-----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, AG20qb1UxATrF4Hy96ULsihbwOcVAjWYDu+CziJZmI6uViQ9tmOtkmth9rx+sa+D qr8wY2sIjiN5wPBW891ZGA== 0000950148-96-001945.txt : 19960910 0000950148-96-001945.hdr.sgml : 19960910 ACCESSION NUMBER: 0000950148-96-001945 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960906 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: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-04422 FILM NUMBER: 96626827 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 SB-2/A 1 AMENDEMENT #2 TO FORM SB-2 1 As Filed with the Securities and Exchange Commission on September 6, 1996 Registration No. 333-4422 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ Amendment No. 2 to FORM SB-2 REGISTRATION STATEMENT* Under the Securities Act of 1933 ---------------------- CINEMASTAR LUXURY THEATERS, INC.** (Name of small business issuer in its charter) 431 COLLEGE BOULEVARD OCEANSIDE, CALIFORNIA 92057 (619) 630-2011 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) CALIFORNIA 7832 33-0451054 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer Identification No.) of Incorporation or Organization) Classification Code Number)
-------------- JOHN ELLISON, JR., PRESIDENT CINEMASTAR LUXURY THEATERS, INC. 431 COLLEGE BOULEVARD OCEANSIDE, CALIFORNIA 92057 (619) 630-2011 (Name and address, including zip code, and telephone number, including area code, of agent for service) Copies to: RONALD P. GIVNER, ESQ. BARRY D. FALK, ESQ. JEFFER, MANGELS, BUTLER & MARMARO LLP JEFFERS, WILSON & SHAFF 2121 AVENUE OF THE STARS, 10TH FLOOR 18881 VAN KARMAN AVENUE LOS ANGELES, CALIFORNIA 90067 IRVINE, CALIFORNIA 92715 (310) 203-8080 (714) 660-7700 Approximate Date of Commencement of Proposed Sale to the Public: As soon as practical after the Registration Statement is declared effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] In any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] 2 If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
================================================================================================================================== TITLE OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED REGISTERED OFFERING PRICE AGGREGATE REGISTRATION FEE PER SHARE OFFERING PRICE - ---------------------------------------------------------------------------------------------------------------------------------- Class B Warrants (1) 4,725,000 Wts. $4.50 $21,262,500 $7,331.90 Common Stock, no 4,725,000 Shs. $7.50 $35,437,500 $12,219.83 par value (2) Total Fee $19,551.73 Previously Paid - ----------------------------------------------------------------------------------------------------------------------------------
(1) Each Class B Warrant is issuable upon exercise of Redeemable Warrant along with one share of Common Stock for $7.00. Estimated offering price of a Class B Warrant is $0.25. See Rule 424(a). The Underlying Common Stock is covered by Registration Statement 33-86716. (2) Issuable upon exercise of Class B Warrants. See Rule 424(g). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION SUCH DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ----------------------- * Pursuant to Rule 429, the enclosed Prospectus constitutes a combined Prospectus relating to the Securities covered by Registration Statement No. 33-87164 (Common Stock, Redeemable Warrants and Underwriter's Warrants) and a post-effective amendment to said Registration Statement ** Formerly Nickelodeon Theater Co., Inc. 3 CINEMASTAR LUXURY THEATERS, INC. CROSS REFERENCE SHEET
ITEM NUMBER AND HEADING IN LOCATION FORM SB-2 REGISTRATION STATEMENT IN PROSPECTUS -------------------------------- ------------- 1. Front of the Registration Statement and Outside Front Cover Page of Prospectus........................... Facing Page and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front Cover and Outside Back Cover Pages of Prospectus............................................... Prospectus 3. Summary Information and Risk Factors..................... Prospectus Summary; Risk Factors 4. Use of Proceeds.......................................... Use of Proceeds 5. Determination of Offering Price.......................... Outside Front Cover Page of Prospectus; Risk Factors; The Offer; Selling Security Holder 6. Dilution................................................. Not Applicable 7. Selling Security Holders................................. Selling Security Holder; Outside Front Cover Page of Prospectus; Certain Transactions 8. Plan of Distribution..................................... The Offer; Selling Security Holder; Outside Front Cover Page of Prospectus; Risk Factors 9. Legal Proceedings........................................ Business 10. Directors, Executive Officers, Promoters and Control Persons.......................................... Management; Certain Transactions; Risk Factors 11. Security Ownership of Certain Beneficial Owners and Management........................................... Principal Shareholders; Selling Security Holder 12. Description of Securities................................ Description of Securities 13. Interest of Named Experts and Counsel.................... Not Applicable 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities........... Management 15. Organization Within Last Five Years...................... Certain Transactions; Management 16. Description of Business.................................. Business; Prospectus Summary; Risk Factors; Management's Discussion and Analysis 17. Management's Discussion and Analysis or Plan of Operations............................................... Management's Discussion and Analysis 18. Description of Property ................................. Business 19. Certain Relationships and Related Transactions........... Certain Transactions 20. Market for Common Equity and Related Stockholder Matters...................................... Market Prices; Description of Securities; Dividend Policy; Management; Certain Transactions 21. Executive Compensation................................... 22. Financial Statements..................................... Financial Statements 23. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................... Not Applicable
4 PROSPECTUS September __, 1996 CINEMASTAR LUXURY THEATERS, INC. OFFER TO HOLDERS OF REDEEMABLE WARRANTS FOR COMMON STOCK This offer expires on October __ 1996 at 5:00 p.m., Eastern Standard Time unless extended -------------------- SUBJECT TO THE TERMS AND CONDITIONS SET FORTH HEREIN, THE OFFER IS BEING MADE TO ALL EXISTING REDEEMABLE WARRANTHOLDERS OF CINEMASTAR LUXURY THEATERS, INC. AND CERTIFICATES REPRESENTING THE WARRANTS MAY BE TENDERED AND EXERCISED IN ACCORDANCE WITH THE TERMS HEREOF. -------------------- TO THE HOLDERS OF THE REDEEMABLE WARRANTS EXPIRING ON FEBRUARY 6, 2000 OF CINEMASTAR LUXURY THEATERS, INC. CinemaStar Luxury Theaters, Inc. (the "Company") hereby offers to holders of its Redeemable Warrants to lower the exercise price of the Redeemable Warrants each holder owns of record from $6.00 to $_____ per Redeemable Warrant share and to issue upon exercise of each Redeemable Warrant not only one share of Common Stock but also one Class B Redeemable Warrant (the "Class B Warrants"). To accept this Offer the Redeemable Warrants must be tendered and exercised on or prior to 5:00 p.m. Eastern Standard Time on October __, 1996, unless such date is extended by the Company in its sole discretion. EACH RECORD HOLDER OF REDEEMABLE WARRANTS MUST EITHER ACCEPT THE OFFER OR RETAIN HIS CURRENT REDEEMABLE WARRANTS ON THEIR CURRENT TERMS. The Redeemable Warrants were issued in the Company's initial public offering and private placements prior thereto. THE OFFER EXPIRES AT 5:00 P.M., EASTERN STANDARD TIME, ON OCTOBER __, 1996 UNLESS EXTENDED. The Company will accept for tender and exercise any and all Redeemable Warrants duly tendered and exercised pursuant to the Offer. There are 4,725,000 Redeemable Warrants outstanding and the Offer applies to all of the outstanding Redeemable Warrants. Officers and directors of the Company own 1,020 Redeemable Warrants. The Company has not obtained a fairness opinion concerning the Offer. -------------------- THESE ARE SPECULATIVE SECURITIES THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGES 12 TO 21. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------- Soliciting Agent: 5 THE BOSTON GROUP, L.P. The terms of the Offer were determined by negotiation between the Company and The Boston Group, LP, which will act as Soliciting Agent and which will receive a 4% fee for each Redeemable Warrant exercised. EXISTING REDEEMABLE WARRANTHOLDERS MUST MAKE THEIR OWN DECISION AS TO WHETHER TO TENDER AND EXERCISE THE REDEEMABLE WARRANTS PURSUANT TO THE OFFER AND, IF SO, HOW MANY REDEEMABLE WARRANTS TO TENDER AND EXERCISE PURSUANT TO THIS OFFER. The Redeemable Warrant exercise price will be payable at the Redeemable Warrantholder's option in cash or by certified or official bank check made payable to Continental Stock Transfer & Trust Company, Agent for CinemaStar Luxury Theaters, Inc. or by wire transfer to the Depository for the benefit of the Company. Continental Stock Transfer & Trust Company (the "Depository") and The Boston Group, L.P. (the "Soliciting Agent") have agreed to provide certain services in connection with the Offer. If you require assistance, please contact the Depository at (212) 509-4000 ext. 253, the Soliciting Agent at (310) 843-9007. The exercise of Redeemable Warrants is irrevocable, except that Redeemable Warrants exercised pursuant to the Offer may be withdrawn prior to 12:00 midnight, New York City time, on October __, 1996 (or the latest time and date at which the Offer, if extended by the Company, shall expire) or after ____________, 1996, if the Redeemable Warrants tendered and exercised have not been accepted by the Company. The Offer is subject to a number of conditions, but is not conditioned upon the exercise of a minimum number of Redeemable Warrants. The Company also reserves the right to extend the Offer provided that in no event will the Offer expire later than 5:00 p.m., New York City time, on October __, 1996. ------------------------- Each Class B Warrant entitles the registered holder thereof to purchase one share of Common Stock at an exercise price of $_____ per share, subject to adjustment, until September __, 2001. The Class B Warrants are redeemable by the Company at any time at a price of $0.25 per Class B Warrant, upon at least 30 days' prior written notice, provided that the closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc.'s Automated Quotation System shall equal or exceed $_____ 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. The Class B Warrants have neither voting or dividend rights nor any rights or preferences upon the liquidation or dissolution of the Company. This Prospectus relates up to 4,725,000 shares of Common stock which will underlie each Class B Warrant issued. See "Description of Securities -- Class B Warrants." This Prospectus also relates to 4,725,000 shares (the "Shares") of Common Stock (the "Common Stock") underlying 4,750,000 Redeemable Warrants. The Shares and the Redeemable Warrants are hereinafter sometimes collectively referred to as the "Securities." Each Redeemable Warrant entitles the registered holder thereof to purchase one share of Common Stock at an exercise price of $6.00 per share, subject to adjustment, until February 6, 2000. The Redeemable Warrants are redeemable by the Company at any time at a price of $0.25 per Redeemable Warrant, upon at least 30 days' prior written notice, provided that the closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc.'s Automated Quotation System shall equal or exceed $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. The Redeemable Warrants have neither voting or dividend rights nor any rights or preferences upon the liquidation or dissolution of the Company. See "Description of Securities." The Redeemable Warrants were issued in the Company's initial public offering in February 1995. -2- 6 This Prospectus also relates to warrants (the "Underwriter's Warrants") granted to Goldmen, the underwriter for the Company's initial public offering on February 7, 1995. The Underwriter's Warrants provide for the purchase from the Company of up to 150,000 shares of Common Stock and up to 150,000 Redeemable Warrants. The Underwriter's Warrants are exercisable at a price of $7.50 per share of Common Stock and $0.375 per Redeemable Warrant for a period of four years commencing on February 7, 1996. Thus, this Prospectus also relates to the 150,000 shares of Common Stock and 150,000 Redeemable Warrants underlying the Underwriter's Warrants and the 150,000 shares of Common Stock underlying such Redeemable Warrants. Goldmen is hereinafter referred to as the Selling Security Holder. The sale of the Selling Security Holder's Securities may be effected from time to time in transactions (which may include block transactions by or for the account of the Selling Security Holder) in the over-the-counter market or in negotiated transactions, through the writing of options on the Selling Security Holder's Securities, through a combination of such methods of sale, or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. If the Selling Security Holder sells its Securities, or options thereon, pursuant to this Prospectus at a fixed price or at a negotiated price which is, in either case, other than the prevailing market price or in a block transaction to a purchaser who resells, or if the Selling Security Holder pays compensation to a broker-dealer that is other than the usual and customary discounts, concessions or commissions, or if there are any arrangements either individually or in the aggregate that would constitute a distribution of the Selling Security Holder's Securities, a post-effective amendment to the Registration Statement of which this Prospectus is a part would need to be filed and declared effective by the Securities and Exchange Commission before such Selling Security Holder could make such sale, pay such compensation or make such a distribution. The Company is under no obligation to file a post-effective amendment to the Registration Statement of which this Prospectus is a part under such circumstances. The Common Stock and Redeemable Warrants of CinemaStar Luxury Theaters, Inc. are traded on the Nasdaq Small Cap Market (Symbols: LUXY and LUXYW). On September 4, 1996, the last sale prices of the Company's Common Stock and Redeemable Warrants were $5-1/2 and $1-11/16, respectively. There is currently no market for the Class B Warrants and no assurances can be given that a market will develop. In order to be quoted on the Nasdaq Small Cap Market, at least 100,000 Class B Warrants must be issued in the Offer. The Company estimates that the total costs of this offering, including the Offer (exclusive of soliciting fees to be paid to the Soliciting Agent), all of which will be paid by the Company, will be $140,000. -3- 7 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). These reports, proxy statements and other information can be inspected and copied at prescribed rates at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: The Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago Illinois 60661-2511 and the New York Regional Office, 7 World Trade Center, 12th Floor, New York, New York 10048. Such reports, proxy statements and other information filed by the Company can also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. Copies of such materials can also be obtained by mail at prescribed rates upon written request addressed to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Company has filed with the Commission in Washington, D.C., a Registration Statement on Form SB-2 under the Securities Act of 1933, as amended, with respect to the securities offered hereby (the "Registration Statement"). This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits and financial statements and schedules, if any, filed therewith or incorporated therein by reference. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or incorporated herein by reference, each statement being qualified in its entirety by such reference. The Registration Statement, including the exhibits thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of any and all parts thereof may be obtained from such office after payment of the fees prescribed by the Commission. -4- 8 PROSPECTUS SUMMARY THE COMPANY CinemaStar Luxury Theaters, Inc. (the "Company") develops, owns and operates multi-screen, primarily first-run movie theater locations in Southern California. The Company currently operates theaters having a total of 54 screens in San Diego and Riverside Counties in Southern California. Construction of the Company's first theater an eight screen theater complex at the Mission Marketplace Shopping Mall in Oceanside, California, was completed in November 1991. In May 1992, the Company opened the Galaxy Six Cinemas in Bonsall, California. In May 1993, the Company opened the Chula Vista 10, a 10 screen theater complex in Chula Vista, California. The Company acquired a six screen complex in Chula Vista, California in August 1995. In March 1996, the Company opened a 14 screen leased theater in Riverside, California. In August 1996, the Company opened a 10 screen leased theater in Perris, California. The Company has entered into agreements pursuant to which it has agreed to develop a 10 screen theater complex in Riverside, California, a 10 screen theater complex in San Marcos, California, an eight screen theater complex in Kailua-Kona, Hawaii and plans to add five screens to its theater in Oceanside. In addition, CinemaStar Luxury Theaters, S.A. de C.V., a 75% owned subsidiary of the Company, is developing a leased 12 screen theater in Guadalajara, Mexico and a leased 10 screen theater in Tijuana, Mexico. The Company has pursued a strategy of selectively developing and leasing multi-screen theaters, except for the six screen complex in Chula Vista which it owns. In evaluating theaters, the Company attempts to locate sites in which it can achieve a dominant position as the sole or leading exhibitor in the targeted film licensing zones. A film licensing zone (a "film zone") is a geographic area established by film distributors, generally encompassing a radius of from three to six miles in metropolitan and suburban markets (depending primarily upon population density), in which a given film is allocated to only one theater. The Company believes that forty of its 54 screens are located in film zones in which it presently is the only exhibitor and that the Ultraplex 14 in Riverside is the leading theater in its film zone. By developing theaters in film zones in which there are a limited number of theaters, the Company believes it is able to select the most desirable films from, and negotiate more effectively with, motion picture distributors that supply the Company's theaters with films. Film zones are designated in the sole discretion of film distributors and may be changed at any time for a variety of reasons, most of which are outside the control of the Company. The Company believes that the locations of its theaters, as well as its high-quality sound systems, state- of-the-art projection equipment, luxurious appointments, such as roomy, comfortable seats and spacious seating configurations, and a carefully selected and trained staff which emphasizes service, provide patrons with an enjoyable movie-going experience. The Company's theater complexes typically contain auditoriums having 120 to 390 seats, which provides the Company the flexibility to adjust its screening schedules by shifting films from larger to smaller auditoriums within the same complex in response to audience demand. The Company expects that its future growth will be dependent upon its ability to develop theaters in desirable locations, although it may consider strategic acquisitions of existing theaters or theater chains. The motion picture exhibition industry is highly competitive, particularly with respect to licensing films, attracting patrons and locating new theater sites. Many of the Company's competitors, including 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 longer, are better established in the markets in which the Company's theaters are or may be located and are better capitalized than the Company. Competition can also come from other sources such as cable television , direct satellite television, video tapes and pay-for-view. The ability of the Company to operate successfully depends on a number of factors, the most important of which is the availability of marketable motion pictures. In June 1996, Disney announced plans to distribute significantly fewer films in the future than they are presently distributing. Other distributors may also produce fewer films. Although the Company believes it can favorably compete with respect to the licensing of films, poor relationships with film distributors, a disruption in the production of motion pictures or poor commercial success of motion pictures booked by the Company would have a material adverse effect upon the Company's business and results of operation. -5- 9 The Company was incorporated in California in April 1989 under the name Nickelodeon Theater Co., Inc. and adopted its current name in August 1995. The Company's executive offices are located at 431 College Boulevard, Oceanside, California 92057 and its telephone number is (619) 630-2011. -6- 10 THE OFFER The Offer......................................................... The Company is offering to lower the exercise price of its Redeemable Warrants to $_____ and to issue one share of Common Stock and one Class B Warrant upon such exercise. The purpose of the Offer is to raise additional working capital to finance the planned additional theaters. The Company believes the Offer is a viable way of raising additional funds, although the Company is continuing to explore other alternatives. Expiration........................................................ The Offer expires at 5:00 p.m., New York City time, on October __, 1996, unless extended (the "Expiration Date"). The Expiration Date of the Offer may be extended, provided that in no event will the Offer expire later than 5:00 p.m., New York City time, on ____________, 1996. See "The Offer -- Expiration Date." Withdrawal Rights................................................. The tender and exercise of Redeemable Warrants pursuant to the Offer may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Withdrawn Redeemable Warrants may be re-tendered and re-exercised at any time prior to the Expiration Date. If the tendered and exercised Redeemable Warrants are not accepted by the Company by 5:00 p.m. New York City time ______________, 1996, withdrawal rights also apply. Impact on Non-tendering and Non-exercising Redeemable Warrantholders......................................... The reduced number of outstanding Redeemable Warrants as a result of the Offer may limit the trading market for the Redeemable Warrants and may adversely affect their liquidity and market price. TO THE EXTENT THE NUMBER OF REDEEMABLE WARRANTS AND REDEEMABLE WARRANTHOLDERS IS REDUCED PURSUANT TO THE OFFER, THE REDEEMABLE WARRANTS MAY NOT CONTINUE TO BE QUOTED BY NASDAQ AND MAY CEASE TO BE REGISTERED UNDER THE EXCHANGE ACT. See "Purposes and Effects of the Warrant Reduction Offer--Impact on Non-exercising Warrantholders." Acceptance of all Redeemable Warrants............................. The Company will accept any and all Redeemable Warrants duly tendered and exercised and not
-7- 11 properly withdrawn on the Expiration Date, subject to certain conditions. See "The Offer--Certain Conditions of the Offer." Conditions of the Offer........................................... The Offer is subject to a number of conditions. See "The Offer--Certain Conditions of the Offer." How to Exercise the Redeemable Warrants........................... Any holder of Redeemable Warrants wishing to accept the Offer should either (a) fill out the exercise subscription form on the back of the Redeemable Warrant Certificate and forward it along with (i) cash; (ii) a certified or official bank check made payable to Continental Stock Transfer & Trust Company, Agent for CinemaStar Luxury Theaters, Inc.; or (iii) a wire transfer to the Depository for the benefit of the Company in the amount of the aggregate warrant exercise price and any other required documents to the Depository, or (b) request a broker or bank to effect the transaction for him or her. HOLDERS OF REDEEMABLE WARRANTS REGISTERED IN THE NAME OF A BROKER, DEALER, BANK, TRUST COMPANY OR NOMINEE SHOULD INSTRUCT SUCH INSTITUTIONS TO EXERCISE THEIR REDEEMABLE WARRANTS. See "The Offer--How to Exercise the Redeemable Warrants." Delivery of Securities............................................ The Company will deliver the certificates for the shares of Common Stock and Class B Warrants issuable upon tender and exercise of the Redeemable Warrants as soon as practicable after the Expiration Date. See "The Offer--Issuance of Common Stock and Class B Warrants." Certain Income Tax Consequences................................... There is no current authority directly addressing the tax consequences of the Offer. The Company has not sought a ruling from the Internal Revenue Service or an opinion of counsel with respect to such tax consequences. Redeemable Warrantholders are urged to consult their own tax advisors regarding this matter. The Offer itself may constitute a significant modification of the Redeemable Warrants, resulting in a taxable exchange regardless of whether a Redeemable Warrantholder
-8- 12 accepts the Offer by tendering and exercising Redeemable Warrants. A Redeemable Warrantholder accepting the Offer may recognize income, gain or loss and would have a tax basis in the Common Stock and Class B Warrants acquired upon such tender and exercise determined in a manner consistent with the tax treatment of the transaction. See "The Offer--Certain Federal Income Tax Consequences." Depositary........................................................ Continental Stock Transfer & Trust Company, Two Broadway, New York, New York 10004. Soliciting Agent.................................................. The Boston Group, L.P., 2049 Century Park East 30th Floor/Suite 3000 Los Angeles, California 90067 (310) 843-9007.
OTHER OFFERINGS Securities Being Offered for the Account of the Company........................................................... Up to 4,725,000 shares of Common Stock underlying 4,725,000 Redeemable Warrants to the extent the Redeemable Warrants are not exercised in connection with the Offer and up to 4,725,000 shares of Common Stock underlying the Class B Warrants which may be issued in the Offer. Securities Being Offered for the Account of the Selling Security Holders.......................................... 150,000 shares of Common Stock, 150,000 Redeemable Warrants and 150,000 shares of Common Stock issuable upon exercise of such Redeemable Warrants are being registered and may be sold by the Selling Security Holder. The Company will not receive any of the proceeds from sales by the Selling Security Holder of the Common Stock or Redeemable Warrants, although it will receive the exercise price if the Redeemable Warrants are exercised. See "Selling Security Holder."
DESCRIPTION OF WARRANTS Terms of the Redeemable Warrants.................................. Except as provided in the Offer, each Redeemable Warrant entitles the holder to purchase one share of
-9- 13 Common Stock at a price of $6.00 per share, subject to adjustment, and is exercisable until February 6, 2000. The Redeemable Warrants will be redeemable at $0.25 per Redeemable Warrant, upon at least 30 days prior written notice provided that the closing bid price of the Common Stock as reported by Nasdaq shall equal or exceed $7.00 per share for any 20 trading days within a period of thirty consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. Terms of the Class B Warrants..................................... Each Class B Warrant will entitle the holder to purchase one share of Common Stock at a price of $_____ per share, subject to adjustment, and is exercisable until September __, 2001. The Class B Warrants will be redeemable at $0.25 per Redeemable Warrant, upon at least 30 days prior written notice provided that the closing bid price of the Common Stock as reported by Nasdaq shall equal or exceed $____ per share for any 20 trading days within a period of thirty consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. There are no Class B Warrants outstanding and no assurances can be given that a market for the Class B Warrants will exist after the Offer.
OUTSTANDING SECURITIES Common Stock Outstanding.......................................... 6,445,367 shares Redeemable Warrants Outstanding................................... 4,725,000 Redeemable Warrants Risk Factors...................................................... The securities offered hereby involve a high degree of risk. See "Risk Factors." Nasdaq Symbols: Common Stock.............................................. LUXY Redeemable Warrants....................................... LUXYW Class B Warrants.......................................... LUXYZ*
- ------------ * Proposed. The Class B Warrants will be quoted on the Nasdaq Small Cap Market only if at least 100,000 Class B Warrants are issued pursuant to the Offer. -10- 14 SUMMARY FINANCIAL DATA The following table sets forth, for the periods and at the dates indicated, summary consolidated financial data of the Company. The summary consolidated historical financial data has been derived from the audited consolidated financial statements of the Company for the two years ended March 31, 1996, and the unaudited consolidated financial statements for the three months ended June 30, 1996 and 1995. The results for the three months ended June 30, 1996, are not necessarily indicative of the results of operations as they may be in the future. The data should be read in conjunction with the financial statements, related notes and other financial information included elsewhere herein.
(In Thousands, except per share data) THREE MONTHS ENDED YEAR ENDED MARCH 31, JUNE 30, ------------------------------------------ ---------------------- 1995 1996 1995 1996 ---------------------------- -------- -------- -------- ACTUAL(1) PRO FORMA(2) --------- ------------ STATEMENT OF OPERATIONS DATA: Revenues ................................. $ 10,045 $ 11,624 $ 11,525 $ 2,679 $ 4,260 Cost and expenses ........................ 11,168 12,569 11,863 2,850 4,128 Operating income (loss) .................. (1,122) (946) (339) (170) 132 Other income (expense) ................... (961) (930) (298) (48) (148) Net loss ................................. $ (2,086) $ (1,875) $ (639) (218) (16) Net loss per common share ................ $ (0.29) $ (0.26) $ (0.10) $ (.04) $ -- Weighted average number of common shares outstanding ..................... 7,303 7,303 6,200 (6,200) 6,254 BALANCE SHEET DATA (END OF PERIOD): Working capital (deficiency) ............ $ 3,235 $ 43 $ (776) $ 289 $ (695) Total assets ............................ 6,783 6,783 8,950 6,736 10,481 Long-term debt and deferred rent liability 3,494 3,494 5,227 3,423 6,212 Shareholders' equity ..................... 2,080 2,080 1,541 1,862 1,938
- -------------------- (1) Includes Chula Vista 6 since August 17, 1995. (2) Includes the operations data of the Chula Vista 6 complex which was acquired on August 17, 1995 as if it was acquired on April 1, 1994. ------------------------------ -11- 15 RISK FACTORS THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS 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 PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. 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. 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. Therefore, the Company has a limited operating history. The Company has had significant and increasing 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. The Company had a net loss of $16,117 for the three months ended June 30, 1996. There can be no assurance as to whether the Company will be able to generate profits. Need for Additional Financing; Use of Cash. The Company has aggressive expansion plans but at June 30, 1996 had a working capital deficit of $695,122, an accumulated deficit of $5,443,020 and stockholder's equity of $1,938,870. In this regard, the Company has entered into lease and other binding commitments with respect to the development of 55 additional screens at seven locations through 1997. The capital requirements necessary for the Company to complete its development plans is estimated to be at least $12,000,000 through fiscal 1997. Such developments will require the Company to raise substantial amounts of new financing, in the form of additional equity investments or loan financing. 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. Further, any such financing may cause dilution of the interests of the current shareholders in the Company. 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, net income (loss) 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. The Company used a substantial portion of its available cash to purchase the Chula Vista 6 in August 1995 but obtained mortgage financing in January 1996 for part of the purchase price for such complex. 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 any may be in breach of the leases for such theaters. The Company cannot predict how many, if any, Redeemable Warrants will be tender and exercised in the Offer and thus, how much, if any, funds it will receive pursuant to the Offer. 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 needs and, thus, may issue debt and/or -12- 16 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. 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. In June 1996, Disney announced plans to distribute significantly fewer films in the future than they are presently distributing. Other distributors may also produce fewer films. See "Business -- Film Licensing." 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. See "Business -- Theater 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 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. 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. See "Business -- Theater Operations--Development of Theaters." 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. See "Business -- Theater Operations -- Development of Theaters." 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 -13- 17 such locations on term 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. 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. See "Business -- Overview of Movie Exhibition Industry" and "Business -- Film Licensing." 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. See "Business -- Competition." Geographic Concentration. Each of the Company's current theaters are located in San Diego and Riverside Counties, in Southern California and the proposed theaters are all in Southern California. 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. Moreover, over the past several years Southern California has experienced a severe economic recession and, as a result, economic conditions in Southern California have been significantly less favorable than the economic conditions in the United States, taken as a whole. A continuation of this relative weakness of Southern California economy could have a material adverse effect on motion picture attendance and results of operations of the Company's theaters. Dependence on Concession Sales. Concession sales accounted for approximately 29.4% and 27.9% of the Company's 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 -14- 18 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. See "Business --Theater Operations - Additional Revenue Sources." 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. See "Business -- Theater Operations -- Additional Revenue Sources" and "Certain Transactions." Increase in Minimum Wage. Most of the Company's employees are paid the minimum wage. On August 20, 1996, President Clinton signed legislation which will increase the federal minimum wage from $4.25 an hour to $4.75 effective October 1, 1996 and again to $5.15 effective September 1, 1997. In addition, California faces an initiative on the November ballot that proposes another two-step increase making the state minimum wage $5.75 an hour by early 1998. Increases to the minimum wage will increase the Company's operating expenses. Control of the Company. As of September 1, 1996, the current officers and directors of the Company own approximately 64.9% of the Common Stock (37.4% assuming exercise in full of the Redeemable Warrants, including the Redeemable Warrants being registered for the account of the Selling Security Holders). 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. See "Management," "Principal Shareholders" and "Description of Securities -- Common Stock." 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, Executive 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 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., Russell Seheult and Alan Grossberg, with respect to which the Company is the sole beneficiary. See "Management." 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, obtaining any required financing, 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 not conducted any efforts to determine the feasibility of expanding its staff, but in the past 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 -15- 19 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. 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. See "Business -- Theater Operations -- Proposed Theater Development." 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. See "Business -- Overview of Movie Exhibition Industry." 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. 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. Officer's Other Business Activities. Alan Grossberg, the Company's Executive Vice President and Chief Financial Officer, devotes a portion of his time and activities to the operation of a motion picture booking business. Pursuant to the terms of his employment agreement, Mr. Grossberg will not be required to devote a specific amount of time to his duties to the Company, but will be required to devote only such time and attention as may be reasonably necessary to perform and carry out such duties. Mr. Grossberg devotes approximately eight to 12 hours per week to his motion picture booking business and 28 to 32 or more hours per week to the Company's affairs. A substantial portion of the booking services rendered by Mr. Grossberg are provided to the Company. To the extent that Mr. Grossberg's film booking activities prevent him from devoting his complete time and attention to the business of the Company, its operations and future potential expansion could be materially adversely affected. See "Management -- Employment and Consulting Agreements". 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. See "Certain Transactions." Another potential conflict of interests may exist between Alan Grossberg and the Company with respect to the amount of time devoted by Mr. Grossberg to the Company's affairs. Pursuant to the terms of his employment agreement with the Company, Mr. Grossberg is permitted to conduct film booking services for entities other than the Company (so long as such services are not rendered to theaters owned or operated in a film licensing zone in which the Company owns, operates or has a commitment to lease or develop a theater). See "Management -- Employment and Consulting Agreements" and "Certain Transactions." As a result, a conflict may result between the demands placed on Mr. Grossberg by the Company and by his film booking business. -16- 20 In addition, a conflict of interest between the Company and Mr. Grossberg existed in connection with the negotiation of the terms of Mr. Grossberg's film booking agreement with the Company. In order to reduce the potential conflicts of interest between the Company and its officers and directors, prior to entering into any transaction in which a potential material conflict exists, the Company's policy has been and will continue to be to obtain the approval of a majority of the disinterested members of the Company's Board of Directors or the approval of holders of a majority of the shares of the Company's Common Stock (excluding the shares owned by the interested party). However, there can be no assurance that conflicts will be resolved in a manner favorable to the Company. 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 (or an entity controlled by him) receives an additional $52,000 per year in exchange 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 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 breech 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. See "Management -- Employment and Consulting Agreements." 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 a penny stock due, among other reasons, 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 and, thus, the ability of purchasers in this offering to sell their Securities in the secondary market. Possible Volatility of Common Stock and Redeemable Warrant Prices; Possible Adverse Effects of The Offer On The Redeemable Warrants. 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 -17- 21 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. THERE IS A MINIMUM OF 100,000 REDEEMABLE WARRANTS THAT MUST REMAIN OUTSTANDING AFTER THE OFFER FOR CONTINUED INCLUSION OF THE REDEEMABLE WARRANTS UNDER THE NASDAQ SMALL CAP MARKET. IF ENOUGH REDEEMABLE WARRANTS ARE TENDERED AND EXERCISED PURSUANT TO THE OFFER THE REDEEMABLE WARRANTS MAY NO LONGER BE QUOTED ON THE NASDAQ SMALL CAP MARKET, THE CURRENTLY LIMITED MARKET FOR THE REDEEMABLE WARRANTS COULD BE SEVERELY ADVERSELY AFFECTED RESULTING IN THE LACK OF ANY REAL MARKET FOR THE REDEEMABLE WARRANTS AND MATERIALLY ADVERSELY AFFECTING THE LIQUIDITY OF THE REDEEMABLE WARRANTS. THE COMPANY WILL NOT SEEK TO DELIST THE REDEEMABLE WARRANTS FROM THE NASDAQ SMALL CAP MARKET. Possible Adverse Effect of Offer on Market for the Securities. Although the Company has several market makers for its Securities and the Soliciting Agent is a an active market maker. During the Offer, the Soliciting Agent may have to cease making a market in the Securities. If during the term of the Offer, the Soliciting Agent has to cease making a market in the Securities, the market for the Company's Securities could be adversely effected. Lack of Market for the Class B Warrants. There is currently no market for the Class B Warrants and no assurances can be given as to how many Class B Warrants, if any, will be issued in the Offer or whether a market will develop for the Class B Warrants. If a market for the Class B Warrants does develop, the Class B Warrants will be subject to all the risks of the markets for the Securities described herein. Without a market for the Class B Warrants, the holders of the Class B Warrants may not be able to sell them and would be forced to exercise the Class B Warrants and sell the underlying Common Stock to realize any value in the Class B Warrants. The NASD requires at least 100,000 Class B Warrants to be outstanding for inclusion in the Nasdaq Small Cap Market. See "The Offer-Blue Sky Laws." Risk of Limitation of Use of Net Operating Loss Carryforwards. As of March 31, 1996, the Company had 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 2011 (subject to certain limitations). The initial public offering resulted in an "ownership change" as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and the issuance of warrants to investors in the Company's September 1994 private placement may have resulted in an ownership change under 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 the issuance of warrants resulted in an ownership change for purposes of the Code, the amount of net operating loss carryforwards, if any, available in any post-change year may be limited in each taxable year. It is uncertain whether -18- 22 the Offer would create an additional ownership change under Code Section 382 and an additional limitation in the Company's net operating loss carryforwards. Current Prospectus and State Registration Required To Exercise Redeemable Warrants and Class B Warrants. The Redeemable Warrants and the Class B Warrants (collectively, the "Warrants") are not exercisable unless, at the time of the exercise, the Company has a current prospectus covering the shares of Common Stock issuable upon exercise of the 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 Warrants. See "The Offer-Blue Sky Laws." In addition, in the event that any holder of the Warrants attempts to exercise any Warrants at any time after nine months from the date of this Prospectus, the Company may be required to file a post-effective amendment to the Registration Statement of which this Prospectus is a part and deliver a current prospectus before the Warrants may be exercised. Although the Company has undertaken to use its best efforts to have all of the shares of Common Stock issuable upon exercise of the Warrants registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Warrants, there is no assurance that it will be able to do so. The value of the Warrants may be greatly reduced if a current prospectus covering the Common Stock issuable upon the exercise of the 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 Warrants then reside. Investors may purchase the Warrants in the secondary market (if one exists) or may move to jurisdictions in which the shares underlying the Warrants are not registered or qualified during the period that the Warrants are exercisable. In such event, the Company will be unable to issue shares to those persons desiring to exercise their 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 Warrants would have no choice but to attempt to sell the Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. See "Description of Securities -- Redeemable Warrants" and "Description of Securities - Class B Warrants." Speculative Nature of Warrants; Adverse Effect of Possible Redemption of Warrants. The 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. Subject to the Offer, specifically, holders of the Redeemable Warrants and Class B Warrants may exercise their right to acquire Common Stock and pay an exercise price of $6.00 per share and $_____ per share, respectively, subject to adjustment in the event of certain dilutive events, on or prior to February 6, 2000 or September __, 2001, respectively, after which date any unexercised Redeemable Warrants -19- 23 and Class B Warrants, respectively, 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 respective Warrants, and consequently, whether it will ever be profitable for holders of the Warrants to exercise the Warrants. The Warrants are subject to redemption by the Company, at any time on 30 days prior written notice, at a price of $0.25 per Warrant if the average closing bid price for the Common Stock equals or exceeds $7.00 per share for the Redeemable Warrants or $_____ per share for the Class B Warrants 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 Warrants could force the holders thereof to exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for such holders to do so, to sell the Warrants at the current market price (if market exists) when they might otherwise wish to hold the Warrants, or to accept the redemption price, which may be substantially less than the market value of the Warrants at the time of redemption. The holders of the Warrants will automatically forfeit their rights to purchase shares of Common Stock issuable upon exercise of the Warrants unless the Warrants are exercised before they are redeemed. See "Description of Securities -- Redeemable Warrants" and "Description of Securities -- Class B 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. See "Dividend Policy." 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 Company may issue up to 4,725,000 shares of Common Stock upon exercise of the Common Stock under Redeemable Warrants at any time through February 6, 2000. A maximum of 4,725,000 shares of Common Stock could be issued upon exercise of Class B Warrants if the Offer is fully subscribed for. 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 Warrants or the underlying shares of Common Stock, or even the existence of the Warrants, may depress the price of the Common Stock or the Warrants in the market for such Securities or Class B Warrants (if a market develops). In addition, in the event that any holder of 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. As of the date of this Prospectus, fully-vested options to purchase 376,000 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. See "Management," "Selling Security Holders," "Certain Transactions -- Private Placements," "Shares Eligible for Future Sale" and "Underwriting." Limitation of Monetary Liability of Officers. Pursuant to the provisions of the California General Corporation Law, the Articles of Incorporation of the Company include a provision which eliminates the personal liability of its directors to the Company and its shareholders for monetary damages to the fullest extent permissible under California law. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing his duties, of a risk of a serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the California Corporations Code (concerning contracts or transactions between the Company and a director) or (vii) under Section 316 of the -20- 24 California Corporations Code (concerning directors' liability for improper dividends, loans and guarantees). The provision does not eliminate or limit the liability of an officer for any act or omission as an officer, notwithstanding that the officer is also a director or that his actions, if negligent or improper, have been ratified by the Board of Directors. Further, the provision has no effect on claims arising under federal or state securities laws and does not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Company's Articles of Incorporation also authorize the Company to indemnify its officers, directors and agents for breaches of duty to the Company and its shareholders, through bylaw provision, agreements, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification specifically permitted by statute; provided, however, that, in the context of a derivative action or class action on behalf of shareholders, the Company may not expand the right to indemnification so far as the standard of conduct of officers and directors is concerned. The Company has entered into indemnification agreements with all of its directors and executive officers whereby the Company has agreed to indemnify each such person (an "indemnitee") against claims arising out of certain past, present or future acts, omissions or breaches of duty committed by an indemnitee while serving as a director or officer of the Company or its subsidiaries. Under certain circumstances, such indemnification (including reimbursement of expenses incurred) will be allowed for liability arising under the Act. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. Tax Consequences of the Offer are Uncertain. There is no current authority directly addressing the federal income tax consequences of the Offer. The Company has not sought a ruling from the Internal Revenue Service or an opinion of counsel with respect to such federal income tax consequences. Redeemable Warrantholders are urged to consult their own tax advisors regarding this matter. The Offer may constitute a significant modification of the Redeemable Warrants resulting in (i) a taxable exchange resulting from the Offer, regardless of whether a Redeemable Warrantholder accepts such offer by tendering and exercising Redeemable Warrants or (ii) a recognition of income or gain resulting from acceptance of the Offer by a Redeemable Warrantholder. The Warrantholder's tax basis in the Common Stock and Class B Warrants acquired upon such tender and exercise would be determined in a manner consistent with the tax treatment of the transaction. See "Offer-- Certain Federal Income Tax Consequences." Possible Rescission Rights. Purchasers of units in a private placement were provided with unaudited financial statements which, upon subsequent audit, proved to be inaccurate. In particular, the unaudited financial statements contained in the Company's offering documents, which management believed to be prepared in accordance with generally accepted accounting principles, were determined not to have been prepared in accordance with generally accepted accounting principles in several respects, the most significant of which was the failure of the financial statements to amortize payments due under long-term leases (which typically call for increasing rental payments over time) on a straight-line basis. As a result, the financial statements significantly understated the extent of the Company's operating losses and stockholders' deficit for the periods in question. As a result of the differences between the financial statements contained in the prospectus for the initial public offering and the financial statements contained in the offering documents for the private placement, the purchasers of units might seek to rescind their investment or seek other damages. If the purchasers of such units rescind their investment or seek other damages, the Company might be liable to these investors for the full amount of their investment (an aggregate of $3,000,000), plus interest and any fines or penalties which state regulators or courts may impose. In addition, the Company would bear the costs of any rescission offer. However, the Company used approximately $3,073,176 of the proceeds of the initial public offering to repay in full the principal of and interest on the promissory notes issued in connection with the private placement. As a result, the Company believes that its potential liability in any suit by purchasers of units has been significantly reduced, particularly since they now hold only Redeemable Warrants. -21- 25 THE OFFER Summary. The Company hereby offers to the holders of its Redeemable Warrants duly tendered and exercised on the following basis: To lower the exercise price per share from $6.00 per Redeemable Warrant to $______ and to receive for each Redeemable Warrant tendered and exercised not only one share of Common Stock but also one Class B Warrant. For a description of the Class B Warrants, see "Description of Securities -- Class B Warrants." Each record holder of Redeemable Warrants must either accept the Offer during its term and tender and exercise any or all of his Redeemable Warrants at $______ per Redeemable Warrant or retain his current Redeemable Warrants on their current terms. See "Description of Securities -- Redeemable Warrants." Subject to the terms and conditions described below, the Company is obligated to accept tenders and exercises of all the outstanding Redeemable Warrants which are tendered and exercised pursuant to the Offer, if any are accepted. Holders of Redeemable Warrants will not be required to pay any brokerage commissions or fees with respect to the tender and exercise of their Redeemable Warrants that would ordinarily be associated with the regular exercise of their Redeemable Warrants. The Company will pay all charges and expenses of the Depository and the Soliciting Agent in connection with the Offer. Purpose of the Offer. The Company has proposed the Offer at this time, since the tender and the exercise of a significant number of the Redeemable Warrants would provide the Company with additional working capital. As set forth elsewhere herein, the Company needs at least $6,200,000 to complete its development plans for opening new theaters. Further, given the existence of the Redeemable Warrants and the fact that the market prices for the Common Stock are at a level which may allow the Company to call the Redeemable Warrants for redemption, the Company is making this offer at this time instead of possibly calling the Redeemable Warrants for redemption. The terms of this Offer were determined by The Boston Group, L.P., after consulting with the Soliciting Agent. There was no independent committee of the Board of Directors of the Company which considered the Offer since except as provided below, no member of the Board of Directors or officers of the Company owns any Redeemable Warrants. The Board of Directors unanimously approved the Offer. No appraisal rights are available under California law for the holders of the Redeemable Warrant and the Company will not extend such rights to holders of the Redeemable Warrants. The Offer is not dependent on approval of a vote of the holders of a majority of the Redeemable Warrants nor was an independent committee appointed to represent the Redeemable Warrantholders. The officers and directors of the Company do not own any Redeemable Warrants, except for Andrew Friedenberg who owns 1,020 Redeemable Warrants. ACCEPTANCE OF THE OFFER BY HOLDERS OF THE REDEEMABLE WARRANTS IS COMPLETELY VOLUNTARY. THE COMPANY DOES NOT MAKE ANY RECOMMENDATION TO THE EXISTING REDEEMABLE WARRANTHOLDERS TO TENDER AND EXERCISE OR REFRAIN FROM TENDERING AND EXERCISING ANY OR ALL OF THEIR REDEEMABLE WARRANTS ELIGIBLE TO BE TENDERED AND EXERCISED. THE DECISION WHETHER OR NOT TO TENDER AND EXERCISE MUST BE MADE BY EACH REDEEMABLE WARRANTHOLDER BASED UPON HIS INDIVIDUAL INVESTMENT OBJECTIVES, TAX POSITION AND OTHER FACTORS AFFECTING HIM PERSONALLY. -22- 26 Impact on Non-Tendering and Non-Exercising Warrantholder. THERE IS A MINIMUM OF 100,000 REDEEMABLE WARRANTS THAT MUST REMAIN OUTSTANDING AFTER THE OFFER FOR CONTINUED INCLUSION OF THE REDEEMABLE WARRANTS UNDER THE NASDAQ SMALL CAP MARKET. IF ENOUGH REDEEMABLE WARRANTS ARE TENDERED AND EXERCISED PURSUANT TO THE OFFER, THE CURRENTLY LIMITED MARKET FOR THE REDEEMABLE WARRANTS COULD BE SEVERELY ADVERSELY EFFECTED , SUCH EVENTS COULD RESULT IN THE REDEEMABLE WARRANTS NO LONGER BEING QUOTED ON NASDAQ, COULD RESULT IN THE LACK OF ANY REAL MARKET FOR THE REDEEMABLE WARRANTS AND COULD MATERIALLY ADVERSELY AFFECTING THE LIQUIDITY OF THE REDEEMABLE WARRANTS. The Company will not seek to delist the Redeemable Warrants from the NASDAQ Small Cap Market. Further, the Offer could result in less than 300 Redeemable Warrantholders of record which could make the Redeemable Warrants eligible for deregistration under Section 12(g)(4) of the Securities Exchange Act of 1934. However, the Company will not seek such deregistration even if available. The Common Stock will continue to be registered under Section 12(g) of such Act and the Class B Warrants will be so registered. Therefore, the Company will remain subject to all the applicable requirements of such Act, including filing periodic reports. Redeemable Warrantholders who do not accept the Offer will continue to hold their Redeemable Warrants under their original terms. Upon the tender and exercise of a Redeemable Warrant pursuant to the Offer, a Redeemable Warrant will be retired. Certain Federal Income Tax Consequences. The following summary is a general discussion of certain of the anticipated federal income tax consequences of the Offer. No discussion is included regarding any applicable state, local or foreign tax laws. The summary is limited to Redeemable Warrantholders who hold the Redeemable Warrants as "capital assets" (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"). The tax consequences to any particular Redeemable Warrantholder may be affected by matters not discussed below. For example, certain types of Redeemable Warrantholders (including life insurance companies, tax-exempt organizations and foreign taxpayers) may be subject to special rules not addressed in this summary. There is no current authority directly addressing the tax consequences of the Offer, and the Company has not sought a ruling from the Internal Revenue Service ("IRS") or an opinion of counsel with respect to such tax consequences. ACCORDINGLY, EACH REDEEMABLE WARRANTHOLDER IS URGED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF HOLDING OR EXERCISING THE REDEEMABLE WARRANTS. The Offer is probably a tax-free event to the Redeemable Warrantholders. However, the Offer contains a significant modification to the terms of the Redeemable Warrants. Accordingly, the Offer itself may be characterized as either a deemed distribution to, or a deemed exchange by, the Redeemable Warrantholders regardless of whether a Redeemable Warrantholder accepts the Offer. Whether the transaction is treated by the IRS as a deemed distribution under Sections 305 and 301 of the Code, or a material change in the terms of the Redeemable Warrants resulting for federal income tax purposes in a deemed exchange of the existing Redeemable Warrants, the tax treatment will be essentially the same assuming the Company has no current earnings and profits during the taxable year of the Offer. Each Redeemable Warrantholder would recognize -23- 27 capital gain (or loss only in the case of a deemed exchange) as a result of the Offer in an amount equal to the difference between (i) the tax basis of the Redeemable Warrant and (ii) the fair market value of the Class B Warrants received in the deemed distribution or deemed exchange. In the case of a deemed exchange, the Redeemable Warrantholders would receive a basis adjustment consistent with the tax treatment of the transaction. The holding period for the Class B Warrants received in the distribution or deemed exchange would begin on the day after the date of the Offer. To the extent the Company has earnings and profits during the taxable year of the Offer each Redeemable Warrantholder may have ordinary dividend income from a deemed distribution by the Company limited in the aggregate to the amount of such earnings and profits. The remaining amount deemed distributed would be treated as described above. The Company does not intend to report the Offer as either a taxable dividend distribution or exchange. Redeemable Warrantholders ordinarily would not recognize any gain or loss at the time of exercise of their respective Redeemable Warrants. Upon such exercise the adjusted tax basis of the Common Stock and Class B Warrants received on the exercise of a Redeemable Warrant would equal the sum of the exercising Redeemable Warrantholder's tax basis in the Redeemable Warrant and the Redeemable Warrant exercise price paid allocated between the Common Stock and Class B Warrants based on their respective fair market values. The Redeemable Warrantholder's holding period for the Common Stock and Class B Warrants received upon such exercise would begin on the date such Redeemable Warrants are exercised. Another alternative treatment that could be asserted by the IRS is that, although the Offer itself does not cause a deemed exchange to occur, the acceptance of the Offer by any Redeemable Warrantholder would result in the recognition of income by the Redeemable Warrantholder (either as a deemed exchange of the Redeemable Warrant for the Class B Warrant, or a receipt of taxable rights by the Redeemable Warrantholder). If a deemed exchange were to occur, the Redeemable Warrantholder would recognize capital gain (or loss) in a manner and amount as described above with respect to the tax treatment of the Offer itself. If the acceptance of the Offer were treated as the receipt of a taxable right, the Redeemable Warrantholder would likely recognize income in an amount equal to the difference between (i) the sum of the reduction in the price to be paid for Common Stock pursuant to the Offer and the fair market value of the Class B Warrant and (ii) the tax basis of the Redeemable Warrant. In either case, the Redeemable Warrantholder would receive a basis adjustment consistent with the tax treatment of the transaction. No gain or loss will be recognized by the Company as a result of the Offer or the exercise of Redeemable Warrants. Pursuant to Section 382 of the Code, utilization of net operating loss ("NOL") carryforwards is limited if there is a change in control of the Company during a specified time period. Prior stock transactions have previously resulted in limitations under Section 382 with respect to the Company's NOL carryforwards. It is uncertain whether the exercise of Redeemable Warrants under the Offer, -24- 28 would create an additional change in control under Section 382 and an additional limitation on the Company's NOL carryforwards. Management believes that the value of the Company is such that NOLs that have been incurred since the last change in control will be available for use within the statutory carryforward periods, irrespective of the Section 382 limitation. See "Management's Discussion and Analysis--Liquidity and Capital Resources." -25- 29 How to Tender and Exercise. The acceptance by a Redeemable Warrantholder of the Offer pursuant to one of the procedures set forth below will constitute an agreement between the Redeemable Warrantholder and the Company in accordance with the terms and subject to the conditions set forth herein. For effective exercise, the exercise form on the reverse side of each Redeemable Warrant certificate must be completed and executed as indicated thereon and the Redeemable Warrants must be accompanied by payment of the aggregate exercise price in cash or certified or official bank check made payable to "Continental Stock Transfer & Trust Company, Agent for "CinemaStar Luxury Theaters, Inc." or by wire transfer to the Depository for the benefit of the Company, together with any other required documents. The foregoing materials must be delivered to and received by the Depository at its address set forth herein on or before the Expiration Date. However, in lieu of the foregoing, a holder may either (i) exercise the Redeemable Warrants pursuant to the procedure for book-entry tender and exercise set forth below (and a confirmation of such book-entry exercise must be received by the Depository on or before the Expiration Date) or (ii) comply with the guaranteed delivery procedure set forth below. THE BENEFICIAL HOLDERS OF REDEEMABLE WARRANTS THAT ARE HELD BY OR REGISTERED IN THE NAME OF A BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE OR CUSTODIAN ARE URGED TO CONTACT SUCH ENTITY PROMPTLY IF THEY WISH TO ACCEPT THE OFFER. Redeemable Warrants together with the cash, a certified or official bank check made payable to Continental Stock Transfer & Trust, Agent for CinemaStar Luxury Theaters, Inc. or a wire transfer to the Depository for the benefit of CinemaStar Luxury Theaters, Inc. and any other required documents to be delivered under the Offer should be delivered only by hand or by courier, or transmitted by mail, and only to the Depository and not to the Company or the Soliciting Agent. The method of delivery of Redeemable Warrants and all other required documents to the Depository is at the election and risk of the holder, but if such -26- 30 delivery is by mail it is suggested that the holder use properly insured, registered mail with return receipt requested, and that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the Depository on or prior to the Expiration Date. Within two business days after the date hereof, the Warrant Agent will establish with respect to the Redeemable Warrants at each of the Depository Trust Company, the Midwest Securities Trust Company and Philadelphia Depository Trust Company (each a "Book-Entry Transfer Facility" and collectively referred to as "Book-Entry Transfer Facilities") for purposes of the Offer. Any financial institution that is a participant in a Book-Entry Transfer Facility's system may make book-entry delivery of Redeemable Warrants by causing the Book-Entry Transfer Facility to transfer the same into the Depository's account at such Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedure for such transfer and to confirm such transfer to the Depository in writing. Any exercise of Redeemable Warrants to be effected through book-entry delivery at a Book-Entry Transfer Facility must have either (i) the Redeemable Warrants executed by the holder of record, together with the proper signature guarantees, and delivered to a Book-Entry Transfer Facility and the cash or certified or official bank check made payable to Continental Stock Transfer & Trust, Agent for CinemaStar Luxury Theaters, Inc. or a wire transfer for the benefit of the Company, together with all other documents required, transmitted to and received by the Depository at its address set forth herein on or before the Expiration Date or (ii) complied with the guaranteed delivery procedure set forth below. Delivery of documents to a Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedure does not constitute delivery to the Depository. If the certificates for Redeemable Warrants are registered in the name of a person other than the person executing such Redeemable Warrants, or if Redeemable Warrants that are not accepted for exercise pursuant to the Offer are to be returned to a person other than the registered owner, then the certificates for such Redeemable Warrants must be endorsed or accompanied by an appropriate instrument of transfer, signed exactly as the name of the registered owner appears on the certificates, with the signatures on the certificates or instruments of transfer guaranteed by a participant in the Medallion Signature Guarantee Program. If a holder of Redeemable Warrants desires to tender and exercise such Redeemable Warrants pursuant to the Offer but is unable either to deliver his certificates, the cash, the certified or official bank check or the wire transfer and all other required documents to the Depository on or before the Expiration Date or to comply with the procedure for book-entry exercise on a timely basis, such Redeemable Warrants may nevertheless be exercised pursuant to the Offer, provided that all of the following conditions are satisfied: (i) such tenders and exercises are made by or through a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondence in the United States (an "Eligible Institution"). (ii) prior to the Expiration Date, a properly completed and duly executed Notice of Guaranteed Delivery (by telegram, telex, facsimile transmission, mail or hand delivery) setting forth the name and address of the Redeemable Warrantholder and the number of Redeemable Warrants tendered and exercised, stating that the tender and exercise is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the Expiration Date, the Redeemable Warrants and the cash, the certified or official bank check or the wire transfer, together with all other documents required, will be deposited by the Eligible Institution with the Depository; and (iii) the certificates for all tendered and exercised Redeemable Warrants in proper form for transfer (or a written confirmation of book-entry transfer into the Depository's account at a Book-Entry Transfer Facility as -27- 31 described above) and the cash, the certified or official bank check or the wire transfer, together with all other documents required, are received by the Depository within three New York Stock Exchange trading days after the Expiration Date. The issuance of Common Stock and Class B Warrants in exchange for Redeemable Warrants tendered and exercised pursuant to the Offer will be made only after timely receipt by the Depository of the certificates for such Redeemable Warrants (or a confirmation of a book-entry transfer of such Redeemable Warrants into the Depository's account at one of the Book-Entry Transfer Facilities as described above) and the cash, the certified or official bank check or the wire transfer, together with all other documents required. If less than the entire number of Redeemable Warrants evidenced by a submitted certificate are to be tendered and exercised, the tendering and exercising Redeemable Warrantholder should indicate the number of Redeemable Warrants being tendered and exercised. The entire number of Redeemable Warrants represented by the certificates for Redeemable Warrants delivered to the Depository will be deemed to have been tendered and exercised unless otherwise indicated. All questions with respect to the validity, form, eligibility (including time of receipt) and acceptance for tender and exercise of Redeemable Warrants will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all exercises of Redeemable Warrants which it determines not to be in proper form, or the acceptance or exercise of which would, in the opinion of the Company's counsel, be unlawful. The Company also reserves the absolute right to waive any defect or irregularity in the tender and exercise of Redeemable Warrants. None of the Company, the Depository, the Soliciting Agent or any other person will be under any duty to give notification of any defects or irregularities in exercise, nor will they incur any liability for failure to give such notification. The tender and exercise of Redeemable Warrants will not be deemed to have been properly made until any irregularities have been waived by, or cured to the satisfaction of, the Company. The Company's reasonable interpretation of the terms and conditions of the Offer will be final and binding. It is a violation of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-4 promulgated thereunder for a person to tender Redeemable Warrants for his own account unless the person so tendering owns such Redeemable Warrants. Section 10(b) and Rule 10b-4 provide a similar restriction applicable to the tender or guarantee of a tender on behalf of another person. The tender and exercise of Redeemable Warrants to the Company pursuant to any of the procedures described in the Offer will constitute an agreement between the tendering and exercising Redeemable Warrantholder and the Company upon the terms and subject to the conditions of the Offer, including the tendering and exercising Redeemable Warrantholder's representations that (i) such Redeemable Warrantholder owns the Redeemable Warrants being tendered and exercised within the meaning of Rule 10b-4 and (ii) the tender and exercise of such Redeemable Warrants complies with Rule 10b-4. Source of Funds. To consummate the Offer, the Company believes it will need approximately $140,000 in expenses which it will pay out of existing working capital. See "The Offer-- Payment of Expenses" and "Use of Proceeds." Expiration Date. As used in this Offer, the term "Expiration Date" means 5:00 p.m., New York time, on October __, 1996; provided, however, that if the Company, in its sole discretion, has extended the period of time for which the Offer is open, the term "Expiration Date" means the latest time and date to which the Offer is extended. The Offer may be extended by notice from the Company to each Redeemable Warrantholder, but in no event shall the Offer be extended beyond __________, 1996. During any such extension, all Redeemable Warrants previously exercised and not withdrawn will remain subject to the Offer, subject to the right of a tendering and exercising Redeemable Warrantholder to withdraw -28- 32 such Redeemable Warrantholder's Redeemable Warrants. The Company shall notify the Depository of any extension by oral or written notice prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Any extension or expiration of the Offer will be followed as soon as practicable, but in no event later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date, by public announcement thereof, and any amendment of the Offer will be followed as soon as practicable by public announcement. Without limiting the manner by which the Company may choose to make such public announcement, the Company shall not, unless otherwise required by law, have any obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release to the Dow Jones News Service. If the Company decides to waive, modify or amend a material provision of the Offer, it may do so at any time, or from time to time, provided that it gives notice thereof in the manner specified above and extends such Offer to the extent required by the Securities Exchange Act of 1934 (the "Exchange Act"). With respect to an increase or decrease in the percentage of the class of securities being sought or a change in the consideration offered, Rule 13e-4(f)(1) under the Exchange Act generally requires that a tender offer remain open for at least 10 business days from the date that notice of such change is first published or sent or given to security holders. The minimum period during which the Offer must remain open following other material changes in the terms of the Offer or information concerning the Offer will depend upon the facts and circumstances, including the relative materiality of the change in the terms of information. Any amendment to the Offer will apply to all Redeemable Warrants tendered and exercised pursuant thereto, regardless of when or in what order the Redeemable Warrants are tendered and exercised. The term "business day" shall mean a day other than Saturday, Sunday or a federal holiday and shall consist of the time period from 12:01 a.m. through 12:00 midnight, New York City time. Withdrawal Rights and Return of Redeemable Warrants Not Tendered and Exercised. The Redeemable Warrants tendered and exercised pursuant to the Offer may be withdrawn subject to the procedures described below, at any time before the Expiration Date. Thereafter, such exercises are irrevocable, except that they may be withdrawn after the expiration of 40 business days from the commencement of the Offer, unless theretofore accepted for tender and exercise as provided herein. If the Company extends the period of time during which the Offer is open, is delayed in its acceptance of Redeemable Warrants for tender and exercise or is unable to accept Redeemable Warrants for tender and exercise pursuant to the Offer for any reason, then, without prejudice to the Company's rights under the Offer, the Depository may, on behalf of the Company, retain all Redeemable Warrants tendered and exercised, and such Redeemable Warrants may not be withdrawn except as otherwise provided herein, subject to Rule 13e-4(f)(5) under the Exchange Act. To be effective, a written, telegraphic or facsimile transmission of a notice of withdrawal must (i) be timely received by the Depository at its address set forth herein before the Depository receives notice of acceptance by the Company of the Redeemable Warrants, (ii) specify the name of the person who exercised the Redeemable Warrants, (iii) if the Redeemable Warrants have been deposited with or otherwise identified to the Depository, contain the description of the Redeemable Warrants to be withdrawn and indicate the certificate numbers shown on the certificates evidencing such Redeemable Warrants (except in the case of book-entry exercises) and (iv) be executed by the holder of the Redeemable Warrants in the same manner as the original Redeemable Warrant or be accompanied by evidence satisfactory to the Company that the person withdrawing the exercise pursuant to the Offer has succeeded to the beneficial ownership of the Redeemable Warrants. If the Redeemable Warrants have been tendered and exercised pursuant to the procedure for book-entry exercise, a notice of withdrawal must specify, in lieu of certificate numbers, the name and account number at a Book-Entry Transfer Facility (as hereinafter defined) to be credited with the withdrawn Redeemable Warrants. No interest shall be paid on any amount returned to a Redeemable Warrantholder pursuant to a proper withdrawal or otherwise, regardless of any delay in the Offer. -29- 33 All questions with respect to the validity, form and eligibility (including time of receipt) of notices of withdrawal will be determined by the Company, in its sole discretion, which determination will be final and binding. None of the Company, the Depository, the Solicitation Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give such notification. Any Redeemable Warrants properly withdrawn will thereafter be deemed not to have been validly exercised for purposes of the Offer. Moreover, withdrawn Redeemable Warrants may be re-tendered and re- exercised at any time prior to the Expiration Date. Certain Condition of the Offer. Notwithstanding any other provision of the Offer, the Company may cancel, modify or terminate the Offer and is not required to accept for tender and exercise any Redeemable Warrants pursuant to the Offer if prior to the Expiration Date: (i) there shall be pending, instituted or threatened any legal action or administrative proceeding before any court or governmental agency, by any governmental agency or any other person, prohibiting, restricting or delaying the Offer; (ii) any statute, rule or regulation shall have been enacted, or any action shall have been taken by any governmental authority, which would prohibit or materially restrict or delay consummation of the Offer; or (iii) there shall have occurred (and the adverse effect of such occurrence will be continuing): (a) any general suspension of, or limitation on prices for trading on, the Nasdaq Small Cap or National Market or in the other over-the-counter markets or the New York Stock Exchange; (b) a declaration of a banking moratorium by United States, New York or California authorities; or (c) a commencement of a war, armed hostilities or other international or national calamity directly or indirectly involving the United States of America which would reasonably be expected to affect materially and adversely (or to delay materially) the consummation of the Offer. In the event that the Company terminates the Offer pursuant to any of the conditions set forth above, the Depository will promptly return the applicable Redeemable Warrants and funds for the aggregate exercise price to the holders thereof. The Company reserves the absolute right to waive satisfaction of any conditions and compliance with any terms of the Offer. The Company further reserves the absolute right to reject any and all exercises not in proper form. The Company will accept any and all Redeemable Warrants which are properly exercised subject to the conditions stated herein, if any are accepted. Blue Sky Laws. This Offer is not being made to, nor will the Company accept tenders from, holders of the Redeemable Warrants in any jurisdiction of the United States in which this Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. In those jurisdictions in which the securities or blue sky laws require this Offer to be made by a licensed broker or dealer, this Offer will be made on behalf of the Company only by registered brokers or dealers who are licensed under the laws of such jurisdiction. Only Redeemable Warrantholders residing in the states set forth below and in which the Company has mailed this Prospectus may tender and exercise the Redeemable Warrants pursuant to the Offer. The Company initially selected the jurisdictions in which Redeemable Warrantholders may participate in the Offer after determining from the Redeemable Warrantholder records and from record owners the states where substantially all the known owners reside. The Company either then determined that there was an exemption available in such state for the Offer or the Company filed necessary applications for clearance of the Offer. For various reasons, but principally due to a lack of a state licensed broker/dealer in making the Offer, clearance of the Offer was denied by various state regulatory agencies. -30- 34 The Offer has been cleared in the following states and residents of such states can participate in the Offer: California, Colorado, [Connecticut], Florida, Georgia, Illinois, Maryland, [New Jersey], New Mexico, Nevada, New York, Rhode Island, Utah and Wisconsin. The Company may add additional states if it determines additional beneficial owners are in other states. This Prospectus will be delivered to those Redeemable Warrantholders eligible to participate in this Offer. In the event the Company receives a tender and exercise from a person who is not entitled to tender and exercise, the Company will promptly notify that person of his or its inability to participate in the Offer, and return any Redeemable Warrants and funds received. The Company either has not filed applications in the following states because it has no knowledge that a Redeemable Warrantholder resides in such state or it filed applications to qualify the Offer in the following states but after a good faith effort, the Offer was not approved in states set forth below and the Offer can not be made in such states: Alabama, Alaska, Arizona, Arkansas, Delaware, Washington D.C., Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, South Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia, Washington, West Virginia, and Wyoming. Issuance of Common Stock and Class B Warrants. Upon the terms and subject to the conditions of the Offer, Redeemable Warrants properly tendered for exercise and not properly withdrawn will be accepted for tender and exercise on the Expiration Date. For purposes of the Offer, the Company will be deemed to have accepted for exercise properly tendered and exercised Redeemable Warrants when, as and if the Company has given oral or written notice thereof to the Depository. All tendering and exercising holders of Redeemable Warrants will be deemed to have waived any right to receive notice of the acceptance of their Redeemable Warrants. Certificates for Common Stock and Class B Warrants and for Redeemable Warrants not tendered and exercised will be issued as promptly as practicable after the Redeemable Warrants are accepted for exercise. The Depository will act as agent for the tendering and exercising holders of Redeemable Warrants, for the purposes of issuing on behalf of Company the Common Stock and Class B Warrants and for returning Redeemable Warrants not tendered and exercised and transmitting such securities to the holders. Tendered and exercised Redeemable Warrants not accepted for exercise by the Company will be returned (or, in the case of Redeemable Warrants exercised by book-entry transfer through a Book-Entry Transfer Facility, will be credited to an account maintained with such Book-Entry Transfer Facility) without expense to the exercising holders as promptly as practicable following the Expiration Date. If the Company extends the period during which the Offer is open, is delayed in its acceptance for tender and exercise or is unable to accept for tender and exercise any Redeemable Warrants pursuant to the Offer for any reason, then, without prejudice to the Company's rights hereunder, the Depository, at the request of the Company, may nevertheless retain Redeemable Warrants exercised and tendered together with any cash, certified or official bank check or wire transfer and any other required document subject to the withdrawal rights of holders thereof as set forth herein and applicable securities laws. Mutilated, Lost, Stolen or Destroyed Certificates. Any holder whose certificates evidencing Redeemable Warrants have been mutilated, lost, stolen or destroyed should contact the Depository at its address set forth herein for further information. Solicitation of Tenders. The Company has entered into a Solicitation Agreement with The Boston Group, L.P., in which The Boston Group, L.P. will act as the exclusive Solicitation Agent for the Company in the Offer and will receive a four percent (4%) fee of the exercise price paid upon each tender and exercise of Redeemable Warrants pursuant to this Offer, except for Redeemable Warrants tendered for its own account. The Company has also agreed to indemnify The Boston Group, L.P. including for liabilities under the Securities Act of 1933. The Company has also agreed to reimburse The Boston Group, L.P. for its reasonable out-of- pocket expenses, including fees and disbursements of counsel, in connection with the Offer. The Boston Group, -31- 35 Inc. may also receive a four percent (4%) commission upon certain exercises of the Class B Warrants. See "Description of Securities - Class B Warrants." Except as set forth above, the Company will not pay any fees or commissions to any broker or dealer or any other person for soliciting tenders and exercise of the Redeemable Warrants pursuant to this Offer. Brokers, dealers, commercial banks and trust companies will be reimbursed by the Company for customary mailing and handling expenses incurred by them in forwarding offering materials to their customers. The Boston Group, L.P. is an active market maker for the Company's Securities and the failure to be able to be a market maker during the Offer could adversely affect the market for the Securities. Depositary. All correspondence in connection with the Offer should be addressed to the Depositary as follows:
By Mail By Hand Delivery Wire Transfer Instructions - ------- ---------------- -------------------------- Depositary: Depositary: Depositary: Continental Stock Transfer Continental Stock Transfer Chase Manhattan Bank (Chemical) & Trust Company & Trust Company 52 Broadway, New York, NY 10004 2 Broadway 2 Broadway, 19th Floor For account of Continental Stock New York, NY 10004 New York, NY 10004 Transfer & Trust Company as Agent Attention: Reorganization Telephone: (212) 509-4000 CinemaStar Luxury Theaters, Inc. Department Facsimile: (212) 509-5150 Acct #003-909851 ABA #021-000021
Payment of Expenses. The expenses to be incurred in connection with the Offer (exclusive of the fee to be paid to the Soliciting Agent) are estimated as follows: Registration Fees ($19,552), NASD and NASDAQ fees ($12,340), Depositary ($3,500), reproduction ($3,000), legal and accounting fees ($55,000), blue sky fees and expenses (including legal fees) ($20,000), Soliciting Agent expenses ($25,000) and miscellaneous other items ($1,108). Total fees are estimated at $140,000, all payable by the Company. Transfer Taxes. The Company will pay all transfer taxes, if any, applicable to the transfer to it and the exercise of Redeemable Warrants under the Offer but only from the registered holders thereof and issuance of the underlying Common Stock and Class B Warrants. Recent Transactions. There have been no transactions in the Redeemable Warrants or the underlying Common Stock that was effected during the past 40 business days by the Company or by any officer, director or controlling person of the Company. -32- 36 Subsequent Purchase of Redeemable Warrants and Common Stock. While the Company has no obligation to do so, it reserves the right, after the expiration of the Offer, to make subsequent offers to acquire Redeemable Warrants or purchase Redeemable Warrants directly from Redeemable Warrantholders or the Company's Common Stock, or to lower the exercise price on such terms and conditions as may then be specified, although no such purchases of Redeemable Warrants or Redeemable Common Stock or Class B Warrants or changes will be made by the Company, or its affiliates, within ten business days after the Expiration Date. MARKET PRICES On February 7, 1995, the Company's Common Stock and Redeemable Warrants became listed in the Nasdaq Small Cap Market (Symbols: LUXY and LUXYW) in connection with its initial public offering and continues to be traded in such market following the initial public offering on such date of the Common Stock at $5.00 per share and Redeemable Warrants at $0.25 per Redeemable Warrant. The table below shows the high and low bid prices had prices as reported by the Nasdaq. The bid prices represent inter-dealer quotations, without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
Calendar Year ended December 31, Common Stock Redeemable Warrants ------------ ------------------- High Low High Low ---- --- ---- --- 1995 First Quarter (From February 7, 1995) $7.50 $3.25 $2.13 $0.81 Second Quarter 4.25 2.75 1.41 0.56 Third Quarter 6.25 3.62 1.59 0.62 Fourth Quarter 7.47 4.50 1.84 0.87 1996 First Quarter 8.25 4.50 2.63 1.34 Second Quarter 8.88 7.38 2.63 2.17 Third Quarter 8.00 6.00 3.19 2.50
See "The Offer--Purpose of the Offer" as to the possible effect of the Offer on the limited market for the Redeemable Warrants. There currently is no market for the Class B Warrants and no assurance can be given that a market will develop. The Company as of June 7, 1996 has 52 shareholders of record and 39 holders of Redeemable Warrants of record. As of March 31, 1995 and 1996, the net tangible book value per share of the Company's Common Stock was $0.33 and $0.24, respectively. Net tangible per share represents the amount of total tangible assets reduced by the amount of all liabilities and divided by the number of shares of Common Stock outstanding. -33- 37 USE OF PROCEEDS Any net proceeds received from the Offer will be used for expansion of the Company's theaters and working capital. Gross proceeds from the Offer could range from no proceeds to $__________. See "The Offer -- Purpose of the Offer." The Company will not receive any amounts upon the sale of the Securities by the Selling Security Holder. The Company may receive funds upon exercise of Redeemable Warrants or Class B Warrants. Any such funds will be used for working capital. The Company estimates that the total costs of this offering, including the Offer (exclusive of soliciting fees paid to Soliciting Agent), all of which will be paid for by the Company, will be $140,000. DIVIDEND POLICY The Company has not paid any dividends since its inception and does not anticipate paying any dividends in the foreseeable future. Earnings, if any, of the Company are expected to be retained for use in expanding the Company's business. The payment of dividends is within the discretion of the Board of Directors of the Company and will depend upon the Company's earnings, if any, capital requirements, financial condition and such other factors as the Board of Directors may consider relevant. Dividend payments are currently prohibited by a bank loan agreement. MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations -34- 38 -35- 39 FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995 Total revenues for the year ended March 31, 1996 increased 14.7% to $11,524,740 from $10,045,581 for the year ended March 31, 1995. The increase consisted of a $1,095,257, or 15.7% increase in admission revenues and a $383,902, or 12.6%, increase in concession sales and other operating revenues. The Chula Vista 6 theater opened in August 1995 and accordingly the results of operations for the year ended March 31, 1996 include only eight months of operations at the Chula Vista 6. The Chula Vista 6 had admission revenues of $552,470 and concession sales and other operating revenues of $253,167 for total revenues of $805,637, accounting for 54.5% of the increase in total revenues of the Company taken as a whole. The Ultraplex 14 at Mission Grove opened March 29, 1996 and accordingly the results of operations for the year ended March 31, 1996 include only three days of operations at the Ultraplex 14 at Mission Grove. The Ultraplex 14 at Mission Grove had admission revenues of $26,623 and concession sales and other operating revenues of $14,092 for total revenues of $40,715, accounting for 2.8% of the increase in total revenues of the Company taken as a whole. Disney has announced that it will be cutting back its film production from approximately 40 films per year to about 30. Of the films Disney produces, the Company by choice, plays only about 70% of them. Of all the films the Company plays, Disney films account for anywhere between 5% and 9% of total film revenue. The Company believes that the Disney action will not result in any material impact on the Company. Further, the Company believes that other film companies may be increasing the number of films they release each year. Film rental and booking costs for the year ended March 31, 1996 increased 14.5% to $4,405,483 from $3,847,431 for the year ended March 31, 1995. The increase was due to additional film rental and booking costs paid on the additional admission revenues discussed above. As a percentage of admission revenues, film rental and booking costs for the year ended March 31, 1996 decreased to 54.5% from 55.0% for the year ended March 31, 1995. Cost of concession supplies for the year ended March 31, 1996 increased 5.9% to $1,252,603 from $1,182,436 for the year ended March 31, 1995. The dollar increase is primarily due to additional concession costs associated with increased admissions . As a percentage of concession revenues, concession costs for the year ended March 31, 1996 decreased to 39.0% from 40% for the year ended March 31, 1995. The decrease is due to concession sales at the Chula Vista 6 and the Ultraplex 14 at Mission Grove. The Company operates concessions at these theaters and experiences a lower cost than the fixed concession cost experienced at all of the other theaters where there is a contract with Pacific Concessions, Inc. to provide concessions for a 40% return of concession sales. -36- 40 Theater operating expenses for the year ended March 31, 1996 increased 0.6% to $3,473,009 from $3,453,768 for the year ended March 31, 1995. As a percentage of total revenues, other theater operating expenses decreased to 30.1% from 34.4% during the applicable periods, due primarily to the relatively fixed nature of certain of the theater operating expenses, such as rent, which did not vary significantly during the periods in question. In addition, Chula Vista 6 is owned by the Company and therefore no rent is paid on that theater. Theater operating expenses for the year ended March 31, 1996 decreased $200,768, or 5.8% on theaters operated by the Company partially as a result of a cost containment program in which senior management approves material purchase orders and volume discounts are obtained. In addition, whenever possible, the Company seeks competitive bids. Enactment of proposals to increase the Federal or California Minimum Wage would increase the Company's labor costs and may adversely affect results of operations. General and administrative expenses for the year ended March 31, 1996 increased 9.4% to $2,157,803 from $1,972,643 for the year ended March 31, 1995, primarily as a result of additional salary costs and increased legal and accounting expenses. As a percentage of total revenues, general and administrative costs decreased to 18.7% from 19.6% during the applicable periods. Depreciation and amortization for the year ended March 31, 1996 increased 27.1% to $574,377 from $451,924 for the year ended March 31, 1995, primarily due to additional depreciation related to the operation of the Chula Vista 6, which was acquired in August 1995 and additional equipment purchased at other theaters. Depreciation and amortization for the Chula Vista 6 was $65,070 or 53.1% of the increase. Interest expense for the year ended March 31, 1996 decreased to $400,966 from $609,862 for the year ended March 31, 1995 primarily as a result of the repayment of debt with the proceeds of the Company's initial public offering is February 1995. Results of operations for the year ended March 31, 1996 included a loss of $260,371 resulting from the refinancing of a capital equipment lease. The lease was refinanced in order to obtain more favorable terms. Results of operations for the year ended March 31, 1995 included $396,320 of debt issuance costs associated with the Company's private placement debt offering completed in September 1994. As a result of the above, the net loss for the year ended March 31, 1996 decreased 69.4% to $638,585 from $2,086,418 for the year ended March 31, 1995. THREE MONTHS ENDED JUNE 30, 1996, COMPARED TO THREE MONTHS, ENDED JUNE 30, 1995. Chula Vista 6 was purchased on August 17, 1995. The Ultraplex 14 at Riverside is leased by the Company and began operating March 28, 1996. Results from these two operations were not part of the quarter ended June 30, 1995, and are referred to as new theaters in the subsequent analysis. The Ultraplex 10 at Perris opened in August 1996. Total revenues for the three months ended June 30, 1996 increased 59.0% to $4,260,403 from $2,679,501 for the three months ended June 30, 1995. The increase consisted of a $1,081,006 or 57.4% increase in admission revenues, a $437,039, or 57.1% increase in concession sales, and a $62,857, or 202.1% increase in other operating revenues. New theaters had admission revenues of $1,102,922, concession sales of $487,698, and other operating revenues of $37,962 making total revenues from new theaters $1,628,582. There was a decrease in ongoing theater total revenues of $47,680, or 1.8%. Film rental and booking costs for the three months ended June 30, 1996 increased 51.6% to $1,603,729 from $1,057,668 for the three months ended June 30, 1995. The increase was due to additional film rental and booking costs paid on increased admission revenues. New theaters had film rental and booking costs of $594,404. As a percentage of admission revenues, film rental and booking costs for the three months ended June 30, 1996 decreased to 54.1% from 56.2% for the three months ended June 30, 1995. Cost of concession supplies for the three months ended June 30, 1996 increased 17.2% to $358,984, from $306,353 for the three months ended June 30, 1995. The dollar increase is primarily due to additional concession costs associated with increased concession sales. New theaters had concession costs of $68,547. As a percentage of concession revenues, concession costs for the three months ended June 30, 1996 decreased to 29.8% from 40.0% for the three months ended June 30, 1995. The ongoing theaters have a concession cost fix at 40% by contract with Pacific Concessions, Inc. ("PCI"). The concessions at the new theaters are operated by the Company and concession costs are at negotiated market prices. The contract with PCI is tied to loans PCI made to the Company and there is a substantial penalty to ending the contract earlier than its negotiated terms. Theater operating expenses for the three months ended June 30, 1996 increased 50.8% to $1,275,509 from $845,581 for the three months ended June 30, 1995. As a percentage of total revenues, theater operating expenses decreased to 29.9% from 31.6% during the applicable periods. New theaters had operating expenses of $486,118 accounting for all of the increase. General and administrative expenses for the three months ended June 30, 1996 increased 27.1% to $664,640 from $523,061 for the three months ended June 30, 1995. New theaters had general and administrative expenses of $100,916. As a percentage of total revenues, general and administrative costs decreased to 15.6% from 19.5% during the applicable periods. Depreciation and amortization for the three months ended June 30, 1996 increased 92.5% to $225,641 from $117,231 for the three months ended June 30, 1995. The increase is a result of additional purchases of equipment. New theaters had depreciation and amortization costs of $89,178. Interest expense for the three months ended June 30, 1996 increased to $150,661 from $103,521 for the three months ended June 30, 1995. This increase is attributable to new debt used to finance new theater development. Interest income for the three months ended June 30, 1996 decreased to $2,644 from $55,429 for the three months ended June 30, 1995. Lower bank cash balances account for the lower interest income. As a result of the factors discussed above, the net loss for the three months ended June 30, 1996 decreased 92.6% to $16,117, or $.00 per common share from $218,485, or $.04 per common share for the three months ended June 30, 1995. On August 20, 1996, President Clinton signed legislation which will increase the federal minimum wage from $4.25 an hour to $4.75 effective October 1, 1996 and again to $5.15 effective September 1, 1997. In addition, California faces an initiative on the November ballot that proposes another two-step increase making the state minimum wage $5.75 an hour by early 1998. Most of the employees working in the theaters operated by the Company receive salaries equal to the minimum wage and an increase in the minimum wage is expected to increase the operating expenses of the Company. 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 leasing arrangements for facilities and equipment. -37- 41 The Company has entered into lease agreements requiring it to develop 54 screens for approximately $12,000,000 with all such screens currently scheduled to be completed by March 1997. The Company plans to construct additional theater complexes; however, no assurances can be given that any additional theaters will be financed or constructed, or, if constructed, that they will be operated profitably. The Company leases its five of its current theater properties and various equipment under noncancelable operating lease agreements and require various minimum annual rentals. At August 15, 1996, the aggregate future minimum lease payments due under noncancelable operating leases was approximately $54,000,000. The Company has also signed lease agreement for five additional theater locations and expansions of one existing theater. The leases and expansion will require expected minimum rental payments aggregating approximately $88,000,000 over the life of the leases. Accordingly, existing minimum lease commitments as of August 15, 1996, plus those expected minimum commitments for the proposed theater locations and expansion would aggregate minimum lease commitments of approximately $142,000,000. -38- 42 During the year ended March 31, 1996, the Company generated cash of $320,052 from operating activities, as compared to using $1,056,182 in cash for the year ended March 31, 1995. The increased generation of cash for the year ended March 31, 1996 primarily resulted from the reduction of the net loss coupled with an increase in accounts payable. During the year ended March 31, 1996, the Company used cash for investing activities of $5,908,736, as compared to $187,874 for the year ended March 31, 1995. Increased use of cash for investing activities for the year ended March 31, 1996 primarily resulted from the purchase of the Chula Vista 6 theater and an increase in purchases of property and equipment . During the year ended March 31, 1996, the Company generated net cash of $1,955,349 from financing activities as compared to $5,242,418 for the year ended March 31, 1995. In 1995 the Company completed the private stock issuances which raised net proceeds of approximately $6,500,000. This was partially offset by the repayment of promissory notes and other debts. In February 1995 the Company completed an initial public offering of 1,500,000 shares of common stock and 1,500,000 redeemable warrants for an aggregate of $7,875,000. Underwriting discounts and other offering costs aggregated approximately $1,484,000 which yielded net proceeds of approximately $6,391,000 to the Company. In March 1995, the Company received notice that A.S. Goldmen & Co., Inc. had exercised its option to purchase 225,000 of the Company's Redeemable Warrants to cover over-allotments in connection with the Company's initial public offering. The sale of such Redeemable Warrants was consummated on or about March 24, 1995 and the net proceeds to the Company were approximately $46,000. During the three months ended June 30, 1996, the Company generated cash of $510,663 from operating activities, as compared to generating $450,087 in cash for the three months ended June 30, 1995. During the three months ended June 30, 1996, the Company used cash in investing activities of $736,802, as compared to $172,470 for the three months ended June 30, 1995. Purchase of equipment for new theaters accounts for the increase in use of cash in investing activities. During the three months ended June 30, 1996, the Company provided net cash of $909,886 from financing activities, as compared to using $81,257 for the three months ended June 30, 1995. The cash generated for the three months ended June 30, 1996 came from two debentures totaling $1,000,000 and a bank loan for $500,000, partially offset by debt repayments. As of June 30, 1996, the Company was in compliance with or had obtained waivers for all bank loan covenants. 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") to one entity, in transactions pursuant to Regulation S as promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. The Debentures are convertible into shares of Common Stock of the Company at a conversion price at $3.95 per share and $4.25 per share, respectively. The Debentures bear interest at the rate of four percent (4%) per annum, payable quarterly. The Convertible Debentures and accrued interest were converted into 245,367 shares of Common Stock. In connection with the placement of the Debentures, the Company paid brokerage commissions in the amount of approximately $134,000 to The Boston Group, L.P. At June 30, 1996, the Company had a working capital deficit of $695,122. On August 6, 1996, the Company issued two Convertible Debentures in the principal amount of $1,000,000 each to two purchasers in 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 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 are due and payable on the second anniversary of issuance. In connection with the issuance of the Convertible Debentures, the Company issued to each purchaser a five-year warrant to purchase 17,142 shares of Common Stock of the Company at an exercise price of $7.00 per share. The Company paid $230,000 in placement fees in connection with such financings. In the opinion of management, the Company believes it can obtain adequate capital and/or financing resources to sustain operations, satisfy all financial obligations and commitments, and finance the investment of all proposed new theater locations through fiscal 1997. However, future events, including the problems, delays, expenses and difficulties frequently encountered by small, under capitalized companies such as the Company, as well as changes in -39- 43 economic, regulatory or competitive conditions, may lead to cost increases that could make the funds anticipated to be generated from the Company's operations 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. If any additional financing is required, 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 lease and other binding commitments with respect to the development of 55 additional screens at five new and one existing location. The capital requirements necessary for the Company to complete its development plans is estimated to be at least $12,000,000 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 believes it has, or can obtain, adequate capital and/or financing resources to sustain operations through the year ending March 31, 1997. However, 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. 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 small, under capitalized companies such as the Company, 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. The Company used a substantial portion of its available cash to purchase the Chula Vista 6 in August 1995 but obtained mortgage financing in January 1996 for part of the purchase price of such complex. 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. 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 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, including net losses of $509,336, $1,551,002, $2,086,418, and $638,585 in the fiscal years ended March 31, 1993, 1994, 1995 and 1996, respectively. The net loss for the three months ended June 30, 1996 was $16,117. 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. As of March 31, 1996, the Company has net operating loss ("NOL") carryforwards of approximately $3,500,000 and $1,700,000 for Federal and -40- 44 California income tax purposes. The Federal NOLs are available to offset future years taxable income and expire during the year ended March 31, 2006 through the year ending March 31, 2010, while the California NOLs are available to offset future years taxable income and expire during the year ending March 31, 1998 through the year ending March 31, 2001. The utilization of these NOLs could be limited due to restrictions imposed under federal and state laws upon a change in ownership. At March 31, 1996, the Company has total deferred income tax assets of approximately $1,476,000. Such potential income tax benefits, a significant portion of which relates to 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 recurring losses from operations. On March 1, 1996, the Company borrowed $500,000 from a bank. The loan bears interest at two points over prime (currently 10.25%) and is due on April 1, 2003. The Company must maintain certain ratios and cannot pay any dividends. The loan is secured by all the Company's personal property and life insurance policies on the lives of Messrs. Ellison, Jr. and Grossberg. Further, Messrs. Ellison, Jr., Grossberg and Seheult guarantee the loan. The Company's largest creditor is Pacific Concessions, Inc, ("Pacific Concessions") which has a number of outstanding loans to the Company having an aggregate principal amount of $1,024,700 as of March 31, 1996. Each of such loans bears interest at the prime rate plus 2% and is secured by substantially all of the assets of the Company. Principal and interest on the loans are paid in monthly installments which totals approximately $25,700 for all of the loans. Pacific Concessions has contracted with the Company to provide certain concession equipment and supplies. The loans by Pacific Concessions to the Company are generally secured by the Company's concession and projection equipment. Pursuant to the terms of 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, 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, and setting off any rents or other payments owed to the Company against payments under Pacific Concessions' 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. Seasonality and Inflation 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. During the past few years, inflation in the United States has been relatively stable. Should the American economy again experience double-digit inflation rates, as was the case in the past, the Company's results of operations may be adversely affected due to lower admission revenues and higher expenses. New Accounting Standards -41- 45 Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company is in the process of analyzing the impact of this statement and does not believe that it will have a material impact on the Company's financial position or results of operations. The Company anticipates adopting the provisions of the statement for fiscal year 1997. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," established financial accounting and reporting standards for stock-based employee compensation plans and certain other transactions involving the issuance of stock. The Company is in the process of analyzing the impact of this statement and anticipates adopting the provisions of the statement for fiscal year 1997. BUSINESS General The Company develops, owns and operates multi-screen, primarily first-run movie theater locations in Southern California. The Company currently operates five theaters having a total of 54 screens in San Diego and Riverside Counties in Southern California. Construction of the Company's first theater, an eight screen leased theater complex at the Mission Market Place Shopping Mail in Oceanside, California, was completed in November 1991. In May 1992, the Company leased the Galaxy Six Cinemas in Bonsall, California. In May 1993, the Company began leasing the Chula Vista 10, a ten screen theater complex in Chula Vista, California. The Company acquired a United Artists theater in Chula Vista, California, a 6 screen complex, in August, 1995. The Company opened a leased 14 screen theater complex in Riverside, California in March 1996. The Company opened a leased 10-screen theater complex in Perris, California in August 1996. The Company has entered into agreements pursuant to which it has agreed to develop a 10 screen theater complex in Riverside, California, a 10 screen theater complex in San Marcos, California, and an eight screen theater complex in Kailua-Kona, Hawaii and plans to add 5 screens to its theater in Oceanside. In addition, CinemaStar Luxury Theaters, S.A. de C.V., a 75% owned subsidiary of the Company, is developing a leased 12 screen theater in Guadalajara, Mexico and a leased 10 screen theater in Tijuana, Mexico. The Company has pursued a strategy of selectively developing and leasing multi-screen theaters. In evaluating theaters, the Company attempts to locate sites in which it believes it can achieve a dominant position as the sole or leading exhibitor in the targeted film licensing zones. A film licensing zone (a "film zone") is a geographic area established by film distributors, generally encompassing a radius of from three to six miles in metropolitan and suburban markets (depending primarily upon population density), in which a given film is allocated to only one theater. Forty of the Company's 54 screens are located in film zones in which it presently is the only exhibitor. By developing theaters in films zones in which there are a limited number of theaters, the Company believes it is able to select the most desirable films from, and negotiate more effectively with, motion picture distributors that supply the Company's theaters with films. Film zones are designated in the sole discretion of film distributors and may be changed at any time for a variety of reasons, most of which are outside the Company's control. -42- 46 The Company believes that the locations of its theaters, as well as its high-quality sound systems, state-of- the-art projection equipment, luxurious appointments, such as roomy, comfortable seats and spacious seating configurations, and a carefully selected and trained staff which emphasizes service, provide patrons with an enjoyable movie-going experience. The Company's theater complexes typically contain auditoriums having 120 to 390 seats, which provide the Company the flexibility to adjust its screening schedules by shifting films from larger to smaller auditoriums within the same complex in response to audience demand. The Company expects that its future growth will be dependent upon its ability to develop theaters in desirable locations, although it may consider strategic acquisitions of existing theaters or theater chains. The motion picture exhibition industry is highly competitive, particularly with respect to licensing films, attracting patrons and locating new theater sites. Many of the Company's competitors, including 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 longer, are better established in the markets in which the Company's theaters are or may be located and are better capitalized than the Company. Competition can also come from other sources such as cable television and video tapes. The ability of the Company to operate successfully depends on a number of factors, the most important of which is the availability of marketable motion pictures. Although the Company believes it can favorably compete with respect to the licensing of films, poor relationships with film distributors, a disruption in the production of motion pictures or a poor commercial success of motion pictures booked by the Company would have a material adverse effect upon the Company's business and results of operations. See "Business -- Film Licensing" and "Business--- Competition." The Company conducts a portion of its business through CinemaStar Luxury Cinemas, Inc., a California corporation and a wholly-owned subsidiary of the Company which manages the Chula Vista 10. In addition, in July 1994, certain officers and directors of the Company contributed to the Company their 60% ownership interest in CinemaStar Luxury Theaters, S.A. de C.V., a Mexican corporation which is in the process of opening two theater complexes. Overview of Movie Exhibition Industry Participants in the domestic motion picture exhibition industry vary substantially in size, from small independent operators of single screen theaters to large national chains of multi-screen theaters, many of which are affiliated with entertainment conglomerates. In an effort to achieve greater operating efficiencies, many theater operators have emphasized the development of multi-screen theater complexes over the past decade, as evidenced by a gradual increase in the total number of screens in the United States as well as an increase in the average number of screens per location. Theatrical motion picture exhibition is typically the initial release vehicle for filmed entertainment. However, the motion picture exhibition industry faces competition from a number of motion picture exhibition delivery systems. In recent years, alternative motion picture exhibition delivery systems have been developed for the exhibition of filmed entertainment, including cable television, direct satellite television, video cassettes and pay-per-view. Management believes that the emergence of these and other new forms of home entertainment has not adversely affected theater admissions; as evidenced by the relatively stable motion picture attendance patterns over the past ten years. Annual U.S. theater attendance during this period has ranged from -43- 47 approximately 1.0 billion to 1.2 billion. However, there can be no assurance that new or alternative forms of entertainment or motion picture delivery systems will not adversely impact motion picture attendance in general or at the Company's theaters in particular. Movie theaters also face competition from other forms of entertainment competing for the public's leisure time and disposable income. Traditionally, the motion picture industry's largest producers and distributors have been the seven major studios (Paramount, Disney/Touchstone, Warner Brothers, Columbia/Tri-Star, Universal, 20th Century Fox and MGM/UA). Since 1989, films distributed by these companies typically have accounted for between approximately 84% and 96% of annual U.S. admissions revenues. No single one of the seven major studios dominates the film distribution market. Disruption in the production of motion pictures by the major studios and/or independent producers or poor commercial success of motion pictures would have a material adverse effect upon the Company's business and results of operations, in June 1996, Disney announced plans to distribute significantly fewer films in the future than they are presently distributing. Other distributors may also produce fewer films. In licensing films, film distributors typically establish geographic film licensing zones and allocate each available film to one theater within that zone. As a result, the ability of motion picture exhibitors to maintain good working relationships with each of the major distributors is an important factor in the success of such exhibitor. The Company believes that it has good working relationships with each of the major motion picture distributors. See "Business - -- Film Licensing." The motion picture exhibition industry tends to be seasonal, as major film distributors have generally released the films expected to the greatest commercial appeal during the summer and the Thanksgiving through the year-end holiday season. However, the Company believes that this seasonality has been reduced in recent years as studios have begun to release major motion pictures somewhat more evenly throughout the year. Business Strategy The Company believes that the following characteristics are the key elements of its operating strategy: Identify Favorable Target Markets. The Company attempts to target markets in which it believes it can achieve a dominant position as a leading motion picture exhibitor. All of the Company's forty-four screens are currently located in film licensing zones in which it is the only exhibitor and the Company believes it is currently one of the dominant exhibitors in the remaining film zone in which it currently operates. The Company believes that a dominant market position will enable it to achieve a significant competitive advantage with respect to film bookings. In addition, the Company attempts to identify development sites in areas having economic and demographic trends that are favorable to increased motion picture attendance. Develop Multi-Screen Theaters. All of the Company's current and proposed screens are located in multi- screen theaters. By pursuing a multi-screen strategy, the Company believes it is able to reduce its dependence on any single film, more effectively respond to demand by adjusting its screening schedules to respond to attendance increases or decreases during the release life of a given film, and achieve operating efficiencies through staggered film starts that enable the Company to reduce the amount of staffing required to show its films. Focus on Patron Satisfaction. The Company attempts to develop and operate conveniently located, high quality facilities that offer a wide variety of films. To enhance the movie going experience, the Company typically invests in high-quality sound and projection equipment, luxurious appointments and a carefully selected and trained staff which emphasizes service. Theater Operations Development of Theaters. The Company generally oversees the design, development and construction of the theaters that it leases. In this regard, the Company's primary concerns are to identify potential theater sites -44- 48 in which it believes it will be the sole or leading exhibitor in the target film zone and to develop and/or acquire such sites at a reasonable cost. Other factors considered by the Company in the selection of a potential theater site include the size and demographics of the surrounding population, the accessibility and visibility of the theater site and economic trends in the surrounding community. Once a potential theater site has been selected and the Company determines that it wishes to develop such site, the Company negotiates and enters into a lease contract with the owner of the undeveloped property Pursuant to the terms of the lease contract, the property owner advances to the Company a negotiated estimate of the construction costs for the development. Developments typically include the Company's theater as the "anchor" tenant. but include other retail or commercial space as well. Once a lease, basic design and construction budget have been negotiated, the Company, through an independent construction project manager, oversees the design, construction and development of the Company's theater. The Company is responsible for completing construction of the theater project within the negotiated construction budget. In the event that the construction budget is not sufficient, the Company is required to fund any shortfall. Similarly, in the event that the Company is able to develop a site for less than the construction budget, any excess funds are retained by the Company. By directly overseeing the construction and development of its theaters, the Company believes it is able to negotiate favorable lease terms while retaining control over the quality and timing of construction. However, as a developer of theater properties, the Company is subject to many of the risks inherent in the development of real estate, including the risk that the construction funds advanced by the property owner will be insufficient to pay for the costs of construction. Other risks associated with the development and construction of theaters include the effects of 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 ran be no assurance that the Company will be able to successfully complete any theater development in a timely manner or within its proposed budget. Additional Revenue Sources. In addition to revenues from box office admissions, the Company receives revenues from concession sales. Concession sales typically constitute approximately 27% to 32% of the Company's revenues for a given fiscal year. During fiscal 1995 and 1996, concession sales constituted 29.4% and 27.9% of the Company's revenues, respectively. The Company's theaters offer a wide range of concession choices. The Company has entered into a long-term concession agreement with Pacific Concessions, Inc. for The Mission Market 8, Chula Vista 10, and Bonsall Galaxy 6 theaters. Pursuant to the terms of these agreements, Pacific Concessions, Inc. installs and supplies counters, equipment, paper and food items in a given theater, while the Company provides the concession space and employees to operate the concession stands. The agreements with Pacific Concessions, Inc. provide that the Company will receive approximately 60% of the gross concession revenues generated at a given theater and Pacific Concessions, Inc. receives the remainder. The concession agreements have terms ranging from eight to ten years and may be terminated by the Company prior to the expiration of the term upon payment of an early termination fee equal to 7.5% of the average monthly net concession sales multiplied by the number of months remaining in the term, less six months. The Company operates the concessions at the other theaters. -45- 49 Video games in certain locations were leased from third parties on a short-term basis and located in the lobby area of the Company's theaters. For the leased games half of all revenues collected are given to the lessor of the machines. In May of 1995 the Company terminated the third party involvement for its Mission Market 8 location and purchased video games, skill games, and a photo booth to replace the leased video games. At the Mission Market 8 location the Company now receives all of the proceeds which must now cover video game purchases and maintenance of the equipment. The Company intends in the future to purchase its own machines for all present and future locations. Video games do not constitute a significant portion of the Company's revenues. During fiscal 1995 and 1996, revenues from video games were $55,455 (0.6% of total revenues) and $181,652 (1.6%), respectively. Advertising and Marketing The Company relies upon advertisements and movie schedules published in newspapers to inform its patrons of film selections and show times. Primary television, radio and print advertising campaigns for major film releases are carried out and paid for by film distributors. The Company also participates in national "co-op" advertising with all major film distributors. In "co-op" advertising, the Company and a film distributor share the cost of advertising for a feature film that also advertises that the film is showing at one or more of the Company's theaters. The Company's theaters also show previews of coming attractions and films already playing at the Company's theaters in the same market area. -46- 50 In connection with the opening of a new theater, the Company utilizes a variety of promotional programs to create public awareness of the theater. Such promotional programs generally include discounted tickets and concession programs as well as more traditional printed advertising. Film Licensing The Company licenses films from distributors on a film-by-film and theater-by-theater basis. Prior to negotiating for a film license, representatives of the Company generally preview and evaluate upcoming films on the basis of cast, director, plot, performance of similar films, estimated film rental costs and expected Motion Picture of America rating. The Company's success in licensing a given film depends to a large extent upon its knowledge of trends and historical film preferences of the residents in markets served by the Company's theaters, as well as on the availability of commercially successful motion pictures. The Company negotiates and obtains film licenses through a film booking arrangement with Alan Grossberg, a director and officer of the Company. See "Certain Transactions." Films are licensed from the major film distributors and from independent film distributors that generally distribute films for smaller production companies. Film distributors typically establish geographic film licensing zones, generally encompassing a radius from three to six miles in metropolitan and suburban markets (depending primarily on population density) ("film zones"), and allocate each available film to one theater within that zone. The Company generally attempts to locate its theaters in film zones in which it is the sole or one of a few exhibitors, thereby permitting the Company to exhibit many of the most commercially successful films in these zones. The Company believes that 30 of its 44 screens are located in film zones in which it is the sole exhibitor, and that the Ultraplex 14 at Mission Grove is the leading theater in its film zone. In film zones where the Company is the sole exhibitor, film licenses for the Company are generally obtained by the Company selecting a film from among those offered and negotiating directly with the distributor. In film zones where there may be competition, a distributor will generally either require the exhibitors in the zone to bid for a film or will allocate films among the exhibitors in the film zone. When films are licensed under the allocation process a distributor will choose which exhibitor is offered a movie and then that exhibitor will negotiate film rental terms directly with the distributor. Over the past several years, distributors have generally used the allocation rather than bidding process and exhibitors compete for licenses based upon the exhibition fees to be paid. The Company currently does not bid for films in any of its markets, although it may be required to do so in the future. The Company predominantly licenses "first run" films. If a film has substantial remaining potential following its first run, the Company may license it for a "second run." Second runs enable the Company to exhibit a variety of films during periods in which there are few new releases. Film distributors establish second run availability on a national or market-by-market basis after the release in first run theaters and generally permit each theater within the market to exhibit such films. Film licenses entered into in either a negotiated or bidding process typically specify rental fees based on the higher of a gross receipts formula or theater admissions revenue formula. Under a gross receipts formula, the distributor receives a specified percentage of box office receipts from the licensed film with the percentage declining over the term of the film run. First run film rental fees usually begin at approximately 70% of box office receipts for the licensed film and gradually decline, over a period of four to seven weeks, to as low as 30% of box office receipts. Second run film rental fees typically begin at 35% of box office receipts for the licensed film and often decline to 30% of box office receipts after the first week. Under a theater admissions revenue formula (commonly known as a "90/10" clause), the distributor receives a specified percentage (i.e., -47- 51 90%) of the excess of box office receipts for a given film over a negotiated allowance for theater expenses. In addition, if the distributor deems a film to be extremely promising, the Company may be required to make refundable advance payments of film rental fees in order to obtain a license for a film. Although generally not specifically contemplated by the provisions of film licenses, the terms of film licenses often are adjusted or renegotiated subsequent to the initial release of the film. The Company's business is dependent upon the availability of marketable motion pictures and its relationships with distributors. Many distributors provide first run movies to the motion picture exhibition industry; however, distribution has been historically dominated by seven distributors (Warner Brother, Paramount, 20th Century Fox, Universal, Disney/Touchstone, MGM/UA and Columbia/Tri-Star) which, since 1989, have typically accounted for well over 75% of domestic admission revenues and virtually every one of the top grossing films in a given year. No single one of the seven major distributors dominates the market. Disruption in the production of motion pictures by the major studios and/or independent producers, poor commercial success of motion pictures or poor relationships with distributors would have a material adverse effect upon the Company's business and results of operations. In June 1996, Disney announced plans to distribute significantly fewer films in the future than they are presently distributing. Other distributors may also produce fewer films. Competition The motion picture exhibition industry is highly competitive, particularly with respect to film licensing including terms, the seating capacity, location and prestige of an exhibitor's theaters, the quality of projection and sound equipment at the theaters and the exhibitor's ability and willingness to promote the films. Competition for patrons is dependent upon factors such as the availability of popular films, the location of theaters, the comfort and quality of theaters and ticket prices. The Company believes that it competes favorably with respect to each of these factors. Participants in the domestic motion picture exhibition industry vary substantially in size, from small independent operators of a single screen theater to large national chains of multi-screen theaters affiliated with entertainment conglomerates. Many of the Company's competitors, including United Artists Theaters, Pacific Theaters and Mann 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 are better capitalized than the Company. 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, 20th Century Fox and MGM/UA), 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 are no significant barriers to entry in the motion picture exhibition industry and there can be no assurance that competition will not develop theaters in the same film zone or geographic vicinity as the Company's theaters. The Company believes that there is a growing trend in the motion picture exhibition industry toward larger, multiscreen theater complexes having as many as 20 screens which are part of larger family entertainment centers offering both traditional motion picture entertainment and other forms of family entertainment for its patrons. Certain of the Company's competitors have sought to increase the number of theaters and screens in operation. Such increase may cause certain markets to become over-screened, resulting in a negative impact on the earnings of the theaters involved, including the Company's theaters in those markets. Future advancements in motion picture exhibition technology and equipment may result in the development of state-of-the-art theaters by the Company's competitors which may make the Company's current theaters obsolete. There can be no assurance that the Company will be able to incorporate such new technology or equipment, if any, into its existing or future theaters, -48- 52 In recent years, alternative motion picture exhibition delivery systems have been developed for the exhibition of filmed entertainment, including cable television, direct satellite television, video cassettes and pay- per-view. While the impact of such delivery systems on movie theaters is difficult to determine precisely, there can be no assurance that they will not adversely impact attendance at the Company's theaters. Movie theaters also face competition from other forms of entertainment competing for the public's leisure time and disposable income. Government Regulation The distribution of motion pictures is in large part regulated by federal and state antitrust laws and has been the subject of numerous antitrust cases. The Company has never been a party to any of such cases but its licensing operations are subject to decrees issued in connection with such cases. Consent decrees resulting from these cases, which predate the formation of the Company, bind certain major film distributors and require the films of such distributors to be offered and licensed to exhibitors, including the Company, on a film-by-film and theater-by-theater basis. Consequently, exhibitors cannot assure themselves of a supply of films by entering into long-term arrangements with the major distributors, but must negotiate for licenses on a film-by-film and theater-by-theater basis. The federal Americans with Disabilities Act (the "ADA") prohibits discrimination on the basis of disability in public accommodations and employment. The ADA became effective as to public accommodations in January 11, 1992 and as to employment in July 1992. The Company designs its theaters in development so that they are in conformity with the ADA and it believes that its existing theaters are in substantial compliance with all currently applicable regulations relating to accommodations for the disabled. The Company intends to comply with future regulations relating to accommodating the needs of the disabled and the Company does not currently anticipate that such compliance will have a material adverse effect on the Company. The Company's theater operations are also subject to federal, state and local laws governing such matters as wages, working conditions, citizenship and health and sanitation requirements and licensing. A significant portion of the Company's employees are paid at the federal Minimum Wage and, accordingly, already adopted and further increases in the Minimum Wage would increase the Company's labor costs. In connection with the construction of its theaters, the Company, its contractors or landlords will be subject to the building permit and other requirements of local zoning and other laws and regulations. The Company does not anticipate that compliance with such laws and regulations will have a material adverse effect on its business. Employees As of June 6, 1996, the Company employed 258 persons, of which 35 were full-time and 223 were part-time employees. Of the Company's employees, 17 are corporate personnel, 18 are theater management personnel and the remainder are hourly personnel. The Company is not subject to any union or collective bargaining agreements and considers its employee relations to be good. Properties The Company currently operates five theaters with an aggregate of 44 screens in San Diego and Riverside Counties, in Southern California. Each of the Company's theaters is a multi-screen facility. Multi-screen theaters enable the Company to offer a diverse selection of films attractive to several segments of patrons residing within the drawing area of a particular theater. Varied auditorium seating capacities within the same theater enable the Company to reduce film rental costs, which generally decrease over the length of a film's release, by exhibiting films for a longer period by shifting films to smaller auditoriums to meet changing attendance levels. In addition, operating efficiencies are realized through the economics of having common box -49- 53 office, concession, projection, lobby and restroom facilities, which enable the Company to spread certain costs, such as payroll and rent, over a higher revenue base. The following briefly describes each of the Company's existing theaters: Chula Vista 10 (Chula Vista, California)--The Company considers the Chula Vista 10 as its "flagship" theater complex. This site is a ten screen, 34,037 square foot complex located in the Chula Vista Center which has a total seating capacity of 2,169 persons. The Chula Vista 10 contains multiple concession stands and a computerized ticketing system. Individual theater sizes range from 162 to 390 seats. Each theater features Lucasfilm Ltd's "THX SOUND" environment, along with six channel, digital surround-sound equipment, plush, reclining seats with cup holders, and row spacing that is designed to allow seated patrons more leg room as other patrons pass in front of them to reach their seats or the aisle. The largest theater in the Chula Vista 10 complex is capable of showing 70mm film presentations as well as more traditional film formats. The primary competition for the Chula Vista 10 is a six screen complex the Company acquired in August 17, 1995, which is located approximately one mile from the Chula Vista 10 and is in the same film licensing zone as the Chula Vista 10. In addition, a six screen Mann Theaters complex and a nine screen Pacific Theaters complex are located four miles from the Chula Vista 10, but each is considered to be in a separate film licensing zone. It is anticipated that by dominating the zone, and spreading available film product over sixteen screens, the Company will be able to increase its revenues on a per screen basis. The Chula Vista 10 theater is leased by CinemaStar Cinemas, Inc., a wholly-owned subsidiary of the Company, from Homart Development Co. The performance of the lease is guaranteed by several of the Company's shareholders and officers. The initial term of the lease is 20 years commencing May 1993, and provides for minimum rent payments of $288,000 per year for the first year of the lease, $576,000 per year for the next four years of the lease, $655,200 for the next five years of the lease, $748,800 per year for the next five years of the lease and $853,200 per year of the lease for every year thereafter until termination. All annual rental amounts are payable in equal monthly installments. In addition to the minimum rent payments, the lease requires CinemaStar Cinemas, Inc. to pay 10% of its net sales at the theater (excluding concession and certain other revenues) over a base level which increases annually from $2,880,000 in net sales in the first year of the lease to $8,532,000 in net sales per year in the 15th and subsequent years of the lease. Chula Vista 6 (Chula Vista, California)--The Company acquired a six-screen theater complex in Chula Vista, California in August 17, 1995 from United Artists Theater Circuit, Inc. The theater is located at 320 Third Ave., Chula Vista, CA 91910. The cost of approximately $3,192,000 was initially paid with the cash funds of the Company. The theater consists of a six screen complex having a total seating capacity of 1,914 persons. In addition to the theater complex, also purchased were shops for two tenants who are currently paying an aggregate of approximately $3,000 per month for rent. The Company has secured mortgage financing for this theater. Mission Marketplace (Oceanside, California)--The Mission Marketplace site is the Company's first theater complex. The theater consists of an eight screen, 28,000 square foot complex having a total seating capacity of 1,496 persons and it contains multiple concession stands and a computerized ticketing system. The Company plans to add five theaters to this complex with an estimated opening in January 1997. Individual theater sizes range from 120 to 292 seats. Each theater features Lucasfilm Ltd's "THX SOUND" environment (a state-of-the-art motion picture sound system), along with six channel, digital surround- sound equipment, plush seats with cup holders, and row spacing that is designed to allow seated patrons more leg room as other patrons pass in front of them to reach their seats or an aisle. This site also has additional office space which serves as the Company's corporate headquarters. The nearest first-run theater complexes to Mission Marketplace are an eight screen Mann Theater complex and two SoCal Cinemas complexes, one with three screens and another with four screens, as well as the Company's own Galaxy Six Cinemas, each of which is located approximately seven miles from Mission Marketplace. However, none of these theaters is currently considered to be within the same film -50- 54 licensing zone as the Mission Marketplace and, as a result, the presence of these competing theaters does not currently affect the Company's ability to license films at this location. The Company leases the Mission Marketplace theater complex from Pacific Oceanside Holdings, L.P. The initial term of such lease is 20 years, expiring in 2011, with three consecutive five-year options to extend. The minimum annual rent for the first five years of the Mission Marketplace lease is $422,000 payable in equal monthly installments. The lease provides for 15% increases in the minimum, annual rent every five years of the lease term commencing in the sixth year of the lease term. In addition, the Company is required to pay additional rent of 10% of theater revenues (excluding concessions and box office sales from certain films licensed to the Company) to the extent that such percentage rent exceeds the minimum rent. The performance by the Company of its obligations under the Mission Marketplace lease is guaranteed by certain shareholders and officers of the Company. Galaxy Six Cinemas (Bonsall, California)--This site is a six screen, 22,780 square foot complex located in the River Village Shopping Center and having a total seating capacity of 1,344 persons. Individual theater sizes range from 168 to 292 seats. The complex was built and the related equipment was installed in 1991 and the lease and theater equipment were acquired by the Company in 1992. The Galaxy Six Cinemas features Dolby sound and six channel digital, surround-sound but does not contain plush seating, THX SOUND environment and many of the other amenities found in the Company's other theaters. As is the case with the Mission Marketplace, the Galaxy Six Cinemas is currently considered to be in its own film licensing zone. See "Business--Film Licensing." The nearest first-run theater complex is the Company's own Mission Marketplace complex, which is approximately seven miles away. The Company leases the Galaxy Six Cinemas from River Village, William C. Buster and Harold F. Alles. The initial term of such lease is 15 years commencing March 1, 1994, with three consecutive five-year options to extend. The minimum rent for the Galaxy Six Cinemas is $16,000 per month for the first three years of the lease, $17,000 per month in year four of the lease term, $18,000 per month in year five of the lease, $21,000 per month in years six through ten of the lease and $24,000 per month in years 11 through 15 of the lease. In addition, the Company is required to pay additional rent of 15% of box office receipts (excluding sales from certain films licensed to the Company) and 8% of concession sales for the first five years of the lease and 10% of concession sales thereafter. Such percentage rents are payable only to the extent that they exceed the minimum rent payable under the lease. For the first five years of the lease, the Company is also required to provide the landlord with 100 free passes per month, and provide free children's movies on the first Saturday and Sunday morning of each month. Ultraplex 14 at Mission Grove (Riverside, California)--Pursuant to a lease dated August 1, 1995, as amended on August 29, 1995, the Company leased from Mission Grove Plaza, L.P. ("Mission Grove") premises consisting of 46,400 square feet of floor area, located at the Mission Grove Plaza, in the City of Riverside, County of Riverside, California. The initial term of the lease is 25 years, with two consecutive options to renew, each for five years. The initial minimum monthly rent is as follows: $44,000.00 in Year 1; $48,000.00 in Year 2; $52,000.00 in Year 3; $56,000.00 in Year 4; $60,000.00 in Years 5-10. On the first day of the One Hundred Twenty First (121st) month, and every sixty months thereafter, the minimum rent shall be increased by the -51- 55 lessor of (i) Fifteen Percent (15%), or (ii) the cost of living increase for the preceding five (5) year period. The Company shall also pay Ten Percent (10%) of gross box office receipts (but no percentage rent paid on "90/10" films). Ultraplex 10 at Perris (Perris, California)--Pursuant to a lease dated February 15, 1996, the Company agreed to lease from The Coudures Family Limited Partnership (the "Coudures Partnership"), premises consisting of 35,000 square feet located at 1688 North Perris Boulevard, Perris, California 92571 (the "Center"). The initial term is 25 years, with two consecutive options to extend, each for five years. Initial minimum rent, which is payable monthly, is as follows: $315,000.00 for Year 1; $378,000.00 for Year 2; $420,000.00 for Year 3; $462,000.00 for Year 4; $525,000.00 for Year 5; for years 6 through 25 the minimum rent will be increased every fifth year during such period by the lesser of 10% or cost of living. In addition to minimum rent, the Company shall pay percentage rent as follows: 10% of gross Box Office receipts (excluding 90/10 films) and 6% of concession and miscellaneous income. All of the Company's leases are triple net leases which require the Company to pay, in addition to rent, a pro- rata share of certain taxes, charges, expenses, and other impositions incurred by the landlord in connection with the ownership and operation of the premises. Proposed Theater Development. The following summarizes certain theaters which are in development by or for the Company. There can be no assurance that any of these theaters will be successfully completed or operated by the Company. -52- 56 Riverside, California--Pursuant to a lease dated July 14, 1995, the Company agreed to lease from University Village, LLC 14 (the "Village") premises consisting of approximately 40,000 square feet located in the City of Riverside, County of Riverside, California, adjacent to the campus of the University of California, Riverside at the intersection of University Avenue and Interstate 215. The initial term of this lease if for a period of 25 years, with two consecutive options to extend for five years each. Either party shall have the right to terminate this lease upon 30 days' written notice to the other party in the event that Village fails to enter into a Disposition and Development Agreement for the Center in which the premises are located. The rent commencement date shall be 180 days following delivery of a "pad" (foundation) to the Company, and issuance of building permits for the tenant work, but in no event later than 420 days after the date of this lease. Landlord shall contribute for the tenant work an amount equal to $80.00 per square foot of the ground floor area of the building. Minimum rent, payable monthly shall be calculated as follows: $30,000.00 in Year 1; $34,000.00 in Year 2; $34,000 in Year 3; $38,000 in Year 4; and $42,000 in Year 5. Beginning in the sixty-first (61st) month, and continuing for sixty (60) months thereafter, the minimum rent shall be increased by the following formula: rent as of the preceding month times One Hundred Fifteen Percent 115%, Every sixty months thereafter, until the end of the initial term, the minimum rent shall be increased according to the same formula. At the option of the Village, the Company shall pay, in lieu of minimum rent, percentage rent (annually) in the amount equal to eight percent (8%) of box office receipts (excluding receipts for "90/10" films), plus Five Percent (5%) of concession sales (less excluded sales and business transacted (as defined in the lease)). These theaters are under construction with an expected opening date of November 1996. San Marcos, California--Pursuant to a ground lease effective July 25, 1996, the Company agreed to lease land in San Marcos to build a ten screen theater complex. The term is to expire on December 31, 2052. Annual Base Rent is $180,000 in year 1, $190,000 in year 2, $200,000 in year 3, $210,000 in year 4, $220,000 in year 5, $246,400 in years 6-10, $280,968 in years 11-15, and $314,084 in years 16-20. These theaters are expected to open in March 1997. Kailua-Kona, Hawaii--The Company has entered into a built-to-suit lease in Kailua-Kona, Hawaii. The Company will operate an eight-screen theater in 25,000 square feet. For the first three years, the monthly rent per square foot will be $1.25. These theaters are expected to open in March 1997. In addition to the foregoing projects, the Company periodically enters into non-binding letters of intent or options for the lease of theater sites to be developed. The Company currently has entered into such arrangements for a twenty-four screen complex in South Gate, California. There can be no assurance that the sites for which the Company currently has letters of intent or options will ultimately be leased by the Company. -53- 57 Mexico--In July 1994, certain officers and directors of the Company contributed to the Company their 60% ownership interest in CinemaStar Luxury Theaters, S.A. de C.V., a Mexican corporation ("CinemaStar Mexico"). An additional 15% ownership interest in CinemaStar Mexico has been returned to the Company by a previous shareholder for consideration of payment to him on legal fees amounting to approximately $30,000, subsequently reduced to $15,000. CinemaStar Mexico is developing the following theater sites in Mexico . Tijuana, Mexico -- Pursuant to a lease entered into June 14, 1996, the Company agreed to lease premises consisting of 34,000 square feet located in Tijuana, Mexico. The initial term is 20 years, with two consecutive options to extend, each for five years. The Company is obligated by the lease to provide equipment in the theater expected to cost $1,200,000. Financing is currently being pursued. Initial minimum monthly rent is as follows: $32,300 for Year 1; $34,000 for Year 2; $35,700 for Year 3; $37,400 for Year 4; $39,100 for Year 5; after the sixth year the minimum rent will be increased annually in compliance with the percentage increase that is established in the Price Index for Urban Consumers in the City of San Diego, California from the previous year of the mentioned price increase. Construction has begun on the complex with an expected opening date of January 1997. Guadalajara, Mexico -- Pursuant to a lease entered into May 11, 1996, the Company agreed to lease premises consisting of 40,000 square feet located in Guadalajara, Mexico. The initial term is 20 years, with two consecutive options to extend, each for five years. The Company is obligated by the lease to provide equipment in the theater expected to cost $1,200,000. Financing is currently being pursued. Initial minimum monthly rent is as follows: $42,000 for Year 1; $44,000 for Year 2; $46,000 for Year 3; $48,000 for Year 4 and 5; on the first day of the sixty first month, and continuing for remainder of the initial term and any extension thereof, minimum rent shall be increased by the greater of: two percent (2%) over the minimum rent paid the previous year, or the annual inflation rate increase of the United States of America as determined at the end of each calendar year. Notwithstanding any provision to the contrary, minimum rent shall in no event be increased annually by more than three percent (3%). Percentage rent shall be calculated at the end of each calendar year and shall be based upon fifteen percent (15%) of box office and concession sales. If this calculation exceeds the minimum rent already paid by the Company for the preceding calendar year, the Company shall pay the excess. For those films, the rental of which exceeds fifty-five percent (55%) of box office sales. Such film rental shall not be included in any calculation of percentage rent. Construction began in June 1996 with an expected opening date of January 1997. Legal Proceedings From time to time the Company is involved in routine litigation and proceedings in the ordinary course of its business. The Company is not currently involved in any pending litigation matters which the Company believes would have a material adverse effect on the Company. An Action was filed against the Company and its subsidiary by MTV Networks, Inc., a subsidiary of Viacom International, Inc., on March 2, 1995. The Action involved an alleged infringement of plaintiff's federally registered trademarks NICKELODEON, NICKELODEON STUDIOS, NICK, NICK AT NITE, AND NICK JR., under Section 32(1) of the Lanham Act, 15 U.S.C. Section 1114(1); unfair competition under Section 43(a) of the Lanham Act, 15 U.S.C. Section 1125(a), unfair competition under New York State law, dilution and injury to business reputation under N.Y. Gen. Bus. Law Section 368-d, and deceptive trade practices under N.Y. Gen. Bus. Law Section 349. On April 27, 1995, the parties entered into a Settlement Agreement and Release of Claims under the terms of which the Company agreed to change its operating and legal name by deleting therefrom any reference to the word Nickelodeon or Nick. The parties further agreed that no damages would be paid and each would pay its own legal expense. The Company subsequently changed its name to CinemaStar Luxury Theaters, Inc. The March 31, 1995 fiscal year financial statements include a $78,000 allowance of estimated costs to make the change. The Company does not believe that the name change has or will have a material adverse impact on the Company or its operations. -54- 58 MANAGEMENT Directors and Executive Officers The following table sets forth certain information concerning the Company's executive officers and directors:
Name Age Position - ---- --- -------- John Ellison, Jr. 54 President, Chief Executive Officer and Director Alan Grossberg 45 Executive Vice President, Chief Financial Officer, Chief Accounting Officer and Director Jerry Willits 56 Vice President of New Development and Director Jon Meloan 61 Secretary, General Counsel and Director Russell Seheult, M.D., D.D.S. 44 Chairman of the Board Walter Schlotter 45 Director Andrew Friedenberg 41 Director Katherine McKeever 36 Vice President of Operations
JOHN ELLISON, JR. co-founded and became a director of the Company in April 1989 and has been its President since February 1992 and an officer since 1989. Prior to February 1992, Mr. Ellison was a Vice President of the Company. Mr. Ellison has over 30 years of experience in the motion picture theater and exhibition business. He has managed theater operations and expansion programs for several theater chains and, prior to forming the Company, he owned and operated the largest locally-owned theater chain in San Diego County, which he sold to Edwards Cinemas in 1985. ALAN GROSSBERG co-founded and became a director of the Company in April 1989 and has been its Executive Vice President and Chief Financial Officer since that time, Mr. Grossberg has over 19 years of experience in theater and entertainment management. Mr. Grossberg previously has acquired and sold several theater and cinema complexes in San Diego County. Mr. Grossberg also owns a film booking and licensing company which provides films bookings and related services to the Company. See "Management--Employment and Consulting Agreements" and "Certain Transactions." JERRY WILLITS has been the Company's Vice President since 1992 and a director since July 1994. For at least five years prior to joining the Company, Mr. Willits owned and operated two theaters in San Diego County. Mr. Willits currently serves as an officer of the Theater & Entertainment Association of Greater San Diego. JON MELOAN joined the Company in March 1991 as its Secretary and General Counsel and became a director in July 1994. From 1989 to 1991, Mr. Meloan was an independent business consultant. Prior to 1989, Mr. Meloan served as senior counsel with Honeywell Inc. Mr. Meloan has over 22 years experience as a corporate lawyer. RUSSELL SEHEULT is an anesthesiologist and dental surgeon who has been a director of the Company since June 1991 and has served as Chairman of the Board of Directors since February 1992. Since 1993 he has operated an outpatient dental surgery clinic in Redlands, California. For at least three years prior to joining the dental clinic, Dr. Seheult was an anesthesiologist in Loma Linda, California and served as head of anesthesiology at Loma Linda Hospital in Loma Linda, California. -55- 59 WALTER SCHLOTTER was appointed as a director of the Company in June 1995. Mr. Schlofter is currently Senior Vice President of the Greater San Diego Chamber of Commerce, and has been the Commissioner of the San Diego Film Commission for more than ten years. He previously worked at Columbia Pictures Television and KPBS-TV, and has received several San Diego Emmy nominations for work as producer on documentaries and commercials. ANDREW FRIEDENBERG was appointed as a director of the Company in June 1995. Mr. Friedenberg is the founder and has been for over five years the director of both the Cinema Society and the Visual Arts Foundation in San Diego, and previously served as Chairman of La Jolla Cultural Arts Committee. Through the Cinema Society and the Visual Arts Foundations, he has helped bring exclusive previews of first-run movies and quality film series programs to San Diego over the last twelve years. Mr. Friedenberg previously worked at Columbia Pictures and United Artists. He is a member of the Academy of Motion Picture Arts and Sciences. KATHERINE MCKEEVER was appointed as the Company's Vice President of Operations in June 1995. Prior to such appointment she served as Director of Advertising and Marketing of the Company from January 1993. Prior to 1993 she directed marketing activities for SoCal Cinemas, Inc. for over 5 years. Ms. McKeever has also worked in advertising production and promotions for national consumer product brands. EXECUTIVE COMPENSATION The following table sets forth information concerning compensation of the chief executive officer and all other executive officers of the Company whose salary and bonus exceeded an annual rate of $100,000 during the fiscal year ended March 31, 1996: -56- 60 SUMMARY COMPENSATION TABLE
Long Term Compensation Awards ------------ Annual Compensation Securities Name and --------------------- Other Annual Underlying Principal Position Year Salary Bonus Compensation Options/SARs - ------------------ ---- ------ ----- ------------ ------------ John Ellison, Jr....................... 1996 $217,620 $50,000 $--(1) -0- President and Chief Executive 1995 $160,792 $50,000 --(1) 88,125 Officer 1994 $115,500 -0- --(1) -0- Alan Grossberg......................... 1996 $211,263(3) $25,000 $--(1) -0- Chief Financial Officer and 1995 $168,939(2) $15,000 --(1) 88,125 Executive Vice President 1994 $115,500 -0- --(1) -0-
- --------------- (1) Perquisites and other personal benefits did not in the aggregate reach the lesser of $50,000 or 10 percent of the total of annual salary reported in this table for any named executive officer. (2) Includes $34,500 paid to Mr. Grossberg in the year ended March 1995, pursuant to the terms of a Film Booking Agreement pursuant to which Mr. Grossberg has agreed to provide film booking services to the Company. See "Management--Employment and Consulting Agreements." (3) Includes $52,000 paid to Mr. Grossberg pursuant to the terms of a Film Booking Agreement pursuant to which Mr. Grossberg has agreed to provide film booking service to the Company. EMPLOYMENT AND CONSULTING AGREEMENTS Effective August 25, 1994, the Company entered into five-year employment agreements with each of Messrs. Ellison, and Grossberg, pursuant to which their salaries are $197,106 and $145,860, subject to annual increases of 10% and 12%, respectively. In addition, Messrs. Ellison and Grossberg will be entitled to receive an annual bonus for each year of their respective employment. Mr. Ellison and Mr. Grossberg's bonuses shall each equal five percent of the Company's net income (before payment of income taxes or bonuses to executive officers) over $2 million, which shall be paid quarterly based on annualized results. In addition, if the Company has net income (before payment of incomes taxes, but after payment of other bonuses to executive officers) in any year over $7 million, there will be an additional payment of $500,000 to each of Mr. Ellison and Mr. Grossberg. Each of Messrs. Ellison and Grossberg also receive an automobile allowance of up to $650 per month. The Company has also agreed to pay maintenance, gasoline (to the extent the usage is business-related), and cellular telephone service for such automobile. Additionally, the employment agreements also give Messrs. Ellison and Grossberg the right to participate in any and all group, life, disability, income health or accident insurance programs applicable to any personnel of the Company, subject only to the eligibility restrictions of such programs. Messrs. Ellison and Grossberg are also entitled, at the Company's expense, to a disability income insurance policy covering each which provides for a monthly payment of at least $10,000. In the event that Mr. Ellison or Mr. Grossberg is terminated or is not reelected or appointed as a director or -57- 61 executive officer of the Company for any reason other than for an uncured breach of his obligations under the employment agreement or his conviction of a felony involving moral turpitude, he shall have the right to receive his annual salary and bonus for the remainder of the original five-year term of the contract. In August 1994, Alan Grossberg entered into a Film Booking Agreement pursuant to which he has agreed to provide film booking and licensing services to the Company for five years at an annual fee $52,000 per year. The contract is assignable by Mr. Grossberg to any entity owned or controlled by Mr. Grossberg, The Company believes that the terms of the Film Booking Agreement are at least as favorable to the Company as would be available to the Company in a third-party transaction. The Company has entered into a five-year Consulting Agreement with Russell Seheult, the Company's Chairman of the Board, pursuant to which he has agreed to render management consulting services to the Company in exchange for a fee of $52,000 per year. OPTION GRANTS DURING FISCAL 1996 No stock options were granted to the officers identified in the Summary Compensation Table during the year ended March 31, 1996 . OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES The following table sets forth information concerning stock options which were exercised during, or held at the end of, fiscal 1996 by the officers named in the Summary Compensation Table: -58- 62
OPTION EXERCISES AND YEAR-END VALUE TABLE (1) NUMBER OF VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES AT FISCAL YEAR END AT FISCAL YEAR END(2) ACQUIRED VALUE -------------------------------- -------------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- -------- ----------- ------------- ----------- ------------- John Ellison, Jr. 0 $0 $88,125 $0 $502,312 $0 Alan Grossberg 0 $0 $88,125 $0 $502,312 $0
- --------------- (1) There were no option exercises during fiscal 1996. (2) Valued at $8.25 per share of Common Stock. STOCK OPTION PLAN In July 1994, the Company adopted the Stock Option Plan (the "Option Plan") under which a maximum of 587,500 shares of Common Stock of the Company may be issued pursuant to incentive and non-qualified stock options granted to officers, key employees or consultants of the Company. The Option Plan is administered by the Board of Directors or, in the discretion of the Board of Directors, by a committee of not less than two individuals, each of whom must be a disinterested member of the Board of Directors, with authority to determine employees to whom options will be granted, the timing and manner of grants of options, the exercise price, the number of shares covered and the terms of options, and all other determinations necessary or advisable for administration of the Option Plan. The purchase price for the shares subject to any option granted under the Option Plan shall not be less than 100% of the fair market value of the shares of Common Stock of the Company on the date the option is granted. No option shall be exercisable after the earliest of the following: the expiration of 10 years after the date the option is granted; three months after the date of the optionee's employment (if the optionee is an employee of the Company) terminates if termination is for any reason other than permanent disability or death; or one year after the date the optionee's employment (if the optionee is an employee of the Company) terminates, if termination is a result of death or permanent disability. Unless sooner terminated by the Board of Directors, the Option Plan expires on December 31, 2003. COMPENSATION OF DIRECTORS Directors prior to June 3, 1995 received no cash compensation for serving on the Board of Directors. The Board of Directors at the June 3, 1995 Board Meeting approved payment of $1,000 per Board Member for attending each Board Meeting, effective with the June 3, 1995 meeting. It is anticipated there will be not less than four Board Meetings per year to coincide with review and approval of quarterly and annual financial statement filings. In the fiscal years ended March 31, 1996 and 1995, Russell Seheult received $26,000 and $20,500 in consulting fees. In August 1994, the Company entered into a five year consulting agreement with Mr. Seheult pursuant to which Mr. Seheult is entitled to receive $52,000 per year. In addition, in July 1994, Mr. Seheult was granted an option to purchase 176,250 shares of Common Stock under the Company's Stock Option Plan at a price of $2.55 per share. -59- 63 See "Management--Employment and Consulting Agreements" for a description of the Film Booking Agreement between the Company and Alan Grossberg. The Company has entered into a Finders Fee Agreement, dated September 11, 1993, with Jon Meloan, the Company's General Counsel and Secretary, pursuant to which Mr. Meloan is entitled to receive a fee of 4.5% of all funds raised through Mr. Meloan's sources. The Finders Fee Agreement was terminated on May 24, 1995. No fees were paid to Mr. Meloan pursuant to such agreement. In March 1995, the Company entered into a finder's fee agreement with Robert Bailey pursuant to which the Company agreed to pay a fee of 5% to Mr. Bailey for all funds raised through from Mr. Bailey's sources. Mr. Bailey has agreed to pay Jon Meloan 32% of any fees Mr. Bailey receives from the Company. LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS Pursuant to provisions of the California General Corporation Law, the Articles of Incorporation of the Company, as amended, include a provision which eliminates the personal liability of its directors to the Company and its shareholders for monetary damage to the fullest extent permissible under California law. This limitation has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or missions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of a serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) under Section 310 of the California General Corporation Law (concerning contracts or transaction between the Company and a director) or (vii) under Section 316 of the California General Corporation Law (concerning directors' liability for improper dividends, loans and guarantees). The provision does not eliminate or limit the liability of an officer for any act or omission as an officer, notwithstanding that the officer is also a director or that his actions, if negligent or improper, have been ratified by the Board of Directors. Further, the provision has no effect on claims arising under federal or state securities laws and does not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. The Company's Articles of Incorporation authorize the Company to indemnify its officers, directors and other agents to the fullest extent permitted by California law, exclusive of rights provided through bylaw provisions, agreements, vote of shareholders or disinterested directors or otherwise. The Company's Articles of Incorporation also authorize the Company to indemnify its officers, directors and agents for breach of duty to the corporation and its shareholders through bylaw provisions, agreements or both, in excess of the indemnification otherwise permitted under California law, subject to certain limitations. The Company has entered into indemnification agreements with all of its directors and executive officers whereby the Company will indemnify each such person (an "indemnitee") against certain claims arising out of certain past, present or future acts, omissions or breaches of duty committed by an indemnitee while serving in his employment capacity. Such indemnification does not apply to acts or omissions which are knowingly fraudulent, deliberately dishonest or arise from willful misconduct. Indemnification will only be provided to the extent that the indemnitee has not already received payments in respect of a claim from the Company or from an insurance company. Under certain circumstances, such as a successful defense of a claim or when allowed pursuant to controlling case law, such indemnification (including reimbursement of expenses incurred) will be allowed for liability arising under the Act. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. -60- 64 The Company intends to purchase a directors' and officers' liability policy insuring directors and officers of the Company. "KEY-MAN" LIFE INSURANCE The Company maintains "key-man" life insurance in the amount of $1,250,000 on the lives of each of Mr. Ellison, Mr. Seheult and Mr. Grossberg, with respect to which the Company is the sole beneficiary. -61- 65 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of September 1, 1996 as to (a) each director, (b) each executive officer identified in the Summary Compensation Table above, (c) all officers and directors of the Company as a group, and (d) each person known to the Company to beneficially own five percent or more of the outstanding shares of Common Stock.
NUMBER OF PERCENTAGE NAME AND ADDRESS (1) SHARES (2) OWNERSHIP (3) - -------------------- ---------- ------------- Directors: John Ellison, Jr. 1,302,725 20.72% Alan Grossberg 1,202,725 19.13% Russell Seheult 1,390,850 21.81% Jerry Willits 266,815 4.30% Jon Meloan 16,929 * Andrew Friedenberg 1,720 * Walter Schlotter 500 * Non-Director Employees: Katherine McKeever 2,520 * All directors and executive officers as a group (9 persons) 4,684,764 64.92%
- ------------------ * Less than 1% (1) The address of Messrs. Ellison, Grossberg, and Seheult is c/o the Company, 431 College Boulevard, Oceanside, California 92057. (2) The number of shares each person owns is determined by assuming the exercise of options, warrants and Redeemable Warrants, that are held by such person and which are exercisable within 60 days. (3) Shares of Common Stock which a person has the right to acquire within 60 days are deemed outstanding in calculating the percentage ownership of the persons, but not deemed outstanding as to any other person. Percentages are calculated based on 6,200,000 shares of Common Stock outstanding. -62- 66 CERTAIN TRANSACTIONS John Ellison, Jr., Alan Grossberg and Russell Seheult (and Jerry Willits with respect to the lease of the Chula Vista 10, and Eileen Seheult the former wife of Russell Seheult, with respect to certain lease and bank obligations incurred or guaranteed by Mr. and Ms. Seheult on behalf of the Company) have personally guaranteed, on a joint and several basis, all significant obligations of the Company pursuant to its theater leases and certain loans. Certain of these obligations of the Company are secured by real or personal property pledged by such individuals. Messrs. Seheult, Ellison and Grossberg have from time to time utilized their personal credit resources on behalf of the Company by personally borrowing funds and then lending those funds to the Company as demand loans. The Company believes that the terms of such loans, as described below, are substantially more favorable to the Company than those that otherwise would have been available to the Company. The following summarizes loan transactions which were entered into or which the Company was obligated to pay within the last two completed fiscal years. In 1991, Mr. Seheult personally borrowed $196,000 from Great Western Bank and in turn loaned all of the loan proceeds to the Company. The loan to Mr. Seheult is secured by a first trust deed on a single family residence owned by Mr. Seheult. The loan is amortized over 30 years at an interest rate of 7% per annum, with monthly payments of principal and interest of $1,304. The Company made monthly payments of principal and interest directly to Great Western Bank on Mr. Seheult's behalf. As payments were made to the bank, the Company's obligation to Mr. Seheult was reduced. The entire balance of principal and interest on the funds loaned to the Company by Mr. Seheult was repaid in October 1994. In 1992, Mr. Seheult advanced $80,000 of funds to the Company out of the proceeds of a personal line of credit. The advances were unsecured, bore interest at the rate of 5.25% per annum and are payable on demand. The Company has made several payments of principal and interest on the borrowing directly to the lender on Mr. Seheult's behalf. As payments are made to the lender, the Company's obligation to Mr. Seheult is reduced. As of March 31, 1995 the outstanding balance of principal and interest on the line of credit had been repaid in full. On June 30, 1993, Mr. Ellison obtained a personal unsecured line of credit of $100,000 from a local bank. Mr. Ellison drew $70,000 of the line and, in turn, loaned the funds to the Company. The line of credit bore interest at a rate of prime plus 4%. The Company has made monthly payments of principal and interest directly to the lender since the loan date. As of March 31, 1995 the outstanding balance of principal and interest on this line of credit had been repaid in full. The Company operates a portion of its business through CinemaStar, Inc. ("Cinemas"). Prior to July 1994, the Company owned 80% of the outstanding common stock of Cinemas. The remaining 20% of the common stock was owned by Jerry Willits, an officer of the Company. In July 1994, Mr. Willits and the Company entered into an agreement pursuant to which Mr. Willits exchanged his shares of Cinemas for 255,065 shares of Common Stock. In January 1994, Messrs. Seheult, Ellison, Grossberg and Willits and certain third parties unaffiliated with the Company formed Nickelodeon Cinemas Internacionales, S.A. de C.V., a Mexican corporation. In May 1995 the name was changed to CinemaStar Luxury Theaters, S.A. de C.V. ("CinemaStar Mexico"), to develop theaters in Mexico under the name "CinemaStar." CinemaStar Mexico has not yet commenced operations. In July 1994, Messrs. Seheult, Ellison, Grossberg, and Willits contributed, for no additional consideration. 18.6%, 18.6%, 18.6% and 4,2%, respectively, totaling 60.0% of the outstanding equity in CinemaStar Mexico to the Company, which constituted all of such individuals' equity in CinemaStar Mexico. The remaining 40% of -63- 67 CinemaStar Mexico was owned by unrelated third parties. The Company subsequently acquired an additional 15% of the equity in CinemaStar Mexico from one of the unrelated shareholders. The Company has loaned as of March 31, 1996 a total of $311,519 to CinemaStar Mexico since its formation pursuant to a promissory note bearing interest at an annual rate of 8%. All interest and principal on such note is due in July 1999. The Company believes that the terms of such note are more favorable than CinemaStar Mexico could receive from a third party lender. For certain other transactions with Alan Grossberg, Russell Seheult, Jon Meloan and Robert Bailey, see "Management's Discussion and Analysis - Liquidity and Capital Resources" and "Management -- Employment and Consulting Agreements." In May 1992, the Company repurchased 1,214,600 shares from Harrah's Theater Service and Supply Inc., one of the Company's founding shareholders, for aggregate consideration of $67,200. In May 1994, the Company repurchased 1,214,600 shares of Common Stock in connection with the settlement of litigation with a former shareholder. On February 12, 1996, the Company and The Boston Group, L.P. entered into a two year Consulting Agreement beginning on April 1, 1996. The Boston Group, L.P. is to provide certain consulting services involving business development, management and investor relations. The Boston Group, L.P. has been paid $250,000 for such services and also received a warrant for 400,000 shares of Common Stock exercisable at $6.50 per share. The warrant becomes exercisable on August 12, 1996 and terminates on August 12, 2000. The Boston Group, L.P. was granted certain demand and piggyback registration rights for the Common Stock underlying the warrants. Many of the transactions described above involve actual or potential conflicts of interest between the Company and its officers or directors. In order to reduce the potential for conflicts of interest between the Company and its officers and directors, prior to entering into any transaction in which a potential material conflict exists, the Company's policy has been and will continue to be to obtain the approval of a majority of the disinterested members of the Company's Board of Directors or the approval of holders of a majority of the disinterested shares of the Company's Common Stock. However, there can be no assurance that conflicts will be resolved in a manner favorable to the Company. -64- 68 SELLING SECURITY HOLDER -65- 69 The Selling Security Holder is A.S. Goldmen which holds Underwriter's Warrants to purchase up to 150,000 shares of Common Stock and 150,000 Redeemable Warrants. The Underwriter's Warrants and the underlying Common Stock and Redeemable Warrants and the Common -66- 70 Stock underlying the Redeemable Warrants are registered for resale by this Prospectus. If the Underwriter's Warrants included in this Prospectus and the underlying were fully exercised, Goldmen would acquire 300,000 shares of Common Stock. Set forth below are the holders of the Underwriter's Warrants covered by this Prospectus.
Number of Underwriter's Unit Name Purchase Warrants ---- ------------------ A.S. Goldmen & Co., Inc.......................... All
For transactions between Goldmen and the Company, see "Selling Securities Holder -- Private Placements," "Description of Securities -- Redeemable Warrants" and "Description of Securities -- Underwriter's Warranties." PLAN OF DISTRIBUTION The sale of the Selling Security Holder's Securities may be effected from time to time in transactions (which may include block transactions by or for the account of the Selling Security Holder) in the over-the-counter market or in negotiated transactions, through the writing of options on the Selling Security Holder's Securities, through a combination of such methods of sale, or otherwise. Sales may be made at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. If the Selling Security Holder sells his, her or its Securities, or options thereon, pursuant to this Prospectus at a fixed price or at a negotiated price which is, in either case, other than the prevailing market price or in a block transaction to a purchaser who resells, or if the Selling Security Holder pays compensation to a broker-dealer that is other than the usual and customary discounts, concessions or commissions, or if there are any arrangements either individually or in the aggregate that would constitute a distribution of the Selling Security Holder's Securities, a post-effective amendment to the Registration Statement of which this Prospectus is a part would need to be filed and declared effective by the Securities and Exchange Commission before such Selling Security Holder could make such sale, pay such compensation or make such a distribution. The Company is under no obligation to file a post-effective amendment to the Registration Statement of which this Prospectus is a part under such circumstances. The Selling Security Holder may effect transactions in their securities by selling their securities directly to purchasers, through broker-dealers acting as agents for the Selling Security Holder or to broker-dealers who may purchase the Selling Security Holder's Securities as principals and thereafter sell such securities from time to time in the over-the-counter market, in negotiated transactions, or otherwise. Such broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the Selling Security Holder and/or the purchasers for whom such broker-dealers may act as agents or to whom they may sell as principals or both. -67- 71 The Selling Security Holder and broker-dealers, if any, acting in connection with such sales might be deemed to be "underwriters" within the meaning of Section 2(11) of the Act and any commission received by them and any profit on the resale of such securities might be deemed to be underwriting discounts and commissions under the Act. The Securities covered by this Prospectus may be sold under Rule 144 instead of under this Prospectus. None of the shares of Common Stock or Redeemable Warrants currently qualifies for sale under Rule 144. The Selling Security Holder have been advised that during the time it is engaged in distribution of the securities covered by this Prospectus, each must comply with Rules 10b-5 and 10b-6 under the Securities Exchange Act of 1934, as amended, and pursuant thereto: (i) shall not engage in any stabilization activity in connection with the Company's securities; (ii) shall furnish each broker through which securities covered by this Prospectus may be offered the number of copies of this Prospectus which are required by each broker; and (iii) shall not bid for or purchase any securities of the Company or attempt to induce any person to purchase any of the Company's securities other than as permitted under the Securities Exchange Act of 1934, as amended. Any Selling Security Holder who may become an "affiliated purchasers" of the Company as defined in Rule 10b- 6, pursuant to Securities Exchange Act Release 34-23611 (September 11, 1986), must coordinate their sales under this Prospectus with each other and the Company for purposes of Rule 10b-6. PRIVATE PLACEMENTS In September 1994, the Company completed a private placement of 30 units (the "Bridge Units"). Each Bridge Unit was offered at a price of $100,000 per Unit and consisted of an unsecured promissory note in the principal amount of $98,000, bearing interest at the rate of 10% per annum, and 100,000 warrants (the "Bridge Warrants"), each exercisable to purchase one share of Common Stock at an exercise price of $1.00 per share. The sale of Bridge Units was exempt from registration under the Securities Act of 1933 by virtue of Regulation D promulgated thereunder. The unsecured promissory notes were paid out of the proceeds of the initial public offering. The terms of the Bridge Warrants provide that, if the Company consummates a public offering of its securities which includes warrants to purchase shares of Common Stock, the Bridge Warrants shall automatically be converted into warrants included in the public offering. Such warrants into which the Bridge Warrants are automatically converted shall be exercisable to purchase the same number of shares as the Bridge Warrants, but shall otherwise contain the terms (including the exercise price) of the warrants offered to the public. The terms of the Bridge Warrants also provided that the Company shall cause the new warrants and the underlying shares of Common Stock to be included in the registration statement relating to the public offering. Accordingly, the Bridge Warrants, upon consummation of the initial public offering, automatically converted into Redeemable Warrants exercisable to purchase an aggregate of 3,000,000 shares of Common Stock. Purchasers of Bridge Units were provided with unaudited financial statements which, upon subsequent audit, proved to be inaccurate. In particular, the unaudited financial statements contained in the Company's offering documents, which management believed to be prepared in accordance with generally accepted accounting principles, were determined not to have been prepared in accordance with generally accepted accounting principles in several respects, the most significant of which was the failure of the financial statements to amortize payments due under long-term leases (which typically call for increasing rental payments over time) on a straight-line basis. As a result, the financial statements significantly understated the extent of the Company's operating losses and stockholders' deficit for the periods in question. As a result of the differences between the financial statements contained in the Prospectus for the initial public offering and the financial statements contained in the offering documents for the private placement, the purchasers of Bridge Units might seek to rescind their investment or seek other damages. If the purchasers of Bridge Units rescind their investment or seek other damages, the Company might be liable to these investors for the full amount of their investment (an aggregate of -68- 72 $3,000,000), plus interest and any fines or penalties which state regulators or courts may impose. In addition, the Company would bear the costs of any rescission offer. However, the Company used approximately $3,073,176 of the proceeds of the initial public offering to repay in full the principal of and interest on the promissory notes issued in connection with the private placement. As a result, the Company believes that its potential liability in any suit by purchasers of Bridge Units has been significantly reduced. The Company paid A.S. Goldmen $392,250 for acting as placement agent in the private placement of the Bridge Units. Such amount represented a 10% commission and a three percent non-accountable expense allowance on the gross proceeds received by the Company from the sale of the Bridge Units, as well as reimbursement of mailing expenses. In July 1994, the Company sold an aggregate of 801,135 shares of Common Stock to certain of the Selling Security Holden who are clients of A.S. Goldmen & Co., Inc. at a price of $0.0132 per share. A.S. Goldmen & Co., Inc. did not receive any compensation or reimbursement of expenses from the Company in connection with such sale. DESCRIPTION OF SECURITIES The Company's authorized capital stock consists of 15,000,000 shares of Common Stock and 100,000 shares of preferred stock, without par value, 25,000 of which have been designated Series A Preferred Stock. COMMON STOCK The holders of outstanding Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine. (The Company has no present intention of paying dividends on its Common Stock). Upon liquidation, dissolution or winding up of the Company, and subject to the priority of any outstanding Preferred Stock, the assets legally available for distribution to shareholders are distributable ratably among the holders of the Common Stock at the time outstanding. No holder of shares of Common Stock has a preemptive right to subscribe to future issuances of securities by the Company. Accordingly, all existing shareholders will suffer dilution of their percentage interest in the Company upon future sales of Common Stock or securities convertible into Common Stock. Holders of Common Stock are entitled to cast one vote for each share held of record on all matters presented to shareholders, other than with respect to the election of directors, for which cumulative voting is currently required under certain circumstances by applicable provisions of California law. Under cumulative voting, each shareholder may give any one candidate whose name is placed in nomination prior to the commencement of voting a number of votes equal to the number of directors to be elected, multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute such number of votes among as many candidates as the shareholder sees fit. The effect of cumulative voting is that the holders of a majority of the outstanding shares of Common Stock may not be able to elect all of the Company's directors. The Common Stock will be, when issued pursuant to the terms of this Prospectus, fully paid and nonassessable. REDEEMABLE WARRANTS Each Redeemable Warrant entitles the holder thereof, upon exercise, to purchase one share of Common Stock at a price of $6.00 per share, subject to adjustment, through February 6, 2000. The exercise price of the Redeemable Warrants and the number and kind of shares of Common Stock issuable upon the exercise of Redeemable Warrants are subject to adjustment in certain circumstances, including a stock split of, or stock dividend on, the Common Stock, all as set forth in the Warrant Agreement relating to the -69- 73 issuance of the Redeemable Warrants. There will be no adjustment for the payment of cash dividends, if any, by the Company on its Common Stock. Holders of the Redeemable Warrants have no voting power and are not entitled to any dividends. In the event of any dissolution or winding up of the Company, the holders of the Redeemable Warrants will not be entitled to participate in a distribution of the Company's assets. In the event that the Company adopts a resolution to merge, consolidate, or sell all or substantially all of its assets prior to the expiration of the Redeemable Warrants, each Redeemable Warrant holder, upon the exercise of his Redeemable Warrant, would be entitled to receive the same treatment as other holders of any other shares of Common Stock. In the event the Company adopts a resolution for the liquidation, dissolution or winding-up of the Company's business, the Company will give written notice of the adoption of such resolution to the registered holders of the Redeemable Warrants. Thereupon, all liquidation and dissolution rights under the Redeemable Warrants will terminate at the end of 30 days from the date of the notice to the extent not exercised within those 30 days. 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. Upon notice to the Redeemable Warrant holders, the Company has the right to reduce the exercise price or extend the expiration date of the Redeemable Warrants. The Redeemable Warrants may be exercised upon surrender of the Redeemable Warrant certificate on or prior to the expiration date (or earlier redemption date, if applicable) of such Redeemable Warrants at the offices of the warrant agent, with the form of "Election to Purchase" on the reverse side of the Redeemable Warrant certificate completed and executed as indicated, accompanied by payment of the full exercise price (in cash or by certified check payable to the order of the warrant agent, as agent for the Company) for the number of Redeemable Warrants being exercised. No Redeemable Warrant will be exercisable unless, at the time of exercise, the Company has filed a current Prospectus with the Securities and Exchange Commission covering the shares of Common Stock to be issued upon exercise of such Redeemable Warrant and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such Redeemable Warrant. The Company will use its best efforts to have all such shares so registered or qualified and to maintain a current Prospectus relating thereto until the expiration of the Redeemable Warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to do so, there is no assurance that it will be able to do so. This Prospectus currently covers the issuance of the Common Stock (and during the terms of the Offer, the Class B Warrants) underlying the Redeemable Warrants. CLASS B WARRANTS Each Class B Warrant entitles the holder thereof,upon exercise, to purchase one share of Common Stock at a price of $_____ per share, subject to adjustment, through September __, 2001. The exercise price of the Class B Warrants and the number and kind of shares of Common Stock issuable upon the exercise of Class B Warrants are subject to adjustment in certain circumstances, including a stock split of, or stock dividend on, the Common Stock, all as set forth in the Warrant Agreement relating to the issuance of the Class B Warrants. There will be no adjustment for the payment of cash dividends, if any, by the Company on its Common Stock. Holders of the Class B Warrants have no voting power and are not entitled to any dividends. In the event of any dissolution or winding up of the Company, the holders of the Class B Warrants will not be entitled to participate in a distribution of the Company's assets. -70- 74 In the event that the Company adopts a resolution to merge, consolidate, or sell all or substantially all of its assets prior to the expiration of the Class B Warrants, each Class B Warrant holder, upon the exercise of his Class B Warrant, would be entitled to receive the same treatment as other holders of any other shares of Common Stock. In the event the Company adopts a resolution for the liquidation, dissolution or winding-up of the Company's business, the Company will give written notice of the adoption of such resolution to the registered holders of the Class B Warrants. Thereupon, all liquidation and dissolution rights under the Class B Warrants will terminate at the end of 30 days from the date of the notice to the extent not exercised within those 30 days. The Class B Warrants are subject to redemption by the Company, at any time on 30 days prior written notice, at a price of $0.25 per Class B Warrant if the average closing bid price for the Common Stock equals or exceeds $____ 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. Upon notice to the Class B Warrant holders, the Company has the right to reduce the exercise price or extend the expiration date of the Class B Warrants. The Class B Warrants may be exercised upon surrender of the Class B Warrant certificate on or prior to the expiration date (or earlier redemption date, if applicable) of such Class B Warrants at the offices of the warrant agent, with the form of "Election to Purchase" on the reverse side of the Class B Warrant certificate completed and executed as indicated, accompanied by payment of the full exercise price (in cash or by certified check payable to the order of the warrant agent, as agent for the Company) for the number of Class B Warrants being exercised. No Class B Warrant will be exercisable unless, at the time of exercise, the Company has filed a current Prospectus with the Securities and Exchange Commission covering the shares of Common Stock to be issued upon exercise of such Class B Warrant and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such Class B Warrant. The Company will use its best efforts to have all such shares so registered or qualified on or before the exercise date of the Class B Warrants and to maintain a current Prospectus relating thereto until the expiration of the Class B Warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to do so, there is no assurance that it will be able to do so. This Prospectus currently covers the Common Stock underlying the Class B Warrants. The Company has agreed, in connection with the exercise of Class B Warrants pursuant to solicitation by the Soliciting Agent (commencing one year from the date of this Prospectus), to pay to the Soliciting Agent a fee of four percent (4%) of Class B Warrant exercise price of which ____% may be reallowed to any dealer who solicited the exercise (which may also be the Soliciting Agent) for each Class B Warrant exercised, provided, however, that the Soliciting Agent will not be entitled to receive such compensation in any Class B Warrant exercise transactions in which (i) the market price of the Common Stock of the Company at the time of exercise is lower than the exercise price of the Class B Warrants; (ii) the Class B Warrants are held in any discretionary account; (iii) disclosure of compensation arrangements is not made, in addition to the disclosure provided in this Prospectus, in documents provided to holders of the Class B Warrant at the time of exercise; (iv) the exercise of the Class B Warrants is unsolicited; (v) after the Company has called the Class B Warrants for redemption; and (vi) the solicitation of exercise of the Class B Warrants was in violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934, as amended. In addition, unless granted an exemption by the Securities and Exchange Commission from Rule 10b-6, the Soliciting Agent will be prohibited from engaging in any market-making activities or solicited brokerage activities with regard to the Company's securities during the period prescribed by Rule 10b-6 before the solicitation of the exercise of any Class B Warrant until the later of (i) the termination of such solicitation activity, or (ii) the termination by waiver or otherwise of any right the Soliciting Agent may have to receive a fee for the exercise of the Class B Warrants following such solicitations. The Company has agreed not to solicit Warrant exercises other than through the Soliciting Agent. -71- 75 PREFERRED STOCK The Company is authorized to issue 100,000 shares of preferred stock. -72- 76 UNDERWRITER'S WARRANTS In connection with the initial public offering, the Company sold to the underwriter A.S. Goldmen & Co., Inc. ("Goldmen"), for nominal consideration, warrants (the "Underwriter's Warrants") to purchase from the Company up to 150,000 shares of Common Stock and/or up to 150,000 Redeemable Warrants. The Underwriter's Warrants are exercisable at a price of $7.50 per share of Common Stock and $0.375 per Redeemable Warrant for a period of four years commencing on February 7, 1996. The Underwriter's Warrants grant to the holder(s) thereof piggy-back registration rights for a period of seven years after February 7, 1995 with respect to the Underwriter's Warrants and the securities issuable upon exercise of the Underwriter's Warrants. Holders of the Underwriter's Warrants have the right to demand, for a period of five years after February 7, 1995, that the Company prepare and file two registration statements covering the sale of the Underwriter's Warrants and the securities issuable upon exercise of the Underwriter's Warrants, one of which is to be prepared at the expense of the Company. The Underwriter's Warrants and underlying securities are covered by this Prospectus. During the term of the Underwriter's Warrants, the holders are given the opportunity to profit from a rise in the market price of the Common Stock with a resulting dilution in the interest of other shareholders. Further, the holders may exercise the Underwriter's Warrants at a time when the Company would in all likelihood be able to obtain equity capital on terms more favorable than those provided in the Underwriter's Warrants. Further in connection with initial public offering, Goldmen also received $200,000 in commissions and $60,000 in non-accountable expense allowances. TRANSFER AGENT AND WARRANT AGENT Continental Stock Transfer & Trust Company is the transfer agent and registrar for the shares of Common Stock and the warrant agent for the Redeemable Warrants and Class B Warrants. LEGAL MATTERS The validity of the issuance of the Securities will be passed upon for the Company by Jeffer, Mangels, Butler & Marmaro LLP, Los Angeles, California. Jeffers, Wilson & Shaff, LLP, Irvine, California has acted as attorneys for the Soliciting Agent. EXPERTS The financial statements of CinemaStar Luxury Theaters, Inc. included in this Prospectus and in the Registration Statement have been audited by BDO Seidman LLP, independent certified public accountants, to the extent and for the periods set forth in their report, appearing elsewhere herein and in the Registration Statement and is included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. The financial statements of United Artist - Chula Vista 6 included in this Prospectus and in the Registration Statement have been audited by BDO Seidman LLP, independent certified public accountants, to the extent and for the periods set forth in their report, appearing elsewhere herein and in the Registration Statement -73- 77 and is included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. -74- 78 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No. (a) Pro forma financial information: Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1995 (unaudited)............................................................................ F-1 Pro Forma Condensed Consolidated Statement of Operations for the year ended March 31, 1995 (unaudited)......................................................... F-2 Pro Forma Condensed Consolidated Statement of Operations for the three months ended June 30, 1995 (unaudited).................................................. F-3 Notes to Pro Forma Condensed Consolidated Financial Statements (unaudited)............................ F-4 (b) Fiscal year end financial statements: Report of Independent Certified Public Accountants.................................................... F-5 Consolidated Balance Sheets as of March 31, 1995 and 1996............................................. F-6 Consolidated Statements of Operation for the years ended March 31, 1995 and 1996............................................................................... F-8 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended March 31, 1995 and 1996................................................................... F-9 Consolidated Statements of Cash Flows for the years ended March 31, 1995 and 1996............................................................................... F-10 Summary of Accounting Policies........................................................................ F-12 Notes to Consolidated Financial Statements........................................................... F-15 (c) Fiscal quarter end financial statements: Unaudited Condensed Consolidated Financial Statements................................................. F-29 Condensed Consolidated Balance Sheet as of June 30, 1996.............................................. F-30 Condensed Consolidated Statements of Operations for the three months ended June 30, 1995 and 1996................................................................................ F-32 Condensed Consolidated Statement of Stockholder's Equity for the three months ended June 30, 1996......................................................................................... F-33 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 1995 and 1996................................................................................ F-34 Notes to Condensed Consolidated Financial Statements.................................................. F-35 (d) United Artists - Chula Vista 6: Report of Independent Certified Public Accountants.................................................... F-36 Balance Sheets as of December 31, 1994 and 1993....................................................... F-37 Statements of Operations and Theater Equity for the years ended December 31, 1994 and 1993............................................................................ F-38 Statements of Cash Flows for the years ended December 31, 1994 and 1993............................................................................ F-39 Summary of Accounting Policies........................................................................ F-40 Notes to Financial Statements......................................................................... F-41
-75- 79 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) MARCH 31, 1995 (SEE NOTE 1)
CinemaStar United Artists 6 See 3/31/95 12/31/94 Adjustments Note # Pro Forma ---------- ----------------- ----------- ------ --------- Assets Current Cash and cash equivalents $4,091,885 $ 25,295 $(3,217,295) (2) $ 899,885 Commissions receivable 24,196 -- 24,185 Merchandise inventory -- 7,058 (7,058) (2) -- Prepaid expenses 64,000 -- 54,000 Other current assets 273,000 7,317 (7,317) (2) 273,000 ---------- ---------- ----------- --- ---------- Total current assets 4,443,081 39,669 (3,231,669) 1,251,061 Property and equipment, net of accumulated depreciation and amortization 2,153,345 2,534,137 657,863 (3) 5,345,345 Deposits and other assets 187,043 -- -- 187,043 ---------- ---------- ----------- --- ---------- Total Assets $6,783,489 $2,573,808 $(2,573,806) $6,783,469 ========== ========== =========== === ========== Liabilities and Stockholders' Equity Current Accounts payable & accrued expenses $ 786,403 $ 320,634 $ (320,834) (2) $ 786,403 Current portion of long-term debt & capital lease obligations 421,872 -- 421,872 ---------- ---------- ----------- --- ---------- Total current liabilities 1,208,275 320,634 (320,634) 1,206,275 Long-term debt & capital lease obligations, net of current portion 2,248,680 -- 2,248,880 Deferred rent liability 1,246,016 -- 1,246,016 ---------- ---------- ----------- --- ---------- Total liabilities 4,703,171 320,634 (320,634) 4,703,171 ---------- ---------- ----------- --- ---------- Stockholders' equity 2,080,288 2,253,172 (2,253,172) 2,080,288 ---------- ---------- ----------- --- ---------- Total Liabilities and Stockholders' Equity $6,783,489 $2,573,806 $(2,573,806) $6,783,489 ========== ========== =========== === ==========
See Notes to Pro Forma Consolidated Financial Statements (Unaudited) F-1 80 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) YEAR ENDED MARCH 31, 1995 (SEE NOTE 1)
CINEMASTAR UNITED ARTISTS 6 SEE 3/31/95 12/31/94 ADJUSTMENTS NOTE # PRO FORMA ----------- ---------------- ----------- ------ ----------- Revenues: Admissions $ 6,992,935 $1,177,219 $ 8,170,154 Concessions 2,956,083 394,000 3,350,083 Other 96,563 6,750 103,313 ----------------------------- ----------- Total revenue 10,045,581 1,577,969 11,623,550 ----------------------------- ----------- Costs and expenses: Film rental and booking costs 3,847,431 649,708 4,497,139 Cost of concession supplies 1,182,438 71,349 1,253,785 Theater operating expenses 3,354,580 572,644 4,127,204 General and administrative expenses 1,871,851 242,723 $(235,800) (3) 1,877,774 Depreciation and amortization 451,924 100,935 (3) 552,850 Loss on lease refinanced 260,371 -- 260,371 ----------------------------- ---------- Total costs and expenses 11,168,573 1,537,350 12,569,133 ----------------------------- ----------- Operating loss (1,122,992) (59,391) (945,583) Other income (expense): Rental income 33,855 33,855 Interest expense (583,931) -- (563,931) Debt issuance costs (396,320) -- (396,320) Other (3,175) -- (3,175) ----------------------------- ----------- Total other income (expense) (963,426) 33,855 (929,571) Net loss $(2,086,418) (25,538) $(1,875,154) ============================= =========== Net loss per common share $ (0.29) $ (0.28) Weighted average number of shares outstanding 7,303,429 7,303,429
See Notes to Pro Forma Consolidated Financial Statements (Unaudited) F-2 81 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) Three Months Ended June 30, 1995 (see note 1)
CINEMASTAR UNITED ARTISTS 6 SEE 6/30/95 6/30/95 ADJUSTMENTS NOTE # PRO FORMA ---------- ---------------- ----------- ------ --------- REVENUES: Admissions $1,882,523 $275,007 $2,157,530 Concessions 765,883 99,050 854,933 Other 31,095 971 32,066 ------------------------ ---------- Total revenues 2,679,501 375,028 3,054,529 ------------------------ ---------- COSTS AND EXPENSES: Film rental and booking costs 1,057,558 140,726 1,196,394 Cost of concession supplies 308,353 36,264 342,517 Theater operating expenses 845,581 139,702 985,283 General and administrative expenses 523,061 60,104 $(59,200) (3) 523,965 Depreciation and amortization 117,231 25,359 142,590 ------------------------ ---------- Total costs and expenses 2,549,594 402,155 3,192,549 ------------------------ ---------- OPERATING LOSS (170,393) (27,127) (138,320) ------------------------ ---------- OTHER INCOME (EXPENSE): Rental income - 8,963 8,963 Interest expense (103,521) - (103,521) Interest income 55,429 - 55,429 ------------------------ ---------- Total other income (expense) (48,092) 8,963 (39,129) ------------------------ ---------- NET LOSS $ (213,485) $(18,164) $ (177,449) ======================== ========== NET LOSS PER COMMON SHARE $ (0.04) $ (0.03) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 6,200,000 6,200,000
See Notes to Pro Forma Consolidated Financial Statements (Unaudited) F-3 82 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - On August 17, 1995 CinemaStar Luxury Theaters, Inc. ("the Company") purchased an operating movie theater from United Artists Theatre Circuit, Inc. The six screen theater ("United Artists 6") is located at 320 Third Ave., Chula Vista, CA 91910. The Pro Forma Condensed Consolidated Balance Sheet and Statement of Operations as of and for the year ended March 31, 1995 reflect the financial position and results of operations for the Company's fiscal year ended March 31, 1995 combined with the financial position and results of operations of United Artists 6 for its fiscal year ended December 31, 1994. The Pro Forma Condensed Consolidated Statement of Operations for the three months ended June 30, 1995 include the Company's unaudited results of operations combined with the estimated results of operations for United Artists 6. Note 2 - The pro forma adjustments to the condensed consolidated balance sheet include the transfer of cash of $3,192,000 for the acquisition of the United Artists 6 land, building, and equipment and the elimination of United Artists 6 assets and liabilities that were not acquired. Note 3 - The Pro Forma Condensed Consolidated Statement of Operations for the year ended March 31, 1995 and the three months ended June 30, 1995 reflect an adjustment to eliminate management fees charged to the individual theater by United Artists Theatre Circuit, Inc. The Company's management believes that any additional general and administrative expenses related to the operation of this location would have been immaterial. As a significant portion of the net $657,863 increase in property and equipment is attributable to land value, additional depreciation for the year ended March 31, 1995 and the three months ended June 30, 1995 is considered to be ?????. F-4 83 [BDO LETTERHEAD] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors CinemaStar Luxury Theaters, Inc. We have audited the accompanying consolidated balance sheets of CinemaStar Luxury Theaters, Inc. (formerly Nickelodeon Theater Co., Inc.) and Subsidiaries as of March 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CinemaStar Luxury Theaters, Inc. (formerly Nickelodeon Theater Co., Inc.) and Subsidiaries as of March 31, 1995 and 1996, and the results of their operations and their cash flows for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. BDO Seidman, LLP Costa Mesa, California May 23, 1996 F-5 84 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 1995 1996 =================================================================================================== ASSETS (Note 3) CURRENT ASSETS: Cash and cash equivalents $4,091,885 $ 458,550 Commission and other receivables 24,196 87,605 Refundable construction deposit (Note 6) - 600,000 Prepaid expenses (Note 6) 54,000 181,000 Other current assets 273,000 78,508 - --------------------------------------------------------------------------------------------------- Total current assets 4,443,081 1,405,663 - --------------------------------------------------------------------------------------------------- Property and equipment, net (Notes 2, 3 and 11) 2,153,345 6,887,704 Preopening costs - 211,756 Deposits and other assets (Note 6) 187,043 445,408 - --------------------------------------------------------------------------------------------------- TOTAL ASSETS $6,783,469 $8,950,531 ===================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-6 85 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 1995 1996 ===================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations (Note 3) $ 421,872 $ 580,533 Accounts payable 469,649 838,140 Accrued expenses 185,216 147,779 Accrued consulting fees (Note 6) - 150,000 Deferred revenue 131,538 145,025 Advances from stockholder (Note 7) - 320,000 - ----------------------------------------------------------------------------------------------------- Total current liabilities 1,208,275 2,181,477 Long-term debt and capital lease obligations, net of current portion (Note 3) 2,248,880 3,725,568 Deferred rent liability (Note 6) 1,246,016 1,501,773 - ----------------------------------------------------------------------------------------------------- Total liabilities 4,703,171 7,408,818 - ----------------------------------------------------------------------------------------------------- Commitments and contingencies (Notes 3, 6 and 7) Subsequent events (Note 12) - ----------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (NOTES 4, 8, 9 AND 12): Preferred stock, no par value; 100,000 shares authorized: Series A redeemable preferred stock; 25,000 shares designated; no shares issued or outstanding - - Common stock, no par value; 15,000,000 shares authorized; 6,200,000 shares issued and outstanding 6,458,586 6,458,586 Additional paid-in capital 410,030 510,030 Accumulated deficit (4,788,318) (5,426,903) - ----------------------------------------------------------------------------------------------------- Total stockholders' equity 2,080,298 1,541,713 - ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,783,469 $ 8,950,531 =====================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-7 86 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31, 1995 1996 ====================================================================================================== REVENUES: Admissions $ 6,992,935 $ 8,088,192 Concessions 2,956,083 3,210,477 Other operating revenues 96,563 226,071 - ------------------------------------------------------------------------------------------------------ Total revenues 10,045,581 11,524,740 - ------------------------------------------------------------------------------------------------------ COSTS AND EXPENSES: Film rental and booking costs 3,847,431 4,405,483 Cost of concession supplies 1,182,436 1,252,603 Theater operating expenses (Note 6) 3,453,768 3,473,009 General and administrative expenses 1,972,643 2,157,803 Depreciation and amortization 451,924 574,377 Loss on lease refinanced 260,371 - - ------------------------------------------------------------------------------------------------------ Total costs and expenses 11,168,573 11,863,275 - ------------------------------------------------------------------------------------------------------ Operating loss (1,122,992) (338,535) - ------------------------------------------------------------------------------------------------------ OTHER INCOME (EXPENSE): Interest income 44,356 102,516 Interest expense (609,862) (400,966) Debt issuance costs (Note 4) (396,320) - - ------------------------------------------------------------------------------------------------------ Total other income (expense) (961,826) (298,450) - ------------------------------------------------------------------------------------------------------ Loss before provision for income taxes (2,084,818) (636,985) Provision for income taxes (Note 5) (1,600) (1,600) - ------------------------------------------------------------------------------------------------------ NET LOSS $ (2,086,418) $ (638,585) ====================================================================================================== NET LOSS PER COMMON SHARE $ (.29) $ (.10) ====================================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND SHARE EQUIVALENTS OUTSTANDING 7,303,429 6,200,000 ======================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-8 87 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1995 AND 1996 --------------------------------------------------------------------------------------- Series A Preferred Stock Common Stock Additional ----------------- --------------------- Paid-in Shares Amount Shares Amount Capital Deficit Total ================================================================================================================================== BALANCE, MARCH 31, 1994 - - 4,858,400 $ 452,200 $ - $(2,701,900) $(2,249,700) Repurchase of common stock (Note 8) - - (1,214,600) (95,000) - - (95,000) Issuance of common stock for minority interest of subsidiary (Note 8) - - 255,065 3,357 - - 3,357 Issuance of common stock for cash (Note 8) - - 801,135 10,544 - - 10,544 Issuance of common stock warrants (Note 4) - - - - 60,000 - 60,000 Issuance of common stock and common stock warrants in initial public offering, net of offering costs (Note 8) - - 1,500,000 6,087,485 350,030 - 6,437,515 Net loss for the year - - - - - (2,086,418) (2,086,418) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 1995 - - 6,200,000 6,458,586 410,030 (4,788,318) 2,080,298 Issuance of common stock warrants (Notes 6 and 8) - - - - 100,000 - 100,000 Net loss for the year - - - - - (638,585) (638,585) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 1996 - $ - 6,200,000 $6,458,586 $510,030 $(5,426,903) $ 1,541,713 ==================================================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-9 88 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (NOTE 10)
Years ended March 31, 1995 1996 ==================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,086,418) $ (638,585) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 450,384 574,377 Amortization of debt issuance costs 396,320 - Deferred rent liability 327,753 255,757 Loss on lease refinanced 260,371 - Increases (decrease) from changes in: Commission and other receivables 78,054 (63,409) Prepaid expenses and other current assets (45,500) (44,264) Deposits and other assets (258,619) (258,365) Accounts payable (190,767) 368,491 Accrued expenses and other liabilities 12,240 126,050 - ---------------------------------------------------------------------------------------------------- Cash provided by (used in) operating activities (1,056,182) 320,052 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (212,874) (5,308,736) Refundable construction deposit - (600,000) Collection of amounts due from officer 25,000 - - ---------------------------------------------------------------------------------------------------- Cash used in investing activities (187,874) (5,908,736) - ----------------------------------------------------------------------------------------------------
F-10 89 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (NOTE 10)
Years ended March 31, 1995 1996 ==================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 350,000 2,100,000 Principal payments on long-term debt and capital lease obligations (825,181) (464,651) Proceeds from issuance of promissory notes payable, net of issuance costs 2,543,680 - Repayment of promissory notes (2,940,000) - Repayment of stockholder notes payable (190,897) - Advances from stockholder - 450,000 Repayment of advances from stockholder (111,600) (130,000) Net proceeds from issuances of common stock and common stock warrants 6,511,416 - Repurchase shares of common stock (95,000) - - ---------------------------------------------------------------------------------------------------- Cash provided by financing activities 5,242,418 1,955,349 - ---------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,998,362 (3,633,335) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 93,523 4,091,885 - ---------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,091,885 $ 458,550 ====================================================================================================
See accompanying summary of accounting policies and notes to consolidated financial statements. F-11 90 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES PRINCIPLES OF The accompanying consolidated financial statements CONSOLIDATION include the accounts of CinemaStar Luxury Theaters, Inc. ("Theaters, Inc.") and its wholly-owned subsidiary CinemaStar Luxury Cinemas, Inc. ("Cinemas, Inc."), and its 75%-owned subsidiary CinemaStar Luxury Theaters, S. A. de C.V. ("CinemaStar International"), hereafter collectively referred to as the "Company". Cinemas, Inc. was an 80%-owned subsidiary of Theaters, Inc. through June 1994. CinemaStar International was a 60%-owned subsidiary of Theaters Inc. through June 1995. In July 1994, Theaters, Inc. acquired the remaining 20% minority interest in Cinemas, Inc. in exchange for 255,065 shares of Theaters, Inc. common stock valued at $3,357 (Note 8). All material intercompany transactions and balances have been eliminated in consolidation. In July 1994, certain officers and directors of the Company contributed to the Company their 60% ownership interest in CinemaStar International. In June 1995, the Company acquired an additional 15% interest in CinemaStar International. For accounting purposes, the acquisition of CinemaStar International was accounted for as a reorganization of affiliates under common control and recorded in a manner similar to a pooling-of-interest. A minority interest is not reflected in the consolidated financial statements since CinemaStar International has no material net assets and has incurred losses since inception. REVENUE The Company recognizes revenues from concession RECOGNITION and non-group ticket sales at the time of sale. The Company has a group ticket sales program under which corporations and large groups can purchase tickets, in advance, for discount prices. Group tickets must be used within twelve months of issuance. Revenues from group ticket sales are recorded as deferred revenue and are recognized when group tickets are used or expire. F-12 91 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES CASH AND CASH For purposes of the statements of cash flows, the EQUIVALENTS Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintained cash deposits and cash equivalents in certain accounts for which the balance was in excess of the Federal Deposit Insurance Corporation limits. At March 31, 1995 and 1996, the uninsured cash and cash equivalents totaled approximately $2,552,000 and $170,000. COMMISSIONS Commissions receivable represent amounts due from a RECEIVABLE concession supply company. The Company sells concession products which are kept on-hand on a consignment basis. A specified percentage of gross receipts from such sales are remitted to the concession supply company and a portion is retained by the Company as a commission. The balance recorded as a receivable represents amounts due to the Company from the concession supply company upon monthly reconciliation of concession sales activity. PROPERTY AND Property and equipment is recorded at cost. EQUIPMENT Depreciation and amortization are provided using the straight-line method over the estimated useful lives (3 - 27 years) of the related assets. Leasehold improvements are amortized over the lesser of the related lease terms or the estimated useful lives of the improvements. Repairs and maintenance are charged to expense as incurred. DEFERRED RENT Deferred rent liability represents the difference LIABILITY between base rentals paid under theater operating lease agreements and the expense recorded in the statements of operations on a straight-line basis over the life of the leases. In the early years of such leases, rent expense recorded in the statement of operations exceeds cash payments. PREOPENING COSTS Preopening costs related to new theaters are capitalized and amortized over twelve months. F-13 92 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes." Deferred income taxes are recognized based on the differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities. NET LOSS Net loss per share is computed by dividing net loss by PER SHARE the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents consist of dilutive outstanding stock options and warrants calculated using the treasury stock method. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and warrants issued and stock options granted during the twelve-month period preceding the date of the initial filing of the Registration Statement have been included in the calculation of common share equivalents, using the treasury stock method, as if they were outstanding through the closing date of the Company's initial public offering (see Notes 4 and 8). FAIR VALUE OF The carrying amount of the Company's financial FINANCIAL instruments, consisting of receivables, accounts INSTRUMENTS payable, and debt, approximates their fair value. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements. Actual amounts could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the 1995 financial statements to conform to the 1996 presentation. F-14 93 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF Theaters, Inc. and Cinemas, Inc. were incorporated in BUSINESS California in 1989 and 1992, respectively, for the purpose of establishing multi-screen, first-run theater locations in the Western United States, with an initial focus on Southern California. The Company currently operates five theaters having a total of 44 screens in San Diego County and Riverside County, California. In August 1995, the Company filed an amendment to its articles of incorporation and changed its legal name from Nickelodeon Theater Co., Inc. to CinemaStar Luxury Theaters, Inc. CinemaStar International was incorporated in Mexico in July 1994 for the purpose of establishing multi-screen, first-run theater locations in Mexico. As of March 31, 1996, the Company had no theaters operating in Mexico. The ability of the Company to operate depends on the availability of marketable motion pictures. The Company currently obtains the motion pictures for its theaters from approximately 10 to 12 distributors. However, poor relationships with distributors or a disruption in the production of motion pictures could limit the Company's ability to obtain films for its theaters. These factors, along with the poor commercial success of motion pictures could have a material adverse effect on the Company's business and results of its operations. However, at this time, the Company, in management's opinion, has good working relationships with its distributors. 2. PROPERTY AND Property and equipment consist of the following: EQUIPMENT
March 31, 1995 1996 ======================================================================== Furniture, fixtures and equipment $ 3,137,989 $ 5,302,367 Building - 2,169,798 Land - 960,000 Leasehold improvements 134,719 149,279 ------------------------------------------------------------------------ 3,272,708 8,581,444 Accumulated depreciation and amortization (1,119,363) (1,693,740) ------------------------------------------------------------------------ $ 2,153,345 $ 6,887,704 ========================================================================
F-15 94 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. PROPERTY AND Property and equipment at March 31, 1995 and 1996 EQUIPMENT includes assets under capital lease agreements with an (CONTINUED) original cost of $1,737,096 and $1,744,763. At March 31, 1995 and 1996, the accumulated amortization of assets under capital lease agreements totalled $728,427 and $1,016,587. Amortization expense related to the capital leases is included in depreciation and amortization in the accompanying consolidated financial statements. 3. LONG-TERM Obligations under long-term debt and capital lease DEBT AND arrangements are as follows: CAPITAL LEASE OBLIGATIONS
March 31, 1995 1996 ======================================================================== Note payable to bank; interest is at LIBOR plus 5.4% (8.45% at March 31, 1996). Monthly payments of principal and interest are $12,246 at March 31, 1996. The note matures in February 2026 and is collateralized by a deed of trust (Note 11) and is guaranteed by certain officers/directors/ stockholders of the Company. $ - $1,588,865 Notes payable to supplier; interest is at prime plus 2% (10% at March 31, 1996). Monthly payments are the greater of 10% of concession sales or $25,700. Notes are secured by substantially all assets of the Company and mature October 1999 through April 2003. 1,216,480 1,024,007 Note payable to bank; interest is at prime plus 2% (10.25% at March 31, 1996). Principal payments of $5,952 plus accrued interest are payable monthly. Note is secured by substantially all assets of the Company and matures in April 2003. - 500,000
F-16 95 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1995 1996 ======================================================================== 3. LONG-TERM Unsecured note payable to former stockholder DEBT AND for stock repurchase and employment CAPITAL LEASE settlement (Note 8). Note bears interest OBLIGATIONS at 6% and is payable in monthly principal (CONTINUED) And interest payments of $5,000 through March 1998. 163,272 111,664 Capitalized lease obligation discounted at 18.9%, payable in monthly installments of $25,101, including interest. Lease matures March 2000. 609,085 478,936 Capitalized lease obligation resulting from refinancing of other obligations; discounted at 22.3%, payable in monthly installments of $11,293, including interest. Lease matures March 2000. 399,072 347,354 Capitalized lease obligation discounted at 5.25%, payable in monthly installments of $2,060, including interest. Lease matures March 1999. 243,772 231,555 Other 39,071 23,720 ------------------------------------------------------------------------ 2,670,752 4,306,101 Current portion (421,872) (580,533) ------------------------------------------------------------------------ $2,248,880 $3,725,568 ========================================================================
F-17 96 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. LONG-TERM Aggregate principal maturities of long-term debt and DEBT AND capital lease obligations are as follows: CAPITAL LEASE OBLIGATIONS (CONTINUED)
Year Ending Long-term Capital March 31, Debt Leases Total ========================================================================== 1997 $ 369,232 $ 392,824 $ 762,056 1998 379,983 464,068 844,051 1999 349,237 388,760 737,997 2000 270,036 162,401 432,437 2001 212,648 26,452 239,100 Thereafter 1,658,400 195,700 1,854,100 -------------------------------------------------------------------------- Total minimum payments 3,239,536 1,630,205 4,869,741 Amount representing interest on leases - (563,640) (563,640) -------------------------------------------------------------------------- Total long-term debt and present value of minimum lease payments $3,239,536 $1,066,565 $4,306,101 ==========================================================================
4. PROMISSORY In July 1994, the Company commenced a private placement NOTES of equity and debt securities. The private placement PAYABLE was offered for a maximum of 30 units, each unit consisting of one unsecured promissory note in the principal amount of $98,000 (an aggregate principal amount of $2,940,000), bearing interest at 10% per annum, and 100,000 warrants each to purchase one share of the Company's common stock (or an aggregate 3,000,000 shares of common stock) at $1.00 per share. Upon the completion of the initial public offering (Note 8), the warrants were converted into redeemable warrants exercisable for the same number of shares as are purchasable upon the exercise of a warrant but having terms identical to the redeemable warrants included in the Company's public offering, including an exercise price of $6.00 per share of common stock. F-18 97 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. PROMISSORY Through September 8, 1994, the closing date of the NOTES private placement offering, the Company sold all 30 PAYABLE units offered and raised a gross $3,000,000 of which $60,000 was allocated to the common stock warrants and (Continued) included in additional paid-in capital. Costs incurred by the Company to effect this private placement aggregated approximately $396,000 which were amortized over six months beginning August 1994. The promissory notes were repaid by the Company in February 1995 out of the net proceeds of its initial public offering (Note 8). 5. INCOME TAXES For the years ended March 31, 1995 and 1996, the Company incurred only the minimum state income taxes due to the losses resulting from operations. A summary of the significant items comprising the Company's deferred income tax assets and liabilities is as follows:
March 31, 1995 1996 ======================================================================== Deferred tax assets: Depreciation and amortization $ 145,200 $ 211,000 Net operating loss carryforwards 829,900 1,018,000 Deferred rent liability 206,900 253,000 Business start-up expenses 107,800 37,000 Accrued expenses and other 43,700 24,000 ------------------------------------------------------------------------ Total deferred income tax assets 1,333,500 1,543,000 Valuation allowance (1,333,500) (1,476,000) ------------------------------------------------------------------------ Net deferred income tax assets - 67,000 Deferred tax liabilities: Preopening costs - 67,000 ------------------------------------------------------------------------ Net deferred income taxes $ - $ - ========================================================================
F-19 98 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INCOME TAXES Reconciliation of the Federal statutory rate to the (CONTINUED) Company's effective income tax rate is as follows:
March 31, 1995 1996 ========================================================================= Federal statutory rate (34.0)% (34.0)% State income taxes, net of federal benefit 0.1 0.3 Effect of foreign operations 2.0 5.9 Non deductible expenses 1.3 5.0 Net operating loss carryforward with no tax benefit realized 30.7 23.1 -------------------------------------------------------------------------- Effective income tax rate 0.1% 0.3% ==========================================================================
At March 31, 1995 and 1996, a 100% valuation allowance has been provided on the total deferred income tax assets since they are not more likely than not to be realized. At March 31, 1996, the Company has net operating loss (NOL) carry-forwards of approximately $3,500,000 and $1,700,000 for federal and state purposes. The NOLs are available to offset future taxable income. The federal NOLs expire in 2006 through 2011, while the state NOLs 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. 6. COMMITMENTS OPERATING LEASES AND CONTINGENCIES The Company leases four theater properties and various equipment under noncancelable operating lease agreements which expire between March 2009 and March 2021 and require various minimum annual rentals. The Company also leases various equipment under noncancelable operating lease agreements which expire through October 1998. Several of the theater leases provide for renewal options to extend the leases for additional five to 10 year periods. Certain theater leases also require the payment of property taxes, normal maintenance and insurance on the properties and additional F-20 99 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. COMMITMENTS rents based on percentages of gross theater and AND concession revenues in excess of various specified CONTINGENCIES revenue levels. Certain of the theater operating (CONTINUED) leases are also personally guaranteed by certain of the Company's officers/stockholders. In connection with the lease of one theater property, the Company made a refundable construction deposit of $600,000 during the year ended March 31, 1996. In April 1996, the deposit was refunded to the Company. During the years ended March 31, 1995 and 1996, the Company incurred rent expense under operating leases of approximately $1,472,000 and $1,405,000. The Company did not incur any contingent rental expense above the base rental charges during either of the years ended March 31, 1995 and 1996. At March 31, 1996, the aggregate future minimum lease payments due under these noncancelable operating leases are as follows:
Year Ending Theater Equipment March 31, Leases Leases Total ========================================================================== 1997 $ 1,544,902 $ 42,385 $ 1,587,287 1998 1,801,848 17,662 1,819,510 1999 1,943,048 2,589 1,945,637 2000 2,024,048 - 2,024,048 2001 2,072,048 - 2,072,048 Thereafter 32,389,628 - 32,389,628 -------------------------------------------------------------------------- Total minimum lease payments $ 41,775,522 $ 62,636 $ 41,838,158 ==========================================================================
The commitments in the table above represent the minimum cash payments required under the leases. For financial statement purposes, rent expense is recorded on a straight-line basis over the life of the lease. As such, because of lower lease payments in the early years of the lease terms, financial statement expense is greater than cash payments. For the years ended March 31, 1995 and 1996, rent expense charged to operations exceeded cash payment requirements by $327,753 and $255,757 and resulted in an increase to the deferred rent liability for the same amount. The Company has signed lease agreements for six new theater locations. The theater leases each have an initial term of 20 to 50 years and begin upon the occupancy of the theater locations, none of which have yet been F-21 100 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. COMMITMENTS constructed. The new leases, certain of which will be AND guaranteed by certain of the Company's officers/ CONTINGENCIES stockholders, will require expected minimum rental (CONTINUED) payments aggregating approximately $97,583,000 over the life of the leases. Accordingly, existing minimum lease commitments as of March 31, 1996 plus those expected minimum commitments for the proposed theater locations would aggregate minimum lease commitments of approximately $139,421,000. In addition to the foregoing projects, the Company periodically enters into non-binding letters of intent or options for the purchase or lease of theater sites to be developed. There can be no assurance that the sites for which the Company currently is negotiating or has letters of intent or options will ultimately be leased or purchased by the Company. CONCESSIONS The Company operates concession stands at two of its theaters. At the other three theaters the Company relies on one supplier for its concession supplies who is also a significant creditor to which the Company was indebted $1,216,480 and $1,024,007 as of March 31, 1995 and 1996 under note payable arrangements (Note 3). Any events of default on the Company's agreements with this supplier or other events which result in the deterioration of this relationship, could have an adverse effect on the Company's operations since the Company's concession agreements require a substantial early termination fee. F-22 101 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. COMMITMENTS EMPLOYMENT AGREEMENTS AND CONTINGENCIES Effective August 1994, the Company entered into (CONTINUED) five-year employment contracts with three of the Company's officers/stockholders. The agreements provide for aggregate annual salaries of $350,000 subject to annual increases of 10% to 12%. These officers will be entitled to annual bonuses equal to 2% to 5% of the Company's income before income taxes and officer bonuses in years when the income before income taxes and officer bonuses exceeds $2,000,000. The three officers will be entitled to additional individual bonuses of $200,000 to $500,000 in years when the income before income taxes but after payment of officer bonuses exceeds $7,000,000. CONSULTING AGREEMENT In February 1996, the Company entered into a consulting agreement for services to be rendered during the years ending March 31, 1997 and 1998. The agreement requires cash payments aggregating $250,000 and the issuance of a warrant to purchase 400,000 shares of the Company's common stock at an exercise price of $6.50 per share (Note 8). The Company estimated the value of the warrant to be $100,000 and recorded such amount as additional paid-in capital. As of March 31, 1996, the Company had issued the warrant and had paid $100,000 of the required cash payment. The consideration for the consulting services, aggregating $350,000, has been recorded in prepaid expenses and other assets. Such amount will be amortized on a straight-line basis over the two-year period of the consulting agreement. SEASONALITY The Company's business is highly seasonal with a large portion of its revenues and profits being derived during the months of June through August and the holiday season in November and December. F-23 102 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. RELATED PARTY The Company has been advanced funds by certain TRANSACTIONS officer/stockholders as follows: - In 1991, the Chairman of the Board of Directors (the "Chairman") personally borrowed $196,000 from a bank and in turn loaned the funds to the Company. The Company made monthly principal and interest payments directly to the bank on behalf of the Chairman until January 1995 when the Company repaid the outstanding principal to the Chairman. - In 1992, the Chairman advanced $80,000 of funds to the Company. The advances were unsecured and bore interest at 5.25%. The outstanding balance of $41,600 at March 31, 1994 was repaid during the year ended March 31, 1995. - In 1993, an officer of the Company personally obtained an unsecured line of credit from a local bank. The officer drew $70,000 on the line and in turn loaned the funds to the Company. The outstanding balance of $70,000 at March 31, 1994 was repaid in March 1995. The Company also has the following related party transactions. The Company pays a fee of $1,000 per week to a company wholly-owned by one of the Company's officer/director/stockholders which provides film buying and booking services to the Company. Such expense aggregated $52,000 for each of the years ended March 31, 1995 and 1996. Commencing August 1994, the Company pays a consulting fee of $26,000 per year for five years to the Company's Chairman of the Board. In addition, the Company has agreed to indemnify the Chairman's former wife for all liabilities that she may incur in connection with her guarantee of certain obligations of the Company, such as notes payable and theater operating leases (see Notes 3 and 6). In January 1996, the Company borrowed $450,000 from an officer/director/stockholder pursuant to a short-term note payable. At March 31, 1996, the outstanding balance was $320,000, which amount was repaid in full in April 1996. Refer to Note 8 for equity transactions with related parties. F-24 103 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. STOCKHOLDERS' In May 1994, the Company repurchased 1,214,600 shares EQUITY of its common stock in connection with a settlement TRANSACTIONS agreement with a former shareholder. Under the settlement agreement, the Company paid $95,000 for the shares of common stock. In addition, the Company made a cash payment of $55,000 and executed a note payable to the former shareholder in the amount of $200,000. The note, which bears interest at 6%, requires monthly principal and interest payments of $5,000 until repaid (Note 3). In July 1994, the Company issued 255,065 shares of common stock to acquire the 20% minority interest of Cinemas, Inc. which was owned by an officer/director of the Company. In July 1994, the Company issued 801,135 shares of common stock for aggregate cash consideration of $10,544. In July 1994, the Company's Board of Directors authorized a new class of preferred stock. A total of 100,000 shares of no par preferred stock has been authorized, of which 25,000 shares have been designated as Series A redeemable preferred stock. No shares of Series A preferred stock have been issued through March 31, 1996. The authorized class of preferred stock shall have the following rights and privileges upon issuance of any such shares. - Dividends - The holders of shares of preferred stock shall be entitled to cumulative annual dividends of $10 per share and will be payable in cash annually on February 1. - Redemption - At any time, the Company may redeem all or a portion of the outstanding shares of preferred stock at $100 per share plus all accrued but unpaid dividends. - Preference on Liquidation - The holders of shares of preferred stock are entitled to a preference on liquidation, dissolution or winding up of the Company. Holders of the shares of preferred stock are to be paid an amount equal to the redemption price prior to any distribution to holders of shares of common stock. Should the Company's assets be insufficient to pay the holders of the preferred stock, the holders of the preferred stock shall share ratably in any distribution of assets. F-25 104 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. STOCKHOLDERS' In February 1995, the Company successfully completed an EQUITY initial public offering of common stock and redeemable TRANSACTIONS warrants to purchase shares of common stock. The (CONTINUED) Company sold 1,500,000 shares at $5.00 per share, and 1,500,000 warrants to purchase one share of common stock at $6.00 per share at $.25 per warrant. The net proceeds to the Company were approximately $6,391,000 after deducting underwriter commissions, discounts, and other offering expenses of approximately $1,484,000. The redeemable warrants are exercisable at any time during a 54-month period commencing August 1995 and include an option whereby, under certain conditions, the Company can redeem the warrants. In March 1995, the underwriter exercised its option to purchase 225,000 of the Company's redeemable warrants to cover over-allotments in connection with the Company's initial public offering. The net proceeds to the Company were approximately $46,000 after deducting underwriter commissions, discounts, and other offering costs of approximately $10,000. In February 1996, the Company issued a warrant to purchase 400,000 shares of the Company's common stock at an exercise price of $6.50 per share in conjunction with a consulting agreement (Note 6). As of March 31, 1996, the Company has reserved 5,125,000 shares of common stock for the exercise of outstanding warrants. A summary of all common stock warrant activity follows:
Number of Shares Exercise Price --------- -------------- Outstanding at March 31, 1994 - $ - Issued 4,725,000 6.00 ------------------------------------------------------------------------ Outstanding at March 31, 1995 4,725,000 6.00 Issued 400,000 6.50 ------------------------------------------------------------------------ Outstanding at March 31, 1996 5,125,000 $ 6.00-6.50 ========================================================================
In connection with the initial public offering in February 1995, the Company issued warrants to the Underwriter ("Underwriter's Warrants") to purchase up to 150,000 shares of common stock and up to 150,000 redeemable warrants. The Underwriter's Warrants are exercisable at a F-26 105 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. STOCKHOLDERS' price of $7.50 per share of common stock and $0.375 per EQUITY redeemable warrant and expire in February 2000. TRANSACTIONS Accordingly, the Company has reserved 300,000 shares of (CONTINUED) common stock for the exercise of the outstanding Underwriter's Warrants. 9. STOCK OPTIONS In July 1994, the Company's Board of Directors approved the formation of the CinemaStar Luxury Theaters, Inc. Stock Option Plan. The Board of Directors has reserved 587,500 shares of common stock for the granting of incentive stock options and non-qualified stock options. Options generally vest over three years and must be exercised within ten years from the date of grant. A summary of all stock option activity follows:
Number of Shares Exercise Price --------- -------------- Outstanding at March 31, 1994 - $ - Granted 376,000 2.55 ------------------------------------------------------------------------- Outstanding at March 31, 1995 376,000 2.55 Granted 19,305 5.25 - 7.63 ------------------------------------------------------------------------- Outstanding at March 31, 1996 395,305 $ 2.55 - 7.63 =========================================================================
As of March 31, 1996, 385,302 stock options were exercisable at prices ranging from $2.55 to $7.63 per share. 10. SUPPLEMENTAL Cash paid for interest and income taxes was as follows: CASH FLOW INFORMATION
Years ended March 31, 1995 1996 ========================================================================= Interest $610,646 $400,966 ========================================================================= Income taxes $ 1,600 $ 1,600 =========================================================================
F-27 106 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. ACQUISITION In August 1995, the Company acquired an operating movie theater complex from United Artists Theatre Circuit, Inc. in Chula Vista California ("Chula Vista-6") for approximately $3,200,000. The acquisition was accounted for under the purchase method of accounting. The operations of Chula Vista-6 have been included in the Company's financial statements since the date of the acquisition. The purchase price approximated the fair value of the assets acquired, which included land, building and the related furniture, fixtures and equipment. The unaudited results of operations on a pro forma basis as though Chula Vista-6 had been acquired as of April 1, 1994 are as follows:
Years ended March 31, 1995 1996 ------------------------------------------------------------------------- Total revenues $11,624,000 $12,095,000 Net loss $(1,875,000) $ (576,000) Net loss per common share $ (.26) $ (.09)
In January 1996, the Company obtained a $1,600,000 loan collateralized by a deed of trust on Chula Vista-6 (Note 3). 12. SUBSEQUENT On each of April 11, 1996 and May 21, 1996, the Company EVENTS 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 or $4.25 per share. On May 22, 1996, the April 1996 debenture and accrued interest was converted into 127,152 shares of common stock. F-28 107 CINEMASTAR LUXURY THEATRES, INC. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIRST QUARTER ENDED JUNE 30, 1996 The accompanying condensed financial statements are unaudited and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. These statements should be read in conjunction with the Company's audited financial statements for the two years ended March 31, 1996, and the notes thereto included in this Prospectus. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company's financial position as of June 30, 1996, and the results of its operations and cash flows for the three-month periods ended June 30, 1996 and 1995. The results for the three months ended June 30, 1996, are not necessarily indicative of the results to be expected for the full year. F-29 108 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, 1996 - ------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash $ 1,142,297 Commission and other receivables 110,799 Prepaid expenses 298,935 Other current assets 82,638 - ------------------------------------------------------------------------------ Total current assets 1,634,669 Property and equipment, net 8,000,663 Preopening costs 175,850 Deposits and other assets 669,860 - ------------------------------------------------------------------------------ TOTAL ASSETS $10,481,042 ==============================================================================
See accompanying notes to condensed consolidated financial statements. F-30 109 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 1996 -------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt and capital lease obligations $ 674,985 Accounts payable 1,330,914 Accrued expenses 108,806 Deferred revenues 155,086 Advances from stockholder 60,000 - ----------------------------------------------------------------------------------------------------------- Total current liabilities 2,329,791 Long-term debt and capital lease obligations, net of current portion 3,973,774 Convertible debenture 500,000 Deferred rent liability 1,738,607 - ----------------------------------------------------------------------------------------------------------- Total liabilities 8,542,172 - ----------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES Subsequent Event 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 -- Common stock, no par value; 15,000,000 shares authorized; 6,327,152 shares issued and outstanding 6,871,860 Additional paid-in capital 510,030 Accumulated deficit (5,443,020) - ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 1,938,870 - ----------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $10,481,042 ===========================================================================================================
See accompanying notes to condensed consolidated financial statements. F-31 110 CINEMASTER LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, -------------------------------------- 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- REVENUES: Admissions $2,963,529 $1,882,523 Concessions 1,202,922 765,883 Other operating revenues 83,952 31,095 - -------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 4,260,403 2,679,501 - -------------------------------------------------------------------------------------------------------------------------- Cost and expenses: Film rental and booking costs 1,603,729 1,057,668 Cost of concession supplies 358,984 306,353 Theater operating expenses 1,275,509 845,581 General and administrative expenses 664,640 523,061 Depreciation and amortization 225,641 117,231 - -------------------------------------------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES 4,128,503 2,849,894 - -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) 131,900 (170,393) - -------------------------------------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest income 2,644 55,429 Interest expense (150,661) (103,521) - -------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INCOME (EXPENSE) (148,017) (48,092) - -------------------------------------------------------------------------------------------------------------------------- LOSS BEFORE PROVISION FOR INCOME TAXES (16,117) (218,485) PROVISION FOR INCOME TAXES -- - -------------------------------------------------------------------------------------------------------------------------- NET LOSS $ (16,117) $ (218,485) ========================================================================================================================== NET LOSS PER COMMON SHARE $ -- $ (.04) ========================================================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND SHARE EQUIVALENTS OUTSTANDING 6,254,000 6,200,000 - --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements. F-32 111 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1996 ----------------------------------------------------------------------------------------------------- Series A Preferred Stock Common Stock Additional ---------------------- ---------------------- Paid-in Accumulated Shares Amount Shares Amount Capital Deficit Total - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, March 31, 1996 - $ - 6,200,000 $6,458,586 $510,030 $(5,426,903) $1,541,713 Issuance of common stock for convertible debenture (Note 2) - - 127,152 413,274 - - 413,274 Net loss for the period - - - - - (16,117) (16,117) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, June 30, 1996 - - 6,327,152 $6,871,860 $510,030 $(5,443,020) $1,938,870 ====================================================================================================================================
See accompanying notes to condensed consolidated financial statements. F-33 112 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Three Months Ended June 30, ---------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (16,117) $ (218,485) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 259,749 117,231 Deferred rent liability 236,834 73,287 Increase (decrease) from changes in: Commission and other receivables (23,194) (23,736) Prepaid expenses and other current assets (122,065) 48,000 Deposits and other assets (138,406) 274,500 Accounts payable 492,774 236,628 Accrued expenses and other liabilities (178,912) (57,338) - ------------------------------------------------------------------------------------------ Cash provided by operating activities 510,663 450,087 - ------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,336,802) (172,470) Refundable construction deposit 600,000 -- - ------------------------------------------------------------------------------------------ Cash used in investing activities (736,802) (172,470) - ------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 500,000 -- Principal payments on long-term debt and capital lease obligations (157,342) (101,257) Proceeds from issuance of convertible debentures 1,000,000 -- Advances from stockholder 60,000 20,000 Repayment of advances from stockholder (320,000) -- Payment of debt issuance costs (172,772) -- - ------------------------------------------------------------------------------------------ Cash provided by (used in) financing activities 909,886 (81,257) - ------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 683,747 196,360 Cash and cash equivalents, beginning of period 458,550 4,091,885 - ------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 1,142,297 $4,228,245 ==========================================================================================
See accompanying notes to condensed consolidated financial statements. F-34 113 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 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 month period ended June 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 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. 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. F-35 114 [BDO LETTERHEAD] INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT To The Board of Directors CinemaStar Luxury Theaters, Inc. Oceanside, California We have audited the accompanying balance sheets of the United Artists-Chula Vista 6, a stand alone operating movie theater formerly owned by United Artists Theatre Circuit, Inc., as of December 31, 1994 and 1993, and the related statements of operations and theater equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the United Artists-Chula Vista 6 at December 31, 1994 and 1993, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. BDO Seidman, LLP October 5, 1995 F-36 115 United Artists-Chula Vista 6 BALANCE SHEETS ===============================================================================
December 31, 1994 1993 =============================================================================== ASSETS (Note 3) CURRENT Cash $ 25,296 $ 9,147 Merchandise inventory 7,056 4,294 Prepaid expenses and other current 7,317 23,692 - ------------------------------------------------------------------------------ Total current assets 39,669 37,133 - ------------------------------------------------------------------------------ PROPERTY AND EQUIPMENT Land 613,283 613,283 Building 1,554,549 1,551,525 Theater equipment and fixtures 607,466 590,305 - ------------------------------------------------------------------------------ 2,775,298 2,755,113 Accumulated depreciation (241,161) (140,225) - ------------------------------------------------------------------------------ Net property and equipment 2,534,137 2,614,888 - ------------------------------------------------------------------------------ Total assets $2,573,806 $2,652,021 ============================================================================== LIABILITIES AND THEATER EQUITY Accounts payable and other accrued expenses, current $ 320,634 $ 209,207 Commitments (Note 2) Theater equity (Note 1) 2,253,172 2,442,814 - ------------------------------------------------------------------------------ Total liabilities and theater equity $2,573,806 $2,652,021 ==============================================================================
See accompanying summary of accounting policies and notes to financial statements. F-37 116 UNITED ARTISTS-CHULA VISTA 6 STATEMENTS OF OPERATIONS AND THEATER EQUITY ===============================================================================
Year ended December 31, 1994 1993 =============================================================================== REVENUES: Admissions $1,177,219 $1,268,153 Concessions 394,000 441,670 Other operating revenues 6,750 9,183 - ------------------------------------------------------------------------------ TOTAL REVENUES 1,577,969 1,719,006 - ------------------------------------------------------------------------------ COSTS AND EXPENSES: Film rental and booking costs 649,708 677,571 Cost of concession supplies 71,349 80,201 Theater operating expenses 672,644 692,792 General and administrative (Note 1) 242,723 262,209 Depreciation 100,936 91,111 - ------------------------------------------------------------------------------ TOTAL COST AND EXPENSES 1,637,360 1,803,884 - ------------------------------------------------------------------------------ OPERATING LOSS (59,391) (84,878) OTHER INCOME Rental income 33,855 32,769 - ------------------------------------------------------------------------------ Net loss (25,536) (52,109) THEATER EQUITY, beginning of year 2,442,814 2,359,529 Net change in parent company investment (Note 1) (164,106) 135,394 - ------------------------------------------------------------------------------ THEATER EQUITY, end of year $2,253,172 $2,442,814 ==============================================================================
See accompanying summary of accounting policies and notes to financial statements. F-38 117 UNITED ARTISTS-CHULA VISTA 6 STATEMENTS OF CASH FLOWS ================================================================================ INCREASE (DECREASE) IN CASH
YEAR ENDED DECEMBER 31, 1994 1993 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(25,536) $ (52,109) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation 100,936 91,111 Increase (decrease) from changes in: Merchandise inventory (2,762) 1,961 Prepaid expenses and other current assets 16,375 (2,818) Accounts payable and accrued expenses 111,427 132,864 - -------------------------------------------------------------------------------- Cash provided by operating activities 200,440 171,009 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (20,185) (306,683) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in parent company investment (164,106) 135,394 - -------------------------------------------------------------------------------- Net increase (decrease) in cash 16,149 (280) CASH, beginning of year 9,147 9,427 - -------------------------------------------------------------------------------- CASH, end of year $ 25,296 $ 9,147 ================================================================================
See accompanying summary of accounting policies and notes to financial statements. F-39 118 UNITED ARTISTS-CHULA VISTA 6 SUMMARY OF ACCOUNTING POLICIES =============================================================================== BUSINESS The United Artists-Chula Vista 6 (the "Theater") operates as a multi-screen, first run theater located in Chula Vista, San Diego County, California. Until August 17, 1995, the Theater, was owned and operated by United Artists Theatre Circuit, Inc. at which time it was sold to CinemaStar Luxury Theaters, Inc. (Note 3). The Theater's business is highly seasonal with a large portion of its revenues and profits being derived during the months of June through August and the holiday season in November and December. REVENUE The Theater recognizes revenue from ticket and concessions RECOGNITION sales at the time of sale. The Theater has a group ticket sales program under which corporations and large groups can purchase tickets, in advance, for discount prices. Revenues from group ticket sales are recognized when group tickets are used or expire. PROPERTY AND Property and equipment is recorded at cost substantially all of EQUIPMENT which is based on allocation of the purchase cost based on an appraisal at the time the Theater was acquired by United Artists Theatre Circuit, Inc. ("UATCI") in May 1992, upon a spin-off of UATCI from its former parent company, TCI Communications, Inc. Depreciation is provided using the straight-line method over the estimated useful lives (10 to 40 years) of the related assets. Repairs and maintenance are charged to expense as incurred. INCOME TAXES As discussed in Note 1, the accompanying financial statements represent those of one operating theater owned by UATCI. The results of operations for the years ended December 31, 1994 and 1993, are included in the consolidated tax return of UATCI. As the Theater, after allocation of corporate overhead (Note 1), operated at a loss for each 1994 and 1993, no allocation of corporate income taxes or income tax benefit was provided. CASH AND CASH For purposes of the statements of cash flows, the Theater EQUIVALENTS considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. F-40 119 UNITED ARTISTS-CHULA VISTA 6 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. RELATED PARTY TRANSACTIONS The Theater operations, through the date of sale by UATCI (Note 3), are significantly controlled by the parent company, UATCI. In that regard, cash deposited to the Theater's operating accounts is transferred to the parent company which uses the funds to pay operating expenses, along with the funds from other UATCI theaters, on a company-wide basis using an integrated system. The net effect of such intercompany cash transfers results in an intercompany receivable or payable. At December 31, 1994, the Theater was due approximately $101,750 from its parent while it owed approximately $62,400 to the parent company. These amounts have been included as a component of the net Theater equity as of December 31, 1994 and 1993. In addition to the normal operating expenses, the Theater is allocated a management fee from UATCI consisting of two components. The first is an allocation of UATCI corporate overhead based on the pro-rata revenues of all UATCI 100%-owned theaters. Such allocation amounted to approximately $83,700 and $112,600 for the years ended December 31, 1994 and 1993. The second component is an allocation of corporate finance and interest charges. Such an allocation is intended to reflect the financing costs that would be incurred as a normal cost of operations if the Theater was truly a stand-alone business. The allocations, which totalled approximately $153,100 and $145,100 for the years ended December 31, 1994 and 1993 are based on the pro-rata net tangible assets of all UATCI 100%-owned theaters. All of such management fees have been included in general and administrative expenses in the accompanying statements of operations. 2. COMMITMENTS Rental Income Agreements The Theater has leased certain portions of its facilities to two tenants. These leases have terms ranging from three to five years and require minimum monthly rentals as follows: F-41 120 UNITED ARTISTS-CHULA VISTA 6 NOTES TO FINANCIAL STATEMENTS ================================================================================ 2. COMMITMENTS (CONTINUED)
DATE OF INITIAL MINIMUM LEASE TERM MONTHLY RENTAL --------------------------------------------------------------- January 1, 1993 January 1993 to December 1997 $1,386 December 28, 1994 March 1995 to February 1998 1,365
As of December 31, 1994, the aggregate future minimum lease payments due to the Theater under these leases is as follows:
YEAR ENDING DECEMBER 31, AMOUNT ---------------------------------------------------------------- 1995 $ 31,458 1996 34,458 1997 34,908 1998 2,730 ---------------------------------------------------------------- Total minimum lease payments $103,644 ================================================================
Parking Structure Rental The Theater is party to an agreement with the Redevelopment Agency of the City of Chula Vista which provides for rental of space in a city-owned parking structure adjacent to the Theater. Such agreement provides for annual rent consisting of a "flat rate payment" of $26,438 plus a "percentage payment", currently equal to .30% of annual gross sales. The flat rent payment is to be paid by UATCI or its successors through 2016 while the percentage payment, which increases to .42% of gross sales in 2000, continues through 2010. As such, the minimum rental payments required under such lease, for the next five years and thereafter is as follows: F-42 121 UNITED ARTISTS-CHULA VISTA 6 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 2. COMMITMENTS (CONTINUED)
Year Amount ---- ------ 1995 $ 26,438 1996 26,438 1997 26,438 1998 26,438 1999 26,438 Thereafter 449,446 -------- $581,636 ========
3. SUBSEQUENT EVENTS On August 17, 1995, substantially all of the Theater's assets, including the land, building, equipment and various operating contracts and leases, were sold to CinemaStar Luxury Theaters, Inc. at a sales price of $3,180,000 which was received in cash upon the closing of the transaction. The Theater began operating, effective August 18, 1995, as a CinemaStar location. The terms of the sale prohibit the use of the "United Artists" name in its future operations. F-43 122 ================================================================================ NO DEALER, SALES REPRESENTATIVE OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------- TABLE OF CONTENTS
Page ---- Available Information .................................................... 4 Prospectus Summary ....................................................... 5 Risk Factors ............................................................. 12 The Offer ................................................................ 22 Market Prices ............................................................ 33 Use of Proceeds .......................................................... 34 Dividend Policy .......................................................... 34 Management's Discussion and Analysis ..................................... 34 Business ................................................................. 42 Management ............................................................... 55 Principal Stockholders ................................................... 62 Certain Transactions ..................................................... 63 Selling Security Holder .................................................. 65 Description of Securities ................................................ 69 Legal Matters ............................................................ 73 Experts .................................................................. 73 Index to Consolidated Financial Statements ................................................... 75
--------------- ================================================================================ ================================================================================ Shares of Common Stock Redeemable Warrants Class B Warrants Underwriter's Warrant CINEMASTAR LUXURY THEATERS, INC. ---------------- PROSPECTUS ---------------- THE BOSTON GROUP, L.P., Soliciting Agent September __, 1996 ================================================================================ 123 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Under California law, in non-derivative actions, an officer or director may be reimbursed for expenses, judgments and settlement if such individual has acted in good faith and in a manner he believes to be in the best interests of a company and the shareholders and in the case of criminal proceeding, he had no reasonable cause to believe the conduct was unlawful. With regard to derivative actions, such person may be reimbursed for expense if the officer or director acted in good faith, in a manner the officer or director believes to be in the best interests of a company and the shareholders; provided, however, that no indemnification shall be made (1) if the officer or director is found liable to a company, except as may be determined by the court in which the action is or was pending; or (2) for amounts paid in defending such action which is terminated without court approval. If indemnification is authorized, but not required, by California law, then the right to indemnification shall be determined by (i) a majority vote of the disinterested members of the board of directors, (ii) a majority vote of the disinterested shareholders (iii) the court in which the action is or was pending, or (iv) if there is not a majority of disinterested directors, by a written option of independent counsel. If the officer or director is successful in the defense of any action, California law provides that such individual shall be entitled to indemnification. A company can maintain officers' and directors' liability insurance. See "Management -- Limitations of Liability and Indemnification of Directors" The Company intends to purchase a directors' and officers' liability insurance policy insuring directors and officers of the Company for up to the maximum amounts set forth in such policy. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following tables sets forth the various expenses in connection with the sale and distribution of the securities covered hereby other than the fee payable to Soliciting Agent. Filing Fees ....................................... $ 19,552 NASD .............................................. $ 11,840 NASDAQ ............................................ $ 1,000 Legal fees and expenses ........................... $ 40,000 Accounting fees and expenses ...................... $ 15,000 Reproduction ...................................... $ 3,000 Depositary (fees and expenses) .................... $ 3,500 Blue Sky fees and expenses (including counsel fees) $ 20,000 Soliciting Agent Expenses ......................... $ 25,000 Miscellaneous expenses ............................ $ 1,108 -------- Total ............................................. $140,000 ========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The Company has sold or issued the following securities during the last three years (except as otherwise indicated, all share information gives effect to the 6.460637-for-1 stock split effected by the Company in July 1994 and the 1.175-for-1 stock split effected by the Company in January 1995): 1. In August 1992, the Company issued a total of 6,073,000 shares of its Common Stock to five founders, John Ellison, Jr., Alan Grossberg, Russell Seheult, Myles Regan and Harrah's Theater Equipment & Supply. Such sale was not subject to registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof. 2. In July 1994, the Company issued 255,065 shares of its Common Stock to an officer of the Company (Jerry Willits) in exchange for a minority interest in a subsidiary of the Company. Such sale was not subject to registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof. II-1 124 3. In July 1994, the Company sold 801,135 shares of its Common Stock to four investors. Such sale was not subject to registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof. 4. In September 1994, the Company completed a private placement of Units consisting of an unsecured promissory note and warrants to purchase shares of the Company's Common Stock at $1.00 per share. A total of $3,000,000 was raised and warrants to purchase up to 3,000,000 shares were issued to 40 investors. Such sale was not subject to registration under the Securities Act of 1933, as amended, by virtue of Regulation D promulgated thereunder. By agreement with each of these investors, the 1.175-for-1 stock split effected in January 1995 did not apply to the outstanding warrants. Upon the effectiveness of the Registration Statement for the initial public offering, the warrants issued in the September 1994 private placement were automatically converted into Redeemable Warrants to purchase the same number of shares and such conversion was exempt from registration under the Securities Act of 1993, as amended, by Section 3(a)(9). 5. Since July 1994, the Company issued options to acquire a total of 395,302 shares of Common Stock to certain officers, directors and/or consultants of the Company pursuant to the Company's Employee Stock Option Plan. Such sale was not subject to registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof. The Company has filed a Form S-8 Registration Statement to cover the shares issuable under such Plan. 6. 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") to one entity, in transactions pursuant to Regulation S. The Debentures are convertible into shares of Common Stock of the Company at a conversion price at $3.95 per share and $4.25 per share, respectively. The Debentures bore interest at the rate of four percent (4%) per annum, payable quarterly. The principal amount of the Debentures were due and payable on April 11, 1999 and May 21, 1999, respectively. The Debentures were converted into 245,367 shares of Common Stock. 7. On August 6, 1996, the Company issued two Convertible Debentures in the principal amount of $1,000,000 each to two purchasers in 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 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 are due and payable on the second anniversary of issuance. In connection with the issuance of the Convertible Debentures, the Company issued to each purchaser a five-year warrant to purchase 17,142 shares of Common Stock of the Company at an exercise price of $7.00 per share. The Company repurchased 2,429,200 of the shares described above in May 1992 and May 1994. ITEM 27. EXHIBITS.
Exhibit Number Description ------ ----------- 1.2 Warrant Solicitation Agreement (1) 3.1 Amended and Restated Articles of Incorporation of the Company, as amended (3) 3.2 Bylaws of the Company (4) 4.1 Specimen Stock Certificate of the Company (10) 4.2 Form of Redeemable Warrant Agreement (with form of certificate attached) (4) 4.3 Form of Underwriter's Warrant Agreement (with form of certificate attached) (4) 4.4 Form of Bridge Warrant (10) 4.5 Form of Acknowledgment and Agreement of Warrant Holder (4) 4.6 Form of Class B Warrant Agreement (with form of certificate attached) (1) 4.7 $500,000 Debenture (5) 4.8 $500,000 Debentures (6) 4.9 Convertible Debenture, dated August 1, 1996 (12) 4.10 Convertible Debenture, dated August 1, 1996 (12)
II-2 125
Exhibit Number Description ------ ----------- 5 Opinion of Jeffer, Mangels, Butler & Marmaro LLP (1) 10.1 Employment Agreement of John Ellison, Jr.(4) 10.2 Employment Agreement of Alan Grossberg (4) 10.3 Employment Agreement of Jerry Willits (4) 10.4 Consulting Agreement of Russell Seheult (4) 10.5 Film Booking Agreement between the Company and Alan Grossberg (4) 10.6 Form of Indemnification Agreement with officers and directors (4) 10.7 Stock Option Plan (4) 10.8 Placement Agent Agreement between the Company and A.S. Goldmen & Co., Inc. as amended (9) 10.9 Equipment Purchase and Ride Film Rental Agreement, dated August 8, 1994, between the Company and Cinema Ride, Inc., as amended (10) 10.10 Form of Promissory Note of the Company issued in connection with a private placement of Promissory Notes and Bridge Warrants in August 1994 and September 1994 (4) 10.11 Form of Financial Advisory and Consulting Agreement between the Company and the A.S. Goldmen Co., Inc. (4) 10.12 Lease Agreement, dated April 30, 1991, between Nickelodeon Cinemas, Inc. and Homart Development Co. (4) 10.13 Lease, dated November 21, 1990, between the Company and Blue Ravine Associates, Inc. (now Pacific Oceanside Holdings, L.P. (4) 10.13.1 First Amendment to Lease, dated July 14, 1995 between the Company and Pacific Oceanside Holdings, L.P. (2) 10.14 Real Property Lease Agreement between the Company and Gary E. Elam, Receiver (4) 10.15 Equipment Purchase Agreement between the Company and Gary E. Elam, Receiver (4) 10.16 Modification and Supplement of Lease and Equipment Purchase Agreement, dated March 1, 1994, between the Company and River Village, William Buster and Harold Alles, as successor in interest to Gary E. Elam, Receiver (4) 10.17 Lease Agreement, dated October 12, 1993, between the Company and Oceanside Cornerstone, Inc.(4) 10.18 Lease, dated October 19, 1994, between the Company and Glenwood Buena Park Limited Partnership (4) 10.19 Purchase Agreement with United Artist (7) 10.20 Newbury Park Center Lease, dated July 12, 1994, between the Company and Newbury Park Group (4) 10.20.1 Amendment No. 1 to Newbury Park Lease (2) 10.21 Agreement, dated July 12, 1994, between the Company and Newbury Park Group, as amended (10) 10.22 Agreements with Pacific Concessions (4) 10.23 Letter of Intent, dated August 5, 1994, between Southland Consulting and the Company (9) 10.24 Memorandum of Intent Re Development, Construction, and Operation of Motion Picture Theater, dated December 1, 1994, between CinemaStar Cinemas Internacionales, S.A. de C.V. and Jose Manuel Gonzolez (9) 10.25 Lease Agreement, dated July 11, 1995 between the Company and Buena Park Cinema Center Limited Partnership and related Guaranty (2) 10.26 Lease Agreement, dated August 1, 1995 between the Company and Mission Grove Plaza, L.P. (as amended) (2) 10.27 Lease Agreement, dated July 14, 1995 between the Company and University Village, LLC (2) 10.28 Ground Lease, dated August 5, 1995 between the Company and Craig W. Clark (2) 10.29 Lease Agreement, dated February 15, 1996 with the Coudures Family Limited Partnership 10.30 Adjustable Rate Note, dated January 23, 1996 (2) 10.31 Settlement Agreement and Release of Claims, dated April 27, 1995, between the Company and Viacom International, Inc. (2) 10.32 First National Bank promissory Note, dated March 1, 1996, for $500,000 (11) 10.33 First National Bank Promissory Note, dated May 28, 1996, for $500,000 (11) 10.34 First National Bank Business Loan Agreement, dated May 28, 1996 (11)
II-3 126
Exhibit Number Description ------ ----------- 10.35 Consulting Agreement with The Boston Group, L.P., dated February 12, 1996 (11) 10.36 400,000 Warrant issue to The Boston Group, L.P., dated February 12, 1996 (11) 10.37 Lease Agreement, dated May 11, 1996, between the Company and Espacios de Zapopan, S.A. de C.V. (11) 10.38 Lease Agreement, dated June 14, 1996, between the Company and Inmobiliaria Lunar, S.C. (11) 10.39 Finder's Fee Agreement with Robert Bailey* 10.40 Consulting Agreement with Boston Group, L.P.* 10.41 Warrant Agreement with The Boston Group, L.P.* 10.42 Offshore Warrant Agreement (12) 10.43 Offshore Warrant Agreement (12) 10.44 Ground Lease with the City of San Marcos, dated June 25, 1996 (13) 10.45 Coconut Grove Marketplace Sublease Agreement (13) 21 Subsidiaries: CinemaStar, Inc., a California corporation, 100% owned CinemaStar Cinemas Internacionales, S.A. de C.V., a Mexican corporation, 75% owned 24.1 Consent of BDO Seidman LLP (see page II-9) 24.2 Consent of Jeffer, Mangels, Butler & Marmaro (included in Exhibit 5) 24.3 Consent of BDO Seidman LLP. (see page II-0) 27 Financial Data Schedule (10) 25 Power of Attorney (see page II-6) 99.1 Letter to Holders of Redeemable Warrants (1) 99.2 Letter to Brokers et al. (1) 99.3 Letter to Clients (1) 99.4 Notice of Guaranteed Delivery (1) 99.5 Depositary Agreement (1)
- -------------------- * Filed herewith (1) Filed with Amendment No. 1 to this Registration (2) Incorporated by reference to identically numbered Exhibits filed with Post-Effective Amendment No. 1 to Form SB-2 Registration Statement No. 33-87164, filed on March 20, 1996 (3) Incorporated by reference to Exhibit 3.1 to form 10-KSB for the fiscal year ended March 31, 1995 (4) Incorporated by reference to identically numbered Exhibits filed with Registration Statement No. 33-87164, filed on November 23, 1994 (5) Incorporated by reference to Exhibit 4.1 to Form 8-K for April 11, 1996 (6) Incorporated by reference to Exhibit 4.1 to Form 8-K for May 21, 1996 (7) Incorporated by reference to Exhibit 10.1 to Form 10-K SB for the fiscal year ended March 31, 1995 (8) Incorporated by reference into Exhibit 10.2 to the Form 10-K SB for the fiscal year ended March 31, 1995 (9) Incorporated by reference to identically numbered Exhibits filed with Amendment No. 1 to Form SB-2 Registration Statement No. 33-87164, filed on January 4, 1995 (10) Incorporated by reference to identically numbered Exhibits to Amendment No. 2 to Form SB-2 Registration Statement, filed on January 31, 1995 (11) Incorporated by reference to identically numbered Exhibits to Form 10-KSB for the fiscal year ended March 31, 1996 (12) Incorporated by reference to the following Exhibits to Form 8-K for August 6, 1996: Form 8-K Exhibits Form SB-2 Exhibits ----------------- ------------------ 4.1 4.9 4.2 4.10 4.5 4.43 4.6 4.44 (13) Incorporated by reference to Exhibits 10.1 (San Marcos) and 10.2 (Coconut Grove) to the Form 10-Q SB for the quarter ended June 30, 1996. II-4 127 ITEM 28. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes : (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement; (i) To include any Prospectus required by section 10(a)(3) of the Securities Act; (ii) To reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually , or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b), in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement ; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising from the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against policy polish as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The Registrant will: (1) For determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of securities at that time as the initial bona fide offering of those securities. II-5 128 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Oceanside, State of California on the 31st of August, 1996. CINEMASTAR LUXURY THEATERS, INC. By: /s/ John Ellison, Jr. ---------------------------- John Ellison, Jr., President POWER OF ATTORNEY Each person whose individual signature appears below hereby constitutes and appoints John Ellison, Jr. and Alan Grossberg, or either of them, as his true and lawful attorney(s)-in-fact with full power of substitution to execute in the name and on behalf of such person, individually and in each capacity stated below, and to file, any and all amendments to this Registration Statement, including any and all post-effective amendments. In accordance with the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Capacity Date - --------- -------- ---- /s/ John Ellison, Jr. President, Chief Executive - -------------------------- Officer and Director (principal John Ellison, Jr. executive officer) August 31, 1996 /s/ Alan Grossberg Chief Financial Officer, - -------------------------- Executive Vice President, and Alan Grossberg Director (principal financial and accounting officer) August 31, 1996 /s/ Terry Willits Vice President and Director - -------------------------- August 31, 1996 Jerry Willits /s/ Jon Meloan General Counsel, Secretary and - -------------------------- Director August 31, 1996 Jon Meloan /s/ Russell Seheult Director - -------------------------- August 31, 1996 Russell Seheult II-6 129 /s/ Walter Schlotter Director - -------------------------- August 31, 1996 Walter Schlotter /s/ Andrew Friedenberg Director - -------------------------- August 31, 1996 Andrew Friedenberg II-7 130 CONSENT OF COUNSEL The consent of Jeffer, Mangels, Butler & Marmaro LLP has been contained in their opinion, Exhibit 5.1. II-8 131 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CinemaStar Luxury Theaters, Inc. Oceanside, California We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 23, 1996 relating to the consolidated financial statements of CinemaStar Luxury Theaters, Inc. and Subsidiaries, which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN, LLP Costa Mesa, California September 6, 1996 II-9 132 CERTIFIED PUBLIC ACCOUNTANTS CinemaStar Luxury Theaters, Inc. Oceanside, California We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated October 5, 1995 relating to the financial statements of United Artist Chula - Vista 6, which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN, LLP Costa Mesa, California September 6, 1996 II-10 133
Exhibit Number Description - ------ ----------- 1.2 Warrant Soliciting Agent Agreement 4.6 Form of Class B Warrant Agreement (with form of certificate attached) 10.39 Finder's Fee Agreement with Robert Bailey 10.40 Consulting Agreement with The Boston Group, L.P. 10.41 Warrant Agreement with The Boston Group, L.P. 99.1 Letter to Holders of Redeemable Warrants 99.2 Letter to Brokers, et al. 99.3 Letter to Clients 99.4 Notice of Guaranteed Delivery 99.5 Depositary Agreement
EX-1.2 2 WARRANT SOLICITING AGENT AGREEMENT 1 EXHIBIT 1.2 CINEMASTAR LUXURY THEATERS, INC. 431 College Boulevard Oceanside, CA 92057 WARRANT SOLICITATION AGREEMENT AGREEMENT dated this _____ day of September __, 1996, by and among the Boston Group, L.P. (the "Soliciting Agent") and CinemaStar Luxury Theaters, Inc. ("CinemaStar"). WITNESSETH: WHEREAS, CinemaStar has offered to the holders of its warrants to purchase one share of Common Stock that expire on February 6, 2000 (the "Redeemable Warrants") to lower the exercise price from $6.00 to $4.00 for each Redeemable Warrant and to issue upon the exercise of each Redeemable Warrant one share of Common Stock (no par value) and one Class B Redeemable Warrant which enables the holder thereof to purchase one share of Common Stock at an exercise price of $7.50 per Class B Warrant ("the Offer"). WHEREAS, CinemaStar has filed, with the Securities and Exchange Commission, a Prospectus dated September __, 1996 as part of a Registration Statement on Form SB-2 (the "Prospectus") relating to the Offer and; WHEREAS, CinemaStar desires to engage the Soliciting Agent to assist in the solicitation of the exercise of the Redeemable Warrants and the Soliciting Agent is willing to be so engaged pursuant to the terms stated herein. NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. Engagement. CinemaStar hereby engages and appoints the Soliciting Agent to serve as its exclusive Solicitation Agent for CinemaStar in connection with the Offer. 2. Solicitation. The Soliciting Agent is hereby authorized to solicit holders of the Redeemable Warrants pursuant to the terms hereof and of the enclosed Prospectus or any revisions thereof, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations of the Securities and Exchange Commission thereunder, the Rules of Fair Practice of the National Association of Securities Dealer(s), Inc., and the applicable state securities laws and regulations. 2 3. Solicitation Material. Copies of the Prospectus relating to the Offer have been furnished to the Soliciting Agent with this Agreement and the Soliciting Agent agrees to deliver a copy of the then effective Prospectus to each Redeemable Warrant holder. The Soliciting Agent is authorized to use only such documents and other Offer literature prepared by CinemaStar and the Soliciting Agent is not authorized to make use of any Prospectus or to make use of soliciting literature not so prepared or furnished, or to make any representations or furnish any information other than that contained in the Prospectus or in such sales literature. The Soliciting Agent will be supplied without charge a reasonable number of Prospectuses and other soliciting literature as may, from time to time, be prepared. The Soliciting Agent agrees not to deliver any soliciting literature to any person unless accompanied or proceeded by the then effective Prospectus. 4. Offer Acceptance Procedures. Executed and exercised Redeemable Warrants together with cash or a certified or official bank check made payable to CinemaStar Luxury Theaters, Inc. in the amount of the aggregate exercise price should be mailed to Continental Stock Transfer & Trust Company, ("Depository"). If Redeemable Warrants and checks are received by the Soliciting Agent, the Soliciting Agent agrees to deliver such Redeemable Warrants, and checks to the Depositary immediately upon its receipt. Upon receipt of the proper consideration, the Redeemable Warrant properly completed and executed by the record holders, and after acceptance by CinemaStar as set forth in the Offer, the Depository will deliver one share of Common Stock and one Class B Warrant. 5. Fee. Subject to the valid exercise by the holder of the Redeemable Warrants, the Soliciting Agent is entitled to receive from CinemaStar a fee equal to four percent (4%) of the exercise price paid upon each tender and exercise of the Redeemable Warranty pursuant to the Offer. In addition, CinemaStar agrees to pay the Soliciting Agent a fee equal to four percent (4%) of the proceeds upon exercise of each Class B Warrant. 6. Expenses. Whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, CinemaStar agrees to pay all costs, fees and expenses, incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including (i) all filing fees, attorneys' fees and expenses incurred by CinemaStar or the Soliciting Agent in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) under the Blue Sky laws, (ii) the filing fee of the National Association of Securities Dealers, Inc., (iii) all other fees, costs and expenses referred to in Item 25 of the Registration Statement, and (iv) shall reimburse the Soliciting Agent for any and all of its reasonable out-of-pocket expenses, including fees and disbursements of its counsel not to exceed $25,000, incurred by the Soliciting Agent in connection with the Soliciting Agent's performance of this Agreement. 7. Inspection of Records. During the period of the Offer and for thirty (30) days thereafter, but in no event after the termination of this Agreement, the Soliciting Agent may, at any time during business hours, examine the records of CinemaStar and the Depository which relates to the Offer. 2 3 8. Termination. The term of this Agreement shall be the longer of (i) five (5) years from and after the date first above written or (ii) one (1) year after expiration of the last to expire of the Class B Warrants. The obligations of CinemaStar provided for in Section 5 and 6 above and Section 9 below shall survive the termination of expiration of the term of this Agreement. 9. Indemnification. CinemaStar agrees to indemnify and hold harmless the Soliciting Agent, the directors, officers, employees and agents of the Soliciting Agent and each person who controls the Soliciting Agent within the meaning of Section 15 of the Securities Act of 1933, as amended (the "Act") or Section 20 of the Exchange Act of 1934, as amended (the "Exchange Act") against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act, or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or action in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed, or in any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or any amendment thereof, or supplement thereto, or any of the soliciting literature provided by CinemaStar, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. 10. Notices. Any notice or other communication required or permitted to be given pursuant to this Agreement shall be deemed sufficiently given if sent by first-class mail, postage prepaid, addressed as follows: if to CinemaStar, at 431 College Boulevard, Oceanside, CA 92057, Attention: John Ellison, President, with copies to Ron Givner, Jeffer, Mangels, Butler & Marmaro LLP; if to the Soliciting Agent, at 1999 Avenue of the Stars, Suite 2500, Los Angeles, CA 90067, Attention: Robert DiMinico, Chairman, with copies to Barry D. Falk, Jeffers, Wilson & Shaff, LLP. 11. Supplements and Amendments. CinemaStar and the Soliciting Agent may from time to time supplement or amend this Agreement in writing without the approval of any holders of Redeemable Warrants in order to cure any ambiguity or to correct or supplement any provisions contained herein or to make any other provisions in regard to matters or questions arising hereunder which CenemaStar and the Soliciting Agent may deem necessary or desirable and which do not adversely affect the interests of the holders of Redeemable Warrants. 12. Assignments. This Agreement may not be assigned by any party without the express written approval of all other parties, except that the Soliciting Agent may assign this Agreement to its successors. 13. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws (and not the laws pertaining to conflicts of laws) of the State of New York. 3 4 14. Benefits of this Agreement. Nothing in this Agreement shall be construed to give any person or corporation other than CinemaStar and the Soliciting Agent any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of CinemaStar and the Soliciting Agent. 15. Descriptive Headings. The descriptive headings of the sections of this Agreement are inserted for convenience only and shall not control or affect the meanings or construction of any of the provisions hereof. 16. Enforceability. If any of the provisions of this Agreement are held to be void or unenforceable, all of the other provisions shall nonetheless continue in full force and effect. 17. Waiver. The waiver by any of the parties hereto of a breach or alleged breach of the terms of this Agreement by the other party shall not constitute a waiver of any other breach or alleged breach. 18. Entire Agreement. This Agreement supersedes all previous arrangements and agreements whether written or oral, and comprises the entire agreement, between CinemaStar and the Soliciting Agent in respect of the subject matter hereof. 4 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. CINEMASTAR LUXURY THEATRES, INC. --------------------------------------- John Ellison, Jr., President AGREED and ACCEPTED: We agree and accept all the terms and conditions stated in the above Agreement. We hereby acknowledge receipt of copies of the Prospectus referred to above. Dated: September , 1996 THE BOSTON GROUP, L.P. "Soliciting Agent" By: ------------------------------------ Robert DiMinico, Chairman Address: 1999 Avenue of the Stars, Suite 2500, Los Angeles, California 90067 5 EX-4.6 3 FORM OF CLASS B WARRANT AGREEMENT 1 EXHIBIT 4.6 WARRANT AGREEMENT This WARRANT AGREEMENT, dated this day of September __, 1996, by and between CINEMASTAR LUXURY THEATERS, a California corporation (the "Company"), and CONTINENTAL TRANSFER & TRUST COMPANY, a New York corporation. WITNESSETH: WHEREAS, in connection with the Offer to its existing holders of Redeemable Warrants, the Company may issue up to Four Million Seven Hundred Twenty-five Thousand (4,725,000) redeemable Class B warrants (the "Warrants") each Warrant entitling the holder thereof to purchase one share of the Company's common stock (the "Warrant Stock"). WHEREAS, the Company desires to provide for the issuance of certificates representing the Warrants; and WHEREAS, the Company desires Continental Stock Transfer & Trust Company to act on behalf of the Company, and Continental Stock Transfer & Trust Company is willing to so act, in connection with the issuance, registration, transfer and exchange of certificates representing the Warrants and the exercise of the Warrants. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the Representative, the holders of certificates representing the Warrants and Continental Stock Transfer & Trust Company, the parties hereto agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise requires: (a) "Act" shall have the meaning assigned to such term in Section 5(b) of this Agreement. (b) "Change of Shares" shall have the meaning assigned to such term in Section 8(a)(i) of this Agreement. (c) "Common Stock" shall mean stock of the Company of any class, whether now or hereafter authorized, which has the right to participate in the voting and in the distribution of earnings and assets of the Company without limit as to amount or percentage. 2 (d) "Company" shall have the meaning assigned to such term in the first (1st) paragraph of this Agreement. (e) "Corporate Office" shall mean the office of the Warrant Agent (as such term is defined in Section 1(y) hereof) at which at any particular time its principal business in New York, New York, shall be administered, which office is located on the date hereof at 2 Broadway, New York, New York 10004. (f) "Exchange Act" shall have the meaning assigned to such term in Section 4(b) of this Agreement. (g) "Exercise Date" shall mean, subject to the provisions of Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have received both (i) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder (as such term is defined in Section 1(o) hereof) thereof or his attorney duly authorized in writing, and (ii) payment in cash or by check made payable to the Warrant Agent for the account of the Company of the amount in lawful money of the United States of America equal to the applicable Purchase Price (as such term is defined in Section 1(l) hereof). (h) "Initial Warrant Exercise Date" shall mean September ____, 1996. (i) "Initial Warrant Redemption Date" shall mean September ____, 1996. (j) "NASD" shall have the meaning assigned to such term in Section 4(b) hereof. (k) "Purchase Price" shall mean, subject to modification and adjustment as provided in Section 8 hereof, dollars ($ ) per share of Common Stock. (l) "Redemption Date" shall have the meaning assigned to such term in Section 9(c) hereof. (m) "Registered Holder" shall mean the person in whose name any certificate representing the Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6 hereof. (n) "Shares" shall have the meaning assigned to such term in Section 2(b) hereof. (o) "Subsidiary" or "Subsidiaries" shall mean any corporation or corporations, as the case may be, of which stock having ordinary power to elect a majority of the Board of Directors of such corporation or corporations (regardless of whether or not at the time the stock of any other class or -2- 3 classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. (p) "Transfer Agent" shall mean Continental Stock Transfer & Trust Company, New York, New York, or its authorized successor. (q) "Warrant Agent" shall mean Continental Stock Transfer & Trust Company, New York, New York, or its authorized successor. (r) "Warrant Certificate" shall mean a certificate representing each of the Warrants substantially in the form annexed hereto as Exhibit A. (s) "Warrant Expiration Date" shall mean, unless the Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York time) on September ____, 2001, or, if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close, subject to the Company's right, prior to the Warrant Expiration Date, in its sole discretion, to extend such Warrant Expiration Date on five (5) business days prior written notice to the Registered Holders. (t) "Warrants" shall have the meaning assigned to such term in the first (1st) WHEREAS clause of this Agreement. (u) "Warrant Stock" shall have the meaning assigned to such term in the first (1st) WHEREAS clause of this Agreement. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) Each Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase at the Purchase Price therefor from the Initial Warrant Exercise Date until the Warrant Expiration Date one (1) share of Common Stock upon the exercise thereof, subject to modification and adjustment as provided in Section 8 hereof. (b) Upon execution of this Agreement, Warrant Certificates representing up to Four Million Seven Hundred Thousand Twenty-five Hundred (4,725,000) Warrants to purchase up to an aggregate of Four Million Seven Hundred Twenty-five Thousand (4,725,000) shares (the "Shares") of Common Stock (subject to modification and adjustment as provided in Section 8 hereof). -3- 4 (c) From time to time, up to the Warrant Expiration Date, as the case may be, the Warrant Agent shall countersign and deliver Warrant Certificates in required denominations of one or whole number multiples thereof to the person entitled thereto in connection with any transfer or exchange permitted under this Agreement. No Warrant Certificates shall be issued except (i) Warrant Certificates initially issued hereunder, (ii) Warrant Certificates issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7 hereof, and (iv) at the option of the Company, Warrant Certificates in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon the exercise of a Warrant or the redemption price therefor. SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates). (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent and issued and delivered with the same force and effect as though the officer of the Company who signed such Warrant Certificates had not ceased to hold such office. -4- 5 SECTION 4. Exercise. (a) Warrants in denominations of one or whole number multiples thereof may be exercised commencing at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date or the Redemption Date, upon the terms and subject to the conditions set forth herein (including the provisions set forth in Sections 5 and 9 hereof) and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date, provided that the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, together with payment in cash or by check made payable to the Warrant Agent for the account of the Company of an amount in lawful money of the United States of America equal to the applicable Purchase Price, has been received by the Warrant Agent. The person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of such securities as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date, the Warrant Agent on behalf of the Company shall cause to be issued to the person or persons entitled to receive the same a Common Stock certificate or certificates for the shares of Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver the same to the person or persons entitled thereto. Upon the exercise of any Warrants, the Warrant Agent shall promptly notify the Company in writing of such fact and of the number of securities delivered upon such exercise and, subject to Section 4(b) hereof, shall cause all payments in cash or by check made payable to the order of the Company in respect of the Purchase Price to be deposited promptly in the Company's bank account. (b) At any time upon the exercise of any Warrants after the Initial Warrant Exercise Date, the Warrant Agent shall, on a daily basis, within two (2) business days after any such exercise, notify The Boston Group, L.P. or its successors or assigns of the exercise of any such Warrants and shall, on a weekly basis (subject to collection of funds constituting the tendered Purchase Price, but in no event later than five (5) business days after the last day of the calendar week in which such funds were tendered), remit to The Boston Group, L.P. or its successors or assigns an amount equal to four percent (4%) of the Purchase Price of such Warrants being then exercised unless The Boston Group, L.P. or its successors or assigns shall have notified the Warrant Agent that the payment of such amount with respect to any such Warrant is violative of the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the rules and regulations of the National Association of Securities Dealers, Inc. (the "NASD") or applicable state securities or "blue sky" laws, in any of which events the Warrant Agent shall have to pay such amount -5- 6 to the Company; provided, however, that the Warrant Agent shall not be obligated to pay any amounts pursuant to this Section 4(b) during any week that such amounts payable are less than one thousand dollars ($1,000) and the Warrant Agent's obligation to make such payments shall be suspended until the amount payable aggregates one thousand dollars ($1,000), and provided further, that, in any event, any such payment (regardless of amount) shall be made not less frequently than monthly. Under current rules of the NASD, amounts can be paid to The Boston Group, L.P. upon any exercise of a Warrant under this Section 4(b) only if (i) the market price of the Company's Common Stock is greater than the then Purchase Price of the Warrants, (ii) the exercise of the Warrant was solicited by a member of the National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant was not held in a discretionary account, (iv) disclosure of compensation arrangements has been made in documents provided to customers both as part of the original offering and at the time of exercise and (v) the solicitation of the exercise of the Warrant was not in violation of Rule 10b-6 (as such rule or any successor rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934. The provisions of this Section 4(b) may not be modified, amended or deleted without the prior written consent of The Boston Group, L.P. (c) The Company shall not be obligated to issue any fractional share interests or fractional warrant interests upon the exercise of any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of fractional interests. Any fraction equal to or greater than one-half shall be rounded up to the next full share or Warrant, as the case may be. Any fraction less than one-half shall be eliminated. SECTION 5. Reservation of Shares; Listing, Payment of Taxes; etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that, upon exercise of the Warrants and payment of the Purchase Price for the shares of Common Stock underlying the Warrants, all shares of Common Stock which shall be issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable, free from all preemptive or similar rights, and free from all taxes, liens and charges with respect to the issuance thereof, and that upon issuance such shares shall be listed or quoted on each securities exchange or NASDAQ, if any, on which the other shares of outstanding Common Stock of the Company are then listed. (b) The Company covenants that if any securities reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental -6- 7 authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will file a registration statement under the federal securities laws or a post-effective amendment to a registration statement, use its best efforts to cause the same to become effective, keep such registration statement current while any of the Warrants are outstanding and deliver a prospectus which complies with Section 10(a)(3) of the Securities Act of 1933, as amended (the "Act"), to the Registered Holder exercising the Warrant (except, if in the opinion of counsel to the Company, such registration is not required under the federal securities law or if the Company receives a letter from the staff of the Securities and Exchange Commission (the "Commission") stating that it would not take any enforcement action if such registration is not effected). The Company will use its best efforts to obtain appropriate approvals or registrations under the state "blue sky" securities laws of all states in which Registered Holders reside. Warrants may not be exercised by, nor may shares of Common Stock be issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares of Common Stock upon exercise of the Warrants; provided, however, that if shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized as the Transfer Agent to requisition from time to time certificates representing shares of Common Stock or other securities required upon exercise of the Warrants, and the Company will comply with all such requisitions. (e) Nothing contained in this Agreement shall be constructed as conferring upon any Registered Holder the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, the Company shall adopt a resolution for the liquidation, dissolution or winding up of the Company's business, then the Company shall give written notice of the adoption of such resolution to all Registered Holders. No such liquidation, dissolution or winding-up of the Company's affairs shall commence until at least thirty (30) days after such written notice is given, at which time the right of the Registered Holders to participate in the liquidation, dissolution or winding-up of the Company's affairs -7- 8 shall terminate unless the Redeemable Warrants are exercised within such thirty (30) day period. SECTION 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants or may be transferred in whole or in part. Warrant Certificates to be so exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep, at such office, books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to any Warrant Certificates presented for registration of transfer, or for exchange or exercise, the subscription or assignment form, as the case may be, on the reverse thereof shall be duly endorsed or be accompanied by a written instrument or instruments of subscription or assignment, in form satisfactory to the Company and the Warrant Agent, duty executed by the Registered Holder thereof or his attorney duly authorized in writing. (d) No service charge shall be made for any exchange or registration of transfer of Warrant Certificates. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange shall be promptly canceled by the Warrant Agent. (f) Prior to due presentment for registration or transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. -8- 9 SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate and (in the case of loss, theft or destruction) of indemnity satisfactory to them, and (in case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall countersign and deliver in lieu thereof a new Warrant Certificate, representing an equal number of Warrants. Applicants for a substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. SECTION 8. Adjustment of Purchase Price and Number of Shares of Common Stock Deliverable. (a) (i) Except as hereinafter provided, in the event the Company shall, at any time or from time to time after the date hereof, sell any shares of Common Stock for a consideration per share less than the Purchase Price or issue any shares of Common Stock as a stock dividend to the holders of Common Stock, or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such sale, issuance, subdivision or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Purchase Price for the Warrants (whether or not the same shall be issued and outstanding) in effect immediately prior to such Change of Shares shall be changed to a price (including any applicable fraction of a cent to the nearest cent) determined by dividing (A) the sum of (x) the total number of shares of Common Stock outstanding immediately prior to such Change of Shares, multiplied by the Purchase Price in effect immediately prior to such Change of Shares, and (y) the consideration, if any, received by the Company upon such sale, issuance, subdivision or combination by (B) the total number of sham of Common Stock outstanding immediately after such Change of Shares; provided, however, that in no event shall the Purchase Price be adjusted pursuant to this computation to an amount in excess of the Purchase Price in effect immediately prior to such computation, except in the case of a combination of outstanding shares of Common Stock. For the purposes of any adjustment to be made in accordance with this Section 8(a)(i) the following provisions shall be applicable: (A) In case of the issuance or sale of shares of Common Stock (or of other securities deemed hereunder to involve the issuance or sale of shares of Common Stock) for a consideration part or all of which shall be cash, the amount of the cash portion of the consideration therefor deemed to have been received by the Company shall be (i) the subscription price, if shares of Common Stock are offered by the Company for subscrip- -9- 10 tion, or (ii) the public offering price (before deducting therefrom any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services, or any expenses incurred in connection therewith), if such securities are sold to underwriters or dealers for public offering without a subscription offering, or (iii) the gross amount of cash actually received by the Company for such securities, in any other case. (B) In case of the issuance or sale (otherwise than as a dividend or other distribution on any stock of the Company, and otherwise than on the exercise of options, rights or warrants or the conversion or exchange of convertible or exchangeable securities) of shares of Common Stock (or of other securities deemed hereunder to involve the issuance or sale of shares of Common Stock) for a consideration part or all of which shall be other than cash or as part of a unit, the amount of the consideration therefor other than cash deemed to have been received by the Company or the amount received per share as part of a unit shall be the value of such consideration as determined in good faith by the Board of Directors of the Company on the basis of a record of values of similar property, services or securities. (C) Shares of Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the day following the record date for the determination of shareholders entitled to receive such dividend or other distribution and shall be deemed to have been issued without consideration. (D) The reclassification of securities of the Company other than shares of Common Stock into securities including shares of Common Stock shall be deemed to involve the issuance of such shares of Common Stock for a consideration other than cash immediately prior to the close of business on the date fixed for the determination of security holders entitled to receive such shares, and the value of the consideration allocable to such shares of Common Stock shall be determined as provided in Section 8(a)(i)(B) hereof. (E) The number of shares of Common Stock at any one time outstanding shall be deemed to include the aggregate maximum number of shares issuable (subject to readjustment upon the actual issuance thereof) upon the exercise of options, rights or warrants and upon the conversion or exchange of convertible or exchangeable securities. (ii) Upon each adjustment of the Purchase Price pursuant to this Section 8, the number of shares of Common Stock purchasable upon the exercise of each Warrant shall be the number derived by multiplying the number of shares of Common Stock purchasable immediately prior to such adjustment by the -10- 11 Purchase Price in effect prior to such adjustment and dividing the product so obtained by the applicable adjusted Purchase Price. (b) In case the Company shall at any time after the date hereof issue options, rights or warrants to subscribe for shares of Common Stock, or issue any securities convertible into or exchangeable for shares of Common Stock, for a consideration per share (determined as provided in Section 8(a)(i) hereof and as provided below) less than the Purchase Price in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities, or without consideration (including the issuance of any such securities by way of dividend or other distribution), the Purchase Price for the Warrants (whether or not the same shall be issued and outstanding) in effect immediately prior to the issuance of such options, rights or warrants, or such convertible or exchangeable securities, as the case may be, shall be reduced to a price determined by making the computation in accordance with the provisions of Section 8(a)(i) hereof, provided that: (i) The aggregate maximum number of shares of Common Stock, as the case may be, issuable or that may become issuable under such options, rights or warrants (assuming exercise in full even if not then currently exercisable or currently exercisable in full) shall be deemed to be issued and outstanding at the time such options, rights or warrants were issued, for a consideration equal to the minimum purchase price per share provided for in such options, rights or warrants at the time of issuance, plus the consideration, if any, received by the Company for such options, rights or warrants; provided, however, that upon the expiration or other termination of such options, rights or warrants, if any thereof shall not have been exercised, the number of shares of Common Stock deemed to be issued and outstanding pursuant to this subsection (i) (and for the purposes of Section 8(a)(i)(E) hereof) shall be reduced by the number of shares as to which options, warrants and/or rights shall have expired, and such number of shares shall no longer be deemed to be issued and outstanding, and the Purchase Price then in effect shall forthwith be readjusted and thereafter be the price that it would have been had adjustment been made on the basis of the issuance only of the shares actually issued plus the shares remaining issuable upon the exercise of those options, rights or warrants as to which the exercise rights shall not have expired or terminated unexercised. (ii) The aggregate maximum number of shares of Common Stock issuable or that may become issuable upon conversion or exchange of any convertible or exchangeable securities (assuming conversion or exchange in full even if not then currently convertible or exchangeable in full) shall be deemed to be issued and outstanding at the time of issuance of such securities, for a consideration equal to the consideration received by the Company for such securities, plus the minimum -11- 12 consideration, if any, receivable by the Company upon the conversion or exchange thereof; provided, however, that upon the termination of the right to convert or exchange such convertible or exchangeable securities (whether by reason of redemption or otherwise), the number of shares of Common Stock deemed to be issued and outstanding pursuant to this subsection (ii) (and for the purposes of Section 8(a)(i)(E) hereof) shall be reduced by the number of shares as to which the conversion or exchange rights shall have expired or terminated unexercised, and such number of shares shall no longer be deemed to be issued and outstanding, and the Purchase Price then in effect shall forthwith be readjusted and thereafter be the price that it would have been had adjustment been made on the basis of the issuance only of the shares actually issued plus the shares remaining issuable upon conversion or exchange of those convertible or exchangeable securities as to which the conversion or exchange rights shall not have expired or terminated unexercised. (iii) If any change shall occur in the price per share provided for in any of the options, rights or warrants referred to in Section 8(b)(i) hereof, or in the price per share or ratio at which the securities referred to in Section 8(b)(ii) hereof are convertible or exchangeable, such options, rights or warrants or conversion or exchange rights, as the case may be, to the extent not theretofore exercised, shall be deemed to have expired or terminated on the date when such price change became effective in respect of shares not theretofore issued pursuant to the exercise or conversion or exchange thereof, and the Company shall be deemed to have issued upon such date new options, rights or warrants or convertible or exchangeable securities. (c) In case of any reclassification or change of outstanding shares of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination), or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a Subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification or change of the then outstanding shares of Common Stock or other capital stock issuable upon exercise of the Warrants), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, then, as a condition of such reclassification, change, consolidation, merger, sale or conveyance, the Company, or such successor or purchasing corporation, as the case may be, shall make lawful and adequate provision whereby the Registered Holder of each Warrant then outstanding shall have the right thereafter to receive on exercise of such Warrant the kind and amount of securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a holder of the number of securities issuable upon exercise of such Warrant immediately prior to such reclassification, change, -12- 13 consolidation, merger, sale or conveyance and shall forthwith file at the Corporate Office of the Warrant Agent a statement signed by its Chairman of the Board, President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary evidencing such provision. Such provisions shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in Sections 8(a) and 8(b) hereof. The above provisions of this Section 8(c) shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. (d) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock pur- chasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Section 2(e) hereof, continue to express the Purchase Price per share and the number of shares purchasable thereunder as the Purchase Price per share and the number of shares purchasable thereunder were expressed in the Warrant Certificates when the same were originally issued. (e) After each adjustment of the Purchase Price pursuant to this Section 8, the Company will promptly prepare a certificate signed by the Chairman of the Board, President, or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company setting forth: (i) the Purchase Price, as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant, after such adjustment, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to each Registered Holder at his last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (f) No adjustment of the Purchase Price shall be made as a result of or in connection with (i) the issuance or sale of shares of Common Stock pursuant to options, warrants, stock purchase agreements and convertible or exchangeable securities outstanding or in effect on the date hereof, (ii) the issuance or sale of shares of Common Stock upon the exercise of any "incentive stock options" (as such term is defined in the Internal Revenue Code of 1986, as amended), or any non-qualified stock options to non-employee directors of the Company pursuant -13- 14 to the Company's 1995 Stock Option Plan, whether or not such options were outstanding on the date hereof, or (C) the issuance or sale of shares of Common Stock if the amount of said adjustment shall be less than ten cents ($.10); provided, however, that in such case, any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment that shall amount, together with any adjustment so carried forward, to at least ten cents ($. 10). In addition, Registered Holders shall not be entitled to cash dividends paid by the Company prior to the exercise of any Warrant or Warrants held by them. (g) In case of any consolidation of the Company with or merger of the Company into another corporation or other entity or in case of any sale, lease, conveyance or other transfer to another corporation, person or other entity of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, person or other entity, as the case may be, shall execute with the Warrantholder, and the agreements governing such consolidation, merger, sale, lease, conveyance or other transfer shall require such execution of, an agreement that the Warrantholder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such event, upon exercise of the Warrants, to receive the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such consolidation, merger, sale, lease, conveyance or other transfer had the Warrants (and each underlying security) been exercised immediately prior to such action. The Company shall promptly mail to each Warrantholder by first class mail, postage prepaid, notice of the execution of any such agreement. In the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, in which the Company is the surviving corporation, the right to purchase shares of Warrant Stock under the Warrants shall terminate on the date of such merger and thereupon the Warrants shall become null and void, but only if the controlling corporation shall agree to substitute for the Warrants its warrant which entitles the holder thereof to purchase upon its exercise the kind and amount of shares and other securities and property which it would have owned or been entitled to receive had the Warrants been exercised immediately prior to such merger. Any such agreements referred to in this Section 8(g) shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 8 hereof, and shall provide for terms and provisions at least as favorable to the Warrantholder as those contained in this Agreement. The provisions of this Section 8(g) shall similarly apply to successive consolidations, mergers, sales, leases, conveyances or other transfers. (h) Before taking any action which would cause an adjustment effectively reducing the portion of the Purchase Price -14- 15 allocable to each share of Warrant Stock below the then par value per share, if any, of the Warrant Stock issuable upon exercise of the Warrants, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Stock upon exercise of the Warrants. (i) The Company may retain BDO Seidman LLP (or such other accounting firm qualified to practice in front of the Securities and Exchange Commission (the "Commission") as is reasonably acceptable to the Representative) to make any computation required under this Section 8, and a certificate signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 8. SECTION 9. Redemption. (a) Commencing on the Initial Warrant Redemption Date, the Company may, on thirty (30) days prior written notice redeem all of the Warrants at a redemption price of twenty five cents ($.25) per Warrant; provided, however, that before any such call for redemption of Warrants can take place, (i) the average closing bid price for the Common Stock in the over-the-counter market as reported by the Nasdaq Stock Market or (ii) the average closing sale price on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange, shall have for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth (5th) trading day prior to the date on which the notice contemplated by Sections 9(b) and 9(c) hereof is given, equalled or exceeded _____ dollars ($_.00) per share (subject to adjustment in the event of any stock splits or other similar events as provided in Section 8 hereof). (b) In case the Company shall exercise its right to redeem all of the Warrants, it shall give or cause to be given notice to the Registered Holders of the Warrants, by mailing to such Registered Holders a notice of redemption, first class, postage prepaid, at their last address as shall appear on the records of the Warrant Agent. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. Not less than five (5) business days prior to the mailing to the Registered Holders of the Warrants of the notice of redemption, the Company shall deliver or cause to be delivered to the Underwriter or its successors or assigns a similar notice telephonically and confirmed in writing, together with a list of the Registered Holders (including their respective addresses and number of Warrants beneficially owned by them) to whom such notice of redemption has been or will be given. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, which shall in no event be less than thirty (30) days after the -15- 16 date of mailing of such notice, (iii) the place where the Warrant Certificates shall be delivered and the redemption price that shall be paid, (iv) that The Boston Group, LLP or its successors or assigns is the Company's exclusive warrant solicitation agent and shall receive the commission contemplated by Section 4(b) hereof, and (v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York time) on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrants shall be the "Redemption Date" for purposes of this Agreement. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a holder (A) to whom notice was not mailed or (B) whose notice was defective. An affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New York time) on the business day immediately preceding the Redemption Date. The redemption price payable to the Registered Holders shall be mailed to such persons at their addresses of record. (e) The Company shall as soon as practicable after the Redemption Date, and in any event within fifteen (15) months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section II(a) of the Act and covering a period of at least twelve (12) consecutive months beginning after the Redemption Date. SECTION 10. Registration Requirement. (a) The Company shall be obligated to the registered holders of the Warrants to continually maintain, at the Company's own expense, the currency and effectiveness of a registration statement of the Company under the Securities Act of 1933, as amended, including the filing of any and all applications and other notifications, filings and post-effective amendments and supplements (collectively, the "Current registration statement") and any necessary filings under applicable state blue sky (securities) laws, as may be necessary, so as to permit the issuance of the Common Stock underlying the Warrants to the holder of the Warrants until the earlier of the time that all shares of Securities have been exercised pursuant to the Current Registration Statement or the Expiration Date. SECTION 11. Concerning the Warrant Agent. (a) The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company and The Boston Group, L.P. and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering -16- 17 Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity or value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and non-assessable. (b) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustment, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of fact contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own gross negligence or willful misconduct. (c) The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company or The Boston Group, L.P.) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. (d) Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board of Directors, President or any Vice President (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand. (e) The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; the Company further agrees to indemnify the Warrant Agent and hold it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's gross negligence or willful misconduct. (f) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder -17- 18 (except liabilities arising as a result of the Warrant Agent's own gross negligence or willful misconduct), after giving thirty (30) days' prior written notice to the Company. At least fifteen (15) days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of thirty (30) days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a stock transfer company licensed by the Securities and Exchange Commission and reasonably acceptable to The Boston Group, L.P. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the warrant agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. (g) Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged, any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent or any new warrant agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holders of each Warrant Certificate. (h) The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effect as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. -18- 19 (i) The Warrant Agent shall retain for a period of two (2) years from the date of exercise any Warrant Certificate received by it upon such exercise. SECTION 12. Modification of Agreement. The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (a) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained, or (b) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that, except as provided in the next two sentences, this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders holding over fifty percent (50%) of the Warrants then outstanding; provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, and no change that increases the Purchase Price of any Warrant, other than such changes as are specifically set forth in this Agreement as originally executed, shall be made without the consent in writing of each Registered Holders affected by such change. In addition, this Agreement may not be modified, amended or supplemented without the prior written consent of The Boston Group, L.P. or its successors or assigns, other than to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained or to make any such change that the Warrant Agent and the Company deem necessary or desirable and which shall not adversely affect the interests of The Boston Group, L.P. or its successors or assigns. Notwithstanding any other provision hereof, the Company upon notice to the Warrantholders, the Warrant Agent and The Boston Group, L.P., may permanently or temporarily lower the exercise price of the Warrants or extend the expiration date of the Warrants. SECTION 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid or delivered to a telegraph office for transmission, if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company at 431 Collage Boulevard, Oceanside, California 92051, Attention: John Ellison, Jr., President. SECTION 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of laws. -19- 20 SECTION 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and their respective successors and assigns and the holders from time to time of Warrant Certificates or any of them. Except as hereinafter stated, nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim or to impose upon any other person any duty, liability or obligation. The Representative is, and shall at all times irrevocably be deemed to be, a third-party beneficiary of this Agreement, with full power, authority and standing to enforce the rights granted to it hereunder. SECTION 16. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. [Rest of page intentionally left blank] -20- 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CINEMASTAR LUXURY THEATERS, INC. CONTINENTAL STOCK TRANSFER & TRUST COMPANY As Warrant Agent BY: By: -------------------------------- --------------------------------- Name: John Ellison, Jr. Name: Title: President Title: THE BOSTON GROUP, L.P. By: -------------------------------- Name: Title: -21- 22 EXHIBIT A No. BW_____ VOID AFTER SEPTEMBER ____, 200_ ____ WARRANTS REDEEMABLE CLASS B WARRANT CERTIFICATE TO PURCHASE SHARES OF COMMON STOCK CINEMASTAR LUXURY THEATERS, INC. CUSIP 172-44-C-11-1 THIS CERTIFIES THAT, FOR VALUE RECEIVED or registered assigns (the "Registered Holder") is the owner of the number of Redeemable Warrants (the "Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and non-assessable share of Common Stock, no par value, of CinemaStar Luxury Theaters, Inc., a California corporation (the "Company"), at any time from September ____, 1996 and prior to the Expiration Date (as hereinafter defined) upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $____, subject to adjustment (the "Purchase Price"), in lawful money of the United States of America in cash or by check made payable to the Warrant Agent for the account of the Company. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated September ____, 1996, by and between the Company, the Warrant Agent and The Boston Group, L.P. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price and the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional interests will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute A-1 23 and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Expiration Date" shall mean 5:00 p.m. (New York time) on September ____, 2001. If such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended (the "Act"), with respect to such securities is effective or an exemption thereunder is available. The Company has covenanted and agreed that it will file a registration statement under the Federal securities laws, use its best efforts to cause the same to become effective, to keep such registration statement current, if required under the Act, while any of the Warrants are outstanding, and deliver a prospectus which complies with Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment and payment of any tax or other charge imposed in connection therewith or incident thereto, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Under certain circumstances, The Boston Group, L.P. shall be entitled to receive aggregate of four percent of the Purchase Price of the Warrants represented hereby. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed at the option of the Company, at a A-2 24 redemption price of $.25 per Warrant, at any time commencing August ____, 1996, provided that (i) the average closing bid price for the Company's Common Stock in the over-the-counter market as reported by the Nasdaq Stock Market or (ii) the average closing sale price on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange, shall have for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth trading day prior to the Notice of Redemption, as defined below, equalled or exceeded $____ per share (subject to adjustment in the event of any stock splits or other similar events). Notice of redemption (the "Notice of Redemption") shall be given not later than the thirtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $.25 per Warrant upon surrender of this Certificate. Under certain circumstances, The Boston Group, L.P. shall be entitled to receive aggregate of four percent of the Purchase Price of the Warrants represented hereby. Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary, except as provided in the Warrant Agreement. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of California without giving effect to conflicts of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. A-3 25 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. Dated: ____ CINEMASTAR LUXURY THEATERS, INC. [SEAL] By:__________________________ Name: John Ellison, Jr. Title: President By:__________________________ Name: Jon Meloun Title: Secretary COUNTERSIGNED: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent By:_____________________________ Authorized Officer A-4 26 SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrant The undersigned Registered Holder hereby irrevocably elects to exercise Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ----------------------- ----------------------- ----------------------- ----------------------- (please print or type name and address) and be delivered to ----------------------- ----------------------- ----------------------- ----------------------- (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. A-5 27 The undersigned represents that the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. If not solicited by an NASD member, please write "unsolicited" in the space below. Unless otherwise indicated by listing the name of another NASD member firm, it will be assumed that the exercise was solicited by The Boston Group, L.P. ----------------------- (Name of NASD member if other than The Boston Group, L.P.) Dated: X ------------- ---------------------- ----------------------- ----------------------- Address ----------------------- Social Security or Taxpayer Identification Number ----------------------- Signature Guaranteed ----------------------- A-6 28 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, ______________________, hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _______________________ _______________________ _______________________ _______________________ (please print or type name and address) _______________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints ________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated:_____________ X______________________ _______________________ Signature Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A PARTICIPANT IN THE MEDALLION SIGNATURE GUARANTEE PROGRAM. A-7 EX-10.39 4 FINDER'S FEE AGREEMENT WITH ROBERT BAILEY 1 Exhibit 10.39 [CINEMASTAR LETTERHEAD] May 2, 1995 Robert A. Bailey, #117 P.O. Box 5005 Rancho Santa Fe, CA 92067 Dear Robert: We would like you to assist us in establishing one or more corporate "Lines of Credit", or establishing Loans to support our company expansion. In addition, we would like you to assist us in locating and establishing leases for existing or "build to suit" theater sites. This letter agreement will serve to establish the terms of your compensation for obtaining for us, one or more "Lines of Credit" and/or for obtaining one or more Loans and/or for establishing leases for existing or "build to suit" theater sites. We reserve the right to accept or decline the terms of a proposed "Line of Credit" or a proposed Loan, or proposed theater lease that you bring to us. Of course, if we decline any of these transactions, no fee is payable on that transaction. 1. Term. This Agreement will become effective upon execution by the parties and will extend until November 2, 1995. It is understood and agreed however, that for a period of two years after the expiration of the Term, if a commitment for a "Line of Credit" is accepted, and/or any funds are borrowed and funded from a source of yours, or a lease is entered into from one of your sources, a fee will nevertheless be paid as if this Agreement were still in full force and effect. 2. Line of Credit. In recognition of the fact that most of your effort will be spent in obtaining a commitment for a "Line of Credit", we agree to pay you a cash fee of three percent (3%) upon our receipt of a written commitment for a "Line of Credit" from one of your lending sources. We agree to draw sufficient funds from this "Line of Credit" at the time of the written commitment in order to make this payment to you, or to instruct the Lender to make payment directly to you from the "Line" as soon as it is issued. In addition, we agree to pay you a cash fee of two percent (2% ) on amounts that are funded against the "Line of Credit". This fee will be payable from proceeds funded against the "Line". It is understood that if a commitment is made to increase an already established "Line of Credit", the above referenced 3% commitment fee will be payable upon such commitment increase, and the 2% fee will be paid on amounts funded as the increased credit line is accessed. 2 Mr. Robert A. Bailey Page 2 May 2, 1995 3. ADDITIONAL LINES. If more than one lender commits to our receiving a "Line of Credit", it is understood that the terms of payment specified in paragraph 1., above will apply to any additional "Lines of Credit" as well as the initial "Line". 4. LOANS. If you obtain a loan for the corporation, the terms of which are acceptable to us, a fee of five percent (5%) of the amount loaned will be paid at the time of funding such loan. 5. LEASES. In the event that you are able to obtain a Lease for either an existing theater or a "build to suit" theater, on terms that are acceptable to us, we will pay you a fee of $3.00 per square foot upon our opening that theater for business. You will attempt to have this fee paid by the Landlord, but if you are unsuccessful, then we shall be obligated to pay the fee. 6. ASSUMPTION OF OBLIGATION. It is our understanding that you will assume the fee obligation that would be owed under any of these transactions by CinemaStar Luxury Theaters, (formerly Nickelodeon Theater Co., Inc.), to Chris Nicholas and to Jon Meloan pursuant to their respective "Fee Agreements" dated 9/3/93. 7. AGREEMENT TO COOPERATE. We understand that in order to develop a substantial "Line of Credit", lenders will require cash-flow projections, company statements, background data, company growth plans, a review of the facilities and interviews with operating management. We fully expect that this will take executive and staff time. We also know that to effectively establish such a banking relationship, several months may be required, along with compensating balances, incremental borrowings and some negotiations with the Lender. We agree to support such an effort. 8. CONFIDENTIALITY. We understand that the Lending Sources and Contacts you bring to us are to be treated as private and confidential and are not to be disclosed to outside parties for a period of one year after the expiration of the term of this Agreement. 9. ENTIRE AGREEMENT. This letter constitutes the entire agreement between the parties regarding lines of credit and loans. Any modification hereto must be made by a written amendment that is signed by both parties. Very Truly Yours, Acknowledged and Agreed: /s/ John Ellison, Jr., /s/ Robert A. Bailey _____________________________ ______________________________ John Ellison, Jr., Robert A. Bailey President 5/2/95 EX-10.40 5 CONSULTING AGREEMENT WITH THE BOSTON GROUP, L.P. 1 Exhibit 10.40 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is made as of February 9, 1996, by and between CinemaStar Luxury Theaters, Inc., a California corporation, having its business address at 431 College Boulevard, Oceanside, California 92057 (referred to herein as the "Company"), and The Boston Group, L.P., having its principal place of business at 1999 Avenue of the Stars, Los Angeles, California 90067 (hereinafter "Consultant"). In consideration of the mutual promises contained herein and on the terms and conditions hereinafter set forth, the Company and Consultant agree as follows: 1. PROVISION OF SERVICES. (a) Consultant agrees, to the extent reasonably required in the conduct of the business of the Company, to place at the disposal of the Company its judgment and experience and to provide business development services to the Company including the following: (i) evaluate the Company's managerial and financial requirements; (ii) assist when requested by the Company in recruiting, screening, evaluating and recommending key personnel, directors, accountants, commercial and investment bankers, underwriters, attorneys, other professional consultants; (iii) assist in preparation of budgets and business plans; (iv) advise with regard to theater development activities (v) evaluate financial requirements and assist in financial arrangements; and (vi) advise with regard to shareholder relations and public relations matters. All such services shall at all times be at the request of the Company. (b) Consultant agrees to use its best efforts in the furnishing of advice and recommendations, and for this purpose Consultant shall at all times maintain or keep available an adequate organization of personnel or a network of outside professionals for the performance of its obligations under this Agreement. 2. COMPENSATION. In consideration of Consultant's services, the Company agrees to pay Consultant the compensation described below: 2 (a) Cash Fee. Simultaneously with the execution of this Agreement, the Company shall pay Consultant an advance of fees in the sum of $100,000 for services to be rendered during fiscal 1997 and 1998. In addition, within sixty (60) days following the date of execution of this Agreement the Company shall pay the Consultant an additional $150,000 in cash. (b) Warrants. In addition to the cash fee described in Section 2(a) above, promptly following the date of execution of this Agreement, the Company shall issue to Consultant Warrants (the "Warrant") to purchase up to 400,000 shares of Common Stock at $6.50 per share (the closing price of the Company's Common Stock as of February 9, 1996). The form of Warrant shall be substantially identical to the form of Warrant attached hereto as Exhibit A. 3. LIABILITY OF CONSULTANT. In furnishing the Company with management advice and other services as herein provided, neither Consultant nor any officer, director or agent thereof shall be liable to the Company or its creditors for errors of judgment or for anything except willful malfeasance, bad faith or gross negligence in the performance of its duties or reckless disregard of its obligations and duties under the terms of this Agreement. It is further understood and agreed that Consultant may rely upon information furnished to it reasonably believed to be accurate and reliable and that, except as herein provided, Consultant shall not be accountable for any loss suffered by the Company by reason of the Company's action or non-action on the basis of any advice, recommendation or approval of Consultant, its partners, employees or agents. 4. STATUS OF CONSULTANT. Consultant shall be deemed to be an independent contractor and, except as expressly provided or authorized in this Agreement, shall have no authority to act or represent the Company. 5. OTHER ACTIVITIES OF CONSULTANT. The Company recognizes that Consultant now renders and may continue to render consulting, financial and other services to other companies which may or may not have policies and conduct activities similar to those of the Company. Consultant shall be free to render such advice and other services and the Company hereby consents thereto. Consultant shall not be required to devote its full time and attention to the performance of its duties under this Agreement, but shall devote only so much of its time and attention as it deems reasonable or necessary for such purposes. 6. CONTROL. Nothing contained herein shall be deemed to require the Company to take any action contrary to its Articles of Incorporation or By-Laws, or any applicable statute or regulation, or to deprive its Board of Directors of their 3 responsibility for any control of the conduct or the affairs of the Company. 7. TERM. Consultant's retention hereunder shall be for a term of two years commencing on April 1, 1996; provided, however, that the provisions of Sections 3 and 8 shall survive the termination of this Agreement. 8. REGISTRATION RIGHTS. Consultant will have the following registration rights with respect to the Warrant and shares of Common Stock underlying the Warrant (the "Warrant Shares"): (a) Demand Registration. At any time commencing on six months from the date of issuance of the Warrant, and expiring four (4) years thereafter, Consultant shall have the right (which right is in addition to the registration rights under Section 8(b) hereof), exercisable by written notice to the Company, to have the Company prepare, file and use its best efforts to have declared effective by the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Consultant, if any, in order to comply with the provisions of the Securities Act of 1933, as amended (the "Securities Act"), so as to permit a public offering and sale by Consultant of the Warrants and Warrant Shares owned and held of record by the Consultant at the time of exercise of such registration rights, for a period of twenty-four (24) consecutive months. (b) Piggy-Back Registration. If at any time the Company proposes to register any of its securities under the Securities Act (other than in connection with a merger, acquisition, exchange offer, redemption or pursuant to Form S-8 or successor form) it will give written notice by registered mail, at least twenty (20) days prior to the filing of each such registration statement to the Consultant of its intention to do so. Upon the written request of Consultant given within ten (10) days after receipt of any such notice of Consultant's desire to include any Warrants or Warrant Shares owned by Consultant in such proposed registration statement, the Company shall afford Consultant the opportunity to have such Warrants or Warrant Shares registered under such registration; provided, however, the Consultant shall not have the right to include any Warrants or Warrant Shares in the event that the registration relates to solely to the registration of (or updating of an existing registration relating to) Redeemable Warrants and underlying shares of Common Stock registered in connection with the Company's initial public offering. The "piggy-back" registration rights described in this Section 8(b) shall terminate on the earlier to occur of (i) five (5) years from the date hereof or (ii) at such time as the Warrants or Warrant Shares, as the case 4 may be, are saleable in one or more transactions pursuant to Rule 144(k) of the Securities Act. Notwithstanding anything to the contrary contained in the provisions of this Section 8(b) the Company shall have the right at any time after it shall have given written notice pursuant to this Section 8(b) (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. (c) Limitation on Registration Rights. Notwithstanding anything to the contrary contained in this Agreement, (i) the Company shall not be obligated to effect a registration pursuant to Section 8 of this Agreement during the period starting with the date ninety (90) days prior to the Company's estimated date of filing of, and ending on a date ninety (90) days following the effective date of, a registration statement pertaining to an underwritten public offering of the Company's securities, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and that the Company's estimate of the date of filing such registration statement is made in good faith; and (ii) if the Company shall furnish Consultant a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company or its shareholders for a registration statement to be filed in the near future, then the Company's obligations to use its best efforts to file a registration statement on demand by the Consultant shall be deferred for a period not to exceed ninety (90) days; provided, however, that the Company shall not obtain such a deferral more than once in any twelve (12) month period. (d) Indemnification. (i) The Company shall indemnify and hold harmless the Consultant from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement filed by the Company under the Securities Act by reason of this Agreement, any post-effective amendment to such registration statements, or any prospectus included therein, or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission based upon information furnished or required to be furnished in writing to the Company by the Consultant (or the authorized representatives or agents of the Consultant) expressly for use therein, which indemnification shall include each person, if any, who controls the Consultant within the meaning of the Securities Act and each officer, director, employee and agent of the Consultant; provided, 5 however, that the indemnification in this Section 8(d) with respect to any prospectus shall not inure to the benefit of the Consultant (or to the benefit of any person controlling the Consultant) on account of any such loss, claim, damage or liability arising from the sale of Shares, Warrants or Warrant Shares by the Consultant, if a copy of a subsequent prospectus correcting the untrue statement or omission in such earlier prospectus was provided to the Consultant by the Company prior to the subject sale and the subsequent prospectus was not delivered or sent by the Consultant to the purchaser of such securities prior to such sale; and provided further, that the Company shall not be obligated to so indemnify the Consultant or any other person referred to above unless the Consultant or other person, as the case may be, shall at the same time indemnify the Company, its directors, each officer signing the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in any registration statement or any prospectus required to be filed or furnished by reason of this Agreement or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages or liabilities are caused by any untrue statement or omission based upon information furnished in writing to the Company by the Consultant expressly for use therein. (ii) If for any reason the indemnification provided for in the preceding subparagraph is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect not only the relative benefits received by the indemnified party and the indemnifying party, but also the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations. 9. MISCELLANEOUS. This Agreement sets forth the entire agreement and understanding between the parties and supersedes all prior discussions, agreements and understandings of every nature between them with respect to the subject matter hereof. This Agreement is executed in and shall be construed and interpreted according to the laws of the State of California. 6 IN WITNESS WHEREOF, the parties have caused this Agreement and by their respective officers or representatives to be signed duly authorized the day and year first above written. CINEMASTAR LUXURY THEATERS, INC. By:____________________________ John Ellison, Jr. THE BOSTON GROUP, L.P. By:____________________________ Robert DiMinico Chairman EX-10.41 6 WARRANT AGREEMENT WITH THE BOSTON GROUP, L.P. 1 Exhibit 10.41 THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH WARRANTS AND SHARES MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. CINEMASTAR LUXURY THEATERS, INC. WARRANT DATED: February 12, 1996 --------------- Holder: The Boston Group, L.P. Number of Warrants: 400,000 --------------- THIS CERTIFIES THAT Holder is the owner of the number of Warrants set forth above of CinemaStar Luxury Theaters, Inc., a California corporation (hereinafter called the "Company"). Each Warrant entitles the registered holder to purchase for $6.50 (as adjusted, the "Exercise Price") one share of Common Stock of the Company ("Common Stock"). 1. Right to Exercise Warrants. The rights represented by this Warrant may be exercised at the Holder's option at any time commencing six (6) months from the date of this Warrant (the "Exercise Date"), and terminating at 2:00 p.m., Los Angeles time, forty-eight (48) months after the Exercise Date. 2. Exercise of Warrants. Subject to the other provisions of this Warrant, the rights represented by this Warrant may be exercised by (i) surrender of this Warrant (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to Holder at the address of Holder appearing on the books of the Company); and (ii) payment to the Company of the exercise price for the number of shares specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any. This Warrant shall be deemed to have been exercised 2 immediately prior to the close of business on the date the Warrant is surrendered and payment is made in accordance with the foregoing provisions of this Section 3, and the person or persons in whose name or names the certificates for shares of Common Stock shall be issuable upon such exercise shall become the holder or holders of record of such Common Stock at that time and date. The certificates for the Common Stock so purchased shall be delivered to Holder within a reasonable time, not exceeding ten (10) business days, after the rights represented by this Warrant shall have been so exercised, and shall bear a legend substantially similar to the following restrictive legend: "This security has not been registered under the Securities Act of 1933 and may not be sold or offered for sale unless registered under said Act and any applicable state securities laws or unless the Company has received an opinion of counsel satisfactory to the Company that such registration is not required." 3. Assignment. This Warrant may be transferred, sold, assigned or hypothecated, only pursuant to a valid and effective registration statement or if the Company has received from counsel to the Company a written opinion, in a form reasonably acceptable to the Company, to the effect that registration of the Warrant or the Common Stock underlying the Warrant is not necessary in connection with such transfer, sale, assignment or hypothecation. Any such assignment shall be effected by Holder by (i) executing the form of assignment at the end hereof; (ii) surrendering the Warrant for cancellation to the Company, accompanied by the opinion of counsel to the Company referred to above; and (iii) delivery to the Company of a statement by the transferee Holder (in a form acceptable to the Company and its counsel) that such Warrant is being acquired by such Holder for investment and not with a view to its distribution or resale; whereupon the Company shall issue, in the name or names specified by Holder (including Holder) new Warrants representing in the aggregate rights to purchase the same number of Shares as are purchasable under the Warrant surrendered. The term "Holder" shall be deemed to include any person to whom this Warrant is transferred in accordance with the terms herein. 4. Registration Rights. The Holder shall be entitled to certain demand and piggy-back registration rights with respect to this Warrant and the Warrant Shares pursuant to the provisions of Section 8 of that certain Consulting Agreement, dated as of February 9, 1996, between Holder and the Company (the "Agreement"). The registration rights granted with respect to this Warrant and the Warrant Shares shall be subject to the limitations and restrictions set forth in the Agreement. 5. Common Stock. The Company covenants and agrees that all shares of Common Stock which may be issued upon exercise hereof will, upon issuance, be duly and validly issued, fully paid and non-assessable and no personal liability will attach to -2- 3 the holder thereof. The Company further covenants and agrees that, during the periods within which this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for issuance upon exercise of this Warrant and all other Warrants. 6. No Stockholder Rights. This Warrant shall not entitle Holder to any voting rights or other rights as a stockholder of the Company. 7. Adjustment of Rights. In the event that the outstanding shares of Common Stock of the Company are at any time increased or decreased or changed into or exchanged for a different number or kind of share or other security of the Company or of another corporation through reorganization, merger, consolidation, liquidation, recapitalization, stock split, combination of shares or stock dividends payable with respect to such Common Stock, appropriate adjustments in the Exercise Price and the number and kind of such securities then subject to this Warrant shall be made effective as of the date of such occurrence so that the position of Holder upon exercise will be the same as it would have been had he owned immediately prior to the occurrence of such events the Common Stock subject to this Warrant. Such adjustment shall be made successively whenever any event listed above shall occur and the Company will notify Holder of the Warrant of each such adjustment. Any fraction of a share resulting from any adjustment shall be eliminated and the price per share of the remaining shares subject to this Warrant adjusted accordingly. 8. Cashless Exercise. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed purchase form and notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------- A Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) -3- 4 A = the fair market value of one share of the Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) For purposes of the above calculation, fair market value of one share of Common Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that in the event that at the time of any such exercise the Common Stock (i) is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the fair market value of a share of common stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in common stock) on the last market trading day prior to the day of determination, as reporting in the Wall Street Journal or such other source as the Board of Directors of the Company deems reliable or (ii) is not listed on any established stock exchange or a national market system but is quoted on the NASDAQ System (but not on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the fair market value of a share of common stock shall be the mean between the bid and asked prices for the common stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Board of Directors of the Company deems reliable. 9. Notices. Unless applicable law requires a different method of giving notice, any and all notices, demands or other communications required or desired to be given hereunder by any party shall be in writing. Assuming that the contents of a notice meet the requirements of the specific Section of this Warrant which mandates the giving of that notice, a notice shall be validly given or made to another party if served either personally or if postage prepaid, or if transmitted by telegraph, telecopy or other electronic written transmission device or if sent by overnight courier service, and if addressed to the applicable party as set forth below. If such notice, demand or other communication is served personally, service shall be conclusively deemed made at the time of such personal service. If such notice, demand or other communication is given by mail, service shall be conclusively deemed given upon the earlier of receipt or seventy-two (72) hours after the deposit thereof in the United States mail, postage pre-paid. If such notice, demand or other communication is given by overnight courier, or electronic transmission, service shall be conclusively made at the time of confirmation of delivery. The addresses for Holder and the Company are as follows: -4- 5 If to Holder: The Boston Group, L.P. 1999 Avenue of the Stars Los Angeles, California 90067 Telecopier No.: 310-226-2796 If to the Company: CinemaStar Luxury Theaters, Inc. 431 College Boulevard Oceanside, California 92057 Telecopier No.: (619) 630-8593 Attention: John Ellison, Jr. Any party hereto may change its or his or its address for the purpose of receiving notices, demands and other communications as herein provided, by a written notice given in the aforesaid manner to the other parties hereto. 10. Governing Law. This Warrant shall be governed by and construed in accordance with the internal laws of California. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officers, and to be dated as of the date set forth above. CINEMASTAR LUXURY THEATERS, INC. By: /s/ John Ellison, Jr. ----------------------------- Name: John Ellison, Jr. President ACKNOWLEDGED, AGREED AND ACCEPTED BY HOLDER: THE BOSTON GROUP, L.P. By: /s/ Robert DiMinico ----------------------------- Name: Robert DiMinico Chairman -5- 6 PURCHASE FORM (To be signed only upon exercise of Warrant) The undersigned, the holder of the foregoing Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Warrant to exercise ___________ Warrants for, and to the purchase thereunder, __________ shares of Common Stock and herewith makes payment of $____________ thereof, and requests that the certificates for shares of Common Stock be issued in the name(s) of, and delivered to _______________ whose address(es) is (are) _________________________. Dated:____________, ____ ______________________________ ______________________________ Address -6- 7 TRANSFER FORM (To be signed only upon transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto _______________ the right to purchase shares of Common Stock represented by _________________________ Warrants, and appoints _________________________ attorney to transfer such rights on the books of _________________________, with full power of substitution in the premises. Dated:____________, ____ ______________________________ Holder ______________________________ Address In the presence of: _________________________ -7- EX-99.1 7 LETTER TO HOLDERS OF REDEEMABLE WARRANTS 1 Exhibit 99.1 [CINEMASTAR LUXURY THEATERS, INC. Stationary] September __, 1996 Dear Redeemable Warrantholder: As part of a plan to raise additional capital, CinemaStar Luxury Theaters, Inc. (the "Company") has temporarily reduced the price at which each of its outstanding Redeemable Warrants (the "Warrants") may be exercised and to also offer Class B Redeemable Warrants upon exercise along with the Common Stock already provided for. From the date hereof until October ____, 1996, unless the offer (the "Offer") is extended, the exercise price of each of the outstanding Redeemable Warrants has been reduced to $____ per Warrant, and upon the tender and exercise of each Redeemable Warrant, the holder will receive one share of Common Stock and one Class B Warrant. The Offer is not conditioned upon the tender and exercise of a minimum number of Redeemable Warrants. Upon the conclusion of the Offer, the exercise price of each Redeemable Warrant will revert to $6.00 until February 6, 2000, the expiration date of the Redeemable Warrants, with each Warrant exercisable for only one share of Common Stock and no Class B Redeemable Warrants. I urge you to consider carefully this opportunity to exercise your Redeemable Warrants pursuant to the Offer. The Offer affords Redeemable Warrantholders the opportunity to make an equity investment in the Company on terms more attractive than those otherwise available. The accompanying Prospectus provides important information about the Company and the detailed terms of the Offer. Please read and consider it carefully. Any Redeemable Warrantholders electing to exercise Redeemable Warrants pursuant to the Offer should either (i) fill out the subscription form on the back of the Redeemable Warrant certificate and forward it along with cash, a certified or official bank check made payable to "Continental Stock Transfer & Trust Company, Agent for CinemaStar Luxury Theaters, Inc." or a wire transfer for the benefit of the Company in the amount of the aggregate exercise price and any other required documents to Continental Stock Transfer & Trust Company, or (ii) request a broker or bank to 2 effect the transaction, all as more fully described in the accompanying Prospectus. Redeemable Warrantholders not exercising their Redeemable Warrants may realize a portion of the economic benefit to them of the Offer by selling their Redeemable Warrants in the market. You are urged to obtain current market quotations for the Redeemable Warrants and Common Stock or contact your broker. Questions and requests for assistance or for additional copies of the Prospectus should be directed to The Boston Group, L.P., the Company's soliciting agent, at (310) 843-9007. Again, I urge you to give your careful consideration to the Offer described in the accompanying Prospectus. Sincerely yours, John Ellison, Jr. President 2 EX-99.2 8 LETTER TO BROKERS, ET AL. 1 Exhibit 99.2 CINEMASTAR LUXURY THEATERS, INC. NOTICE OF OFFER TO HOLDERS OF REDEEMABLE WARRANT THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER __, 1996, UNLESS EXTENDED. To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We are asking you, as the record holder of Redeemable Warrants of CinemaStar Luxury Theaters, Inc. (the "Company"), to bring to the attention of clients for whom you hold Redeemable Warrants the Company's offer (the "Offer") to reduce temporarily the exercise price for the Company's outstanding Redeemable Warrants and to further modify the Redeemable Warrants to provide that on the exercise of a Redeemable Warrant, the Company will issue one share of Common Stock, plus one Class B Redeemable Warrant. The Offer, commenced on September __, 1996, and will end on October __, 1996, unless extended (the "Expiration Date"). After the Offer, each Redeemable Warrant will revert back to its original terms which entitles the holder until February 6, 2006, to purchase one share of Common Stock at a price of $6.00. Each Class B Redeemable Warrant is exercisable from September __, 1996 until September __, 2001 to purchase one share of Common Stock at $_____. For your information, we are enclosing herewith the following materials: 1. Prospectus dated September __, 1996. 2. Letter to Redeemable Warrantholders of the Company from John Ellison, Jr., President of the Company, dated September __, 1966. 3. Notice of Guaranteed Delivery to be used to accept the Offer if the Redeemable Warrants and all other required documents are not immediately available or cannot be delivered to the Depository Trust Company, the Midwest Securities Trust Company or the Philadelphia Depository Trust Company by the Expiration Date or if the procedure for book-entry transfer cannot be completed prior to the Expiration Date. 4. A printed form of letter which may be sent to customers for whose account you hold Redeemable Warrants registered in your name or in the name of your nominee, with 1 2 space provided for obtaining such customers' instructions with regard to the Offer. 5. Envelopes addressed to Continental Stock Transfer & Trust Company, the Depository, to be used by you to return the tendered and executed Redeemable Warrants. WE URGE YOU TO CONTACT YOUR CUSTOMERS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON SEPTEMBER ____, 1996, UNLESS EXTENDED. In all cases, the delivery of Common Stock and Class B Redeemable Warrants for Redeemable Warrants accepted for tender and exercise pursuant to the Offer will be made only after timely receipt by the Depository of certificates evidencing such Redeemable Warrants (or a confirmation of a book-entry transfer of such Redeemable Warrants into the book entry account at one of the Book-Entry Transfer Facilities (as defined in the Prospectus)) with the subscription form on the back of such Redeemable Warrant certificates properly completed and duly executed and any other required documents. Payment of the Redeemable Warrant exercise price may be made, at the Redeemable Warrantholder's option, in the form of cash, a certified or official bank check made payable to "Continental Stock Transfer & Trust Company, Agent for CinemaStar Luxury Theaters, Inc." or by wire transfer to Continental Stock Transfer & Trust Company for the benefit of CinemaStar Luxury Theaters, Inc. Redeemable Warrantholders who wish to exercise their Redeemable Warrants should complete the subscription form on the back of the Redeemable Warrant certificates to be Depository and deliver the same by hand or by mail to: Continental Stock Transfer & Trust Company, Two Broadway, New York, New York 10004, Attn: Corporate Trust Department. While the method of delivery of Redeemable Warrants (which may be by hand or by mail) is at the option and risk of the Redeemable Warrantholders, it is suggested that delivery, if made by mail, be registered or certified and properly insured. If Redeemable Warrantholders wish to exercise their Redeemable Warrants, but it is impracticable for them to forward their Redeemable Warrants and all other required documents prior to the Expiration Date, an exercise may be effected by following the guaranteed delivery procedure described in the Prospectus under the caption "The Offer--How to Tender and Exercise". The Company will promptly reimburse brokers and other nominees for the reasonable expenses incurred by them in forwarding materials relating to the Offer to the beneficial holders of the Redeemable Warrants. The Company will pay such brokerage commissions or fees and all applicable transfer taxes with respect to the exercise of Redeemable Warrants pursuant to the Offer which would ordinarily be associated with the regular 2 3 exercise of such Redeemable Warrants, except in the case of deliveries of Common Stock or Class B Warrants or certificates for unexercised Redeemable Warrants that are to be made to any person other than a registered holder of Redeemable Warrants. Questions or requests for additional copies of the enclosed materials should be directed to The Boston Group, L.P., Telephone No. 1-(310) 843-9007. CINEMASTAR LUXURY SUITES, INC. NOTHING CONTAINED HEREIN OR IN THE DOCUMENTS ENCLOSED HEREWITH SHALL CONSTITUTE YOUR OR ANY OTHER PERSON THE AGENT FOR THE COMPANY, THE DEPOSITORY OR THE SOLICITING AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS SPECIFICALLY SET FORTH THEREIN. 3 EX-99.3 9 LETTER TO CLIENTS 1 Exhibit 99.3 CINEMASTAR LUXURY THEATERS, INC. NOTICE OF OFFER TO HOLDERS OF REDEEMABLE WARRANTS THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER __, 1996, UNLESS EXTENDED September __, 1996 To Our Clients: Enclosed for your consideration is the Prospectus, dated September __, 1996, of CinemaStar Luxury Theaters, Inc. (the "Company"), relating to the Offer described therein, together with a Letter to Redeemable Warrantholders from the Company. This material is being forwarded to you as the beneficial owner of Redeemable Warrants of the Company carried by us in your account but not registered in your name. A tender and exercise of such Redeemable Warrants may be made only by us as the holder of record and pursuant to your instructions. The Letter to Redeemable Warrantholders is furnished to you for your information only and cannot be used by you to tender and exercise Redeemable Warrants held by us for your account. Accordingly, we request instructions as to whether you wish us to tender and exercise any or all of the Redeemable Warrants held by us for your account, pursuant to the terms and conditions set forth in the Prospectus. Your instructions to us should be forwarded as promptly as possible in order to permit us to tender and exercise on your behalf in accordance with the provisions of the Offer, which terminates at 5:00 p.m. New York City time, on October __, 1996, unless extended (the "Expiration Date"). The Offer is not conditioned upon the exercise of a minimum number of Redeemable Warrants. All Redeemable Warrants properly tendered and exercised and not withdrawn prior to the Expiration Date will be deemed to have been accepted by the Company when, as and if the Company has given oral or written notice thereof to the Depository. If you wish to have us tender and exercise any or all of the Redeemable Warrants held by us for your account, will you kindly so instruct us by completing, executing, detaching and returning to us the instruction form set forth below. An envelope in which to return your instructions to us is enclosed. If you authorize the exercise of your Redeemable Warrants, all such Redeemable Warrants will be exercised unless otherwise specified in your instructions. Your instructions should be 1 2 forwarded to us in ample time to permit us to submit a tender and exercise of Redeemable Warrants on your behalf prior to the Expiration Date. The Company will pay such brokerage commissions or fees with respect to the exercise of Redeemable Warrants pursuant to the Offer which would ordinarily be associated with the regular exercise of such Redeemable Warrants. The Offer is made solely by the Prospectus and is being made to all Redeemable Warrantholders. The Offer can only be accepted by residents of states set forth in the Prospectus under "The Offer - Blue Sky Law". If the Company becomes aware of beneficial owners in other states, the Company will seek to clear the Offer in such states. If, after such good faith effort, the Company cannot comply with such state statute, the Offer will not be made to (nor will exercises of Redeemable Warrants be accepted from or on behalf of) the holders of Redeemable Warrants in such state. In any state where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Company by one or more registered brokers or dealers licensed under the laws of such state. 2 3 INSTRUCTIONS WITH RESPECT TO THE CINEMASTAR LUXURY THEATERS, INC. The undersigned acknowledge(s) receipt of your letter enclosing the Prospectus, dated September __, 1996, of CinemaStar Luxury Theaters, Inc., such Prospectus and the other documents referred to in your letter. This will instruct you to tender and exercise the number of Redeemable Warrants of CinemaStar Luxury Theaters, Inc. indicated below held by you for the account of the undersigned, pursuant to the terms and conditions set forth in the Prospectus. The undersigned represents that the exercise of the within Warrant was solicited by a member of the National Association of Securities Dealers, Inc. and shall be entitled to receive compensation as set forth in the Prospectus. Number of Redeemable Warrants SIGN HERE to be tendered and exercised: - ----------------------------- ------------------------------ Dated: , 1996 ---------------- ------------------------------ (Signature(s)) ------------------------------ (Please type or print name(s) here) ------------------------------ (Please type or print address) ------------------------------ (Please type or print Area Code and Telephone Number) 3 EX-99.4 10 NOTICE OF GUARANTEED DELIVERY 1 Exhibit 99.4 NOTICE OF GUARANTEED DELIVERY for Tendered and Exercised Redeemable Warrants of CINEMASTAR LUXURY THEATERS, INC. As set forth in the Prospectus dated September __, 1996 (the "Prospectus") under "The Offer--How to Tender and Exercise" this form or one substantially equivalent hereto must be used to tender and exercise Redeemable Warrants of CinemaStar Luxury Theaters, Inc., a California corporation, pursuant to the Offer (as defined in the Prospectus) if the certificate(s) for the Redeemable Warrants to be exercised are not immediately available, or the procedure for book-entry transfer cannot be completed on a timely basis or a Redeemable Warrantholder cannot deliver the certificate(s) and all other required documents to the Depository at the address listed below prior to the Expiration Date (as defined in the Prospectus). This form may be delivered by hand or sent by facsimile transmission or mail to the Depository and must be received by the Depository on or prior to the Expiration Date. CONTINENTAL STOCK TRANSFER & TRUST COMPANY (Depositary) By Mail: By Hand: Two Broadway Two Broadway New York, New York 10004 19th Floor Attn: Corporate Trust Department New York, New York 10004 Telephone: (212) 509-4000 ext. 253 Facsimile: (212) 509-5150 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. 1 2 Gentlemen: The undersigned hereby tenders and exercises the number of Redeemable Warrants of CinemaStar Luxury Theaters, Inc., a California corporation, set forth below upon the terms and subject to the conditions set forth in the Prospectus dated September __, 1996, receipt of which is hereby acknowledged, together with cash or a certified or official bank check made payable to "Continental Stock Transfer & Trust Company, Agent for CinemaStar Luxury Theaters, Inc." or a wire transfer to the Depository for the benefit of CinemaStar Luxury Theaters, Inc. in the amount of the aggregate exercise price of the Redeemable Warrants tendered and exercised, pursuant to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Offer--How to Tender and Exercise." Number of Redeemable Warrants Name(s) of Record Holder(s): to be Tendered and Exercised: - ----------------------------- ------------------------------ ------------------------------ Certificate Nos. (if available) Please Print Address(es) Here: - ----------------------------- ------------------------------ - ----------------------------- ------------------------------ ------------------------------ Check ONE box if Redeemable Warrants will be exercised by book-entry transfer: Area Code and Telephone Number: / / The Depository Trust Company ------------------------------ / / Midwest Securities Trust Company / / Philadelphia Depository Trust Company Signature(s) ------------------ Account Number Dated: , 1996 -------------- ------------------ GUARANTEE 2 3 The undersigned, a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, guarantees that (a) the above named person(s) owns the Redeemable Warrants exercised hereby and (b) the undersigned will deliver to the Depository the certificates representing the Redeemable Warrants exercised hereby in proper form for tender and exercise with required signature guarantees (or written confirmation of book-entry transfer of such Redeemable Warrants into the Depository's account at The Depository Trust Company, the Midwest Securities Trust Company or the Philadelphia Depository Trust Company), together, in each case, with cash or a certified or official bank check made payable to CinemaStar Luxury Theaters, Inc. or a wire transfer to the Depository for the benefit of CinemaStar Luxury Theaters, Inc. in the amount of the aggregate exercise price of the Redeemable Warrants exercised, and any other required documents, all within three New York Stock Exchange trading days after the Expiration Date. - -------------------------------- ------------------------------ (Address) (Name of Firm) - -------------------------------- ------------------------------ (Area Code and Telephone Number) (Authorized Signature) Dated: , 1996 --------------- 3 EX-99.5 11 DEPOSITARY AGREEMENT 1 Exhibit 99.5 DEPOSITARY AGREEMENT September __, 1996 Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Ladies and Gentlemen: CinemaStar Luxury Theaters, Inc., a California corporation (the "Company"), proposes to offer (the "Offer") to holders of its outstanding Redeemable Warrants the right to exercise such Redeemable Warrants for $__________ per Redeemable Warrant and receive one share of Common Stock, ($.01) (the "Common Stock") and one Class B Redeemable Warrant ("Class B Warrants") upon the exercise of each Redeemable Warrant. Each Class B Warrant entitles the holder thereof to purchase one share of Common Stock at a specified exercise price. The Offer is being made all in accordance with and subject to the terms and conditions set forth in a Prospectus (the "Prospectus") of the Company dated September __, 1996. The Offer will commence upon the mailing to holders of the Redeemable Warrants the Prospectus (the "Initial Date"), and will terminate at the date and time as set forth in the Prospectus, subject to extension by the Company by written notice, or by oral notice promptly confirmed in writing, to you (such time and date, as they may be extended, are herein referred to as the "Expiration Date"). The terms of the Offer are set forth in the Prospectus. Subject to the provisions hereof, the Company hereby appoints you, and you hereby agree to act, as the Depository for purposes of receiving, accepting for delivery and otherwise acting upon tenders and exercises of the Redeemable Warrants in accordance with the Prospectus and with the terms and conditions of the Offer. In connection with your appointment as Depository, the following documents have been delivered to you: (a) A copy of the Prospectus; (b) The Class B Warrant Agreement; and (c) Specimen of the Class B Warrants. You are hereby authorized and you hereby agree: (a) To receive all tenders and exercises of Redeemable Warrants made pursuant to the Offer; (b) To examine each Redeemable Warrant delivered or mailed to you to determine whether or not all requirements necessary to constitute a valid tender and exercise of the Redeemable Warrant, as set forth in the Prospectus, 2 have been met. All Redeemable Warrants must be tendered and exercised on the terms and conditions set forth in the Prospectus, unless waived by the Company. You are not authorized to accept any alternative, conditional or contingent tender and exercises, or any other tender and exercises that you deem to have been improperly made, except with the consent of the Company. In the event a Redeemable Warrant Certificate has been improperly completed or executed or in the case where a Redeemable Warrant Certificate do not bear the requisite endorsement or are not accompanied by appropriate stock powers (if required by the Offer), or if some other irregularity in connection with the purported tender and exercise exists, you will endeavor to take such action as you believe necessary and appropriate to cause such irregularity to be corrected. You may notify the person tendering and exercising the Redeemable Warrants in writing and/or by telephone of each such irregularity or defect. The determination to waive any irregularities or conditions to tenders and exercises or granting of consents shall be made solely by the Company, and the determination made by the Company shall be final and binding; (c) To record (including day, month and approximate time of receipt) and hold, subject to farther instructions from the Company, all tenders and exercises of Redeemable Warrants received by you (along with all funds so received) and determined to have been validly made; (d) To report periodically to the Company and The Boston Group, L.P., the Company's Solicitation Agent for the Offer, on the number of tenders and exercises made and the number of Redeemable Warrants surrendered; (e) To accept delivery of tenders and exercises made without the initial receipt and deposit of Redeemable Warrants by actual delivery or by book-entry transfer as described in the Offer, if: (1) the Notice of Guaranteed Delivery has been executed by an Eligible Institution (as defined in the Offer) and the holder prior to the Expiration Date; and (2) the Redeemable Warrants, the exercise price and any other documents required by the Offer are received by you within three New York Stock Exchange trading days after the Expiration Date, and to record the day, month and approximate time that the documentation and funds referred to in clauses (i) and (ii) is received by you; (f) In the event a holder of shares of Redeemable Warrants delivers to you a number of Redeemable Warrants in excess of the number of Redeemable Warrants actually tendered and exercised under the Offer, to return such Redeemable Warrants to the tendering Redeemable Warrants in accordance with the Offer; (g) To follow and to act in accordance with the terms of the Offer and amendments, modifications or supplements to these instructions, and upon any -2- 3 further instructions in connection with the Offer, any of which may be given to you by the President, the Chief Financial Officer or any Vice President of the Company or such other person or persons as the Company shall designate in writing, including instructions with respect to any extension of the Offer; (h) To return to the tendering and exercising holders of Redeemable Warrants, in accordance with the provisions of the Offer, any Redeemable Warrants that were not properly tendered and exercised and as to which the irregularities or defects were not cured or waived, or Redeemable Warrants that were withdrawn in accordance with the terms of the Offer as described in the Prospectus, or if the Offer is terminated in accordance with its terms; (i) If the Offer has been consummated, to deliver as soon as practicable, but not earlier than seven days after the Expiration Date, by First Class Mail, postage prepaid, to holders of shares of Redeemable Warrants who have properly tendered and exercised and whose tenders and exercises have been accepted by the Company, the Common Stock and Class B Warrants as set forth in the Offer, at the addresses specified in such Redeemable Warrants with proper procedures to ensure the protection of the Common Stock and Class B Warrants during mailing; (j) To follow and act upon ail instructions properly completed and given pursuant to any Offer received by you; (k) To return all certificates for Redeemable Warrants properly tendered and exercised to the Company as directed by the Company; and (l) To maintain such records with respect to the Offer as the Company may reasonably request at the Company's cost and expense. You acknowledge that you have a list as of a recent date of all holders of Redeemable Warrants eligible to tender and exercise such Redeemable Warrants pursuant to the Offer, and a fist of the number of Redeemable Warrants owned of record by each such holder. As Depository you: (a) shall have no duties or obligations other than those specifically set forth herein or as may subsequently be agreed to by you and the Company; (b) will not be required to and will make no representations and have no responsibilities as to the validity, accuracy, value or genuineness of (i) the Offer, (ii) any Redeemable Warrants or documents deposited with you, (iii) any Common Stock and Class B Warrants delivered by you pursuant to the Offer, (iv) any documents prepared by the Company in connection with the Offer, or (v) any signatures or endorsements, other than your own; (c) shall not be obligated to take any legal action hereunder that might in your reasonable judgment involve any expense or liability unless you have been furnished with reasonable indemnity by the Company; -3- 4 (d) may rely on and shall be protected in acting on the written or oral instructions with respect to any matter relating to your actions as Depository specifically covered by this Agreement or supplementing or qualifying any such instructions of any officer of the Company authorized to give instructions under paragraph (g) above; (e) may rely on and shall be protected in acting upon any certificate, instrument, opinion, notice, letter, telegram or any other document or security delivered to you and reasonably and in good faith believed by you to be genuine and to have been duly signed by the proper party or parties; (f) may consult counsel satisfactory to you (including counsel for the Company) and the advice or opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by you hereunder in good faith and in accordance with such advice or opinion of such counsel; (g) shall not be called on at any time to advise, and shall not advise, any person tendering pursuant to the Offer as to the value of the Redeemable Warrants tendered and exercised pursuant to the Offer; and (h) shall not be liable for anything which you may do or refrain from doing in connection with this Agreement except for your own gross negligence, willful misconduct or bad faith. For your services as Depository you shall be entitled to fees in the amounts agreed upon and stated in a separate letter attached hereto as Exhibit A. The Company shall indemnify and hold you harmless against any loss or liability incurred, without gross negligence, willful misconduct or bad faith on your part, arising out of or in connection with the administration of your duties hereunder, including the cost of defending you against any such claim or liability; provided, however, that this indemnity shall not extend to any losses of Redeemable Warrants certificates or other documents occurring in the process of delivery of Redeemable Warrants Stock to you or Common Stock and Class B Warrants by you. In no case shall the Company be liable pursuant to this paragraph with respect to any claim against you unless you shall have notified the Company by letter, or by cable or telex confirmed by letter, of the written assertion of a claim against you or of any action commenced against you, promptly after you shall have received any such written assertion of any such claim or shall have been served with the summons or other first legal process giving information as to the nature and basis of the claim, but failure so to notify the Company shall not relieve the Company from any liability which it may have otherwise than pursuant to this paragraph. The Company shall be entitled to participate at its own expense in the defense of any such claim which may be asserted against you, and if the Company so elects at any time after receipt of such notice, the Company may assume the defense of any suit brought to enforce any such claim; provided, however, that if there exists a conflict of interest which would make it inappropriate for the same counsel to represent both you and the Company, you shall be entitled to retain your own counsel at the expense of the Company, Notwithstanding the foregoing, the Depository may retain its own counsel in connection with the defense of any such claim at its own expense. -4- 5 This Depository Agreement shall be construed and enforced in accordance with the laws of the State of New York and shall inure to the benefit of and the obligations created hereby shall be binding upon the successors and assigns of the parties hereto. Unless otherwise expressly provided herein, all notices, requests, demands and other communications hereunder shall be in writing, shall be delivered by hand, by telephonic facsimile transmission with a confirmed telephonic transmission answer back or by First Class Mail, postage pre-paid, shall be deemed given when received and shall be addressed to you and the Company at the respective addresses listed below or to such other addresses as you or the Company shall designate from time to time in writing forwarded in like manner. If to the Company, to: CinemaStar Luxury Theaters 2121 Avenue of the Stars, 10th Floor Los Angeles, California 90067 Attn: John Ellison, Jr. With copies to: Jeffer, Mangels, Butler & Marmaro LLP 2121 Avenue of the Stars, 10th Floor Los Angeles, California 90067 Attn: Joel I. Bennett, Esq. If to you, to: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 Attn: Compliance Department If you are in accord with the above, please indicate your agreement herewith by having an authorized officer sign the enclosed copy of this letter as indicated and return it to the undersigned. Very truly yours, CINEMASTAR LUXURY THEATERS, INC. By:___________________________________ John Ellison, Jr. President Agreed to and Accepted: CONTINENTAL STOCK TRANSFER & TRUST COMPANY By:______________________________ William F. Seegraber, Vice President Date: September __, 1996 -5- -----END PRIVACY-ENHANCED MESSAGE-----