 2000 decreased to $64,354 from
$140,230 for the year ended March 31, 1999. This decrease is attributable to the
reduction in the average balance of available cash.
As a result of the factors noted above factors, the net loss for the year ended
March 31, 2000, which includes the $2,000,000 asset impairment charge, increased
229.8% to $5,231,252 from $1,586,372 for the fiscal year ended March 31, 1999.
Excluding the asset impairment charge, the net loss increased $1,644,880 or
103.7% from fiscal year 1999 to fiscal year 2000.
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.
16
<PAGE> 17
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. 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 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 unable at draw against the facility as of March 31, 2000, as the
Company's leverage ratio exceeds the maximum established by the April 4, 2000
amendment to the Revolving Credit Agreement. The Company will be able to draw
down on the credit facility once its leverage ratio is under the maximum
specified by the amendment, however the
17
<PAGE> 18
amount of borrowings the Company anticipates becoming available is not expected
to be significant, as the borrowings will continue to be limited by the leverage
ratio covenant.
As of March 31, 2000 the Company had outstanding borrowings of $2,000,000 under
the facility, and the Company used the facility to secure a standby letter of
credit for $275,000 related to the construction of the San Bernardino theater.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $5,231,252 and $1,586,372 in the fiscal
years ended March 31, 2000 and 1999, respectively. The fiscal year 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 year ended March 31, 2000, the Company generated cash of $2,212,651
from operating activities, as compared to $765,447 for the year ended March 31,
1999. This difference is primarily due to a decrease in working capital and an
increase in operating losses.
During the year ended March 31, 2000, the Company used cash in investing
activities of $7,067,498 as compared to $1,264,309 for the year ended March 31,
1999. The increase is primarily due to the costs incurred in the construction of
the new San Bernardino 20 screen theater and the 4 screen addition to the
Mission Grove theater. For the year ended March 1999, the Company used cash to
fund approximately $926,000 of construction activity, and to purchase the
remaining 25% interest in the Company's Mexican subsidiary not previously owned
by the Company.
During the year ended March 31, 2000, the Company provided net cash of
$5,281,426 from financing activities, as compared to using net cash of $762,720
for the year ended March 31, 1999. The cash provided from financing activities
in the year ended March 31, 2000 was from an additional $2,000,000 of net
borrowings against the Company's credit facility and $3,500,000 of proceeds from
the sale of common stock, offset by approximately $219,000 of principal payments
on the Company's debt and capital lease obligations. The cash used in the year
ended March 31, 1999 related to the repayment of principal on the Company's debt
and capital lease obligations, and the payment of debt issuance costs of
approximately $380,000 with respect to the Company's Revolving Credit Agreement
signed in October 1998.
As of March 31, 2000, the Company held cash and cash equivalents in the amount
of $2,646,975. Over the near term, the Company will have to fund its remaining
obligations of approximately $1,700,000 related to the San Bernardino and
Mission Grove construction projects. The Company is also 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 meet its construction obligations, 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 is a developing company, and although the Company has recognized
substantial revenues, the Company has incurred recurring losses from operations,
has a working capital deficiency, and is experiencing capital needs related to
its development objectives. The Company has received a report from its
independent auditors filed concurrently herewith, concerning their audit of the
consolidated financial statements of the Company and its subsidiaries as of
March 31, 2000 and 1999
18
<PAGE> 19
containing an explanatory paragraph that expresses uncertainty as to the
Company's ability to continue as a going concern because of its recurring losses
from operations and working capital deficiency. In order to meet obligations as
they come due, the Company may need to raise funds, in which case it may secure
additional bank financing, or sell additional shares of common stock or other
securities. The Company can make no assurances, however, that additional
financing will be available to the Company on favorable terms, if at all. If
funds are not available, or are not available on favorable terms, the Company's
ability to fund operations, pursue development opportunities, or otherwise
remain competitive will be substantially limited, and the Company's business,
results of operations and financial condition could be materially adversely
affected by such limitation.
NET OPERATING LOSS (NOL) CARRYFORWARDS
For the year ended March 31, 2000, the Company generated 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 are 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 cash flows, and
the results of one quarter are not necessarily indicative of results for
subsequent quarters.
YEAR 2000
Over the past year, 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. This review, did not identify any
significant year 2000 issues relative to its computer applications. The Company
also communicated via questionnaire with third parties with which it has a
material relationship to assess its risk with respect to year 2000 issues. This
assessment did not identify any material year 2000 issues with respect to its
dealings with such third parties.
The costs to the Company for its year 2000 preparations have been nominal. The
Company has not deferred or delayed any projects or expenditures in anticipation
of any year 2000 issues. 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.
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
19
<PAGE> 20
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 the future, and it has taken no steps to guard against these risks.
ITEM 7 - FINANCIAL STATEMENTS
The Company's audited consolidated financial statements for the years ended
March 31, 2000 and 1999 are presented immediately following on pages F-1 to
F-17.
20
<PAGE> 21
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information concerning the Company's
current directors and executive officers:
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATION AGE
---- -------------------- ---
<S> <C> <C>
Jack R. Crosby Director; Chairman of the Board of Directors and Co- Chief 73
Executive Officer
Paul W. Hobby Director and Co-Chief Executive Officer 39
Jack S. Gray, Jr. Director 43
Thomas G. Rebar Director and Member of the Compensation and Audit Committees 37
Wayne B. Weisman Director and Member of the Compensation and Audit Committees 44
Winston J. Churchill Director and Member of the Compensation Committee 59
Donald H. Harnois, Jr. Chief Financial Officer, Vice President and Secretary 35
</TABLE>
JACK R. CROSBY has been Chairman of the Board of Directors of the Company since
December 1997 and Chief Executive Officer of the Company since February 1998.
Mr. Crosby was Chairman of Board of Directors of Tescorp, Inc., a publicly
traded company which owns and operates cable television systems in Argentina
("Tescorp"), since its inception in 1980, and was Chief Executive Officer from
1991 until it was sold in February 1998. Mr. Crosby is the General Partner of
Rust Group, L.P., a Texas limited partnership holding certain of Mr. Crosby's
business assets, and he is the president of Rust Investment Corp., the general
partner of Rust Capital, Ltd. ("Rust Capital"), an investment limited
partnership with its headquarters in Austin, Texas. Mr. Crosby presently serves
as a director of Prime Venture I, a cable television enterprise. Mr. Crosby also
serves as a director of two other publicly traded companies: National Dentex
Corporation, a manufacturer of dental appliances, and DSI Toys, Inc., a toy
manufacturer and distributor. From 1982 through early 1985, he served as a
director of Orion Pictures. As a principal of Rust Group, L.P., Mr. Crosby
participated in the purchase of selected motion picture theaters from Wometco
Theaters, Inc. in 1990 before selling them in 1994.
PAUL W. HOBBY has been a Director and Co-Chief Executive Officer since October
1999. Mr. Hobby also currently serves as Chairman and Chief Executive Officer of
Hobby Media Services, Inc., a private company that provides venture funding for
traditional and new media investments. He was also the controlling General
Partner for Columbine JDS Systems, Inc., a leading integrator and developer of
existing and new information technology products for media management systems
within stations, networks and agencies. Prior to that, he served as Principal of
H&C Communications, Inc., a closely held media company and as Assistant U.S.
Attorney for the U.S. Department of Justice for the Southern District of Texas.
JACK S. GRAY, JR. has been a Director of the Company since April 1998. Prior to
that, he served as President and Chief Operating Officer of Tescorp, Inc., a
NASDAQ traded company, from March 1991 until February 1998. Mr. Gray has acted
as partner, officer and/or director of Rust Group, L.P. and/or its affiliates
since 1985.
THOMAS G. REBAR has been a Director and Member of the Compensation and Audit
Committees of the Company since December 1997 and served as Secretary of the
Company from April 1998 to November 1998. Mr. Rebar is a Partner of SCP Private
Equity Management, L.P., the general partner of SCP Private Equity Partners,
L.P., a private equity investment fund ("SCP"), which position he has held since
June 1996. From 1989 until joining SCP in 1996, Mr. Rebar served as Senior Vice
President of Charterhouse, Inc., an investment banking firm. Prior to joining
Charterhouse, Inc., Mr. Rebar was a member of the corporate finance department
at Bankers Trust Company.
WAYNE B. WEISMAN has been a Director and Member of the Compensation and Audit
Committees of the Company since December 1997. Mr. Weisman has been a Partner of
SCP Private Equity Management, L.P., the general partner of SCP, since the
inception of SCP in 1996. Since 1991, Mr. Weisman has served as Vice President
of CIP Capital Management, Inc., the general partner of CIP Capital, L.P., a
small business investment company, or in a similar capacity in the predecessors
to such
21
<PAGE> 22
entities. From 1992 to 1994, he served as a director and Executive Vice
President of Affinity Biotech. Inc., and Vice President and General Counsel of
its successor, IBAH, Inc. From 1987 to 1990, Mr. Weisman ran an independent
investment management and advisory firm. He formerly practiced law with the
Philadelphia firm of Saul, Ewing, Remick & Saul.
WINSTON J. CHURCHILL has been a Director and Member of the Compensation
Committee of the Company since December 1997. Mr. Churchill has been a Managing
General Partner of SCP Private Equity Management, L.P., the general partner of
SCP, since SCP's inception in 1996. Mr. Churchill founded Churchill Investment
Partners, Inc. in 1989 and CIP Capital, Inc. in 1990, each of which is an
investment and venture capital fund, and continues to be a principal of each.
From 1989 to 1993 he served as Chairman of the Finance Committee of the $24
billion Pennsylvania Public School Employees' Retirement System. From 1984 to
1989, Mr. Churchill was a general partner of Bradford Associates, a private
investment firm in Princeton, New Jersey. Prior to that time, he practiced law
at the Philadelphia firm of Saul, Ewing, Remick & Saul for 16 years and was a
member of its executive committee. Mr. Churchill is a member of the Board of
Directors of Central Sprinkler Corporation, a manufacturer and distributor of
automatic fire sprinkler systems and components, Freedom Securities Corp., a
brokerage and investment banking firm and Amkor Technology, Inc.
DONALD H. HARNOIS, JR. was appointed Vice President, Chief Financial Officer in
December 1999 and was appointed Secretary of the Company in April 2000. Mr.
Harnois was formerly the senior finance manager at Cinemark USA, Inc. Prior to
Cinemark, Mr. Harnois held various accounting and finance positions at American
Airlines and its sister company, The SABRE Group. Prior to joining American
Airlines, Mr. Harnois was a senior staff member of Arthur Andersen L.L.P.'s
audit and business advisory practice. Mr. Harnois holds an undergraduate degree
in accounting from Boston College, and an MBA from the University of Texas at
Arlington. Mr. Harnois is also a certified public accountant.
The Board of Directors held a total of three meetings during the fiscal year
ended March 31, 2000. The Board of Directors has an Audit Committee and a
Compensation Committee. It does not have a nominating committee or a committee
performing the functions of a nominating committee.
The Audit Committee of the Board of Directors currently consists of Mr. Rebar
and Mr. Weisman. The Audit Committee met three times during the fiscal year
ended March 31, 2000. The Audit Committee recommends engagement of the Company's
independent auditors, and is primarily responsible for approving the services
performed by the Company's independent auditors and for reviewing and evaluating
the Company's accounting principles and its system of internal accounting
controls.
The Compensation Committee of the Board of Directors currently consists of Mr.
Churchill, Mr. Rebar and Mr. Weisman. The Compensation Committee three times
during the fiscal year ended March 31, 2000. The Compensation Committee
establishes the compensation for the Company's executive officers, including the
Company's Chief Executive Officer.
No director attended fewer than 75% of the aggregate number of meetings of the
Board of Directors and meetings of the committees of the Board of Directors that
he was eligible to attend.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers and persons who own more than 10% of
a registered class of the Company's equity securities to file various reports
with the Securities Exchange Commission and the National Association of
Securities Dealers concerning their holdings of, and transactions in, securities
of the Company. Copies of these filings must be furnished to the Company.
ITEM 10 - EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the chief
executive officer and all other executive officers of the Company whose salary
and bonus exceeded an annual rate of $100,000 during the fiscal year ended March
31, 2000 or is expected to exceed $100,000 in fiscal 2001.
22
<PAGE> 23
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------- ------------
All Other Securities
Name and Fiscal Year Annual Underlying
Principal Position Ended Salary Bonus Compensation(3) Options/SARs
------------------ ----------- ---------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
EXECUTIVE OFFICERS:
Jack R. Crosby............. 2000 $154,807 $0 0
Chairman of the Board of 1999 $161,538(2) $0(1) 42,571(1)
Directors and Co- Chief 1998 $0 $0 0
Executive Officer
Paul W. Hobby................ 2000 $40,415(7) $0 71,000(1)
Co-Chief Executive Officer 1999 $0 $0 0
1998 $0 $0 0
Frank J. Moreno............ 2000 $295,696(4) $0 0
President and Chief 1999 $254,806(4) $20,000(1)(5) $32,988(3) 71,429(1)(4)
Operating Officer 1998 $57,531(4)
$0 0
Donald H. Harnois, Jr...... 2000 $29,538(8) $10,000(8) 45,000
Chief Financial Officer, 1999 $0 $0 0
Vice President and Secretary 1998 $0 $0 0
Norman Dowling............. 2000 $85,846(6) $3,207 7,143(1)(6)
Chief Financial Officer, 1999 $109,326(6) $12,500(1)(5)
Vice President and Secretary 1998 $36,345 14,286(1)(6)
$0
Jack S. Gray, Jr........... 2000 $57,692(2) $0 42,857(1)
Vice Chairman of the Board 1999 $92,308(2) $0(1) 0
of Directors 1998 $0 $0 0
Neil R. Austrian, Jr....... 2000 $53,846(2) $0 28,572(1)
Executive Vice President 1999 $92,308(2) $0(1) 0
1998 $0 $0 0
</TABLE>
--------------------
(1) Pursuant to their stock option agreements, each of the current executive
officers is entitled to a bonus, payable when the applicable tax payment
is due, equal to the difference in the amount of federal income tax the
executive officer is required to pay upon exercising his options if, and
to the extent, such options had been considered incentive stock options
for federal income tax purposes.
(2) Pursuant to Compensation Committee and Board of Directors consents, each
dated April 29, 1998, Jack R. Crosby is to receive an annual salary of
$175,000, Jack S. Gray, Jr. is to receive an annual salary of $100,000
and Neil R. Austrian, Jr. is to receive an annual salary of $100,000.
Jack S. Gray, Jr. resigned his position as Co-Chairman of the Board of
Directors October 26, 1999, however, he remains a member of the Board of
Directors. Neil R. Austrian, Jr. resigned his position of Executive Vice
President on October 26, 1999. In connection with his resignation, Mr.
Austrian forfeited his stock options.
23
<PAGE> 24
(3) Perquisites and other personal benefits did not in the aggregate reach
the lesser of $50,000 or 10% of the total of annual salary and bonus
reported in this table for any named executive officer, except Frank J.
Moreno for whom relocation expenses of $32,988 were paid or reimbursed
by the Company, pursuant to the terms of his employment contract.
(4) Amount includes salary and consulting fees paid. Pursuant to the
Employment Agreement by and between the Company and Frank J. Moreno,
dated April 29, 1998, Mr. Moreno is to receive an annual salary of
$250,000. Effective February 2, 2000 Mr. Moreno and the Company agreed
that Mr. Moreno's duties under the Employment Agreement dated April 29,
1998 would be modified and his related compensation modified
accordingly. In lieu of any salary accrued after February 8, 2000 the
Company shall pay Mr. Moreno a total of $250,000 in four equal payments.
Also in connection with the modification of his employment agree, Mr.
Moreno forfeited his stock options.
(5) Pursuant to the Employment Agreement between the Company and Frank J.
Moreno, dated April 29, 1998, and the Employment Agreement between
Norman Dowling and the Company, dated June 18, 1998 (and amended
effective February 19, 1999), Mr. Moreno and Mr. Dowling may be awarded
bonus compensation at the discretion of the Board of Directors.
(6) Pursuant to the Employment Agreement by and between the Company and
Norman Dowling dated June 18, 1998 (and amended effective February 19,
1999), Mr. Dowling's annual salary increased to $120,000 from $105,000.
Mr. Dowling resigned from the Company on November 16, 1999. In
connection with his resignation, Mr. Dowling forfeited his stock
options.
(7) Pursuant to the Employment Agreement by and between the Company and Paul
Hobby dated October 28, 1999, Mr. Hobby's salary is $148,000 and may be
awarded bonus compensation at the discretion of the Board of Directors.
(8) Pursuant to the Employment Agreement by and between the Company and
Donald H. Harnois, Jr. dated January 3, 2000, Mr. Harnois's salary is
$120,000 and may be awarded bonus compensation at the discretion of the
Board of Directors. Mr. Harnois also received a $10,000 irrevocable
bonus advance upon execution of the Employment Agreement.
OPTION GRANTS DURING FISCAL 2000
The following table sets out the stock options that were granted to the
executive officers identified in the Summary Compensation Table during the
fiscal year ended March 31, 2000:
OPTION GRANTS DURING FISCAL 2000
<TABLE>
<CAPTION>
Number of Securities % of Total Options Exercise or
Underlying Options Granted to Employees Base Price Expiration
Name Granted in Fiscal Year ($/Share) Date
---- -------------------- -------------------- ----------- ----------
<S> <C> <C> <C> <C>
Paul W. Hobby 71,000 61.2 1.44 April 18, 2010
Donald H. Harnois, Jr. 45,000 38.8 1.44 April 18, 2010
</TABLE>
24
<PAGE> 25
OPTION EXERCISES IN FISCAL 2000 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options that were
exercised during, or held at the end of, fiscal 2000 by the executive officers
named in the Summary Compensation Table:
OPTION EXERCISES AND YEAR-END VALUE TABLE(1)
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Options at Fiscal Year at Fiscal Year
End End(2)
--------------------- --------------------
Shares
Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack R. Crosby 0 $0 28,572 14,286 $0 $0
Jack S. Gray, Jr. 0 $0 21,429 21,429 $0 $0
Paul W. Hobby 0 $0 0 71,000 $0 $0
Donald H. Harnois, Jr. 0 $0 0 45,000 $0 $0
</TABLE>
--------------------
(1) There were no option exercises during fiscal 2000.
(2) Valued based on an assumed price of $1.125 per share of common stock.
STOCK OPTIONS
In December 1997, the Company adopted the CinemaStar Luxury Theaters, Inc. Stock
Option Plan (the "1997 Option Plan") under which a maximum of 412,280 shares of
Common Stock may be issued pursuant to incentive and non-qualified stock options
grants to officers, key employees or consultants of the Company. As of March 31,
2000, there were 206,214 options issued and outstanding under the 1997 Option
Plan.
The 1997 Option Plan is administered by a committee comprised of three (3)
members of the Board of Directors (or such other number as determined by the
Board of Directors) and shall be comprised of such number of "disinterested
persons" as is necessary to meet the requirements of Rule 16b-3 of the Exchange
Act and such number of "outside directors" as is necessary to meet the
requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended.
This committee has authority to determine employees to whom options will be
granted, the timing and manner of grants of options, the exercise price, the
number of shares covered by and all of the terms of options, and all other
determinations necessary or advisable for administration of the 1997 Option
Plan. The 1997 Option Plan was approved by a vote of shareholders at the annual
meeting of shareholders on November 17, 1998.
The exercise price for the shares subject to any incentive stock option granted
under the 1997 Option Plan shall not be less than 100% of the fair market value
of the shares of common stock of the Company on the date the option is granted.
No option shall be exercisable after the earliest of the following: the
expiration of 10 years after the date the option is granted; three months after
the date the optionee's employment with the Company terminates, if termination
is by the Company for any reason without cause, immediately upon the voluntary
termination by the optionee of the optionee's employment with the Company or the
termination of the optionee's employment with the Company by the Company for
cause; or one year after the date the optionee's employment terminates, if
termination is a result of death or permanent disability. The vesting schedule
for options issued under the 1997 Option Plan is determined by the committee.
All options granted to date under this Plan vest over a three-year period
beginning December 16, 1997, with full acceleration on a change in control.
In July 1994, the Company adopted the CinemaStar Luxury Theaters, Inc. Stock
Option Plan (the "1994 Option Plan") under which a maximum of 83,929 shares of
Common Stock of the Company could be issued pursuant to incentive and
non-qualified stock options granted to officers, key employees or consultants of
the Company. Most of the options granted under this 1994 Option Plan have
expired or been terminated. Pursuant to a Board of Directors consent, any
outstanding options under the 1994 Option Plan have been transferred to the 1997
Option Plan.
25
<PAGE> 26
COMPENSATION OF DIRECTORS
Prior to June 3, 1995, directors received no cash compensation for serving on
the Board of Directors. In June 1995, the Board of Directors approved payment of
$1,000 per director for each meeting attended. On April 29, 1998, the Board of
Directors approved payment of $1,000 per director for each meeting, or committee
meeting, attended; provided such director does not draw a salary from the
Company in his or her capacity as an employee of the Company.
In fiscal 2000, there were three meetings of the Board of Directors.
In the fiscal year ended March 31, 1998, Russell Seheult received $52,000 in
consulting fees. In August 1994, the Company entered into a five year consulting
agreement with Mr. Seheult that was extended in December 1996 for five years
from December 1996. Mr. Seheult was granted options to purchase 25,179 shares of
Common Stock at an exercise price of $17.85 per share in July 1994. On December
16, 1997, Mr. Seheult resigned as a director and ceased providing consulting
services. As a result, all of Mr. Seheult's options have expired and the Company
has stopped making payments under the consulting agreement. Mr. Seheult remains
as a guarantor on certain of the Company's long-term theater leases. Mr. Seheult
has since commenced litigation against the Company regarding the termination of
the consulting agreement.
EMPLOYMENT AND CONSULTING AGREEMENTS
Effective April 29, 1998, the Company entered into a three-year employment
agreement with Frank J. Moreno, pursuant to which Mr. Moreno's annual base
salary of $250,000 is subject to increase at the discretion of the Board of
Directors. In addition, Mr. Moreno may receive an annual bonus at the discretion
of the Board of Directors. Mr. Moreno also receives an automobile allowance of
$650 per month. The employment agreement also gives Mr. Moreno the right to
participate in any and all group medical and other benefit plans generally
available to employees of the Company. Under the employment agreement, Mr.
Moreno was compensated for his out-of-pocket relocation costs and received
$20,000 in connection with the sale of his home. The employment agreement also
acknowledges that the Company granted Mr. Moreno options to acquire 71,429
shares of the Company's Common Stock on December 16, 1997. Effective February 2,
2000 Mr. Moreno and the Company agreed that Mr. Moreno's duties under the
Employment Agreement dated April 29, 1998 would be modified and his related
compensation modified accordingly. In lieu of any salary accrued after February
8, 2000 the Company shall pay Mr. Moreno a total of $250,000 in four equal
payments.
Effective February 19, 1999, the one-year employment agreement with Norman
Dowling dated as of June 18, 1998 was amended to extend the contract period for
an additional year. The contract amendment provides for an annual base salary of
$120,000 and an annual bonus at the discretion of the Board of Directors. Mr.
Dowling also receives an automobile allowance of $450 per month. The employment
agreement also gives Mr. Dowling the right to participate in any and all group
medical and other benefit plans generally available to employees of the Company.
The employment agreement also acknowledges that the Company granted Mr. Dowling
options to acquire 14,286 shares of the Company's Common Stock on December 16,
1997. On March 6, 1999, Mr. Dowling was granted additional options to acquire
7,143 shares of the Company's Common Stock. Mr. Dowling resigned from the
Company on November 16, 1999.
Effective January 3, 2000, the Company entered into a three year employment
agreement with Donald H. Harnois, Jr. providing for an annual base salary of
$120,000 and an annual bonus at the discretion of the Board of Directors. Mr.
Harnois also receives an automobile allowance of $450 per month. The employment
agreement also gives Mr. Harnois the right to participate in any and all group
medical and other benefit plans generally available to employees of the Company.
The employment agreement also acknowledges that the Company granted Mr. Harnois
options to acquire 45,000 shares of the Company's Common Stock. In the event Mr.
Harnois is terminated by the Company without cause, as defined in the employment
agreement, he is entitled to his base salary for the remainder of the contract
period.
26
<PAGE> 27
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
PRINCIPAL SHAREHOLDERS
The Company has outstanding voting securities consisting of only common stock,
of which 6,289,196 shares were outstanding as of the close of business day on
June 23, 2000. The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of the close of business
day on June 23, 2000 as to (a) each director, (b) each executive officer
identified in the Summary Compensation Table above, (c) all executive officers
and directors of the Company as a group, and (d) each person known to the
Company to beneficially own five percent or more of the outstanding shares of
Company's common stock.
<TABLE>
<CAPTION>
As of June 23, 2000
---------------------------
Number of Percent of
Title of Class Beneficial Owner(1) Shares(2) Class(2)
-------------- ------------------- ------------- ----------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Common Jack R. Crosby 39,287 (3)(4) *
Common Jack S. Gray, Jr. 21,429 (5) *
Common Thomas G. Rebar -0- -0-
Common Wayne B. Weisman -0- -0-
Common Winston J. Churchill 6,873,388 (6) 85.7%
Common Paul W. Hobby 23,667 (7) *
Common Donald H. Harnois, Jr. 15,000 (8) *
----------------------------------------------------------------------------------------------------------
ALL CURRENT DIRECTORS AND 6,972,771 (9) 86.0%
EXECUTIVE OFFICERS AS A
GROUP (8 PERSONS)
FIVE PERCENT SHAREHOLDERS:
Common CinemaStar Acquisition Partners, 3,107,165 (10) 46.5%
L.L.C.
Common SCP Private Equity Partners, L.P. 6,873,388 (11) 85.7%
Common CEDE & Company 1,044,845 16.6%
</TABLE>
* Items marked with an asterisk comprise less than 1% of the total
outstanding common stock of the Company.
(1) The address of each of Messrs. Crosby and is c/o Rust Capital, Ltd., 327
Congress Avenue, Suite 350, Austin, Texas 78701. The address of each of
Messrs. Churchill, Rebar and Weisman and SCP Private Equity Partners, L.P.
("SCP") and CinemaStar Acquisition Partners, L.L.C. ("CAP") is c/o SCP
Private Equity Partners, L.P., 435 Devon Park Drive, Building 300, Wayne,
Pennsylvania 19087.
(2) Shares of common stock that a person has the right to acquire within 60
days are deemed outstanding in calculating the percentage ownership of such
person, but are not deemed outstanding as to any other person. Percentages
are calculated based on 6,289,196 shares of common stock issued and
outstanding as of June 25, 2000.
(3) Includes 10,715 Reel Shares.
(4) Includes 28,572 options, granted under the 1997 Option Plan, to acquire the
Company's common stock.
(5) Includes 21,429 options, granted under the 1997 Option Plan, to acquire the
Company's common stock.
(6) Includes 2,719,389 shares owned by CAP, 2,424,158 shares owned by SCP, the
CAP Warrants to purchase 387,776 shares, Reel Warrants to purchase 442,225
shares (held by SCP as transferee thereof), Watley Warrants to purchase
120,646 shares (held by SCP as transferee thereof), and the SCP Warrants to
purchase 779,194 shares, each with respect to which Mr. Churchill has
voting and investment control.
27
<PAGE> 28
(7) Includes 23,667 options, granted under the 1997 Option Plan, to acquire the
Company's common stock.
(8) Includes 15,000 options, granted under the 1997 Option Plan, to acquire the
Company's common stock.
(9) Includes 2,719,389 shares owned by CAP, 2,424,158 shares owned by SCP, the
CAP Warrants to purchase 387,776 shares, Reel Warrants to purchase 442,225
shares (held by SCP as transferee thereof), Watley Warrants to purchase
120,646 shares (held by SCP as transferee thereof), and the SCP Warrants to
purchase 779,194 shares, each with respect to which Mr. Churchill has
voting and investment control.
(10) Includes 2,719,389 shares owned by CAP, and the CAP Warrants to purchase
387,776 shares.
(11) Includes 2,719,389 shares owned by CAP, 2,424,158 shares owned by SCP, the
CAP Warrants to purchase 387,776 shares, Reel Warrants to purchase 442,225
shares (held by SCP as transferee thereof), Watley Warrants to purchase
120,646 shares (held by SCP as transferee thereof), and the SCP Warrants to
purchase 779,194 shares, each with respect to which Mr. Churchill has
voting and investment control.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits with
respect to the lease of the Chula Vista 10, and Eileen Seheult the former wife
of Russell Seheult, with respect to certain lease and bank obligations incurred
or guaranteed by Mr. and Ms. Seheult on behalf of the Company) have personally
guaranteed, on a joint and several basis, certain obligations of the Company
pursuant to its theater leases and a mortgage loan. Certain of these obligations
of the Company are secured by real or personal property pledged by such
individuals. The Company has agreed to use its reasonable best efforts to obtain
the releases of Mr. Ellison, Mr. Willits and Mr. Grossberg from their
obligations under any personal guarantees made for the benefit of the Company or
its entities. To date, no such releases have been obtained. See "Executive
Compensation -- Employment and Consulting Agreements." As of March 31, 2000,
such guaranteed obligations involved aggregate future payments of the Company
totaling approximately $114,000,000.
CinemaStar Luxury Theaters, S.A. de C. V. ("CinemaStar International"),
incorporated in Mexico in July 1994, was a 75%-owned subsidiary until December
1998. The remaining 25% ownership interest in CinemaStar International was held
by Atlantico y Asociados S.A. de C.V., a Mexican corporation until December,
1998 when the Company acquired the remaining 25% ownership. CinemaStar
International leases and operates the Plaza Americana 10 facility in Tijuana.
CinemaStar International leases equipment and obtains technical services and
support from the Company, in each case for payment that the Company believes is
fair value.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See "Index to Exhibits" for a listing of those exhibits included in this filing.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended (9)
3.2 Amended and Restated Bylaws of the Company (8)
3.3 Agreement and Plan of Merger of CinemaStar Luxury Theaters, Inc. (a
Delaware corporation) and CinemaStar Luxury Theaters, Inc. (a California
corporation) (13)
3.4 Certificate of Incorporation of the Company (13)
3.5 Bylaws of the Company (13)
3.6 Specimen Stock Certificate of the Company (15)
4.1 Form of Redeemable Warrant Agreement (with form of certificate attached)
(1)
4.2 Form of Underwriter's Warrant Agreement (with form of certificate
attached) (1)
4.3 Form of Bridge Warrant (1)
4.4 Form of Acknowledgment and Agreement of Warrant Holder (1)
4.5 Form of Class B Warrant Agreement (with form of certificate attached)
(3)
4.6 Offshore Warrant Agreement between the Company and Swan Alley (Nominees)
Limited, nominee of Wales Securities Limited (3)
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
4.7 Offshore Warrant Agreement between the Company and Swan Alley (Nominees)
Limited, nominee of Villandry Investments Ltd. (3)
4.8 First Bridge Warrant from Company to Reel Partners, L.L.C., dated
September 23, 1997 (9)
4.9 400,000 Warrant Issued to The Boston Group, L.P., dated February 12,
1996 (4)
10.11 Form of Indemnification Agreement with officers and directors (1)
10.12 Placement Agent Agreement between the Company and A.S. Goldmen & Co.,
Inc. as amended (1)
10.13 Equipment Purchase and Ride Film Rental Agreement, dated August 8, 1994,
between the Company and Cinema Ride, Inc., as amended (1)
10.14 Form of Promissory Note of the Company issued in connection with a
private placement of Promissory Notes and Bridge Warrants in August 1994
and September 1994 (1)
10.15 Lease Agreement, dated April 30, 1991, between Nickelodeon Cinemas, Inc.
and Homart Development Co. (1)
10.16 Real Property Lease Agreement between the Company and Gary E. Elam,
Receiver (1)
10.17 Equipment Purchase Agreement between the Company and Gary E. Elam,
Receiver (1)
10.18 Modification and Supplement of Lease and Equipment Purchase Agreement,
dated March 1, 1994, between the Company and River Village, William
Buster and Harold Alles, as successor in interest to Gary E. Elam,
Receiver (1)
10.19 Purchase Agreement with United Artists (2)
10.20 Agreements with Pacific Concessions (1)
10.21 Lease Agreement, dated August 1, 1995 between the Company and Mission
Grove Plaza, L.P. (1)
10.22 Fourth Amendment to Lease Agreement between the Company and Mission
Grove Plaza, L.P. (15)
10.23 Lease Agreement, dated July 14, 1995 between the Company and University
Village, LLC (1)
10.24 Ground Lease, dated August 5, 1995 between the Company and Craig W.
Clark (1)
10.25 Lease Agreement, dated February 15, 1996 with the Coudures Family
Limited Partnership (4)
10.26 Adjustable Rate Note, dated January 23, 1996 (1)
10.27 Lease Agreement, dated June 14, 1996, between the Company and
Inmobiliaria Lunar, S.C. (4)
10.28 Pacific Oceanside Holdings, L.P. Lease Agreement (6)
10.29 MDA-San Bernardino Associates, L.L.C. Lease Agreement (6)
10.30 First Amendment to MDA-San Bernardino Associates, L.L.C. Lease Agreement
(14)
10.31 Form of Agreement Regarding Letters of Credit by and among MDA-San
Bernardino Associates, GMAC Commercial Mortgage Company and the Company
(14)
10.32 Amendment to Concession Lease Agreement, dated April 23, 1997, between
the Company and Pacific Concessions, Inc. (Portions have been omitted
pursuant to a request for confidential treatment under Rule 24b-2 of the
Securities Exchange Act of 1934) (8)
10.33 First Amendment to Lease, dated May 5, 1997, between Pacific Oceanside
Holdings, L.P. and the Company (8)
10.34 Amendment to Loan Agreement, dated as of April 23, 1997, between the
Company and Pacific Concessions, Inc. (8)
10.35 Letter of Intent, dated June 24, 1997, by and between Rust Capital Ltd.
and CinemaStar Luxury Theaters, Inc. (7)
10.36 Stock Purchase Agreement by and among the Company, Reel Partners, L.L.C.
and CinemaStar Acquisition Partners, L.L.C., dated September 23, 1997
(9)
10.37 CinemaStar Luxury Theaters, Inc. Stock Option Plan, dated December 16,
1997 (10)
10.38 Form of Stock Option Agreement, as of December 16, 1997 (10)
10.39 Employment Agreement by and between the Company and Frank Moreno, dated
April 29, 1998 (10)
10.40 Employment Agreement by and between the Company and Norman Dowling,
dated June 18, 1998 (10)
10.41 First Amendment (dated February 19, 1999) to Employment Agreement by and
between the Company and Norman Dowling, dated June 18, 1998 (15)
10.42 Lease Agreement by and between the Company and Landgrant Corporation
dated as of April 15, 1998 (Ocean View Plaza) (10)
10.43 $15 Million Revolving Credit Agreement between the Company and Union
Bank of California, N.A. (12)
10.44 First Amendment to $15 Million Revolving Credit Agreement between the
Company and Union Bank of California, N.A. (15)
10.45 Second Amendment to $15 Million Revolving Credit Agreement between the
Company and Union Bank of California, N.A. (15)
10.46 Stock Purchase and Sale Agreement between the Company and Atlantico &
Ass. S.A. de C.V. dated November 23, 1998 (14)
10.47 Amendment to Employment Agreement by and between the Company and Frank
Moreno, dated as of February 2, 2000 (16)
10.48 Employment Agreement by and between the Company and Don Harnois, dated
as of January 3, 2000 (16)
10.49 Employment Agreement by and between the Company and Paul Hobby, dated as
of October 18, 1999 (17)
21 Subsidiaries of the Company (15)
27 Financial Data Schedule (17)
</TABLE>
29
<PAGE> 30
27 Financial Data Schedule (15)
-------------------------------------------------------------
(1) Incorporated by reference to the exhibits filed with Registration Statement
No. 33-86716.
(2) Incorporated by reference to Form 10-KSB for the year ended March 31, 1995.
(3) Incorporated by reference to Form 8-K for June 6, 1996.
(4) Incorporated by reference to Form 10-KSB for the year ended March 31, 1996.
(5) Incorporated by reference to Form 10-Q for the period ended June 30, 1996.
(6) Incorporated by reference to Form 10-Q for the period ended December 31,
1996.
(7) Incorporated by reference to Form 8-K filed July 1, 1997
(8) Incorporated by reference to Form 10-KSB for the year ended March 31, 1997.
(9) Incorporated by reference to the Proxy Statement filed November 17, 1997.
(10) Incorporated by reference to Form 10-KSB for the year ended March 31, 1998.
(11) Incorporated by reference to Form 10-QSB for the period ended June 30,
1998.
(12) Incorporated by reference to Form 10-QSB for the period ended September 30,
1998.
(13) Incorporated by reference to the Proxy Statement filed October 23, 1998.
(14) Incorporated by reference to Form 10-QSB for the period ended December 31,
1998
(15) Incorporated by reference to Form 10-KSB for the period ended March 31,
1999.
(16) Incorporated by reference to Form 10-QSB for the period ended December 31,
1999.
(17) Filed concurrently herewith
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the last quarter of the period
covered by this report:
None
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CINEMASTAR LUXURY THEATERS, INC.
/s/Jack R. Crosby Dated June 28, 1999
-----------------------------
Jack R. Crosby, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/Jack R. Crosby Chairman of the Board of Directors and Chief June 28, 2000
-------------------------- Executive Officer (principal executive officer)
Jack R. Crosby
/s/ Paul W. Hobby Co-Chief Executive Officer June 28, 2000
-------------------------- and Director
Paul W. Hobby
/s/ Donald H. Harnois, Jr. Vice President, Chief Financial Officer June 28, 2000
-------------------------- and Secretary (principal financial officer
Donald H. Harnois, Jr. and principal accounting officer)
/s/ Winston J. Churchill Director June 28, 2000
--------------------------
Winston J. Churchill
/s/ Wayne B. Weisman Director June 28, 2000
--------------------------
Wayne B. Weisman
/s/ Thomas G. Rebar Director June 28, 2000
--------------------------
Thomas G. Rebar
/s/ Jack S. Gray, Jr. Director June 28, 2000
--------------------------
Jack S. Gray, Jr.
</TABLE>
31
<PAGE> 32
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of March 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the years ended March 31, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity for the years ended March 31, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended March 31, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CinemaStar Luxury Theaters, Inc.:
We have audited the accompanying consolidated balance sheets of CinemaStar
Luxury Theaters, Inc. (a Delaware corporation) and subsidiaries as of March 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CinemaStar Luxury
Theaters, Inc. and subsidiaries as of March 31, 2000 and 1999, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The 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 result should the Company be unable to continue as a
going concern.
Arthur Andersen LLP
San Diego, California
May 26, 2000
F-2
<PAGE> 34
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,646,975 $ 2,220,396
Prepaid expenses 224,534 210,412
Other current assets (Note 9) 312,679 327,308
------------ ------------
TOTAL CURRENT ASSETS 3,184,188 2,758,116
Property and equipment, net (Note 3) 14,209,544 11,510,495
Deposits and other assets (Note 9) 559,470 870,608
============ ============
TOTAL ASSETS $ 17,953,202 $ 15,139,219
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 4) $ 2,000,000 $-
Current portion of long-term debt and
Capital lease obligations (Note 4) 37,557 207,082
Accounts payable 3,174,755 970,979
Accrued liabilities (Note 9) 777,165 842,913
Deferred revenue 412,975 455,284
------------ ------------
TOTAL CURRENT LIABILITIES 6,402,452 2,476,258
Long-term debt and capital lease obligations,
Net of current portion (Note 4) 1,710,254 1,759,304
Deferred rent liability (Note 6) 4,566,582 3,898,491
------------ ------------
TOTAL LIABILITIES 12,679,288 8,134,053
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 8):
Common stock, $0.01 par value ;
Authorized shares 20,000,000 and 60,000,000, respectively;
issued and outstanding shares 6,289,196
and 3,865,038, respectively 62,892 38,650
Additional paid-in capital 29,691,930 26,216,172
Accumulated deficit (24,480,908) (19,249,656)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,273,914 7,005,166
============ ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,953,202 $ 15,139,219
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 35
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Admissions $ 19,163,649 $ 19,074,303
Concessions 8,114,681 7,991,692
Other operating revenues 685,876 670,342
------------ ------------
TOTAL REVENUES 27,964,206 27,736,337
------------ ------------
COSTS AND EXPENSES:
Film rental and booking costs 10,188,451 9,989,353
Cost of concession supplies 1,510,671 1,669,388
Theater operating expenses 12,971,782 11,844,008
General and administrative expenses 3,347,845 3,295,739
Depreciation and amortization 2,439,844 2,331,503
Asset impairment loss 2,000,000 -
------------ ------------
TOTAL COSTS AND EXPENSES 32,458,593 29,129,991
------------ ------------
OPERATING LOSS (4,494,387) (1,393,654)
------------ ------------
OTHER INCOME (EXPENSE):
Non-cash interest expense (189,122) (37,029)
Interest expense (501,751) (294,319)
Interest income 64,354 140,230
------------ ------------
TOTAL OTHER EXPENSE, NET (626,519) (191,118)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (5,120,906) (1,584,772)
PROVISION FOR INCOME TAXES (Note 5) (110,346) (1,600)
------------ ------------
NET LOSS $ (5,231,252) $ (1,586,372)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE $ (1.34) $ (0.42)
============ ============
WEIGHTED AVERAGE SHARES 3,891,480 3,770,848
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 36
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance March 31, 1998 3,672,001 $ 22,628,670 $ 3,626,152 $(17,663,284) $ 8,591,538
Issuance of common stock
pursuant to terms of
equity financing agreement
(Note 8) 193,037 - - - -
Reincorporation (Note 8)
- (22,590,020) 22,590,020 - -
Net loss
- - - (1,586,372) (1,586,372)
------------ ------------ ------------ ------------ ------------
Balance March 31, 1999 3,865,038 38,650 26,216,172 (19,249,656) 7,005,166
Issuance of common stock
pursuant to terms of
equity financing agreement
(Note 8) 2,424,158 24,242 3,475,758 - 3,500,000
Net loss
- - - (5,231,252) (5,231,252)
============ ============ ============ ============ ============
Balance March 31, 2000 6,289,196 $ 62,892 $ 29,691,930 $(24,480,908) $ 5,273,914
============ ============ ============ ============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 37
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,231,252) $(1,586,372)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,439,844 2,331,503
Asset impairment loss 2,000,000 -
Non-cash interest expense 189,122 37,029
Deferred rent expense 668,091 720,732
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 507 (20,256)
Deposits and other assets 50,620 37,934
Accounts payable 2,203,776 (701,703)
Accrued and other current liabilities (108,057) (53,420)
----------- -----------
Net cash provided by operating activities 2,212,651 765,447
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (7,134,516) (925,666)
Sale of property and equipment 67,018 -
Purchase of minority interest in Mexican subsidiary - (338,643)
----------- -----------
Net cash used in investing activities (7,067,498) (1,264,309)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net 2,000,000 -
Principal payments on long-term debt and
capital lease obligations (218,574) (386,314)
Proceeds from issuance of common stock 3,500,000 -
Payment of debt issuance costs - (376,406)
----------- -----------
Net cash provided by (used in) financing activities 5,281,426 (762,720)
----------- -----------
Net increase (decrease) in cash and cash equivalents 426,579 (1,261,582)
Cash and cash equivalents, beginning of year 2,220,396 3,481,978
----------- -----------
Cash and cash equivalents, end of year $ 2,646,975 $ 2,220,396
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 419,966 $ 306,700
=========== ===========
Income taxes $ 110,346 $ 1,600
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 38
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND COMPANY OPERATIONS
NATURE OF BUSINESS
CinemaStar Luxury Theaters, Inc. ("Theaters, Inc.") and CinemaStar Luxury
Cinemas, Inc. ("Cinemas, Inc."), a wholly owned subsidiary of Theaters, Inc.,
were incorporated in California in 1989 and 1992, respectively, for the purpose
of establishing multi-screen, first-run theater locations in the Western United
States, with a focus on Southern California. Theaters, Inc. was reincorporated
in Delaware in December 1998.
CinemaStar Luxury Theaters, S.A. de C.V. ("CinemaStar International") was
incorporated in Mexico in July 1994 for the purpose of establishing
multi-screen, first-run theater locations in Mexico. As of March 31, 2000 and
1999, CinemaStar International had one theater having 10 screens in operation in
Tijuana, B.C., Mexico. CinemaStar International was a 60%-owned subsidiary of
Theaters, Inc. through June 1995 at which time Theaters, Inc. acquired an
additional 15% interest. The remaining 25% equity interest was acquired by
Theaters, Inc. in December 1998.
Theaters Inc., Cinemas Inc., and CinemaStar International will hereafter
collectively be referred to as the "Company".
COMPANY OPERATIONS AND RISK FACTORS
The accompanying 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.
The Company began fiscal year 2000 with eight theaters for a total of 79
screens. In December of 1999, the Company opened a twenty screen complex in San
Bernardino, California, which brought the total number of screens as of March
31, 2000 to ninety-nine. For all of fiscal year 1999, the Company operated eight
theaters with a total of 79 screens. In April 2000, the Company completed a four
screen expansion of its Mission Grove theater.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $5,231,252 and $1,586,372 in the fiscal
years ended March 31, 2000 and 1999, respectively. Unaudited information
subsequent to March 31, 2000 indicates that losses are continuing. As of March
31, 2000, the Company has an accumulated deficit of approximately $24,500,000,
and a working capital deficiency of approximately $3,200,000.
As of March 31, 2000, the Company held cash and cash equivalents in the amount
of $2,646,975. Over the near term, the Company will have to fund its remaining
obligations of approximately $1,700,000 related to the San Bernardino and
Mission Grove construction projects. The Company is also 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 meet its construction obligations, 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.
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.
F-7
<PAGE> 39
1. NATURE OF BUSINESS AND COMPANY OPERATIONS - CONTINUED
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 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.
The Company operates a leased 10-screen theater in Tijuana, Mexico through its
wholly-owned subsidiary, CinemaStar International. The operation of this theater
in Mexico subjects the Company to the attendant risks of doing business
internationally, including fluctuations in foreign currency, changes in foreign
laws and regulations, political turmoil and uncertain and volatile economic
conditions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Theaters, Inc. and its wholly owned subsidiaries Cinemas, Inc., and CinemaStar
International. All material intercompany transactions and balances have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be a cash equivalent. At March 31, 2000 and 1999, cash
equivalents consisted of money market funds at a bank.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
related assets, which range from 3 to 27 years. Leasehold improvements and
equipment held under capital leases are amortized over the lesser of the related
lease terms or the estimated useful lives of the related asset. Repairs and
maintenance are charged to expense as incurred.
LONG-LIVED ASSETS
The Company evaluates and assesses its assets for impairment under the
guidelines of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121"). The criteria used for these evaluations include management's
estimate of the assets' continuing ability to generate income from operations
and positive cash flows in future periods, including the potential proceeds from
disposition of the property, as well as the strategic significance of the assets
to the Company's business activities.
OTHER ASSETS
In December 1998, the Company acquired the remaining 25% interest in CinemaStar
International. The entire purchase price of approximately $339,000 has been
recorded as goodwill and is being amortized over a seven-year period.
F-8
<PAGE> 40
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DEFERRED RENT LIABILITY
Substantially all of the Company's leases include a rental escalation provision
over the term of the lease. Deferred rent liability represents the difference
between base rentals paid under the Company's operating lease agreements and the
expense recorded in the consolidated statements of operations on a straight-line
basis over the life of the leases. In the early years of such leases, rent
expense recorded in the consolidated statements of operations exceeds cash
payments.
PRE-OPENING COSTS
Pre-opening costs related to new theaters are expensed as incurred.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
For Income Taxes." Deferred income taxes are recognized based on the temporary
differences between financial statement and income tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
REVENUE RECOGNITION
The Company recognizes revenues from ticket and concessions sales at the time of
sale. The Company has a group ticket sales program under which corporations and
large groups can purchase tickets, in advance, for discount prices. Group
tickets must be used within twelve months of issuance. Revenues from group
ticket and gift certificate sales are recorded as deferred revenue and are
recognized when group tickets or gift certificates are used or expire.
NET LOSS PER SHARE
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. 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.
COMPREHENSIVE INCOME
The Company has no components of comprehensive income.
STOCK-BASED COMPENSATION
The Company elected to adopt the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, the Company will continue to account for its stock
based compensation plans under the provisions of APB No. 25.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, consisting of
accounts payable and debt, approximates their fair value.
USE OF ESTIMATES
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.
F-9
<PAGE> 41
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
GEOGRAPHIC SEGMENT DISCLOSURE
The Company operates one business segment. Such segment has operations in two
geographic regions, California and Northern Mexico. Fiscal 2000 total revenues
were $22,948,178 in California, and $5,016,028 in Mexico. Fiscal year 1999 total
revenues were $22,906,264 in California, and $4,830,073 in Mexico. Total assets
as of March 31, 2000 for the California region were $17,356,830, and $596,372
for the Mexico region. Total assets as of March 31, 1999 for the California
region were $14,665,956, and $473,263 for the Mexico region.
NEW ACCOUNTING PRONOUNCEMENTS
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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31,
2000 1999
------------ ------------
<S> <C> <C>
Land $ 960,000 $ 960,000
Furniture, fixtures and equipment 13,861,544 10,636,766
Building 2,169,798 2,169,798
Leasehold improvements 7,069,512 3,213,314
Equipment held under capital lease obligations 1,951,327 1,951,327
------------ ------------
26,012,181 18,931,205
Less:
Accumulated depreciation and amortization (9,552,637) (7,170,710)
Reserve for Asset Impairment (2,250,000) (250,000)
============ ============
$ 14,209,544 $ 11,510,495
============ ============
</TABLE>
Included in accumulated depreciation and amortization is approximately
$1,506,000 and $1,236,000 of amortization related to equipment held under
capital lease obligations at March 31, 2000 and 1999, respectively.
During the fourth quarter of fiscal 2000, the Company recorded an asset
impairment charge of $2,000,000. This charge includes a write down of $1,800,000
related to one of the Company's theaters that it is attempting to sell. In
determining the write down required related to this theater, the Company
considered, among other things, an offer which has been received from a third
party to purchase the theater.
F-10
<PAGE> 42
4. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND LINE OF CREDIT
Obligations under long-term debt and capital lease arrangements are as follows:
<TABLE>
<CAPTION>
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Mortgage note payable to bank; interest at LIBOR plus 5.4%
(11.625% and 10.375% at March 31, 2000 and 1999,
respectively). Monthly payments of principal and interest
are $14,494 at March 31, 2000. The note matures in February
2026 and is collateralized by a deed of trust and is
guaranteed by certain former officers/directors/stockholders
of the Company $ 1,561,946 $ 1,572,425
Capitalized lease obligation discounted at 5.25%, payable in 175,754 190,815
monthly installments of $2,060, including interest. Lease
matures March 2009 - 111,433
Capital lease obligation matured March 2000 10,111 91,713
Other notes payable
----------- -----------
Total long-term debt and capital lease obligations 1,747,811 1,966,386
Less: Current portion (37,557) (207,082)
=========== ===========
Total long-term debt and capital lease obligations,
net of current portion $ 1,710,254 $ 1,759,304
=========== ===========
</TABLE>
Aggregate principal maturities of long-term debt and capital lease obligations
are as follows:
<TABLE>
<CAPTION>
Year Ending Long-term Capital
March 31, Debt Leases Total
--------- ----------- ----------- -----------
<S> <C> <C> <C>
2001 $ 21,464 $ 27,204 $ 48,668
2002 11,551 24,720 26,271
2003 12,888 24,720 37,608
2004 14,379 24,720 39,099
2005 16,043 24,720 40,763
Thereafter 1,496,732 94,760 1,591,492
----------- ----------- -----------
Total minimum payments 1,572,057 220,844 1,792,901
Less: Amount representing interest on leases - (45,090) (45,090)
=========== =========== ===========
Total long-term debt and present value
of minimum lease payments $ 1,572,057 $ 175,754 $ 1,747,811
=========== =========== ===========
</TABLE>
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.
F-11
<PAGE> 43
4. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND LINE OF CREDIT - CONTINUED
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
(see Note 8) 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 unable at draw against the facility as of March 31, 2000, as the
Company's leverage ratio exceeds the maximum established by the April 4, 2000
amendment to the Revolving Credit Agreement. The Company will be able to draw
down on the credit facility once its leverage ratio is under the maximum
specified by the amendment, however the amount of borrowings the Company
anticipates becoming available is not expected to be significant, as the
borrowings will continue to be limited by the leverage ratio covenant.
As of March 31, 2000, the Company had outstanding borrowings of $2,000,000 under
the facility, and the Company used the facility to secure a standby letter of
credit for $275,000 related to the construction of the San Bernardino theater.
5. INCOME TAXES
For the years ended March 31, 2000 and 1999, the Company incurred only the
minimum state income taxes due to the losses resulting from its domestic
operations. The provision for income taxes for fiscal 2000 is principally
related to the Company's Mexican subsidiary. A summary of the significant items
comprising the Company's deferred income tax assets and liabilities is as
follows:
<TABLE>
<CAPTION>
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Depreciation, amortization, and asset impairment $ 1,841,000 $ 904,000
Net operating loss carryforwards 4,193,000 3,773,000
Deferred rent expense 1,121,000 1,247,000
Accrued expenses and other 37,000 35,000
----------- -----------
Total deferred income tax assets 7,192,000 5,959,000
Valuation allowance (7,192,000) (5,959,000)
----------- -----------
Net deferred income taxes $ -- $ --
=========== ===========
</TABLE>
A reconciliation of the federal statutory rate to the Company's effective income
tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------
2000 1999
------- -------
<S> <C> <C>
Federal statutory rate (34.00)% (34.00)%
State income taxes, net of federal benefit
Non-deductible expenses 0.03% 0.03%
Net operating loss carryforward with 11.69% 12.47%
no tax benefit realized
Foreign taxes 22.31% 21.53%
3.76% --
======= =======
Effective income tax rate 3.79% 0.03%
======= =======
</TABLE>
F-12
<PAGE> 44
5. INCOME TAXES - CONTINUED
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. As a result of
the Company's continued losses and uncertainties surrounding the realization of
the net operating loss carryforward and other deferred tax assets, management
has determined that the realization of the deferred tax assets is not "more
likely than not." Accordingly, a 100% valuation allowance has been recorded
against the net deferred income tax assets.
At March 31, 2000, the Company has net operating loss carryforwards ("NOL's") of
approximately $15,000,000 and $5,000,000 for federal and state purposes,
respectively. The NOL's are available to offset future taxable income. The
federal NOL's expire in 2007 through 2021, while the state NOL's expire in 2000
through 2006.
The utilization of these NOLs is limited due to restrictions imposed under the
federal and state laws resulting from a change in ownership.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San
Diego Superior Court alleging that the Company breached a 50-year lease relating
to commercial real property located in the Rancho Del Rey Business Center
consisting of approximately 35,000 square feet. The complaint alleges that the
lease was terminated as a result of the Company's failure to perform 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.
OPERATING LEASES
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.
During the years ended March 31, 2000 and 1999, the Company incurred rent
expense under operating leases of approximately $4,705,000 and $4,107,000,
respectively. The Company did not incur any significant percentage rental
expense above the base rental charges during either of the years ended March 31,
2000 and 1999.
F-13
<PAGE> 45
6. COMMITMENTS AND CONTINGENCIES - OPERATING LEASES - CONTINUED
At March 31, 2000, the aggregate future minimum lease payments due under these
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Ending Theater Equipment
March 31, Leases Leases Total
------------- ------------- -------------
<S> <C> <C> <C>
2001 $ 5,486,398 $ 14,771 $ 5,501,169
2002 5,622,834 7,682 5,630,516
2003 5,765,907 - 5,765,907
2004 5,773,778 - 5,773,778
2005 5,844,356 - 5,844,356
Thereafter 71,149,352 - 71,149,352
------------- ------------- -------------
Total minimum lease payments $ 99,642,625 $ 22,454 $ 99,665,079
============= ============= =============
</TABLE>
The commitments in the table above represent the minimum cash payments required
under the leases. For financial statement purposes, rent expense is recorded on
a straight-line basis over the life of the lease. As such, because of lower
lease payments in the early years of the lease terms, financial statement
expense is greater than cash payments. For the years ended March 31, 2000 and
1999, rent expense charged to operations exceeded cash payment requirements by
approximately $668,000 and $721,000, respectively, and resulted in an increase
to the deferred rent liability by the same amount.
7. RELATED PARTY TRANSACTIONS
John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits with
respect to the lease of the Chula Vista 10, and Eileen Seheult the former wife
of Russell Seheult, with respect to certain lease and bank obligations incurred
or guaranteed by Mr. and Ms. Seheult on behalf of the Company) have personally
guaranteed, on a joint and several basis, certain obligations of the Company
pursuant to its theater leases and a mortgage loan. Certain of these obligations
of the Company are secured by real or personal property pledged by such
individuals. The Company has agreed to use its reasonable best efforts to obtain
the releases of Mr. Ellison, Mr. Willits and Mr. Grossberg from their
obligations under any personal guarantees made for the benefit of the Company or
its entities. To date, no such releases have been obtained. As of March 31,
2000, such guaranteed obligations involved aggregate future payments of the
Company totaling approximately $114,000,000.
8. STOCKHOLDERS' EQUITY
COMMON STOCK AND COMMON STOCK WARRANTS
The Company completed a one-for-seven reverse stock split of its Common Stock,
effective December 2, 1998 (See Note 2). The reverse stock split affected the
Company's Common Stock and all options and warrants that are convertible into
the Company's Common Stock. All references to shares included in the financial
statements have been restated to reflect the one-for-seven reverse stock split.
The Company reincorporated in Delaware effective December 1, 1998. As a result,
the Company assigned a par value of $0.01 per share to its common stock.
Previously the Company's common stock had no par value.
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").
F-14
<PAGE> 46
8. STOCKHOLDERS' EQUITY - COMMON STOCK AND COMMON STOCK WARRANTS - CONTINUED
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.
During fiscal year 1999, the aggregate number of shares of common stock issuable
pursuant to the CAP Agreement Warrants increased by 33,674 shares to 1,090,684,
and the exercise price per share with respect thereto decreased to $5.75.
In October 1998, the Company issued 100,000 Warrants to purchase a total of
14,286 shares of Common Stock at an average price per share of $7.88 to The
Equity Group, its former public relations firm.
As of March 31, 1999, the Company had outstanding 4,648,562 Redeemable Warrants
to purchase 1,568,704 shares of the Company's common stock. These Redeemable
Warrants expired on February 6, 2000.
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.
The following table sets forth the number of issuable or outstanding warrants as
of March 31, 2000:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Number of Shares per Price per Common
Warrants Warrants Warrant Share Stock Issuable
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class B Redeemable Warrants 226,438 0.33644 $19.32 76,183
-----------------------------------------------------------------------------------------------
CAP Agreement Warrants 7,399,070 0.14741 $5.75 1,090,684
-----------------------------------------------------------------------------------------------
SCP Warrants 779,194 1.00000 $1.44 779,194
-----------------------------------------------------------------------------------------------
Other Warrants 816,928 0.14286 $5.91 - $52.50 116,705
-----------------------------------------------------------------------------------------------
Total Warrants 9,221,630 0.14286 - 1.0 $1.44 - $52.50 2,062,766
-----------------------------------------------------------------------------------------------
</TABLE>
Certain of the outstanding warrants contain antidilution provisions, as defined
in the applicable warrant agreements.
9. CERTAIN FINANCIAL INFORMATION
OTHER CURRENT ASSETS
Included in other current assets at March 31, 2000 and 1999 was approximately
$183,000 and $189,000, respectively, representing inventory of concession
supplies.
F-15
<PAGE> 47
9. CERTAIN FINANCIAL INFORMATION - CONTINUED
DEPOSITS AND OTHER ASSETS
Included in deposits and other assets at March 31, 2000 and 1999 was
approximately $92,000 and $312,000, respectively, representing the unamortized
portion of a loan origination fee paid with respect to the revolving credit
facility. Through March 31, 1999 the Company was amortizing the fees over the
original 7 year maturity. For fiscal year 2000 the Company has recognized
amortization based on the amended maturity date of December 31, 2000. Also
included in deposits and other assets at March 31, 2000 and 1999 is
approximately $256,000 and $328,000, respectively, representing unamortized
goodwill related to the acquisition of the remaining 25% equity in the Company's
Mexican subsidiary.
ACCRUED LIABILITIES
Included in accrued liabilities at March 31, 2000 and 1999 was approximately
$250,000 and $159,000, respectively, of accrued payroll, and approximately
$172,000 and $128,000, respectively, of accrued property taxes.
SEASONALITY
The Company's revenues are 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 cash flows, and
the results of one quarter are not necessarily indicative of results for
subsequent quarters.
10. STOCK OPTIONS
The Company has a Stock Option Plan, which provides for the granting of
incentive stock options and non-qualified stock options. Shares reserved under
the plan are 412,280 shares. Options generally vest over a period of three
years, at an exercise price determined by the compensation committee, and must
be exercised within ten years from the date of grant.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
March 31, 2000 March 31, 1999
------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of the year 211,644 $ 6.11 157,357 $ 6.19
------------------------------------------------------------------------------------------------------
Cancelled (121,430) $ 6.06 (28,571) $ 6.13
------------------------------------------------------------------------------------------------------
Granted 116,000 $ 1.44 82,857 $ 5.96
------------------------------------------------------------------------------------------------------
End of year 206,214 $ 2.69 211,644 $ 6.11
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Options exercisable at year end 51,643 $ 6.26 58,789 $ 6.29
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
Weighted average fair value of $ 1.44 $ 7.08
options granted during the year
------------------------------------------------------------------------------------------------------
</TABLE>
Information relating to stock options at March 31, 2000 summarized by exercise
price is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Exercise Price Weighted Average Weighted Average
Per Share Shares Life (Years) Exercise Price Shares Exercise Price
-------------- ------- ------------ ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.44 116,000 10.1 $ 1.44 -- --
$ 5.75 21,429 8.9 $ 5.75 7,143 $ 5.75
$ 6.125 68,571 7.7 $ 6.13 44,286 $ 6.13
$ 51.66 214 6.3 $ 51.66 214 $ 51.66
------- ------- ------- ------- -------
$1.44 to $51.66 206,214 9.2 $ 2.69 51,643 $ 6.26
======= ======= ======= ======= =======
</TABLE>
F-16
<PAGE> 48
10. STOCK OPTIONS - CONTINUED
SFAS No. 123 requires the Company to provide pro forma information regarding
results of operations and per share information as if such compensation cost for
the Company's stock option plan had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The Company estimated the fair
value of each stock option at the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 2000 and 1999: 0% dividend yield; expected volatility of 114% and 13%
for 2000 and 1999, respectively; risk free interest rate of 7.25% and 6.00% for
2000 and 1999, respectively; and expected lives of 4 years.
Under the accounting provisions of SFAS No. 123, the Company's net loss and net
loss per share would have been substantially the same as that reflected in the
accompanying consolidated statements of operations.
F-17
