-----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, ITzhv6ewD4ciyslqQnv0+vWxn9FzRDKDeXf80rPQOuvNIU9ZiBY+rICQtkWpf3SV dO9vHlDZHF0uYKWJSrZ6vw== 0000950148-00-000270.txt : 20000223 0000950148-00-000270.hdr.sgml : 20000223 ACCESSION NUMBER: 0000950148-00-000270 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000222 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: 550818 BUSINESS ADDRESS: STREET 1: 12230 EL CAMINO REAL STREET 2: SUITE 320 CITY: SAN DIEGO STATE: CA ZIP: 92130 BUSINESS PHONE: 6195092777 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 (12/31/1999) 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, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from __________ to __________ Commission File Number 0-25252 CINEMASTAR LUXURY THEATERS, INC. (Exact Name of Registrant as specified in its charter) DELAWARE 33-0451054 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 12230 EL CAMINO REAL, SUITE 320, SAN DIEGO, CA 92130 (Address of principal executive offices) (Zip Code) (858) 509-2777 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Common stock, $0.01 par value: 3,864,986 shares outstanding as of February 14, 2000. Transitional Small Business Disclosure Format. (check one): YES [ ] NO [X] 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, 1999 (Unaudited) 3 Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 1999 and 1998 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1999 and 1998 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Defaults in Senior Securities 13 Item 4. Submission of Matters to a Vote of Securities Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
December 31, 1999 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,714,771 Prepaid expenses 281,275 Other current assets 301,926 -------------- TOTAL CURRENT ASSETS 2,297,972 Property and equipment, net 14,190,711 Deposits and other assets 824,378 -------------- TOTAL ASSETS $ 17,313,061 ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 3,100,763 Accounts payable 1,253,894 Accrued liabilities 979,154 Deferred revenue 540,109 -------------- TOTAL CURRENT LIABILITIES 5,873,920 Long-term debt and capital lease obligations, net of current portion 1,698,087 Deferred rent liability 4,344,617 -------------- TOTAL LIABILITIES 11,916,624 -------------- STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; authorized shares 20,000,000; issued and outstanding shares 3,864,986 38,650 Additional paid-in capital 26,216,172 Accumulated deficit (20,858,385) -------------- TOTAL STOCKHOLDERS' EQUITY 5,396,437 -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,313,061 ==============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended December 31, Nine Months ended December 31, ------------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES: Admissions $ 4,449,305 $ 4,663,484 $ 15,183,498 $ 15,252,824 Concessions 1,915,960 1,955,625 6,322,259 6,408,881 Other operating revenues 166,705 168,000 506,902 503,181 ---------------- ---------------- ----------------- ------------------ TOTAL REVENUES 6,531,970 6,787,109 22,012,659 22,164,886 ---------------- ---------------- ----------------- ------------------ COSTS AND EXPENSES: Film rental and booking costs 2,421,817 2,474,677 8,365,097 8,153,080 Cost of concession supplies 338,221 328,958 1,159,409 1,382,174 Theater operating expenses 3,419,401 3,050,919 9,638,183 9,260,200 Selling, general and administrative expenses 798,790 897,366 2,368,314 2,382,818 Depreciation and amortization 603,303 613,969 1,800,188 1,727,724 ---------------- ---------------- ----------------- ------------------ TOTAL COSTS AND EXPENSES 7,581,531 7,365,889 23,331,191 22,905,996 ---------------- ---------------- ----------------- ------------------ OPERATING LOSS (1,049,562) (578,780) (1,318,532) (741,110) OTHER INCOME (EXPENSE): Interest expense (135,076) (91,442) (344,018) (246,574) Interest income 13,562 30,292 53,821 108,712 ---------------- ---------------- ----------------- ------------------ TOTAL OTHER EXPENSE (121,515) (61,150) (290,197) (137,862) ---------------- ---------------- ----------------- ------------------ LOSS BEFORE PROVISION FOR INCOME TAXES INCOME TAXES (1,171,076) (639,930) (1,608,729) (878,972) PROVISION FOR INCOME TAXES - - - (1,600) ---------------- ---------------- ----------------- ------------------ NET LOSS (1,171,076) (639,930) $ (1,608,729) $ (880,572) ================ ================ ================= ================== BASIC AND DILUTED NET LOSS PER SHARE $ (0.30) $ (0.17) $ (0.42) $ (0.24) ================ ================ ================= ================== WEIGHTED AVERAGE SHARES 3,864,986 3,864,986 3,864,986 3,737,725 ================ ================ ================= ==================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months ended December 31, -------------------------------- 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (1,608,729) $ (880,572) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,800,189 1,727,724 Deferred rent expense 446,126 557,081 Changes in operating assets and liabilities: Prepaid expenses and other current assets (45,481) (54,573) Deposits and other assets 4,011 (8,273) Accounts payable 282,915 (464,557) Accrued and other liabilities (936) (22,349 ------------------ ------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 878,095 854,481 ------------------ ------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of minority interest in consolidated subsidiary - (337,146) Purchases of property and equipment (4,216,185) (575,668) ------------------ ------------------- NET CASH USED IN INVESTING ACTIVITIES (4,216,185) (912,814) ------------------ ------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt 3,000,000 - Principal payments on long-term debt and capital lease obligations (167,537) (300,769) Payment of debt issuance costs - (376,406) ------------------ ------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,832,463 (677,175) ------------------ ------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (505,627) (735,508) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,220,396 3,481,978 ------------------ ------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,714,771 $ 2,746,470 ================== =================== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 208,099 $ 232,878 ================== =================== Income taxes $ - $ 1,600 ================== ===================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 CINEMASTAR LUXURY THEATERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (UNAUDITED) NOTE 1 The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements for the fiscal year ended March 31, 1999 and footnotes thereto, included in the Company's Annual Report on Form 10-KSB which was filed with the Securities and Exchange Commission. Operating results for the three and nine month periods ended December 31, 1999 are not necessarily indicative of the results of operations that may be expected for the year ending March 31, 2000. NOTE 2 Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") issued by the FASB establishes accounting and reporting standards for derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The effective date for the adoption of SFAS No. 133 was extended to fiscal years beginning after June 15, 2000 with the issuance of SFAS No. 137. The Company currently expects to adopt the provisions of SFAS No. 133 on April 1, 2001. NOTE 3 Certain reclassifications have been made to the December 31, 1998 financial statements to conform to the December 31, 1999 presentation. NOTE 4 Basic and diluted net income (loss) per share are computed by dividing net loss by the weighted average number of common shares outstanding during the years. Potentially dilutive securities consist of outstanding stock options and warrants, and are not included in the computation as their inclusion would be anti-dilutive. All per share information and references to the number of shares outstanding included herein have been adjusted to reflect the one-for-seven reverse stock split of the Company's common stock, effected on December 2, 1998. NOTE 5 On September 23, 1997, the Company entered into a definitive agreement (the "CAP Agreement") with CinemaStar Acquisition Partners, L.L.C. ("CAP") and Reel Partners L.L.P. ("Reel") whereby Reel provided $3,000,000 of interim debt financing (the "Bridge Loan") and CAP provided $15,000,000 of equity financing (the "Equity Financing"). Pursuant to the terms of the CAP Agreement, the Company was and continues to be obligated to issue additional shares of Common Stock (the "Adjustment Shares") to CAP. The number of Adjustment Shares to be issued is based upon (i) the recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the Company in connection with the contemplated transactions, (iii) any negative cash flow incurred by the Company during the period commencing August 31, 1997 and ending December 15, 1997, and (iv) operating losses experienced by, or costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation and achieving operating profits) and San Bernardino Facility which opened in December 1999. The measurement of the operating losses and/or closing costs for the two facilities is cumulative, calculated in the aggregate and will take place on the earlier to occur of the closing of each such facility or December 15, 2000. The Company issued 193,037 Adjustment Shares to CAP pursuant to the terms of the CAP Agreement, in September 1998. To the extent there are (a) operating losses at the Company's Tijuana and San Bernardino facilities, calculated in the aggregate, for the 6 7 three-year period ended December 15, 2000, and (b) expenditures in connection with the discovery of liabilities, or defense and/or settlement of claims, in either case relating to periods prior to August 31, 1997, the Company will be obligated to issue additional Adjustment Shares. NOTE 6 On October 19, 1998, the Company signed a $15 million Seven-Year Revolving Credit Agreement with a senior, secured lender. The terms of the agreement were modified in March 1999. This facility will be used primarily to finance the Company's future developments in accordance with the terms and conditions of the Revolving Credit Facility. The Company has borrowed $3,000,000 against this facility as of December 31, 1999 and had used the facility to secure two standby letters of credit, with initial terms of one year, totaling $2,275,000, issued in accordance with the terms of its lease (as amended) on the San Bernardino 20-screen facility, which opened in December, 1999. The $2,000,000 standby letter of credit was cancelled as of December 10, 1999 in accordance with the lease terms on the San Bernardino 20-screen facility. Commitment and other fees associated with the Revolving Credit Agreement and the standby letters of credit, totaling approximately $380,000, are included in Other Assets and are being amortized over their respective terms. As of December 31, 1999 the Company was not in compliance with certain of the covenants contained in its Revolving Credit Facility, and as a result, the Company is not currently able to borrow against the facility. Management is in discussions with the lender in order to obtain a waiver and to modify the agreement. A definitive agreement to waive the December 31, 1999 covenant violations and to modify the Revolving Credit Facility has not been reached as of this date. Although management expects an agreement will be reached and the lender has not attempted to accelerate the due date of any payment obligation of the Company under the Revolving Credit Facility, the outstanding borrowings against the facility of $3,000,000 as of December 31, 1999 have been classified as a current liability in the accompanying consolidated balance sheet. Management is also in negotiations with its principal shareholder to obtain an equity infusion of $3.5 million, most likely from the sale of convertible preferred stock. The proceeds from this equity transaction will be used to reactivate the Company's Revolving Credit Facility, to fund theater development, and to meet seasonal working capital requirements. NOTE 7 The Company purchased on November 23, 1998 the remaining 25% minority interest in the Company's Mexican subsidiary, CinemaStar Luxury Theaters, S.A. de C.V., for approximately $340,000. This amount is included in Other Assets and is being amortized over a seven-year period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-QSB. Except for the historical information contained herein, the discussion in this Form 10-QSB contains certain forward looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-QSB should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-QSB. Where possible, the Company uses words like "believes", "anticipates", "expects", "plans" and similar expressions to identify such forward looking statements. The Company's actual results could differ materially from those discussed here. Factors, risks and uncertainties that could cause or contribute to such differences include the availability of marketable motion pictures, the increase of revenues to meet long-term lease obligations and rent increases, risks inherent in the construction of new theaters, the ability to secure new locations on favorable terms, intense competition in the industry, dependence on concession sales and suppliers, earthquakes and other natural disasters and costs associated with potential changes in management and disputes related thereto. At April 1, 1999 the Company had eight theater locations with a total of 79 screens. At December 31, 1999 the Company had nine theater locations with a total of 99 screens. The increase was due to the opening of a 20 screen multi-plex theater in San Bernardino, California in December 1999. The Company operates one business segment. Such segment has operations in two geographic regions, California and Northern Mexico. For the nine months ended December 31, 1999 total revenues were $18,204,837 in California and $3,807,822 in Northern Mexico, compared to $18,567,639 and $3,597,247 for California and Northern Mexico respectively in the nine months ended December 31, 1998. Total assets for the California and Northern Mexico regions as at December 31,1999 were $17,377,904 and $586,685, respectively. The Company has had significant net losses in each fiscal year of its operations, including net losses of $1,586,372 and $7,932,011 and in the fiscal years ended March 31, 1999 and 1998, respectively. Further, the Company has incurred losses of $1,171,076 and $1,608,729 for the three and nine month periods ended December 31, 1999. There can be no assurance as to whether or when the Company will achieve profitability. Any substantial profitability will 7 8 depend, among other things, on the Company's ability to continue to grow its operations through the addition of new screens and its ability to maintain adequate financing. The Company is not in compliance with certain covenants of its credit agreement. See Liquidity. The Company has entered into an agreement for a four-screen expansion to an existing theater in Riverside, California. The four-screen addition is currently under construction, and is anticipated to be substantially completed in March 2000. Additionally, the Company has entered into discussions and/or negotiations regarding the development of other theater complexes in the United States and the Republic of Mexico. The building of these and other new theater complexes is subject to many contingencies, many of which are beyond the Company's control, including consummation of site purchases or leases, receipt of necessary government approvals, negotiation of acceptable construction agreements, the availability of financing and timely completion of construction. No assurances can be given that the Company will be able to successfully build, finance or operate any of the new theaters presently contemplated or otherwise. THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1998. Total revenues for the three months ended December 31, 1999 decreased 3.8% to $6,531,970 compared to $6,787,109 for the prior comparable period. Admission revenues decreased by $214,179 or 4.6%, and concession sales and other operating revenues decreased by $40,960, or 1.9%. The decrease in admissions revenues is attributable to a decline in paid attendance, partially offset by an increase in average ticket price. Domestic average ticket price for the fiscal three months ended December 31, 1999 increased by 6.1% to $5.02 compared to the prior comparable period. International average ticket price for the three months ended December 31, 1999 increased 18.2% to $3.08 compared to the prior comparable period. Domestic attendance declined 11.8% to 731,138 and international attendance declined 11.4% to 253,171 for the three months ended December 31, 1999 compared to the prior comparable period. Domestic per capita concession revenues for the fiscal three months ended December 31, 1999 increased 6.6% to $1.98 compared to the prior comparable period. International per capita concession revenue for the three months ended December 31, 1999 increased 21.8% to $1.71 compared to the three months ended December 31, 1998. Film rental and booking costs for the three months ended December 31, 1999 decreased 2.1% to $2,421,817 compared to $2,474,677 for the previous fiscal year's third quarter. As a percentage of admission revenues, film rental and booking costs increased to 54.4% for the three months ended December 31, 1999 from 53.1% for the prior comparable period, due to the timing and terms of new releases in this year's third quarter compared to the prior year. Cost of concession supplies for the three months ended December 31, 1999 increased 2.8% to $338,221 from $328,958 for the previous year. As a percentage of concession revenues, cost of concession supplies increased to 17.7% from 16.8% in the three months ended December 31, 1999 compared to the previous year, due to increases in vendor concession costs. Theater operating expenses for the three months ended December 31, 1999 increased 15.0% to $3,419,401 compared to $2,972,919 for the previous year. This increase was due, in part, to the opening of the new theater in December 1999. As a percentage of total revenues, theater operating expenses increased 8.5% to 52.3% for the three months ended December 31, 1999 compared to 43.8% for the prior year. Selling, general and administrative expenses for the three months ended December 31, 1999 decreased 18.1% to $798,790 compared to $975,366 for the previous year. As a percentage of total revenues, selling, general and administrative costs decreased to 12.2% from 14.4% due in part to continued cost cutting measures. Depreciation and amortization for the three months ended December 31, 1999 decreased 1.7% to $603,303 compared to $613,969 for the previous year, due, in part, to the write off of replaced equipment in the prior year. Interest expense for the fiscal three months ended December 31, 1999 increased 47.7% to $135,076 compared to $91,442 for the previous year. This increase is primarily due to the amortization of fees and interest on borrowings related to the Company's line of credit to fund development of a new theater and expansion of an existing theater. 8 9 Interest income for the three months ended December 31, 1999 decreased to $13,562 from $30,292 for the three months ended December 31, 1998. This decrease is attributable to changes in cash balances. As a result of the above factors, the net loss for the three months ended December 31, 1999 was $1,171,076 compared to net loss of $639,930 for the three months ended December 31, 1998. NINE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1998. Total revenues for the nine months ended December 31, 1999 decreased 3.8% to $22,012,659 compared to $22,164,886 for the prior comparable period. Admission revenues decreased by $69,326 or 0.5%, and concession sales and other operating revenues decreased by $82,902, or 1.2%. The decrease in admissions revenues is attributable to a decline in paid attendance partially offset by an increase in average ticket prices. Domestic average ticket price for the fiscal nine months ended December 31, 1999 increased by 2.2% to $4.91 compared to $4.80 for the prior comparable period. International average ticket price for the nine months ended December 31, 1999 increased 18.8% to $2.95 compared to $2.48 for the prior comparable period. Domestic attendance declined 3.2% to 2,612,499 and international attendance declined 13.4% to 799,056 for the nine months ended December 31, 1999 compared to the prior comparable period. Domestic per capita concession revenues for the fiscal nine months ended December 31, 1999 decreased 3.5% to $1.82 compared to the prior comparable period. International per capita concession revenue for the nine months ended December 31, 1999 increased 24.9% to $1.68 compared to the nine months ended December 31, 1998. Film rental and booking costs for the nine months ended December 31, 1999 increased 2.6% to $8,365,097 compared to $8,153,080 for the previous fiscal year's first nine months. As a percentage of admission revenues, film rental and booking costs increased to 55.1% for the nine months ended December 31, 1999 from 53.5% for the prior comparable period, due to the timing and terms of new releases in this year's first nine months compared to the prior year. Cost of concession supplies for the nine months ended December 31, 1999 decreased 16.1% to $1,159,409 from $1,382,174 for the previous year. As a percentage of concession revenues, cost of concession supplies decreased to 18.3% from 21.6% in the nine months ended December 31, 1999 compared to the previous year, due in part to the termination of concession lease agreements with PCI, the Company's former primary concession vendor. As of June 15, 1998, the Company ceased the purchase of concession supplies and services from PCI and began purchasing concessions supplies on a competitive basis. Theater operating expenses for the nine months ended December 31, 1999 increased 6.8% to $9,638,183 compared to $9,026,200 for the previous year. This increase was due, in part, to increases in federally mandated minimum wages and the opening of the new theater. As a percentage of total revenues, theater operating expenses increased 3.1% to 43.8% for the nine months ended December 31, 1999 compared to 40.7% for the prior year. Selling, general and administrative expenses for the nine months ended December 31, 1999 decreased 9.5% to $2,368,314 compared to $2,616,818 for the previous year due in part to continuing cost cutting measures. As a percentage of total revenues, selling, general and administrative costs decreased to 10.8% from 11.8%. Depreciation and amortization for the nine months ended December 31, 1999 increased 4.2% to $1,800,188 compared to $1,727,724 for the previous year, due, in part, to amortization of goodwill associated with the purchase of the remaining 25% equity interest in the Company's Mexican subsidiary in the third quarter of fiscal year 1999. Interest expense for the fiscal nine months ended December 31, 1999 increased 39.5% to $344,018 compared to $246,574 for the previous year. This increase is primarily due to the amortization of fees and interest on borrowings related to the Company's line of credit to fund development of a new theater and expansion of an existing theater. Interest income for the nine months ended December 31, 1999 decreased to $53,821 from $108,712 for the nine months ended December 31, 1998. This decrease is attributable to changes in cash balances. As a result of the above factors, the net loss for the nine months ended December 31, 1999 was $1,608,729 compared to $880,572 for the nine months ended December 31, 1998. 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 been financed with internally generated cash flow, long-term debt financing or leasing arrangements of facilities and equipment, the offering to the public of equity securities and the private placement of convertible debentures. During fiscal 1998, however, the Company determined that it lacked the resources necessary to finance its current capital obligations through traditional sources and sought additional capital through alternative financing sources. On September 23, 1997, the Company signed the CAP Agreement for CAP to acquire a majority equity interest in the Company through a $15 million purchase of newly issued shares of the Company's Common Stock. Following stockholder approval, the Equity Financing transaction was completed on December 15, 1997. Pursuant to the CAP Agreement, CAP purchased 2,526,352 shares of Common Stock for a purchase price of $5.94 per share. CAP also received, at closing, warrants to purchase 232,947 shares of Common Stock at an exercise price of $5.94 per share. Pursuant to the terms of the CAP Agreement, the Company has and continues to be obligated to issue Adjustment Shares to CAP. The number of Adjustment Shares to be issued is based upon (i) the recognition of any liabilities not disclosed as of August 31, 1997, (ii) certain expenses incurred and paid by the Company in connection with the contemplated transactions, (iii) any negative cash flow incurred by the Company during the period commencing August 31, 1997 and ending December 15, 1997, and (iv) operating losses experienced by, or costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation and achieving operating profits) and San Bernardino Facility which opened in December 1999. The measurement of the operating losses and/or closing costs for the two facilities is cumulative, calculated in the aggregate and will take place on the earlier to occur of the closing of each such facility or December 15, 2000. The Company issued 193,037 Adjustment Shares to CAP pursuant to the terms of the CAP Agreement, in September 1998. To the extent there are (a) operating losses at the Company's Tijuana and San Bernardino facilities, calculated in the aggregate, for the three-year period ended December 15, 2000, and (b) expenditures in connection with the discovery of liabilities, or defense and/or settlement of claims, in either case relating to periods prior to August 31, 1997, the Company will be obligated to issue additional Adjustment Shares. The Company leases eight theater properties and various equipment under non-cancelable operating lease agreements which expire through 2025 and require various minimum annual rentals. In December the Company opened for business a new 20 screen leased multi-plex theater in San Bernardino, California. At December 31, 1999, the aggregate future minimum lease payments due under non-cancelable operating leases was approximately $126,200,000. In addition, the Company has signed a lease agreement for the expansion by 4 screens of an existing theater in Riverside, California. The lease for the Riverside expansion will require expected minimum rental payments aggregating approximately $9,300,000 over the 22-year life of the lease. Accordingly, existing minimum lease commitments as of March 31, 1999 plus those expected minimum commitments for the proposed theater location and theater expansion, would aggregate minimum lease commitments of approximately $135,500,000. Under the terms of the San Bernardino lease, the Company constructed and equipped the theater building. Costs to the Company to complete and equip the San Bernardino Facility were approximately $4,500,000, of which the Company has already paid approximately $3,100,000. Although the theater is open for business, the Company, the developer, and contractor are still in the process of completing the final construction "punch lists", meeting certain city requirements, and authorizing final payments. The landlord committed under the lease to make available a tenant allowance of approximately $9,200,000 to reimburse the Company for a portion of the cost of constructing and equipping the complex. While the landlord has met its financing commitments to date to fund its tenant improvement allowance to the Company, its ability to fund the balance of the tenant improvement allowance is dependant upon its lender adhering to the terms of their financing commitments. Therefore, there can be no assurance that the Company will be able to receive adequate funds from the landlord to complete the construction of the project. The Company has executed a fixed-price construction contract with a general contractor, for the construction of the theater project. The Company is obligated to pay the contractor the full amount due under the contract whether or not the Company receives reimbursement from the landlord. In addition, the Company's lease obligations with respect to the San Bernardino Facility are contingent upon the completion and acceptance of the theater. 10 11 Under the terms of the Riverside expansion lease amendment, the Company's obligation with respect to constructing and equipping the theater is estimated at approximately $1,900,000, of which the Company has already paid approximately $800,000. With respect to both projects, costs to complete and equip have exceeded original estimations. The Company believes the Riverside expansion will be completed and open for business in March 2000. The ability of the Company to expand through the development of new theaters, the expansion of existing theaters or the acquisition of established theaters is contingent upon numerous factors including the Company's ability to secure new, third party financing. In this regard, the Company signed on October 19, 1998, a $15 million Revolving Credit Agreement (the "Revolving Credit Facility") with a senior, secured lender. The terms of the facility were amended in March and August 1999. This facility is being used primarily to finance the Company's future developments in accordance with the terms and conditions of the Revolving Credit Facility. The Company has borrowed $3,000,000 against this facility through December 31, 1999 and has used the facility to secure a standby letter of credit, with initial terms of one year, totaling $275,000, issued in accordance with the terms of its lease (as amended) on the San Bernardino 20-screen facility. Commitment and other fees associated with the Revolving Credit Facility and the standby letters of credit, totaling approximately $380,000, are being amortized over their respective terms. The Revolving Credit Facility is subject to maximum borrowing limits based on multiples as defined under its terms and conditions. The Revolving Credit Facility is also subject to various positive and negative covenants. As of December 31, 1999 the Company was not in compliance with certain of the covenants contained in its Revolving Credit Facility, and as a result, the Company is not currently able to borrow against the facility. Management is in discussions with the lender in order to obtain a waiver and to modify the agreement. A definitive agreement to waive the December 31, 1999 covenant violations and to modify the Revolving Credit Facility has not been reached as of this date. Although management expects an agreement will be reached and the lender has not attempted to accelerate the due date of any payment obligation of the Company under the Revolving Credit Facility, the outstanding borrowings against the facility of $3,000,000 as of December 31, 1999 have been classified as a current liability in the accompanying consolidated balance sheet. Management is also in negotiations with its principal shareholder to obtain an equity infusion of $3.5 million, most likely from the sale of convertible preferred stock. The proceeds from this equity transaction will be used to reactivate the Company's Revolving Credit Facility, to fund theater development, and to meet seasonal working capital requirements. No assurance can be given that the negotiations with the Company's lender and principal shareholder will be successful. During the nine months ended December 31, 1999, the Company generated cash of $878,095 from operating activities, as compared to $854,481 for the nine months ended December 31, 1998. Reductions in the cost of concession supplies and selling, general & administrative expenses have been offset by increases in film rental costs and theater operating costs. During the nine months ended December 31, 1999, the Company used cash in investing activities of $4,216,185 as compared to $912,814 for the nine months ended December 31, 1998. The increase is primarily due the construction of the 20-screen Ultraplex in San Bernardino, California and the 4-screen addition under construction in Riverside, California. During the nine months ended December 31, 1999, the Company provided net cash of $2,832,463 from financing activities, as compared to using net cash of $677,175 for the nine months ended December 31, 1998. The cash provided in the nine months ended December 31, 1999 related to the drawdown of $3,000,000 against the Company's Revolving Credit Facility, offset in part by principal payments on long-term debt and capital lease obligations. The cash used in the nine months ended December 31, 1998 related to principal repayments on long-term debt and capital lease obligations, and payment of debt issuance costs. At December 31, 1999, the Company held cash and cash equivalents of $1,714,771 and had a negative working capital of $3,575,948. As of March 31, 1999, the Company had net operating loss carryforwards ("NOLs") of approximately $13,250,000 and $6,500,000 for Federal and California income tax purposes, respectively. The Federal NOLs are available to offset future years taxable income, and they expire in 2006 through 2019 if not utilized prior to that time. The California NOLs are available to offset future years taxable income, and they expire in 1999 through 2004 if not utilized prior to that time. The annual utilization of NOLs will be limited in accordance with restrictions imposed under the Federal and state laws as a result of changes in ownership. The Company's initial public offering and certain other equity transactions resulted in an "ownership change" as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). As a result, the Company's use of its net operating loss carryforwards to offset taxable income in any post-change period will be subject to certain specified annual limitations. At March 31, 1999, the Company has total net deferred income tax assets in excess of $5,900,000. Such potential income tax benefits, a significant portion of which relates to the NOLs discussed above, have been subjected to a 100% valuation allowance since realization of such assets is not "more likely than not" in light of the Company's 11 12 recurring losses from operations. SEASONALITY The Company's revenues have been seasonal, coinciding with the timing of major releases of motion pictures by the major distributors. Generally, the most marketable motion pictures are released during the summer and the Thanksgiving through year-end holiday season. The unexpected emergence of a hit film during other periods can alter this trend. The timing of such releases can have a significant effect on the Company's results of operations, and the results of one quarter are not necessarily indicative of results for subsequent quarters. YEAR 2000 The Company has performed a review of its computer applications, including software and hardware, related to their continuing functionality for the year 2000 and beyond. Based on this review, the Company does not believe that it has material exposure with respect to the year 2000 issue in regards to its computer applications. The Company has implemented new ticketing systems and concessions systems at each of its locations (an initiative unrelated to year 2000). These systems are certified as year 2000 compliant. Management believes that the Company is not dependent on any other internal computer applications for its day to day operations. The Company has communicated via questionnaire with third parties with whom it has a material relationship to assess its risk with respect to year 2000 issues. Not all such third parties have responded. The Company is not aware at this time of any material year 2000 issues with respect to its dealings with such third parties. The historical costs to the Company for its year 2000 preparations have been nominal, future costs are not yet known due to the Company's ongoing assessments and the Company has not deferred or delayed any projects or expenditures in anticipation of any year 2000 issues. The Company believes that its worst case scenario for the change to year 2000 would be a disruption of film distribution to the Company. Such a disruption could have a material impact on the Company and its results of operations. To date with the advent of the year 2000, there have been no year 2000 issues that have affected the operation of the company. CURRENCY FLUCTUATIONS The Company is subject to the risks of fluctuations in the Mexican Peso with respect to the U.S. dollar. These risks are heightened because revenues in Mexico are generally collected in Mexican Pesos, but the theater lease payments are denominated in U.S. dollars. While the Company does not believe it has been materially adversely effected by currency fluctuations to date, there can be no assurance it will not be so affected in the future and it has taken no steps to guard against these risks. PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS From time to time the Company is involved in routine litigation and proceedings in the ordinary course of its business. Except as disclosed in the Company's Form 10-QSB for the quarter ended June 30, 1999, the Company is not currently involved in any other pending litigation matters, which the Company believes would have a material adverse effect on the Company. ITEM 2 -- CHANGES IN SECURITIES ONE-FOR-SEVEN REVERSE STOCK SPLIT The Company completed a one-for-seven reverse stock split of its Common Stock, effective December 2, 1998. The reverse stock split affects the Company's Common Stock and all options and warrants that are convertible into the Company's Common Stock. The number of shares of the Company's Common Stock outstanding prior to the reverse stock split was 27,054,902 and after the reverse stock split is 3,864,986. The reverse stock split also amends the terms of the Company's Redeemable Warrants and Class B Redeemable Warrants. After giving effect to the reverse stock split, the number of outstanding and issuable Redeemable Warrants for Common Stock, with a maturity date of February 6, 2000 under the trading symbol "LUXYW," remains at 4,648,562. The total number of shares of Common Stock for which such warrants will be exercisable is 12 13 reduced, however, to approximately 1,568,704 shares from 10,980,833 shares prior to the reverse stock split. The number of shares of Common Stock exercisable per each warrant is reduced to 0.33746 shares per warrant from 2.36220 shares per warrant prior to the reverse stock split. The price per share upon exercise of the warrants increases to $17.78, compared to $2.54 prior to the reverse stock split. After giving effect to the reverse stock split, the number of outstanding and issuable Class B Redeemable Warrants for Common Stock, with a maturity date of September 15, 2001 under the trading symbol "LUXYZ," remain at 226,438 outstanding. The total number of shares of Common Stock for which such warrants will be exercisable is reduced to approximately 76,183 shares from 533,278 shares prior to the reverse stock split. The number of shares of Common Stock exercisable per each Class B warrant is reduced to 0.33644 shares per warrant from 2.35507 shares per warrant prior to the stock split. The price per share upon exercise of the warrants increases to $19.32, compared to $2.76 prior to the reverse stock split. ITEM 3 -- DEFAULTS IN SENIOR SECURITIES As of December 31, 1999 the Company was not in compliance with certain of the covenants contained in its Revolving Credit Facility, and as a result, the Company is not currently able to borrow against the facility. Management is in discussions with the lender in order to obtain a waiver and to modify the agreement. A definitive agreement to waive the December 31, 1999 covenant violations and to modify the Revolving Credit Facility has not been reached as of this date. Although management expects an agreement will be reached and the lender has not attempted to accelerate the due date of any payment obligation of the Company under the Revolving Credit Facility, the outstanding borrowings against the facility of $3,000,000 as of December 31, 1999 have been classified as a current liability in the accompanying consolidated balance sheet. Management is also in negotiations with its principal shareholder to obtain an equity infusion of $3.5 million, most likely from the sale of convertible preferred stock. The proceeds from this equity transaction will be used to reactivate the Company's Revolving Credit Facility, to fund theater development, and to meet seasonal working capital requirements. No assurance can be given that the negotiations with the Company's lender and principal shareholder will be successful. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the Company's 1999 annual meeting of stockholders in October, 1999, the Company's stockholders voted to (i) approve an amendment to the Company's Certificate of Incorporation authorizing a reduction in the number of authorized shares of Common Stock of the Company from 60,000,000 to 20,000,000 shares (the number of votes cast for this matter was 3,755,388, the number of votes cast against this matter was 10,764, the number of abstentions was 616, and the number of broker non-votes was 0), (ii) the appointment of Arthur Andersen LLP as the Company's independent public accountants for the fiscal year ended March 31, 2000 (the number of votes cast for this matter was 3,666,231, the number of votes cast against this matter was 96,857, the number of abstentions was 3,680, and the number of broker non-votes was 0) and (iii) the election to the Board of Directors of the Company one nominees referenced in the Company's Proxy Statement, dated as of September 29, 1999, specifically, Messrs. Jack R. Crosby, Frank J. Moreno, Jack S. Gray, Jr., Thomas G. Rebar, Wayne B. Weisman and Winston J. Churchill. With respect to the election of directors, the number of votes cast for, against, abstentions and broker non-votes is indicated on the following schedule. Broker Election of Directors For Withhold Non-Votes Total - --------------------- --- -------- --------- ----- Jack R. Crosby 3,666,137 100,631 0 3,766,768 Frank J. Moreno 3,661,994 104,774 0 3,766,768 Jack S. Gray, Jr. 3,660,716 106,052 0 3,766,768 Thomas G. Rebar 3,665,994 100,774 0 3,766,768 Wayne B. Weisman 3,665,994 100,774 0 3,766,768 Winston J. Churchill 3,665,994 100,631 0 3,766,625 ITEM 5 -- OTHER INFORMATION The Board of Directors of the Company appointed Paul W. Hobby as Co-Chief Executive Officer and Vice Chairman of the Board of Directors, effective October 27, 1999. The Board of Directors also appointed Mr. Don Harnois to the office of Chief Financial Officer of the Company, filling the vacancy in that office created by the resignation of Mr. Norman Dowling, which was effective as of November 1999. The Company entered into an executive compensation agreement with Mr. Harnois providing for a 3 year term, annual compensation of $120,000, plus a $10,000 signing bonus and options to purchase 15,000 shares annually for up to 45,000 shares of the Company's common stock over the term of this agreement at an exercise price equal to the price quoted as of the average closing price of the Common Stock over he twenty days prior to the date his executive compensation agreement was executed. Effective February 8, 2000, Mr. Frank J. Moreno, a member of the Company's Board of Directors and its President and Chief Operating Officer resigned from those capacities, although 13 14 he will continue to provide consulting services to the Company on an ad hoc basis. Mr. Moreno has executed an amendment to his employment contract reflecting these arrangements, dated as of February 2, 2000, under which he will continue to be compensated through April 2001 in four equal installments payable at equal intervals commencing on February 8, 2000 in the amount of $62,500 each ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS Item 27. Financial Data Schedule Exhibit 10.1 Employment Agreement between the Company and Don Harnois Exhibit 10.2 Amendment to Frank Moreno Employment Agreement, dated April 29, 1998 (B) REPORTS ON FORM 8-K None 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: February 22, 2000 CinemaStar Luxury Theaters, Inc. by: /s/ Jack R. Crosby ----------------------------------------- Jack R. Crosby Chairman and Chief Executive Officer (principal executive officer) by: /s/ Donald H. Harnois, Jr. ------------------------------------------ Donald H. Harnois, Jr. Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) 15 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 CinemaStar Luxury Theaters, Inc. 11230 El Camino Real #320 San Diego, CA 92130 Mr. Don Harnois 2108 Clayton Dr. Flower Mound, TX 75028 Dear Mr. Harnois: This Employment Agreement ("Agreement") is made and entered into as of the 3rd day of January, 2000 (the "Commencement Date"), by and between you ("Employee") and CinemaStar Luxury Theaters, Inc., a Delaware corporation, as employer (hereinafter referred to as "CinemaStar"). We have agreed as follows: 1. EMPLOYMENT AND SERVICES: CinemaStar shall employ Employee and Employee agrees to be employed and perform his exclusive services for CinemaStar or one of its subsidiaries or related companies upon the terms and conditions hereinafter set forth. Employee will serve hereunder as Chief Financial Officer of CinemaStar. In his capacity as Chief Financial Officer of CinemaStar, Employee shall do and perform all services, acts or things necessary, advisable or customary to manage and conduct the business of CinemaStar, and also will perform such services as requested, from time to time, by the Chief Executive Officer of CinemaStar (the "Chief Executive Officer"). Employee shall devote his best efforts, energies and abilities and his full business time, skill and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of CinemaStar. Employee shall perform the duties and carry out the responsibilities assigned to him by the Chief Executive Officer to the best of his ability, in a diligent, trustworthy, businesslike and efficient manner for the purpose of advancing the business of CinemaStar. Employee agrees not to perform services of any kind or nature which would interfere with the performance of Employee's services hereunder for any third party, or render services for Employee's own account, in either case which would interfere with the performance of Employee's services hereunder, and in each case, unless specifically permitted to do so in writing by the Board or the Chief Executive Officer. 2. TERM: The term of this Agreement shall commence on the date hereof and continue for three (3) years from the date hereof (the "Employment Period"). Notwithstanding anything to the contrary contained herein, the Employment Period is subject to termination pursuant to Paragraph 5 below. EMPLOYEE AGREES AND ACKNOWLEDGES THAT CINEMASTAR HAS NO OBLIGATION TO RENEW THIS AGREEMENT OR TO CONTINUE EMPLOYEE'S EMPLOYMENT AFTER EXPIRATION OF THE TERM HEREUNDER, and Employee expressly acknowledges that no promises or understandings to the contrary have been made or reached. 3. COMPENSATION: 3.1 BASE COMPENSATION: For all services rendered under this Agreement, CinemaStar shall pay Employee a base salary at an annual rate of One Hundred Twenty Thousand Dollars ($120,000) during the Employment Period or at such higher rate as may be determined by the Board in its sole discretion (the "Base Salary"). The Base Salary shall be payable in accordance with CinemaStar's policy for regular salaried employees. CinemaStar is not 2 obligated to actually utilize Employee's services hereunder, and payment of the Base Salary will discharge all of CinemaStar's obligations hereunder. 3.2 BONUS COMPENSATION: Employee shall be eligible to receive bonus compensation, to be determined by the Board at its sole discretion. 3.3 SIGNING BONUS Employee shall receive the amount of $10,000 as an unrevocable advance on his first year bonus, payable upon signing of this agreement. 3.4 WITHHOLDING: All compensation payable to Employee hereunder is stated in gross amount and shall be subject to all applicable withholding taxes, other normal payroll deductions and any other amounts required by law to be withheld. 4. VACATION: Employee shall be entitled to three (3) weeks paid vacation each fiscal year with salary, consistent with CinemaStar's policy for all employees of similar stature and provided that unused vacation time shall not be carried over to subsequent years. 5. TERMINATION: Subject to Paragraph 5.2 below, the Employment Period may be terminated by CinemaStar at any time, with or without cause. No amounts shall be paid or benefits provided upon any termination of the Employment Period, whether as liquidated damages, or otherwise, except as specifically provided in Section 5.2 below or under any benefit plan or agreement in which Employee participates or to which Employee is a party. Employee shall not be entitled to participate in any severance plan of CinemaStar, except as required by law. 5.1 TERMINATION FOR CAUSE: CinemaStar may terminate the Employment Period for "cause" (as defined in this Paragraph 5.1) at any time upon written notice to Employee. In the event of a termination for cause, CinemaStar shall have no further obligations to Employee under this Agreement, except payment of the Base Salary and vacation pay accrued through the date of termination, and CinemaStar shall continue to have all other rights available hereunder at law or in equity. As used herein, the term "cause" shall mean any one or combination of the following: a. The willful failure of Employee to perform his duties or comply with reasonable directions of the Board that continues after the Board has given written notice to Employee specifying in reasonable detail the manner in which Employee has failed to perform such duties or comply with such directions; b. A material breach by Employee of any of the terms and conditions of this Agreement; c. Employee's gross negligence in the performance of his duties hereunder; d. Employee's conviction of any crime (whether or not involving CinemaStar) which constitutes a crime of moral turpitude or is punishable by imprisonment of thirty (30) days or more, PROVIDED, HOWEVER, nothing in this Agreement shall obligate CinemaStar to pay the Base Salary during any period that Employee is unable to perform his duties hereunder due to any incarceration; 3 e. Employee's violation of any rule or regulation of Cinemastar applicable to other employees of similar stature; f. Employee's omission or act constituting fraud, dishonesty or misrepresentation, occurring subsequent to the date hereof; g. Subject to any applicable federal and state laws, Employee's failure, inability (including any disability which prevents Employee from performing the essential functions of his position with reasonable accommodation), or refusal to perform Employee's duties on an exclusive and full time basis, but in no case shall such right be exercised until six (6) months from the date of the commencement of any physical or mental disability. Employee shall be deemed to be disabled, for purposes of this Agreement, if he is unable to perform, by reason of physical or mental incapacity, his essential duties or obligations under this Agreement, for a total period of Twelve (12) weeks in Three Hundred Sixty (360) days; or h. Employee's death. 5.2 TERMINATION WITHOUT CAUSE: If the Employment Period is terminated by CinemaStar without cause (as "cause" is defined in Paragraph 5.1 above), CinemaStar shall pay to Employee the Base Salary for the balance of the Employment Period. CinemaStar acknowledges and agrees that Employee's employment with CinemaStar shall be deemed to have been terminated by CinemaStar without cause in the event that substantially all of the assets of CinemaStar are sold, or if there is a change in the control of CinemaStar, AND the Employee's duties and responsibilities hereunder are materially altered at any time during the 6-month period following such sale or change in control. For purposes of this Agreement, "change in control" shall mean any event whereby any party (or group of affiliated parties), other than CinemaStar Acquisition, L.L.C. or any of its affiliates, shall have votes sufficient to elect more than fifty percent (50%) of the Board. 5.3 TERMINATION BY EMPLOYEE: Employee has the right to terminate the Agreement for any reason, upon sixty (60) days prior written notice to CinemaStar. 6. BENEFITS: During the Employment Period, and so long as Employee is not in breach of this Agreement: a. CinemaStar shall reimburse Employee for his reasonable and necessary out-of-pocket business expenses in accordance with its then prevailing policy for employees of similar stature (which shall include appropriate itemization and substantiation of expenses incurred). This shall also include any moving expenses incurred of not more than Seven Thousand Dollars ($7,000). b. Employee and his dependents shall be entitled to participate in CinemaStar's basic medical and other benefit plans generally available to employees of CinemaStar in accordance with the terms of such plans, excluding severance benefits; and c. Employee shall be given an automobile allowance of $450.00 per month. d. Employee shall be entitled to participate in all other benefits afforded to all other employees, including a 401K program wherein the employer matches the employee's contribution at the rate of 25% of the first 6% of employee's contribution to the plan. e. Employee shall be entitled to purchase 15,000 shares of LUXY stock per year (at a price quoted as the average closing price of the previous 20 days of LUXY stock prior to signing this agreement) for a total of 45,000 shares for the term of this agreement. 4 Employee further expressly agrees and acknowledges that after termination of the Employment Period (by CinemaStar with or without cause or by Employee) Employee shall be entitled to no benefits, except as specifically provided under the benefit plans referred to herein, subject in all cases to the terms and conditions of each such plan, and except as required by law. 7. CONFORMITY WITH THE IMMIGRATION REFORM AND CONTROL ACT OF 1986: As a condition to Employee's employment with CinemaStar, Employee shall furnish, and will continue to furnish, to CinemaStar all documentation legally sufficient to establish satisfy the requirements of the Immigration Reform and Control Act of 1986, with respect to Employee. If Employee fails to provide the required documentation within the legally-prescribed time limits, Employee's employment and all contractual obligations hereunder will terminate immediately. 8. CONFIDENTIALITY AND NONCOMPETITION: a. Employee shall hold in a fiduciary capacity, for the benefit of CinemaStar, all confidential or proprietary information, knowledge and data of CinemaStar which Employee may acquire, learn, obtain or develop during his employment by CinemaStar. Further, Employee shall not, during the Employment Period or after the termination of such Employment Period, directly or indirectly use, communicate or divulge for his own benefit or for the benefit of another any such information, knowledge or data. Employee makes the same commitment with respect to the secret, confidential or proprietary information, knowledge and data of affiliates, customers, contractors and others with whom CinemaStar has a business relationship. The information covered by this protection includes, but is not limited to matters of a business nature such as trade secrets, information about finances, costs and profits, business plans, marketing and advertising plans and strategies, sales results or projections, plans of CinemaStar to expand its business, personnel information, records, customer lists, contact persons, customer data, software, sales data, information regarding any form of product produced, distributed or acquired by CinemaStar, and/or other confidential or proprietary information belonging to CinemaStar relating to CinemaStar's business and enterprise (collectively, the "Confidential Information"). Employee agrees to hold and safeguard the Confidential Information in trust for CinemaStar, and agrees that he will not, without the prior written consent of CinemaStar, misappropriate or disclose or make available to anyone for use outside of CinemaStar, at any time, any of the Confidential Information. Notwithstanding the foregoing, Employee may disclose Confidential Information if such information becomes publicly known without fault of Employee, or where Employee is obligated to disclose such information by operation of law; provided, however, that if Employee receives a subpoena or other legal process, or otherwise receives a legally-binding request (whether voluntary or involuntary) from a third party, the response to which reasonably could result in the disclosure of Confidential Information, he shall provide notice thereof to CinemaStar within three (3) business days of such subpoena, legal process or request. Employee's obligations under this Paragraph 8 with respect to the Confidential Information will survive expiration or termination of the Employment Period. b. Employee shall not at any time during the Employment Period be or become (i) interested or engaged in any manner, directly or indirectly, either alone or with any person, firm or corporation now existing or hereafter created, in any business which is or may be competitive with the business of CinemaStar or (ii) directly or indirectly a stockholder or officer, director or employee of, or in any manner associated with, or aid or abet or give information or financial assistance to, any such business. Employee hereby acknowledges that the provisions of this subparagraph b. are reasonable and necessary to protect the legitimate interests of CinemaStar and that any violation of such provisions would result in irreparable injury to CinemaStar. The provisions of this subparagraph b. shall not be deemed to prohibit Employee's purchase or ownership, as a passive investment, of not more than five percent (5%) of the outstanding capital stock of any corporation whose stock is publicly traded. 5 c. All records, files, lists, drawings, documents, models, equipment, software or intellectual property relating to CinemaStar's business shall be returned to CinemaStar upon the termination of the Employment Period, whether such termination is at Employee's or CinemaStar's request. 9. NO SOLICITATION OF EMPLOYEES AND CONTRACTORS: Employee shall not during the Employment Period or for one (1) year thereafter induce or attempt to induce any employees, contractors or representatives of CinemaStar (or those of any of its affiliates) to stop working for, contracting with or representing CinemaStar or any of its affiliates or work for, contract with or represent any of CinemaStar's competitors. Employee hereby acknowledges that the provisions of this Paragraph 9 are reasonable and necessary to protect the legitimate interests of CinemaStar and that any violation of such provisions would result in irreparable injury to CinemaStar. In the event of a violation of the provisions of this Paragraph 9, Employee further agrees that CinemaStar shall, in addition to all other remedies available to it, be entitled to equitable relief by way of injunction and any other legal or equitable remedies. 10. RESULTS AND PROCEEDS: As Employee's employer, CinemaStar shall own all rights in and to the results and proceeds connected with or arising out of, directly or indirectly, Employee's services hereunder. 11. OWNERSHIP OF INTELLECTUAL PROPERTY: a. CinemaStar shall own, and Employee hereby transfers and assigns to it, all rights, of every kind and character throughout the world, in perpetuity, in and to any material or ideas and all results and proceeds of Employee's services hereunder, or conceived of or produced during the term of Employee's employment, whether the same consists of plans, methods, slogans, product names, ideas or copyrightable or patentable subject matter. b. Employee agrees to execute and deliver to CinemaStar such assignments, certificates of authorship, or other instruments in accordance with standard industry practice as CinemaStar may require from time to time to evidence ownership of the results and proceeds of Employee's services. Employee's agreement to assign to CinemaStar any of Employee's rights as set forth in this Paragraph 11 does not apply to any invention which qualifies fully as Employee's invention under the provisions of Section 2870 of the California Labor Code, where no equipment, supplies, facility, or trade secret information of CinemaStar was used and which was developed entirely upon Employee's own time, and which (i) does not relate to the business of CinemaStar or to its actual or demonstrably anticipated research or development, or (ii) which does not result from any work performed by Employee for CinemaStar. c. Employee represents and warrants that except as previously disclosed to CinemaStar in writing, Employee neither owns nor controls any copyrights or copyrightable product. d. Employee agrees that CinemaStar shall have the right, but not the obligation, to use Employee's name, voice and likeness in connection with any use or exploitation of the results and proceeds of Employee's services hereunder, and in connection with advertising, publicity, exhibition, distribution and/or other exploitation of any of the foregoing. Employee agrees that CinemaStar shall have the sole and exclusive right to issue publicity concerning Employee with respect to Employee's employment hereunder and the results and proceeds of Employee's services hereunder, except neither Employee nor CinemaStar shall issue any press release or other public announcement with respect to the execution or the terms of this Agreement without the consent of the other. 12. MISCELLANEOUS: a. Any notice provided for in this Agreement must be in writing and must be either (i) personally delivered, (ii) mailed by registered or certified first class mail, prepaid with return receipt requested, 6 (iii) sent by a recognized overnight courier service or (iv) sent by facsimile with a machine generated confirmation, to the recipient at the address indicated below: 7 IF TO EMPLOYEE: The address first written above. IF TO CINEMASTAR: CinemaStar Luxury Theaters, Inc. 11230 El Camino Real #320 San Diego, CA 92130 Attention: Board of Directors Telephone:858/509-2777 Facsimile:858/509-9426 with a copy to: Katten Muchin & Zavis 525 West Monroe Suite 1600 Chicago, Illinois 60661-3693 Attention:Julie A. Kunetka Telephone:312/902-5200 Facsimile:312/902-1061 or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given (a) on the date such notice is personally delivered, (b) three (3) days after the date of mailing if sent by certified or registered mail, (c) one (1) day after the date such notice is delivered to the overnight courier service if sent by overnight courier, or (d) the next business day following transmission by facsimile. b. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or enforcement in any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. c. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. d. This Agreement may be executed on separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement and shall become effective when one or more counterparts have been executed by each of the parties hereto and delivered to the other. e. This Agreement is intended to bind and inure to the benefit of and be enforceable by Employee and CinemaStar and their respective successors and permitted assigns. Employee may not assign any of his rights or obligations hereunder without the written consent of CinemaStar. 7 f. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. g. Any provision of this Agreement may be amended or waived only with the prior written consent of the parties hereto. The waiver by CinemaStar of any breach of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. h. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the State of California, without giving effect to provisions thereof regarding conflict of laws. i. The headings and other captions in this Agreement are included solely for convenience of reference and shall not control the meaning and the interpretation of any provision of this Agreement. j. Each of the parties to this Agreement shall execute and deliver any and all additional papers, documents, and other assurances, and shall do any and all acts and things reasonably necessary in connection with the performance of their obligations hereunder and to carry out the intent of the parties to this Agreement. k. If CinemaStar or Employee should terminate the Employment Period pursuant to Paragraph 5 above for any reason, then, notwithstanding such termination, those provisions contained in Paragraphs 3.3, 5, 6, 8, 9, 10, 11, 12, 13, and 14 hereof shall remain in full force and effect. 13. ALTERNATIVE DISPUTE RESOLUTION: a. Except for CinemaStar's right to seek immediate injunctive and equitable relief in accordance with the provisions of Paragraphs 8, 9, and 11 of this Agreement, the parties agree that all disputes, claims and other matters in controversy arising out of or relating to this Agreement, or the performance or breach thereof, shall be submitted to binding arbitration in accordance with the provisions and procedures of this Paragraph 13. This arbitration requirement shall include, without limitation, the agreement by Employee to submit to arbitration any and all claims arising out of any alleged discrimination or harassment, including, but not limited to, those covered by the California Fair Employment and Housing Act, the 1961 Civil Rights Act, 42 U.S.C. Section 2000e ("Title VII"), the Age Discrimination in Employment Act, and the Americans With Disabilities Act. b. The arbitration provided for in this paragraph shall take place in Los Angeles County, California, in accordance with the provisions of Title 9, Sections 1280 ETSEQ. of the California Code of Civil Procedure, except as provided to the contrary hereunder. The arbitration shall be held before and decided by a single neutral arbitrator. The single neutral arbitrator shall be selected in accordance with the Labor Arbitration Rules of the American Arbitration Association, as amended and effective on January 1, 1996, or by a process mutually agreed upon by the parties. If no agreement can be reached as to the process for selecting the arbitrator or if the agreed method fails, the arbitrator shall be appointed in accordance with the provisions of California Code of Civil Procedure Section 1281.6. c. The parties shall mutually agree upon the date and location of the arbitration, subject to the availability of the arbitrator. If no agreement can be reached as to the date and location of the arbitration, the arbitrator shall appoint a time and place in accordance with the provisions of California Code of Civil Procedure Section 1282.2(a)(1), except that the arbitrator shall give not less than 30 days notice of the hearing unless the parties mutually agree to shorten time for notice. d. The parties shall be entitled to undertake discovery in the arbitration in accordance with the provisions of subsections (a) through (d) of California Code of Civil Procedure Section 1283.05. In conjunction with these procedures, the parties shall be entitled to request and obtain production of documents in discovery in the arbitration in accordance with the same rights, remedies and procedures, and shall be subject to all of the same duties, liabilities and obligations as if the subject matter of the arbitration were pending in a civil action before a Superior Court of the State of California. The parties hereby agree that any discovery taken 8 hereunder shall be permitted without first securing leave of the arbitrator and shall be kept to a reasonable minimum. e. The decision of the arbitrator may be confirmed pursuant to the provisions of California Code of Civil Procedure Section 1285, and shall not be appealable for any reason, it being understood that a petition to vacate an award for any of the reasons set forth in California Code of Civil Procedure Section 1286.2 shall not be permitted. 14. CINEMASTAR CONSULTING SERVICES: The parties acknowledge that on occasion certain entities affiliated with CinemaStar may engage CinemaStar as a consultant with respect to certain activities similar to CinemaStar's business, and Employee's services may be required in connection therewith. CinemaStar hereby agrees with Employee that any services requested of Employee by the Board in connection with such consulting services shall not be deemed a breach under any of the provisions of this Agreement. Please indicate your agreement to be bound by the terms of this Agreement by executing where indicated below. Very truly yours, CINEMASTAR LUXURY THEATERS, INC., a Delaware corporation By: ------------------------------------ Paul W. Hobby, Chairman and Chief Executive Officer ACKNOWLEDGED AND AGREED TO AS OF THIS DAY OF , 1999: /s/ - -------------------------------- DON HARNOIS EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 6.2 [CINEMA STAR LUXURY THEATERS LETTERHEAD LOGO] February 2, 2000 Mr. Frank Moreno 7573 Navigator Circle Carlsbad, CA 92009 Dear Frank: This letter represents a mutually-agreed amendment to your employment agreement with CinemaStar ("the company") dated April 29, 1998 ("the contract"). Both parties have been working in good faith towards an amicable resolution of this matter, and this represents a final compromise. Both you and the company agree that your duties under the contract should be modified, and your compensation adjusted accordingly. Neither the term nor the health benefits are affected by this amendment. Paragraph 1 relating to Employment and Services is modified to allow you to spend less than your full business time working on the company's behalf. While the company wishes to retain access to your talents on an ad-hoc basis, including, but not limited too, studio relations, film show presence, due diligence for acquisitions and general corporate matters, the company acknowledges, however, in Mexico that you will be engaged in other potentially competitive activities that relate to the film exhibition business. You agree that you shall not compete for any site that the company is currently considering, specifically the McDonald's site in East Mexicali, the Florido site in Tijuana, the Rosarito Beach location, or the Riverside Plaza Mall. Your compensation under the contract shall be modified as follows: the company shall pay a total amount to you in lieu of any salary accrued after February 8, 2000 of $250,000 in four equal installments, the first one at February 8, 2000, with the remaining three payments spaced at equal intervals between February 8, 2000, and April 29, 2001. These payments shall be the total expense to the company (other than health insurance benefits) over the remaining term of the contract; you shall forfeit all earned and unearned stock options, car allowance, future 401 k contributions by the company, and other non health related benefits. 2 During the remainder of the contract term neither you nor the company shall speak ill of each other, and you shall not reveal trade secrets of the company. It is specifically acknowledged, however, that the company has disclosure obligations consistent with its publicly traded status, and that the change in your responsibilities will be acknowledged in that regard. Your resignation from CinemaStar's board shall also be effective as of February 8, 2000. Finally, by execution of this document the parties mutually release each other for all causes of action not based on contractual rights specifically stated in this amendment, based either in law or equity, relating to your employment with the company. Your release will also operate for the benefit of individual principals, investors, board members or agents associated with the company. If the company fails to make any payment on or before the schedule attached as Exhibit A hereto, the company shall have five business days to cure such default after notice by you, thereafter you shall have the right to accelerate all remaining payments due, with interest accruing at the prime rate from the date of default. This obligation of the company shall survive as an obligation of any party purchasing all or substantially all of the company's stock or assets. Dated this ___ day of February, 2000. - ----------------------------- ---------------------------------- Jack R. Crosby, Frank Moreno, individually for the Company and for his successors and assigns EX-27 4 FINANCIAL DATA SCHEDULE
5 9-MOS MAR-31-2000 APR-01-1999 DEC-31-1999 1,714,771 0 0 0 0 2,297,972 23,367,861 9,177,151 17,313,061 5,873,920 0 0 0 38,650 5,357,787 17,313,061 22,012,659 22,012,659 9,524,506 23,331,191 0 0 344,018 (1,608,729) 0 (1,608,729) 0 0 0 (1,608,729) (0.42) (0.42)
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