-----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, PGv74ODpcP8wtltP6Zn0UPBY7xhJLluHQ09bQNseA7fUECC//dVf/FMazUrltOlg JV62qxtcfMaaGMDkKe0iSg== 0000950148-98-001981.txt : 19980817 0000950148-98-001981.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950148-98-001981 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-25252 FILM NUMBER: 98687122 BUSINESS ADDRESS: STREET 1: 431 COLLEGE BLVD CITY: OCEANSIDE STATE: CA ZIP: 92057-5435 BUSINESS PHONE: 6196302011 MAIL ADDRESS: STREET 1: 431 COLLEGE BLVD CITY: OCEANSIDE STATE: CA ZIP: 92057-5435 FORMER COMPANY: FORMER CONFORMED NAME: NICKELODEON THEATER CO INC DATE OF NAME CHANGE: 19941128 10QSB 1 FORM 10-QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Quarterly period ended June 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION Commission File Number 0-25252 CinemaStar Luxury Theaters, Inc. (Exact Name of Registrant as specified in its charter) CALIFORNIA 33-0451054 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12230 EL CAMINO REAL, SUITE 320, SAN DIEGO, CA 92130 (Address of principal executive offices) (Zip Code) (619) 509-2777 (Registrant's telephone number, including area code) 431 COLLEGE BLVD., OCEANSIDE, CA 92057 (Address of former principal executive offices) Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Common stock, no par value: 25,703,646 shares outstanding as of August 13, 1998. Transitional Small Business Disclosure Format. (check one): YES [ ] NO [X] 2 CINEMASTAR LUXURY THEATERS, INC. TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of June 30, 1998 3 Condensed Consolidated Statements of Operations for the three months ended June 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 10 Item 2. Changes in Securities 11 Item 3. Defaults in Senior Securities 11 Item 4. Submission of Matters to a Vote of Securities Holders 11 Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, 1998 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,388,548 Prepaid expenses 122,229 Other current assets 226,559 ------------ TOTAL CURRENT ASSETS 3,737,336 Property and equipment, net 12,647,321 Deposits and other assets 293,964 ------------ TOTAL ASSETS $ 16,678,621 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 258,300 Accounts payable 1,337,833 Accrued expenses 1,464,351 Deferred revenue 228,282 ------------ TOTAL CURRENT LIABILITIES 3,288,766 Long-term debt and capital lease obligations, net of current portion 1,866,438 Deferred rent liability 3,390,614 ------------ TOTAL LIABILITIES 8,545,818 ------------ STOCKHOLDERS' EQUITY: Common stock, no par value; authorized shares - 60,000,000; issued and outstanding shares - 25,703,646 22,628,670 Additional paid-in capital 3,626,152 Accumulated deficit (18,122,019) ------------ TOTAL STOCKHOLDERS' EQUITY 8,132,803 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,678,621 ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -3- 4 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended June 30, ------------------------------- 1998 1997 ------------ ------------ REVENUES: Admissions $ 4,865,395 $ 3,915,058 Concessions 2,065,181 1,719,006 Other operating revenues 159,401 118,669 ------------ ------------ TOTAL REVENUES 7,089,977 5,752,733 COSTS AND EXPENSES: Film rental and booking costs 2,645,292 2,248,524 Cost of concession supplies 632,593 593,194 Theater operating expenses 3,042,385 2,280,566 Selling, general and administrative expenses 657,221 874,432 Depreciation and amortization 532,208 454,598 ------------ ------------ TOTAL COSTS AND EXPENSES 7,509,699 6,451,314 ------------ ------------ OPERATING LOSS (419,722) (698,581) OTHER INCOME (EXPENSE): Interest expense (76,834) (186,869) Interest income 39,420 6,553 ------------ ------------ TOTAL OTHER EXPENSE (37,414) (180,316) ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (457,136) (878,897) PROVISION FOR INCOME TAXES (1,600) -- ------------ ------------ NET LOSS $ (458,736) $ (878,897) ============ ============ BASIC AND DILUTED NET LOSS PER SHARE $ (0.02) $ (0.11) WEIGHTED AVERAGE SHARES 25,703,646 7,790,747
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -4- 5 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended June 30, ----------------------------- 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (458,736) $ (878,897) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 532,208 454,598 Deferred rent expense 212,855 212,861 Changes in operating assets and liabilities: Prepaid expenses and other current assets 129,613 (50,943) Deposits and other assets (5,938) (82,516) Accounts payable (334,848) 514,239 Accrued expenses and other liabilities 341,014 613 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 416,168 169,955 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (281,638) (1,750,714) Deposits and other assets -- (332,514) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (281,638) (2,083,228) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 2,000,000 Principal payments on long-term debt and capital lease obligations (227,960) (204,381) Advances from stockholder, net -- 84,429 ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (227,960) 1,880,048 ----------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS (93,430) (33,225) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,481,978 601,646 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,388,548 $ 568,421 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 76,834 $ 186,869 =========== =========== Income taxes $ 1,600 -- =========== =========== SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued upon conversion of debentures -- $ 339,300 =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. -5- 6 CINEMASTAR LUXURY THEATERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) NOTE 1 The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements for the year ended March 31, 1998 and footnotes thereto, included in the Company's Annual Report on Form 10-KSB/A which was filed with the Securities and Exchange Commission. Operating results for the three month period ended June 30, 1998 are not necessarily indicative of the results of operations that may be expected for the year ending March 31, 1999. NOTE 2 Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted SFAS No. 130 effective April 1, 1998 and the adoption had no effect on the Company's financial statements. Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997. The new standard requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers. The adoption of SFAS No. 131 will have no effect on the Company's results of operations. In April of 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-up Activities. SOP 98-5 requires costs of start-up activities to be expensed when incurred. The Company has adopted this practice, which has not had a material impact on its results of operations. NOTE 3 Certain reclassifications have been made to the June, 1997 financial statements to conform to the June, 1998 presentation. NOTE 4 On September 23, 1997, the Company entered into a definitive agreement (the "CAP Agreement") with CinemaStar Acquisition Partners, L.L.C. ("CAP") and Reel Partners L.L.P. ("Reel") whereby Reel provided $3,000,000 of interim debt financing (the "Bridge Loan") and CAP was to provide $15,000,000 of equity financing (the "Equity Financing"). Pursuant to the terms of the CAP Agreement, the Company is obligated to issue additional shares of common stock (the "Adjustment Shares") to CAP. The number of Adjustment Shares to be issued is based upon (i) the recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the Company in connection with the contemplated transactions, (iii) any negative cash flow incurred by the Company during the period commencing August 31, 1997 and ending December 15, 1997, and (iv) operating losses experienced by, or costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation) and San Bernardino Facility (still in development). The measurement of the operating losses and/or closing costs for the two facilities is cumulative, calculated in the aggregate and will take place on the earlier to occur of the closing of each such facility or December 15, 2000. The Company and CAP have agreed that 1,351,256 Adjustment Shares shall be issued by the Company to CAP pursuant to the terms of the CAP Agreement. The Company expects to issue the Adjustment Shares in the second fiscal quarter ended September 30, 1998. To the extent there are (a) operating losses at the Company's Tijuana and San Bernardino facilities, calculated in the aggregate, for the three-year period ended December 15, 2000, and (b) expenditures in connection with the discovery of liabilities, or defense -6- 7 and/or settlement of claims, in either case relating to periods prior to August 31, 1997, the Company will be obligated to issue additional Adjustment Shares. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-QSB. Except for the historical information contained herein, the discussion in this Form 10-QSB contains certain forward looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-QSB should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-QSB. Where possible, the Company uses words like "believes", "anticipates", "expects", "plans" and similar expressions to identify such forward looking statements. The Company's actual results could differ materially from those discussed here. Factors, risks and uncertainties that could cause or contribute to such differences include the availability of marketable motion pictures, the increase of revenues to meet long-term lease obligations and rent increases, risks inherent in the construction of new theaters, the ability to secure new locations on favorable terms, intense competition in the industry, dependence on concession sales and suppliers, earthquakes and other natural disasters and costs associated with potential changes in management and disputes related thereto. At June 30, 1997 the Company had seven theater locations with a total of 64 screens. During the twelve months ended June 30, 1998, the Company added 5 new screens in July 1997 to an existing location and, in November 1997, a new ten screen theater complex was opened. Thus at June 30, 1998 the Company had 8 locations and 79 screens. These additions resulted in an increase in revenues and expenses for the three months ended June 30, 1998 compared to June 30, 1997. The Company has entered into agreements, negotiations and/or discussions pertaining to the development of a 20 screen theater complex and a 16 screen theater complex in San Bernardino, California and Oceanside, California, respectively. Additionally, the Company has entered into negotiations regarding the development of other theater complexes in the United States and the Republic of Mexico. The building of these and other new theater complexes is subject to many contingencies, many of which are beyond the Company's control, including consummation of site purchases or leases, receipt of necessary government approvals, negotiation of acceptable construction agreements, the availability of financing and timely completion of construction. No assurances can be given that the Company will be able to successfully build, finance or operate any of the new theaters presently contemplated or otherwise. THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997. Total revenues for the three months ended June 30, 1998 increased 23.2% to $7,089,977 from $5,752,733 for the three months ended June 30, 1997. The increase resulted from a 24.3% increase in admissions revenues to $4,865,395 and a 21.1% increase in concession and other operating revenues to $2,224,582. The increases in admission revenue and concession and other operating revenue were due primarily to the increase in the number of theaters and screens. Average revenues per screen for theaters in operation during both periods declined slightly, primarily due to the closure, for remodeling, of a six screen facility for part of fiscal 1999's first quarter. Film rental and booking costs for the three months ended June 30, 1998 increased 17.6% to $2,645,292 from $2,248,524 for the three months ended June 30, 1997. The increase was due to the greater revenue generated from more screens. As a percentage of admissions revenues, film rental and booking costs decreased to 54.4% from 57.4% in the three months ended June 30, 1998 compared to the comparable prior year period, in part due to lower film rental cost in the Company's new location in Tijuana, Mexico. Cost of concession supplies for the three months ended June 30, 1998 increased 6.6% to $632,593 from $593,194 for the three months ended June 30, 1997. The increase was due in part to increased concession costs associated with increased concession revenues. As a percentage of concession revenues, cost of concession supplies decreased to 30.6% from 34.5% in the three months ended June 30, 1998 compared to the comparable prior year period, due to the termination during the quarter of concession lease agreements with its former primary concession vendor, Pacific Concessions, Inc. ("PCI"). As of June 15, 1998, the Company ceased using PCI to provide concession operations at any of its theaters and began operating such concessions itself. Management believes that contracting directly -7- 8 with the concession suppliers at competitive rates will decrease the Company's cost of concessions and increase the Company's gross profit margin on concession sales in future periods. Theater operating expenses for the three months ended June 30, 1998 increased 33.4% to $3,042,385 from $2,280,566 for the three months ended June 30, 1997. As a percentage of total revenues, theater operating expenses increased to 42.9% from 39.6% during the applicable periods. The increase in theater operating costs was primarily due to the increased costs attributable to the addition of new theaters, increases due to federally mandated increases in minimum wages and increased maintenance and repair expenses associated with certain upgrades and remodels. Selling, general and administrative expenses for the three months ended June 30, 1998 decreased 24.8% to $657,221 from $874,432 for the three months ended June 30, 1997. As a percentage of revenues, selling, general and administrative expenses decreased to 9.3% from 15.2% for the three months ended June 30, 1998 compared with the prior comparable period. The decrease is the result of cost reduction initiatives and of lower international expenses. Depreciation and amortization for the three months ended June 30, 1998 increased 17.1% to $532,208 from $454,598 for the three months ended June 30, 1997. The increase was primarily the result of increased depreciation on additional equipment associated with the opening of the new theaters . Interest expense for the three months ended June 30, 1998 decreased to $76,834 from $186,869 for the three months ended June 30, 1997. This decrease was primarily a result of the majority of the Company's debt having been repaid from the proceeds of the Equity Financing transaction consummated in December 1997. Interest income for the three months ended June 30, 1998 increased to $39,420 from $6,553 for the three months ended June 30, 1997. This increase is attributable to changes in cash balances, due to the completion of the Equity Financing transaction in December 1997. As a result of the factors discussed above, the net loss for the three months ended June 30, 1998 was $458,736 or $ .02 per common share, compared to a net loss of $878,897, or $.11 per common share, for the three months ended June 30, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's revenues are collected in cash, principally through box office admissions and concession sales. Because its revenues are received in cash prior to the payment of related expenses, the Company has an operating "float" which partially finances its operations. The Company's capital requirements arise principally in connection with new theater openings and acquisitions of existing theaters. In the past new theater openings have typically been financed with internally generated cash flow and long-term debt financing arrangements for facilities and equipment. The Company discovered that it lacked the ability to finance its current capital obligations through internally generated funds and sought additional capital. On September 23, 1997, the Company signed a definitive agreement for CinemaStar Acquisition Partners, L.L.C. ("CAP") to acquire a majority equity interest in the Company through a $15 million purchase of newly issued shares of the Company's common stock. Following stockholder approval, the equity financing transaction was completed on December 15, 1997. Pursuant to the CAP Agreement, CAP purchased 17,684,464 shares of common stock for a purchase price of $0.848202 per share. CAP also received at closing warrants to purchase 1,630,624 shares of common stock at an exercise price equal to $0.848202 per share. Pursuant to the terms of the CAP Agreement, the Company is obligated to issue additional shares of common stock (the "Adjustment Shares") to CAP. The number of Adjustment Shares to be issued is based upon (i) the recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the Company in connection with the contemplated transactions, (iii) any negative cash flow incurred by the Company during the period commencing August 31, 1997 and ending December 15, 1997, and (iv) operating losses experienced by, or costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation and achieving operating profits) and San Bernardino Facility (still in development). The measurement of the operating losses and/or closing costs for the two facilities is cumulative, calculated in the aggregate and will take place on the earlier to occur of the closing of each such facility or December 15, 2000. The Company and CAP have agreed that 1,351,256 Adjustment Shares shall be issued by the Company to CAP pursuant to the terms of the CAP Agreement. The Company expects to issue the Adjustment Shares in the second fiscal quarter ended September 30, 1998. To the extent there are (a) operating losses at the Company's Tijuana and San Bernardino facilities, calculated in the aggregate, for the three-year period ended December 15, 2000, and (b) expenditures in connection with the discovery of liabilities, or defense and/or settlement of claims, in either case relating to periods prior to August 31, 1997, the Company will be obligated to issue additional Adjustment Shares. -8- 9 The Company leases seven theater properties and various equipment under non-cancelable operating lease agreements which expire through 2021 and require various minimum annual rentals. At June 30, 1998, the aggregate future minimum lease payments due under non-cancelable operating leases was approximately $90,000,000. In addition, the Company has signed a lease agreement for a 20 screen facility in San Bernardino, California and a 16 screen facility in Oceanside, California. The lease for the San Bernardino Facility will require expected minimum rental payments aggregating approximately $40,700,000 over the 25-year life of the lease and the lease for the Oceanside Facility will require expected minimum rental payments aggregating approximately $30,425,000 over the 25-year life of the lease. Accordingly, existing minimum lease commitments as of June 30, 1998 plus those expected minimum commitments for the proposed theater locations would aggregate minimum lease commitments of approximately $161,100,000. Costs to the Company to complete and equip the San Bernardino Facility and the Oceanside Facility are estimated at approximately $3,500,000 and $3,600,000, respectively. The Company's ability to develop these projects is dependent upon several factors, including the performance of the landlord/developer under the leases in the construction of the facilities and the Company's ability to obtain satisfactory financing for the projects. In addition, the status of the lease for the San Bernardino Facility is in dispute. Therefore, there can be no assurance that the Company will be able to complete these projects. In addition, because lease payments do not begin until acceptance of a completed building by the Company, it is not assured that the foregoing obligations with respect to a given project will materialize. The Company has had significant net losses in each fiscal year of its operations, including net losses of $4,304,370 and $7,932,011 in the fiscal years ended March 31, 1997 and 1998, respectively and also experienced a net loss of $458,736 in its first quarter ended June 30, 1998. There can be no assurance as to whether or when the Company will achieve profitability. While the Company believes it could attain profitability with its current operations, any substantial profitability will depend, among other things, on the Company's ability to continue to grow its operations through the addition of new screens and the success of management's cost reduction efforts. The ability of the Company to expand and add new screens either through the development of new theaters, the expansion of existing theaters or the acquisition of new theaters is contingent upon, among other things, the Company's obtaining new, third party financing to fund such growth. While the Company signed a commitment letter for a $15 million development and acquisition line from a senior, secured lender sufficient to meet the Company's current business plan, no definitive agreements have been reached and there can be no assurance that this or any other financing will be obtained by the Company on commercially reasonable terms. During the three months ended June 30, 1998, the Company generated $416,168 from operating activities, as compared to generating $169,955 cash from operating activities for the three months ended June 30, 1997. The increase is due to lower costs of concession supplies as a percentage of concession revenues and lower selling, general and administrative expenses in the three months ended June 30, 1998 compared with the three months ended June 30, 1997, partially offset by higher theater operating expenses. During the three months ended June 30, 1998, the Company used cash in investing activities of $281,638, as compared to $2,083,228 for the three months ended June 30, 1997. The decrease is due to lower purchases of fixed assets during the three months ended June 30, 1998 compared with the prior comparable period. During the three months ended June 30, 1998, the Company used net cash of $227,960 in financing activities, as compared to providing $1,880,048 for the three months ended June 30, 1997. The cash used in the three months ended June 30, 1998 related to principal repayment of debt and capital lease obligations. The cash provided in the three months ended June 30, 1997 related to the proceeds of the issuance of long term debt, partially offset by principal repayment of debt and capital lease obligations. At June 30, 1998, the Company held cash, cash equivalents and working capital in the amounts of $3,388,548 and $448,570, respectively. Management believes that cash, cash equivalents and working capital should be adequate to fund the existing operations of the Company during fiscal 1999. However, should the Company require additional financing, there can be no assurance that the Company will be able to obtain such financing on reasonable terms, and a failure to obtain such financing could have a material adverse effect on the financial condition and results of operations of the Company. As of June 30, 1998, the Company had net operating loss carryforwards ("NOLs") of approximately $11,000,000 and $5,500,000 for Federal and California income tax purposes, respectively. The Federal NOLs are available to offset future years taxable income, and they expire in 2006 through 2013 if not utilized prior to that time. The California NOLs are available to offset future years taxable income, and they expire in 1999 through 2003 if not utilized prior to that time. The annual utilization of NOLs will be limited in accordance with restrictions imposed under the Federal and state laws as a result of changes in ownership. The Company's initial public offering and certain other equity transactions resulted in an "ownership change" as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company's use of its net operating loss carryforwards to offset -9- 10 taxable income in any post-change period will be subject to certain specified annual limitations. At June 30, 1998, the Company has total net deferred income tax assets in excess of $4,900,000. Such potential income tax benefits, a significant portion of which relates to the NOLs discussed above, have been subjected to a 100% valuation allowance since realization of such assets is not "more likely than not" in light of the Company's recurring losses from operations. Due to the absence of two market makers for its Class B Redeemable Warrants, the Company had been notified by NASDAQ that these were to be delisted effective June 27, 1998. NASDAQ subsequently notified the Company that it was now in compliance with the market maker requirement and that the Class B Redeemable Warrants would remain listed. SEASONALITY The Company's revenues have been seasonal, coinciding with the timing of major releases of motion pictures by the major distributors. Generally, the most marketable motion pictures are released during the summer and the Thanksgiving through year-end holiday season. The unexpected emergence of a hit film during other periods can alter this trend. The timing of such releases can have a significant effect on the Company's results of operations, and the results of one quarter are not necessarily indicative of results for subsequent quarters. YEAR 2000 The Company has performed a review of its computer applications related to their continuing functionality for the year 2000 and beyond. The Company does not believe that it has material exposure with respect to the year 2000 issue in regards to its computer applications. The Company does not expect that the cost of any modifications will cause reported financial information not to be indicative of future operating results or financial condition. The year 2000 issue may impact the operations of the Company indirectly by affecting the operations of its suppliers, business partners, customers and other parties that provide significant services to the Company. The Company expects to complete during fiscal 1999 a review of potential year 2000 issues with these parties. The Company currently is unable to predict the extent that the year 2000 will have on these parties and, consequently, on the Company. CURRENCY FLUCTUATIONS The Company is subject to the risks of fluctuations in the Mexican Peso with respect to the U.S. dollar. These risks are heightened because revenues in Mexico are collected in Mexican Pesos, but the lease is denominated in U.S. dollars. While the Company does not believe it has been materially adversely effected by currency fluctuations to date, there can be no assurance it will not be so affected in the future and it has taken no steps to guard against these risks. PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San Diego Superior Court, Case No. N07870, alleging that the Company breached a 50-year lease relating to commercial real property located in the Rancho Del Rey Business Center consisting of approximately 35,000 square feet. The complaint alleges that the lease was terminated as a result of the Company's failure to perform. The complaint also alleges first year minimum rent of $174,240. Management believes the complaint is without merit and the Company will vigorously defend against this action. Management believes the termination of the lease in question was in accordance with its terms, but there is no assurance that the Company ultimately will prevail in this action. The Company believes that the landlord has already leased the property to another tenant, which would significantly mitigate the damages that could be claimed by the landlord. On November 7, 1997, MDA-San Bernardino Associates, LLC ("MDA"), the landlord of the San Bernardino Facility, filed an action for Unlawful Detainer in the Municipal Court of the State of California for the County of San Bernardino, Case No. 184164. The action sought to terminate the Company as tenant. The action was filed because MDA believed the Company had not satisfied certain financial conditions under the lease. The Company filed a response to this action and subsequently entered into a Stipulation for Entry of Judgment with MDA. The Company believes it is in a position to comply with all requirements of such Stipulation for Entry of Judgment. As a result of MDA's delay in development of the project, the Company has not yet fully complied with all of the conditions of the Stipulation for Entry of Judgment. Additionally, management believes that as a result of MDA's failure of certain conditions precedent in the lease, the lease terminated on its own terms as early as January 9, 1998. MDA disputes the Company's position. The Company has informed MDA that if MDA does not fulfill such conditions precedent immediately, the Company will -10- 11 abandon the project. In addition, from time to time the Company is involved in routine litigation and proceedings in the ordinary course of its business. The Company is not currently involved in any other pending litigation matters which the Company believes would have a material adverse effect on the Company. ITEM 2 -- CHANGES IN SECURITIES ANTI-DILUTION ADJUSTMENTS TO PUBLIC WARRANTS The terms of the Company's publicly traded Redeemable Warrants and Class B Redeemable Warrants contain anti-dilution provisions that provide for adjustments in the exercise price and number of shares issuable upon exercise of such warrants in the event of issuance of Common Stock (or securities convertible into Common Stock) at a price per share below the exercise price of such warrants As of June 30, 1998, the Company had reserved for issuance upon exercise of outstanding or issuable warrants an aggregate of 19,856,849 shares of common stock. Issuance of equity securities for consideration below the applicable exercise price triggers certain anti-dilution provisions in the Company's Redeemable Warrants and its Class B Redeemable Warrants. In fiscal year 1998, the following events triggered the anti-dilution provisions of the Redeemable Warrants and the Class B Redeemable Warrants (1) the issuance of 1,100,000 stock options each having an exercise price of $.875, (2) the issuance of 17,684,464 shares of common stock in the Equity Financing for a price per share equal to $.848202, (3) the issuance of the 500,000 PCI Warrants having an exercise price of $.9344, (4) the issuance of the 75,000 Reel Shares at a price per share of $.666, and (5) the issuance of the Watley Warrants, the CAP Warrants and the Reel Warrants, totaling 7,399,070 and each having an exercise price of $.848202 per share. After giving effect to these events, other events occurring prior to the 1998 fiscal year, the issuance of an additional 330,000 stock options at an exercise price of $.875 per share in April, 1998 and the obligation to issue 1,351,256 Adjustment Shares for no additional consideration, the shares of common stock issuable upon exercise of each Redeemable Warrant as of June 30, 1998 was 2.3622 and the shares of common stock issuable upon the exercise of each Class B Redeemable Warrant as of June 30, 1998 was 2.3551. Consequently, as of June 30, 1998, an aggregate of 10,980,833 shares of common stock are issuable upon exercise of the outstanding Redeemable Warrants at an exercise price of $2.54 per share and an aggregate of 533,278 shares of common stock are issuable upon exercise of the outstanding Class B Redeemable Warrants at an exercise price of $2.76 per share. ITEM 3 -- DEFAULTS IN SENIOR SECURITIES None ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS No matter was submitted to a vote of security holders during the first quarter of fiscal 1999. ITEM 5 -- OTHER INFORMATION None ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Item 27. Financial Data Schedule (b) Reports on Form 8-K The Company filed one Report on Form 8-K during the quarter ended June 30, 1998. On April 29, 1998, the Company filed a Form 8-K for a reportable event on April 16, 1998. On April 16, 1998, the Company dismissed BDO Seidman, LLP as its independent accountants and engaged Arthur Andersen LLP as its new accountants. The Company acknowledged that there had been no disagreements with BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. -11- 12 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 13, 1998 CinemaStar Luxury Theaters, Inc. by: /s/ JACK R. CROSBY -------------------------------------- Jack R. Crosby Chairman and Chief Executive Officer (principal executive officer) by: /s/ NORMAN DOWLING -------------------------------------- Norman Dowling Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) -12- EX-27 2 FINANCIAL DATA SCHEULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS OF INCOME AND CONSOLIDATED BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 3-MOS MAR-31-1999 APR-01-1998 JUN-30-1998 3,388,548 0 0 0 0 3,737,336 18,236,530 5,589,209 16,678,621 3,288,766 0 0 0 22,628,670 (14,495,867) 16,678,621 7,089,977 7,089,977 3,277,885 7,509,699 0 0 76,834 (457,136) 1,600 (458,736) 0 0 0 (458,736) (.02) (.02)
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