10QSB 1 e10qsb.txt FORM 10-QSB (06/30/2000) 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 [ ] 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: 6,289,196 shares outstanding as of August 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 June 30, 2000 (Unaudited) 3 Condensed Consolidated Statements of Operations for the three months ended June 30, 2000 and 1999 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2000 and 1999 (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 13 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 13 Signatures 14
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, 2000 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 717,718 Prepaid expenses 203,730 Other current assets 346,115 ------------ TOTAL CURRENT ASSETS 1,267,563 Property and equipment, net 13,327,921 Deposits and other assets 561,528 ============ TOTAL ASSETS $ 15,157,012 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit $ 2,000,000 Current portion of long-term debt and capital lease obligations 29,391 Accounts payable 1,359,462 Accrued liabilities 426,934 Deferred revenue 485,249 ------------ TOTAL CURRENT LIABILITIES 4,301,036 Long-term debt and capital lease obligations, net of current portion 1,693,498 Deferred rent liability 4,763,968 ------------ TOTAL LIABILITIES 10,758,502 ------------ STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; authorized shares 20,000,000; issued and outstanding shares 6,289,196 62,892 Additional paid-in capital 29,665,121 Accumulated deficit (25,329,503) ------------ TOTAL STOCKHOLDERS' EQUITY 4,398,510 ============ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,157,012 ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended June 30, --------------------------------- 2000 1999 ----------- ----------- REVENUES: Admissions $ 4,825,368 $ 5,055,021 Concessions 2,084,307 2,093,434 Other operating revenues 210,476 156,917 ----------- ----------- TOTAL REVENUES 7,120,151 7,305,372 ----------- ----------- COSTS AND EXPENSES: Film rental and booking costs 2,445,249 2,902,221 Cost of concession supplies 369,680 375,812 Theater operating expenses 3,632,663 3,046,044 Selling, general and administrative expenses 642,487 732,784 Depreciation and amortization 797,490 597,127 ----------- ----------- TOTAL COSTS AND EXPENSES 7,887,569 7,653,988 ----------- ----------- OPERATING LOSS (767,418) (348,616) OTHER INCOME (EXPENSE): Interest expense (154,179) (93,016) Interest income 10,861 12,602 ----------- ----------- TOTAL OTHER EXPENSE (143,318) (80,414) ----------- ----------- LOSS BEFORE PROVISION FOR INCOME TAXES (910,736) (429,030) PROVISION FOR INCOME TAXES (62,237) -- ----------- ----------- NET LOSS $ (848,499) $ (429,030) =========== =========== BASIC AND DILUTED NET LOSS PER SHARE $ (0.13) $ (0.11) =========== =========== WEIGHTED AVERAGE SHARES 6,289,196 3,864,986 =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months ended June 30, --------------------------------- 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (848,499) $ (429,030) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 797,490 597,127 Deferred rent expense 197,386 159,589 Changes in operating assets and liabilities: Prepaid expenses and other current assets (12,662) (89,261) Deposits and other assets (2,058) 4,427 Accounts payable (1,731,160) 522,317 Accrued and other liabilities (278,053) (272,424) ----------- ----------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,877,556) 492,745 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment -- (1,019,987) ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -- (1,019,987) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from credit facility borrowings -- 1,000,000 Principal payments on long-term debt and capital lease obligations (24,922) (51,960) Common stock issuance costs (26,809) -- ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (51,731) 948,040 ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,929,287) 420,798 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,646,975 2,220,396 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 717,718 $ 2,641,194 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 116,786 $ 69,683 =========== =========== Taxes -- -- =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 6 CINEMASTAR LUXURY THEATERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (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, 2000 and footnotes thereto, included in the Company's Annual Report on Form 10-KSB which was filed with the Securities and Exchange Commission. Operating results for the three month period ended June 30, 2000 are not necessarily indicative of the results of operations that may be expected for the year ending March 31, 2001. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and disclosure of contingent assets and liabilities at the date of the financial statements and during the reporting periods. Actual amounts could differ from those estimates. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. See Results of Operations for further discussion. NOTE 2 The Securities and Exchange Commission has issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101") which, together with certain amendments, provides guidance on the application of generally accepted accounting principles related to revenue recognition in financial statements. Management believes its presentation of revenues in the Company's consolidated financial statements is consistent with the revenue recognition criteria and other principles mandated by SAB 101, and that its adoption will not have a material financial effect on the Company's consolidated financial statements. The Company will be required to adopt SAB 101 by the fourth quarter of fiscal 2001. NOTE 3 Basic and diluted net 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. NOTE 4 On September 23, 1997, the Company entered into an agreement (the "CAP Agreement") with CinemaStar Acquisition Partners, LLC ("CAP") and Reel Partners LLP ("Reel") whereby Reel provided $3,000,000 of interim debt financing and CAP acquired a majority equity interest in the Company through a $15 million purchase of newly issued shares of the Company's Common Stock (the "Equity Financing"). 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. Concurrent with the execution of the CAP Agreement, the Company also issued to CAP a warrant to purchase 142,857 shares of common stock at an exercise price of $5.94 (the "Signing Warrants"). 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 6 7 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 the costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation and achieving operating profits) and San Bernardino Facility (opened 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. On March 28, 2000, the Company sold 2,424,158 shares of the Company's common stock to the Company's principal shareholder, SCP Private Equity Partners, LP ("SCP"). The purchase price was $1.44 per share for an aggregate purchase price of $3,500,000. Pursuant to the terms of the Stock Purchase Agreement, under certain circumstances the Company has the option to sell SCP an additional 692,617 shares of common stock at $1.44 per share for an aggregate purchase price of $1,000,000 at any time until March 28, 2002, so long as there have been no material adverse changes in the Company, or in the Company's business subsequent to March 28, 2000. Under the terms of the Stock Purchase Agreement, the Company granted SCP warrants to purchase an additional 779,194 shares of the Company's common stock at a price of $1.44 per share. The warrants issued in conjunction with the Stock Purchase Agreement expire on March 28, 2005. In as much as the warrants were issued at fair value, no value has been assigned to these warrants. NOTE 5 In October 1998, the Company signed a seven year, $15 million Revolving Credit Agreement with a senior, secured lender. The Revolving Credit Agreement contains various positive and negative covenants, such as consolidated leverage ratio, consolidated fixed charge ratio, maximum fixed asset expenditures, consolidated interest coverage ratio and minimum EBITDA. Borrowings under the Revolving Credit Agreement are collateralized by the Company's tangible and intangible assets, and the stock of the Company's wholly owned subsidiaries, Cinemas, Inc. and CinemaStar International. The Company may elect to borrow under the Revolving Credit Agreement at either (i) the higher of the lender's reference rate or the federal funds rate plus 0.50% or (ii) the LIBOR rate, in each case plus the applicable margin. The Company was required to reduce the amount of borrowings outstanding under the facility beginning in March 2000. On April 4, 2000, the Company amended its Revolving Credit Agreement. Under the terms of the amendment, the total available borrowing was reduced from $15,000,000 to $5,000,000, and the termination date of credit facility was changed from August 31, 2005 to December 31, 2000. The amendment required the Company to complete the $3,500,000 sale of stock to its principal shareholder and to use $1,000,000 of the proceeds from the sale of the common stock to reduce the Company's outstanding borrowings on its credit facility from $3,000,000 to $2,000,000. The amendment waived certain covenant violations and adjusted certain positive and negative covenants to make them more consistent with the Company's expected future financial performance. The Company is able at draw against the facility as of June 30, 2000, as the Company's leverage ratio is below the maximum established by the April 4, 2000 amendment to the Revolving Credit Agreement. The amount of borrowings available to the Company under the facility as of June 30, 2000 is not significant, as the borrowings continue to be limited by the leverage ratio covenant. As of June 30, 2000, the Company had outstanding borrowings of $2,000,000 under the facility. 7 8 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. The Company began the first quarter of fiscal 2001 with nine theaters with a total of 99 screens. On April 1, 2000, the Company added four stadium-style auditoriums to its Mission Grove complex in Riverside, California. The addition raised the total screen count at the Mission Grove location from 14 to 18, and raised the circuit-wide screen count to 103. On June 30, 2000 the Company closed its six screen theater in Chula Vista, California, reducing the Company's theater and screen count to eight and 97, respectively, as of June 30, 2000. The Company is currently attempting to sell the Chula Vista 6 property. For the entire first quarter of fiscal 2000, the Company operated eight theaters with a total of 79 screens. The Company operates one business segment. Such segment has operations in two geographic regions, California and Northern Mexico. For the three months ended June 30, 2000, total revenues were $5,950,770 in California and $1,169,381 in Northern Mexico, compared to $6,104,236 and $1,201,136 for California and Northern Mexico, respectively in the three months ended June 30, 1999. Total assets for the California and Northern Mexico regions as at June 30, 2000 were $14,499,881 and $657,131, respectively as compared to total assets of $15,627,845 and $439,867, for the California and Northern Mexico regions respectively, as of June 30, 1999. The Company has generated significant net losses in each fiscal year of its operations, including net losses of $5,231,252 in the fiscal year ended March 31, 2000 and a net loss of $848,499 in the quarter ended June 30, 2000. As of June 30, 2000, the Company has an accumulated deficit of approximately $25,330,000, and a working capital deficiency of approximately $3,033,000. As of June 30, 2000, the Company held cash and cash equivalents in the amount of $717,718. The Company is obligated to pay down the $2,000,000 of borrowings against its credit facility, which terminates on December 31, 2000. Management can make no assurances as to the Company's ability to pay down its credit facility debt and fund its working capital requirements over the next twelve months. Management plans to improve the Company's liquidity through securing a new debt facility, either a revolving credit facility or a term loan, from a new senior lender. The Company's ability to secure a new debt facility will be enhanced if it is able to complete the sale of one of its theaters and pay off the related mortgage loan on the property. Management can give no assurances that it will be able to secure a debt facility on terms favorable to the Company, if at all. Further, management can give no assurances that it will be able to sell the theater property. Management is also in the process of implementing strategies to increase theater revenues, reduce theater operating expenses, and reduce general and administrative expenses. To the extent management can increase the Company's Earnings Before Interest, Depreciation, and Amortization (EBITDA), the Company will have an increased capacity for borrowing. Management can give no assurances that its strategies to increase revenues and reduce expenses will be successful, or that it will be able to significantly improve the Company's EBITDA. 8 9 While the Company believes it could attain profitability with its current operations, such profitability is contingent on numerous factors, many of which are outside the control of the Company. Any substantial profitability will depend on, among other things, the Company's ability to continue to grow its operations through the addition of new screens. The ability of the Company to operate depends on the availability of marketable motion pictures. The Company currently obtains the motion pictures for its theaters from approximately 10 to 12 distributors. Poor relationships with distributors or a disruption in the production of motion pictures could limit the Company's ability to obtain films for its theaters. Further, the motion picture exhibition industry is highly competitive, particularly with respect to film licensing, the terms of which can depend on seating capacity, location and configuration of the exhibitor's theaters, the quality of projection and sound equipment, the comfort and quality of theaters and ticket prices. Many of the Company's competitors have been in existence significantly longer than the Company and are better established in the markets where the Company's theaters are or may be located and are better capitalized than the Company. These and other factors, including the poor commercial success of motion pictures or the Company's inability to attract and retain key management personnel, could have a material adverse effect on the Company's business and results of its operations. At this time, however, the Company believes that it has good working relationships with its distributors and is competitive with respect to these matters. These factors, among others, indicate the Company may be unable to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts, or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 Total revenues for the three months ended June 30, 2000 decreased $185,221 or 2.5% to $7,120,151 from $7,305,372 for the prior year. Admission revenues decreased $229,653 or 4.5%, concession sales decreased $9,127 or 0.4%, and other operating revenues increased by $53,559, or 34.1%. The decrease in admissions and concession revenues is attributable to a decrease in attendance, offset by modest increases in the average ticket price and concession revenues per patron. Total attendance decreased 5.6% from the first quarter of last year, however the average ticket price and the concession revenue per cap increased 1.1% and 5.4%, respectively, for the first quarter of fiscal 2001 as compared to the first quarter of fiscal 2000. Film rental and booking costs for the three months ended June 30, 2000 decreased $456,972 or 15.8% to $2,445,249 from $2,902,221 for the previous fiscal year's first quarter. The decrease is attributable to a decrease in admission revenues and a reduced cost of film relative to last year's first quarter. As a percentage of admission revenues, film rental and booking costs decreased to 50.7% for the three months ended June 30, 2000 from 57.4% for the three months ended June 30, 1999, due to the timing and terms of new releases in this year's first quarter compared to the prior year. The cost of concession supplies for the three months ended June 30, 2000 decreased $6,132 or 1.6% to $369,680 from $375,812 for the previous year. The decrease is attributable to a decrease in concession revenues and reduced concession product costs relative to last year's first quarter. As a percentage of concession revenues, the cost of concession supplies decreased to 17.7% for the three months ended June 30, 2000 from 18.0% for the three months ended June 30, 1999. Theater operating expenses for the three months ended June 30, 1999 increased $586,619 or 19.3% to $3,632,663 compared to $3,046,044 for the previous year. This increase in operating expenses was due to the addition of the San Bernardino 20 complex which opened in December 1999, and the addition of four screens to the Mission Grove complex in April 2000. As a percentage of total revenues, theater operating expenses increased by 9.3% to 51.0% for the three months ended June 30, 2000, compared to 41.7% for the three months ended June 30, 1999. General and administrative expenses for the three months ended June 30, 2000 decreased $90,297 or 12.3% to $642,487 compared to $732,784 for the previous year. The decrease is primarily attributable to management's efforts to reduce general and administrative costs. As a percentage of total revenues, general and administrative expense decreased by 1.0% to 9.0% for the three months ended June 30, 2000, compared to 10.0% for the three months ended June 30, 1999. 9 10 Depreciation and amortization for the three months ended June 30, 2000 increased $200,363 or 33.6% to $797,490 compared to $597,127 for the previous year, due to the increase in the Company's balance of fixed assets as a result of the addition of the San Bernardino 20 complex and the addition of four screens to the Mission Grove complex. Interest expense for the fiscal three months ended June 30, 2000 increased $61,163 or 65.8% to $154,179 compared to $93,016 for the previous year. This increase is due to an increase in the Company's average debt balance in the first quarter of fiscal 2001 as compared to 2000. Interest income for the three months ended June 30, 2000 decreased $1,741 or 13.8% to $10,861 from $12,602 for the three months ended June 30, 1999. This decrease is attributable to a decrease in the Company's average cash balance in the first quarter of fiscal 2001 as compared to 2000. The net loss for the three months ended June 30, 2000 increased $419,469 or 97.8% to $848,499 from $429,030 for the three months ended June 30, 1999 as a result of the changes in revenues and expenses described in the preceding paragraphs. 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 the development of new theaters and the acquisition of existing theaters. Historically, new theaters have been financed with internally generated cash flow, long-term debt, convertible debentures, equity, and facility and equipment leasing. On September 23, 1997, the Company entered into an agreement (the "CAP Agreement") with CinemaStar Acquisition Partners, LLC ("CAP") and Reel Partners LLP ("Reel") whereby Reel provided $3,000,000 of interim debt financing, and CAP acquired a majority equity interest in the Company through a $15 million purchase of newly issued shares of the Company's Common Stock (the "Equity Financing"). 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. Concurrent with the execution of the CAP Agreement, the Company also issued to CAP a warrant to purchase 142,857 shares of common stock at an exercise price of $5.94 (the "Signing Warrants"). 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 the costs of closing, the Company's Plaza Americana 10 facility in Tijuana (now in full operation and achieving operating profits) and San Bernardino Facility (opened 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. On March 28, 2000, the Company sold 2,424,158 shares of the Company's common stock to the Company's principal shareholder, SCP Private Equity Partners, LP ("SCP"). The purchase price was $1.44 per share for an aggregate purchase price of $3,500,000. Pursuant to the terms of the Stock Purchase Agreement, under certain circumstances the Company has the option to sell SCP an additional 692,617 shares of common stock at $1.44 per share for an aggregate purchase price of $1,000,000 at any time until March 28, 2002, so long as there have been no material adverse changes in the Company, or in the Company's business subsequent to March 28, 2000. Under the 10 11 terms of the Stock Purchase Agreement, the Company granted SCP warrants to purchase an additional 779,194 shares of the Company's common stock at a price of $1.44 per share. The warrants issued in conjunction with the Stock Purchase Agreement expire on March 28, 2005. In as much as the warrants were issued at fair value, no value has been assigned to these warrants. In October 1998, the Company signed a seven year, $15 million Revolving Credit Agreement with a senior, secured lender. The Revolving Credit Agreement contains various positive and negative covenants, such as consolidated leverage ratio, consolidated fixed charge ratio, maximum fixed asset expenditures, consolidated interest coverage ratio and minimum EBITDA. Borrowings under the Revolving Credit Agreement are collateralized by the Company's tangible and intangible assets, and the stock of the Company's wholly-owned subsidiaries, Cinemas, Inc. and CinemaStar International. The Company may elect to borrow under the Revolving Credit Agreement at either (i) the higher of the lender's reference rate or the federal funds rate plus 0.50% or (ii) the LIBOR rate, in each case plus the applicable margin. The Company was required to reduce the amount of borrowings outstanding under the facility beginning in March 2000. On April 4, 2000, the Company amended its Revolving Credit Agreement. Under the terms of the amendment, the total available borrowing was reduced from $15,000,000 to $5,000,000, and the termination date of credit facility was changed from August 31, 2005 to December 31, 2000. The amendment required the Company to complete the $3,500,000 sale of stock to its principal shareholder, and to use $1,000,000 of the proceeds from the sale of the common stock to reduce the Company's outstanding borrowings on its credit facility from $3,000,000 to $2,000,000. The amendment waived certain covenant violations and adjusted certain positive and negative covenants to make them more consistent with the Company's expected future financial performance. The Company is able at draw against the facility as of June 30, 2000, as the Company's leverage ratio is below the maximum established by the April 4, 2000 amendment to the Revolving Credit Agreement. The amount of borrowings available to the Company under the facility as of June 30, 2000 is not significant, as the borrowings continue to be limited by the leverage ratio covenant. As of June 30, 2000, the Company had outstanding borrowings of $2,000,000 under the facility. The Company has generated significant net losses in each fiscal year of its operations, including net losses of $5,231,252 in the fiscal year ended March 31, 2000 and a net loss of $848,499 in the quarter ended June 30, 2000. The fiscal year ended March 31, 2000 loss included an asset impairment charge of $2,000,000; therefore the net loss for the year excluding the asset impairment charge was $3,231,252. There can be no assurance as to when or if the Company will achieve profitability. While the Company believes it could attain profitability with its current operations, such profitability is contingent on numerous factors, many of which are outside the control of the Company. Any substantial profitability will depend, among other things, on the Company's ability to continue to grow its operations through the addition of new screens. During the three months ended June 30, 2000, the Company's operating activities resulted in a net use of cash of $1,961,689, as compared to a net source of cash of $492,745 for the three months ended June 30, 1999. The primary cause for the difference in cash used versus generated in the first quarter of fiscal 2001 as compared to 2000 was an $1,815,293 reduction in the Company's payables during the first quarter of fiscal 2001. Approximately $1,600,000 of the reduction in payables was related to the payment of construction expenses that had been accrued as of March 31, 2000. The $419,469 increase in the first quarter net loss of the Company in 2001 versus 2000 included increases in non-cash expenses of $200,363 and $37,797 for depreciation and deferred rent expense, respectively. During the three months ended June 30, 2000, the Company's investing activities resulted in a net source of cash of $84,133, as compared to a net use of cash of $1,019,987 for the three months ended June 30, 1999. The Company made minor property dispositions in the first quarter of 2001, where as the Company added $1,019,987 of property in the first quarter of 2000, primarily related to the construction of the San Bernardino 20. During the three months ended June 30, 2000, the Company's financing activities resulted in a net use of cash of $51,731, as compared to a net source of cash of $948,040 for the three months ended June 30, 1999. The primary cause for the difference in cash used versus generated was that the Company only made routine debt payments in the first quarter of 2001, as compared to the first quarter of 2000 when the Company drew $1,000,000 from its credit facility to fund its construction projects, which was partially offset by routine debt payments made by the Company. As of June 30, 2000, the Company held cash and cash equivalents in the amount of $717,718. The Company is obligated to pay down the $2,000,000 of borrowings against its credit facility, which terminates on December 31, 11 12 2000. Management can make no assurances as to the Company's ability to pay down its credit facility debt, and fund its working capital requirements over the next twelve months. Management plans to improve the Company's liquidity through securing a new debt facility, either a revolving credit facility or a term loan, from a new senior lender. The Company's ability to secure a new debt facility will be enhanced if it is able to complete the sale of the Chula Vista 6 property and pay off the related mortgage on the property. Management can give no assurances that it will be able to secure a debt facility on terms favorable to the Company, if at all. Further management can give no assurances that it will be able to sell the Chula Vista 6 property. Management is also in the process of implementing strategies to increase theater revenues, reduce theater operating expenses, and reduce general and administrative expenses. To the extent management can increase the Company's Earnings Before Interest Depreciation and Amortization (EBITDA), the Company will have an increased capacity for borrowing. Management can give no assurances that its strategies to increase revenues and reduce expenses will be successful, or that it will be able to significantly improve the Company's EBITDA. The Company leases eight theater properties and various equipment under non-cancelable operating lease agreements that expire between the years 2000 and 2021 and require various minimum annual rentals. Several of the theater leases provide for renewal options to extend the leases for additional five-to-ten year periods. Certain theater leases also require the payment of property taxes, normal maintenance and insurance on the properties and additional rents based on percentages of gross theater and concession revenues in excess of various specified revenue levels. Certain of the Company's former officers, directors, and stockholders personally guarantee certain of the Company's theater operating leases. The estimated minimum lease payments due under non-cancelable operating leases for fiscal year 2001 was approximately $5,501,000. At June 30, 2000, the aggregate future minimum lease payments due under non-cancelable operating leases was approximately $99,665,000. As of March 31, 2000, the Company had total net deferred income tax assets of approximately $7,192,000. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As a result of the Company's continued losses and uncertainties surrounding the realization of the net operating loss carryforward and other deferred tax assets, management has determined that the realization of the deferred tax assets is not "more likely than not." Accordingly, a 100% valuation allowance has been recorded against the net deferred income tax assets. As of March 31, 2000, the Company had net operating loss carryforwards ("NOL's") of approximately $15,000,000 and $5,000,000 for Federal and California income tax purposes, respectively. The Federal NOL's are available to offset future years taxable income, and they expire in 2007 through 2021 if not utilized prior to that time. The California NOL's are available to offset future years taxable income, and they expire in 2000 through 2006 if not utilized prior to that time. Federal and state tax laws restrict the utilization of these NOL's as a result of the Company's changes in ownership. The Company's initial public offering and certain other equity transactions have resulted in an "ownership change" as defined in Section 382 of the Internal Revenue Code of 1986, as amended. As a result, the Company's use of its net operating loss carryforwards to offset taxable income in any post-ownership change period will be subject to certain specified annual limitations. 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. CURRENCY FLUCTUATIONS The Company is subject to the risks of fluctuations in the value of the Mexican Peso relative to the U.S. dollar. These risks are heightened because a majority of the revenues in Mexico are collected in Mexican Pesos, but the lease for the theater complex is denominated in U.S. dollars. While the Company does not believe it has been materially adversely effected by currency fluctuations to date, there can be no assurance it will not be so affected in 12 13 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 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 and seeks damages of $1.25 million. The landlord has already leased the property to another tenant, which the Company believes would mitigate all, or a portion of the damages sought. Recently, the landlord has entered into an agreement to sell the property, which will likely change the damage claim of the plaintiff. Discovery is on hold until completion of the sale transaction. The Company intends to vigorously defend this action. Management does not believe the ultimate outcome of this matter will have a material adverse impact on the Company's financial position or its results of operations. On March 9, 2000, Russell Seheult, a former director of the Company filed suit in the Superior Court for the State of California in San Bernardino County. He alleges the Company has breached its obligation to make weekly payments in the amount of $1,000 pursuant to a purported consulting agreement between him and the Company. This matter is in the early stages of discovery, and a trial date has not been set. Management does not believe the ultimate outcome of this matter will have a material adverse impact on the Company's financial position or its results of operations. 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 that the Company believes would have a material adverse effect on the Company. ITEM 2 -- CHANGES IN SECURITIES None ITEM 3 -- DEFAULTS IN SENIOR SECURITIES None ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 5 -- OTHER INFORMATION None ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit 10.1 Fourth Amendment and Waiver dated April 4, 2000 to the Revolving Credit Agreement dated as of October 19, 1998, as amended. Exhibit 27. Financial Data Schedule (b) REPORTS ON FORM 8-K None 13 14 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 14, 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) 14