-----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, H4/dg3GRAA/uAl4ZuCnTnvXhxLp+M85AiCOO1QWh9uaS50rKdxVftQWGPftXDek7 XLQ8Swgoo2ZEgFCgpnt9nQ== 0000950148-99-000109.txt : 19990126 0000950148-99-000109.hdr.sgml : 19990126 ACCESSION NUMBER: 0000950148-99-000109 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990125 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: 99512189 BUSINESS ADDRESS: STREET 1: 431 COLLEGE BLVD CITY: OCEANSIDE STATE: CA ZIP: 92057-5435 BUSINESS PHONE: 619-509-2777 MAIL ADDRESS: STREET 1: 12230 EL CAMINO REAL STREET 2: SUITE 320 CITY: SAN DIEGO STATE: CA ZIP: 92130 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 DECEMBER 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ Commission File Number 0-25252 CINEMASTAR LUXURY THEATERS, INC. (Exact Name of Registrant as specified in its charter) DELAWARE 33-0451054 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12230 EL CAMINO REAL, SUITE 320, SAN DIEGO, CA 92130 (Address of principal executive offices) (Zip Code) (619) 509-2777 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Common stock, $0.01 par value: 3,864,986 shares outstanding as of January 22, 1999. 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 December 31, 1998 (Unaudited) 3 Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 1998 and 1997 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1998 and 1997 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults in Senior Securities 13 Item 4. Submission of Matters to a Vote of Securities Holders 13 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1998 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,746,470 Prepaid expenses 300,299 Other current assets 273,281 ------------ TOTAL CURRENT ASSETS 3,320,050 Property and equipment, net 11,750,604 Other assets 964,476 ------------ TOTAL ASSETS $ 16,035,130 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 232,441 Accounts payable 1,208,124 Accrued expenses 800,834 Deferred revenue 528,436 ------------ TOTAL CURRENT LIABILITIES 2,769,835 Long-term debt and capital lease obligations, net of current portion 1,819,490 Deferred rent liability 3,734,839 ------------ TOTAL LIABILITIES 8,324,164 ------------ STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; authorized shares - 60,000,000; issued and outstanding shares - 3,864,986 22,628,670 Additional paid-in capital 3,626,152 Accumulated deficit (18,543,856) ------------ TOTAL STOCKHOLDERS' EQUITY 7,710,966 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,035,130 ============
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 NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------ ------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ REVENUES: Admissions $ 4,663,484 $ 4,512,741 $ 15,252,824 $ 13,104,417 Concessions 1,955,625 1,668,318 6,408,881 5,457,313 Other operating revenues 168,000 121,471 503,181 379,487 ------------ ------------ ------------ ------------ TOTAL REVENUES 6,787,109 6,302,530 22,164,886 18,941,217 COSTS AND EXPENSES: Film rental and booking costs 2,474,677 2,495,583 8,153,080 7,432,200 Cost of concession supplies 328,958 639,889 1,382,174 1,975,661 Theater operating expenses 3,050,919 2,887,241 9,260,200 7,850,350 Termination fees - concession lease agreement -- 1,859,352 -- 1,859,352 Selling, general and administrative expenses 897,366 1,395,909 2,382,818 3,182,021 Depreciation and amortization 613,969 473,750 1,727,724 1,460,105 ------------ ------------ ------------ ------------ TOTAL COSTS AND EXPENSES 7,365,889 9,751,724 22,905,996 23,759,689 ------------ ------------ ------------ ------------ OPERATING LOSS (578,780) (3,449,194) (741,110) (4,818,472) OTHER INCOME (EXPENSE): Interest expense (91,442) (324,803) (246,574) (693,451) Non-cash interest expense -- (221,750) -- (328,750) Interest income 30,292 14,098 108,712 23,580 ------------ ------------ ------------ ------------ TOTAL OTHER EXPENSE (61,150) (532,455) (137,862) (998,621) ------------ ------------ ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (639,930) (3,981,649) (878,972) (5,817,093) PROVISION FOR INCOME TAXES -- -- (1,600) (1,600) ------------ ------------ ------------ ------------ NET LOSS $ (639,930) $ (3,981,649) $ (880,572) $ (5,818,693) ============ ============ ============ ============ BASIC AND DILUTED NET LOSS PER SHARE $ (0.17) $ (2.51) $ (0.24) $ (4.54) WEIGHTED AVERAGE SHARES 3,864,986 1,584,963 3,737,725 1,280,384
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, -------------------------------- 1998 1997 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (880,572) $ (5,818,693) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,727,724 1,460,105 Deferred rent expense 557,081 635,980 Non-cash interest expense -- 328,750 Changes in operating assets and liabilities: Prepaid expenses and other current assets (54,573) 16,014 Deposits and other assets (8,273) (19,301) Accounts payable (464,557) (822,284) Accrued expenses and other liabilities (22,349) 831,683 ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 854,481 (3,387,746) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of minority interest in consolidated subsidiary (337,146) -- Purchases of property and equipment (575,668) (4,167,753) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (912,814) (4,167,753) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt -- 5,637,104 Principal payments on long-term debt and capital lease obligations (300,769) (7,935,080) Proceeds from issuance of common stock, net -- 13,154,053 Proceeds from issuance of common stock warrants, net -- 738,375 Payment of debt issuance costs (376,406) -- Advances from stockholder, net -- 57,010 ------------ ------------ NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (677,175) 11,651,461 ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (735,508) 4,095,962 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,481,978 601,646 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,746,470 $ 4,697,608 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 232,878 $ 693,451 ============ ============ Income taxes $ 1,600 $ 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 DECEMBER 31, 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 adjustments) 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 and nine month periods ended December 31, 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 Financial Accounting Standards Board ("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 Company will adopt SFAS No. 131 during its fiscal year ended March 31, 1999. 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 December, 1997 financial statements to conform to the December, 1998 presentation. NOTE 4 The Company completed a one-for-seven reverse stock split, effective December 2, 1998. Basic and diluted loss per share and weighted average shares outstanding have been adjusted to reflect the impact of such reverse stock split for all periods presented. NOTE 5 On September 23, 1997, the Company entered into a definitive agreement (the "CAP Agreement") with CinemaStar Acquisition Partners, L.L.C. ("CAP") and Reel Partners L.L.P. ("Reel") whereby Reel provided $3,000,000 of interim debt financing (the "Bridge Loan") and CAP provided $15,000,000 of equity financing (the "Equity Financing"). Pursuant to the terms of the CAP Agreement, the Company was and continues to be obligated to issue additional shares of Common Stock (the "Adjustment Shares") to CAP. The number of Adjustment Shares to be issued is based upon (i) the recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the Company in connection with the contemplated transactions, (iii) any negative cash flow incurred by the Company during the period commencing August 31, 1997 and ending December 15, 1997, and (iv) operating losses experienced by, or costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation and achieving operating profits) and San Bernardino Facility (still in development). The 6 7 measurement of the operating losses and/or closing costs for the two facilities is cumulative, calculated in the aggregate and will take place on the earlier to occur of the closing of each such facility or December 15, 2000. The Company issued 1,351,256 Adjustment Shares (193,037 Adjustment Shares taking account of the one-for-seven reverse stock split which became effective December 2, 1998) to CAP pursuant to the terms of the CAP Agreement, in September 1998. To the extent there are (a) operating losses at the Company's Tijuana and San Bernardino facilities, calculated in the aggregate, for the three-year period ended December 15, 2000, and (b) expenditures in connection with the discovery of liabilities, or defense and/or settlement of claims, in either case relating to periods prior to August 31, 1997, the Company will be obligated to issue additional Adjustment Shares. NOTE 6 The Company signed on October 19, 1998, a $15 million Seven Year Revolving Credit Agreement with a senior, secured lender. This facility will be used primarily to finance the Company's future developments in accordance with the terms and conditions of the Revolving Credit Facility. The Company has not to date borrowed against this facility but has used the facility to secure two standby letters of credit, with initial terms of one year, totaling $2,275,000, issued in accordance with the terms of its lease (as amended) on the San Bernardino 20-screen facility, currently under construction. Commitment and other fees associated with the Revolving Credit Agreement and the standby letters of credit, totaling approximately $380,000, are included in Other Assets will be amortized over their respective terms. NOTE 7 The Company purchased on November 23, 1998 the remaining 25% minority interest in the Company's Mexican subsidiary, CinemaStar Luxury Theaters, S.A. de C.V., for approximately $340,000. This amount is included in Other Assets and will be amortized over a seven year period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-QSB. Except for the historical information contained herein, the discussion in this Form 10-QSB contains certain forward looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-QSB should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-QSB. Where possible, the Company uses words like "believes", "anticipates", "expects", "plans" and similar expressions to identify such forward looking statements. The Company's actual results could differ materially from those discussed here. Factors, risks and uncertainties that could cause or contribute to such differences include the availability of marketable motion pictures, the increase of revenues to meet long-term lease obligations and rent increases, risks inherent in the construction of new theaters, the ability to secure new locations on favorable terms, intense competition in the industry, dependence on concession sales and suppliers, earthquakes and other natural disasters and costs associated with potential changes in management and disputes related thereto. At April 1, 1998 and at December 31, 1998 the Company had eight theater locations with a total of 79 screens. In July 1997, the Company added five screens to an existing theater. In November 1997, the Company added a new ten screen theater complex. These additions resulted in an increase in revenues and expenses for the three and nine months ended December 31, 1998 compared to December 31, 1997. The Company has entered into agreements, negotiations and/or discussions pertaining to the development of a 20 screen Ultraplex theater in San Bernardino, California, a 4 screen expansion of an existing theater in Riverside, California and an 8 screen expansion of an existing theater in Chula Vista, California. 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 to the developer and/or the Company and timely completion of construction. No assurances can be given either that the developer will 7 8 perform or that the Company will be able to successfully build, finance or operate any of the new theaters presently contemplated or otherwise. THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1997. Total revenues for the three months ended December 31, 1998 increased 7.7% to $6,787,109 from $6,302,530 for the three months ended December 31, 1997. The increase resulted from a 3.3% increase in admissions revenues to $4,663,484 and an 18.7% increase in concession and other operating revenues to $2,123,625. The increases in admission revenue and concession and other operating revenue were due primarily to the increase in the number of theaters, screens and average ticket prices. Average revenues per screen for theaters in operation during both periods decreased slightly, in part due to the absence of equivalent movie offerings compared with the prior year for the important Christmas season and increased competition in selected markets. The increase in concession and other operating revenues resulted, in part, from the introduction of screen advertising programs and ATM machines at the Company's theaters. Film rental and booking costs for the three months ended December 31, 1998 decreased 0.8% to $2,474,677 from $2,495,583 for the three months ended December 31, 1997. As a percentage of admissions revenues, film rental and booking costs decreased to 53.1% from 55.3% in the three months ended December 31, 1998 compared to the same period of the prior year, 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 December 31, 1998 decreased 48.6% to $328,958 from $639,889 for the three months ended December 31, 1997. As a percentage of concession revenues, cost of concession supplies decreased to 16.8% from 38.4% in the three months ended December 31, 1998 compared to the comparable prior year period, due to the termination, during the first quarter of fiscal 1999, of concession lease agreements with its former primary concession vendor, Pacific Concessions, Inc. ("PCI"). As of June 15, 1998, the Company ceased the purchase of concessions supplies and services from PCI and began purchasing concessions supplies on a competitive basis. Theater operating expenses for the three months ended December 31, 1998 increased 5.7% to $3,050,919 from $2,887,241 for the three months ended December 31, 1997. The increase in theater operating costs was primarily due to the increased costs attributable to the addition of a new theater and increases due to federally mandated increases in minimum wages. As a percentage of total revenues, theater operating expenses decreased to 45.0% from 45.8% during the applicable periods. Termination fees -- concession lease agreement of $1,859,352 for the three months ended December 31, 1997 comprised penalty payments for notice of early termination of agreements with respect to concession supplies at the Company's seven domestic locations. Such penalty payments were made in December 1997. Selling, general and administrative expenses for the three months ended December 31, 1998 decreased 35.7% to $897,366 from $1,395,909 for the three months ended December 31, 1997. As a percentage of total revenues, selling, general and administrative expenses decreased to 13.2% from 22.1% for the three months ended December 31, 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 December 31, 1998 increased 29.6% to $613,969 from $473,750 for the three months ended December 31, 1997. The increase was primarily the result of increased depreciation on additional equipment associated with the opening of a new theater. Interest expense for the three months ended December 31, 1998 decreased to $91,442 from $324,803 for the three months ended December 31, 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. Non-cash interest expense for the three months ended December 31, 1997, totaling $221,750, resulted from the issuance of debt with detachable warrants and represents the value of the detachable warrants. This debt was repaid in full in December 1997. Interest income for the three months ended December 31, 1998 increased to $30,292 from $14,098 for the three months ended December 31, 1997. This increase is attributable to the increase 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 December 31, 1998 was $639,930 or $0.17 per common share, compared to a net loss of $3,981,649, or $2.51 per common share, for the three months ended December 31, 1997. 8 9 NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1997. Total revenues for the nine months ended December 31, 1998 increased 17.0% to $22,164,886 from $18,941,217 for the nine months ended December 31, 1997. The increase resulted from a 16.4% increase in admissions revenues to $15,252,824 and an 18.4% increase in concession and other operating revenues to $6,912,062. 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, in part due to the closure, for remodeling, of a six screen facility for part of fiscal 1999's first quarter and also, in part due to the absence of equivalent movie offerings compared with the prior year for the important Christmas season. The increase in concession and other operating revenues resulted, in part, from the introduction of screen advertising programs and ATM machines at the Company's theaters. Film rental and booking costs for the nine months ended December 31, 1998 increased 9.7% to $8,153,080 from $7,432,200 for the nine months ended December 31, 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 53.5% from 56.7% in the nine months ended December 31, 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 nine months ended December 31, 1998 decreased 30.0% to $1,382,174 from $1,975,661 for the nine months ended December 31, 1997. As a percentage of concession revenues, cost of concession supplies decreased to 21.6% from 36.2% in the nine months ended December 31, 1998 compared to the comparable prior year period, due to the termination of concession lease agreements with PCI, its former primary concession vendor. As of June 15, 1998, the Company ceased the purchase of concessions supplies and services from PCI and began purchasing concessions supplies on a competitive basis. Theater operating expenses for the nine months ended December 31, 1998 increased 18.0% to $9,260,200 from $7,850,350 for the nine months ended December 31, 1997. As a percentage of total revenues, theater operating expenses increased to 41.8% from 41.4% 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. Termination fees -- concession lease agreement of $1,859,352 for the three months ended December 31, 1997 comprised penalty payments for notice of early termination of agreements with respect to concession supplies at the Company's seven domestic locations. Such penalty payments were made in December 1997. Selling, general and administrative expenses for the nine months ended December 31, 1998 decreased 25.1% to $2,382,818 from $3,182,021 for the nine months ended December 31, 1997. As a percentage of total revenues, selling, general and administrative expenses decreased to 10.8% from 16.8% for the nine months ended December 31, 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 nine months ended December 31, 1998 increased 18.3% to $1,727,724 from $1,460,105 for the nine months ended December 31, 1997. The increase was primarily the result of increased depreciation on additional equipment associated with the addition of screens at an existing theater and the opening of a new theater. Interest expense for the nine months ended December 31, 1998 decreased to $246,574 from $693,451 for the nine months ended December 31, 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. Non-cash interest expense for nine months ended December 31, 1997, totaling $328,750, resulted from the issuance of debt with detachable warrants and represents the value of the detachable warrants. This debt was repaid in full in December, 1997. Interest income for the nine months ended December 31, 1998 increased to $108,712 from $23,580 for the nine months ended December 31, 1997. This increase is attributable to the increase 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 nine months ended December 31, 1998 was $880,572 or $0.24 per common share, compared to a net loss of $5,818,693 or $4.54 per common share, for the nine months ended December 31, 1997. 9 10 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. During fiscal 1998, 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 the CAP Agreement for CAP to acquire a majority equity interest in the Company through a $15 million purchase of newly issued shares of the Company's Common Stock. Following stockholder approval, the Equity Financing transaction was completed on December 15, 1997. Pursuant to the CAP Agreement, CAP purchased 17,684,464 shares of Common Stock for a purchase price of $0.848202 per share (2,526,352 shares for a purchase price of $5.94 per share taking into consideration the one-for-seven reverse stock split which became effective December 2, 1998). 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 (warrants to purchase 232,947 shares of Common Stock at an exercise price of $5.94 per share taking account of the one-for-seven reverse stock split which became effective December 2, 1998). Pursuant to the terms of the CAP Agreement, the Company has and continues to be obligated to issue Adjustment Shares to CAP. The number of Adjustment Shares to be issued is based upon (i) the recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the Company in connection with the contemplated transactions, (iii) any negative cash flow incurred by the Company during the period commencing August 31, 1997 and ending December 15, 1997, and (iv) operating losses experienced by, or costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation and achieving operating profits) and San Bernardino Facility (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 issued 1,351,256 Adjustment Shares (193,037 Adjustment Shares taking into consideration the one-for-seven reverse stock split which became effective December 2, 1998) to CAP pursuant to the terms of the CAP Agreement, in September 1998. To the extent there are (a) operating losses at the Company's Tijuana and San Bernardino facilities, calculated in the aggregate, for the three-year period ended December 15, 2000, and (b) expenditures in connection with the discovery of liabilities, or defense and/or settlement of claims, in either case relating to periods prior to August 31, 1997, the Company will be obligated to issue additional Adjustment Shares. The Company leases seven theater properties and various equipment under non-cancelable operating lease agreements which expire through 2021 and require various minimum annual rentals. At December 31, 1998, the aggregate future minimum lease payments due under non-cancelable operating leases was approximately $88,300,000. In addition, the Company has signed a lease agreement for a 20 screen Ultraplex theater in San Bernardino, California. The lease for the San Bernardino Ultraplex will require expected minimum rental payments aggregating approximately $40,700,000 over the 25-year life of the lease. Accordingly, existing minimum lease commitments as of December 31, 1998 plus those expected minimum commitments for the proposed theater locations would aggregate minimum lease commitments of approximately $129,000,000. Under the terms of the lease, the Company is obligated to construct and equip the theater building. Costs to the Company to complete and equip the San Bernardino Facility are estimated at approximately $3,500,000. All necessary zoning and similar approvals have been obtained from the City of San Bernardino, and the landlord has committed under the lease to make available a tenant allowance of approximately $9,200,000 to reimburse the Company for a portion of the cost of constructing and equipping the complex. While the landlord has financing commitments in place to fund its tenant improvement allowance to the Company, its ability to fund the tenant improvement allowance is dependant upon its lender adhering to the terms of their financing commitments. Therefore, there can be no assurance that the Company will be able to receive adequate funds from the landlord to complete the construction of the project. The Company has executed a fixed-price construction contract with a general contractor, for the construction of the theater project. The Company is obligated to pay the contractor the full amount due under the contract whether or not the Company receives reimbursement from the landlord. In addition, the Company's lease obligations with respect to the San Bernardino Facility are contingent upon the completion and acceptance of the theater. The Company experienced 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 $880,572 in the nine months ended December 31, 1998. There can be no assurance as to whether or when the Company will achieve consistent profitability. While the Company believes it could attain profitability with its current operations, any substantial profitability will depend upon numerous factors including the Company's ability to continue reducing costs and expand through the addition of new screens and theaters. 10 11 The ability of the Company to expand through the development of new theaters, the expansion of existing theaters or the acquisition of existing theaters is contingent upon numerous factors including the Company's ability to secure new, third party financing. In this regard, the Company signed on October 19, 1998, a $15 million Revolving Credit Agreement (the "Revolving Credit Facility") with a senior, secured lender. This facility will be used primarily to finance the Company's future developments in accordance with the terms and conditions of the Revolving Credit Facility. The Company has not to date borrowed against this facility but has used the facility to secure two standby letters of credit, with initial terms of one year, totaling $2,275,000, issued in accordance with the terms of its lease (as amended) on the San Bernardino 20-screen facility, currently under construction. Commitment and other fees associated with the Revolving Credit Facility and the standby letters of credit, totaling approximately $380,000, will be amortized over their respective terms. During the nine months ended December 31, 1998, the Company generated $854,481 from operating activities, as compared to using $3,387,746 cash in operating activities for the nine months ended December 31, 1997. The increase is primarily due to lower costs of concession supplies as a percentage of concession revenues and lower selling, general and administrative expenses in the nine months ended December 31, 1998 compared with the nine months ended December 31, 1997, partially offset by higher theater operating expenses, in addition to the use of cash in the nine months ended December 31, 1997 to pay early termination fees on certain concession lease agreements. During the nine months ended December 31, 1998, the Company used cash in investing activities of $912,814, as compared to $4,167,753 for the nine months ended December 31, 1997. The decrease is due to lower purchases of fixed assets during the nine months ended December 31, 1998 compared with the prior comparable period, partially offset by the purchase of the remaining 25% minority interest in the Company's Mexican subsidiary for approximately $340,000. During the nine months ended December 31, 1998, the Company used net cash of $677,175 in financing activities, as compared to providing $11,651,461 for the nine months ended December 31, 1997. The cash used in the nine months ended December 31, 1998 related to principal repayment of debt and capital lease obligations and the payment of debt issuance costs of approximately $380,000 with respect to the Company's Revolving Credit Facility. The cash provided in the nine months ended December 31, 1997 related to the proceeds of the issuance of Common Stock and warrants, partially offset by principal repayment of debt and capital lease obligations. At December 31, 1998, the Company held cash and cash equivalents and working capital in the amounts of $2,746,470 and $550,215, respectively. Management believes that cash and cash equivalents, working capital and the $15 million Revolving Credit Facility are adequate to fund the existing operations and capital requirements of the Company during the next twelve months. As of March 31, 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 taxable income in any post-change period will be subject to certain specified annual limitations. At March 31, 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 has been notified by NASDAQ that these warrants were delisted effective December 14, 1998. These warrants may trade on the Over-The-Counter Market, upon application by a market maker. 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. 11 12 YEAR 2000 The Company has performed a review of its computer applications related to their continuing functionality for the year 2000 and beyond. Based on this review, the Company does not believe that it has material exposure with respect to the year 2000 issue in regards to its computer applications. The Company is in the process of implementing new ticketing systems and concessions systems at each of its locations (an initiative unrelated to year 2000). Such implementation will be completed by March 31, 1999. These systems are certified as fully year 2000 compliant. The Company is communicating via questionnaire with third parties with whom it has a material relationship to assess its risk with respect to year 2000 issues. This assessment is not complete, in particular because the Company has not completed its inquiries of its primary film distributors. However, the Company is not aware at this time of any material year 2000 issues with respect to its dealings with such third parties. The Company anticipates that its assessment will be complete by March 31, 1999. The historical costs to the Company for its year 2000 preparations have been nominal and the future costs are not yet known due to the Company's ongoing assessments. The Company believes that its worst case scenario for the change to year 2000 would be a disruption of film distribution to the Company. Such a disruption could have a material impact on the Company and its results of operations. The Company does not yet have a contingency plan to address any year 2000 issues such as disruption in film distribution. Upon completion of the Company's assessment of its year 2000 readiness, in particular the completion of its assessment of third party issues, the Company will implement a contingency plan if the assessment indicates that significant year 2000 risks exist. CURRENCY FLUCTUATIONS The Company is subject to the risks of fluctuations in the Mexican Peso with respect to the U.S. dollar. These risks are heightened because revenues in Mexico are generally collected in Mexican Pesos, but the theater lease payments are denominated in U.S. dollars. While the Company does not believe it has been materially adversely effected by currency fluctuations to date, there can be no assurance it will not be so affected in the future and it has taken no steps to guard against these risks. PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS 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, for which arbitration is currently being scheduled. 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. With respect to the Company's previous dispute with MDA-San Bernardino Associates, LLC, the parties have executed a First Amendment to Multi-Plex Theater Lease that resolves the disputed issues. 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 ONE-FOR-SEVEN REVERSE STOCK SPLIT The Company completed a one-for-seven reverse stock split of its Common Stock, effective December 2, 1998. The reverse stock split affects the Company's Common Stock and all options and warrants that are convertible into the Company's Common Stock. The number of shares of the Company's Common Stock outstanding prior to the reverse stock split was 27,054,902 and after the reverse stock split is 3,864,986. 12 13 The reverse stock split also amends the terms of the Company's Redeemable Warrants and Class B Redeemable Warrants. After giving effect to the reverse stock split, the number of outstanding and issuable Redeemable Warrants for Common Stock, with a maturity date of February 6, 2000 under the trading symbol "LUXYW," remains at 4,648,562. The total number of shares of Common Stock for which such warrants will be exercisable is reduced, however, to approximately 1,568,704 shares from 10,980,833 shares prior to the reverse stock split. The number of shares of Common Stock exercisable per each warrant is reduced to 0.33746 shares per warrant from 2.36220 shares per warrant prior to the reverse stock split. The price per share upon exercise of the warrants increases to $17.78, compared to $2.54 prior to the reverse stock split. After giving effect to the reverse stock split, the number of outstanding and issuable Class B Redeemable Warrants for Common Stock, with a maturity date of September 15, 2001 under the trading symbol "LUXYZ," remain at 226,438 outstanding. The total number of shares of Common Stock for which such warrants will be exercisable is reduced to approximately 76,183 shares from 533,278 shares prior to the reverse stock split. The number of shares of Common Stock exercisable per each Class B warrant is reduced to 0.33644 shares per warrant from 2.35507 shares per warrant prior to the stock split. The price per share upon exercise of the warrants increases to $19.32, compared to $2.76 prior to the reverse stock split. ITEM 3 -- DEFAULTS IN SENIOR SECURITIES None ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The Annual Meeting of the Shareholders of the Company took place on November 17, 1998. The following proposals were voted on by holders of Common Stock and the results of voting are set out below: 1. To elect directors to serve for the ensuing year and until their successors are elected and qualified; The following directors were elected: For Withhold Jack R. Crosby 23,690,402 1,245,330 Frank J. Moreno 23,675,402 1,260,330 Jack S. Gray, Jr. 23,691,252 1,244,480 Thomas G. Rebar 23,691,252 1,244,480 Wayne B. Weisman 23,690,402 1,245,330 Winston J. Churchill 23,690,402 1,245,330 2. To approve the 1997 Stock Option Plan of the Company; The Company's 1997 Stock Option Plan was approved as follows: For 20,171,252 Against 1,383,620 Abstain 41,465 3. To approve a change in the Company's state of incorporation from California to Delaware by means of a merger of the Company with and into a wholly-owned Delaware subsidiary of the Company; This proposal was approved as follows: For 20,370,731 Against 1,210,236 Abstain 15,370 4. To approve a one-for-seven reverse split of the Common Stock of the Company and thus to exchange outstanding shares for new share certificates on a one-for-seven basis; 13 14 This proposal was approved as follows: For 23,564,731 Against 1,356,446 Abstain 14,555 5. To ratify the appointment of Arthur Andersen LLP as the Company's independent public accountants for the fiscal year ending March 31, 1999; This proposal was approved as follows: For 23,780,316 Against 1,129,560 Abstain 25,856 ITEM 5 -- OTHER INFORMATION None ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Item 10.1 Form of First Amendment to Multi-Plex Theater Lease between MDA-San Bernardino Associates, L.L.C, a Delaware limited liability company, and CinemaStar Luxury Theaters, Inc., a Delaware corporation, dated December 10, 1998 Item 10.2 Form of Agreement Regarding Letters of Credit by and among MDA-San Bernardino Associates, L.L.C., a Delaware limited liability company, GMAC Commercial Mortgage Company, a California corporation, and CinemaStar Luxury Theaters, Inc., a Delaware corporation, dated December 10, 1998 Item 10.3 Stock Purchase Agreement of CinemaStar Luxury Theaters, S.A. de C.V., between CinemaStar Luxury Theaters, Inc. and Atlantico & Ass., S.A. de C.V. Item 27. Financial Data Schedule (b) REPORTS ON FORM 8-K None 14 15 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: January 22, 1999 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) 15 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 FIRST AMENDMENT TO MULTI-PLEX THEATER LEASE 1. Parties. This First Amendment ("First Amendment") to the Multi-Plex Theater Lease, dated for identification purposes December 10, 1998 is made by and between MDA-SAN BERNARDINO ASSOCIATES, L.L.C., a Delaware limited liability company ("Landlord"), and CINEMASTAR LUXURY THEATERS, INC., a Delaware corporation ("Tenant"), with reference to that certain Multi-Plex Theater Lease (the "Lease"), dated December 20, 1996, between Landlord and Tenant. Unless otherwise defined herein, all capitalized terms used herein shall have the same meaning as in the Lease. 2. Recitals. 2.1. In order to provide Landlord with assurances that Tenant is financially able to commence and complete Tenant's obligations under the Lease with respect to construction of the Building and installation of FF&E, Section 2.3 of the Lease required that Tenant provide to Landlord, among other things, a FF&E Commitment, a First LC and a Second LC (collectively, "Tenant's Work Assurances"). Landlord and Tenant desire to amend Section 2.3 of the Lease by substituting for Tenant's Work Assurances the requirement that Tenant deliver one unconditional and irrevocable letter of credit in the amount of Two Million Dollars ($2,000,000), on the terms and conditions contained herein. 2.2. Exhibit "C" of the Lease (the "Construction Provisions Agreement") sets forth, among other things, the procedures for disbursement of the Tenant Improvement Allowance relating to Tenant's Work. Section 2.2.5 of the Construction Provisions Agreement provides that in the event that any construction or other Mortgagee of Landlord requires any further or different procedures, Tenant agrees to comply with same, so long as the general timing and terms for payment are reasonably consistent with Section 2.2.2.1 of the Construction Provisions Agreement. Landlord's Mortgagees have required certain other procedures. Therefore, Landlord and Tenant desire to amend Section 2.2.2 of the Construction Provisions Agreement, on the terms and conditions contained herein. 2.3. At the time Landlord and Tenant executed the Lease, certain exhibits were not available for incorporation into the Lease. The exhibits are now available, and Landlord and Tenant desire to also amend the Lease to add and incorporate such exhibits. 1 2 2.4. On December 1, 1998, Tenant re-incorporated as a Delaware corporation pursuant to a merger agreement, dated as of December 1, 1998, which included ratification of existing obligations. Tenant hereby confirms that such ratification extends to the Lease. 3. Amendment. For valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby amend the Lease as follows: 3.1. Section 1.1(b) of the Lease is deleted and the following provision is substituted in its place: "(b) Rental Commencement Date: Two Hundred Fifty-Four (254) days after the "Delivery Date" (as defined in Section 3.1)." 3.2. Section 2.3 of the Lease is deleted and the following is substituted in its place: "2.3 Tenant covenants that it shall contribute not less than $1,000,000 in cash towards payment of Tenant's Work (provided, however, Tenant may encumber the FF&E purchased with such funds by a loan ("FF&E Loan") made by an institutional lender ("FF&E Lender"), in a principal amount not to exceed $1 Million, the proceeds of which are used solely to purchase and install a portion of the FF&E, subject to the terms of Section 13.2 below). In order to provide Landlord with assurances that Tenant shall be financially able to commence and complete Tenant's obligations with respect to construction of the Building and installation of FF&E, Tenant shall do each of the following as and when required below: (a) Concurrently with execution of this First Amendment, Tenant shall deliver to Landlord, at Tenant's sole cost and expense, an unconditional and irrevocable letter of credit in the amount of Two Million Dollars ($2,000,000) (the "$2 Million LC") in the form attached hereto as Exhibit "1", issued by a national banking association approved by Landlord, with an expiration date not sooner than one (1) year from issuance, automatically renewable for successive one-year periods unless notice is given by the issuer to Landlord at least sixty (60) days prior to expiration (with any non-renewal entitling Landlord to draw down on the $2 Million LC if no substitute letter of credit has been delivered to Landlord on or before at least thirty (30) days prior to the expiration date), made payable to Landlord or Landlord's transferee. Landlord shall not 2 3 draw down funds under such letter of credit unless and until: (i) Tenant is in default of Tenant's obligations under the Lease; and (ii) Tenant has failed to cure such default within the applicable grace period provided under the Lease. Further, Landlord covenants that the proceeds drawn under the $2 Million LC shall be applied only as follows: Up to the $2 Million of sums drawn under the $2 Million LC may be used by Landlord to pay or to reimburse Landlord for all or any portion of the costs incurred and to be incurred by Landlord as a result of Tenant's breach of Tenant's obligations under this Lease solely with respect to acquisition and installation of the FF&E, and not more than $1 Million, in the aggregate, of the sums drawn under $2 Million LC shall be used to pay or reimburse Landlord for costs and expenses incurred and to be incurred by Landlord as a result of any breach by Tenant of Tenant's obligations under this Lease( including, but not limited to, a breach with respect to FF&E obligations). Landlord acknowledges and agrees that funds drawn by Landlord from the $2 Million LC shall be used only for the purposes described in the preceding sentence, and the remainder, if any, shall be refunded to Tenant. If Landlord draws down sums under the $2 Million LC to pay or to reimburse Landlord with respect to Tenant's breach of Tenant's obligations with respect to FF&E, Landlord shall not be obligated to use the proceeds of the $2 Million LC to install the exact items of FF&E as described on Exhibit "7" of this Lease, but rather, may use the proceeds to acquire and install reasonably equivalent furniture, fixtures and equipment in order to fixturize the Premises in a manner so as to be used by a theater operator for the purposes intended under this Lease. (b) Landlord hereby advises Tenant that Landlord intends to assign its right, title and interest in the $2 Million LC to Landlord's Mortgagee(s), and requests Tenant to cause such letter of credit to be issued for the benefit of Landlord's Mortgagee. Concurrently with such assignment of the $2 Million LC to Landlord's Mortgagee, Landlord shall deliver to Tenant such mortgagee's agreement, in writing, that (i) such mortgagee shall not draw funds under such letter of credit except as and when Landlord would be entitled to make such draw under Section 2.3(a) above; (ii) such draw is subject to the conditions described in section 2.3(a) above; and (iii) mortgagee shall use Annex A to the $2 Million LC in order to transfer mortgagee's interest in the $2 Million LC and shall deliver a copy of such mortgagee's written agreement with Tenant and Landlord with respect to such letter of credit and advise any 3 4 transferee of the conditions imposed under Section 2.3(a) above with respect to such draw. Landlord hereby instructs Tenant to cause the $2 Million LC to be issued for the benefit of "GMAC Commercial Mortgage Corporation,650 Dresher Road, Post Office Box 1015, Horsham, PA 19044-8015, Attention: Michael C. Sperger, Treasurer". Upon Landlord's Mortgagee's release of its interest in the $2 million LC, Tenant shall, at Landlord's request, cause the $2 million LC to be reissued in Landlord's name, as beneficiary, provided Landlord concurrently surrenders the original $2 million LC to Tenant. (c) Provided that Tenant is not then in default under the Lease, the $2 Million LC shall be surrendered to Tenant upon Landlord's receipt of reasonably satisfactory evidence from Tenant (including invoices and lien waivers) verifying that all FF&E required under the Lease to be purchased with funds contributed by Tenant (i.e., FF&E not purchased with Tenant Improvement Allowance funds) has been installed in the Premises, and at least $1 Million of the cost of such FF&E installed at the Premises has been paid for by Tenant, in cash, and that the proceeds of the FF&E Loan, if any, were used solely to purchase and install FF&E." 3.3. Section 3.3 of the Lease is hereby deleted in its entirety and the following provision is substituted in its place: "Landlord hereby approves Tenant's Final Plans described on Exhibit "2" attached hereto. Tenant has provided Landlord with reasonable evidence that portion of Tenant's Final Plans identified as "Submitted Plans" on Exhibit "2" have been submitted to all applicable governmental agencies and there are no conditions to the issuance of building permit(s) with respect to such Submitted Plans other than Tenant's payment of governmental fees required as a condition to the issuance of such permit(s). Tenant shall pay for and obtain all required permits for Tenant's Work with respect to the Submitted Plans on or before fourteen (14) days after the Delivery Date. Tenant shall submit to all applicable governmental agencies for approval that portion of Tenant's Final Plans identified as the "Remaining Plans" on Exhibit "2" on or before January 15, 1999. Tenant shall make such revisions to the Remaining Plans as may be required by governmental agencies and approved by Landlord in order to obtain all required permits to construct and complete Tenant's Work and occupy the Building. Tenant shall use commercially reasonable efforts and due diligence to obtain all 4 5 required building permits for the Remaining Plans on or before thirty (30) days after the Delivery Date. The issuance of governmental permits for Tenant's Work shall not be a condition precedent to Tenant's obligations under this Lease. Tenant shall construct Tenant's Work in accordance with Tenant's Work Schedule attached hereto as Exhibit "3". 3.4. Article Six of the Lease is amended to delete the words "[TO BE INSERTED]" and substitute the following in their place: "The Parking Agreement is attached to the Lease as Exhibit "I". Landlord shall have the right to modify the Parking Agreement from time to time without the consent of Tenant so long as such modification does not decrease the number of parking spaces available for use by Tenant, its customers and employees (on a non-exclusive basis) during peak and non-peak hours from the minimum number of parking spaces provided in Exhibit "I," impose additional parking charges, costs or expenses which are payable by Tenant, its customer or employees, substitute parking in areas outside of the 1600' radius required by the Parking Agreement (except as and when required under the Parking Agreement), or materially interfere with ingress and egress to and from the Parking Areas. 3.5. Section 13.1 is amended by deleting the words "First LC and Second LC" on the first line of Page 33 and substituting "$2 Million LC" in their place. 3.6. Section 13.2 of the Lease is amended to add the following provision at the end of the second sentence: "provided that the FF&E Lender shall have entered into an agreement with Landlord providing Landlord with notice of Tenant's default and opportunity to cure, access to the proceeds of such loan notwithstanding Tenant's default, and otherwise is on terms reasonably acceptable to Landlord and Landlord's Mortgagee, and Landlord also agrees to execute, if required by the FF&E Lender, a landlord's consent, in a form reasonably acceptable to Landlord and such lender, which would allow the FF&E Lender, inter alia, to have access to the Premises to realize upon the collateral for the FF&E Loan (excluding such items as Tenant may be required to leave in the Premises at the end of the Lease term, including but not limited to those items which have been paid for by the proceeds of "Cost Savings" (as defined in Section 2.2.2.3 of 5 6 Exhibit "C," which items shall be specifically described in such landlord's consent)." 3.7. Section 18.2 of the Lease is amended to delete the words "[TO BE INSERTED]" and substitute the following provisions in its place: "The areas designated by the Redevelopment Agency of the City in the Parking Agreement as the parking spaces available for "Permittee's" non-exclusive use from time to time shall be deemed the "Parking Areas" under this Lease. Tenant acknowledges that Tenant's right to use the Parking Areas shall in no event exceed Landlord's right to use such areas under the Parking Agreement and that the Parking Areas are not Common Area under this Lease." 3.8. Section 19.2 of the Lease is amended by deleting the words "First LC and Second LC" and substituting the words "$2 Million LC" in their place. 3.9 Section 29.16 of the Lease is modified as follows: a) In Section 29.16 (a), insert the word "material" after the words "At all times and in all" in the 7th line of page 67 and add the words "shareholders, members, officers and directors" after the words "contractors" in line 10 of such section. b) In Section 29.16 (b), insert the words "Materials to be" after the words "Tenant shall not cause any and all". c) Add the following provisions after Section 29.16 (d): "(e) Landlord's Covenant to Remediate. If (i) Hazardous Materials are discovered to be located at, to, in, on, under, or about the Premises during the term of this Lease in violation of applicable Hazardous Materials Laws, (ii) such Hazardous Materials were used, generated, treated, stored, transported, disposed, handled, released, spilled, discharged or present at the Premises prior to the Delivery Date ("Existing Hazardous Materials"), and (iii) the remediation and/or removal of such materials is required under Environmental Laws, Landlord agrees to perform such testing, investigation, and remediation and removal work, in compliance with and to the extent required under applicable Hazardous Materials Laws, at Landlord's sole cost , in a diligent manner and use commercially reasonable efforts to minimize any material interference with construction of Tenant's Work or 6 7 Tenant's business operations in its performance of such work ("Required Environmental Work"); provided, however, such covenant shall not apply to any testing, investigations, or remediation or removal work caused by, or necessitated due to the negligence or willful misconduct of, Tenant or any Tenant Party (but only after Tenant or a Tenant Party has knowledge of the presence of such Hazardous Materials). (f) Landlord's Representation and Warranty. Landlord represents and warrants to Tenant that Landlord has no knowledge of the existence of any Hazardous Materials in violation of Hazardous Materials Laws at, to, in, on, under, or about the Premises as of December 14, 1998. (g) Landlord's Indemnification. (i) Landlord shall indemnify, defend, protect and hold Tenant and the Tenant Parties, and each of them, free and harmless from and against any claims, actions, causes of action, proceedings, suits, defenses, judgments, demands, orders, damages, punitive damages, penalties, fines, costs, obligations, liabilities, interest, and losses, together with all other costs and expenses of any kind or nature (excluding consequential damages or lost profits) (an "Environmental Claim") arising out of or resulting from (A) Landlord's failure to commence and diligently pursue to completion all Required Environmental Work after receipt of notice from Tenant and a reasonable opportunity to investigate whether or not such Hazardous Materials are Existing Hazardous Materials and require testing, investigations, remediation and/or removal under applicable Environmental Laws, or (B) the use, generation, treatment, storage, transportation, disposal, handling , release, spill, presence or discharge of Hazardous Materials by Landlord or Landlord's employees, agents, contractors or representatives at, in, under or about the Premises prior to or during the term of this Lease; provided, however, that such indemnity shall not include Environmental Claims arising out of or resulting from Tenant's or any Tenant Party's negligence or willful misconduct, including without limitation, the negligence or willful misconduct of Tenant or any Tenant Party with respect to a release, use, generation, treatment, storage, transportation, disposal, handling , spill, or discharge of such Existing Hazardous Materials in violation of 7 8 Environmental Laws (but only after Tenant or a Tenant Party has knowledge of the presence of such Hazardous Materials). (ii) Further, Landlord shall indemnify, defend, protect and hold Tenant and the Tenant Parties, and each of them, free and harmless from and against any claims, actions, causes of action, proceedings, suits, defenses, judgments, demands, orders, damages, punitive damages, penalties, fines, costs, obligations, liabilities, interest, and losses, together with all other costs and expenses of any kind or nature (excluding consequential damages or lost profits)arising out of or resulting from claims made by third parties against Tenant or any Tenant Party, including, without limitation, claims made by employees of any Tenant or any Tenant Party (a "Third Party Claim") as a result of the the use, generation, treatment, storage, transportation, disposal, handling , release, spill, presence or discharge of Existing Hazardous Materials, provided, however, that such indemnity shall not include any Third Party Claim(s) arising out of or resulting from the negligence or willful misconduct of Tenant or any Tenant Party, including without limitation, the negligence or willful misconduct of Tenant or any Tenant Party with respect to a release, use, generation, treatment, storage, transportation, disposal, handling , spill, or discharge of such Existing Hazardous Materials in violation of Environmental Laws(but only after Tenant or a Tenant Party has knowledge of the presence of such Hazardous Materials). (h) Landlord's Release. Landlord hereby releases and forever discharges Tenant and the Tenant Parties, and each of them, from and against any and all Environmental Claims and Third Party Claims relating to any Existing Hazardous Materials, provided, however, that such release shall not include any Environmental Claims or Third Party Claims arising out of or resulting from the negligence or willful misconduct of Tenant or any Tenant Party, including without limitation, the negligence or willful misconduct of Tenant or any Tenant Party with respect to a release, use, generation, treatment, storage, transportation, disposal, handling , spill, or discharge of such Existing Hazardous Materials in violation of Environmental Laws(but only after Tenant or a Tenant Party has knowledge of the presence of such Hazardous Materials). 8 9 (i) Force Majeure Notwithstanding anything to the contrary in this Lease, (A) each of the following shall be considered a Force Majeure event: the discovery, investigation, characterization, or negotiation with governmental agencies with respect to Existing Hazardous Materials, and Required Environmental Work to remediate any Existing Hazardous Materials if, and only to the extent that, such events cause delay, prevention or stoppage of Tenant's Work that cannot be avoided by Tenant without incurring material additional cost or expense, and (B) the Rent Commencement Date shall be postponed by one (1) day for each day of such prevention, delay or stoppage of Tenant's Work. Tenant shall promptly give notice to Landlord upon the commencement of any such Force Majeure delay." 3.10. The Construction Provisions Agreement attached as Exhibit "C" to the Lease ("Exhibit "C") is amended in the following respects: a. Section 1.2.1 of Exhibit "C" is amended to add the word "site" after the words "required on-site" in line one. b. The following provision is added at the end of Section 1.2 of Exhibit "C": "Landlord shall Substantially Complete Landlord's Work described in Sections 1.2.1 and 1.2.2 of this Exhibit "C" on or before the Delivery Date and shall Substantially Complete the remaining Landlord's Work on or before the date specified in Exhibit "3" of the Lease ("Landlord's Work Schedule"). Landlord shall construct Landlord's Work substantially in accordance with the plans and specifications for Landlord's Work described on Exhibit "5" of the Lease ("Landlord's Work Plans"), subject to such modifications as Landlord may require, provided that no such modification shall materially affect or delay Tenant's Work or increase the cost of Landlord's Work (unless Landlord provides Tenant with reasonable evidence of the source of funding of such cost increases and that such cost increases shall not result in a decrease of funds available to pay the remaining balance of the Tenant Improvement Allowance under that certain Fiscal Agent Agreement ("Fiscal Agent Agreement") dated December 10, 1998, by and among Landlord, Agency, and Landlord's Mortgagee ("GMACCM") and First American Title Company ("Fiscal Agent"). A copy of the Fiscal Agent Agreement is attached to the Lease as Exhibit "6". If Landlord fails to Substantially Complete Landlord's Work on or 9 10 before the later of the date set forth in Landlord's Work Schedule or the date of Tenant's completion of Tenant's Work, Tenant shall have the right, after written notice to Landlord and Landlord's failure to commence cure within ten (10) days after receipt of such notice, and thereafter diligently pursue cure to completion, and provided Landlord has not given Tenant written notice that Landlord disputes Tenant's claim that such work is not Substantially Complete, to complete Landlord's Work and, upon presentation of invoices and unconditional lien waivers for such work and Landlord's failure to reimburse Tenant within 10 days thereafter, to deduct the reasonable costs incurred by Tenant in performing such Landlord's Work from the rent next coming due under the Lease." c. The following provision is added to the end of Section 1.3 of Exhibit "C": "Landlord shall submit any request for a Change received from Tenant to the Agency and GMACCM (if required under their respective loan documents) as soon as reasonably feasible, but in no event later than three (3) business days of receipt of Tenant's plans for the proposed Change. Notwithstanding any provision of this Lease to the contrary, Landlord agrees to respond to any request by Tenant for a Change on or before the earlier of twenty-four (24) hours after Landlord's receipt of Landlord's Mortgagee's approval or disapproval of such requested Change or four (4) business days after Tenant's submission of a request for a Change to Landlord. Landlord's failure to respond to Tenant within such time period shall be deemed a disapproval of the Change. Landlord may condition its approval of any requested Change, among other conditions, upon Tenant's deposit of funds with Landlord in an amount equal to the amount of the increase in the total cost to complete Tenant's Work resulting from such Change. Landlord shall use commercially reasonable efforts to provide Tenant with a response to a request for any Change which would cost less than $10,000 and which does not materially affect the Building structure, exterior walls, or mechanical systems or roof, within one (1) business day of Tenant's request." d. Section 2.1 of Exhibit "C" is amended to delete the second to the last sentence and insert the following provision in its place: 10 11 "While the design, acquisition and installation of FF&E is included in the definition of Tenant's Work, the Tenant Improvement Allowance shall not be applied to reimburse Tenant for the cost of FF&E, and Tenant shall bear all costs and expenses related to FF&E except as provided in Section 2.2.2.3 of this Exhibit "C" with respect to Cost Savings. Tenant shall install at the Premises all FF&E described on Exhibit "7" to the Lease, subject to such changes and substitutions as Landlord may approve, which approval shall not be unreasonably withheld." e. Section 2.1 of Exhibit "C" is further revised to add the following sentence at the end of Section 2.1: "Tenant represents that the FF&E described on Exhibit "7", together with such furniture, fixtures and equipment shown as to be installed by Tenant's contractor on the plans described in Exhibit "2", constitute all furniture, fixtures, and equipment necessary for Tenant to fully fixturize the Building for operation as a multiplex theater required under this Lease and that such FF&E is consistent with the type, quantity and standards for fixturization in other first class theaters in California owned or operated by Tenant. Landlord acknowledges that if Tenant constructs Tenant's Work in a good and workmanlike manner and substantially and materially in accordance with the Tenant Final Plans described in Exhibit "2", subject to any approved Changes, and installs the FF&E described in Exhibit "7" together with such furniture, fixtures and equipment shown as to be installed by Tenant's Contractor on the plans described in Exhibit "2", in the Premises in a good and workmanlike manner, subject to any approved substitutions, deletions or additions to such FF&E, Tenant shall have satisfied the requirement that the Building be a "first class, state of the art" motion picture building, including interior finish and FF&E, and that such Building shall be deemed to conform to the architectural plan and standards for the Development Site." Notwithstanding the foregoing, nothing contained in this Section shall reduce or limit the conditions which must be satisfied by Tenant in order to receive disbursements of the Tenant Improvement Allowance. f. Sections 2.2.1.1 through 2.2.1.6, inclusive, of Exhibit "C" are deleted and the following provision inserted in their place: "Only those costs and expenses identified on the Schedule of Values for Tenant's Work attached to the Lease as Exhibit "8"." 11 12 g. Section 2.2.2.1 of Exhibit "C" is amended to add the following at the end of subsection (iv): ", including but not limited to, the information and certifications with respect to Tenant's Work which may be required to be delivered by Landlord, as "Borrower" to Fiscal Agent and Landlord's Mortgagees under the Fiscal Agent Agreement as a condition to Agency and/or GMACCM funding Payment Requests under such agreement." h. Section 2.2.2.1 of Exhibit "C" is further amended to delete the second and third sentence of such section and substitute the following provision in their place: "As soon as reasonably feasible, but in no event later than five (5) business days after submission of a Payment Request, Tenant and Tenant's Architect and Contractor shall meet with Landlord (and/or its Project Manager) and Leviene-Rich, Inc., or another representative of Landlord's Mortgagees (the "Disbursement Control Agent"), to review each Payment Request. As soon as reasonably feasible, but in no event later than twenty (20) days of the Disbursement Control Agent's certification of the amount approved under such Payment Request, and provided that Tenant has submitted (A) all items required under such Sections (i) through (iv), inclusive, above, (B) unconditional lien waivers for all work included in prior Payment Requests (to the extent not previously delivered), and (C) any amounts required under Section 2.2.2.6 below, Landlord shall make a payment to Tenant in the amount certified by the Disbursement Control Agent, less a ten percent (10%) retention (the aggregate amount of such retentions herein referred to as the "Final Retention"), provided that Landlord does not dispute any Payment Request based upon non-compliance with Tenant's Final Plans (as amended by approved Changes) or due to substandard work, or other reasons permitted under this Lease. Landlord's payment to Tenant shall not be deemed an approval or acceptance by Landlord of any work furnished or materials supplied as set forth in such Payment Request." i. Section 2.2.2.2 of Exhibit "C" is deleted in its entirety and, in lieu of a Draw Multiplier, if Landlord determines at any time prior to disbursement of the Final Retention that the cost to complete construction of Tenant Improvement Cost Items ("Tenant's Work Costs") exceeds the then remaining balance of the Tenant Improvement Allowance, the provisions of Section 2.2.2.6 of Exhibit "C" shall apply. 12 13 j. Section 2.2.2.3 of Exhibit "C" is amended to add the following at the end of subsection (ii): "provided, however, that such determination shall be made in conjunction with Project Manager's review and approval of the Payment Request for the Final Retention." k. Section 2.2.2.3 of Exhibit "C" is further amended to add the following at the end of subsection (ix): "and such other items as may be requested by Landlord's Mortgagees with respect to the Lease and Tenant's Work. Tenant also shall deliver to Landlord all certifications required with respect to the Construction Contract and Tenant's Work which constitute conditions to funding Payment Requests, including but not limited to delivery of a certified copy of all plans and specifications for FF&E, Tenant's certification that Tenant has obtained all required governmental permits to install and use all FF&E, and such other certifications as Landlord's Mortgagees may reasonably request." l. Section 2.2 of Exhibit "C" is further amended by adding the following as a new Section 2.2.2.6: "2.2.2.6 Additional Terms. Notwithstanding the foregoing, if at any time Landlord reasonably determines that the unpaid balance of Tenant Work Costs exceeds or will exceed the remaining balance of the Tenant Improvement Allowance, Tenant shall, within three (3) business days of Landlord's request, deposit with Landlord an amount equal to such deficiency, in immediately available funds, which amount shall be deposited by Landlord with the Fiscal Agent under the Fiscal Agent Agreement (or, if required by Landlord's Mortgagee, with such mortgagee) and disbursed to pay approved Payment Request(s) next coming due, in accordance with this Section 2.2 above. If Tenant shall fail to timely make such deposit, then, in addition to Landlord's other rights and remedies hereunder, Landlord shall have the right to draw on the "Contingency LC" (defined below), deposit all funds drawn with respect to such letter of credit with Fiscal Agent (or, if required by Landlord's Mortgagee, with such mortgagee), and use such funds to pay approved Payment Request(s) next coming due. Concurrently herewith, Tenant shall pay to Landlord the amount of $ 52,548 in reimbursement of certain Tenant Improvement Costs previously paid by Landlord which are in excess of the Tenant Improvement 13 14 Allowance and are identified on Exhibit "8." Concurrently herewith, Tenant also shall deposit with Landlord a letter of credit in the amount of $ 275,000, in the form attached hereto as Exhibit "9" ("Contingency LC"), which letter of credit shall secure Tenant's obligation to pay Tenant's Work Costs exceeding the Tenant Improvement Allowance. The Contingency LC shall be issued by a national banking association approved by Landlord, with an expiration date not sooner than one (1) year from issuance, automatically renewable for successive one-year periods unless notice is given by the issuer to Landlord at least sixty (60) days prior to expiration (with any non-renewal entitling Landlord to draw down on the Contingency LC upon certification that no substitute letter of credit has been delivered to Landlord on or before at least thirty (30) days prior to the expiration date), made payable to Landlord or Landlord's transferee, upon delivery to the issuer of the original Contingency LC. Landlord shall not draw down funds under such letter of credit unless and until (A) Tenant is in default of Tenant's obligations under the Lease with respect to Tenant's obligation to deliver to Landlord immediately available funds to pay for Tenant Work Costs in excess of the remaining balance of the Tenant Improvement Allowance; and (B) Tenant has failed to cure such default within the applicable grace period provided under the Lease. Landlord acknowledges and agrees that any funds drawn by Landlord shall be used only to pay or to reimburse Landlord for Tenant's Work Costs in excess of the Tenant Improvement Allowance, and the remainder, if any, shall be refunded to Tenant. Landlord hereby advises Tenant that Landlord intends to assign its right, title and interest in the Contingency LC to Landlord's Mortgagee(s), and requests Tenant to cause such letter of credit to be issued for the benefit of Landlord's Mortgagee. Concurrently with such assignment of the Contingency LC to Landlord's Mortgagee, Landlord shall deliver to Tenant such mortgagee's agreement, in writing, that (i) such mortgagee shall not draw funds under such letter of credit except as and when Landlord would be entitled to make such draw under this Section above; (ii) such draw is subject to the conditions described in this Section above; and (iii) mortgagee shall use Annex A to the Contingency LC in order to transfer mortgagee's interest in the Contingency LC and shall deliver to such transferee a copy of mortgagee's written agreement with Landlord and Tenant with respect to such letter of credit and advise any such transferee of the conditions imposed under this Section above with respect to such draw. Landlord hereby instructs Tenant to cause the Contingency LC to be issued for the benefit of 14 15 "GMAC Commercial Mortgage Corporation,650 Dresher Road, Post Office Box 1015, Horsham, PA 19044-8015, Attention: Michael C. Sperger, Treasurer". Upon Landlord's Mortgagee's release of its interest in the Contingency LC, Tenant shall, at Landlord's request, cause the Contingency LC to be reissued in Landlord's name, as beneficiary, provided Landlord concurrently surrenders the original Contingency LC to Tenant. Provided that Tenant is not then in default under the Lease, the Contingency LC shall be surrendered to Tenant concurrently with the Final Retention, subject to satisfaction of all conditions to Tenant's receipt of the Final Retention. m. Section 4.2.2.3 of Exhibit "C" is amended to provide that Tenant shall, concurrently with execution of this First Amendment, execute and deliver to Landlord security assignments of Tenant's interest in all architectural, engineering and construction contracts, and plans and specifications for Tenant's Work, including but not limited to the consents of Contractor and Architect to such assignments, which assignments shall be in the form attached hereto as Exhibit "10" ("Landlord Assignments"). n. Section 5.1 of Exhibit "C" is amended to delete "Alan Grossberg" as Tenant's representative and substitute "Dana Carter" in his place. o. With respect to Section 3.1 of Exhibit "C", Landlord hereby approves (i) Stoutenbourgh, Inc. as Tenant's Architect and (ii) that certain Architect Agreement, between Stoutenbourgh, Inc. and Tenant, referenced in the Landlord Assignments. Concurrently with each Payment Request, Tenant shall cause Tenant's Architect to provide all certifications and other information which may be required to be submitted by Landlord under the Fiscal Agent Agreement with respect to Tenant's Work. p. With respect to Section 3.1 of Exhibit "C", Landlord confirms that Landlord has approved (i) the plans and specifications for Tenant's Work identified on Exhibit "2" hereto, and (ii) the time schedule for performance of Tenant's Work set forth on Exhibit "3" hereto. q. With respect to Sections 3.2, 3.3 and 3.4 of Exhibit "C", Landlord confirms that it has approved Tenant's Final Plans as described on Exhibit "2". r. With respect to Section 3.5 of Exhibit "C", Landlord confirms that, as of the date of the First Amendment, Landlord has not incurred any review costs under such section. s. With respect to Section 4.1.1 of Exhibit "C", Landlord confirms Landlord has approved (i) Joe E. Woods Construction as Tenant's Contractor and (ii) that certain 15 16 Standard Form of Agreement between Owner and Contractor, between Tenant, as owner, and Joe E. Woods, Inc. as contractor, referenced in the Landlord Assignments ("Construction Contract"). Tenant shall cause Tenant's Contractor to provide all certifications and other 16 17 information as may be required to be submitted by Landlord under the Fiscal Agent Agreement with respect to Tenant's Work. Tenant confirms that the Construction Contract requires Tenant's Contractor to abide by the requirements of Section 5.7 of Exhibit "C" and the Additional Covenants attached as Exhibit "L" to the Lease. t. With respect to Section 4.2. of Exhibit "C", Landlord and Tenant hereby confirm that Landlord and Tenant have approved the respective Work Schedules attached to the First Amendment as Exhibits "3" and "5," respectively. u. With respect to Section 5.2 of Exhibit "C", Tenant acknowledges that David Gaulton of Pacific Development Company shall be Landlord's Project Manager; provided, however, any Changes must be approved, in writing, by either Rex Swanson or Jason Kamm on behalf of Landlord. v. With respect to Section 5.7 of Exhibit "C", add the following provision at the end of such Section: "Notwithstanding anything to the contrary in this Lease, if and to the extent that Tenant is not required under applicable laws to otherwise comply with the Davis-Bacon Act, as amended, and such compliance is not required under the DDA, Landlord shall not require Tenant to comply with such Act respecting wages paid in connection with the installation of all FF&E that is not funded out of the Tenant Improvement Allowance." 3.11 The Subordination, Nondisturbance, and Attornment Agreement attached as Exhibit "H" to the Lease is deleted in its entirety and Exhibit "H" attached to this First Amendment is substituted in its place. 3.12 The Short Form of Lease attached as Exhibit "K" to the Lease is deleted in its entirety and Exhibit "K" attached to this First Amendment is substituted in its place. Concurrently herewith, Landlord and Tenant shall execute and deliver the Short Form of Lease for recording purposes in the form of Exhibit "K" to the First Amendment. 17 18 3.13 The Lease is hereby amended to incorporate all exhibits attached to this First Amendment, as follows: (a) Legal Description of the Theater Parcel is attached hereto as "Exhibit A-1"; (b) Final Site Plan for the Project is attached hereto as "Exhibit A-2"; (c) Legal Description of the Development Parcels is attached hereto as "Exhibit A-3"; (d) Elevation Drawings of the Premises are attached hereto as "Exhibit B"; (e) Tenant's Sign Criteria is attached hereto as "Exhibit F"; (f) Rules and Regulations are attached hereto as "Exhibit G"; (g) Subordination, Nondisturbance and Attornment Agreement Forms are attached hereto as "Exhibit H"; (h) Parking Agreement is attached hereto as "Exhibit I"; (i) Permitted Title Exceptions are attached hereto as "Exhibit J"; (j) Short Form of Lease is attached hereto as Exhibit "K"; (k) Additional Covenants are attached hereto as "Exhibit L"; (l) Form of $2 Million LC is attached hereto as "Exhibit 1"; (m) Description of Tenant's Final Plans (including Submitted Plans and Remaining Plans) is attached hereto as "Exhibit 2"; (n) Tenant's Work Schedule and Landlord's Work Schedule are attached hereto as Exhibit "3"; (o) Intentionally Deleted; (p) A description of Landlord's Work Plans is attached hereto as Exhibit "5"; 18 19 (q) The Fiscal Agent Agreement is attached hereto as Exhibit "6"; (r) A description of FF&E is attached hereto as Exhibit "7"; (s) Tenant Improvement Allowance Items, Schedule of Values, and Prepaid Costs subject to Reimbursement to Landlord is attached hereto as Exhibit "8"; (t) Form of Contingency LC is attached as Exhibit "9"; and (u) Landlord Assignments are attached hereto as "Exhibit "10". 4. No Further Modification. Except as expressly modified herein, the Lease remains unmodified and in full force and effect. 5. No Release of Guarantors. The execution and delivery of this First Amendment, and the Lease modifications hereunder, shall not be deemed to release or relieve any Guarantor of the Lease, each of whom Tenant represents and warrants shall continue to be bound by the Lease, as modified by this First Amendment, in accordance with the terms of the Guaranty. 6. Satisfaction/Waiver. Landlord and Tenant acknowledge and agree that all conditions set forth in Article 4 of the Lease have been satisfied and/or waived and that neither party has any further right to terminate the Lease based upon a failure of any of such conditions. 7. Counterparts. This First Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which, taken together, shall constitute one document. 8. Notices. Tenant's address for notice purposes under this Lease is CinemaStar Luxury Theaters, Inc. 12230 El Camino Real, Suite 320 San Diego, CA 92130 Attention: Mr. Norman Dowling 19 20 The parties have executed this First Amendment as of the date set forth opposite such parties' signature below. LANDLORD MDA - San Bernardino Associates, L.L.C., a Delaware limited liability company By: MDA Investors No. 1, L.L.C., a Delaware limited liability company, its Managing Member By: MJL Associates, a California Limited Partnership, its Managing Member By: MJL Investments, Inc., a California corporation, its General Partner Date: _________________ By:__________________________ Name: _______________________ Title: ______________________ TENANT CINEMASTAR LUXURY THEATERS, INC., a Delaware Corporation Date: _________________ By:_________________________________ Print Name:_________________________ Its:________________________________ 20 21 EXHIBIT " A-1 " LEGAL DESCRIPTION OF THEATER PARCEL 21 22 EXHIBIT A-2 FINAL SITE PLAN 22 23 EXHIBIT " A-3 " LEGAL DESCRIPTION OF DEVELOPMENT PARCELS 23 24 EXHIBIT B ELEVATION DRAWINGS OF PREMISES 24 25 EXHIBIT "F" SIGNAGE PLAN Tenant shall submit to Landlord, for Landlord's reasonable review and approval, a Signage Plan for Tenant's Building within thirty (30) days after execution of this First Amendment. The provisions of Sections 3.2 and 3.3 of Exhibit "C" to the Lease shall apply with respect to the timing and procedures for review, revision and approval of such Signage Plan. Upon Landlord's approval of the Signage Plan, such Plan shall be initialed by the parties and annexed hereto as Exhibit "F." 25 26 EXHIBIT G- RULES AND REGULATIONS (NONE AT THIS TIME. LANDLORD WILL SUBMIT THIS EXHIBIT PRIOR TO OPENING THE RETAIL BUSINESSES ON THE DEVELOPMENT PARCELS) 26 27 EXHIBIT "L" ADDITIONAL COVENANTS I. At the time of the opening of the Theater, Tenant anticipates creating at least 105 full and part time jobs; provided, however, Tenant shall have the right to modify its employment pattern from time to time in a manner consistent with its normal operations. II. Tenant acknowledges that a portion of the funds for the Tenant Improvement Allowance shall be obtained from HUD, and that Tenant shall be prohibited under 24 CFR Part 570.601 (24 CFR Part 87) from using federally appropriated funds for the purpose of influencing or attempting to influence an officer or employee of any agency, a member of Congress, an officer or employee of Congress, or an employee of a member of Congress, in connection with the awarding of any Federal contract, the making of any Federal grant, loan or cooperative agreement, and any extension, continuation, renewal, amendment or modification of said documents with respect to the Theater Project. Tenant covenants that Tenant and all of Tenant's contractors (and subcontractors) with respect to Tenant's Work shall comply with the Federal Lobbyist Requirements at all times prior to the Theater Project Completion Date. III. Tenant agrees that no person shall, on the grounds of race, sex, creed, color, religion, national origin, or age be excluded from participation in, be refused the benefits of, or otherwise be subjected to discrimination in any activities, programs, or employment with respect to the Theater Project. Tenant shall comply with all applicable regulations set forth in 24 CFR 570.600-602, including without limitation, the requirement that Tenant comply with Title VI of the Civil Rights Act of 1964 (Public Law 88-352) and the regulations set forth at 24 CFR Part 1 and the Age Discrimination Act of 1975 (42 U.S.C. 6101-07) and Executive Order 11245 and the regulations issued pursuant thereto (41 CFR Part 60), if applicable; and the requirements of the Americans With Disabilities Act, as amended (42 U.S.C. 12101-12213). Tenant shall take affirmative action to ensure that the Theater Project shall provide equal employment and career advancement opportunities for minorities and women and, to the greatest extent feasible, to provide opportunities for training and employment of lower income persons residing within the area of the Theater Project. In furtherance of the foregoing Tenant shall, prior to the commencement of Landlord's Work, deliver to Landlord a list, reasonably acceptable to Landlord setting forth affirmative steps taken by Tenant, or to be taken by Tenant, to assure that minority business and women's business enterprises are offered an equal opportunity to obtain or compete for contracts and subcontracts as sources of supplies, equipment, construction and services. Such affirmative steps may include, but are not limited to, technical assistance open to all businesses but designed to enhance opportunities for these enterprises and special outreach efforts to inform them of contract opportunities. Such steps shall not include preferring any business in the award of any contract or subcontract solely or in part on the basis of race or gender. Tenant shall deliver to Landlord semiannually, prior to April 15 and October 15 of each fiscal year, a report summarizing the nature of the businesses with which Tenant has entered into contracts and 27 28 subcontracts in connection with the Theater Project during the preceding six (6) month period ending March 31 or September 30, as applicable. The obligation of Tenant to deliver the reports specified in this Section shall expire upon delivery of the report summarizing the last contracts and subcontracts entered into by Tenant in connection with the Theater Project prior to the Theater Project Completion Date. IV. Tenant shall, during regular business hours, allow authorized personnel of Landlord and Landlord's Mortgagees to inspect and monitor its facilities and program operations as they relate to the Theater Project, including the interview of Tenant's Staff and program participants, in order to verify compliance with the covenants in this Exhibit "L". 28 29 EXHIBIT "K" RECORDING REQUESTED BY AND WHEN RECORDED, MAIL TO: GREENBERG GLUSKER FIELDS CLAMAN & MACHTINGER LLP 1900 Avenue of the Stars Suite 2100 Los Angeles, CA 90067-4590 Attn: Debby R. Zurzolo, Esq. - -------------------------------------------------------------------------------- SHORT FORM OF LEASE 1. Parties. This Short Form of Lease ("Short Form"), dated for identification purposes only December 10, 1998, is entered into by and between MDA-SAN BERNARDINO ASSOCIATES, L.L.C., a Delaware limited liability company ("Landlord"), and CINEMASTAR LUXURY THEATERS, INC., a California corporation ("Tenant"). 2. Recitals. a. Landlord is the fee owner of that certain real property more particularly described on Exhibit "A" attached hereto ("Theater Parcel"). b. The Theater Parcel is part of a larger project which may be developed by Landlord on adjacent real property (collectively with the Theater Parcel, the "Development Site"), described on Exhibit "B" attached hereto. c. Pursuant to the Lease, Tenant shall design and construct an approximately 80,000- foot building on the Theater Parcel for use as a first-class, state of the art, movie theater. d. In order to accommodate Tenant's parking requirements, Landlord has or will enter into certain parking agreements more particularly described in the Lease. e. In consideration of the Recitals contained herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 29 30 3. Grant of Leases. Landlord leases to Tenant, and Tenant leases from Landlord the Theater Parcel, together with all improvements constructed thereon, subject to the provisions of that certain unrecorded Lease dated December 20, 1996, as amended by a First Amendment to Lease, dated December 10, 1998 between Landlord and Tenant (collectively, "Lease"). 4. Term of Lease. The initial term of the Lease commences on the "Rent Commencement Date" as defined in Section 1.1(b) of the Lease, and, unless sooner terminated pursuant to the terms thereof, shall expire twenty-five (25) years from the date thereof, unless extended as provided therein. 5. Option to Renew. Section 3.7 of the Lease provides that Tenant shall have the option to extend the initial term of the Lease for two (2) additional periods of five (5) years each, subject to the terms and conditions set forth therein. 6. Tenant's Exclusive Use. Section 7.3 of the Lease provides as follows: "So long as Tenant continuously operates the Premises for the use specified in Section 1.1(l), Landlord shall not lease space within the Development to anyone for the purpose of operating within the Development a movie theater, or conducting a business requiring the use of auditoriums exceeding 10,000 square feet for meetings and conventions at the Development, without Tenant's prior written approval. This restriction shall not apply to the operation of restaurant or banquet facilities." 7. Purpose of Short Form of Lease. This Short Form is prepared for the purpose of recordation only, and in no way modifies the terms and provisions of the Lease. In the event of any inconsistency between the terms and provisions of this Short Form and the terms and provisions of the Lease, the terms and provisions of the Lease shall prevail. 8. Successors and Assigns. This Short Form shall be binding upon and inured to the benefits of the parties hereto and their respective permitted successors and assigns. 30 31 9. Exhibits. All exhibits attached hereto are incorporated herein by this reference. The parties have executed this Memorandum as of the date first set forth opposite their signatures below. Executed this ____ day "LANDLORD" of _________________, 1998, at _______________________. MDA-San Bernardino Associates, L.L.C., a Delaware limited liability company By: MDA Investors No. 1, L.L.C., a Delaware limited liability company, its Managing Member By: MJL Associates, a California Limited Partnership, its Managing Member By: MJL Investments, Inc., a California corporation, its General Partner By:____________________________ Its:___________________________ Print Name_____________________ Executed this ____ day "TENANT" of _________________, 1998, at _______________________. CINEMASTAR LUXURY THEATERS, INC., a Delaware Corporation By:___________________________ Its___________________________ Print Name____________________ 31 32 STATE OF CALIFORNIA ) )SS. COUNTY OF ____________ ) On _____________________, 1998, before me, ______________________, a Notary Public, personally appeared ______________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature ___________________________ (Seal) STATE OF CALIFORNIA ) )SS. COUNTY OF ____________ ) On _____________________, 1998, before me, ______________________, a Notary Public, personally appeared ______________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Signature ___________________________ (Seal) 32 33 EXHIBIT "A" LEGAL DESCRIPTION OF THEATER PARCEL 33 34 EXHIBIT "B" LEGAL DESCRIPTION OF DEVELOPMENT SITE 34 35 EXHIBIT "1" UNION BANK C/O SOUTHERN CALIFORNIA INTERNATIONAL OPERATIONS CENTER 1980 Saturn Street, VO1-519 Monterey Park, CA 91755-7417 Attention: Standby Letter of Credit Section Date: December __, 1998 IRREVOCABLE LETTER OF CREDIT NO.___________ BENEFICIARY: APPLICANT: Cinema Star Luxury Theaters, Inc. 12230 El Camino Real, Suite 320 San Diego, CA 92130 Currency: USD Amount: 2,000,000.00 (Two Million and no/100 U.S. Dollars) Available by: Payment at this office Ladies and Gentlemen: For the account of_____________________("Beneficiary"), we hereby open in your favor our Irrevocable Letter of Credit No.________________ ("Credit") for an amount not to exceed a total of U.S. $2,000,000, effective immediately and expiring on December ___, 1999, or any automatically extended date or any alterative date as herein set forth at the close of business of this office in Monterey Park, California. Funds under this Credit are available to you for all or any part of this Credit upon presentation of the following documentation: Your sight draft drawn on us marked "Drawn under Union Bank of California, N.A. Irrevocable Standby Letter of Credit No. _____________, dated ________________." This Credit shall be deemed automatically extended without an amendment for a one year period beginning on the present expiration date hereof December ___, 1999, and upon each anniversary of such date, unless at least sixty (60) days prior to any such expiration date we have sent you written notice by courier service or overnight mail that we elect not to permit this Credit to be so extended beyond its then current expiration date. This Credit shall finally expire on December___, 2000, if it has not previously expired in accordance with the preceding paragraph. The date this Credit expires in accordance with the preceding paragraph is the "Final Expiry Date". Upon the occurrence of the Final Expiry Date this Credit shall fully and finally expire and no presentations made under this Credit after such date will be honored. 35 36 Upon receipt by you of our notice that we elect not to renew, or at any time thirty (30) days or less prior to the Final Expiry Date, you may draw against the Credit upon presentation of the following documentation: Your sight draft drawn on us marked: "Drawn under Union Bank of California, N.A., Irrevocable Standby Letter of Credit No. _____________, dated __________________." We will promptly honor all drafts drawn in compliance with the terms of this Credit if received on or before the Final Expiry Date at the address above. Documents are to be sent in one lot by courier service, overnight mail or hand delivery. Drafts presented at our office at the address set forth above no later than 10:00 a.m. shall be honored on the date of presentation, by payment in accordance with your payment instructions that accompany each such draft. If requested by you, payment under this Credit may be made by wire transfer of immediately available funds to your account as specified in your payment instructions, or by deposit of same funds in your designated account that you maintain with us. The Credit is transferable. Transfer of this Letter of Credit shall be effected by the presentation to us of a certificate signed by Beneficiary in substantially the form of Annex A attached hereto, with a copy delivered to the Applicant. Upon presentation to us of such a certificate, the transferee named in such certificate will thereupon become the Beneficiary hereof and will be entitled to draw hereunder as though said transferee were the Beneficiary originally named in this Letter of Credit. This Credit shall be governed by and subject to the Uniform Customs and Practice for Documentary Credits 91993 revision), International Chamber of Commerce Publication No. 500 ("UCP"), and to the extent not inconsistent with UCP, the laws of the State of California. This Credit sets forth in full the terms of our undertaking, and such terms shall not be modified, amended or amplified by any document, instrument or agreement referred to in this Credit, in which this Credit is referred to or to which this Credit relates. SPECIAL INSTRUCTIONS: The original of this Credit must be presented together with the above documents in order to endorse the amount of each drawing on the reverse side. All banking charges imposed by us under this Credit are for the account of the Applicant. Sincerely, Union Bank of California, N.A. By______________________________ Print Name:______________________ Its:_____________________________ 36 37 ANNEX A INSTRUCTION TO TRANSFER UNION BANK c/o SOUTHERN CALIFORNIA INTERNATIONAL OPERATIONS CENTER 1980 Saturn Street, VO1-519 Monterey Park, CA 91755-7417 Attention: Standby Letter of Credit Section -------------------, --- Re: Irrevocable Letter of Credit No. ____________ dated December____, 1998. Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to: ------------------------------ ------------------------------ ------------------------------ all rights of the undersigned beneficiary to draw under the above-captioned Letter of Credit (the "Letter of Credit). Transferee, by acceptance of the Letter of Credit, acknowledges that it is aware of the conditions on draws under the letter of credit as set forth in Section 3.1 of that certain Lease, Dated December 20, 1996, as amended December 10, 1998, between Applicant, as tenant, and MDA-San Bernardino Associates, LLC, as landlord, and that certain Letters of Credit Agreement, dated December __, 1998, among Applicant, MDA-San Bernardino Associates, LLC and the undersigned beneficiary, and agrees not to draw on the Letter of Credit unless and until all conditions for draw under such Lease and such Agreement have been satisfied. By this transfer, all rights of the undersigned beneficiary in the Letter of Credit are transferred to the transferee and transferee shall hereafter have the sole rights as beneficiary thereof as though such transferee were the beneficiary originally named in the Letter of Credit. Please acknowledge receipt of this Instruction to Transfer by signing in the space provided below and returning such signed copy to the transferee named above. Very truly yours, [Name of Beneficiary] By:______________________ Title:____________________ Receipt of Instruction to Transferee hereby accepts the Letter of Transfer acknowledged as of Credit as of:_____________________,____ ___________________, 19____: _____________________________________ [Name of Letter of Credit Issuer] [Name of Transferee] By:________________________ By:________________________ Title:_____________________ Title:______________________ 37 38 EXHIBIT " 9" UNION BANK C/O SOUTHERN CALIFORNIA INTERNATIONAL OPERATIONS CENTER 1980 Saturn Street, VO1-519 Monterey Park, CA 91755-7417 Attention: Standby Letter of Credit Section Date: December __, 1998 IRREVOCABLE LETTER OF CREDIT NO.___________ BENEFICIARY: APPLICANT: Cinema Star Luxury Theaters, Inc. 12230 El Camino Real, Suite 320 San Diego, CA 92130 Currency: USD Amount: $275,000 (Two Hundred Seventy-Five Thousand and no/100 U.S. Dollars) Available by: Payment at this office Ladies and Gentlemen: For the account of_____________________("Beneficiary"), we hereby open in your favor our Irrevocable Letter of Credit No.________________ ("Credit") for an amount not to exceed a total of U.S. $275,000, effective immediately and expiring on December ___, 1999, or any automatically extended date or any alterative date as herein set forth at the close of business of this office in Monterey Park, California. Funds under this Credit are available to you for all or any part of this Credit upon presentation of the following documentation: Your sight draft drawn on us marked "Drawn under Union Bank of California, N.A. Irrevocable Standby Letter of Credit No. _____________, dated ________________." This Credit shall be deemed automatically extended without an amendment for a one year period beginning on the present expiration date hereof December ___, 1999, and upon each anniversary of such date, unless at least sixty (60) days prior to any such expiration date we have sent you written notice by courier service or overnight mail that we elect not to permit this Credit to be so extended beyond its then current expiration date. This Credit shall finally expire on December___, 2000, if it has not previously expired in accordance with the preceding paragraph. The date this Credit expires in accordance with the preceding paragraph is the "Final Expiry Date". Upon the occurrence of the Final Expiry Date this Credit shall fully and finally expire and no presentations made under this Credit after such date will be honored. Upon receipt by you of our notice that we elect not to renew, or at any time thirty (30) days or less prior to the Final Expiry Date, you may draw against the Credit upon presentation of the following documentation: Your sight draft drawn on us marked: "Drawn under Union Bank of California, N.A., Irrevocable Standby Letter of Credit No. _____________, dated __________________." 38 39 We will promptly honor all drafts drawn in compliance with the terms of this Credit if received on or before the Final Expiry Date at the address above. Documents are to be sent in one lot by courier service, overnight mail or hand delivery. Drafts presented at our office at the address set forth above no later than 10:00 a.m. shall be honored on the date of presentation, by payment in accordance with your payment instructions that accompany each such draft. If requested by you, payment under this Credit may be made by wire transfer of immediately available funds to your account as specified in your payment instructions, or by deposit of same funds in your designated account that you maintain with us. The Credit is transferable. Transfer of this Letter of Credit shall be effected by the presentation to us of a certificate signed by Beneficiary in substantially the form of Annex A attached hereto, with a copy delivered to the Applicant. Upon presentation to us of such a certificate, the transferee named in such certificate will thereupon become the Beneficiary hereof and will be entitled to draw hereunder as though said transferee were the Beneficiary originally named in this Letter of Credit. This Credit shall be governed by and subject to the Uniform Customs and Practice for Documentary Credits 91993 revision), International Chamber of Commerce Publication No. 500 ("UCP"), and to the extent not inconsistent with UCP, the laws of the State of California. This Credit sets forth in full the terms of our undertaking, and such terms shall not be modified, amended or amplified by any document, instrument or agreement referred to in this Credit, in which this Credit is referred to or to which this Credit relates. SPECIAL INSTRUCTIONS: The original of this Credit must be presented together with the above documents in order to endorse the amount of each drawing on the reverse side. All banking charges imposed by us under this Credit are for the account of the Applicant. Sincerely, Union Bank of California, N.A. By______________________________ Print Name:______________________ Its:_____________________________ 39 40 ANNEX A INSTRUCTION TO TRANSFER UNION BANK c/o SOUTHERN CALIFORNIA INTERNATIONAL OPERATIONS CENTER 1980 Saturn Street, VO1-519 Monterey Park, CA 91755-7417 Attention: Standby Letter of Credit Section -------------------, --- Re: Irrevocable Letter of Credit No. ____________ dated December _____, 1998. Gentlemen: For value received, the undersigned beneficiary hereby irrevocably transfers to: ------------------------------ ------------------------------ ------------------------------ all rights of the undersigned beneficiary to draw under the above-captioned Letter of Credit (the "Letter of Credit). Transferee, by acceptance of the Letter of Credit, acknowledges that it is aware of the conditions on draws under the letter of credit as set forth in Section 2.2.2..6 of Exhibit "C" that certain Lease, Dated December 20, 1996, as amended December 10, 1998, between Applicant, as tenant, and MDA-San Bernardino Associates, LLC, as landlord, and that certain Letters of Credit Agreement, dated December __, 1998, among Applicant, MDA-San Bernardino Associates, LLC and the undersigned beneficiary, and agrees not to draw on the Letter of Credit unless and until all conditions for draw under such Lease and such Agreement have been satisfied. By this transfer, all rights of the undersigned beneficiary in the Letter of Credit are transferred to the transferee and transferee shall hereafter have the sole rights as beneficiary thereof as though such transferee were the beneficiary originally named in the Letter of Credit. Please acknowledge receipt of this Instruction to Transfer by signing in the space provided below and returning such signed copy to the transferee named above. Very truly yours, [Name of Beneficiary] By:______________________ Title:____________________ Receipt of Instruction to Transferee hereby accepts the Letter of Transfer acknowledged as of Credit as of:_____________________,____ ___________________, 19____: _____________________________________ [Name of Letter of Credit Issuer] [Name of Transferee] By:________________________ By:________________________ Title:_____________________ Title:______________________ 40 EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 AGREEMENT REGARDING LETTERS OF CREDIT This AGREEMENT REGARDING LETTERS OF CREDIT ("Agreement") is executed as of December 10, 1998, by and among MDA-SAN BERNARDINO ASSOCIATES, LLC, a Delaware limited liability company ("Borrower"), GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation ("Lender"), and CINEMASTAR LUXURY THEATERS, INC., a Delaware corporation ("Tenant"). R E C I T A L S : A. Lender and Borrower have entered into that certain Construction Loan Agreement of even date herewith (the "Loan Agreement") pursuant to which Lender has agreed to make a construction loan to Borrower (the "Loan") in the maximum principal amount of Three Million Six Hundred Thousand Dollars ($3,600,000). The Loan is evidenced by a Promissory Note Secured By Construction Deed of Trust of even date herewith ("Note") in the amount of $3,600,000. The Note is secured by, among other things, (i) a Construction Deed of Trust, Security Agreement, Agreement of Rents, and Fixture Filing of even date herewith (the "Deed of Trust") encumbering certain real property located in the City of San Bernardino, County of San Bernardino, California, and more particularly described in the Deed of Trust (the "Property") and (ii) an Assignment of Leases and Rents ("Lease Assignment") of even date herewith executed by Borrower in favor of Lender. Pursuant to the Loan Agreement, Borrower, Lender, the Redevelopment Agency of the City of San Bernardino ("Agency") and First American Title Insurance Company ("Fiscal Agent") have also entered into a Fiscal Agent Construction Loan Disbursement Agreement ("Disbursement Agreement"). Unless otherwise expressly defined herein all capitalized terms used herein shall have the meanings ascribed to them in the Theater Lease (defined below). B. Pursuant to that certain Multi-Plex Theater Lease dated December 20, 1996, by and between Borrower and Tenant, as amended by a First Amendment to Multi-Plex Lease ("First Amendment"), dated December 10, 1998 for identification purposes (collectively, the "Theater Lease"), Tenant is required to obtain the following letters of credit ("Letters of Credit") in order to provide assurances that Tenant will be financially able to commence and complete Tenant's obligations with respect to construction of the Building (as Theater defined in the Theater Lease) and installation of the FF&E (as defined in the Theater Lease). 1. An unconditional and irrevocable standby letter of credit ("$2 Million LC") issued to and in a form approved by Lender and which may be drawn upon from time to time upon a default by Tenant under the Theater Lease which is not cured within the applicable grace period provided under the Theater Lease ("Tenant Default") as provided in Section 2.3(a) of the Theater Lease, as amended by the First Amendment ("$2 Million LC Draw Event") . 2 2. An unconditional and irrevocable standby letter of credit in the amount of $275,000 ("Contingency LC") issued to and in a form approved by Lender which may be drawn upon from time to time upon Tenant's failure to deposit with the Fiscal Agent or Lender (as hereinafter provided below) an amount equal to the Tenant Work Cost Deficiency Amount as provided in Section 2.2.2.6 of the Theater Lease, as amended by the First Amendment ("Contingency LC Draw Event"). As used herein, the term "Tenant Work Cost Deficiency Amount" means the amount by which the unpaid balance of the Tenant Work Costs exceed or will exceed the remaining balance of the Tenant Improvement Allowance, as reasonably determined by Landlord (or Lender upon the occurrence of an Event of Default (as defined in the Deed of Trust) ). A fully executed copy of the First Amendment is attached hereto as Exhibit A. C. Lender is not willing to make the Loan, or otherwise extend credit, to Borrower unless Borrower assigns and pledges all of its right, title and interest in and to the Letters of Credit and the Letter of Credit Funds (defined below) upon the terms and subject to the limitations provided herein. A G R E E M E N T : NOW, THEREFORE, as an inducement to Lender to make the Loan to Borrower, and to extend such additional credit as Lender may from time to time agree to extend under the Loan Documents, and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, the parties do hereby agree as follows: 1. Creation of Security Interest. This Agreement is intended to create, and Borrower does hereby grant, assign and set-over to Lender, a first-lien security interest in all of Borrower's right, title and interest now or hereafter acquired in and to (a) the Letters of Credit and Borrower's rights under the Theater Lease with respect to the Letters of Credit, and (b) any funds comprising the Letters of Credit which may hereafter be drawn upon and deposited with the Fiscal Agent or with Lender ("Letter of Credit Funds"). In order to perfect Lender's security interest in the Letters of Credit and the Letter of Credit Funds, Borrower has concurrently herewith delivered to Lender the original Letters of Credit issued to and approved by Lender. Lender hereby approves the forms of Letters of Credit attached to the First Amendment as Exhibit "1" and "9", respectively. 2. Letters of Credit. (a) Until the occurrence of an Event of Default (as defined in and pursuant to the Deed of Trust) but subject to the limitations contained in this Agreement and in the consent agreement attached hereto signed by Fiscal Agent, Borrower shall have all rights under the Theater Lease to draw upon the Letters of Credit as otherwise permitted under the Theater Lease. If prior to an Event of Default under the Deed of Trust, Borrower has the right under the Theater Lease to draw upon one or more of the -2- 3 Letters of Credit, Borrower shall deliver to Lender a written request ("Letter of Credit Draw Request"), certifying to Lender that Borrower has the right to draw on such Letter of Credit and specifying in detail the nature of the Draw Event (defined below) and the amount of the requested draw amount ("Draw Amount"). Each Letter of Credit Draw Request shall be accompanied by evidence reasonably satisfactory to Lender that a Draw Event has occurred and that Borrower has a right under the Theater Lease to draw upon such Letter of Credit. Within five (5) days of Lender's receipt of a Letter of Credit Draw Request, Lender shall draw down upon the applicable Letter of Credit in accordance with the Letter of Credit Draw Request and will apply the Letter of Credit funds so drawn as provided in Subsection (d) below. Tenant irrevocably authorizes Lender, without notice to Tenant, to comply with any Letter of Credit Draw Request received by Lender from Borrower. Borrower agrees not to deliver such Letter of Credit Draw Request unless and until the conditions precedent to such draw under the Theater Lease have been satisfied. (b) From and after the occurrence and during the continuance of an Event of Default under the Deed of Trust, Lender (or its nominee) shall have the automatic and immediate right, but not the obligation, in its sole and absolute discretion, to exercise any and all rights of Borrower under the Theater Lease with respect to the Letters of Credit and/or the Letter of Credit Funds. Lender shall also have the right, but not the obligation, to take in its name or in the name of the Borrower such action as Lender may at any time (whether or not an Event of Default has occurred) reasonably determine to be necessary or advisable to protect the rights of Borrower or Lender with respect to the Letters of Credit and/or the Letter of Credit Funds; provided however, that so long as no Event of Default has occurred, Lender shall not take any such action until it has given Borrower ten (10) prior days written notice thereof and Borrower has failed to take such action within such ten (10) day period, unless in Lender's reasonable judgment, immediate action is necessary to protect the security provided hereby, in which case no prior notice shall be required (provided, however, Lender shall notify Borrower and Tenant of the actions taken by Lender within five (5) days) after such action is taken). Lender shall incur no liability if any action so taken by it, or on its behalf shall prove to be inadequate or invalid, provided, however, Lender shall draw upon the Letters of Credit only as and when Borrower would be entitled to do so under the Theater Lease. (c) Borrower shall at all times (i) provide Lender with copies of all notices, requests and other communications concerning any default by Tenant under the Theater Lease, the Letters of Credit, and/or Borrower's request that a Tenant Work Cost Deficiency Amount be deposited by Tenant concurrently if delivered to Tenant by Borrower or within five (5) days if received by Borrower from Tenant; (ii) immediately notify Lender in writing upon the occurrence of each and every Tenant Default, and each and every $2 Million Draw Event and Contingency Draw Event (collectively, a "Draw Event") (each defined below). (d) Notwithstanding anything contained in the Theater Lease, any amounts drawn on either of the Letters of Credits shall be deposited as follows: -3- 4 (i) Any amounts drawn on the Contingency LC ("Contingency Funds") shall not be delivered to Borrower but shall be deposited: (a) so long as none of the Loan proceeds have been disbursed, with the Fiscal Agent to be held and disbursed in payment of Tenant Work Costs in accordance with the terms of the Loan Agreement and the Disbursement Agreement, and (b) from and after the initial advance of Loan proceeds, with Lender to be held and disbursed in payment of Tenant Work Costs in accordance with the terms of the Loan Agreement and the Disbursement Agreement . The Contingency Funds so deposited with the Fiscal Agent or Lender will be disbursed before any further Loan proceeds in payment of Tenant Work Costs will be disbursed. (ii) Any amounts drawn on the $2 Million LC ("$2 Million Funds") shall not be delivered to Borrower but shall be deposited with Lender and applied as follows: (A) to the extent any portion of the $2 Million Funds are drawn upon due to a Tenant Default with respect to the cost of the acquisition and installation of Theater Tenant FF&E (as defined in the Loan Agreement) ("FF&E Costs"), then such Letter of Credit funds shall be deposited with Lender to be disbursed towards the payment of FF&E Costs in accordance with the terms of the Loan Agreement; (B) to the extent any portion of the $2 Million Funds are drawn upon due to a Tenant Default with respect to the failure to pay Tenant Work Costs or complete the Building as required under the Theater Lease, then such Letter of Credit Funds shall be deposited with Lender to be disbursed in payment of Tenant Work Costs in accordance with the terms of the Loan Agreement and the Disbursement Agreement and before any further loan proceeds in payment of Tenant Work Costs will be disbursed; (C) to the extent the $2 Million Funds are drawn upon due to a Tenant Default other than with respect to FF&E Costs or Tenant Work Costs ("Non-Construction Default Funds"), then Lender shall apply up to $1,000,000 in the aggregate of the Non-Construction Default Funds to cure or partially cure such Tenant Default in accordance with the terms of the Theater Lease to be disbursed or applied or as the case may be, in accordance with the terms of the Loan Agreement. (D) At such time as the earlier of (i) the Loan is repaid, in full and all obligations of the Borrower under the Loan Documents are fully satisfied, or (ii) upon Borrower's notice to Lender that Tenant has satisfied the conditions for the return of the Letters of Credit set forth in the First Amendment, Lender shall return the Letters of Credit, and any remaining Letter of Credit Funds not previously disbursed pursuant to this -4- 5 Agreement to Borrower. Borrower agrees to give Lender such notice promptly upon Tenant's satisfaction of such conditions. Borrower agrees to return such Letters of Credit and any remaining Letter of Credit Funds not previously disbursed to the Tenant in accordance with the terms of the Lease. Lender will execute such assignment documents, including without limitation Annex A to the Letters of Credit as Borrower may reasonably request to transfer the Letters of Credit to Borrower. (e) Neither this Agreement nor any action taken or not taken by Lender hereunder shall constitute an assumption by Lender of any obligations under the Theater Lease and Borrower and Tenant shall continue to be liable for their respective obligations under the Theater Lease. Borrower agrees to indemnify, defend (with counsel of Lender's choice), protect and hold Lender free and harmless from and against any loss, cost, liability or expense (including but not limited to attorney's fees and costs) (collectively, "Losses") incurred by Lender in connection with Lender's exercise of any of its rights under this Agreement and/or in connection with any draw upon either of the Letters of Credit made by Lender under this Agreement and/or in connection with the disbursement of the Letter of Credit Funds, excluding any Losses resulting solely from the gross negligence or willful misconduct of Lender. Borrower and Tenant hereby agree to release and hold harmless Lender, for any action (or inaction) taken by Lender with respect to the Letters of Credit and/or the Letter of Credit Funds under this Agreement, excluding any Losses resulting solely from the gross negligence or willful misconduct of Lender. (f) If Tenant fails to deposit renewal Letter(s) of Credit as and when required under the Letters of Credit, Lender shall immediately and without any notice to Borrower or Tenant have the right to draw down the Letters of Credit and hold all Letter of Credit Funds until replacement letters of credit issued to Lender from the same issuing bank and in the same form as the Letters of Credit ("Replacement Letters of Credit") are delivered to Lender. Until such time as Replacement Letters of Credit are delivered to Lender, Lender shall hold and disburse the Letter of Credit Funds in accordance with the terms of this Agreement. 3. No Amendments to Lease. Neither Borrower nor Tenant will agree to or enter into any amendment, restatement modification or termination of the Theater Lease including without limitation with respect to the Letters of Credit, without the prior written consent of Lender, which consent may be withheld in Lender's sole and absolute discretion. 4. No Waiver of Rights. Borrower shall not waive, forgo or otherwise diminish any rights with respect to the Letters of Credit or the Letter of Credit Funds. Borrower shall enforce, at its sole cost and expense, Tenant's obligations under the Theater Lease. 5. Transfer of Collateral. In addition to the restrictions contained in the other Loan Documents, Borrower shall not sell, transfer, convey, assign, or further hypothecate or encumber, either voluntarily or involuntarily, all or any portion of its interests in and to the -5- 6 Theater Lease (including, without limitation, the Letters of Credit or the Letter of Credit Funds), without the prior written consent of Lender which consent may be withheld in Lender's sole and absolute discretion, excluding assignments to the Agency pursuant to the Agency Second Loan Documents and Agency Third Loan Documents (as defined in the Loan Documents) and approved by Lender. 6. Notices. Borrower agrees to deliver to Lender a copy of any notice, demand or other writing delivered to or received from Tenant under the Theater Lease promptly following the giving or receiving of same. 7. Payment of Expenses. In the event that Borrower should breach or fail to timely perform any provisions of this Agreement, Borrower shall, immediately upon demand by Lender, pay Lender all costs and expenses (including court costs and attorneys' fees) incurred by Lender in the enforcement hereof or the preservation of Lender's rights hereunder, and including attorneys' fees and costs incurred in connection with any and all bankruptcy proceedings such as, for example and without limitation, relief from stay proceedings brought by Lender. The covenant contained in this section shall survive the payment of the Loan and performance of the Borrower's obligations under the Loan Documents. 8. Waiver. No failure to exercise, and no delay in exercising, on the part of Lender, any right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right. The rights of Lender hereunder shall be in addition to all other rights provided by law. No modification or waiver of any provision of this Agreement, nor consent to departure therefrom, shall be effective unless in writing and no such consent or waiver shall extend beyond the particular case and purpose involved. No notice or demand given in any case shall constitute a waiver of the right to take other action in the same, similar or other instances without such notice or demand. 9. Notice. All notices or other communications required or permitted hereunder shall be in writing and shall be delivered or sent, as the case may be, by any of the following methods: (i) personal delivery; (ii) nationally recognized overnight commercial carrier or delivery service; (iii) registered or certified mail (with postage prepaid and return receipt requested) or (iv) by facsimile transmission with a "hard" copy delivered within the next two (2) business days addressed as follows: "Lender" GMAC Commercial Mortgage Corporation 100 South Wacker Drive, Suite 400 Chicago, Illinois 60606 Attention: Phillip J. Keel Telecopier No.: (312) 845-8623 -6- 7 "Borrower" MDA-San Bernardino Associates, LLC 300 Continental Boulevard, Suite 360 El Segundo, California 90245 Attention: Jason Kamm Telecopier No.: (310) 416-8741 "Tenant" CinemaStar Luxury Theaters, Inc. 12230 El Camino Real, Suite 320 San Diego, California 92130 Attention: Frank Moreno, President Notices shall be deemed given upon receipt at the address set forth above. Notice of any change of address or of the person to whom notices are to be sent shall be given in the manner set forth in this Section 10. 10. Governing Law; Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Borrower hereby irrevocably submits to the jurisdiction of any court of competent jurisdiction located in the State of California in connection with any proceeding out of or relating to this Agreement. 11. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during the term of this Agreement, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement, unless such continued effectiveness of this Agreement, as modified, would be contrary to the basic understandings and intentions of the parties as expressed herein. 12. Amendments. This Agreement may be amended only by an instrument in writing executed by the party or an authorized representative of the party against whom such amendment is sought to be enforced. 13. Parties Bound; Agreement. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns and legal representatives; provided, however, that Borrower may not, without the prior written consent of Lender, assign any of its rights, powers, duties or obligations hereunder. In the event Lender assigns its interest in either or both of the Letters of Credit and/or to any Letter of Credit Funds to a third party, Lender will provide any such third party with a copy of this Agreement. 14. Headings. Section headings are for convenience of reference only and shall in no way affect the interpretation of this Agreement. 15. Recitals. The recital and introductory paragraphs hereof are a part hereof, form a basis for this Agreement and shall be considered prima facie evidence of the facts and documents referred to therein. -7- 8 16. WAIVER OF RIGHT TO TRIAL BY JURY. BORROWER AND TENANT HEREBY AGREE NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS AGREEMENT, THE DEED OF TRUST, OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER AND TENANT, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER. 17. Exhibits Incorporated; Number and Gender. Any Exhibits attached hereto are incorporated herein by reference and expressly made a part of this Agreement for all purposes. References to any Exhibit in this Agreement shall be deemed to include this reference and incorporation. As used in this Agreement, the masculine gender shall include the feminine and neuter, and singular number shall include the plural, and vice versa. Time is of the essence of this Agreement. Each party hereto acknowledges, represents, and warrants that (i) each party hereto is of equal bargaining strength; (ii) each such party has actively participated in the drafting, preparation, and negotiation of this Agreement; (iii) each such party hereto has had the opportunity to have such party's independent counsel review this Agreement; and (iv) any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement, any portion hereof, any amendments hereto, or any Exhibits attached hereto. 18. Remedies Cumulative. All rights and remedies of Lender provided for herein and in any other Loan Document are cumulative and shall be in addition to all other rights and remedies provided by law. 19. Third Party Transfers. Lender agrees that concurrently with any transfer or assignment of either or both of the Letters of Credit and/or any Letter of Credit Funds to a third party, Lender shall advise such transferee of the conditions or draw set forth in the Lease and as an additional condition to drawing upon the Letters of Credit, such third party shall give Tenant at least five (5) days prior notice of intent to draw. -8- 9 EXECUTED as of the day and year first above written. "Borrower" MDA-SAN BERNARDINO ASSOCIATES, L.L.C., a Delaware limited liability company By: MDA Investors No. 1, L.L.C., a Delaware limited liability Company Its: Managing Member By: MJL Associates, a California limited partnership Its: Managing Member By: MJL Investments, Inc., a California corporation Its: General Partner By:___________________________ Name:_________________________ Title:________________________ [SIGNATURES CONTINUED] -9- 10 "Tenant" CINEMASTAR LUXURY THEATERS, INC., a Delaware corporation By:_________________________________ Name:___________________________ Title:__________________________ [SIGNATURES CONTINUED] -10- 11 "Lender" GMAC COMMERCIAL MORTGAGE CORPORATION, a California corporation By:________________________________ Name:__________________________ Title:_________________________ -11- 12 CONSENT TO AGREEMENT REGARDING LETTERS OF CREDIT FIRST AMERICAN TITLE INSURANCE COMPANY ("Fiscal Agent") hereby acknowledges and agrees that it has received a copy of the foregoing Agreement Regarding Letters of Credit dated of even date herewith and Fiscal Agent and Tenant each acknowledges and agrees further as follows: 1. Consent to Assignment. To the extent that the grant of the security interest and assignment by Borrower of its right, title and interest in and to the Letters of Credit and the Letter of Credit Funds and the enforcement of the terms hereof with respect thereto require the consent, approval or action of Fiscal Agent or Tenant, Fiscal Agent and Tenant hereby grant such consent and approval. 2. Notice of Security Interest. Notice is hereby given to Fiscal Agent under California Commercial Code Section 9302(1)(g)(ii) of Borrower granting to Lender a first-lien security interest in, among other collateral, Borrower's right, title and interest in and to the Letters of Credit and the Letter of Credit Funds some of which may be deposited from time to time with Fiscal Agent pursuant to the terms of the Agreement to be held and disbursed by Fiscal Agent pursuant to the terms of the Disbursement Agreement. 3. Notices. All notices or other communications required or permitted pursuant to this consent agreement shall be delivered in the same manner as required under Paragraph 10 of the Agreement. If such notice or communication is to be delivered to Escrow Holder, it shall be addressed as follows: "Fiscal Agent" First American Title Insurance Company 323 Court Street San Bernardino, California 92412 Attention: Lee Ann Adam -12- 13 IN WITNESS WHEREOF, the parties hereto have executed this Consent to Agreement Regarding Letters of Credit effective as of the date and year first written above under the Agreement. "Fiscal Agent" FIRST AMERICAN TITLE INSURANCE COMPANY By:________________________________ Print Name: _________________________ Title: ______________________________ [SIGNATURES CONTINUED] -13- 14 "Tenant" CINEMASTAR LUXURY THEATERS, INC., a Delaware corporation By:__________________________________ Name:_____________________________ Title:____________________________ -14- EX-10.3 4 EXHIBIT 10.3 1 EXHIBIT 10.3 PURCHASE SALE OF STOCK AGREEMENT OF CINEMASTAR LUXURY THEATERS, S.A DE C.V., ENTERED INTO BETWEEN ATLANTICO & ASS, S.A. DE C.V., REPRESENTED HEREIN BY MR. MARCO ANTONIO ALEMAN BONILLA, HEREINAFTER REFERRED TO AS THE "SELLER", AND ON THE OTHER PART BY CINEMASTAR LUXURY THEATERS, INC. AND CINEMASTAR LUXURY CINEMAS, INC., COMPANIES DULY INCORPORATED UNDER THE LAWS OF THE UNITED STATES, HEREINAFTER JOINTLY REFERRED TO AS THE "BUYER", REPRESENTED HEREIN BY MR. FRANK J. MORENO, PURSUANT TO THE FOLLOWING RECITALS AND CLAUSES: RECITALS I. The SELLER hereby represents: a) That SELLER is the owner of 25% of the capital stock of the company Cinemastar Luxury Theaters, S.A de C.V. (henceforth referred to as CINEMASTAR) a corporation duly existing and formed in accordance with the laws of the Mexican Republic, and they are willing to transfer their interests in favor of Cinemastar Luxury Theaters, Inc. and Cinemastar Luxury Cinemas, Inc., through the execution of this purchase sale of stock agreement (the "Agreement"). b) That CINEMASTAR by-laws were duly formalized by means of public instrument number 6800, volume 270, passed before the faith of Mr. Marco Antonio Mayo Barron, Notary Public number 11, in the city of Tijuana, Baja California. The by-laws were recorded at the Public Registry of Property and Commerce of the city of Tijuana, State of Baja California, under entry number 5067316, Commerce Section, on April 23, 1996. c) That the capital stock and shares that SELLER owns are 425 of Series "B". d) That SELLER's shares are free and clear of all liens, security interests, claims or liabilities with respect to taxes, pledges, voting rights, or similar restrictions of any kind whatsoever. e) That his authority to act on behalf of the SELLER is currently in force and it has not been revoked nor limited in any manner whatsoever. f) That SELLER wishes to transfer its CINEMASTAR interests to the BUYERS with the following binding terms and conditions. II. THE BUYERS' representative states: a) Cinemastar Luxury Theaters, Inc. and Cinemastar Luxury Cinemas, Inc. are companies duly formed and incorporated in accordance with the laws of the United States of America. b) That Cinemastar Luxury Theaters, Inc. has a legitimate interest in acquiring 424 shares of the stock interest owned by the SELLER, providing that all requirements of law have been met to perfect the transfer of shares in accordance with the laws of the Mexican Republic. 2 c) That Cinemastar Luxury Cinemas, Inc. has a legitimate interest in acquiring 1 share of the stock interest owned by the SELLER, providing that all requirements of law have been met to perfect the transfer of shares in accordance with the laws of the Mexican Republic. d) That his authority to act on behalf of the BUYERS is currently in force and has not been revoked nor limited in any manner whatsoever. III. The consummation of the purchase and sale of the 425 shares as provided for in this Agreement (the "Closing") shall take place at the offices of CinemaStar, on November 23, 1998 (the "Closing Date"). The certificates representing the 425 shares and appropriately executed stock powers shall be delivered to Buyers. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: CLAUSES CLAUSE 1. PURCHASE AND SALE OF STOCK. 1.1 PURCHASE OF STOCK. In accordance with the terms and subject to the conditions specified in this agreement, the SELLER in this act sells, assigns, conveys, transfers, and delivers to the BUYERS the certificates, as well as the entire rights, title and interest of 425 shares of CINEMASTAR, and the BUYERS purchase and acquire the entire right, title, and interest of said shares, free and clear of all liens, security interests, claims, or liabilities with respect to taxes, pledges, voting agreements, or similar restrictions of any kind whatsoever, with the understanding that Cinemastar Luxury Theaters, Inc. acquire 424 shares, and Cinemastar Luxury Cinemas, Inc. acquire 1 share of the stock interest owned by the SELLER. CLAUSE 2. PURCHASE PRICE. 2.1 The BUYERS shall pay as a purchase price to the SELLER the amount of US $330,000.00 (three hundred and thirty thousand dollars 00/100) for the transfer of SELLER's ownership interest in CINEMASTAR (the "Purchase Price"). 2.2 The BUYERS shall receive the full Purchase Price by means of a certified check upon execution of this agreement. CLAUSE 3. WARRANTIES AND REPRESENTATIONS OF THE SELLER. 3.1 That, to the extent of their knowledge, all recitals and declarations made by them are correct and truthful. 3.2 That CINEMASTAR is currently in strict compliance of all obligations regarding environmental, sanitary, labor, social security, and tax issues 2 3 applicable by law, and that it has obtained proper authorizations, permits, and licenses required by law for its daily course of business. 3.3 That CINEMASTAR does not have any outstanding debts , nor any economic or administrative contingency regarding the concepts to which are referred in paragraph 3.2 above, arising from of violations or failure to comply with the respective laws. 3.4 That CINEMASTAR is current in the payment of its taxes and other contributions, as well as governmental fees and utilities charges, whether federal, state or municipal. 3.5 That CINEMASTAR has no pending lawsuits, trials, proceedings, claims, investigations, or any other circumstance of any nature from any individual, corporation or governmental agency against it, or of which it may be a part, and as a consequence could result in a contingent or real liability for CINEMASTAR. 3.6 That policies for human resources administration, salaries, and other labor and fringe benefits, as well as the occupational health and safety measures, and training and skill development programs being implemented by the company with regard to its employees, are in strict observance of the tax, labor, environmental, and social security regulations. 3.7 The Seller is a corporation duly organized, validly existing and in good standing under the laws of Mexico, state of Baja California, and has full power, corporate or otherwise, legal capacity and authority to enter into and perform its obligations under this Agreement. 3.8 The Seller has taken all action required by law, its Articles of Incorporation, and its Bylaws to authorize the execution, delivery and performance of this Agreement. 3.9 This Agreement, upon execution and delivery, shall constitute the legal, valid and binding act of the Seller, enforceable against the Seller in accordance with its terms (except as enforcement may be limited by bankruptcy, insolvency, reorganization, priority, or other laws relating to or affecting the enforcement of creditors' rights or by laws affecting generally the availability of equitable remedies). 3.10 The 425 shares shall be issued and delivered to the Buyers free and clear of any and all liens, encumbrances, security interests, pledges, claims, voting trust agreements and equities of any kind or nature except for the interests and encumbrances created by this Agreement. 3.11 Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby: (A) violate, conflict with, result in a breach of, or constitute a default under the Articles of Incorporation, Bylaws or other organizational documents of the Seller, or any agreement, instrument or obligation to which the Seller is a party, or by which its assets 3 4 may be bound or affected; (B) violate any order, writ, injunction, decree, statute, rule or regulation applicable to the Seller; or (C) require the consent, approval or permission of any third party. CLAUSE 4. INDEMNITY. 4.1 In addition to the ability of the BUYERS to conduct all kinds of investigations on the subject, the SELLER agrees to defend, indemnify and hold harmless the BUYERS, its representatives, shareholders, administrators, divisions, departments, affiliate companies, parent companies, holdings, employees, agents, successors, assignees, and other subordinates, against any and all losses, claims, lawsuits, actions, damages, liabilities, expenses, and other costs of any nature and amount (including legal fees), demanded or not demanded, known or unknown, foreseen or unforeseen, ordinary or extraordinary, that may arise on or after the execution of this agreement as a consequence of: 4.1.1 Inaccuracies, false statements or failures to comply with all the recitals, clauses, and warranties granted herein or agreed upon by the SELLER in this agreement. 4.1.2 Default of the SELLER with regard to compliance of any term, condition, clause, or obligations contained in or derived from the present agreement. 4.1.3 Debt or accounts payable to third parties, including tax credits, based on which any creditor may have a right or interest in CINEMASTAR's shares. 4.1.4 The existence of creditors not previously disclosed to the BUYERS. It is hereby understood that if the BUYERS have suffered hardship, loss, claim, lawsuit, action, damage or the necessity to deal with or make themselves responsible for any liability, expenses, or other costs of any nature and amount stated in this clause, or paid or received by the BUYERS or its parent companies, affiliate companies, or employees, the SELLER hereby obligates itself to reimburse and pay in full all such expenses and other costs as defined in this clause, within 10 days following the date on which SELLER is notified of such expenses or damages suffered by the BUYERS. Such notice must be acknowledged by means of a receipt and forwarded in writing to the address stated herein for all of the SELLERS. CLAUSE 5. NOTICES. 5.1 All communications, notices, service of process, requests, citations, and any other that must be made between the parties relating to this agreement, including but not limited to changes of domicile, as stated below, must be delivered at the following domiciles: 4 5 BUYER SELLERS - ----------------------------------- ------------------------------------- - ----------------------------------- ------------------------------------- - ----------------------------------- ------------------------------------- CLAUSE 6. TAXES. 6.1 The parties agree that each party shall be exclusively responsible for payment of the corresponding taxes derived from the transfer of the shares. Specifically, the SELLER shall be responsible for payment of the corresponding income tax caused as a consequence of their transfer of shares in favor of the BUYERS. CLAUSE 7. AMENDMENTS TO THIS AGREEMENT. 7.1 Any amendment or addition to the present agreement shall not produce legal effect unless same is made in writing and duly signed by all of the parties executing this instrument. CLAUSE 8. WAIVER OF RIGHTS. 8.1 The SELLER represents that CINEMASTAR does not owe it any compensation, amount or dividend in the present or future, and thus expressly waives any right to claim any amount relating to same. 8.2 Therefore, the sole consideration to be paid to the SELLER are those amounts agreed upon herein. CLAUSE 9. INTERPRETATION, COMPLIANCE, JURISDICTION AND VENUE. 9.1 Any controversy or dispute arising from, related to, or as consequence of the interpretation and compliance of this agreement will be determined by the laws of the Mexican United States, and therefore, parties submit to the venue of a jurisdiction of the courts of the city of Tijuana, Baja California, Mexico. CLAUSE 10. SURVIVAL. 10.1 The representations and warranties of the parties set forth above shall survive the Closing. CLAUSE 11. BINDING AGREEMENT. 11.1 This Agreement shall inure to the benefit of and be binding on the parties hereto and on each of their respective heirs, executors, successors, personal representatives, and assigns. 5 6 CLAUSE 12. SEVERABILITY. 12.1 Should any other provision or portion of this Agreement be held unenforceable or invalid for any reason, the remaining provisions and portions of this Agreement shall be unaffected by such holding, unless to do so would alter substantially the intended effect of this Agreement. CLAUSE 13. SPECIFIC PERFORMANCE. 13.1 The parties acknowledge and agree that the 425 shares cannot be readily purchased and sold in the open market, and for that reason, among others, the parties agree that failure to perform the obligations under this Agreement will result in irreparable damage to the other parties in the event that this Agreement is not specifically enforced. Should any dispute arise under this Agreement, the parties agree that a decree of specific performance shall be an appropriate remedy. All remedies shall be cumulative and not exclusive and shall be in addition to all other remedies which the parties may have. CLAUSE 14. WAIVER. 14.1 A waiver by any Party of any provision of this Agreement shall not affect its validity or enforceability or constitute a waiver of future enforcement of that provision or of any other provision of this Agreement. CLAUSE 15. COUNTERPARTS. 15.1 This Agreement may be executed in counterparts, each executed copy of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. CLAUSE 16. HEADINGS. 16.1 The subject headings of articles, paragraphs, and subparagraphs of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. CLAUSE 17. SOLE AND ONLY AGREEMENT. 17.1 This Agreement supersedes all prior oral or written agreements between the parties with respect to their subject matter and constitute (along with the documents referred to in this Agreement) the sole and only agreements of the parties hereto with respect to their subject matter. CLAUSE 18. ATTORNEY'S FEES. 18.1 If any of the parties hereto commences an action against the others to enforce any of the terms hereof, or to obtain damages for any alleged breach of any of the terms hereof, or for a declaration of rights hereunder, the losing party or parties shall pay to the prevailing party or parties the prevailing party's or parties' attorneys' fees and costs incurred in connection 6 7 with prosecution of such action, whether or not such action proceeds to trial or appeal. CLAUSE 19. NECESSARY ACTS. 19.1 All parties to this Agreement shall perform any and all acts as well as execute any and all documents that may be reasonably necessary to fully carry out the provisions and intent of this Agreement. IN WITNESS HEREOF, parties to this agreement execute same with 5 copies on November 23, 1998 in the city of Tijuana, Baja California, Mexico. THE SELLER /s/ Mr. Marco Antonio Aleman Bonilla -------------------------------------------- ATLANTICO & ASS, S.A. DE C.V., represented by Mr. Marco Antonio Aleman Bonilla THE BUYERS /s/ Mr. Frank J. Moreno /s/ Mr. Frank J. Moreno - -------------------------------------- -------------------------------------- CINEMASTAR LUXURY THEATERS, INC. CINEMASTAR LUXURY CINEMAS, INC. represented by Mr. Frank J. Moreno represented by Mr. Frank J. Moreno 7 EX-27 5 FINANCIAL DATA SCHEDULE
5 9-MOS MAR-31-1999 APR-01-1998 DEC-31-1998 2,746,470 0 0 0 0 3,320,050 18,610,146 6,859,542 16,035,130 2,769,835 0 0 0 22,628,670 (14,917,704) 16,035,130 22,164,886 22,164,886 9,535,254 22,905,996 0 0 246,574 (878,972) 1,600 (880,572) 0 0 0 0 (0.24) (0.24)
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