-----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, Rq/rZTl/TseO4RZBW5rMwbuF7tMCwSztp9lIzRUQZ8Ol6J4oDn0biuRxahMvgGUC m5NADXyi/oqO1TFu5NKRaQ== 0000950148-99-001655.txt : 19990720 0000950148-99-001655.hdr.sgml : 19990720 ACCESSION NUMBER: 0000950148-99-001655 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990719 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: 99666536 BUSINESS ADDRESS: STREET 1: 431 COLLEGE BLVD CITY: OCEANSIDE STATE: CA ZIP: 92057-5435 BUSINESS PHONE: 619-509-2777 MAIL ADDRESS: STREET 1: 12230 EL CAMINO REAL STREET 2: SUITE 320 CITY: SAN DIEGO STATE: CA ZIP: 92130 FORMER COMPANY: FORMER CONFORMED NAME: NICKELODEON THEATER CO INC DATE OF NAME CHANGE: 19941128 10QSB 1 FORM 10-QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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) (619) 509-2777 (Registrant's telephone number, including area code) Check whether the issuer (1) has filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Common stock, $0.01 par value: 3,864,986 shares outstanding as of July 15, 1999. Transitional Small Business Disclosure Format. (check one): YES [ ] NO [X] 2 CINEMASTAR LUXURY THEATERS, INC. TABLE OF CONTENTS
PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of June 30, 1999 (Unaudited) 3 Condensed Consolidated Statements of Operations for the three months ended June 30, 1999 and 1998 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 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 11 Item 2. Changes in Securities 12 Item 3. Defaults in Senior Securities 12 Item 4. Submission of Matters to a Vote of Securities Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, 1999 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,641,194 Prepaid expenses 251,060 Other current assets 375,921 ------------ TOTAL CURRENT ASSETS 3,268,175 Property and equipment, net 11,947,576 Deposits and other assets 851,961 ============ TOTAL ASSETS $ 16,067,712 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligations $ 208,242 Accounts payable 1,493,296 Accrued liabilities 597,822 Deferred revenue 427,952 ------------ TOTAL CURRENT LIABILITIES 2,727,312 Long-term debt and capital lease obligations, net of current portion 2,706,184 Deferred rent liability 4,058,080 ------------ TOTAL LIABILITIES 9,491,576 ------------ STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; authorized shares 60,000,000; issued and outstanding shares 3,864,986 38,650 Additional paid-in capital 26,216,172 Accumulated deficit (19,678,686) ------------ TOTAL STOCKHOLDERS' EQUITY 6,576,136 ============ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,067,712 ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months ended June 30, ---------------------------- 1999 1998 ----------- ----------- REVENUES: Admissions $ 5,055,021 $ 4,865,395 Concessions 2,093,434 2,065,181 Other operating revenues 156,917 159,401 ----------- ----------- TOTAL REVENUES 7,305,372 7,089,977 ----------- ----------- COSTS AND EXPENSES: Film rental and booking costs 2,902,221 2,645,292 Cost of concession supplies 375,812 632,593 Theater operating expenses 3,046,044 2,964,385 Selling, general and administrative expenses 732,784 735,221 Depreciation and amortization 597,127 532,208 ----------- ----------- TOTAL COSTS AND EXPENSES 7,653,988 7,509,699 ----------- ----------- OPERATING LOSS (348,616) (419,722) OTHER INCOME (EXPENSE): Interest expense (93,016) (76,834) Interest income 12,602 39,420 ----------- ----------- TOTAL OTHER EXPENSE (80,414) (37,414) ----------- ----------- LOSS BEFORE PROVISION FOR INCOME TAXES (429,030) (457,136) PROVISION FOR INCOME TAXES -- (1,600) ----------- ----------- NET LOSS $ (429,030) $ (458,736) =========== =========== BASIC AND DILUTED NET LOSS PER SHARE $ (0.11) $ (0.12) =========== =========== WEIGHTED AVERAGE SHARES 3,864,986 3,671,949 =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 CINEMASTAR LUXURY THEATERS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months ended June 30, ---------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (429,030) $ (458,736) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 597,127 532,208 Deferred rent expense 159,589 212,855 Changes in operating assets and liabilities: Prepaid expenses and other current assets (89,261) 129,613 Deposits and other assets 4,427 (5,938) Accounts payable 522,317 (334,848) Accrued and other liabilities (272,424) 341,014 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 492,745 416,168 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (1,019,987) (281,638) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (1,019,987) (281,638) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt 1,000,000 -- Principal payments on long-term debt and capital lease obligations (51,960) (227,960) ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 948,040 (227,960) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 420,798 (93,430) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,220,396 3,481,978 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,641,194 $ 3,388,548 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 93,016 $ 76,834 =========== =========== Income taxes $ -- $ 1,600 =========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 6 CINEMASTAR LUXURY THEATERS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 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 month period ended June 30, 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 Company currently expects to adopt the provisions of SFAS No. 133 on April 1, 2001. NOTE 3 Certain reclassifications have been made to the June 30, 1998 financial statements to conform to the June 30, 1999 presentation. NOTE 4 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. 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 (still in development). The measurement of the operating losses and/or closing costs for the two facilities is cumulative, calculated in the aggregate and will take place on the earlier to occur of the closing of each such facility or December 15, 2000. The Company issued 7 193,037 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. 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 $1,000,000 against this facility as of June 30, 1999 and has used the facility to secure two standby letters of credit, with initial terms of one year, totaling $2,275,000, issued in accordance with the terms of its lease (as amended) on the San Bernardino 20-screen facility, currently under construction. Commitment and other fees associated with the Revolving Credit Agreement and the standby letters of credit, totaling approximately $380,000, are included in Other Assets are being amortized over their respective terms. NOTE 7 The Company purchased on November 23, 1998 the remaining 25% minority interest in the Company's Mexican subsidiary, CinemaStar Luxury Theaters, S.A. de C.V., for approximately $340,000. This amount is included in Other Assets and 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 and at June 30, 1999 the Company had eight theater locations 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, 1999 total revenues were $6,104,236 in California and $1,201,136 in Northern Mexico, compared to $5,946,986 and $1,142,990 for California and Northern Mexico respectively in the three months ended June 30, 1998. Total assets for the California and Northern Mexico regions as at June 30, 1999 were $15,627,845 and $439,867, 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. There can be no assurance as to whether or when the Company will achieve profitability. While the Company believes it could attain profitability 8 with its current operations, such profitability is contingent on many factors such as the availability of marketable motion pictures and the continued success of management's on-going cost reduction efforts. 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. The Company has entered into agreements pertaining to the development of a 20-screen theater complex and a four-screen expansion to an existing theater complex in San Bernardino, California and Riverside, California, respectively. Additionally, the Company has entered into negotiations regarding the development of other theater complexes in the United States and the Republic of Mexico. The building of these and other new theater complexes is subject to many contingencies, many of which are beyond the Company's control, including consummation of site purchases or leases, receipt of necessary government approvals, negotiation of acceptable construction agreements, the availability of financing and timely completion of construction. No assurances can be given that the Company will be able to successfully build, finance or operate any of the new theaters presently contemplated or otherwise. THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998. Total revenues for the three months ended June 30, 1999 increased 3.0% to $7,305,372 compared to $7,089,977 for the prior comparable period. Admission revenues increased by $189,626, or 3.9%, and concession sales and other operating revenues increased by $25,769, or 1.2%. The increase in admissions revenues is attributable to an increase in average ticket price, partially offset by a modest decline in paid attendance. Domestic average ticket price for the fiscal three months ended June 30, 1999 increased by 2.6% to $4.99 compared to the prior comparable period. International average ticket price for the three months ended June 30, 1999 increased 17.3% to $2.90 compared to the prior comparable period. Domestic per capita concession revenues for the fiscal three months ended June 30, 1999 decreased 1.1% to $1.91 compared to the prior comparable period. International per capita concession revenue for the three months ended June 30, 1999 increased 22.9% to $1.64 compared to the three months ended June 30, 1998. Film rental and booking costs for the three months ended June 30, 1999 increased 9.7% to $2,902,221 compared to $2,645,292 for the previous fiscal year's first quarter. As a percentage of admission revenues, film rental and booking costs increased to 57.4% for the three months ended June 30, 1999 from 54.4% for the prior comparable period, due to the timing and terms of new releases in this year's first quarter compared to the prior year. Cost of concession supplies for the three months ended June 30, 1999 decreased 40.6% to $375,812 from $632,593 for the previous year. As a percentage of concession revenues, cost of concession supplies decreased to 18.0% from 30.6% in the three months ended June 30, 1999 compared to the previous year, due 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 three months ended June 30, 1999 increased 2.8% to $3,046,044 compared to $2,964,385 for the previous year. This increase was due, in part, to increases in federally mandated minimum wages. As a percentage of total revenues, theater operating expenses decreased 0.1% to 41.7% for the three months ended June 30, 1999 compared to 41.8% for the prior year. Selling, general and administrative expenses for the three months ended June 30, 1999 decreased 0.3% to $732,784 compared to $735,222 for the previous year. As a percentage of total revenues, selling, general and administrative costs decreased to 10.0% from 10.4%. Depreciation and amortization for the three months ended June 30, 1999 increased 12.2% to $597,127 compared to $532,208 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 three months ended June 30, 1999 increased 21.1% to $93,016 compared to $76,834 for the previous year. This increase is primarily due to the amortization of fees related to the Company's line of credit. 9 Interest income for the three months ended June 30, 1999 decreased to $12,602 from $39,420 for the three months ended June 30, 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 June 30, 1999 decreased 6.5% to $429,030 from $458,736 for the three months ended June 30, 1998. 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 (still in development). The measurement of the operating losses and/or closing costs for the two facilities is cumulative, calculated in the aggregate and will take place on the earlier to occur of the closing of each such facility or December 15, 2000. The Company issued 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 seven theater properties and various equipment under non-cancelable operating lease agreements which expire through 2021 and require various minimum annual rentals. At June 30, 1999, the aggregate future minimum lease payments due under non-cancelable operating leases was approximately $86,500,000. In addition, the Company has signed a lease agreement for a 20-screen Ultraplex theater in San Bernardino, California and for the expansion by 4 screens of an existing theater in Riverside, California. The lease for the San Bernardino Ultraplex will require expected minimum rental payments aggregating approximately $40,700,000 over the 25-year life of the lease. 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 $136,500,000. Under the terms of the San Bernardino lease, the Company is obligated to construct and equip the theater building. Costs to the Company to complete and equip the San Bernardino Facility are estimated at approximately $3,800,000. All necessary zoning and similar approvals have been obtained from the City of San Bernardino, and the landlord has committed under the lease to make available a tenant allowance of approximately $9,200,000 to reimburse the Company for a portion of the cost of constructing and equipping the complex. While the landlord has financing commitments in place to fund its tenant improvement allowance to the Company, its ability to fund the tenant improvement allowance is dependant upon its lender adhering to the terms of their financing commitments. Therefore, there can be no assurance that the Company will be able to receive adequate funds from the landlord to complete the construction of the project. The Company has executed a fixed-price construction contract with a general contractor, for the construction of the theater project. The Company is obligated to pay the contractor the full amount due under the 10 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. 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 $1,500,000. 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. There can be no assurance as to whether or when the Company will achieve profitability. While the Company believes it could attain profitability with its current operations, any substantial profitability will depend upon numerous factors including the Company's ability to continue reducing costs and expand through the addition of new screens and theaters. 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 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 $1,000,000 against this facility in June 1999 and has used the facility to secure two standby letters of credit, with initial terms of one year, totaling $2,275,000, issued in accordance with the terms of its lease (as amended) on the San Bernardino 20-screen facility, currently under construction. Commitment and other fees associated with the Revolving Credit Facility and the standby letters of credit, totaling approximately $380,000, are being amortized over their respective terms. The Revolving Credit Facility is subject to various positive and negative covenants. The Company is in compliance with these covenants as of June 30, 1999. During the three months ended June 30, 1999, the Company generated cash of $492,745 from operating activities, as compared to $416,168 for the three months ended June 30, 1998. Reductions in the cost of concession supplies have been offset by increases in film rental costs. During the three months ended June 30, 1999, the Company used cash in investing activities of $1,019,987 as compared to $281,638 for the three months ended June 30, 1998. The increase is due to construction in progress for the 20-screen Ultraplex in San Bernardino, California. During the three months ended June 30, 1999, the Company provided net cash of $948,040 from financing activities, as compared to using net cash of $227,960 for the three months ended June 30, 1998. The cash provided in the three months ended June 30, 1999 related to the drawdown of $1,000,000 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 three months ended June 30, 1998 related to principal repayments on long-term debt and capital lease obligations. At June 30, 1999, the Company held cash, cash equivalents and working capital in the amounts of $2,641,194 and $540,863, respectively. Management believes that cash and cash equivalents, working capital and the $15 million Revolving Credit Facility will be adequate to fund the existing operations and capital requirements of the Company during the next twelve months. 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 recurring losses from operations. Due to the absence of two market makers for its Redeemable Warrants (LUXYW), the Company has been notified by NASDAQ that these warrants were delisted effective December 14, 1998. These warrants may trade on the Over-The-Counter Market, upon application by a market maker. SEASONALITY The Company's revenues have been seasonal, coinciding with the timing of major releases of motion pictures by the major distributors. Generally, the most marketable motion pictures are released during the summer and the Thanksgiving through year-end holiday season. The unexpected emergence of a hit film during other periods can alter this trend. The timing of such releases can have a significant effect on the Company's results of operations, and the results of one quarter are not necessarily indicative of results for subsequent quarters. 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 is communicating via questionnaire with third parties with whom it has a material relationship to assess its risk with respect to year 2000 issues. This assessment is not complete, in particular because the Company has not completed its inquiries of its primary film distributors. However, the Company is not aware at this time of any material year 2000 issues with respect to its dealings with such third parties.The 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. The Company is in the process of developing and testing a contingency plan to address any year 2000 issues such as disruption in film distribution. Upon completion of the Company's assessment of its year 2000 readiness, in particular the completion of its assessment of third party issues, the Company will finalize its contingency plan. The Company believes that its contingency plan will be finalized and tested prior to September 30, 1999. CURRENCY FLUCTUATIONS The Company is subject to the risks of fluctuations in the Mexican Peso with respect to the U.S. dollar. These risks are heightened because revenues in Mexico are generally collected in Mexican Pesos, but the theater lease payments are denominated in U.S. dollars. While the Company does not believe it has been materially adversely effected by currency fluctuations to date, there can be no assurance it will not be so affected in the future and it has taken no steps to guard against these risks. PART II -- OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS On June 17, 1998, The Clark Real Estate Group, Inc. sued the Company in San Diego Superior Court, 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 Company intends to vigorously defend this action. Management believes the Company's termination of the lease in question was in accordance with its terms, however there is no assurance that the Company ultimately will prevail in this action. The Company also understands that the landlord has already leased the property to another tenant which the 12 Company believes would mitigate all or a portion of the claimed damages. Therefore, based on the aforementioned assumptions, management believes that the ultimate outcome of this matter will not have a material adverse impact on the Company's financial position or 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, 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 reduced, however, to approximately 1,568,704 shares from 10,980,833 shares prior to the reverse stock split. The number of shares of Common Stock exercisable per each warrant is reduced to 0.33746 shares per warrant from 2.36220 shares per warrant prior to the reverse stock split. The price per share upon exercise of the warrants increases to $17.78, compared to $2.54 prior to the reverse stock split. After giving effect to the reverse stock split, the number of outstanding and issuable Class B Redeemable Warrants for Common Stock, with a maturity date of September 15, 2001 under the trading symbol "LUXYZ," remain at 226,438 outstanding. The total number of shares of Common Stock for which such warrants will be exercisable is reduced to approximately 76,183 shares from 533,278 shares prior to the reverse stock split. The number of shares of Common Stock exercisable per each Class B warrant is reduced to 0.33644 shares per warrant from 2.35507 shares per warrant prior to the stock split. The price per share upon exercise of the warrants increases to $19.32, compared to $2.76 prior to the reverse stock split. ITEM 3 -- DEFAULTS IN SENIOR SECURITIES None ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 5 -- OTHER INFORMATION None ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Item 27. Financial Data Schedule (b) REPORTS ON FORM 8-K None 13 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: July 16, 1999 CinemaStar Luxury Theaters, Inc. by: /s/ Jack R. Crosby ------------------------------------ Jack R. Crosby Chairman and Chief Executive Officer (principal executive officer) by: /s/ Norman Dowling ------------------------------------ Norman Dowling Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS MAR-31-2000 APR-01-1999 JUN-30-1999 2,641,194 0 0 0 0 3,268,175 19,951,780 8,004,204 16,067,712 2,727,312 0 0 0 38,650 6,537,486 16,067,712 7,305,372 7,305,372 3,278,033 7,653,988 0 0 93,016 (429,030) 0 (429,030) 0 0 0 (429,030) (0.11) (0.11)
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