-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IO/3Dpvff1HiuuXyJULJp99C1LDjwALXKHkitvAa0ex6t+rmSBvSxG0+rRVNwKEf Lf2EDfyftNLZ9cXh8M1L/A== 0000936392-96-001063.txt : 19961118 0000936392-96-001063.hdr.sgml : 19961118 ACCESSION NUMBER: 0000936392-96-001063 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINEMASTAR LUXURY THEATERS INC CENTRAL INDEX KEY: 0000931085 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE THEATERS [7830] IRS NUMBER: 330451054 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-25252 FILM NUMBER: 96665245 BUSINESS ADDRESS: STREET 1: 431 COLLEGE BLVD CITY: OCEANSIDE STATE: CA ZIP: 92057-5435 BUSINESS PHONE: 6196302011 MAIL ADDRESS: STREET 1: 431 COLLEGE BLVD CITY: OCEANSIDE STATE: CA ZIP: 92057-5435 FORMER COMPANY: FORMER CONFORMED NAME: NICKELODEON THEATER CO INC DATE OF NAME CHANGE: 19941128 10QSB 1 FORM 10-QSB FOR THE PERIOD ENDED SEPT. 30, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE ACT 0F 1934. For the Quarterly period ended September 30, 1996 [ ] Transition report under section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition Commission File Number 0-25252 CinemaStar Luxury Theaters, Inc. (Exact Name of Registrant as specified in its charter) California 33-0451054 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 431 College Blvd., Oceanside, CA 92057-5435 (Address of principal executive offices) (Zip Code) (619) 630-2011 (Registrant's telephone number, including area code) (Former name, former address and formal fiscal year, if changed since last report) 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, no par value:6,759,944 shares outstanding as of November 12, 1996. Transitional Small Business Disclosure Format. (check one): YES ________ NO X 2 CINEMASTAR LUXURY THEATERS, INC. TABLE OF CONTENTS
Page No. PART I. Financial Information: Item 1. Financial Statements Condensed Consolidated Balance Sheet as of September 30, 1996 3 Condensed Consolidated Statements of Operations for the three and six months ended September 30, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 1996 and 1995 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition 8-27 and Results of Operations. PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 28 Item 6. Exhibits and Reports on Form 8-K 28-29 Signatures 30
2 3 PART I. Financial Information ITEM 1. Financial Statements CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1996 ------------ ASSETS CURRENT ASSETS Cash $ 609,526 Commissions and other receivables 128,365 Prepaid expenses 391,014 Other current assets 139,625 ------------ Total current assets 1,268,530 Property and equipment, net 9,852,821 Preopening costs, net 235,115 Deposits and other assets 810,450 ------------ TOTAL ASSETS $ 12,166,916 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt and capital lease obligations 691,800 Accounts payable 1,416,162 Accrued expenses 149,511 Deferred revenue 53,245 Advances from stockholders 60,000 ------------ Total current liabilities 2,370,718 Long-term debt and capital lease obligations, net of current portion 3,792,402 Convertible debentures 2,000,000 Deferred rent liability 1,914,804 ------------ TOTAL LIABILITIES 10,077,924 ------------ STOCKHOLDERS' EQUITY Preferred stock, no par value; 100,000 shares authorized; Series A redeemable preferred stock, no par value; 25,000 shares designated; no shares issued or outstanding 0 Common stock, no par value; 15,000,000 shares authorized; 6,445,367 shares issued and outstanding 7,285,110 Additional paid-in capital 510,030 Accumulated deficit (5,706,148) ------------ TOTAL STOCKHOLDER'S EQUITY 2,088,992 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,166,916 ============
See accompanying notes to condensed consolidated financial statements. 3 4 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- REVENUES: Admissions $ 3,493,385 $ 2,293,693 $ 6,456,914 $ 4,176,216 Concessions 1,453,061 862,413 2,655,983 1,628,296 Other operating revenues 100,502 63,227 194,454 94,322 ----------- ----------- ----------- ----------- TOTAL REVENUES 5,046,948 3,219,333 9,307,351 5,898,834 ----------- ----------- ----------- ----------- Costs and expenses: Film rental & booking costs 1,963,790 1,259,818 3,567,519 2,317,486 Cost of concession supplies 482,909 334,811 841,893 641,164 Theater operating expenses 1,526,949 811,894 2,802,458 1,657,475 General & administrative expenses 863,710 526,574 1,528,350 1,048,035 Depreciation & amortization 331,428 157,508 557,069 274,739 ----------- ----------- ----------- ----------- TOTAL COSTS AND EXPENSES 5,168,786 3,090,605 9,297,289 5,938,899 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) (121,838) 128,728 10,062 (40,065) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest income 12,514 31,572 15,158 87,001 Interest expense (152,204) (102,204) (302,865) (205,725) ----------- ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSE) (139,690) (70,632) (287,707) (118,724) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME (261,528) 58,096 (277,645) (158,789) TAXES PROVISION FOR INCOME TAXES (1,600) 0 (1,600) (1,600) ----------- ----------- ----------- ----------- NET INCOME (LOSS) ($ 263,128) $ 58,096 ($ 279,245) ($ 160,389) =========== =========== =========== =========== Net income (loss) per common share (. 04) .01 (.04) (.03) =========== =========== =========== =========== Weighted average number of common shares and share equivalents outstanding 6,441,512 6,200,000 6,348,514 6,200,000 =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements. 4 5 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended September 30, -------------------------------- 1996 1995 ------------ ------------ Cash flows from operating activities; Net loss ($ 279,245) ($ 160,389) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 557,069 274,739 Deferred rent liability 413,031 127,878 Increase (decrease) from changes in: Commission and other receivables (40,760) (8,645) Prepaid expenses and other current assets (271,131) 311,000 Accounts payable 578,022 152,694 Accrued expenses and other liabilities (240,048) (141,789) Deposits and other assets (63,705) 1,500 Preopening costs (97,014) 0 ----------- ----------- Cash provided by operating activities 556,219 556,988 ----------- ----------- Cash flows from investing activities: Refund of construction deposit 600,000 0 Purchases of property and equipment (3,448,531) (3,504,968) ----------- ----------- Cash used in investing activities (2,848,531) (3,504,968) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt 500,000 0 Principal payments on long term-debt and capital lease obligations (321,899) (214,830) Proceeds from issuance of convertible debentures 3,000,000 0 Payment of debt issuance costs (474,813) 0 Advances from stockholder 60,000 0 Repayment of advances from stockholder (320,000) (19,500) ----------- ----------- Cash provided by (used in) financing activities 2,443,288 (234,330) ----------- ----------- Net increase (decrease) in cash 150,976 (3,182,310) Cash, beginning of period 458,550 4,091,885 ----------- ----------- Cash, end of period $ 609,526 $ 909,575 =========== ===========
See accompanying notes to condensed consolidated financial statements. 5 6 CINEMASTAR LUXURY THEATERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 (UNAUDITED) NOTE 1 The interim 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 accruals) considered necessary for a fair presentation have been included. For further information, refer to the audited financial statements for the year ended March 31, 1996, 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 six month periods ended September 30, 1996 are not necessarily indicative of the results of operations that may be expected for the year ending March 31, 1997. NOTE 2 On each of April 11, 1996 and May 21, 1996, the Company issued a convertible debenture in the principal amount of $500,000. The debentures bear interest at 4% per annum and are due three years after issuance. The debentures are convertible after 40 days into shares of common stock at a conversion price of $3.95 and $4.25 per share, respectively. On May 22, 1996, the April 1996 debenture and accrued interest was converted into 127,152 shares of common stock. On July 3, 1996, the May 1996 debenture and accrued interest was converted into 118,215 shares of common stock. NOTE 3 On August 6, 1996, the Company issued a Convertible Debenture in the principal amount of $1,000,000 to Wales Securities Limited, a Guernsey corporation ("Wales"), and a second Convertible Debenture in the principal amount of $1,000,000 to Villandry Investments Ltd., a Guernsey corporation ("Villandry"), in separate 6 7 transactions pursuant to Regulation S as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. Each Convertible Debenture is convertible into shares of Common Stock of the Company at a conversion price per share equal to the lesser of (x) $3.50, or (y) 85% of the average closing bid price of the Common Stock for the three consecutive trading days immediately preceding the date of conversion. The purchasers have agreed that from the date of issuance until after the forty-fifth day after such date (the "Restricted Period"), any offer, sale or transfer of the Convertible Debentures or the shares of Common Stock issuable upon conversion of the Convertible Debentures (including any interests therein), shall be subject to various restrictions in accordance with Regulation S. The Convertible Debentures bear interest at the rate of four percent (4%) per annum, payable quarterly. If not sooner converted, the principal amount of the Convertible Debentures is due and payable on the second anniversary of issuance. On October 1, 1996 $900,000 worth of debentures were converted to 257,143 shares of common stock and on October 16, 1996 $200,000 worth of debentures were converted to 57,143 shares of stock and 291 shares of stock were issued for the payment of interest. In connection with the issuance of the Convertible Debentures, the Company issued to Wales a five year warrant to purchase 17,142 shares of common stock of the Company at an exercise price of $7.00 per share. A warrant containing identical terms also was issued to Villandry. 7 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. Three months ended September 30, 1996 compared to three months ended September 30, 1995. At September 30, 1995 the company was comprised of four theater locations with a total of 30 screens. During the twelve months ended September 30, 1996, the company added two locations with an additional 24 screens. Thus at September 30, 1996 the company is comprised of 6 locations and 54 screens. The addition of the two theaters resulted in an increase in revenues and expenses for the six months ended September 30, 1996 compared to September 30, 1995. Total revenues for the three months ended September 30, 1996 increased 56.8% to $5,046,948 from $3,219,333 for the three months ended September 30, 1995. The increase consisted of a $1,199,692, or 52.3%, increase in admission revenues and a $627,923, or 67.8%, increase in concession revenues and other operating revenues. The admission revenue and concession and other operating revenue increase for the comparative quarter was due to the increase in the number of theaters and screens. Total revenues for the existing theaters owned by the company for the full quarter ended September 30, 1996 compared to September 30, 1995 declined from $2,181,950 to $1,969,920, a reduction of $212,030 or 9.7%. This reduction in revenues can be attributed to lower theater attendance in the months of August and September. Management believes the reduction was attributed in part to competition from the summer Olympic games held in Atlanta, Georgia, and the pennant race of the San Diego Padres, combined with weaker than normal late summer film product. The revenues from the three months ending September 30, 1996 include $109,000 one time non-recurring recognition of deferred revenue from prior periods advanced ticket sales. 8 9 Film rental and booking costs for the three months ended September 30, 1996 increased 55.9 % to $1,963,790 from $ 1,259,818 for the three months ended September 30, 1995. The increase was due to the addition of new theaters and increases in higher booking costs paid to distributors for higher grossing early summer movies, such as Twister, The Rock, Eraser, Hunchback of Notre Dame, and Independence Day. Cost of concession supplies for the three months ended September 30, 1996 increased 44.2 % to $482,909 from $334,811 for the three months ended September 30, 1995. The dollar increase was primarily due to increased concession costs associated with increased concession revenues. As a percentage of concession revenues, costs of concession supplies for the three months ended September 30, 1996 and September 30, 1995 decreased to 33.2 % from 38.8 %. The decrease is attributable to the Company purchasing its own concessions for new theaters, instead of having its concessions being subcontracted though a concession vendor. Theater operating expenses for the three months ended September 30, 1996 increased 88.1 % to $1,526,949 from $811,894 for the three months ended September 30, 1995. The dollar increase in theater operating costs is primarily due to the increased costs attributable to the costs associated with the start up of new theaters. As a percentage of total revenues, theater operating expenses increased to 30.3% from 25.2 % during the applicable periods. General and administrative expenses for the three months ended September 30, 1996 increased 64.0 % to $863,710 from $526,574 for the three months ended September 30, 1995. The increase is primarily due to additional advertising and insurance associated with the opening of new theaters as well as consulting fees and other costs associated with the expansion of corporate operations. As a percentage of total revenues, general and administrative expenses increased to 17.1 % from 16.4 % during the three months ended September 30, 1995. 9 10 Depreciation and amortization for the three months ended September 30, 1996 increased 110.4 % to $331,428 from $157,508 for the three months ended September 30, 1995. The increase is primarily the result of depreciation on additional equipment associated with the opening of the new theaters and the amortization of preopening costs during the three months ended September 30, 1996. Interest expense for the three months ended September 30, 1996 increased to $152,204 from $102,204 for the three months ended September 30, 1995. This increase is primarily attributable to the increased debt incurred by the Company in its expansion. Interest income for the three months ended September 30, 1996 decreased to $12,514 from $31,572 for the three months ended September 30, 1995. This decrease is attributable to lower interest earning balances as the Company used its funds for expansion. In the prior year, the Company had more interest earning funds remaining from its initial public offering. As a result of the factors discussed above, the net loss for the three months ended September 30, 1996 was $263,128 or $ .04 per common share, compared to a net profit of $58,096, or $.01 per common share, for the three months ended September 30, 1995. Six months ended September 30, 1996 compared to six months ended September 30, 1995. At September 30, 1995 the Company operated four theater locations with a total of 30 screens. During the twelve months ended September 30, 1996, the company added two locations with an additional 24 screens. Thus at September 30, 1996 the Company operated 6 locations with 54 screens. The addition of the two theaters resulted in an increase in revenues and expenses for the six months ended September 30, 1996 compared to September 30, 1995. Total revenues for the six months ended September 30, 1996 increased 57.8% to $9,307,351 from $5,898,834 for the six months ended September 30, 1995. The increase consisted of a $2,280,698, or 54.6%, increase in admission revenues and a $1,127,819, or 65.4 %, increase in concession and other operating 10 11 revenues. The increase in total revenues was due to the opening of new theaters. Total revenues from existing theaters for the six months ended September 30, 1996 decreased by $183,349, or 5.3%, compared to revenues in 1995. Film rental and booking costs for the six months ended September 30, 1996 increased 53.9% to $3,567,519 from $2,317,486 for the six months ended September 30, 1995. The increase was due to higher film rental and booking costs paid on increased admission revenues, resulting from the addition of new theaters. Cost of concession supplies for the six months ended September 30, 1996 increased 31.3% to $841,893 from $641,164 for the six months ended September 30, 1995. The dollar increase is due to increased concession costs associated with higher concession revenues. As a percentage of concession revenues, concession costs for the six months ended September 30, 1996 and September 30, 1995 decreased to 31.7% from 39.4%. The decrease is due to lower concession costs experienced at the new theaters. A contract with Pacific Concessions, Inc. ("PCI") for the Company's first three theaters requires that PCI provide concession supplies in exchange for 40 % of concession revenues. The Company provides its own concession supplies at the other theaters. Theater operating expenses for the six months ended September 30, 1996 increased 69.1% to $2,802,458 from $1,657,475 for the six months ended September 30, 1995. As a percentage of total revenues, theater operating expenses increased to 30.1% from 28.1% during the applicable periods. The dollar increase is primarily attributable to the costs associated with the new theaters. General and administrative expenses for the six months ended September 30, 1996 increased 45.8% to $1,528,350 from $1,048,035 for the six months ended September 30, 1995. The increase is primarily due to additional advertising and insurance associated with the opening of new theaters, bonuses and consulting fees and other costs associated with the expansion of corporate operations. As a percentage of total revenues, general and administrative costs decreased to 16.4% from 17.8% during the applicable periods. 11 12 Depreciation and amortization for the six months ended September 30, 1996 increased 102.8 % to $557,069 from $274,739 for the six months ended September 30, 1995. The increase is primarily the result of depreciation on additional equipment associated with the opening of the new theaters. Interest expense for the six months ended September 30, 1996 increased to $302,865 from $205,725 for the six months ended September 30, 1995. This increase is primarily attributable to the increased debt incurred by the Company in its expansion. Interest income for the six months ended September 30, 1996 decreased to $15,158 from $87,001 for the six months ended September 30, 1995. This decrease is attributable to lower interest earning balances as the Company used funds for expansion. In the prior year, the Company had more interest earning funds remaining from its initial public offering. As a result of the factors discussed above, the net loss for the six months ended September 30, 1996 increased to $279,245, or $ .04 per common share, from $160,389, or $.03 per common share, for the six months ended September 30, 1995. . 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. New theater openings typically are financed with internally generated cash flow and long-term debt financing arrangements for facilities and equipment. The Company plans to construct additional theater complexes; however, no assurances can be given that any additional theaters will be constructed, or, if constructed, that they will be operated profitably. 12 13 The Company leases five theater properties and various equipment under noncancelable operating lease agreements which expire through 2021 and require various minimum annual rentals. At September 30, 1996, the aggregate future minimum lease payments due under noncancelable operating leases was approximately $53,734,930. As of September 30, 1996 the Company had also signed lease agreements for four additional theater locations. The new leases will require expected minimum rental payments aggregating approximately $85,090,300 over the life of the leases. Accordingly, existing minimum lease commitments as of September 30, 1996 plus those expected minimum commitments for the proposed theater locations would aggregate minimum lease commitments of approximately $138,825,230. During the six months ended September 30, 1996, the Company generated cash of $556,217 from operating activities, as compared to generating $556,988 in cash from operating activities for the six months ended September 30, 1995. During the six months ended September 30, 1996, the Company used cash in investing activities of $2,848,531 as compared to $3,504,968 for the six months ended September 30, 1995. Purchase of equipment for new theaters net of construction deposit refunds, accounts for the use of cash in investing activities. During the six months ended September 30, 1996, the Company provided net cash of $2,443,290 from financing activities, as compared to using $234,330 for the six months ended September 30, 1995. The cash generated for the six months ended September 30, 1996 came from four convertible debentures totaling $3,000,000 and a bank loan for $500,000, partially offset by debt repayments and costs for the acquisition of the capital. As of September 30, 1996, the Company was in compliance with or had obtained waivers for, all bank loan covenants. The Company, at September 30, 1996, had a working capital deficit of $1,211,188. On April 11, 1996, the Company issued a $500,000 convertible debenture. On May 21, 1996, the Company issued a second $500,000 convertible debenture. On May 22, 1996, the April 1996 debenture and accrued 13 14 interest was converted into 127,152 shares of common stock. On July 3, 1996, the May 1996 debenture and accrued interest was converted into 118,215 shares of common stock. On August 6, 1996, the Company issued a Convertible Debenture in the principal amount of $1,000,000 to Wales Securities Limited, a Guernsey corporation ("Wales"), and a second Convertible Debenture in the principal amount of $1,000,000 to Villandry Investments Ltd., a Guernsey corporation ("Villandry"), in separate transactions pursuant to Regulation S as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. Each Convertible Debenture is convertible into shares of Common Stock of the Company at a conversion price per share equal to the lesser of (x) $3.50, or (y) 85% of the average closing bid price of the Common Stock for the three consecutive trading days immediately proceeding the date of conversion. The purchasers have agreed that from the date of issuance until after the forty-fifth day after such date (the "Restricted Period"), any offer, sale or transfer of the Convertible Debentures or the shares of common stock issuable upon conversion of the Convertible Debentures (including any interests therein), shall be subject to various restrictions in accordance with Regulation S. The Convertible Debentures bear interest at the rate of four percent (4%) per annum, payable quarterly. If not sooner converted, the principal amount of the Convertible Debentures is due and payable on the second anniversary of issuance. On October 1, 1996 $900,000 worth of debentures were converted to 257,143 shares of common stock and on October 16, 1996 $200,000 worth of debentures were converted to 57,143 shares of stock and 291 shares of stock were issued for the payment of interest. In connection with the issuance of the Convertible Debentures, the Company issued to Wales a five year warrant to purchase 17,142 shares of common stock of the Company at an exercise price of $7.00 per share. A warrant containing identical terms also was issued to Villandry. Future events, including the problems, delays, expenses and difficulties frequently encountered by similarly situated companies, as well as changes in economic, regulatory or competitive conditions, may lead to cost 14 15 increases that could make the funds anticipated to be generated from the Company's operations together with anticipated additional debt and/or equity, insufficient to fund the Company's expansion for the next 12 months. Management may also determine that it is in the best interest of the Company to expand more rapidly than currently intended, in which case additional financing will be required. Additional financing is required, and there can be no assurances that the Company will be able to obtain such additional financing on terms acceptable to the Company and at the times required by the Company, or at all. The Company has plans for significant expansion. In this regard, the Company has entered into leases with respect to the development of 55 additional screens at six locations. The capital requirements necessary for the Company to complete its 1997 fiscal development plans is estimated to be at least $12,400,000 in fiscal 1997. Such developments will require the Company to raise substantial amounts of new financing, in the form of additional equity or loan financing, during fiscal 1997. The Company's minimum contractual obligations for the proposed development plans is approximately $6,000,000, in fiscal 1997 with the balance of the proposed plans subject to termination by the Company without material adverse consequences to the Company. The Company believes it can obtain adequate capital and/or financing resources to sustain operations through the year ending March 31, 1997. However, the Company has not obtained any commitments for such financing and there can be no assurance that the Company will be able to obtain additional financing on terms that are acceptable to the Company and at the time required by the Company, or at all. If the Company is unable to obtain such additional equity or loan financing, the Company's financial condition and results of operations will be materially adversely affected. Moreover, the Company's estimates of its cash requirements to develop and operate such theaters and service any debts incurred in connection with the development of such theaters are based upon certain assumptions, including certain assumptions as to the Company's revenues, earnings and other factors, and there can be no assurance that such assumptions will prove to be accurate or that unbudgeted costs will not be incurred. Future events, including the problems, delays, expenses and difficulties frequently encountered by similarly situated companies, as well as changes in economic, regulatory or competitive conditions, may lead to cost increases that could have a material adverse effect on the Company and its expansion and development plans.. If the Company is not successful in obtaining loans or equity financing for future developments, it is unlikely that the Company will have sufficient cash to open additional theaters, or to perform its obligations under certain existing leases for theaters under development. 15 16 The Company recently has financed certain expansion activities through the private placement of debt instruments convertible into shares of its common stock. In order to induce parties to purchase such securities, the instruments are convertible into common stock of the Company at a conversion price that is significantly lower than the price at which the Company's common stock is trading. Because of its history of operating losses, limited equity, and rapid growth plans, the Company has limited options in acquiring the additional debt and/or equity, and may issue debt and/or equity securities, or securities convertible into its equity securities, on terms that could result in substantial dilution to its existing shareholders. The Company believes that in order to raise needed capital, it may be required to issue debt or equity securities convertible into common stock at conversion prices that are significantly lower than the current market price of the Company's common stock. In addition, certain potential investors have indicated that they will require that the conversion price adjust based on the current market price of the Company's common stock. In the event of a significant decline in the market price for the Company's common stock, such a conversion feature could result in significant dilution to the Company's existing shareholders. In addition, the Company has issued securities in offshore transactions pursuant to Regulation S, promulgated by the Securities and Exchange Commission, and may do so in the future. Because the purchasers of such securities are free to sell the securities after holding them for a minimum of 40 days pursuant to Regulation S, sales of securities by such holders may adversely impact the market price of the Company's common stock. The Company has had significant net losses in each fiscal year of its operations. There can be no assurance as to when the Company will be profitable, if at all. Continuing losses would have a material detrimental effect on the liquidity and operations of the Company. The Company has net operating loss ("NOL") carryforwards of approximately $3,500,000 and $1,700,000 for Federal and California income tax purposes, respectively. The Federal NOLs are available to offset future years taxable income and expire in 2006 through 2011, while the California NOLs are available to offset future years taxable income and expire in 1998 through 2001. The utilization of these NOLs could be limited due to restrictions imposed under the Federal and state laws upon a change in ownership. 16 17 At September 30, 1996, the Company's total net deferred income tax assets, a significant portion of which relates to NOLs discussed above, have been subjected to a 100% valuation allowance since it has been determined that realization of such assets is not more likely than not in light of the Company's recurring losses from operations. RISK FACTORS 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 the Form 10-QSB should be read as being applicable in all related forward looking statements wherever they appear in this Form 10-QSB. The company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein, and in the Company's most recently filed Annual Report on Form 10-KSB. History of Losses. The Company was founded in April 1989. Operations began with the completion of construction of the Company's first theater in November 1991. The Company has had significant net losses in each fiscal year of its operations, including net losses of $2,086,418 and $638,585 in the fiscal years ended March 31, 1995 and 1996, respectively. Need for Additional Financing; Use of Cash. The Company has aggressive expansion plans. In this regard, the Company has entered into lease and other binding commitments with respect to the development of 55 additional screens at six locations during fiscal 1997. The capital requirements necessary for the Company to complete its development plans is estimated to be at least $12,400,000. Such developments will require the Company to raise substantial amounts of new financing, in the form of additional equity investments or loan financing, during fiscal 1997. The Companies contractual obligation for the proposed developmental plans is approximately $6,000,000, with the balance of the proposed plans subject to termination without adverse or material consequences to the Company. There can be no assurance that the Company will be able to obtain such additional financing on terms that are acceptable to the Company and at the time required by the Company, or at all. If the Company is unable to obtain such additional equity or loan financing, the Company's financial condition and results of operations will be materially adversely affected, and it is likely the company would be in default under various leases and other obligations to which it is a party. Potential Dilution. The Company recently has financed certain expansion activities through the private placement of debt instruments convertible into shares of its common stock. In order to induce parties to purchase such securities, the instruments are convertible into common stock of the Company at a conversion price that is significantly lower than the price at which the Company's common stock is trading. The Company believes that because of its history of operating losses, limited equity, and rapid growth plans, it has limited options in acquiring the additional debt and/or equity the Company may issue debt and/or equity securities, or securities 17 18 convertible into its equity securities, on terms that could result in substantial dilution to its existing shareholders. The Company believes that in order to raise needed capital, it may be required to issue debt or equity securities convertible into common stock at conversion prices that are significantly lower than the current market price of the Company's common stock. In addition, certain potential investors have indicated that they will require that the conversion price adjust based on the current market price of the Company's common stock. In the event of a significant decline in the market price for the Company's common stock, such a conversion feature could result in significant dilution to the Company's existing shareholders. In addition, the Company has issued securities in offshore transactions pursuant to Regulation S, promulgated by the Securities and Exchange Commission, and may do so in the future. Because the purchasers of such securities are free to sell the securities after holding them for a minimum of 40 days pursuant to Regulation S, sales of securities by such holders may adversely impact the market price of the Company's common stock. Dependence on Films. The ability of the Company to operate successfully depends upon a number of factors, the most important of which is the availability of marketable motion pictures. Poor relationships with film distributors, a disruption in the production of motion pictures or poor commercial success of motion pictures would have a material adverse effect upon the Company's business and results of operations. Long-Term Lease Obligations; Periodic Rent Increases. The Company operates most of its current theaters pursuant to long-term leases which provide for large monthly minimum rental payments which increase periodically over the terms of the leases. The Chula Vista 6 is owned by the Company and not subject to such lease payments. The Company will be dependent upon increases in box office and other revenues to meet these long-term lease obligations. In the event that box office and other revenues decrease or do not significantly increase, the Company will likely not have sufficient revenues to meet its lease obligations, which would have a material adverse effect on the Company and its results of operations. Possible Delay in Theater Development and Other Construction Risks. In connection with the development of its theaters, the Company typically receives a construction budget from the property owner and oversees the design, construction and completion of the theater site. The Company is generally responsible for construction costs in excess of the negotiated construction budget. As a result, the Company is subject to many of the risks inherent in the development of real estate, many of which are beyond its control. Such risks include 18 19 governmental restrictions or changes in Federal, state or local laws or regulations, strikes, adverse weather, material 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 theater development in a timely manner or within its proposed budget. The Company has experienced cost overruns and delays in connection with the development of one of its existing theaters and no assurance can be given that such overruns and delays will not occur with respect to any future theater developments. The Company in the course of such development activities has also become involved in certain disputes with property owners, resulting in delays in reimbursement of Construction Expenses. Failure of the Company to develop its theaters within the construction budget allocated to it will likely have a material adverse effect on the Company. In addition, the Company will be dependent upon unaffiliated contractors and project managers to complete the construction of its theaters. Although the Company believes that it will be able to secure commitments from contractors, project managers and other personnel needed to design and construct its theaters, the inability to consummate a contract for the development of a theater or any subsequent failure of any contractor or supplier to comply with the terms of its agreement with the Company might have a material adverse effect on the Company. Dependence on Ability to Secure Favorable Locations and Lease Terms. The success of the Company's operations is dependent on its ability to secure favorable locations and lease terms for each of its theaters. There can be no assurance that the Company will be able to locate suitable locations for its theaters or lease such locations on terms favorable to it. The failure of the Company to secure favorable locations for its theaters or to lease such locations on favorable terms would have a material adverse effect on the Company. Competition. The motion picture exhibition industry is highly competitive, particularly with respect to licensing films, attracting patrons and finding new theater sites. There are a number of well-established competitors with substantially greater financial and other resources than the Company that operate in Southern California. Many of the Company's competitors, including United Artists Theaters, Pacific Theaters, and Mann Theaters, each of which operates one or more theaters in the same geographic vicinity as the Company's current theaters, have been in existence significantly longer than the Company and are both better established in the markets where the Company's theaters are or may be located and better capitalized than the Company. Competition can also come from other sources such as television, cable television, pay television, direct satellite television and video tapes. 19 20 Many of the Company's competitors have established, long-term relationships with the major motion picture distributors (Paramount, Disney/Touchstone, Warner Brothers, Columbia/Tri-Star, Universal and 20th Century Fox), who distribute a large percentage of successful films. Although the Company attempts to identify film licensing zones in which there is no substantial current competition, there can be no assurance that the Company's competitors will not develop theaters in the same film zone as the Company's theaters. To the extent that the Company directly competes with other theater operators for patrons or for the licensing of first-run films, the Company may be at a competitive disadvantage. Although the Company attempts to develop theaters in geographic areas that it believes have the potential to generate sufficient current and future box office attendance and revenues, adverse economic or demographic developments, over which the Company has no control, could have a material adverse effect on box office revenues and attendance at the Company's theaters. In addition, there can be no assurance that new theaters will not be developed near the Company's theaters, which development might alter existing film zones and might have a material adverse effect on the Company's revenues and earnings. In addition, future advancements in motion picture exhibition technology and equipment may result in the development of costly state-of-the-art theaters by the Company's competitors which may make the Company's current theaters obsolete. There can be no assurance that the Company will be financially able to pay for or able to incorporate such new technology or equipment, if any, into its existing or future theaters. In recent years, alternative motion picture exhibition delivery systems have been developed for the exhibition of filmed entertainment, including cable television, direct satellite delivery, video cassettes and pay-per-view. An expansion of such delivery systems could have a material adverse effect on motion picture attendance in general and upon the Company's business and results of operations. Geographic Concentration. Each of the Company's current theaters are located in San Diego or Riverside Counties, California and the proposed theaters are all in Southern California, Hawaii or Mexico. As a result, negative economic or demographic changes in Southern California will have a disproportionately large and adverse effect on the success of the Company's operations as compared to those of its competitors having a wider geographic distribution of theaters. 20 21 Dependence on Concession Sales. Concession sales accounted for 29.4% and 27.9% of the Company's total revenues in the fiscal years ended March 31, 1995 and 1996, respectively. Therefore, the financial success of the Company depends, to a significant extent, on its ability to successfully generate concession sales in the future. The Company currently depends upon Pacific Concessions, Inc. ("Pacific Concessions"), a creditor of the Company, to operate and supply the concession stands located in certain of the Company's theaters. The Company's concession agreements with Pacific Concessions may be terminated by the Company prior to the expiration of their respective terms upon payment of a substantial early termination fee. Relationship with Pacific Concessions. The Company utilizes loans from Pacific Concessions to fund a portion of its operations. In the Company's loan agreements with Pacific Concessions, an event of default is defined to include, among other things, any failure by the Company to make timely payments on its loans from Pacific Concessions. In the event that an event of default occurs under such loan agreements, Pacific Concessions has certain remedies against the Company in addition to those afforded to it under applicable law, including, but not limited to, requiring the Company to immediately pay all loan amounts due to Pacific Concessions and requiring the Company to sell, liquidate or transfer any of its theaters and related property to third parties in order to make timely payments on its loans. If the Company were to default under any of its agreements with Pacific Concessions, and if Pacific Concessions enforced its rights thereunder, the Company would be materially adversely affected. Control of the Company. As of September 30, 1996, the current officers and directors of the Company own approximately 50.4% of the Common Stock (27.5% assuming exercise in full of the Redeemable Warrants and conversion of debentures). As a result, these individuals are in a position to materially influence, if not control, the outcome of all matters requiring shareholder approval, including the election of directors. Dependence on Management. The Company is significantly dependent upon the continued availability of John Ellison, Jr., Alan Grossberg and Jerry Willits, its President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and Vice President, respectively. The loss or unavailability of any one of these officers to the Company for an extended period of time could have a material adverse effect on the Company's business operations and prospects. To the extent that the services of these officers are unavailable to the Company for any reason, the Company will be required to procure other personnel to manage and operate 21 22 the Company and develop its theaters. There can be no assurance that the Company will be able to locate or employ such qualified personnel on acceptable terms. The Company has entered into five-year employment agreements with each of Messrs. Ellison, Grossberg and Willits. The Company maintains "key man" life insurance in the amount of $1,250,000 on the lives of each of John Ellison, Jr., Alan Grossberg and Russell Seheult (the Chairman of the Company's Board of Directors), with respect to which the Company is the sole beneficiary. Expansion; Management of Growth. The Company's plan of operation calls for the rapid addition of new theaters and screens. The Company's ability to expand will depend on a number of factors, including the selection and availability of suitable locations, the hiring and training of sufficiently skilled management and personnel and other factors, such as general economic and demographic conditions, which are beyond the control of the Company. Such growth, if it occurs, could place a significant strain on the Company's management and operations. To manage such growth effectively, the Company will be required to increase the depth of its financial, administrative and theater management staffs. The Company has been able to identify and hire qualified personnel available to satisfy its growth requirements. There can be no assurance, however, that the Company will be able to identify and hire additional qualified personnel or take such other steps as are necessary to manage its growth, if any, effectively. In addition, there is no assurance that the Company will be able to open any new theaters or that, if opened, those theaters can be operated profitably. Risks of International Expansion. The Company has signed agreements to lease a 12 screen theater in Guadalajara, Mexico and a 10 screen theater in Tijuana, Mexico through CinemaStar Luxury Theaters, S.A. de C.V., a Mexican corporation in which the Company has a 75% ownership interest. These theaters are presently under construction and are expected to open in the Spring of 1997.To the extent that the Company elects to develop theaters in Mexico or any other country, the Company will be subject to the attendant risks of doing business abroad, including adverse fluctuations in currency exchange rates, increases in foreign taxes, changes in foreign regulations, political turmoil, deterioration in international economic conditions and deterioration in diplomatic relations between the United States and such foreign country. Recently the value of the Mexican Peso has fallen in relation to the U.S. Dollar and Mexico is experiencing substantial inflation. 22 23 Fluctuations in Quarterly Results of Operations. 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 have been released during the summer and the Thanksgiving through year-end holiday season. The unexpected emergence of a hit film during other periods can alter the traditional 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. Potential Business Interruption Due to Earthquake. All of the Company's current and proposed theaters are or will be located in seismically active areas of Southern California and Mexico. In the event of an earthquake of significant magnitude, damage to any of the Company's theaters or to surrounding areas could cause a significant interruption or even a cessation of the Company's business, which interruption or cessation would have a material adverse effect on the Company, its operations and any proposed theater development. Although the Company maintains business interruption insurance, such insurance does not protect against business interruptions due to earthquakes. Conflicts of Interest. Several possible conflicts of interest may exist between the Company and its officers and directors. In particular, certain officers and directors have directly or indirectly advanced funds or guaranteed loans or other obligations of the Company. As a result, a conflict of interest may exist between these officers and directors and the Company with respect to the determination of which obligations will be paid out of the Company's operating cash flow and when such payments will be made. Compensation of Executive Officers. Effective August 1994, the Company entered into five-year employment agreements with each of John Ellison, Jr., Alan Grossberg and Jerry Willits, pursuant to which their annual salaries are $197,106, $145,860 and $94,380, respectively, subject to annual increases of between 10% and 12%. Mr. Grossberg's employment agreement is being amended to increase his salary by $52,000, to reflect compensation previously paid to him for film booking services. In addition, Messrs. Ellison, Grossberg and Willits will be entitled to receive substantial bonuses based on a percentage of net income in the event that the Company's net income for a given year exceeds $2 million and additional bonuses in the event that the Company has net income in excess of $7 million in a given year. Each of Messrs. Ellison, Grossberg and Willits will also receive an automobile allowance of up to $650 per month and certain 23 24 insurance and other benefits. Moreover, in the event that Mr. Ellison or Mr. Grossberg is terminated or is not reelected or appointed as a director or executive officer of the Company for any reason other than for an uncured breach of his obligations under his employment agreement or his conviction of a felony involving moral turpitude, he shall have the right to receive his annual salary and bonuses for the remainder of the original five-year term of the contract. The employment agreements described above require that the Company pay substantial salaries during each year of the five year terms thereof to each of Messrs. Ellison, Grossberg and Willits, regardless of the Company's financial condition or performance. As a result, the agreements could have a material adverse effect on the Company's financial performance and condition. No Assurance of Continued NASDAQ Inclusion; Risk of Low-Priced Securities. In order to qualify for continued listing on NASDAQ, a company, among other things, must have $2,000,000 in total assets, $1,000,000 in capital and surplus and a minimum bid price of $1.00 per share. If the Company is unable to satisfy the maintenance requirements for quotation on NASDAQ, of which there can be no assurance, it is anticipated that the Securities would be quoted in the over-the-counter market National Quotation Bureau ("NQB") "pink sheets" or on the NASD OTC Electronic Bulletin Board. As a result, an investor may find it more difficult to dispose of, or obtain accurate quotations as to the market price of, the Securities, which may materially adversely affect the liquidity of the market for the Securities. In addition, if the Securities are delisted from NASDAQ, they might be subject to the low-priced security or so-called "penny stock" rules that impose additional sales practice requirements on broker-dealers who sell such securities. For any transaction involving a penny stock the rules require, among other things, the delivery, prior to the transaction, of a disclosure schedule required by the Securities and Exchange Commission (the "Commission") relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker- dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in the customer's account. Although the Company believes that the Securities are not defined as a penny stock due to their continued listing on NASDAQ, in the event the Securities subsequently become characterized as a penny stock, the market liquidity for the Securities could be severely affected. In such an event, the regulations relating to penny stocks could limit the ability of broker-dealers to sell the Securities. 24 25 Risk of Limitation of Use of Net Operating Loss Carryforwards. The Company has net operating loss carryforwards of approximately $3,500,000 for federal income tax purposes, which may be utilized through 2006 to 2011, and approximately $1,700,000 for state income tax purposes, which may be utilized through 1998 to 2001 (subject to certain limitations). The initial public offering and certain other equity transactions resulted or may have 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 may be subject to certain specified annual limitations. If there has been an ownership change for purposes of the Code, there can be no assurance as to the specific amount of net operating loss carryforwards, if any, available in any post-change year since the calculation is based upon fact-dependent formula. Possible Volatility of Common Stock and Redeemable Warrant Prices. The trading prices of the Securities may respond to quarterly variations in operating results and other events or factors, including, but not limited to, the sale or attempted sale of a large amount of the Securities into the market. In addition, the stock market has experienced extreme price and volume fluctuations in recent years, particularly in the securities of smaller companies. These fluctuations have had a substantial effect on the market prices of many companies, often unrelated to the operating performance of the specific companies, and similar events in the future may adversely affect the market prices of the Securities. Current Prospectus and State Registration Required To Exercise Redeemable Warrants. The Redeemable Warrants are not exercisable unless, at the time of the exercise, the Company has a current prospectus covering the shares of Common Stock upon exercise of the Redeemable Warrants and such shares have been registered, qualified or deemed to be exempt under the securities or "blue sky" laws of the state of residence of the exercising holder of the Redeemable Warrants. Although the Company has undertaken to use its best efforts to have all of the shares of Common Stock issuable upon exercise of the Redeemable Warrants registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Redeemable Warrants, there is no assurance that it will be able to do so. The value of the Redeemable Warrants may be greatly reduced if a current prospectus covering the Common Stock issuable upon the exercise of the Redeemable Warrants is not kept effective or if such Common Stock is not qualified or exempt from qualification in the states in which the holders of the Redeemable Warrants then reside. 25 26 Investors may purchase the Redeemable Warrants in the secondary market or may move to jurisdictions in which the shares underlying the Redeemable Warrants are not registered or qualified during the period that the Redeemable Warrants are exercisable. In such event, the Company will be unable to issue shares to those persons desiring to exercise their Redeemable Warrants unless and until the shares are qualified for sale in jurisdictions in which such purchasers reside, or an exemption from such qualification exists in such jurisdictions, and holders of the Redeemable Warrants would have no choice but to attempt to sell the Redeemable Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. Speculative Nature of Redeemable Warrants; Adverse Effect of Possible Redemption of Redeemable Warrants. The Redeemable Warrants do not confer any rights of Common Stock ownership on the holders thereof, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of Common Stock at a fixed price for a limited period of time. Specifically, holders of the Redeemable Warrants may exercise their right to acquire Common Stock and pay an exercise price of $6.00 per share, subject to adjustment in the event of certain dilutive events, on or prior to February 6, 2000, after which date any unexercised Redeemable Warrants will expire and have no further value. There can be no assurance that the market price of the Common Stock will ever equal or exceed the exercise price of the Redeemable Warrants, and consequently, whether it will ever be profitable for holders of the Redeemable Warrants to exercise the Redeemable Warrants. The Redeemable Warrants are subject to redemption by the Company, at any time on 30 days prior written notice, at a price of $0.25 per Redeemable Warrant if the average closing bid price for the Common Stock equals or exceeds $7.00 per share for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. Redemption of the Redeemable Warrants could force the holders thereof to exercise the Redeemable Warrants and pay the exercise price at a time when it may be disadvantageous for such holders to do so, to sell the Redeemable Warrants at the current market price when they might otherwise wish to hold the Redeemable Warrants, or to accept the redemption price, which may be substantially less than the market value of the Redeemable Warrants at the time of redemption. The holders of the Redeemable Warrants will automatically forfeit their rights to purchase shares of Common Stock issuable upon exercise of the Redeemable Warrants unless the Redeemable Warrants are exercised before they are redeemed. 26 27 On or about October 25, 1996, a registration statement filed with the Securities and Exchange Commission became effective in connection with a temporary reduction in the exercise price of its Redeemable Warrants and the issuance of certain new warrants to holders of Redeemable Warrants who choose to exercise the Redeemable Warrants. . No Dividends. The Company has not paid any dividends on its Common Stock and does not intend to pay any dividends in the foreseeable future. Earnings, if any, are expected to be retained for use in expanding the Company's business. Shares Eligible for Future Sale. Sales of substantial amounts of Securities in the public market or the perception that such sales could occur may adversely affect prevailing market prices of the Securities. The Redeemable Warrants being offered by the Company and the Redeemable Warrants being registered for the account of the Selling Security Holders entitle the holders of such Redeemable Warrants to purchase up to an aggregate of 4,500,000 shares of Common Stock at any time through February 7, 2000. In connection with the initial public offering, the Company issued to A.S. Goldmen & Co., Inc. Underwriter's Warrants to purchase up to 150,000 shares of Common Stock and/or Redeemable Warrants to purchase up to an additional 150,000 shares of Common Stock. Sales of either the Redeemable Warrants or the underlying shares of Common Stock, or even the existence of the Redeemable Warrants, may depress the price of the Common Stock or the Redeemable Warrants in the market for such Securities. In addition, in the event that any holder of Redeemable Warrants exercises his warrants, the percentage ownership of the Common Stock by current shareholders would be diluted. Finally, the Company has reserved 587,500 shares of Common Stock for issuance to key employees and officers pursuant to the Company's Stock Option Plan.Fully-vested options to purchase 385,302 shares of Common Stock have been granted pursuant to such Stock Option Plan. In the event that these or any other stock options granted pursuant to such Stock Option Plan are exercised, dilution of the percentage ownership of Common Stock owned by the public investors will occur. Moreover, the mere existence of such options may depress the price of the Common Stock. 27 28 PART II - OTHER INFORMATION ITEM 4 - Submission of Matters to a vote of Security Holders The Annual Meeting of shareholders of the Company was held on August 14, 1996 in Perris, California, for the purpose of electing a board of directors, and approving the appointment of auditors. Proxies for the meeting were solicited pursuant to Section 14 (a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitation. All of management's nominees for directors as listed in the proxy statement were elected with the following vote:
Name Votes For - ---- Russell Seheult 6,313,852 John Ellison, Jr. 6,313,852 Alan Grossberg 6,313,852 Jerry Willits 6,313,852 Wally Schlotter 6,313,852 Andrew Friedenberg 6,313,852 Jon Meloan 6,313,852
The appointment of BDO Seidman as independent auditors was approved by the following vote:
Votes For: 6,301,322 Votes Against: 7,900 Abstentions: 11,400
ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits Item 27. Financial Data Schedule 28 29 (b) Reports on Form 8-K No Reports on Form 8-K were filed in the reporting period for which this report is filed. 29 30 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: November 14, 1996 CinemaStar Luxury Theaters, Inc. by: /s/ JOHN ELLISON, JR. ------------------------------------------ John Ellison, Jr. President, Chief Executive Officer (principal executive officer) by: /s/ ALAN GROSSBERG ------------------------------------------ Senior Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) 30 31 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 27 Financial Data Schedule
31 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS MAR-31-1997 SEP-30-1996 609,526 0 128,365 0 0 1,268,531 12,029,975 2,177,154 12,166,916 2,479,718 2,000,000 0 0 7,285,110 (5,196,118) 12,166,916 9,307,351 9,307,351 4,409,412 9,297,289 0 0 302,865 (277,645) 1,600 (279,245) 0 0 0 (279,245) (0.04) (0.04)
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