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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File Number 0-25252
CINEMASTAR LUXURY THEATERS, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 33-0451054
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
12230 EL CAMINO REAL, SUITE 320,
SAN DIEGO, CA 92130
(Address of principal executive offices) (Zip Code)
(858) 509-2777
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Common stock, $0.01 par value: 3,864,986 shares outstanding as of
February 14, 2000.
Transitional Small Business Disclosure Format. (check one):
YES [ ] NO [X]
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CINEMASTAR LUXURY THEATERS, INC.
TABLE OF CONTENTS
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
December 31, 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations
for the three and nine months ended
December 31, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31,
1999 and 1998 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults in Senior Securities 13
Item 4. Submission of Matters to a Vote of Securities Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
December 31,
1999
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,714,771
Prepaid expenses 281,275
Other current assets 301,926
--------------
TOTAL CURRENT ASSETS 2,297,972
Property and equipment, net 14,190,711
Deposits and other assets 824,378
--------------
TOTAL ASSETS $ 17,313,061
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease
obligations $ 3,100,763
Accounts payable 1,253,894
Accrued liabilities 979,154
Deferred revenue 540,109
--------------
TOTAL CURRENT LIABILITIES 5,873,920
Long-term debt and capital lease obligations,
net of current portion 1,698,087
Deferred rent liability 4,344,617
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TOTAL LIABILITIES 11,916,624
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STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value;
authorized shares 20,000,000;
issued and outstanding shares 3,864,986 38,650
Additional paid-in capital 26,216,172
Accumulated deficit (20,858,385)
--------------
TOTAL STOCKHOLDERS' EQUITY 5,396,437
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,313,061
==============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months ended December 31, Nine Months ended December 31,
------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Admissions $ 4,449,305 $ 4,663,484 $ 15,183,498 $ 15,252,824
Concessions 1,915,960 1,955,625 6,322,259 6,408,881
Other operating revenues 166,705 168,000 506,902 503,181
---------------- ---------------- ----------------- ------------------
TOTAL REVENUES 6,531,970 6,787,109 22,012,659 22,164,886
---------------- ---------------- ----------------- ------------------
COSTS AND EXPENSES:
Film rental and booking costs 2,421,817 2,474,677 8,365,097 8,153,080
Cost of concession supplies 338,221 328,958 1,159,409 1,382,174
Theater operating expenses 3,419,401 3,050,919 9,638,183 9,260,200
Selling, general and administrative expenses 798,790 897,366 2,368,314 2,382,818
Depreciation and amortization 603,303 613,969 1,800,188 1,727,724
---------------- ---------------- ----------------- ------------------
TOTAL COSTS AND EXPENSES 7,581,531 7,365,889 23,331,191 22,905,996
---------------- ---------------- ----------------- ------------------
OPERATING LOSS (1,049,562) (578,780) (1,318,532) (741,110)
OTHER INCOME (EXPENSE):
Interest expense (135,076) (91,442) (344,018) (246,574)
Interest income 13,562 30,292 53,821 108,712
---------------- ---------------- ----------------- ------------------
TOTAL OTHER EXPENSE (121,515) (61,150) (290,197) (137,862)
---------------- ---------------- ----------------- ------------------
LOSS BEFORE PROVISION FOR INCOME TAXES
INCOME TAXES (1,171,076) (639,930) (1,608,729) (878,972)
PROVISION FOR INCOME TAXES - - - (1,600)
---------------- ---------------- ----------------- ------------------
NET LOSS (1,171,076) (639,930) $ (1,608,729) $ (880,572)
================ ================ ================= ==================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.30) $ (0.17) $ (0.42) $ (0.24)
================ ================ ================= ==================
WEIGHTED AVERAGE SHARES 3,864,986 3,864,986 3,864,986 3,737,725
================ ================ ================= ==================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months ended December 31,
--------------------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,608,729) $ (880,572)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,800,189 1,727,724
Deferred rent expense 446,126 557,081
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (45,481) (54,573)
Deposits and other assets 4,011 (8,273)
Accounts payable 282,915 (464,557)
Accrued and other liabilities (936) (22,349
------------------ -------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 878,095 854,481
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of minority interest in consolidated subsidiary - (337,146)
Purchases of property and equipment (4,216,185) (575,668)
------------------ -------------------
NET CASH USED IN INVESTING ACTIVITIES (4,216,185) (912,814)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 3,000,000 -
Principal payments on long-term debt and capital
lease obligations (167,537) (300,769)
Payment of debt issuance costs - (376,406)
------------------ -------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,832,463 (677,175)
------------------ -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (505,627) (735,508)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,220,396 3,481,978
------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,714,771 $ 2,746,470
================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 208,099 $ 232,878
================== ===================
Income taxes $ - $ 1,600
================== ===================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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CINEMASTAR LUXURY THEATERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
NOTE 1
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. For further
information, refer to the audited consolidated financial statements for the
fiscal year ended March 31, 1999 and footnotes thereto, included in the
Company's Annual Report on Form 10-KSB which was filed with the Securities and
Exchange Commission. Operating results for the three and nine month periods
ended December 31, 1999 are not necessarily indicative of the results of
operations that may be expected for the year ending March 31, 2000.
NOTE 2
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") issued by the FASB
establishes accounting and reporting standards for derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The effective date for the adoption of SFAS No.
133 was extended to fiscal years beginning after June 15, 2000 with the issuance
of SFAS No. 137. The Company currently expects to adopt the provisions of SFAS
No. 133 on April 1, 2001.
NOTE 3
Certain reclassifications have been made to the December 31, 1998 financial
statements to conform to the December 31, 1999 presentation.
NOTE 4
Basic and diluted net income (loss) per share are computed by dividing net loss
by the weighted average number of common shares outstanding during the years.
Potentially dilutive securities consist of outstanding stock options and
warrants, and are not included in the computation as their inclusion would be
anti-dilutive. All per share information and references to the number of shares
outstanding included herein have been adjusted to reflect the one-for-seven
reverse stock split of the Company's common stock, effected on December 2, 1998.
NOTE 5
On September 23, 1997, the Company entered into a definitive agreement (the "CAP
Agreement") with CinemaStar Acquisition Partners, L.L.C. ("CAP") and Reel
Partners L.L.P. ("Reel") whereby Reel provided $3,000,000 of interim debt
financing (the "Bridge Loan") and CAP provided $15,000,000 of equity financing
(the "Equity Financing").
Pursuant to the terms of the CAP Agreement, the Company was and continues to be
obligated to issue additional shares of Common Stock (the "Adjustment Shares")
to CAP. The number of Adjustment Shares to be issued is based upon (i) the
recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain
expenses incurred and paid by the Company in connection with the contemplated
transactions, (iii) any negative cash flow incurred by the Company during the
period commencing August 31, 1997 and ending December 15, 1997, and (iv)
operating losses experienced by, or costs of closing, the Company's Plaza
Americana 10 facility in Tijuana (now in full operation and achieving operating
profits) and San Bernardino Facility which opened in December 1999. The
measurement of the operating losses and/or closing costs for the two facilities
is cumulative, calculated in the aggregate and will take place on the earlier to
occur of the closing of each such facility or December 15, 2000. The Company
issued 193,037 Adjustment Shares to CAP pursuant to the terms of the CAP
Agreement, in September 1998. To the extent there are (a) operating losses at
the Company's Tijuana and San Bernardino facilities, calculated in the
aggregate, for the
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three-year period ended December 15, 2000, and (b) expenditures in connection
with the discovery of liabilities, or defense and/or settlement of claims, in
either case relating to periods prior to August 31, 1997, the Company will be
obligated to issue additional Adjustment Shares.
NOTE 6
On October 19, 1998, the Company signed a $15 million Seven-Year Revolving
Credit Agreement with a senior, secured lender. The terms of the agreement were
modified in March 1999. This facility will be used primarily to finance the
Company's future developments in accordance with the terms and conditions of the
Revolving Credit Facility. The Company has borrowed $3,000,000 against this
facility as of December 31, 1999 and had used the facility to secure two standby
letters of credit, with initial terms of one year, totaling $2,275,000, issued
in accordance with the terms of its lease (as amended) on the San Bernardino
20-screen facility, which opened in December, 1999. The $2,000,000 standby
letter of credit was cancelled as of December 10, 1999 in accordance with the
lease terms on the San Bernardino 20-screen facility. Commitment and other fees
associated with the Revolving Credit Agreement and the standby letters of
credit, totaling approximately $380,000, are included in Other Assets and are
being amortized over their respective terms.
As of December 31, 1999 the Company was not in compliance with certain of the
covenants contained in its Revolving Credit Facility, and as a result, the
Company is not currently able to borrow against the facility. Management is in
discussions with the lender in order to obtain a waiver and to modify the
agreement. A definitive agreement to waive the December 31, 1999 covenant
violations and to modify the Revolving Credit Facility has not been reached as
of this date. Although management expects an agreement will be reached and the
lender has not attempted to accelerate the due date of any payment obligation
of the Company under the Revolving Credit Facility, the outstanding borrowings
against the facility of $3,000,000 as of December 31, 1999 have been classified
as a current liability in the accompanying consolidated balance sheet.
Management is also in negotiations with its principal shareholder to obtain an
equity infusion of $3.5 million, most likely from the sale of convertible
preferred stock. The proceeds from this equity transaction will be used to
reactivate the Company's Revolving Credit Facility, to fund theater
development, and to meet seasonal working capital requirements.
NOTE 7
The Company purchased on November 23, 1998 the remaining 25% minority interest
in the Company's Mexican subsidiary, CinemaStar Luxury Theaters, S.A. de C.V.,
for approximately $340,000. This amount is included in Other Assets and is being
amortized over a seven-year period.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Condensed Consolidated Financial Statements and notes thereto included
elsewhere in this Form 10-QSB. Except for the historical information contained
herein, the discussion in this Form 10-QSB contains certain forward looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Form 10-QSB should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-QSB.
Where possible, the Company uses words like "believes", "anticipates",
"expects", "plans" and similar expressions to identify such forward looking
statements. The Company's actual results could differ materially from those
discussed here. Factors, risks and uncertainties that could cause or contribute
to such differences include the availability of marketable motion pictures, the
increase of revenues to meet long-term lease obligations and rent increases,
risks inherent in the construction of new theaters, the ability to secure new
locations on favorable terms, intense competition in the industry, dependence on
concession sales and suppliers, earthquakes and other natural disasters and
costs associated with potential changes in management and disputes related
thereto.
At April 1, 1999 the Company had eight theater locations with a total of 79
screens. At December 31, 1999 the Company had nine theater locations with a
total of 99 screens. The increase was due to the opening of a 20 screen
multi-plex theater in San Bernardino, California in December 1999. The Company
operates one business segment. Such segment has operations in two geographic
regions, California and Northern Mexico. For the nine months ended December 31,
1999 total revenues were $18,204,837 in California and $3,807,822 in Northern
Mexico, compared to $18,567,639 and $3,597,247 for California and Northern
Mexico respectively in the nine months ended December 31, 1998. Total assets for
the California and Northern Mexico regions as at December 31,1999 were
$17,377,904 and $586,685, respectively.
The Company has had significant net losses in each fiscal year of its
operations, including net losses of $1,586,372 and $7,932,011 and in the fiscal
years ended March 31, 1999 and 1998, respectively. Further, the Company has
incurred losses of $1,171,076 and $1,608,729 for the three and nine month
periods ended December 31, 1999. There can be no assurance as to whether or when
the Company will achieve profitability. Any substantial profitability will
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depend, among other things, on the Company's ability to continue to grow its
operations through the addition of new screens and its ability to maintain
adequate financing. The Company is not in compliance with certain covenants of
its credit agreement. See Liquidity.
The Company has entered into an agreement for a four-screen expansion to an
existing theater in Riverside, California. The four-screen addition is currently
under construction, and is anticipated to be substantially completed in March
2000. Additionally, the Company has entered into discussions and/or negotiations
regarding the development of other theater complexes in the United States and
the Republic of Mexico. The building of these and other new theater complexes is
subject to many contingencies, many of which are beyond the Company's control,
including consummation of site purchases or leases, receipt of necessary
government approvals, negotiation of acceptable construction agreements, the
availability of financing and timely completion of construction. No assurances
can be given that the Company will be able to successfully build, finance or
operate any of the new theaters presently contemplated or otherwise.
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1998.
Total revenues for the three months ended December 31, 1999 decreased 3.8% to
$6,531,970 compared to $6,787,109 for the prior comparable period. Admission
revenues decreased by $214,179 or 4.6%, and concession sales and other operating
revenues decreased by $40,960, or 1.9%. The decrease in admissions revenues is
attributable to a decline in paid attendance, partially offset by an increase in
average ticket price. Domestic average ticket price for the fiscal three months
ended December 31, 1999 increased by 6.1% to $5.02 compared to the prior
comparable period. International average ticket price for the three months ended
December 31, 1999 increased 18.2% to $3.08 compared to the prior comparable
period. Domestic attendance declined 11.8% to 731,138 and international
attendance declined 11.4% to 253,171 for the three months ended December 31,
1999 compared to the prior comparable period. Domestic per capita concession
revenues for the fiscal three months ended December 31, 1999 increased 6.6% to
$1.98 compared to the prior comparable period. International per capita
concession revenue for the three months ended December 31, 1999 increased 21.8%
to $1.71 compared to the three months ended December 31, 1998.
Film rental and booking costs for the three months ended December 31, 1999
decreased 2.1% to $2,421,817 compared to $2,474,677 for the previous fiscal
year's third quarter. As a percentage of admission revenues, film rental and
booking costs increased to 54.4% for the three months ended December 31, 1999
from 53.1% for the prior comparable period, due to the timing and terms of new
releases in this year's third quarter compared to the prior year.
Cost of concession supplies for the three months ended December 31, 1999
increased 2.8% to $338,221 from $328,958 for the previous year. As a percentage
of concession revenues, cost of concession supplies increased to 17.7% from
16.8% in the three months ended December 31, 1999 compared to the previous year,
due to increases in vendor concession costs.
Theater operating expenses for the three months ended December 31, 1999
increased 15.0% to $3,419,401 compared to $2,972,919 for the previous year. This
increase was due, in part, to the opening of the new theater in December 1999.
As a percentage of total revenues, theater operating expenses increased 8.5% to
52.3% for the three months ended December 31, 1999 compared to 43.8% for the
prior year.
Selling, general and administrative expenses for the three months ended December
31, 1999 decreased 18.1% to $798,790 compared to $975,366 for the previous year.
As a percentage of total revenues, selling, general and administrative costs
decreased to 12.2% from 14.4% due in part to continued cost cutting measures.
Depreciation and amortization for the three months ended December 31, 1999
decreased 1.7% to $603,303 compared to $613,969 for the previous year, due, in
part, to the write off of replaced equipment in the prior year.
Interest expense for the fiscal three months ended December 31, 1999 increased
47.7% to $135,076 compared to $91,442 for the previous year. This increase is
primarily due to the amortization of fees and interest on borrowings related to
the Company's line of credit to fund development of a new theater and expansion
of an existing theater.
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Interest income for the three months ended December 31, 1999 decreased to
$13,562 from $30,292 for the three months ended December 31, 1998. This decrease
is attributable to changes in cash balances.
As a result of the above factors, the net loss for the three months ended
December 31, 1999 was $1,171,076 compared to net loss of $639,930 for the three
months ended December 31, 1998.
NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1998.
Total revenues for the nine months ended December 31, 1999 decreased 3.8% to
$22,012,659 compared to $22,164,886 for the prior comparable period. Admission
revenues decreased by $69,326 or 0.5%, and concession sales and other operating
revenues decreased by $82,902, or 1.2%. The decrease in admissions revenues is
attributable to a decline in paid attendance partially offset by an increase in
average ticket prices. Domestic average ticket price for the fiscal nine months
ended December 31, 1999 increased by 2.2% to $4.91 compared to $4.80 for the
prior comparable period. International average ticket price for the nine months
ended December 31, 1999 increased 18.8% to $2.95 compared to $2.48 for the prior
comparable period. Domestic attendance declined 3.2% to 2,612,499 and
international attendance declined 13.4% to 799,056 for the nine months ended
December 31, 1999 compared to the prior comparable period. Domestic per capita
concession revenues for the fiscal nine months ended December 31, 1999 decreased
3.5% to $1.82 compared to the prior comparable period. International per capita
concession revenue for the nine months ended December 31, 1999 increased 24.9%
to $1.68 compared to the nine months ended December 31, 1998.
Film rental and booking costs for the nine months ended December 31, 1999
increased 2.6% to $8,365,097 compared to $8,153,080 for the previous fiscal
year's first nine months. As a percentage of admission revenues, film rental and
booking costs increased to 55.1% for the nine months ended December 31, 1999
from 53.5% for the prior comparable period, due to the timing and terms of new
releases in this year's first nine months compared to the prior year.
Cost of concession supplies for the nine months ended December 31, 1999
decreased 16.1% to $1,159,409 from $1,382,174 for the previous year. As a
percentage of concession revenues, cost of concession supplies decreased to
18.3% from 21.6% in the nine months ended December 31, 1999 compared to the
previous year, due in part to the termination of concession lease agreements
with PCI, the Company's former primary concession vendor. As of June 15, 1998,
the Company ceased the purchase of concession supplies and services from PCI and
began purchasing concessions supplies on a competitive basis.
Theater operating expenses for the nine months ended December 31, 1999 increased
6.8% to $9,638,183 compared to $9,026,200 for the previous year. This increase
was due, in part, to increases in federally mandated minimum wages and the
opening of the new theater. As a percentage of total revenues, theater operating
expenses increased 3.1% to 43.8% for the nine months ended December 31, 1999
compared to 40.7% for the prior year.
Selling, general and administrative expenses for the nine months ended December
31, 1999 decreased 9.5% to $2,368,314 compared to $2,616,818 for the previous
year due in part to continuing cost cutting measures. As a percentage of total
revenues, selling, general and administrative costs decreased to 10.8%
from 11.8%.
Depreciation and amortization for the nine months ended December 31, 1999
increased 4.2% to $1,800,188 compared to $1,727,724 for the previous year, due,
in part, to amortization of goodwill associated with the purchase of the
remaining 25% equity interest in the Company's Mexican subsidiary in the third
quarter of fiscal year 1999.
Interest expense for the fiscal nine months ended December 31, 1999 increased
39.5% to $344,018 compared to $246,574 for the previous year. This increase is
primarily due to the amortization of fees and interest on borrowings related to
the Company's line of credit to fund development of a new theater and expansion
of an existing theater.
Interest income for the nine months ended December 31, 1999 decreased to $53,821
from $108,712 for the nine months ended December 31, 1998. This decrease is
attributable to changes in cash balances.
As a result of the above factors, the net loss for the nine months ended
December 31, 1999 was $1,608,729 compared to $880,572 for the nine months
ended December 31, 1998.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's revenues are collected in cash, principally through box office
admissions and concession sales. Because its revenues are received in cash prior
to the payment of related expenses, the Company has an operating "float" which
partially finances its operations.
The Company's capital requirements arise principally in connection with new
theater openings and acquisitions of existing theaters. In the past, new theater
openings have been financed with internally generated cash flow, long-term debt
financing or leasing arrangements of facilities and equipment, the offering to
the public of equity securities and the private placement of convertible
debentures. During fiscal 1998, however, the Company determined that it lacked
the resources necessary to finance its current capital obligations through
traditional sources and sought additional capital through alternative financing
sources. On September 23, 1997, the Company signed the CAP Agreement for CAP to
acquire a majority equity interest in the Company through a $15 million purchase
of newly issued shares of the Company's Common Stock. Following stockholder
approval, the Equity Financing transaction was completed on December 15, 1997.
Pursuant to the CAP Agreement, CAP purchased 2,526,352 shares of Common Stock
for a purchase price of $5.94 per share. CAP also received, at closing, warrants
to purchase 232,947 shares of Common Stock at an exercise price of $5.94 per
share. Pursuant to the terms of the CAP Agreement, the Company has and continues
to be obligated to issue Adjustment Shares to CAP. The number of Adjustment
Shares to be issued is based upon (i) the recognition of any liabilities not
disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the
Company in connection with the contemplated transactions, (iii) any negative
cash flow incurred by the Company during the period commencing August 31, 1997
and ending December 15, 1997, and (iv) operating losses experienced by, or costs
of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full
operation and achieving operating profits) and San Bernardino Facility which
opened in December 1999. The measurement of the operating losses and/or closing
costs for the two facilities is cumulative, calculated in the aggregate and will
take place on the earlier to occur of the closing of each such facility or
December 15, 2000. The Company issued 193,037 Adjustment Shares to CAP pursuant
to the terms of the CAP Agreement, in September 1998. To the extent there are
(a) operating losses at the Company's Tijuana and San Bernardino facilities,
calculated in the aggregate, for the three-year period ended December 15, 2000,
and (b) expenditures in connection with the discovery of liabilities, or defense
and/or settlement of claims, in either case relating to periods prior to August
31, 1997, the Company will be obligated to issue additional Adjustment Shares.
The Company leases eight theater properties and various equipment under
non-cancelable operating lease agreements which expire through 2025 and require
various minimum annual rentals. In December the Company opened for business a
new 20 screen leased multi-plex theater in San Bernardino, California. At
December 31, 1999, the aggregate future minimum lease payments due under
non-cancelable operating leases was approximately $126,200,000. In addition, the
Company has signed a lease agreement for the expansion by 4 screens of an
existing theater in Riverside, California. The lease for the Riverside expansion
will require expected minimum rental payments aggregating approximately
$9,300,000 over the 22-year life of the lease. Accordingly, existing minimum
lease commitments as of March 31, 1999 plus those expected minimum commitments
for the proposed theater location and theater expansion, would aggregate minimum
lease commitments of approximately $135,500,000.
Under the terms of the San Bernardino lease, the Company constructed and
equipped the theater building. Costs to the Company to complete and equip the
San Bernardino Facility were approximately $4,500,000, of which the Company has
already paid approximately $3,100,000. Although the theater is open for
business, the Company, the developer, and contractor are still in the process of
completing the final construction "punch lists", meeting certain city
requirements, and authorizing final payments. The landlord committed under the
lease to make available a tenant allowance of approximately $9,200,000 to
reimburse the Company for a portion of the cost of constructing and equipping
the complex. While the landlord has met its financing commitments to date to
fund its tenant improvement allowance to the Company, its ability to fund the
balance of the tenant improvement allowance is dependant upon its lender
adhering to the terms of their financing commitments. Therefore, there can be no
assurance that the Company will be able to receive adequate funds from the
landlord to complete the construction of the project. The Company has executed a
fixed-price construction contract with a general contractor, for the
construction of the theater project. The Company is obligated to pay the
contractor the full amount due under the contract whether or not the Company
receives reimbursement from the landlord. In addition, the Company's lease
obligations with respect to the San Bernardino Facility are contingent upon the
completion and acceptance of the theater.
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Under the terms of the Riverside expansion lease amendment, the Company's
obligation with respect to constructing and equipping the theater is estimated
at approximately $1,900,000, of which the Company has already paid approximately
$800,000. With respect to both projects, costs to complete and equip have
exceeded original estimations. The Company believes the Riverside expansion will
be completed and open for business in March 2000.
The ability of the Company to expand through the development of new theaters,
the expansion of existing theaters or the acquisition of established theaters is
contingent upon numerous factors including the Company's ability to secure new,
third party financing. In this regard, the Company signed on October 19, 1998, a
$15 million Revolving Credit Agreement (the "Revolving Credit Facility") with a
senior, secured lender. The terms of the facility were amended in March and
August 1999. This facility is being used primarily to finance the Company's
future developments in accordance with the terms and conditions of the Revolving
Credit Facility. The Company has borrowed $3,000,000 against this facility
through December 31, 1999 and has used the facility to secure a standby letter
of credit, with initial terms of one year, totaling $275,000, issued in
accordance with the terms of its lease (as amended) on the San Bernardino
20-screen facility. Commitment and other fees associated with the Revolving
Credit Facility and the standby letters of credit, totaling approximately
$380,000, are being amortized over their respective terms.
The Revolving Credit Facility is subject to maximum borrowing limits based on
multiples as defined under its terms and conditions. The Revolving Credit
Facility is also subject to various positive and negative covenants. As of
December 31, 1999 the Company was not in compliance with certain of the
covenants contained in its Revolving Credit Facility, and as a result, the
Company is not currently able to borrow against the facility. Management is in
discussions with the lender in order to obtain a waiver and to modify the
agreement. A definitive agreement to waive the December 31, 1999 covenant
violations and to modify the Revolving Credit Facility has not been reached as
of this date. Although management expects an agreement will be reached and the
lender has not attempted to accelerate the due date of any payment obligation of
the Company under the Revolving Credit Facility, the outstanding borrowings
against the facility of $3,000,000 as of December 31, 1999 have been classified
as a current liability in the accompanying consolidated balance sheet.
Management is also in negotiations with its principal shareholder to obtain an
equity infusion of $3.5 million, most likely from the sale of convertible
preferred stock. The proceeds from this equity transaction will be used to
reactivate the Company's Revolving Credit Facility, to fund theater
development, and to meet seasonal working capital requirements. No assurance
can be given that the negotiations with the Company's lender and principal
shareholder will be successful.
During the nine months ended December 31, 1999, the Company generated cash of
$878,095 from operating activities, as compared to $854,481 for the nine months
ended December 31, 1998. Reductions in the cost of concession supplies and
selling, general & administrative expenses have been offset by increases in film
rental costs and theater operating costs.
During the nine months ended December 31, 1999, the Company used cash in
investing activities of $4,216,185 as compared to $912,814 for the nine months
ended December 31, 1998. The increase is primarily due the construction of the
20-screen Ultraplex in San Bernardino, California and the 4-screen addition
under construction in Riverside, California.
During the nine months ended December 31, 1999, the Company provided net cash of
$2,832,463 from financing activities, as compared to using net cash of $677,175
for the nine months ended December 31, 1998. The cash provided in the nine
months ended December 31, 1999 related to the drawdown of $3,000,000 against the
Company's Revolving Credit Facility, offset in part by principal payments on
long-term debt and capital lease obligations. The cash used in the nine months
ended December 31, 1998 related to principal repayments on long-term debt and
capital lease obligations, and payment of debt issuance costs.
At December 31, 1999, the Company held cash and cash equivalents of $1,714,771
and had a negative working capital of $3,575,948.
As of March 31, 1999, the Company had net operating loss carryforwards ("NOLs")
of approximately $13,250,000 and $6,500,000 for Federal and California income
tax purposes, respectively. The Federal NOLs are available to offset future
years taxable income, and they expire in 2006 through 2019 if not utilized prior
to that time. The California NOLs are available to offset future years taxable
income, and they expire in 1999 through 2004 if not utilized prior to that time.
The annual utilization of NOLs will be limited in accordance with restrictions
imposed under the Federal and state laws as a result of changes in ownership.
The Company's initial public offering and certain other equity transactions
resulted in an "ownership change" as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). As a result, the Company's use of
its net operating loss carryforwards to offset taxable income in any post-change
period will be subject to certain specified annual limitations.
At March 31, 1999, the Company has total net deferred income tax assets in
excess of $5,900,000. Such potential income tax benefits, a significant portion
of which relates to the NOLs discussed above, have been subjected to a 100%
valuation allowance since realization of such assets is not "more likely than
not" in light of the Company's
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recurring losses from operations.
SEASONALITY
The Company's revenues have been seasonal, coinciding with the timing of major
releases of motion pictures by the major distributors. Generally, the most
marketable motion pictures are released during the summer and the Thanksgiving
through year-end holiday season. The unexpected emergence of a hit film during
other periods can alter this trend. The timing of such releases can have a
significant effect on the Company's results of operations, and the results of
one quarter are not necessarily indicative of results for subsequent quarters.
YEAR 2000
The Company has performed a review of its computer applications, including
software and hardware, related to their continuing functionality for the year
2000 and beyond. Based on this review, the Company does not believe that it has
material exposure with respect to the year 2000 issue in regards to its computer
applications. The Company has implemented new ticketing systems and concessions
systems at each of its locations (an initiative unrelated to year 2000). These
systems are certified as year 2000 compliant. Management believes that the
Company is not dependent on any other internal computer applications for its day
to day operations. The Company has communicated via questionnaire with third
parties with whom it has a material relationship to assess its risk with respect
to year 2000 issues. Not all such third parties have responded. The Company is
not aware at this time of any material year 2000 issues with respect to its
dealings with such third parties. The historical costs to the Company for its
year 2000 preparations have been nominal, future costs are not yet known due to
the Company's ongoing assessments and the Company has not deferred or delayed
any projects or expenditures in anticipation of any year 2000 issues. The
Company believes that its worst case scenario for the change to year 2000 would
be a disruption of film distribution to the Company. Such a disruption could
have a material impact on the Company and its results of operations. To date
with the advent of the year 2000, there have been no year 2000 issues that have
affected the operation of the company.
CURRENCY FLUCTUATIONS
The Company is subject to the risks of fluctuations in the Mexican Peso with
respect to the U.S. dollar. These risks are heightened because revenues in
Mexico are generally collected in Mexican Pesos, but the theater lease payments
are denominated in U.S. dollars. While the Company does not believe it has been
materially adversely effected by currency fluctuations to date, there can be no
assurance it will not be so affected in the future and it has taken no steps to
guard against these risks.
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
From time to time the Company is involved in routine litigation and proceedings
in the ordinary course of its business. Except as disclosed in the Company's
Form 10-QSB for the quarter ended June 30, 1999, the Company is not currently
involved in any other pending litigation matters, which the Company believes
would have a material adverse effect on the Company.
ITEM 2 -- CHANGES IN SECURITIES
ONE-FOR-SEVEN REVERSE STOCK SPLIT
The Company completed a one-for-seven reverse stock split of its Common Stock,
effective December 2, 1998. The reverse stock split affects the Company's Common
Stock and all options and warrants that are convertible into the Company's
Common Stock. The number of shares of the Company's Common Stock outstanding
prior to the reverse stock split was 27,054,902 and after the reverse stock
split is 3,864,986.
The reverse stock split also amends the terms of the Company's Redeemable
Warrants and Class B Redeemable Warrants. After giving effect to the reverse
stock split, the number of outstanding and issuable Redeemable Warrants for
Common Stock, with a maturity date of February 6, 2000 under the trading symbol
"LUXYW," remains at 4,648,562. The total number of shares of Common Stock for
which such warrants will be exercisable is
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reduced, however, to approximately 1,568,704 shares from 10,980,833 shares prior
to the reverse stock split. The number of shares of Common Stock exercisable per
each warrant is reduced to 0.33746 shares per warrant from 2.36220 shares per
warrant prior to the reverse stock split. The price per share upon exercise of
the warrants increases to $17.78, compared to $2.54 prior to the reverse stock
split.
After giving effect to the reverse stock split, the number of outstanding and
issuable Class B Redeemable Warrants for Common Stock, with a maturity date of
September 15, 2001 under the trading symbol "LUXYZ," remain at 226,438
outstanding. The total number of shares of Common Stock for which such warrants
will be exercisable is reduced to approximately 76,183 shares from 533,278
shares prior to the reverse stock split. The number of shares of Common Stock
exercisable per each Class B warrant is reduced to 0.33644 shares per warrant
from 2.35507 shares per warrant prior to the stock split. The price per share
upon exercise of the warrants increases to $19.32, compared to $2.76 prior to
the reverse stock split.
ITEM 3 -- DEFAULTS IN SENIOR SECURITIES
As of December 31, 1999 the Company was not in compliance with certain of the
covenants contained in its Revolving Credit Facility, and as a result, the
Company is not currently able to borrow against the facility. Management is in
discussions with the lender in order to obtain a waiver and to modify the
agreement. A definitive agreement to waive the December 31, 1999 covenant
violations and to modify the Revolving Credit Facility has not been reached as
of this date. Although management expects an agreement will be reached and the
lender has not attempted to accelerate the due date of any payment obligation
of the Company under the Revolving Credit Facility, the outstanding borrowings
against the facility of $3,000,000 as of December 31, 1999 have been classified
as a current liability in the accompanying consolidated balance sheet.
Management is also in negotiations with its principal shareholder to obtain an
equity infusion of $3.5 million, most likely from the sale of convertible
preferred stock. The proceeds from this equity transaction will be used to
reactivate the Company's Revolving Credit Facility, to fund theater
development, and to meet seasonal working capital requirements. No assurance
can be given that the negotiations with the Company's lender and principal
shareholder will be successful.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's 1999 annual meeting of stockholders in October, 1999, the
Company's stockholders voted to (i) approve an amendment to the Company's
Certificate of Incorporation authorizing a reduction in the number of authorized
shares of Common Stock of the Company from 60,000,000 to 20,000,000 shares (the
number of votes cast for this matter was 3,755,388, the number of votes cast
against this matter was 10,764, the number of abstentions was 616, and the
number of broker non-votes was 0), (ii) the appointment of Arthur Andersen LLP
as the Company's independent public accountants for the fiscal year ended March
31, 2000 (the number of votes cast for this matter was 3,666,231, the number of
votes cast against this matter was 96,857, the number of abstentions was 3,680,
and the number of broker non-votes was 0) and (iii) the election to the Board
of Directors of the Company one nominees referenced in the Company's Proxy
Statement, dated as of September 29, 1999, specifically, Messrs. Jack R. Crosby,
Frank J. Moreno, Jack S. Gray, Jr., Thomas G. Rebar, Wayne B. Weisman and
Winston J. Churchill. With respect to the election of directors, the number of
votes cast for, against, abstentions and broker non-votes is indicated on the
following schedule.
Broker
Election of Directors For Withhold Non-Votes Total
- --------------------- --- -------- --------- -----
Jack R. Crosby 3,666,137 100,631 0 3,766,768
Frank J. Moreno 3,661,994 104,774 0 3,766,768
Jack S. Gray, Jr. 3,660,716 106,052 0 3,766,768
Thomas G. Rebar 3,665,994 100,774 0 3,766,768
Wayne B. Weisman 3,665,994 100,774 0 3,766,768
Winston J. Churchill 3,665,994 100,631 0 3,766,625
ITEM 5 -- OTHER INFORMATION
The Board of Directors of the Company appointed Paul W. Hobby as Co-Chief
Executive Officer and Vice Chairman of the Board of Directors, effective October
27, 1999. The Board of Directors also appointed Mr. Don Harnois to the office of
Chief Financial Officer of the Company, filling the vacancy in that office
created by the resignation of Mr. Norman Dowling, which was effective as of
November 1999. The Company entered into an executive compensation agreement with
Mr. Harnois providing for a 3 year term, annual compensation of $120,000, plus a
$10,000 signing bonus and options to purchase 15,000 shares annually for up to
45,000 shares of the Company's common stock over the term of this agreement at
an exercise price equal to the price quoted as of the average closing price of
the Common Stock over he twenty days prior to the date his executive
compensation agreement was executed.
Effective February 8, 2000, Mr. Frank J. Moreno, a member of the
Company's Board of Directors and its President and Chief Operating Officer
resigned from those capacities, although
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he will continue to provide consulting services to the Company on an ad hoc
basis. Mr. Moreno has executed an amendment to his employment contract
reflecting these arrangements, dated as of February 2, 2000, under which he will
continue to be compensated through April 2001 in four equal installments payable
at equal intervals commencing on February 8, 2000 in the amount of $62,500 each
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Item 27. Financial Data Schedule
Exhibit 10.1 Employment Agreement between the Company and Don
Harnois
Exhibit 10.2 Amendment to Frank Moreno Employment Agreement,
dated April 29, 1998
(B) REPORTS ON FORM 8-K
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: February 22, 2000
CinemaStar
Luxury Theaters, Inc.
by: /s/ Jack R. Crosby
-----------------------------------------
Jack R. Crosby
Chairman and Chief Executive Officer
(principal executive officer)
by: /s/ Donald H. Harnois, Jr.
------------------------------------------
Donald H. Harnois, Jr.
Vice President and Chief Financial Officer
(principal financial officer and
principal accounting officer)
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