June 24, 1997
Mr. John Ellison, Jr.
Chief Executive Officer
CinemaStar Luxury Theaters, Inc.
431 College Boulevard
Oceanside, California 92057
Dear Mr. Ellison:
This letter expresses our understanding of the intention of Rust Capital,
Ltd. ("Buyer") to acquire from CinemaStar Luxury Theaters, Inc. (the
"Company"), $15.0 million of newly issued common stock (the "Purchase")
subject to the following terms and conditions:
1. PURCHASE OF SHARES. The Shares shall be purchased from Company by
Buyer based upon a $24.0 million aggregate valuation of the Company (the
"Enterprise Value"). For the purpose of determining the number of Shares
issued to Buyer, the Enterprise Value shall be increased by the cash balances
of the Company on-hand as of the closing date and reduced by the aggregate
liabilities of the Company as of the closing date to determine a value net of
liabilities (the "Net Enterprise Value"). For the purpose of this
calculation, cash on-hand shall include the aggregate exercise price of all
options and warrants outstanding as of the closing date. For the purpose of
this calculation, liabilities shall include but not be limited to the amount
of funds necessary to (i) repay the notes owed by the Company to Pacific
Concessions, Inc. ("PCI") including but not limited to principal, interest
and penalties and charges necessary to relieve the Company of any and all
financial and business obligations to PCI, (ii) pay all obligations
pertaining to capital expenditures for which work has been performed or work
is scheduled to be performed, (iii) any and all costs pertaining to the
contemplated spin-off of the Company's business activities in the Republic of
Mexico, (iv) the net present value of all management employment contracts
calculated at a 10.0 percent discount rate, (v) estimated aggregate liability
of any pending or threatened litigation to the extent that such liabilities
can be estimated, (vi) the Company's half of any required Hart-Scott-Rodino
filing fee, as provided below, and (vii) all other debts and obligations of
the Company, for which the Company is required, pursuant to generally
accepted accounting principles, to make an accrual as of the closing date.
RUST CAPITAL, LTD.
327 CONGRESS AVENUE, SUITE 200, AUSTIN, TEXAS 78701;
(512) 482-0806, FAX (512) 474-1610
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 2
The number of Shares issued to Buyer shall be calculated as the greater
of (i) the product of 1.0408 and total number of common stock share
equivalents determined on a fully diluted basis immediately prior to
consummation of the transaction contemplated herein (the "Pre-Closing
Shares), and (ii) the quotient obtained by dividing (x) the product of the
number of Pre-Closing Shares times $15,000,000 by (y) the Net Enterprise
Value. Under no circumstance shall the number of Shares of common stock
issued to Buyer in connection with the Purchase be less than 51.0 percent of
the outstanding capital stock of the Company calculated on a fully diluted
basis after consummation of the transaction contemplated herein.
Subsequent to the closing of the Purchase, the Company shall issue
additional Shares (the "Adjustment Shares") to Buyer as compensation for any
liabilities of the Company which related to events initiated on or prior to
the closing but which were not recognized or formally incurred until
subsequent to closing (the "Undisclosed Liabilities"). Such Undisclosed
Liabilities shall include but not be limited to contingent liabilities
pertaining to the possible outcome of litigation (initiated on, before or
after the closing) in response to acts or omissions of the Company or Company
management on or before the closing of the Purchase. The Undisclosed
Liabilities shall not include any liabilities included in the determination
of Net Enterprise Value pursuant to the first paragraph of this Section 1;
however, Undisclosed Liabilities shall include any increase in the amount of
such liabilities necessary to reflect a true and accurate calculation of such
liabilities. The number of Adjustment Shares issued shall be calculated as
the difference, if any, between (i) the number of Shares that would have been
issued at the closing using the formulas in the preceding paragraph and
assuming that the Net Enterprise Value had been reduced by the amount of the
Undisclosed Liabilities and (ii) the number of Shares that would have been
issued at the closing using the formula in clause (i) or (ii) of the preceding
paragraph that yielded the lesser number of shares when calculated in
relation to the closing.
With respect to any matters giving rise to Undisclosed liabilities, the
three continuing members of the board of directors of the Company (or their
successors) shall direct the resolution of such matters after the closing
date, subject to the approval of the full board of directors, which approval
shall not be unreasonably withheld.
2. USE OF PROCEEDS. The Company will use the proceeds from the
Purchase to make certain capital expenditures related to the development and
expansion of certain theaters; to retire the indebtedness to PCI and certain
other debt; for working capital; and for general corporate purposes to be
agreed upon in advance prior to consummation of the Purchase. In addition,
the proceeds may be used for a fairness opinion of an investment banker to be
selected by the Company, provided that the payment for such fairness opinion
shall not exceed $150,000 and provided further that any payments in excess of
$50,000 shall result in an adjustment to the Enterprise Value.
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 3
3. CONDITIONS. The terms of the Purchase will be set forth in a
definitive agreement mutually acceptable to Buyer and Company containing
customary representations, warranties and covenants of, and indemnities for, a
stock purchase of this kind. The obligation of Buyer to close under the
definitive agreement will be subject to, among other things, Company's
obtaining shareholder approval of any amendments of its Articles of
Incorporation necessary to effect the transactions contemplated herein, the
absence of defaults on the part of the Company pursuant to any material
agreements to which the Company is a party, and the absence of any material
adverse change in the business, financial condition or prospects of the
Company arising after the date of the Company's most recent audited financial
statements and not disclosed to the Buyer prior to the execution of the
definitive agreement. The definitive agreement will contain provisions for a
Break Fee in the amount described in Section 9 below in the event that the
Purchase is not consummated for reasons of the sort set forth in Section 9
below.
The Company will also demonstrate to the satisfaction of Buyer that it
has the flexibility to be released at a cost not to exceed $25,000 in the
aggregate to Buyer or Company from the leases for new theater sites in Kona,
Hawaii and San Bernardino, California (the "New Leases") without liability or
potential liability to the Company, should it desire to do so. Buyer has the
option of requiring the Company to (i) obtain a full release at a cost not to
exceed $25,000 in the aggregate to Buyer or Company from any and all
liabilities associated with the New Leases, or (ii) make payments (the "Lease
Termination Costs") necessary to obtain a release of any and all liabilities
associated with the New Leases. In the event that the Company pays Lease
Termination Costs, such payments shall be treated as a liability or
Undisclosed Liability for the purpose of calculating the number of Shares
issued to Buyer pursuant to Section 1 of this letter of intent.
4. SCHEDULE. The Buyer shall prepare and deliver drafts of the
definitive agreement to the Company as soon as reasonably practical.
The Company shall obtain shareholder approval of the contemplated
Purchase on or before August 28, 1997. The Closing of the Purchase shall
occur on or before August 29, 1997. If the Securities and Exchange Commission
shall make written comments to the proxy materials submitted by the Company
relating to the meeting of shareholders called for the purpose of obtaining
such approval and related amendments to the Company's articles of
incorporation, and by reason of such comments the Company is delayed in
releasing final proxy materials for a period in excess of ten business days,
the date for shareholder approval shall be extended to September 12, 1997,
and the date for the Closing of the Purchase shall be extended to September
13, 1997.
Buyer shall have no obligation to continue negotiations with Company, to
enter into any definitive agreement with Company, or to consummate the
Purchase or any of the other transactions contemplated herein unless Buyer,
in its sole discretion, is satisfied with the results of all due diligence
investigations that it deems necessary. The due diligence
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 4
period shall begin immediately following the execution of this letter of
intent and shall extend until July 15, 1997. At the end of the due diligence
period Buyer will advise Company in writing whether Buyer will proceed or
terminate negotiations. Negotiation of a definitive agreement will occur
simultaneously with the due diligence period. Upon execution of the
definitive agreement, the Company will promptly file with the SEC and send to
shareholders any notice required by Rule 14f-1 under the Securities Exchange
Act of 1934 and, upon the expiration of any waiting period required by such
rule and funding of the Bridge Loan, the Company's Board of Directors will be
reconstituted with four representatives of Buyer and three continuing
directors. Insiders will grant proxies to Buyer, and upon reconstitution of
the Board Buyer will fund the bridge loan described in Section 10 herein.
Buyer and the Company will split the cost of any filing fees required
under the Hart-Scott-Rodino Antitrust Improvements Act; provided that, the
Company's half of any such fees shall be a reduction to the overall valuation
of the Company for purposes of Section 1 above.
5. OPERATION OF THE BUSINESS. Until the earliest to occur of (i)
written notice from Buyer to the Company that Buyer is not satisfied with the
results of the due diligence investigation referenced in paragraph 4 above
and has determined to terminate negotiations, (ii) execution of a definitive
agreement for the Purchase, and (iii) July 15, 1997, the Company shall
conduct the business in the ordinary course consistent with previous
practices, and will not make any material change therein, other than the
repayment of unaffiliated third party debt, or incur any material liabilities
in connection therewith other than liabilities incurred in the ordinary
course of business consistent with previous practices and not exceeding
$100,000 in the aggregate, without Buyer's prior consent, such consent not to
be unreasonably withheld.
6. EXPENSES. Each party hereto shall be responsible for all costs and
expenses incurred by such party in connection with the negotiation,
documentation and consummation of the Purchase.
7. ACCESS. The Company shall afford to Buyer, its counsel, accountants
and other representatives, free and full access to all of the offices,
facilities, properties, equipment, inventories, books, contracts,
commitments, records, customer information, list of employees and records,
and other relevant records of the Company during normal business hours and
shall furnish such persons with all information (including financial and
operating data) concerning the business, assets and financial condition of
the Company as Buyer shall reasonably request, and the Company shall assist
Buyer, its counsel, accountants and representatives, in their examination of
such materials.
8. CONFIDENTIALITY. Buyer agrees that any information or material that
is obtained from the Company will be used solely for the purposes of
evaluating the Business and the Company in connection with the transactions
contemplated hereby. Buyer agrees
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 5
that it and its representatives will not disclose any information which they
receive from the Company to any third party, except as required by applicable
law or legal process, without the prior written consent of the Company;
provided, however, that any such information may be disclosed by Buyer to
Buyer's representatives when they need to know such information for the
purposes of preparing for and evaluating the Purchase. Buyer agrees that if
the Purchase contemplated herein is not consummated for any reason, Buyer
shall return or destroy all materials received from the Company or to the
party furnishing such material. Buyer acknowledges that Company is a public
reporting Company and it has not and will not buy or sell the Company's
securities. The Company will issue a press release, to be mutually agreed
upon with Buyer, upon execution of this letter of intent.
9. EXCLUSIVITY. Company shall immediately cease and cause to be
terminated any existing discussions or negotiations with any persons
conducted heretofore with respect to any merger, financing (other than any
financing in the ordinary course of business consistent with previous
practices not to exceed $100,000 in the aggregate and not involving the
issuance of securities convertible into or exchangeable or exercisable for
Company securities), consolidation, sale of substantial assets, sale of
shares of capital stock (including without limitation by way of a tender
offer) or similar transaction involving the company or any of its
subsidiaries, as the case may be (any of the foregoing inquiries or proposals
other than the Purchase and the Bridge Loan contemplated hereby arising prior
to July 15, 1997 (whether initiated before or after the date of this letter
of intent) being referred to as an "Acquisition Proposal"). From the date of
this letter of intent until the earlier of the date Buyer advises Company of
its intention to terminate negotiations as provided in Section 4 above, and
July 15, 1997 (the "Exclusivity Period"), the Company shall not, directly or
indirectly, through any of its officers, directors, employees,
representatives or agents, initiate, solicit or encourage the initiation of,
any inquiries or proposals regarding any Acquisition Proposal. Nothing
contained in this Section 9 shall prevent the Board of Directors of the
Company from considering, negotiating, approving and recommending to the
stockholders of the Company a bona fide Acquisition Proposal, provided that
the Board of Directors determines in good faith (upon advice of independent
counsel) that it is required to do so in order to discharge properly its
fiduciary duties, and provided further that any such action by the Board of
Directors will give rise to the obligation of the Company to pay the Break
Fee described below in the event the Company completes a transaction with a
party other than Buyer as a result of such Acquisition Proposal.
In the event Buyer advises Company of its intention to continue
negotiations after its completion of due diligence review in accordance with
Section 4 above, and Buyer and Company enter into a definitive agreement,
such definitive agreement shall provide for a Break Fee on substantially the
same terms as are set forth in this letter of intent.
Company shall immediately notify Buyer after receipt of any Acquisition
Proposal, or any modification of or amendment to any Acquisition Proposal, or
any request for nonpublic information relating to Company in connection with
an Acquisition Proposal or
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 6
for access to the properties, books or records of Company by any person or
entity that informs the Board of Directors that it is considering making, or
has made, an Acquisition Proposal.
Company will ensure that its officers, directors and employees and any
investment banker or other representative or adviser retained by it are aware
of the restrictions imposed by this Section 9.
Company shall pay to Buyer a fee (the "Break Fee") of $600,000 within
ten days of the first to occur of any of the following:
(a) if Company breaches any of the provisions set forth in the first
paragraph of Section 9;
(b) if Company fails during the Exclusivity Period to enter into a
definitive agreement with Buyer for a transaction on substantially the terms
set forth in this letter of intent, provided that Buyer has negotiated in
good faith, that Buyer has waived its due diligence condition, and provided
further that Buyer has presented to the Company for its execution a
definitive agreement on substantially the terms set forth in this letter of
intent and otherwise containing only customary representations, warranties
and covenants of, and indemnities for, a stock purchase of the kind
contemplated herein (provided that, to the extent that, during the
negotiation of the definitive agreement, Buyer has proposed and Company has
agreed to the inclusion in the definitive agreement of any provision, such
provision shall be deemed to be customary);
(c) if Buyer and Company enter into a definitive agreement and the
approval of Company shareholders to such agreement and any required
amendments to the Company's Articles of Incorporation is not received on or
before August 28, 1997 (or, if extended as provided above, September 12,
1997); or
(d) if on or before June 30, 1998, the Company consummates a transaction
pursuant to an Acquisition Proposal arising prior to (including any such
Acquisition Proposal arising prior to the execution of this letter agreement)
or during the Exclusivity Period with a party other than Buyer.
10. BRIDGE LOAN. Buyer will provide to Company a loan (the "Bridge
Loan") in the amount of $2.0 million concurrent with the signing of a
definitive agreement for the Purchase. The Bridge Loan, which will be subject
to the execution of legal documentation mutually acceptable to Buyer and
Company, shall have the following terms and conditions:
(a) The term of the Bridge Loan shall be six months with all outstanding
principal and interest due and payable at the closing of the definitive
agreement for the Purchase. The principal amount of the Bridge Loan shall be
convertible into 2.0 million shares of the Company's common stock.
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 7
(b) Interest shall accrue at the lesser of 14.0 percent per annum or the
highest rate allowed by applicable law.
(c) Concurrent with the funding of the Bridge Loan, the Company shall
issue to Buyer (i) a warrant (the "First Warrant") to purchase 1.0 million
shares of the Company's common stock, and (ii) a second warrant (the "Second
Warrant") to purchase 1.5 million shares of the Company's common stock. The
Second Warrant may not be exercised prior to August 29, 1997, and will be
canceled upon closing of the definitive agreement for the Purchase or if the
Company terminates the definitive agreement prior to its closing due to a
default on the part of Buyer. The exercise price per share under each warrant
shall be equal to the lesser of (i) $1.13 per share, or (ii) the average
closing price of the Company's common stock as quoted on National Association
of Securities Dealer's Automated Quotation System for the five trading days
prior to the date on which the Bridge Loan is funded. If the Purchase is not
consummated, the Company will agree not to issue other shares until it has
obtained authorization for issuance of shares sufficient for exercise of all
warrants and conversion of the principal amount of the Bridge Loan. The
Company shall grant to Buyer full demand registration rights with regards to
the underlying shares of Company common stock to be issued upon execution of
both warrants and all shares issuable upon conversion of the Bridge Loan.
(d) The Bridge Loan shall be secured with a second lien (a third lien
with respect to the Chula Vista 6 lease) on all of the assets of the Company,
including but not limited to all leases.
(e) The terms of the Bridge Loan shall contain representations,
warranties and covenants customary for a transaction of this type. Prior to
repayment of all outstanding principal and interest owed on the Bridge Loan,
the Company, without the express written consent of the Buyer, shall not (i)
incur any new indebtedness except for trade payables incurred in the normal
course of business, (ii) modify or otherwise change the by-laws or Articles
of Incorporation of the Company or any of its affiliates except as
contemplated by this letter of intent, (iii) enter into or modify any
employment agreements, (iv) pledge, mortgage or otherwise encumber any of the
assets of the Company, (v) enter into any agreements for the settlement of
debts or litigation, (vi) enter into any contracts, leases or agreements
having a term in excess of six months and a monthly payment obligation of in
excess of $5,000 per month, (vii) take any actions detrimental to the ability
of the Company to repay the Bridge Loan, (viii) issue any new shares of
capital stock of the Company, or (ix) take any actions to diminish the value
of the Buyer's collateral.
(f) Upon default by the Company, the Buyer shall have remedies which
include but are not limited to the following:
(1) Foreclosure of any and all collateral, and
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 8
(2) The right to appoint a majority of the Board of Directors of
the Company.
(g) Company shall as a condition to the making of the Bridge Loan
provide Buyer with such assurance as Buyer may reasonably require that the
Bridge Loan will not violate any applicable usury or similar laws.
(h) Company may at its option reduce the amount of the Bridge Loan, in
such event, the number of shares of Company common stock covered by the
warrants to be issued to Buyer pursuant to paragraph 10(c) above shall be
reduced in the same proportion as the reduction in the principal amount of
the Bridge Loan.
11. MEXICAN OPERATIONS. During the due diligence period Buyer will
evaluate the Mexican operations of the Company and consider a sale of the
existing Mexican operations to John Ellison and certain other existing
CinemaStar management personnel. In the event that Buyer determines to permit
such a sale, the sale will be effected by an agreement to be negotiated
between the Company and such Company personnel, subject to the approval of
the terms of such agreement by Buyer.
12. BOARD OF DIRECTORS. The Company's board of directors will be
reconstituted to reflect Buyer's ownership of a majority of the Company's
shares.
13. BINDING LAW; ARBITRATION. To the extent that the foregoing
provisions are intended to be binding upon the parties, (i) any dispute
arising under such binding provisions shall be resolved exclusively by
arbitration to take place in the state of Delaware; (ii) such binding
provisions shall be governed by the laws of the State of Delaware, without
regard to conflict of laws principles, and (iii) the parties hereby consent
to the personal jurisdiction of such courts in respect of disputes regarding
such binding provisions. Company shall not assert as a defense to the payment
of the Break Fee that the provisions of this letter of intent concerning the
Break Fee are unenforceable due to vagueness. Any dispute between Company and
Buyer with respect to any provision intended to be binding hereunder shall be
resolved by arbitration. Buyer and Company shall each appoint an arbitrator,
and such arbitrators shall appoint a third arbitrator. The decision of a
majority of the three arbitrators shall be binding. Such arbitration shall
take place in the state of Delaware at such place as a majority of the
arbitrators shall agree, and shall be conducted in accordance with the rules
of the American Arbitration Association or such other rules as the
arbitrators may agree upon by majority vote.
14. Buyer may assign its rights hereunder to any entity controlling,
controlled by or under common control with Buyer, which assignment shall not
require the consent of the Company.
Except for paragraphs 5 to 9 above inclusive and 13 and 14 (which shall
be binding on the parties hereto), the foregoing provisions of this letter is
only an expression of the
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 9
mutual intention of Buyer and the Company and shall not constitute any
binding agreement of the parties hereto. Except with respect to paragraphs 5
to 9 above inclusive and 13 and 14, no binding agreement between the parties
shall arise except upon execution and delivery of the definitive agreement
referred to in paragraph 3 hereof. In the event a definitive agreement is not
executed on or prior to July 15, 1997, this agreement shall terminate except
for the provisions of paragraphs 6, 8, 9, 13 and 14, which shall survive.
CinemaStar Luxury Theaters, Inc.
June 20, 1997
Page 10
Please indicate your acceptance of the proposal by executing this letter
in the space provided below, and then returning an executed copy to me at the
address below no later than 5:00 p.m., PDT, on June 24, 1997.
Very truly yours,
RUST CAPITAL, LTD.
By: Rust Investment Corporation
Its: General Partner
By: /s/ JACK R. CROSBY
-------------------------------
Jack R. Crosby, President
Acknowledged, accepted and agreed to on this __ day of June 1997 by:
CINEMASTAR LUXURY THEATERS, INC.
By: /s/ JOHN ELLISON, JR.
-------------------------------
Its: PRESIDENT
-------------------------------
/s/ALAN GROSSBERG
-------------------------------
Senior V.P.